In association with:
Public Hospital Block Funding
Consultation Outcomes
Report
9 November 2012
Public Hospital Block Funding Consultation Outcomes Report
Table of Contents
1.
Introduction .............................................................................................................. 4
2.
Rationale for, and scope of, block funding.................................................................. 5
3.
2.1
Rationale for block funding ................................................................................ 5
2.2
Consultation feedback on rationale for block funding ......................................... 6
2.3
Scope of Block Funding ...................................................................................... 9
2.4
Consultation feedback on scope ......................................................................... 9
2.5
Determination of public hospitals eligible for block funding ............................. 14
Existing approaches to, and cost structures of, block funded hospitals ..................... 16
3.1
Consultation feedback on existing approaches to block funding ....................... 16
3.2
Consultation feedback on cost drivers and cost structures of block funded
hospitals ..................................................................................................................... 19
3.3
4.
5.
Range of block funded hospitals ....................................................................... 21
Original proposals.................................................................................................... 25
4.1
Original proposals for block funding ................................................................. 25
4.2
Consultation feedback on block funding proposal ............................................ 27
Proposed approach to block funding ........................................................................ 39
5.1
Core elements of block funding ........................................................................ 39
5.2
The three block funding options ....................................................................... 44
5.3
Other issues ..................................................................................................... 48
Appendix 1: Submissions ................................................................................................ 51
Appendix 2: Late submission .......................................................................................... 52
References ..................................................................................................................... 54
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Glossary
ABF
Activity based funding
AHHA
Australian Healthcare & Hospitals Association
AMA
Australian Medical Association
ASGC
Australian Standard Geographical Classification
BF
Block Funding
CGC
Commonwealth Grants Commission
COAG
Council of Australian Governments
DoHA
Department of Health and Ageing
FTE
Full Time Equivalent
IHPA
Independent Hospital Pricing Authority
LHN
Local Hospital Network
MPC
Multi-Purpose Centre
MPS
Multi-Purpose Service
MSOAP
Medical Specialist Outreach Assistance Program
NEC
National Efficient Cost
NHCDC
National Hospital Cost Data Collection
NHRA
National Health Reform Agreement
NPHED
National Public Hospital Establishment Database
NRHA
National Rural Health Alliance
NWAU
National Weighted Activity Unit
PF
Pricing Framework
SARIA+
State Accessibility Remoteness Index of Australia Plus
SARRAH
Services for Australian Rural and Remote Allied Health
VHA
Victorian Healthcare Association
Disclaimer
Please note that, in accordance with our Company’s policy, we are obliged to advise that neither the Company
nor any employee nor sub-contractor undertakes responsibility in any way whatsoever to any person or
organisation (other than the Independent Hospital Pricing Authority) in respect of information set out in this
report, including any errors or omissions therein, arising through negligence or otherwise however caused.
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1. Introduction
The Independent Hospital Pricing Authority (IHPA) appointed Health Policy Solutions working in association
with Aspex Consulting (the Consulting Team) to develop, and consult on, policy options for block funding
arrangements and the determination of the national efficient cost for block funded hospitals.
Following the preparation and release of the Public Hospital Block Funding Discussion Paper, the Consulting
Team met with the Commonwealth and all state1 health departments and held a workshop with members of
the National Rural Health Alliance (NRHA) in the two-week period from 8 October to 19 October 2012.
Appendix 1 lists the submissions received on this Discussion Paper by 26 October. (Appendix 2 is the executive
summary of a late submission from NSW). The Consulting Team wishes to acknowledge the collaborative
approach of all consultation participants in making themselves available at short notice to share their
expertise and contribute to shaping the development of national block funding arrangements.
This Consultation Report draws upon four main information sources:
1.
Consultation meetings and submissions specifically on the Public Hospital Block Funding Discussion
Paper;
2.
Other submissions made to IHPA in response to the draft Pricing Framework for 2013-14;
3.
Work undertaken by Health Policy Analysis to analyse the relationship between the activity and costs
of block funded hospitals; and
4.
Subsequent analysis undertaken by the Consulting Team (specifically, Aspex Consulting) to determine
the hospital categories and the mix of availability and service capacity payments.
To distinguish the two sources of submissions, they are referred to as either BF (Block Funding) Submission or
PF (Pricing Framework) Submission as they are cited in this Consultation Report.
This report is organised as follows.
 Chapter 2 examines the rationale for block funding, together with consultation feedback on the policy
objectives that could drive block funding. It also examines issues related to the scope of public
hospitals and public hospital services eligible for block funding.
 Chapter 3 moves to an examination of the existing block funding approaches used by states, as well as
incorporating consultation feedback on the cost drivers that might be relevant in developing a funding
model for block funded hospitals. Chapter 3 provides an overview of the heterogeneity across block
funded hospitals through providing some illustrative profiles.
 Chapter 4 summarises the block funding proposals that were ‘road-tested’ during the consultations.
It includes a thematic analysis of consultation feedback on the core elements of block funding and
reactions to the original block funding options.
 Chapter 5 draws on the consultation feedback and subsequent analysis to outline the core elements
of an approach to block funding. It also describes and evaluates three potential block funding
options, known as the “National Average” option, the “Availability Plus” option and the “Services &
Fixed Costs” option.
1
The term ‘states’ is used to refer to all states and territories throughout this paper.
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2. Rationale for, and scope of, block funding
This chapter addresses two main questions:
1.
2.
2.1
Why (and how) are governments introducing block funding for some public hospitals?
What are the public hospitals and public hospital services that will be covered (be ‘in scope’) for block
funding?
Rationale for block funding
The National Health Reform Agreement (NHRA) requires that activity based funding (ABF) be used ‘wherever
practicable’, but recognises that some hospital services may be ‘better funded through block grants,
including relevant services in rural and regional communities’ (Clause A1(c)).
The Agreement does not provide a detailed rationale for why block funding is ‘better’ for some hospitals.
Block funded hospitals are still expected to be efficient, with block grant funding based on the ‘efficient cost’
of these services. However, the Agreement hints at one of the factors that might be important in driving the
need for block funding. It says that the efficient cost must not only be based on utilisation and the scope and
cost of services, but that it should ensure “that the Local Hospital Network has the appropriate capacity”
(Clause A4) to deliver relevant services. Hence, the Agreement appears to recognise that there are costs, over
and above those able to be addressed through an activity based funding model, that are related to providing
the capacity to deliver services to the local community. In other words, the hospital must be available and
‘keep its doors open’, regardless of the number of patients treated.
Under the NHRA, IHPA is required to develop Block Funding Criteria that can be used to determine which
public hospital services are eligible for block funding. The Block Funding Criteria that have been submitted to
COAG for endorsement are provided in Figure 2.1. The Block Funding Criteria provide further rationale as to
when and why block funding might be required. They identify that block funding will be required when it is
not technically possible to use ABF and when there is an absence of economies of scale that mean some
services would not be financially viable under ABF.
This project is focussing on the second scenario related to the absence of economies of scale and, in
particular, the measurement of economies of scale at the hospital establishment level. (IHPA has
commissioned other work to examine the costs of particular services that may be eligible for block funding,
where these services are provided in public hospitals that are otherwise funded on an activity basis.)
In understanding the rationale for national block funding, it is also important to consider how it will be
introduced. Under the NHRA, states will have a substantial role in regard to block funded hospitals as follows:
 The IHPA is responsible for setting the national efficient cost for block funded hospitals. The national
efficient cost is only used in determining the funding contribution from the Commonwealth
Government. State governments have autonomy in determining their level of funding contribution
to block funded hospitals. In addition, state governments may choose to continue to use statespecific, historical funding approaches to block funded hospitals.
 Related to this, the National Health Reform Agreement specifies that in regard to the Commonwealth
funding contribution:
“Funding for block grants will flow through Pool accounts to State managed funds and from
there to Local Hospital Networks.” (Clause B52b)
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This is different from payments to ABF hospitals which flow directly through Pool accounts (the
National Health Funding Pool) to Local Hospital Networks. While this adds another step in the
payment arrangements, the National Health Reform Agreement clearly specifies in regard to both ABF
and block funding payments that:
“States will not redirect Commonwealth payments:
a.
b.
c.
Between Local Hospital Networks;
Between funding streams (for example from ABF to block funding); or
To adjust the payment calculations underpinning the Commonwealth’s funding.”
(Clause B56)
In other words, the requirement is that the national efficient cost of block funded hospitals
(determined by the IHPA) will be used by the Administrator of the National Funding Pool to calculate
the level of the Commonwealth funding contribution for block funded hospitals. This contribution will
be paid through State managed funds to Local Hospital Networks. This means that LHNs, like States,
may play a role in moderating or varying the impact of the Commonwealth block funding
contribution for individual block funded hospitals. However, this role is likely to vary across States
depending upon the size of their LHNs and the number and mix of ABF and block funded hospitals
within LHNs.
 Finally, for 2013-14, states are guaranteed that the Commonwealth will provide funding equivalent to
the amount that would otherwise have been payable through the National Healthcare Specific
Purpose Payment (Clause A33). The funding guarantee applies to the aggregate of all ABF and block
funded payments.
2.2
Consultation feedback on rationale for block funding
While the Discussion Paper did not include a question on the rationale for block funding, some participants
took the opportunity to raise their views on the policy objectives that should underpin block funding. In
some cases, these policy objectives were not the same as the rationale articulated in the Agreement or the
Block Funding Criteria. It is important to be clear upfront about what block funding is intended to achieve:
otherwise, the effectiveness of the approach to block funding may be evaluated against policy objectives that
were not specified in the NHRA and/or not within the remit of the IHPA.
The AMA argued for a broader policy objective for block funded hospitals, suggesting that:
“The overarching objective for small rural hospitals is not to (simply) support timely access to quality
health services; it must include supporting small rural hospitals in their broader function of supporting
the operation and viability of their local community.” (Professor Dobb, Vice-President AMA BF
Submission)
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Figure 2.1: Block Funding Criteria
Public hospitals, or public hospital services, will be eligible for block grant funding if:
a) The technical requirements for applying activity based funding (ABF) are not able to be satisfied; and/or
b) There is an absence of economies of scale that mean some services would not be financially viable under
ABF.
Examples of circumstances which may meet the criteria proposed above include, for each of the criteria:
Inability to satisfy technical requirements
ABF may be impractical in situations where there is:



