Valuing rural hospitals - the Australian experience

Area of Science:

• Health economics
• Public health policy
• Hospital administration

Background:

• Australian public hospitals historically relied on block funding, with the national government covering ~40% of costs.
• A 2010 reform introduced activity-based funding (ABF) via the Independent Hospital Pricing Authority (IHPA), using National Weighted Activity Units (NWAU) and National Efficient Price (NEP).
• Rural hospitals were initially excluded from ABF due to perceived inefficiency and variable activity.

Purpose of the Study:

• To develop a robust system for collecting hospital data, including rural facilities.
• To create a predictive model for hospital costs, termed the National Efficient Cost (NEC).
• To refine hospital funding models for improved accuracy and transparency.

Main Methods:

• Developed a sophisticated data collection system for all hospitals.
• Created a predictive model (NEC) based on increasingly detailed data.
• Analyzed hospital care costs, excluding the smallest hospitals (<188 NWAU) with highly variable costs.
• Tested various predictive models to balance simplicity, policy, and predictive power.

Main Results:

• A selected model combines activity-based payments with a "flag fall" component.
• Funding tiers: fixed payment for low-volume (<188 NWAU), diminishing flag fall plus activity for medium volume (188-3500 NWAU), and activity-only for high volume (>3500 NWAU).
• This model enhances the prediction of costs for rural hospitals.

Conclusions:

• Over a decade, hospital cost and activity measurement has become more sophisticated, enhancing understanding.
• National government funding for hospitals, distributed by states, now features greater transparency in cost, activity, and efficiency.
• The refined funding model offers implications for future policy and resource allocation in Australian public hospitals.