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Activity-based funding and prevention: a message for state governments

Keeping people well and out of hospital should be a primary focus of our health system.  Yet the evidence is that we could do much better in preventing and managing problems in the community, before they require hospital treatment.

In the post below, Professor Stephen Duckett, Health Program Director at the Grattan Institute, provides some useful advice to state/territory governments on how to focus own hospital avoidance without losing funding under the current ‘activity-based’ system.


Stephen Duckett writes:

Memo to the states: you can keep people out of hospital and still get your fair share of activity based funding. Here’s how….

State governments are arguing that the incentives enshrined in Australia’s ‘activity based’ funding regime for hospitals actually discourage states from improving their health services so that fewer people end up having to go to hospital.

The argument goes that because the system rewards activity, any state that develops a ‘hospital avoidance’ program will cop a double penalty. Firstly, the state bears the cost of providing alternative, community-based services to keep people out of hospital.

Secondly, to the extent the program is successful and does keep patients out of hospital, the state misses out on the Commonwealth payments it would have received had those people been treated in hospital. And, what’s worse, the Commonwealth saves money by not having to meet its 45 per cent share of costs for those ‘avoided’ patients but does not bear any of the costs.

There are two things wrong with this argument. Firstly, successful hospital avoidance programs would lower future demand for hospital capital works and that is a cost wholly carried by the state. But more broadly, the argument betrays a lack of imagination on the part of states – and a lack of understanding of the National Health Reform Agreement.

The current dead-end discourse

Several states are developing hospital avoidance programs – as they should – and considering proposing arrangements to share the risks and benefits with the Commonwealth. These involve attempting to estimate the number of admissions avoided and work out how to count these under the national activity based funding regime.

The trouble with this approach is that risk-benefit sharing arrangements are the unicorns of Australian health policy: much discussed but rarely seen. Counting things that don’t happen is tricky to say the least and ends up in abstruse arguments about whose statistical estimates and projections are better.

A simpler strategy: building on what is already in place

What the states are overlooking is that activity based funding can easily accommodate a shift toward hospital avoidance programs. Indeed, hospital avoidance programs are explicitly recognised in the Independent Hospital Pricing Authority’s (IHPA’s) pricing framework, and have been from the start.

The National Health Reform Agreement is broadly written. Services to be funded under the Agreement have to be added to IHPA’s ‘General List’. In addition to standard inpatient and emergency department services, the General List can include services which are:

  • directly related to an inpatient admission or an ED attendance; or
  • intended to substitute directly for an inpatient admission or ED attendance; or
  • expected to improve the health or better manage the symptoms of people with physical or mental health conditions who have a history of frequent hospital attendance or admission.

It’s there in black and white: services ‘intended to substitute directly for an inpatient admission’ may be counted as public hospital services. The activity based funding regime thus already covers hospital avoidance programs. So the states should use the existing provisions of the regime – rather than claiming it is not fit for purpose.

What the states should do now

States proposing to embark on hospital avoidance programs should seek approval for these programs to be included in the General List of activity that attracts Commonwealth funding. Here’s how it should happen:

  1. All states should develop specific programs for hospital avoidance. Each program should be backed by an evidence-based business case which outlines the cost of the program, and the link between the program and the types of admissions to be avoided, including broad estimates of how many admissions are expected to be avoided.
  2. The business case should specify the number and type of services that will be provided under the program. These services will need to meet the definition of a ‘service event’: that is, an interaction between one or more healthcare provider(s) with one non-admitted patient, which must contain therapeutic/clinical content and result in a dated entry in the patient’s medical record.
  3. In many cases, with only a little stretching of definitions, these services, typically nursing and allied health or social work interventions, could be classified as non-admitted services, already classified and priced as National Weighted Activity Units (NWAUs), or even as admitted (‘hospital in the home’) NWAUs.
  4. The Commonwealth and state should jointly review the business case and, where appropriate, approve a two-year trial of the specific program.
  5. As part of the trial, the Commonwealth and state should agree on data monitoring (which might involve an additional diagnosis field which makes clear that that this NWAU was part of the trial). They should jointly approach IHPA to have the NWAU associated with the trial deemed to be public hospital services for the purpose of the National Health Reform Agreement, for the period of the trial.
  6. If the trial is evaluated as successful and cost-effective, it and other services like it should be deemed to be public hospital services into the future.

Under this proposal, states would receive a revenue stream for admission avoidance programs, to offset in full or in part the cost of the programs. So there would be no justification for states arguing (or fearing) that they would miss out on revenue from these programs but bear all the costs.

The states can – and should – keep more people out of hospital while still getting a fair share of health funding. All that’s needed is a new way of thinking. It’s surely worth a try.

• Stephen Duckett is Health Program Director at the Grattan Institute.

Comments 2

  1. Stephen Borness says:

    Excellent suggestions, same business case approach could apply to QI initiatives ? And the resulting protocols (clinical or not) coded as interventions

  2. Robert says:

    Can a state really “try” this, without baking it into their on-going funding recipe?

    This article talks about developing business cases between Cmwlth & states (with all states agreeing on additions to IHPA general list items?) within the existing boundaries of the ABF architecture.

    This is where I see a problem – I’m not sure all states (particularly those with small tax bases) want to further propagate their ABF relationship with the Cmwlth, particularly by defining ‘service events’ for non-episodic services, in order to enlarge their service profiles … and especially not while IHPA had been investigating bundled payment options.

    Is it possible that states (let’s be honest.. treasury, rather than the health department readers of Croaky) are actually looking at this, but instead see greater value in resisting ABF and lobbying for some sort of specific purpose or other equalized payment (block funding)?

    My point is that perhaps the the risk could be re-framed – it’s not that individual states fear they won’t get a fair share of ABF funding, but that instead, greater ABF funding isn’t fair for all states.

    So rather than the “dead-end discourse” described, is it instead a sensible policy posture?

    Not saying this posture is right (or that it even exists), but as always – there are greater (or at least differing) perspectives on these things. Rarely is is actually “black and white”, as suggested.

    Granted this is hard to profile in a short memo, but rather than simply selling one “should” solution, it’d be helpful to promote some greater understanding of the policy options so that readers can form informed opinions, rather than regurgitate those of others.

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air pollution
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consumer health matters
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environmental health
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Health in All Policies
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Media Doctor Australia
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Croakey Conference News Service 2013 – 2019
2013 conferences
Australian Centre for Health Services Innovation Forum 2013
Australian Health Promotion Association Conference 2013
Closing the Credibility Gap 2013
CRANAplus Conference 2013
FASD Conference 2013
Health Workforce Australia 2013
International Health Literacy Network Conference 2013
NACCHO Summit 2013
National Rural Health Conference 2013
Oceania EcoHealth Symposium 2013
PHAA conference 2013
2014 conferences
#IPCHIV14
AIDA Conference 2014
Congress Lowitja 2014
CRANAplus conference 2014
Cultural Solutions - Healing Foundation forum 2014
Lowitja Institute Continuous Quality Improvement conference 2014
National Suicide Prevention Conference 2014
Racism and children/youth health symposium 2014
Rural & Remote Health Scientific Symposium 2014
2015 conferences
#CPHCEforum
#CRANAplus15
#HSR15
#NRHC15
#OTCC15
Population Health Congress 2015
2016 conferences
#AHHAsim16
#AHMRC16
#ANROWS2016
#ATSISPEP
#AusCanIndigenousWellness
#cphce2016
#CPHCEforum16
#CRANAplus2016
#IAMRA2016
#LowitjaConf2016
#PreventObesity16
#TowardsRecovery
#VMIAC16
#WearablesCEH
#WICC2016