The National Pricing Model
Explained
2013 ABF Conference
16 May 2013
Trent Yeend
Senior Advisor, Pricing & Funding
IHPA
1
Overview of workshop
1. ABF and the National Health Reform Agreement
2. Introduction to the National Pricing Model
3. Introduction to the National Cost Model
4. Transformation of National Cost Model to National Pricing Model
5. National Pricing Model by service category
6. Application of the National Pricing Model
2
§1
Activity Based Funding
and
the National Health Reform Agreement
3
ABF and the NHRA
Under the National Health Reform Agreement, the role
of the national efficient price is to:
a. form the basis for the calculation of the
Commonwealth funding contribution; and
b. provide a relevant price signal to States and Local
Hospital Networks.
- Clause B11
4
ABF and the NHRA
Two features of role (a) in ABF:
1. Volumes of (price) weighted activity at the Local Hospital
Network (LHN) level are used to proportionally allocate each
state/territory’s Commonwealth funding among their LHNs.
5
ABF and the NHRA
Two features of role (a) in ABF:
2. Growth in price and activity over time are used to determine
growth in Commonwealth funding over time.
• Commonwealth funds 45% of growth from 2013-14 to
2016-17, then 50% of growth from 2016-17 onwards.
2013-14
45%
2014-15
45%
2015-16
45%
2016-17
50%
2017-18
50%
2018-19
50%
...
CFx – Commonwealth funding in year x
Px – Price in year x
Vx – Volume in year x
CF2 = CF1 + 45% (P2 V2 – P1 V1)
6
ABF and the NHRA
Other features of the NHRA:
1. Scope of services
2. Private patients
3. Other Commonwealth programs
7
§2
Introduction to
the National Pricing Model
8
The National Pricing Model
The National Pricing Model provides the means by
which IHPA prices hospital services. It comprises three
parts:
National Pricing Model
National Efficient Price
(NEP)
Price Weights
Adjustments
Combine to define the
National Weighted Activity Unit (NWAU)
Price of hospital service = NEP × NWAU
9
The National Pricing Model
Price Weights
Adjustments
• Define a measure of relative
price across all in-scope activity.
• Are defined across the
classification systems within
each service category.
• Are used to modify price relativities to
account for legitimate and unavoidable
variations in the costs of service
delivery.
Price Weights
Non-Admitted
Emergency
Subacute
Activity
Acute
Adjustments
Weighted
Activity
(NWAU)
10
The National Pricing Model
Price Weights
Adjustments
1 2 3 4 5 6 7
Acute admitted care
      
Subacute & non-acute

admitted care
 
Emergency care

Non-admitted care
Mental health care

 
1. Paediatric
2. Specialist
Psychiatric
3. Indigenous
4. Remoteness
5. ICU
6. Private Patient
Service
7. Private Patient
Accommodation
11
The National Pricing Model
National Efficient Price (NEP)
• Converts NWAU to price
‒ The NEP is the price of 1 NWAU
‒ Price = NEP x NWAU volume
• Measures year on year change in mean price
‒ Based on mean price of in-scope acute admitted activity
‒ Excludes changes in mean price caused by changes in
activity profile (ie. case-mix change).
12
The National Pricing Model
Change in NEP and change in Price Weights
YEAR 1
NEP
YEAR 2
Change in NEP
Price Weights
NEP
Price Weights
Non-Admitted
Emergency
Subacute
Acute
Non-Admitted
Change in Price Weights
Emergency
Subacute
Acute
13
The National Pricing Model
Example: Change in Price Weights vs Change in Price
Price Weights
I61A
M63Z
E62C
2012-13
3.3272
0.3789
0.7785
2013-14
3.2545
0.3787
0.7915
change
-2.2%
-0.1%
1.7%
2012-13
2013-14
change
$4,808
$4,993
3.8%
direction



NEP
I61A
M63Z
E62C
prices
2012-13
2013-14
$15,997
$16,250
$1,822
$1,891
$3,743
$3,952
change
1.6%
3.8%
5.6%
direction