No or poor product specification/classification, meaning that there is no basis for
differentiating/describing the ‘product’ that is to be priced; and/or
No or poor costs associated with any product classification, or where there is no cost homogeneity of the
product classification; and/or
No suitable ‘unit of output’ for counting and funding the product, such as a well defined occasion of
service, episode of care, or bed-day, amongst others.
Absence of economies of scale/lack of financial viability
ABF may be impractical in situations where there is:



A low volume of services, with an outcome being that the costs of keeping the health service open and
‘available’ exceed the funding that would be able to be achieved under ABF payments;
Instability or unpredictability in service volumes, accompanied by an inability to manage input costs in
accordance with changing service patterns; and
A skewed profile of services and/or costs.
Other considerations
IHPA is also releasing some indicative guidelines on ‘low volume’ thresholds that might form part of draft Block
Funding Criteria for use from 2013-2014. Under these thresholds, hospitals may be eligible for block funding
if:


They are in a metropolitan area (defined as ‘major city’ in the Australian Standard Geographical
Classification) and they provide ≤ 1,800 inpatient National Weighted Activity Units (NWAU) per annum; or
They are in a rural area (defined as all remaining areas, including ‘inner regional’, ‘outer regional’, ‘remote’
and ‘very remote’ in the Australian Standard Geographical Classification and they provide ≤ 3,500
inpatient NWAU per annum.
The National Rural Health Alliance (BF Submission) raised a series of issues about the environment for small
rural hospitals and the possible consequences or impact of block funding. The Alliance indicated that:
 It hoped that block funding may help resolve the gaps in access to health services in rural
communities, including due to workforce shortages. In noting the $2.2 billion deficit in rural primary
care,1 2 the Alliance argued that block funding based on historical evidence and existing levels of
expenditure in rural communities would not provide equity for rural people.
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 It was important to retain and re-establish maternity services in smaller rural communities. If block
funding reflected the real cost of theatres and birthing services, this “could provide the means for
smaller hospitals to reintroduce perinatal and birthing services”.
 It recognised that “there will be changes in both directions in the size and scope of small hospitals”. It
further noted that it supported “the central tenet of the IHPA’s work that the pricing formula should
do nothing to discourage service improvements delivered through changes in the pattern of service
delivery or in the models of care that underpin such delivery”.
 It emphasized the importance of safety and quality in rural and remote areas. During the
consultation meetings, Alliance members indicated that if ABF matured over time to include levers for
improving quality and safety, it would be desirable for these levers to also apply to block funded
hospitals.
 It argued that an overarching objective should be to improve the transparency of funding for small
rural hospitals “so that communities can hold LHNs and states/territories accountable”. The
Alliance supported “robust local governance and accountability, together with transparent reporting
of resource utilisation, outputs and outcomes”.
 Finally, it valued a block funding approach that would provide flexibility to meet the needs of local
communities, rather than being captured by provider or professional enthusiasms.
Flexibility in block funding models was also supported by the Victorian Healthcare Association (VHA) which
argued that:
“Flexible funding models support locally designed and flexible models of care in small and remote
health services, which addresses the inequitable access to services that currently exists in areas served
by small rural health services.” (VHA PF Submission)
Finally, the Tasmanian Department of Health argued that it was ‘logical’ for block funding to be applied to
small rural hospitals that had “largely fixed costs” that could be quantified by the “inputs required to meet the
base level of service delivery” (Tasmanian Department of Health BF Submission).
Response to consultation feedback
Under the NHRA, the IHPA is charged with determining the efficient cost of block funded services:
“taking account of changes in utilisation, the scope of services provided and the cost of those services
to ensure the Local Hospital Network has the appropriate capacity to deliver the relevant block funded
services and functions”. (Clause A4)
Some of the issues raised by consultation participants are outside the remit of the IHPA. Decisions about the
level of spending on rural health services, including how best to tackle the relative gap in some
Commonwealth-funded programs, should occur in broader political and intergovernmental financing forums.
A block funding model for public hospital services in rural communities may contribute to, but cannot ensure,
the viability of these communities. The pricing of public hospital services is not designed to incentivise the
provision of particular types of services, such as birthing services, in rural communities. Instead, decisions
about the range and service capability level of particular services that will be provided by public hospitals are
made by state governments in association with Local Hospital Networks (LHNs).
However, other policy objectives for block funding cited by consultation participants are broadly consistent
with the IHPA’s Pricing Guidelines (included in the IHPA’s 2012-13 Pricing Framework). These Pricing
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Guidelines apply to all public hospital services, irrespective of whether they are funded through ABF or block
funding and irrespective of their location in metropolitan or rural areas.
2.3
Scope of Block Funding
The ‘scope’ issue applies at two levels:

Whether particular facilities are regarded as public hospitals eligible to receive a Commonwealth
funding contribution; and