14
The National Pricing Model
This relationship extends to NWAU:
For a fixed ‘basket’ of activity, after converting the activity to NWAU using two
years’ pricing models, the following can be said:
1.
NWAU increases  aggregate price has grown at a rate greater than the
growth in NEP
2.
NWAU remains constant  aggregate price has grown in line with growth
in NEP
3.
NWAU decreases  aggregate price has grown at a rate less than the
growth in NEP
relative change (eg. 5% growth expressed as 105%
change, -2% growth expressed as 98% change)
Property: For fixed activity,
(% change in NWAU) × (% change in NEP) = % change in aggregate price.
15
§3
Introduction to
the National Cost Model
16
The National Cost Model
• The National Pricing Model is based on cost and
activity data from three years prior; eg. the 2013-14
pricing model is based on 2010-11 cost and activity
data.
• The cost and activity data for each of the historical
years are used derive the National Cost Model for that
year.
• The National Cost Model is designed to ensure that
the total model costs are equalised with the estimated
total actual costs across ABF establishments.
17
The National Cost Model
• The cost model is made up of cost parameters and
adjustments:
– paediatric adjustment,
– specialist psychiatric age adjustment,
– indigenous adjustment,
– remoteness area adjustment,
– and ICU adjustment
• The private patient service and private patient
accommodation adjustments do not form part of the cost
model.
– They are introduced in the pricing model to remove out of scope costs
associated with private patients.
18
The National Cost Model
Cost Parameters
Adjustments
• Define a measure of cost across
all in-scope activity (cost profiles).
• Are used to modify modelled costs
to account for legitimate and
unavoidable variations in the costs
of service delivery.
• Are defined across the
classification systems within each
service category
The National Cost Model
Cost Parameters
Non-Admitted
Emergency
Subacute
Activity
Acute
Adjustments
Modelled
cost of
activity
($)
19
§4
Transformation of
the National Cost Model
to
the National Pricing Model
20
Transformation of NCM to NPM
There are three key differences between the National Pricing
Model and the National Cost Model:
1. The pricing model comprises an NEP (ie. a reference cost),
price weights and adjustments, whereas the cost model
comprises cost parameters and adjustments.
2. The cost model is based on costs and activity three years
prior to the year of the corresponding pricing model.
3. The pricing model excludes costs offset by revenue from
other Commonwealth programs.
21
Transformation of NCM to NPM
Cost Model
Cost Parameters
Adjustments
1. Derivation of a
reference cost
2. Conversion of
parameters to weights
Cost Weight Model
Reference Cost
Cost Weights
Adjustments
3. Removal
of out of
scope costs
4. Indexation to
reflect costs in
the year of the
pricing model
Pricing Model
NEP
Price Weights
Adjustments
22
Transformation of NCM to NPM
Step 1: Derivation of a reference cost
• The reference cost is the precursor to the NEP.
• The change in reference cost over time is ‘standardised’ to
ensure it is not influenced by changes in activity profile (ie.
case-mix change).
– cf. standardised incidence/prevalence/mortality rates
controlling for differences demographic/age profile.
23
Transformation of NCM to NPM
Step 1: Derivation of a reference cost
Year of activity data
2009-10
2010-11
$4,587 (B)
(Z)
(X)
$4,489 (C)
$4,260 (A)
(Y)
A – 2009-10 reference cost (= 2009-10 mean cost)
X – crude growth rate of mean cost
B – 2010-11 mean cost
Y – standardised growth rate
C – 2010-11 reference cost
Z – ‘rebasing’ factor
24
Transformation of NCM to NPM
Step 2: Conversion of parameters to weights
• The parameters of the cost model are divided by the
reference cost, converting the parameters to cost weights and
transforming the cost model to a cost weight model.
• The selection of reference cost in the previous step ensures
that the two consecutive years’ cost weight models give the
same total weighted volume when applied to the activity data
on which the standardised growth rate is derived.
25
Transformation of NCM to NPM
Step 3: Removal of out of scope costs
Out of scope costs can be classified as follows:
1. Costs associated with out of scope activity, (eg. activity
delivered to out of scope patient types such as DVA), and
activity not regarded as from an in-scope service type (eg.
out of scope Tier 2 non-admitted service types).
2. Proportions of costs associated with private patients that are
offset by non-government and Commonwealth revenue.
3. Costs associated with other Commonwealth programs(eg.
Highly Specialised Drugs program, Pharmacy Reform
Agreements).
26
Transformation of NCM to NPM
Step 3: Removal of out of scope costs
1. Group 1 costs are excluded by simply restricting the cost
model to in-scope activity.
2. Group 2 costs are excluded through the implementation of
the private patient service adjustment and private patient
accommodation adjustment within the pricing model.
3. Group 3 costs are excluded by deflating them out of the cost
model.
27
Transformation of NCM to NPM
Step 4: Indexation
• The final step is the indexation of costs to estimate those in
the year of the pricing model.
• To derive this indexation rate:
1. the cost model is applied retrospectively to the five years of
patient costed acute admitted activity data up to the year of
the cost model.
2. Scaling factors are calculated that adjust the cost model so
that model costs are equalised with each year’s actual costs.
3. The trend of these scaling factors is then projected forward
from the year of cost model to the year of pricing model.
28
Transformation of NCM to NPM
Step 4: Indexation
Illustration of scaling factors required to equalise model and actual costs
Actual costs
Model costs derived by applying
cost model to costed activity data
Historical
Projected
s2
sx Scaling factor required to equalise
s
s5= 1
model costs with actual costs
s3
s4
s1
Year 1
Year 4
Year 5
Year 6
Year 7
Year 8
s1
s4
s5
s
s2
s3
Time series
Year of
cost model
Year of
pricing model
Projection of time series
29
Transformation of NCM to NPM
· Derivation of reference cost
· Conversion of cost parameters
to cost weights
Cost Model
· Deflation to remove costs offset by
funding from other Commonwealth programs
· Indexation
· Restriction to in-scope activity
Cost Weight Model
Pricing Model
Reference Cost
National Efficient Price
Cost Weights
Price Weights
Adjustments
Adjustments
Cost Parameters
Adjustments
· Inclusion of private patient adjustments
30
§5
National Pricing Model
by Service Category
31
National Pricing Model by Service Category
• Activity is grouped into four streams (service categories)
– Acute Admitted
– Subacute and Non-Acute Admitted
– Emergency
– Non-Admitted
– With mental health spanning all four streams
• Classification systems are defined across all service categories,
and the National Pricing Model defines prices over these
classification systems.
32
National Pricing Model
- Acute Admitted -
33
NPM – Acute Admitted
• Classification: Australian Refined Diagnosis Related Groups
(AR-DRGs)
• DRGs are broken into price categories based on (ICU adjusted)
length of stay:
– same-day
– short-stay outlier
– inlier
– long-stay outlier
34
NPM – Acute Admitted
Episode
Is the episode
same-day?
No
Does the DRG have
ICU unbundled?
No
Define ‘ICU-adjusted LOS’
as LOS
Yes
Does the DRG have a
same-day price
category
No
Yes
Define ‘ICU-adjusted
LOS’ as LOS minus
whole eligible ICU days
(ensuring a lower
bound of 1 day)
Price Category
Same-day
Yes
Is ICU-adjusted LOS
(strictly) less than
DRG inlier lower
bound?
Yes
Price Category
Short-Stay
Outlier
Yes
Price Category
Inlier
No
Is ICU-adjusted LOS
less than or equal to
DRG inlier upper
bound?
No
Price Category
Long-Stay
Outlier
35
NPM – Acute Admitted
• There are seven episode-level adjustments:
– paediatric adjustment
– specialist psychiatric age adjustment
– indigenous adjustment
– remoteness area adjustment
– ICU adjustment
– private patient service adjustment
– private patient accommodation adjustment
36
NPM – Acute Admitted
Price Weight Table
37
NPM – Acute Admitted
Price weights
• Same-day price category makes use of same-day price weight
• Short-stay outlier price category makes use of short-stay
outlier base and per diem price weights
• Inlier price category makes use of inlier price weight
• Long-stay outlier price category makes use of inlier and longstay outlier per diem price weights
38
NPM – Acute Admitted
Basic form of DRG price weight function
price
weight
SD
SSO
Inlier
LSO
ICU-adjusted
LOS
39
Price Weight function forms
NPM – Acute Admitted
Price Weight function
Price Categories
DRGs
MDCs 19&20
Remainder
Inlier
3
28
Inlier/LSO
0
230
SSO/Inlier/LSO
15
293
SD/Inlier
0
1
SD/Inlier/LSO
1
119
SD/SSO/Inlier/LSO
1
14
40
NPM – Acute Admitted