Whether particular services provided by eligible public hospitals are, in turn, ‘in scope’ to receive a
Commonwealth funding contribution.
The Discussion Paper indicated that the Pricing Framework had already specified the scope of public hospital
services eligible for Commonwealth funding (the second issue). The scope of eligible public hospital services is
intended to be the same across all hospitals, regardless of whether the hospital is funded through ABF or block
funding. The Discussion Paper further noted that the IHPA was receiving submissions on the scope of eligible
services as part of its concurrent consultation process on the 2013-14 Pricing Framework.
On the issue of which facilities are in scope, the Discussion Paper indicated that there were differences across
states as to whether services in remote locations that provided non-admitted services only (but had no beds)
were counted as public hospitals. This was highlighted by the fact that of the 41 facilities initially identified as
providing non-admitted services only, 31 of these were in Queensland, 9 in New South Wales and 1 in South
Australia. The Discussion Paper noted that:
 Queensland operates outpatient clinics, primary health care centres, community health centres and
health services in many rural and remote communities that do not otherwise have access to public
hospitals. Some of the specialist services provided at these facilities are likely to be equivalent to
non-admitted services provided by public hospitals that are ‘in scope’ under the Tier 2 listing in the
Pricing Framework. Some of these facilities have been included by Queensland in national public
hospital data collections and therefore meet the ‘test’ in the Pricing Framework that they had to be
reported in the 2010 Public Hospitals Establishments Collection to be ruled as ‘in scope’.
 However, potentially similar remote health clinics in the Northern Territory and nursing posts in
Western Australia have historically been regarded as separate from public hospitals in these states.
Consequently, they have not been included in national public hospital data collections.
2.4
Consultation feedback on scope
The consultations revealed some continuing uncertainty about the scope of ‘included’ public hospital services
(prior to making a decision on ABF or block funding), with two main issues identified:
1.
The first issue related to a commonly espoused view that rural hospitals “tend to provide a broader
range of services to the communities they serve” (SARRAH PF Submission). It was then frequently
argued that funding under the NHRA should cover the whole entity for rural public hospitals, rather
than just ‘public hospital services’.
2.
The second issue was about whether some facilities/services that are not commonly recognised as
public hospitals should be included in scope for funding under the NHRA. For example, this question
was raised in regard to stand-alone community health services and remote health facilities that
provided non-admitted services with no inpatient beds.
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Views on funding of rural public hospital ‘entities’
Many consultation participants argued that there is a critical interdependence across rural hospitals, aged
care and primary care and that it is neither possible nor desirable to develop a funding model for ‘public
hospital services’ in isolation from other health and aged care services.
The Tasmanian Department of Health commented that:
“Tasmania’s small rural hospitals’ costs for admitted and non-admitted activity are indivisible – it is
extremely difficult if not impossible to accurately separate out costs that are captured in a rural
inpatient facility between aged care (including supplementation of aged care services), acute care,
emergency care, community care etc. This is because the services are so integrated and every site is
slightly different in terms of what positions are funded from the hospital cost centre, what mix of
services they provide etc.” (Tasmanian Department of Health BF Submission)
The ‘blurring’ of care in rural settings was also emphasised by the National Rural Health Alliance:
“The Alliance has an ongoing interest in how ‘primary care’ is defined, but it makes the point that
distinctions between primary, acute, aged, disability and rehabilitation are much less clear and thus
less important in rural and remote areas than in major conurbations.” (NRHA BF Submission)
Several states argued that they had invested in aged and primary care services in rural communities (often
located at public hospitals), in response to the lack of provision of private services that are a Commonwealth
funding responsibility. For example, Western Australia argued that:
“WA Health acts as a key provider of primary health care services in areas where services are not
delivered by other Commonwealth-supported and non-government providers. Essentially, WA Health
‘fills the gap’ in primary health care service delivery in the state, particularly in country areas, where in
many circumstances, the state facilities and workforce are the only providers of primary care services’.
(West Australian Department of Health PF Submission)
Similarly, Victoria suggested that:
“The scope of services provided by small rural health services and funded through the specific purpose
payment needs to be considered in the context of the community access to the full range of services
offered in larger population centres. In many small communities there is limited or no access to
private hospital and community services, MBS funded GP services and the full range of public sub
acute and community services”. (Victorian Department of Health BF Submission)
Some groups argued that tight integration of health and aged care services was vital in rural communities to
ensure a critical mass in workforce recruitment and retention and to promote sustainable models of care. For
example, Tasmania cited examples of the overlapping roles of rural public hospitals as follows:
“Some services have additional roles to address a particular local community need, for example,
Midlands Multipurpose Centre has a role in supporting the local ambulance response on a 24 hour/7
days a week basis. In addition some services facilitate out of hours access to medications in rural
areas when a doctor is not available to attend the facility and the community pharmacy is closed. All
of these additional roles in the local community incur additional expenses for the service but the
collaborative approaches provide benefits to the community in terms of addressing inequities in access
to needed health services. In addition, the latter example is a workforce strategy to reduce excessive
callouts for busy rural doctors. This is especially relevant for solo practitioners and ensures an ongoing
general practice presence in the community.” (Tasmanian Department of Health BF Submission)
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Similarly, an AMA representative commented that:
“Any rural hospital is actually a pillar that supports its local community, a core component that makes
the community viable and vibrant. The presence of the hospital is critical for the presence of other
services, particularly medical care which is frequently tightly integrated with the hospital. Many rural
communities would not be viable without their hospital and access to the associated medical care.”
(Professor Dobb, Vice-President AMA BF Submission)
And, SARRAH noted that:
“It is noteworthy that in many smaller and more remote communities those people in need of primary
health care are reliant on nursing and allied health services. If these health professionals are well
supported then the need to access specialist and hospital services will be reduced.” (SARRAH PF
Submission)
However, the Commonwealth Department of Health and Ageing (DoHA) does not support changing the scope
of public hospital services eligible for Commonwealth funding in rural communities. DoHA notes that:
“The national efficient cost (NEC) should not incorporate funding for non public hospital services in
small rural hospitals...The IHPA must ensure that funding from other state and territory programs is
removed from the calculation of the NEC.” (Commonwealth DoHA BF Submission)
In justifying this position, DoHA notes that:
“Clause A6 of the NHRA provides that the Commonwealth will not pay twice under the NHRA for
patient services already funded through other Commonwealth programs (except as allowed for by
clause A7). Accordingly, the national efficient cost for block funded services should be net of the
contribution to underlying hospital costs made by other Commonwealth programs, such as
Multipurpose Service Program funding for integrated health and aged care services for small rural and
remote communities.” (Commonwealth DoHA PF Submission)
Views on funding of non-admitted service facilities
The Discussion Paper identified that some Queensland non-admitted facilities had been included in the
National Public Hospital Establishment Data Collection (and were therefore eligible for Commonwealth
funding as public hospitals), but remote health clinics in the NT and nursing posts in WA were not reported as
public hospitals.
Other states also indicated that they operate non-admitted clinics that may be similar to the Queensland nonadmitted facilities. For example:
 Tasmania indicated that it also had some remote services that provide an emergency response role
on Bruny Island, Rosebery and Cape Barren Island that “are currently not recognised as hospital
services and are therefore not included in the Public Hospital Establishment data collection”.
(Tasmanian Department of Health BF Submission)
 South Australia advised during the consultation meetings that it operated non-admitted clinics at
several locations including Andamooka, Marree, Oodnadatta, Mintabie and Marla. The roles of these
clinics vary, but tend to be more primary care focussed (albeit with some clinics providing an urgent
care facility). It was likely that most of the services provided by these clinics would not be equivalent
to ‘public hospital services’ eligible for Commonwealth funding under the NHRA.
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The Australian Healthcare & Hospitals Association (AHHA) suggested that:
“There is little consistency in the funding approach being taken by the states and territories in relation
to these smaller services”. (AHHA BF Submission)
The consultation meetings suggested that states were still undecided about the merits of having their small,
non-admitted only services recognised as ‘public hospital services’ for the purposes of Commonwealth funding
under the NHRA. Barriers cited by some states included: the historical and organisational distinctions between
these facilities and public hospitals; the challenges in distinguishing the activity and costs that would be ‘in
scope’ versus excluded primary health care services; and concerns about the application of reporting and
accountability requirements on small non-admitted facilities outweighing the benefits of access to
Commonwealth funding for relatively, low cost services.
However, in its subsequent submission, the NT Department of Health argued that the absence of a common
definition of a small rural hospital is problematic. It noted that:
“The report accepts each jurisdiction’s separate definition of a hospital, based on historical situations,
rather than any commonality in purpose or capability. The NT considers further development of the
‘small rural hospital’ model is required to fairly include all hospital activity.” (NT Department of Health
PF Submission)
The NT Department of Health argued that as their remote health clinics had historically not been recognised as
hospitals, the NT was substantially disadvantaged as the costs of patient transport from remote health clinics
to public hospitals were not recognised as inter-hospital transfer costs within the NHCDC. The NT Department
of Health noted that the remote health clinics:
“...provide many functions of a hospital including critical emergency care and stabilisation, managing
the transfer of critically ill patients to hospital, intravenous therapy for resuscitation and drug therapy,
electrocardiographic investigations, outpatient clinics via specialist outreach program and in some
centres, radiology and ultrasound and renal dialysis.” (NT Department of Health PF Submission)
In regard to non-admitted facilities, the Commonwealth Department of Health and Ageing indicated that
‘primary healthcare clinics’ (that had been identified by Queensland during the 2012-13 bilateral negotiations
with the Commonwealth) should not be considered as in scope services eligible for Commonwealth funding
(Commonwealth DoHA BF submission). It was open, however, to the inclusion of non-admitted facilities that
provided the equivalent of specialist outpatient services if these had been reported in the 2010 National Public
Hospital Establishments Collection. The Department advised it had stressed during the 2012-13 bilateral
negotiations with each state on block funding, that the inclusion of services as block funded in 2012-13 did not
mean that these would automatically be accepted as being in scope in 2013-14.
Response to consultation feedback
While consultation participants favoured a funding model across the whole rural hospital (covering all services
provided by the entity), the NHRA is explicit that the shared funding responsibility across governments relates
to ‘public hospital services’ only. The IHPA’s Pricing Framework makes it clear that:
 Not all non-admitted services provided by public hospitals will be included as in-scope public hospital
services. It lists examples of services that are not included as in-scope public hospital services as
services provided by GP clinics or aged care assessment teams, even if they are provided at a public
hospital campus.
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While residential and community-based aged care and primary care may be provided through small rural
hospitals, these services are not eligible for Commonwealth funding as ‘public hospital services’.
The second issue about the reporting and funding of non-admitted only facilities is somewhat more
ambiguous. The Pricing Framework distinguishes between two types of eligible non-admitted services:
 Specialist outpatient clinic services: Eligible services have to be within one of the approved Tier 2
clinics. The IHPA has also specified a requirement that these services be ‘required to report as public
hospital services in a national dataset’, namely the 2010 National Public Hospital Establishments
Collection. (This mirrors a similar requirement in the NHRA that sets 2010 as the baseline for
recognising public hospital services).
 Other non-admitted patient services: The definition of these services by the IHPA in the Pricing
Framework requires that they meet one or more of four ‘tests’. To be recognised as an eligible ‘other
non-admitted patient service’, the service must be:
1.
2.
3.
4.
Directly related to an inpatient admission or an emergency department attendance; OR
Intended to substitute directly for an inpatient admission or emergency department
attendance; OR
Expected to improve the health or better manage the symptoms of persons with physical or
mental health conditions who have a history of frequent hospital attendance or admission;
OR
Reported as a public hospital service in the Public Hospitals Establishment Collection 2010.
The question of whether facilities providing non-admitted only services are ‘public hospital services’ was not
directly tackled in 2012-13. This was because while the IHPA had responsibility for setting the national
efficient price for ABF services, the Commonwealth Department of Health and Ageing had responsibility for
bilateral negotiations on block funding that occurred largely at the aggregate funding level. That is, states
nominated the quantum of funding that they wanted to have allocated towards block funded services, but
there was not a transparent process to establish consistency of block funded public hospital services across
states.
The concept that ‘non-admitted only service facilities’ may be recognised as providing eligible public hospital
services may be unexpected for some people. However, it flows from the acknowledgement in the Pricing
Framework that public hospital services may be provided by “public hospitals and by other organisations”. It is
also a logical outcome of the recognition in the Pricing Framework that “in-scope, non-admitted services may
be provided in any setting” including at a hospital, in the community or in a person’s home.
To determine eligibility of the services provided by non-admitted only facilities in 2013-14, the IHPA would
be required to apply a multi-step decision tree as follows:
1.
Did the non-admitted services facility report as a public hospital service in the 2010 Public Hospitals
Establishment Collection?
a) If Yes, go to Step 2
b) If No, go to Step 3
2.
For non-admitted services facilities that reported as public hospital services in the 2010 Public
Hospitals Establishment Collection:
a)
Did it provide in-scope ‘specialist outpatient clinic services’ listed in Category A, In-Scope Tier
2 Clinics List?
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
If Yes, these clinics would be assessed as ‘in scope’ and eligible to receive a
Commonwealth funding contribution.

If No, go to Step 2b
b) Did it provide ‘other non-admitted patient services’ in Category B?

3.
If Yes, these services would be assessed as ‘in scope’ and eligible to receive a
Commonwealth funding contribution.
For non-admitted service facilities that did not report as public hospital services in the 2010 Public
Hospitals Establishment Collection, were the non-admitted services:
a)
Directly related to an inpatient admission or an emergency department attendance; or
b) Intended to substitute directly for an inpatient admission or emergency department
attendance; or
c)
Expected to improve the health or better manage the symptoms of a person with physical or
mental health conditions who have a history of frequent hospital attendance or admission.