Example of cost model DRG profile against actual costs and activity
41
NPM – Acute Admitted
Application of adjustments
PW
Apply paediatric
adjustment
Apply ICU
adjustment
Apply specialist
psychiatric age
adjustment
Apply private
patient service
adjustment and
private patient
accommodation
adjustment
Apply indigenous
adjustment and
remoteness area
adjustment
NWAU
42
National Pricing Model
- Subacute & Non-Acute Admitted -
43
NPM – Subacute & Non-Acute Admitted
• Classifications:
– The Australian National Subacute and Non-Acute Patient (ANSNAP) Classification
– Care Type
• AN-SNAP classes are broken into price categories based
on length of stay:
– same-day
– entire episode per diem
– short-stay outlier
– inlier
– long-stay outlier
44
NPM – Subacute & Non-Acute Admitted
Episode
Is the AN-SNAP class
same-day (referred
to as ambulatory in
description)?
Yes
Is episode LOS
(strictly) less than
AN-SNAP class inlier
lower bound?
Price Category
Same-day
Yes
Price Category
Inlier
No
No
Are the AN-SNAP
class inlier lower
and upper bounds
zero?
Yes
Price Category
Short-Stay
Outlier
Yes
Price Category
Entire Episode
Per Diem
No
Is episode LOS less
than or equal to
AN-SNAP inlier upper
bound?
No
Price Category
Long-Stay
Outlier
45
NPM – Subacute & Non-Acute Admitted
• There are five episode-level adjustments:
– paediatric adjustment
– indigenous adjustment
– remoteness area adjustment
– private patient service adjustment
– private patient accommodation adjustment
46
NPM – Subacute & Non-Acute Admitted
Price Weight Table
47
NPM – Subacute & Non-Acute Admitted
Price Weights
• Same-day price category makes use of episode price weight
• Episode per diem price category makes use of outlier per
diem price weight
• Short-stay outlier price category makes use of outlier per
diem price weight
• Inlier price category makes use of episode and inlier per diem
price weights
• Long-stay outlier price category makes use of episode and
inlier per diem and outlier per diem price weights
48
NPM – Subacute & Non-Acute Admitted
Basic form of AN-SNAP price weight function
price
weight
SSO
Inlier
LSO
Episode
LOS
49
NPM – Subacute & Non-Acute Admitted
Price Weight function forms
Price Weight function
Price categories
AN-SNAP
classes
Same-day
45
Inlier/LSO
13
SSO/Inlier/LSO
45
EpiPerDiem
24
50
NPM – Subacute & Non-Acute Admitted
Application of adjustments
PW
Apply paediatric
adjustment
Apply indigenous
adjustment and
remoteness area
adjustment
Apply private
patient service
adjustment and
private patient
accommodation
adjustment
NWAU
51
National Pricing Model
- Emergency -
52
NPM – Emergency
• Classifications:
– Urgency Related Groups (URGs)
– Urgency Disposition Groups (UDGs)
• There is one episode-level adjustment:
– indigenous adjustment
• A single price weight is defined for each URG and for each
UDG.
PW
Apply indigenous adjustment
NWAU
53
National Pricing Model
- Non-Admitted -
54
NPM – Non-Admitted
• Classification:
– Tier 2 Non-Admitted Services Classification
• There is one episode-level adjustment:
– indigenous adjustment
• A single price weight is defined for each in-scope Tier 2
Service class.
PW
Apply indigenous adjustment
NWAU
55
§6
Application of
the National Pricing Model
56
NWAU calculators
• Available from the IHPA website
• Microsoft Excel Workbooks
• One for each service category
1. Copy & Paste activity data into appropriate Workbook
– Input variables defined in Workbooks (incl. formatting)
2. Press button  Validation Checks on input data
 Outputs NWAU value against each record
57
NWAU calculators
Excel NWAU calculator – Acute Admitted
Input variables required:
1. RecordID
9. Pat_SLA
2. Hosp_State
10. FundingSource
3. Hosp_RA06
11. LOS
4. Hosp_Level3ICU_Flag
12. Psych_Days
5. Hosp_Paed_Flag
13. ICUHours
6. Pat_AgeYears
14. SameDay_Flag
7. Pat_Indigenous_Flag
15. DRG6x
8. Pat_Postcode
58
NWAU calculators
Excel NWAU calculator – Subacute & Non-Acute Admitted
Input variables required:
1. RecordID
8. FundingSource
2. Hosp_State
9. Phase_LOS
3. Hosp_RA06
10. SameDay_Flag
4. Pat_AgeYears
11. ANSnapClass_v3
5. Pat_Indigenous_Flag
12. CareTypeCode
6. Pat_Postcode
7. Pat_SLA
59
NWAU calculators
Excel NWAU calculator – Emergency
• Two calculators:
– URG version
– UDG version
• Input variables required:
1. RecordID
2. Pat_Indigenous_Flag
3. URG v1.3 Code / UDG v1.3 Code
60
NWAU calculators
Excel NWAU calculator – Non-Admitted
• Input variables required:
1. RecordID
2. Pat_Indigenous_Flag
3. Tier2_Clinic_Code
61
62