If Yes to any of 3a, 3b or 3c), those non-admitted services would be assessed as ‘in
scope’ and eligible to receive a Commonwealth funding contribution.
This illustrates that there are multiple ‘pathways’ by which the non-admitted services provided by ‘nonadmitted only facilities’ could be determined as being eligible to receive a Commonwealth funding
contribution as in-scope ‘public hospital services’. The most straightforward pathway is if they reported in the
2010 Public Hospitals Establishment Collection AND provided either specialist outpatient clinics listed in
Category A or other non-admitted services under Category B.
Where non-admitted only facilities did not report through the 2010 Public Hospitals Establishment Collection,
they must satisfy one of the other three tests to be included as an ‘other non-admitted patient service’ under
Category B. The Pricing Framework states in regard to Category B services that “jurisdictions will be invited to
propose programs that will be included or excluded from Category B” and that “jurisdictions will be required to
support the case for the inclusion or exclusion of services based on the four criteria”.
In conclusion, the application of the Pricing Framework in 2013-14 to ‘non-admitted only service facilities’ will
require relevant states to provide supporting information to the IHPA that justifies how these services meet
the criteria for eligibility as in-scope public hospital services.
Recommendation
R1 That the IHPA endorse the multi-step approach outlined above for assessment of non-admitted
service only facilities to determine their eligibility for Commonwealth funding as in-scope, public
hospital services.
2.5
Determination of public hospitals eligible for block funding
As previously described, the Block Funding Criteria provide the framework under which decisions are made
about which public hospital services will be funded on a block funded basis. The NHRA indicates that states
have a role in advising IHPA on how their hospital services meet the Block Funding Criteria. Following the
provision of this advice, IHPA then makes a determination on the public hospitals that are eligible for
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Commonwealth funding on a block grant basis. (This is different to the 2012-13 process that involved bilateral
agreements between the Commonwealth and each state).
For the determination of block funded hospitals in 2013/14, the process has occurred through two parallel
steps:
 Health Policy Analysis has calculated the acute admitted NWAU for each public hospital in 2010-11 to
identify the hospitals for which activity is less than the low-volume thresholds included in the Block
Funding Criteria. This has used 2010-11 acute admitted patients data included in the Admitted
Patient Care National Minimum Data Set (NMDS), with the calculation of acute admitted NWAU based
on the methodology specified by IHPA in the document National Pricing Model Technical Specification
2012-13.
 States have separately advised IHPA of the public hospitals that they believe should be block funded
in 2013-14 using the Block Funded Criteria. In providing this advice, states are able to recommend
that hospitals with activity levels below the low-volume threshold are funded on an ABF basis,
rather than through block funding. However, IHPA will not agree to the converse situation:
hospitals with activity in excess of that specified in the low-volume thresholds will continue to be
funded under ABF and will not be eligible for block funding. It should be noted that some states
notified IHPA of ABF hospitals (rather than block funded hospitals) on the assumption that all other
hospitals would be block funded. However, there is no ‘agreed’ listing of public hospitals and public
hospitals may be identified differently across various national datasets. This means that IHPA will be
confirming the lists of ABF and block funded hospitals with states.
The Public Hospital Block Funding Discussion Paper indicated that 559 public hospitals had been provisionally
identified as eligible for block funding based on the initial analysis undertaken by Health Policy Analysis. Since
early October, this listing has been revised based on feedback from states to remove 75 hospitals from the list
of block funded hospitals, resulting in a revised total of 484 hospitals that will be block funded in 2013-14.
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3. Existing approaches to, and cost structures of, block funded
hospitals
Having identified the potential scope of block funded hospitals, this chapter considers two issues that might
help inform the development of an approach to block funding, namely:
1.
2.
3.1
How do states currently fund public hospital services that are not funded on an activity basis?
What do we know about the cost drivers or cost structures of these block funded public hospitals?
Consultation feedback on existing approaches to block funding
The Discussion Paper noted that the common wisdom was that small rural hospitals in most states are funded
on a largely historical basis under a single block funding payment. It included further descriptive information
on the funding approach used by some states based on a desktop review and foreshadowed that states would
be asked to outline their current approach to block funding as part of the consultation meetings. The
following summary is based on consultation feedback, information in any submissions received to date and the
previous desktop review.
In general, most states are continuing to set budgets for block funded hospitals on the basis of historical
costs. While submissions from states identified particular factors generating higher costs for these hospitals,
most states have not developed a funding formula or approach to block funding that explicitly includes these
cost drivers.
The exception is South Australia which has calculated modelled budgets for ‘low volume rural hospitals’
using a complex ‘build-up’ formula since the mid 1990s.3 The funding methodology groups low volume rural
hospitals into three tiers as follows:



Tier 1: nursing home daily bed average of ≤ 12 and acute daily bed average of ≤8;
Tier 2: nursing home daily bed average of > 12 and acute daily bed average > 8 but < 13; or
Tier 3: nursing home daily bed average ≥ 20 and acute daily bed average ≥ 13.
The modelled build-up of funding for low volume rural hospitals in South Australia comprises:
 Nursing: the model calculates the clinical component of nursing costs based on assumptions about
nursing hours per patient per day for different types of patients, with minimum levels of nurse
staffing required per shift. It also incorporates funding for an executive officer/director of nursing
role and a clinical nurse consultant role. It then multiplies the required FTE by the rates of pay
incorporating enterprise bargaining arrangements and various costs and allowances;
 Other salaries and wages allocations: the model specifies the staff full time equivalent (FTE)
allocations for each of the three tiers of hospitals, disaggregated by administration, housekeeping,
catering, maintenance and diversional therapy staff. It then multiplies the required FTE by the rates
of pay incorporating enterprise bargaining arrangements and various costs and allowances; and
 Goods and services: the model specifies the average costs of providing goods and services that
contribute to patient care including: food services, drug services, medical, paramedical & laboratory
supplies, fuel, light & power, domestic charges, repairs & maintenance, linen services, motor vehicle
operating expenses, rent & rates; staff development, other administration expenses, patient
transport, pathology services, rural health enhancement package, DVA fee for service, outreach
grants, other site specifics and fee for service.
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The South Australian approach to funding low volume rural hospitals is partly an input-based model. The SA
Department of Health describes this model as a way “to address funding constraints that had accrued over
time that had negative impact on the capacity to deliver and demonstrate accountability for an appropriate
range and mix of health services locally”. 4
All other states described block funding as being driven largely by historical costs, with the application of
relevant indexation and/or productivity dividends, together with additional funding tied to budget initiatives
(e.g. new services). Other information provided by states included:
 Tasmania: Funding for Tasmanian block funded small rural hospitals is on an historical basis and is
intended to recognise minimum operating costs. In its determination of block funding, Tasmania
uses an approach that is somewhat similar to SA. It calculates the minimum operating costs for
particular services (for example, minimum nurse staffing requirements, or the provision of an
emergency service capability). However, Tasmania indicated that most of its block funded hospitals
operated at costs in excess of this build-up approach and that these hospitals received block funding
that reflected their current costs. The budget for block funded hospitals is not split by service streams
(such as acute, aged care or primary care), with hospitals instead receiving an aggregate budget
across all these services.
 Northern Territory: Block funding is used by the NT to provide “the balance of funding for the
Commonwealth block funded services” and to fund “services that are out of scope or excluded from
the ABF scope of services”. The NT provided detailed information on its 2012-13 forecast for each of
its two LHNs, identifying the budget build-up for each of its five public hospitals (three of which are
above the low-volume thresholds and therefore receive Commonwealth funding on an ABF basis; and
two of which are above the low-volume thresholds and therefore eligible for Commonwealth funding
on a block funding basis). For each of its five hospitals, the NT calculates the amount of funding that
would be generated through ABF. It also calculates specific blocks of funding for each of its five
hospitals that are notionally allocated to meet the costs of services/functions including: teaching,
training & research; ‘community service obligation’ hospitals; mental health services; subacute
services; inter-hospital transfers and primary evacuations; supplementary funding; and network
transition funding. The NT notes that:
“Activity based funding is given prominence even in block funded hospitals in order to test the
boundaries of where activity based funding will, and will not, meet the costs of delivering
services in NT hospitals. In the long term it is expected that all hospitals in the NT will be
funded by a mixture of activity based and block payments.” (NT BF Submission)
 Western Australia: Block funding is provided on an historical basis, with no disaggregation of funding
into different programs such as acute or aged care. WA is planning to undertake more detailed
examination of the activities and costs of these hospitals in the future. This may include moving to
patient costing of services at some of the larger block funded hospitals. WA has developed a cost
disability index that is based on calculating the modelled costs of public hospital services across
different regions. However, the cost disability index is not directly incorporated in the budget
determination of block funded hospitals.
 Queensland: As specified in the 2011-12 Queensland Business Rules and Guidelines5, Queensland
funds health services that are not covered by ABF on a grant or historical basis. Queensland Health
publishes annual service agreements for each of its 17 Hospital and Health Services (the Queensland
title for Local Hospital Networks). For hospitals that are not funded under ABF, the service agreement
specifies the budget and activity at an aggregate level.
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 New South Wales: In its consultation meeting, NSW advised that budgets for block funded hospitals
were published on its intranet.
 Victoria: A block funding model has applied to Victorian small rural health services for ten years. This
model currently applies to 44 small rural health services and is reported as a separate output group in
the Victorian State budget. Small rural health services are allocated budgets, with separate blocks of
funding provided for four output groups: acute health services, aged care, HACC and primary care.
The funding model provides small rural health services with flexibility to determine service type and
volume. Victoria stressed that a key element of its approach to block funding of small rural health
services was that:
“Activity funded outputs are not subject to recall. This allows health services to shift
resources to community based models of care as required. This has been particularly
important in areas of declining population or areas where demand for acute beds is
reducing”. (Victorian Department of Health BF Submission)
 ACT: The only hospital eligible for block funding in the ACT is an early parenting centre/mothercraft
service. ACT advised that this hospital was funded largely on an historical block funding basis, with
funding changes related to movements in the number of beds provided.
Implications for block funding from consultation feedback
The historical approach to block funding by most states is essentially about recognising the costs of individual
hospitals. It is thus not readily translatable to a national model for block funding based on efficient costs.
However, there are some lessons to consider in developing a national approach to block funding:
1.
Block funding provided to small rural health hospital is usually provided at the whole entity level,
covering all health and aged care services provided by the small rural hospital. As noted by several
states, block funding typically covers not only in-scope ‘public hospital services’, but a range of other
services provided through rural facilities including primary health, public health and aged care. While
a few states may split their budget allocation for these hospitals into service streams, most do not.
(In addition, consultation participants noted that small rural hospitals are often supported through
other funding streams including the Medical Specialist Outreach Assistance Program (MSOAP) and
Commonwealth Multipurpose Service (MPS) program funding). One important implication of the
current block funding approaches is that the expenditure data reported by small rural hospitals will
generally not be able to be split to accurately identify the ‘cost base’ for in-scope public hospital
services. The Health Policy Analysis report examines in further detail the methodology that was used
to determine the expenditure for public hospital services provided at block funded hospitals. In
general, the expenditure reported is at the ‘establishment’ or whole entity level, meaning that it is
highly likely that some small rural hospitals have included expenditure on services that are not in
scope for a Commonwealth funding contribution under the NHRA including aged care and primary
care in their reporting to the National Public Hospital Establishment Database. (This issue is further
discussed in Chapter 4).
2.
The approach to modelling budgets of small rural hospitals used by South Australia is intended to
determine minimum (or expected) operating costs associated with specified inputs. It may be more
‘accurate’ than historically determined block funding used in most other states. However, it is highly
complex to understand and may impose additional administrative and reporting burdens (particularly
in states that do not have robust patient costing data for small rural hospitals). It is also closely linked
to local models of care and expectations about service delivery, as well as state-specific costs
reflected in enterprise bargain agreements. A modelled build-up approach to determining block
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funding based on the costs of fixed inputs is not compatible with determining a national efficient
cost for block funded hospitals.
3.
3.2
While states may include ‘activity targets’ or ‘service expectations’ for block funded hospitals in
service agreements with LHNs, the funding is not directly ‘at risk’. There is certainty of funding, with
no ‘recall’ or reconciliation based on the actual level/type of services delivered, for block funded
hospitals. As noted by several states, this provides small rural hospitals with the flexibility to tailor
service delivery to meet local community needs including shifting from bed-based to ambulatory
services or changing the range of services provided in response to changing population demographics.
Access to ‘guaranteed funding’ is an integral element of block funding that will be proposed for
inclusion in national block funding arrangements outlined in Chapter 4.
Consultation feedback on cost drivers and cost structures of block funded hospitals
The Discussion Paper identified only two Australian studies that provided empirical evidence on the costs of
rural health services and the factors affecting these costs. The Discussion Paper asked for information on any
other published studies or evidence on the factors contributing to differences in the cost structures of rural
hospitals.
Some consultation participants noted that there were no other relevant Australian studies. In its submission,
the Tasmanian Department of Health identified two recent US studies examining the costs of rural American
hospitals. While noting that “funding mechanisms and market forces are not generalisable to the
Australian/Tasmanian context”, the submission suggested that “there would seem to be some similar factors
impacting on the cost of delivering rural hospital services” (Tasmanian Department of Health BF Submission).
In brief, the two studies included in the Tasmanian submission found that:
 Rural and small hospitals face significant factors that hinder performance relative to urban and larger
hospitals. Performance is impacted by: size of hospitals, occupancy rate, ownership status, degree of
market competition, teaching status and measure of financial indebtedness; 6 and
 The US introduced the Rural Hospital Flexibility Program in 1997 under which rural hospitals could be
designated as ‘critical access hospitals’ and so not be subject to prospective payment (the American
equivalent of ABF). Hospitals participating in this program receive “cost-based reimbursement at
101% of their allowable and reasonable costs”. This study suggested that critical access hospitals
became more inefficient over time as they relied on cost-based reimbursement. The authors
suggested that further research was necessary into the feasibility and potential impact of alternative
payment approaches (including modified cost-based payments or modified prospective payment) in
order “to increase efficiency without harming financial viability, access and quality”.7
Apart from these studies, consultation participants cited a range of factors that may contribute to higher costs
for small rural hospitals including:
 The mix of services: It was suggested, for example, that hospitals would have higher costs if they
provided maternity and surgical services than if they did not. Tasmania also noted that its funding
approach for small rural hospitals recognised the additional costs of providing an emergency response
capability. Other consultation participants noted that the absence of private sector services resulted
in small rural hospitals having to provide a broader range of services.
 Location: Remoteness was frequently cited as a cost driver. More specifically, costs associated with
remoteness include staffing (locums, fly-in, fly-out and drive-in, drive-out staff), accommodation for
staff, and transport costs for staff and patients. Another dimension of location related to peak or
unexpected demands for hospital services related to seasonal tourist influxes or the growth of
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industries such as mining. Some states argued that the current Australian Standard Geographical
Classification (ASGC) may not adequately capture differential location costs with ASGC regions. For
example, Western Australia proposed that the IHPA should consider developing an alternative
approach to the current classification system, citing the example of the State
Accessibility/Remoteness Index of Australia Plus (SARIA+) 2006 used by the CGC as a basis for
classifying remoteness relative to the relevant State capital city cost. In commenting on location
adjustments used under national ABF, Western Australia argued that the current delineation based on
ASGC by postcode does not differentiate sufficiently between regional locations, citing these
examples:
“Patient A is transported for treatment from Eucla to Perth (1500km) attracting a loading of
8.7 per cent compared with Patient B transported from Mallacoota to Melbourne (500km)
with a loading of 5.3 per cent.
Patient X from Kununurra to Perth (3000km) attracts the same loading as patient Y
transported from Wyalkatchem to Perth (200km).” (West Australian Department of Health PF
Submission)
Other dimensions of location cited by consultation participants included: distance (by land or air)
from either a major city or major hospital; isolation for health services located on islands or in remote
communities accessible only by air or separated by rugged terrain.
 Medical staffing models: In many small rural hospitals, medical services are provided mainly by local
GPs. Tasmania’s rural hospitals have no salaried resident medical officers, with GPs providing care
under the Tasmanian Rural Medical Practitioner Agreement.8 Under this Agreement, the hospitals are
grouped into three tiers based on the availability of GPs:
o
Tier 1 rural hospitals: are inpatient facilities with a contracted GP who is credentialed in
emergency treatment to be continuously contactable and able to attend within 15 minutes;
o
Tier 2 rural hospitals: are inpatient facilities with a contracted GP with clinical privileges
appropriate to the role of the facility, and who is continuously contactable and able to attend
within 30 minutes. The doctor may be uncontactable by prior arrangement with the hospital
for an aggregate period not exceeding two hours in any 24 hour period.
o
Tier 3 rural hospitals: are non-inpatient facilities (may have one or two observation beds)
with a contracted community GP who is contactable during agreed hours and who provides a
continuously staffed telephone service when he/she is unavailable for any period exceeding
two hours.
Tasmania noted that it incurred higher costs in some locations where there were no private GPs and it
had to contract with a GP management company to ensure a GP presence (Tasmanian Department of
Health BF Submission).
 Specialist services: Consultation participants noted the higher costs associated with the provision of
specialist services.
“Some rural health services routinely provide financial incentives to attract clinicians who in
turn can bill the patient or the health provider a fee for service rate based on the Medicare
Benefits scheme which is generally greater than 100 per cent of cost. The lack of choice for
rural services restricts their capacity to negotiate sessional rates with clinicians on par with
normal rates for metropolitan clinicians.” (Victorian Healthcare Association PF Submission)
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In more remote locations, states noted that there were very high costs associated with the provision
of locum services citing $2000/day. High staff turnover in remote regions was an issue across all
categories of staff (medical, nursing, administration, cleaning and catering), leading to a highly
casualised workforce.
However, the Commonwealth Department of Health and Ageing (PF Submission) commented that
locum services are not directly correlated to rurality, citing the example that some coastal rural areas
experience fewer difficulties in recruiting and retaining clinical staff.
 Patient transport/cost of boarders: The Northern Territory (PF Submission) suggested that their
major issue was the lack of recognition of the costs of patient (and escort) transport from remote
clinics to hospitals and the cost of boarders. While inter-hospital transport costs are included in the
NHCDC, the costs of emergency medical retrievals from the network of about 70 remote health
centres in the NT to public hospitals are not included as remote health clinics are not recognised as
hospitals, so the transfers are not counted as ‘inter-hospital transfers’. During the consultations, the
NT provided some indicative breakdowns of transport costs for Round 15 of the NHCDC, suggesting
that ‘included’ inter-hospital transfers were in the order of $25 to $28 million. However, retrieval
costs (which include transfers of patients from remote health clinics to hospitals) were excluded from
the NHCDC and were in the order of $45 to $50 million. The NT is undertaking further work to
understand the cost components within its block funding contract for transport and provided some
additional material on transport costs with their submission.
 Patient demographics (including Indigeneity): Small rural hospitals may have a higher proportion of
Indigenous patients. The Northern Territory indicated that language and cultural requirements were
cost drivers (including health literacy, need for interpreters, cultural liaison officers, appropriate
security, training for staff, need for family members as escort/boarder for patient to undergo full
course of treatment and follow-up). Other consultation participants suggested that some of their
small rural hospitals were in areas of relative social disadvantage with the local community having
higher morbidity than the population average.
Implications for block funding from consultation feedback
As noted in the Discussion Paper, most of the information on higher costs of small rural hospitals is anecdotal
with few published studies quantifying the size and impact of particular cost drivers. No additional published
studies on the costs of Australian rural hospitals were identified during the consultations. With the exception
of South Australia, states simply incorporate any higher costs for small rural hospitals through funding on an
historical cost basis. That is, states do not attempt to disaggregate their block funding to recognise the
specific contribution of particular cost drivers, but instead pay small rural hospitals on a simple block
funding model with higher costs built into the historical base.
In determining the efficient cost of block funded hospitals, the IHPA is required under the NHRA to consider
the actual costs of these services. However, the IHPA could follow the approach currently used by states in
using the existing cost base for small rural hospitals, with no need for a complex formula that assessed the
costs of particular factors. The complexity or simplicity of a national approach to block funding depends, in
part, upon the extent of hetereogeneity across block funded hospitals, an issue which is examined next.
3.3
Range of block funded hospitals
Section 2.5 indicated that 484 hospitals would be block funded in 2013-14 based upon a two-fold test:

They provided activity below the low volume thresholds in the Block Funding Criteria (<1800
admitted NWAU for metropolitan hospitals and <3500 admitted NWAU for rural hospitals); and
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
States had nominated that they wanted these hospitals to be block funded, rather than funded on an
ABF basis. (Other hospitals with activity below the low volume thresholds have been nominated for
ABF by some states).
Table 3.1 provides an overview of these hospitals which have initially been grouped based on:
 Location: metropolitan or rural; and
 Hospital type/service mix: hospitals have been grouped based on the predominant mix of services
provided into one of five categories:
o Acute & mixed acute/subacute;
o Non-admitted services only;
o Subacute services;
o Designated psychiatric services; or
o Mothercraft services.
The non-admitted services only group of facilities has been modified (relative to its presentation in the
Discussion Paper) to recognise that there is some ‘blurring’ with hospitals that have extremely, low numbers of
admitted patients. The ‘blurring’ works in both directions:
 The facilities which are supposedly solely non-admitted facilities often have an observation bed (that
is used for emergency stabilisation) and so may record some ‘admissions’ even if they report no beds
in national data collections; and
 Some very small hospitals essentially have almost no admissions (and they may only have one or two
beds). A cut-off point has been used of 50 overnight bed days annually (equal to one overnight
admission/week) and these facilities have been incorporated into the ‘non-admitted services’ group.
In summary, the non-admitted services group comprises facilities that predominantly provide non-admitted
services and where admissions can be viewed as the exception (if overnight stays occur, they are most likely
to be unplanned and probably related to emergency stabilisation prior to transfer of the patient).
Table 3.1: Overview of block funded hospitals in 2013-14
Hospital type/Service mix
Acute & mixed acute/subacute
Subacute
Designated psychiatric
Mothercraft service
Non-admitted services
Total
Rural hospitals (No)
385
9
5
0
63
462
Metropolitan
hospitals (No)
7
9
3
3
0
22
Total hospitals
(No)
392
18
8
3
63
484
Source: Health Policy Analysis, 2012, Identification and determination of efficient cost for block funded hospitals project, Draft Final Report
Table 3.1 indicates that the majority of block funded hospitals are small rural hospitals. However, small rural
hospitals are highly diverse across many parameters including:





Service profile (types of services provided including surgery, birthing, dialysis, emergency
stabilisation) and service capability (their role delineation levels);
Size (volume of activity, number of beds);
Location (AGSC categories, road/flight access, travelling time);
Clinical staffing models (access to VMOs, GP models, locum services);
Presence/absence of co-located residential aged care services (including in multipurpose services or
as separate acute and aged care services);
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

Networking and governance arrangements (including stand-alone hospitals, facilities that form part of
a multi-campus hospital, hospitals that are referral hospitals for other small rural hospitals etc);
Expenditure.
The diversity of small rural hospitals that will be block funded in 2013-14 is illustrated by the following
examples (drawn from the Health Policy Analysis work, consultations, submissions and other public reports):
 Gove District Hospital (NT) is a 32 bed acute hospital that mainly cares for patients who are
Indigenous and from very remote communities. It provides medical, surgical, paediatric, respite and
maternity services. There are 15 remote community clinics that refer patients to hospital for
inpatient, outpatient and specialist care. The hospital also provides a district medical officer service
to the region. This role encompasses medical advice, conduction of community clinic visits, orders to
admit patients to the hospital, evacuation of patients via Air Medical Services to Royal Darwin
Hospital. In 2011 it had reported expenditure of $22 million and treated about 2,200 acute admitted
patients. It also has 4 high care and 2 community aged care packages funded under an MPS
arrangement. The hospital is located in a very remote area under AGSC.
 Leongatha Hospital (Vic) is a 52 bed (46 overnight beds) acute hospital located in the Gippsland
region of Victoria. It is about 130 kilometres by road to Melbourne, with the hospital located in an
inner regional area under AGSC. It provides medical, surgical, paediatric, respite and maternity
services. The hospital provided about 2,900 acute admissions in 2010-11, equivalent to total NWAU
of about 2,200. There were about 5,600 emergency department presentations in that year and about
14,900 other non admitted occasions of service. In 2010-11 Leongatha Hospital reported expenditure
of around $16.1 million. Leongatha Hospital is part of the Gippsland Southern Health Service. There
is a 36 bed high care residential aged care facility located on the grounds at Leongatha Memorial
Hospital which is also operated by the Gippsland Southern Health Service.
 Beaconsfield Multipurpose Service (Tas) has 4 acute beds, but is predominantly an aged care service
with 18 aged care beds. In 2010-11 it had 28 acute admissions with an average length of stay of 23
days. There is no theatre or birthing capacity, although it has a co-located paramedic ambulance. It
provides no outpatient services, but offers a range of local community health services (including
physiotherapy, home maintenance, child health). Medical services are provided by a contracted GP
who lives 17 km away and visits the hospital about three times each week. The nearest major
hospital is Launceston General Hospital (50 km, 40 minutes drive). In 2011, it had reported
expenditure of $3.5 million. The hospital is located in an ‘outer regional’ area under AGSC.
 Aurukun Health Centre (Qld) is located on the west coast of Cape York and is essentially a large, nonadmitted services only facility. It provided no overnight admitted care in 2010-11 (it had 1 same day
bed), although in previous years it had reported some admitted care. Aurukun Health Centre
reported around 900 emergency occasions of service and 15,500 non-admitted occasions of services
in 2010-11. It has no onsite doctors, with medical support provided through the Royal Flying Doctor
Service several days each week, and through visiting specialists. Most allied health services are also
provided by visiting staff. The vast majority of patients cared for by the facility are Aboriginal and
Torres Strait Islanders from the local community. Aurukun Health Centre had reported expenditures
of $3.6 million in 2010-11. It is located in a very remote area under AGSC, about 810 kilometres by
(largely unsealed) road to Cairns, the nearest referral hospital. Weipa hospital is located 187
kilometres from Aurukun on an unsealed road.
 Wauchope Hospital (NSW) is a 34 bed (31 overnight beds) acute hospital located in the mid north
coast of NSW. It provides medical, surgical, paediatric, respite and maternity services. The hospital
provided about 2,300 acute admissions in 2010-11, with total NWAU of about 1,500. There were
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about 7,300 emergency department presentations in that year, and about 2,900 other non admitted
occasions of service. Indigenous Australians make up around 3% of admitted patients. In 2010-11
Wauchope Hospital reported expenditure of around $9.5 million. The hospital is located in an inner
regional area under AGSC, about 20 kilometres by road to the nearest hospital in Port Macquarie.
 Nickol Bay Hospital (WA) is located in Karratha in the Pilbara region of Western Australia. Karratha
has been highly impacted by the mining boom, resulting in a very significant increase in the local
population and the fly-in fly-out workforce. This has also impacted the housing and accommodation
market. All these factors have had a significant impact on the demand for hospital services and the
cost of maintaining the hospital’s workforce. Nichol Bay Hospital reports 28 beds (20 of which are
overnight beds). In 2010-11 there were about 3,600 acute episodes (2,500 NWAU), about 16,700
emergency department occasions of service and 8,000 non-admitted occasion of service. Indigenous
Australians make up around 24% of admitted patients. The hospital reported expenditures of $37.7
million. Nickol Bay Hospital is located in a remote area under the AGSC. It is about 240 kilometres by
road to Port Hedland which has the next largest hospital in the region. However most referrals are
directly to Perth which is around 1,500 kilometres by road.
 Crystal Brook District Hospital (SA) is a 19 bed hospital in the Southern Flinders area of South
Australia. It is located in an outer regional area under the AGSC. In 2010-11, it provided about 550
acute episodes, about 1,200 emergency department occasions of service and about 1,700 nonadmitted occasions of service. The hospital reported expenditures of $3.5 million. Indigenous
Australians make up about 3% of admitted patients. It provides high level residential aged care, with
funding under the MPS program.
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4. Original proposals
This chapter summarises the original proposals on block funding that were the subject of consultations. It
then provides detailed analysis of the consultation feedback on the block funding proposals.
4.1
Original proposals for block funding
The Discussion Paper identified some of the key concepts and choices that need to be made in the
development of a national approach to block funding. The key elements of potential block funding models are
summarised here, noting that there has been considerable evolution of the models as a result of the
consultations and further analysis. The tasks/choices comprise:
 Grouping hospitals into categories: A first step in developing national block funding is to identify how
to group block funded hospitals into categories that can be used for setting the national efficient cost.
The approach to grouping hospitals has to be decided, as well as the number of categories that will be
used. This is because while the determination of the efficient cost under the NHRA (Clause A4) is
required to be based on changes in utilisation, the scope of services provided and the cost of these
services, block funding is fundamentally about the determination of funding at the hospital level. (It
is not about funding particular services within hospitals).
 Determining the number of ‘funding blocks’ that each hospital will receive: Block funding does not
necessarily mean that a public hospital receives only a single block of funding. Section 3.3 described
some of the factors contributing to the heterogeneity across block funded hospitals and Section 5.1
below provides further analysis on this issue. The heterogeneity of block funded hospitals means that
there is a strong interrelationship between
1. The number of hospital categories used for block funding; and
2. The number of funding blocks that hospitals receive.
To illustrate, if each of the 484 block funded hospitals had its own ‘category’, they could each be
funded based on the actual costs of that category using a single block (this is, of course, equivalent to
funding at the status quo with no national efficient cost for block funded hospitals). If there is
considerable variation in costs within a category of hospitals, it may be necessary to provide several
blocks of funding to each hospital that can be built-up in recognition of the factors associated with
variation in costs within the category.
 Describing the ‘funding blocks’ and how they are calculated: The Discussion Paper outlined four
potential ‘funding blocks’ that could be used in determining the national efficient cost of block funded
hospitals. (As with ABF, it is important to note that the national efficient cost will be used in setting
the funding contribution from the Commonwealth Government; state governments have autonomy in
determining their level of funding contribution to block funded hospitals). The four potential ‘funding
blocks’ are:
1.
An availability payment: This payment is intended to recognise the fixed costs for public
hospitals in ‘keeping the doors open’. It recognises that some costs are incurred irrespective
of the number of patients treated. The availability payment could:
o
Be set at the same rate across all block funded hospitals (a flat availability payment);
or
o
Increase for each category of block funded hospitals (a scalable availability
payment). The preferred approach outlined in the Discussion Paper is for a
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scalable availability payment that would increase in ‘steps’ corresponding to
increases in the fixed costs of each hospital category.
2.
A service capacity payment: This payment is intended to recognise the costs (that are in
excess of those funded through the availability payment) that relate to differences in the
level of service provision across hospitals within each category of block funded hospitals.
The Discussion Paper indicated that the service capacity payment would not be at risk. It
also proposed that the service capacity payment would not be calculated based on the actual
activity at individual hospitals (which would be equivalent to ABF). Instead, the service
capacity payment could be based on broad bands of activity within each of the hospital
categories.
3.
Adjustment payments: Adjustment payments may be necessary if empirical analysis
identifies that there are differences in the costs of block funded hospitals that are not
adequately captured through availability and service capacity payments. The Discussion
Paper gave the example of adjustments for Indigeneity and location of patients used in
national ABF arrangements.
4.
ABF payments: The Discussion Paper put up for further debate the question of whether
block funded hospitals should have access to ABF payments in addition to the block
payments described above. ABF payments would be at risk. The Discussion Paper suggested
that access to ABF payments might be limited to hospitals that are on the ‘cusp’ of ABF
funding (just below the low volume thresholds) and/or ABF payments might be restricted to
specified services.
 Deciding the ‘price point’ or efficient cost of block funded hospitals: As for hospitals funded on an
activity basis, the IHPA will be using data on the actual costs of block funded hospitals to set the
efficient cost. A key decision will be how to set the efficient cost relative to the actual costs of block
funded hospitals.
 Indexing block funding: There are two tasks for the IHPA related to indexation, one for 2013-14 and
one for future years. The immediate task is to calculate an efficient cost for block funded hospitals in
2013-14, recognising that there is a three year lag in the costing data that are being used to develop
the block funding model. The future task is to calculate from 1 July 2014 onwards the ‘growth’ in the
efficient cost of providing block funded services.
 Clarifying the treatment of multi-purpose services under block funding: About one-third of small
rural hospitals are MPSs (also known as Multi-Purpose Health Services in some states and including
Multi-Purpose Centres, the predecessor of Multi-Purpose Services). The Discussion Paper noted that
MPSs shared some of the features of the proposed national block funding arrangements. It identified
that the implementation of national block funding would result in a parallel funding approach for
similar services, noting that in addition to the 147 MPSs, there were also significant numbers of small
rural hospitals that had collocated aged services but were not MPSs. It also identified the potential
for different ‘rules’ to apply to MPSs and small rural hospitals in regard to factors such as cost
indexation and growth funding. The Discussion Paper did not include specific recommendations, but
invited advice on these issues.
Concurrently with the release of the Discussion Paper, the IHPA released an initial analysis report by Health
Policy Analysis that included modelling of several block funding options, drawing from the above concepts.
The specific details of all the options are not presented here, because the consultations and subsequent
analysis have resulted in refinement of these options, as well as development of a new block funding option.
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However, consultation feedback on both reports will be outlined (including reference to relevant preliminary
options), as this feedback helped shape the further development of block funding options.
4.2
Consultation feedback on block funding proposal
The concepts for the design of national block funding included in the Discussion Paper received broad support.
For example, Queensland Health noted that:
“The discussion paper accurately identifies options for the design of block funding arrangements and
establishes a sound rationale for the consideration of these options in the determination of the
national efficient cost of block funded hospitals.” (Queensland Health BF Submission)
In addition, the consultation meetings were characterised by strong engagement as government officials and
stakeholders sought to test and further refine preferred options for national block funding arrangements.
Specific feedback on each of the elements is presented.
4.2.1
HOSPITAL CATEGORIES FOR BLOCK FUNDING
There were no particularly strong views on the number of hospital categories that should be established for
the purposes of national block funding. Consultation participants suggested that there was ‘no technically
right answer’. It was suggested that the number of hospital categories should be empirically informed, based
on identifying patterns or groupings of hospitals that are similar on either an activity or cost basis.
On day 2 of the consultations, the Consulting Team put forward an approach to categorising hospitals that had
not been included in the Discussion Paper and that would potentially result in a simplified block funding
model. The suggested approach to categorising hospitals was discussed at all the consultation meetings (with
the exception of the Northern Territory that occurred on day 1) and involves a categorisation matrix using
two parameters:


Total NWAU (covering all admitted and non-admitted activity); and
Location (using the four ASGC groups).
This is shown in Table 4.1 below, with an indicative example where block funded hospitals would be grouped
into 20 categories. The actual number of columns/categories (the total NWAU parameter) would be
determined through analysis of the block funded hospitals and is explained further in Section 5.1.1.
Table 4.1: Illustration of a matrix approach to categorising block funded hospitals
Cat A
(NWAU range)
Cat B
(NWAU range)
Cat C
(NWAU range)
Cat D
(NWAU range)
Cat E
(NWAU range)
Inner Regional
Outer regional
Remote
Very remote
The suggested approach to categorising block funded hospitals was well accepted, pending empirical
testing. It was also independently proposed by the Commonwealth Department of Health and Ageing in its
consultation meeting.
In terms of the parameters that might be used to group hospitals into categories, Tasmania noted that:
“At a national level, location and size of facility, and scope and scale of services are factors, i.e.
between the very small and the largest rural hospitals. However in Tasmania, observation of rural
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hospital activity and cost trends indicates activity data is not predictive of cost, i.e. up to a certain
threshold the costs to keep the doors open is the same regardless of activity levels.”
Queensland Health indicated that it:
“...supports the approach whereby block funded hospitals are able to be clustered into categories of
hospitals with similar costs. Establishing criteria for clustering these hospitals together with similar
costs is a sound starting point despite the challenges regarding:
 Confidence in the costing data
 Defining what is a public hospital
 The scope of public hospital services.
Grouping by type of service, combined with some measures of scale seems reasonable, provided this is
empirically based and not too complex. Feedback from Queensland Hospital and Health Services
indicates that remoteness is a critical factor to be considered in determining these groupings.”
(Queensland Health BF Submission)
The NT Department of Health argued that decisions on hospital categories had to be based on a “common
definition of a small rural hospital”. In particular, the NT Department of Health was referring to the lack of
consistency across states as to whether non-admitted facilities were counted as hospitals or not, and the
impact this might have in determining hospital categories for the purposes of block funding (NT Department of
Health BF Submission).
The National Rural Health Alliance commented that it was:
“...generally supportive of the consultants’ proposals relating to categorising rural hospitals for the
purposes of block funding. It will be pleased if additional factors, such as distance can be considered in
addition to the ASGC-RA.” (NRHA BF Submission)
The only dissenting view on the need to establish hospital categories for the purposes of block funding was
raised by the AMA representative as follows:
“As the proposal acknowledges, deciding the categories of hospitals to determine the national
efficient cost of block funded hospitals is not straightforward. We agree, in fact we think it is ‘so not
straightforward’ it should not be the preferred option in the medium term.” (Professor Dobb, VicePresident AMA BF Submission)
This rejection of hospital categories occurred in the context of the AMA representative’s proposal that each
block funded hospital should essentially be “guaranteed a continuation of current funding plus an indexation
factor, as a floor”. That is, the preference was for block funding to be “trialled on a purely theoretical basis for
the initial 2-3 years”, so that historical funding levels for each block funded hospital were guaranteed.
A second level of issues related to grouping hospitals into categories is about how best to manage risk within
and between categories, given the heterogeneity in costs and activity of block funded hospitals. This is
potentially relevant to both the availability and service capacity payments, depending upon how they are
calculated and their relative sizes.

The ‘within category’ risk relates to what level of variability might be acceptable within categories.
The Tasmanian Department of Health (BF Submission) commented that any determination of hospital
categories:
“...poses a risk for any outliers/anomalies in each category”.
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
4.2.2
The ‘between category’ risk relates to how to manage any recategorisation of hospitals related to
changes in the level of activity. Table 4.1 identifies that the categories would be determined based on
a matrix of activity and location. While the location of block funded hospitals will not change, their
activity will vary across years. The need for recategorisation depends upon: whether the activity
categories are broadly or narrowly constructed (that is, narrow bands will result in higher need for
recategorisation); and the underlying distribution of activity across block funded hospitals. (The issue
of recategorisation is also discussed in Section 4.2.7).
NUMBER OF BLOCKS AND PRINCIPLES DRIVING CHOICE OF BLOCK FUNDING OPTIONS
Consultation feedback provided some guidance on the preferred approaches and broad principles that should
guide the development of block funding options.
Most consultation participants did not want a complex or over-engineered block funding model. Much of
the feedback related to what was then described as Option C1 in the Initial Analysis Report, with this option
comprising:
 A very low level of availability payment, the amount of which increased in steps for hospitals
grouped into six categories based on a combination of three factors (service type, activity grouped
into quartiles of total NWAU activity and location);
 Multiple service capacity payments, based on the actual activity at each block funded hospital, with
the activity and unit cost separately specified for acute, sub & non-acute, emergency department and
non-admitted services activity; and
 Additional adjustments for remoteness, that were payable to larger hospitals only (defined as
hospitals in the top quartile of total NWAU activity) in remote and very remote locations, with the
adjustment payable on acute NWAU only.
An illustrative ‘picture’ of this model, showing the relative size of the availability and service capacity elements,
is provided in Figure 4.1.
Figure 4.1: Illustration of Option C1 (multiple funding blocks) for larger hospitals
Source: Health Policy Analysis, 2012, Identification and determination of efficient cost for block funded hospitals project, Report of initial
analysis
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In response to this model, the AHHA commented that the proposal was “complex” and it supported
“simplification including rolling most of the funding into the availability grant” (AHHA BF Submission). The
Tasmanian Department of Health suggested that this model is “difficult to understand” and further argued
that:
“The availability component is too low. The amounts would not be sufficient to fund the minimum
amount of staffing required for each category of facility”. (Tasmanian Department of Health BF
Submission)
It further suggested that:
“The preferred model should be simple based on a two dimensional approach based on the key
elements of size and remoteness. This could be achieved through an availability payment and a
service capacity payment for larger rural hospitals and a single availability payment for the very small
rural hospitals.” (Tasmanian Department of Health BF Submission)
Similarly, the Commonwealth DoHA argued for a simplified model as follows:
“The Commonwealth is concerned that the use of three or four block funding components will lead to
an overly complex funding model. The Commonwealth suggests using only two components (service
availability payment and an activity payment).
The inclusion of additional block funding components increases the complexity of the system,
particularly for the Administrator who will be required to conduct a variety of calculations for each of
the 560 block funded hospitals [Note: number subsequently revised] to determine their
Commonwealth funding. As block funding for small rural hospitals is expected to account for 10-20%
of total Commonwealth public hospital funding, the Commonwealth is concerned that the burden of
administering the proposed model will be disproportionate to the overall funding involved.”
(Commonwealth DoHA BF Submission)
In commenting on the four potential block funding elements, the AMA representative noted that the
approach:
“...seems to be extremely complex and difficult to understand, let alone put into practice. The
complexity of the proposal seems to be driven by the need to encompass multiple (interacting)
variables to attempt to cater for the range of hospitals and circumstances involved.” (Professor Dobb,
Vice-President AMA, BF Submission)
4.2.3
AVAILABILITY PAYMENTS
As mentioned earlier, most consultation participants believed that the availability payment should be sizable
and comprise the majority of (or even all) funding received by block funded hospitals. The most common
concern expressed about Option C1 in the Initial Analysis Report was that the availability payment was too
small. The Tasmanian Department of Health noted, for example that:
“Tasmania’s rural hospital services are very small with comparatively low levels of inpatient activity, a
situation which has remained stable over many years. As such, based on their small size and low
volume activity, Tasmania’s preferred approach would be for a single availability payment together
with a specific adjustment for remoteness. The applicability of a service capacity payment...would not
be suitable for Tasmania. Furthermore, Tasmania seriously cautions against this approach for very
small rural hospitals as it has the potential to diminish current hospital avoidance initiatives by
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creating a perverse incentive to admit patients who would be more appropriately cared for in the
community.” (Tasmanian Department of Health BF Submission)
The Tasmanian Department of Health (BF Submission) further commented that there was a low probability of
significant increases in activity in its block funded hospitals, so the key was “getting the base/availability
funding right...based on the cost of keeping the doors open”.
There was strong support for an availability payment that was scalable, varying by the size of the facility. It
was also agreed that the ‘fixed costs’ that were being captured under an availability payment were likely to
vary by not only scale (hospital size/activity), but by location.
There was limited feedback on the approach to calculating the level of availability payment for each hospital
category. While the Discussion Paper had suggested that it could be set at equal to the cost of the lowest cost
hospital in each category, Queensland Health suggested that it may be better to use regression analysis in
determining the availability payment for each hospital category.
4.2.4
SERVICE CAPACITY PAYMENTS
The service capacity payment element had been described somewhat differently in the Discussion Paper and
the Initial Analysis Report, so consultation feedback needs to be interpreted in this context. The different
expressions of the service capacity payment were:
 Discussion Paper: The service capacity payment would be based on broad bands of activity (relating
to ranges of total NWAU) within each of the hospital categories. This means that hospitals with
similar broad ranges of activity would receive the same service capacity payment. In other words,
there are a limited number of levels of service capacity payment.
 Initial Analysis Report: The service capacity payment would be calculated on the basis of activity
streams (acute, subacute, emergency and non-admitted services) that were specific to each block
funded hospital multiplied by the unit cost of these services. This means that each hospital would
receive a unique service capacity payment based on the actual services provided by that hospital. In
other words, there are as many levels of service capacity payment as there are block funded hospitals.
In both reports the service capacity payment was described as:

Being calculated on a rolling three-year average (rather than estimates of the current year’s activity).
This is designed to ‘smooth’ out volatility, so that the level of funding provided to block funded
hospitals under the service capacity payment does not fluctuate significantly on an annual basis.
 Not being ‘at risk’. That is, the funding payable under the service capacity payment would be paid to
the block funded hospital, irrespective of whether the activity provided was higher or lower than the
activity estimated as the basis of the service capacity payment.
Within this context, the feedback on service capacity payments was supportive of service capacity payments
being based on rolling averages of activity and not being at risk if activity varied. For example, the Victorian
Department of Health commented that:
“The service capacity component should not be subject to recall of funding if the projected level of
activity is not achieved. The service capacity component is based on a 3 year average. More analysis
is needed to show if this is the most appropriate time series to capture volatility generated by low
volumes, population trends (and) workforce attraction/retention issues. ” (Victorian Department of
Health BF Submission)
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Most of the consultation meetings indicated support for a service capacity component that was based on
total NWAU (rather than specific activity streams), so that block funded hospitals had flexibility and were not
locked into providing particular services (e.g. inpatient care). The Victorian Department of Health noted that
this flexibility underpinned its small rural health service funding model, allowing “health services to shift
resources to community based models of care as required” (Victorian Department of Health BF Submission).
There were mixed views on when a service capacity payment was relevant, how it should be calculated and
its size relative to an availability payment. During the consultation meetings, an approach was outlined by
the Consulting Team, based on Table 4.1, whereby:
 The lowest volume activity hospitals (the left hand columns in Table 4.1) would receive all their
funding through an availability payment, related to ‘keeping the doors open’;
 The hospitals with higher volumes of activity (the right hand columns in Table 4.1) would receive most
of their funding through an availability payment, with some funding through a service capacity
payment related to activity (but the funding would not be at risk if activity changed).
There was reasonably strong support for this ‘simplified’ approach to block funding. As noted earlier, the
Tasmanian Department of Health believed that all their small rural hospitals should be funded through a single
availability payment on the basis of their relatively low activity levels (that is, they are in the low activity, left
hand columns of Table 4.1). This view was shared by the ACT in regard to its one block funded hospital (an
early parenting centre).
Potential benefits of a service capacity payment for some hospitals were also identified by consultation
participants. For example, the Commonwealth wanted to guard against block funding removing all incentives
for efficiency, suggesting that an activity component:
“...for funding small rural hospitals will send a small signal while maintaining the ‘security’ of a block
funding amount”. (Commonwealth Department of Health and Ageing BF Submission)
The NRHA suggested that service capacity payments could provide a block of flexible funding that would allow
small hospitals:
“...to provide a range of services through outreach and hospital in the home that have not been
available to small hospitals in the past”. (NRHA BF Submission)
While most states supported a simplified approach to block funding (using a mix of availability and service
capacity), the Northern Territory and Queensland favoured an approach where hospitals received multiple
block payments, adjustments and, indeed, variable ABF payments (closer to Option C1 in Figure 4.1). The NT
position is probably explained by two factors:

The NT’s view of its ‘exceptionalism’ or outlier status in regard to health costs: In its PF Submission,
the NT commented that:
“It becomes more apparent as we progress with national reform that the Territory’s health
environment continues to present unique challenges that are usually not comparable with
other jurisdictions. Out system operates in an environment where remoteness and
Indigenous disadvantage is the norm rather than the exception.”
In this context, the NT position is to argue for as many adjustments as possible in a national funding
model (whether ABF or block funding) to better recognise the factors that contribute to its cost
structure. So, the NT Department of Health advocated that:
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“The block model needs to recognise population morbidity / mortality, language and cultural
costs, hospital catchments, ‘isolation’ factors (with associated travel costs to access hospitals
for our significant offshore island Indigenous populations and extreme mainland access issues
for Indigenous patients) and hospital related activity occurring in remote health centres,
effectively as ‘satellite’ units of the regional hospital”. (NT Department of Health BF
Submission)

The Consulting Team did not raise the simplified block funding model (availability/service capability)
with the NT Department of Health which was the site of the first consultation meeting. As a result,
the NT Department of Health was responding to the original concepts in the Discussion Paper and it
did not have the opportunity to consider the simplified block funding approach.
Queensland argued consistently across its consultation meeting and its submission that the block funding
model needed to incorporate multiple blocks to recognise the diversity of block funded hospitals. It stated:
“Queensland Health strongly supports a model where public hospitals would receive multiple block
payments, as well as adjustments. While it could be argued that such an approach is overly complex,
Queensland Health considers it essential that the model is sufficiently granular to take account of the
key cost drivers and different cost structures across the range of block funded public hospitals. There
is evidence that a range of factors including size of the hospital, the types and volume of services
provided and remoteness are key drivers of efficient cost, and any model that does not take these
factors into account will not be viewed as credible by Hospital and Health Services or hospitals
themselves, and could not be used by states as system managers as a basis for funding allocations.”
(Queensland Health BF Submission)
In contrast, most other states interpreted their role as system managers to work within a relatively simplified,
national block funding model and manage the volatility in costs of individual block funded hospitals through
state funding models, rather than the national block funding model.
As part of its support for a multiple block funding model, Queensland Health argued (similarly to the NT) for
consideration of multiple adjustments, over and above those mentioned in the Discussion Paper, if they were
significant. Queensland Health suggested that:
“While it will not be possible for the model to reflect all of the cost drivers, there is a range of other
factors that affect costs. These include population, distance from a centre (hub and spoke approach),
medical staffing in the public and private systems, cultural diversity, proportion of Aboriginal and
Torres Strait Island patients, socioeconomic status, health literacy, obesity and burden of chronic
diseases.” (Queensland Health BF Submission)
However, Queensland Health also acknowledged that its state approach to block funding of relevant hospitals
did not specifically apply these factors and that they were only implicitly taken into account in historical
allocations.
4.2.5
ADJUSTMENT PAYMENTS
There was relatively limited (and unclear) feedback on the potential use of adjustment payments in a block
funding model. In part, this was because the matrix approach to categorising block funded hospitals shown in
Figure 4.1 includes remoteness as one of its two axes. The Consulting Team suggested during the consultation
meetings that the costs of location could be ‘embedded’ in the availability block funding component, rather
than being added ‘on top’ as an adjustment payment.
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This approach was generally supported, although there was some residual interest in having separate
adjustment payments, in addition to funding the costs of remoteness through the availability payment.
For example, the AHHA noted that it “supports adjustment payments, especially for indigeneity and
remoteness, which could be linked to the grouping proposals put forward” (AHHA BF Submission). The
Tasmanian Department of Health also supported factoring location and Indigeneity into the payment model,
although it believed that location could be included through the availability payment. The Commonwealth
DoHA suggested that an Indigenous adjustment could be factored into the service capacity payment.
4.2.6
ABF VARIABLE PAYMENTS
Victoria is the only state that currently provides any access to variable ABF (at risk) payments for block funded
hospitals for specified services. It is understood that this exception is largely in relation to dialysis services, so
that block funded hospitals are directly incentivised to provide dialysis through access to a separate revenue
stream.
However, in the consultation meetings the Victorian Department of Health indicated that it did not support
the introduction of ABF payments for block funded hospitals under a national funding model. It suggested that
this role was essentially a purchasing function (through deciding which services could be funded outside block
grants under ABF) and that it should remain with states, rather than be incorporated in a national block
funding model.
All states (except Queensland, and possibly the NT) did not want to have variable ABF payments included in
a national block funding model. They were concerned that this would be complex to administer (including
determining the boundary between services funded under the block grant versus via ABF) and it was not
compatible with the funding certainty achieved through block funding. At the consultation meeting,
Queensland Health indicated that:

It believed that the majority of costs would be fixed for hospitals below 20 or 30 beds (and/or
perhaps hospitals below 1000 admitted NWAU). For these hospitals, the funding should largely be
provided through an availability payment and there should be no ‘at risk’ ABF payments.

It supported the use of a service capacity payment (related to activity, but not at risk) in larger block
funded hospitals for two main reasons. First, a mixed availability/service capacity payment could
help drive necessary service model changes in hospitals that would allow relevant hospitals to be
viable under ABF in the future. Second, it argued strongly that a service capacity payment provided
an important signal to encourage increased ‘local’ treatment of patients in rural block funded
hospitals. This is in the context that the national introduction of ABF might encourage more patients
to be referred to large regional hospitals or to tertiary hospitals, with a drift away from local
treatment.
In its subsequent submission, Queensland Health confirmed that ABF payments would “not appear necessary
or appropriate for the categories of smaller block funded hospitals”. It also reiterated its concern that:
“Without an ABF payment for the block funded hospitals, there is a perverse incentive for the Hospital
and Health Service to shift the activity to an ABF facility in order to receive an ABF payment...To retain
services as close to the patient’s home (which is a key purchasing intention of Queensland Health), the
funding of block funded hospitals should minimise the incentive to transfer the patient from a block
funded hospital to an ABF hospital.” (Queensland Health BF Submission)
There appears to have been some evolution in Queensland Health’s position, with more support now for ABF
payments, at least for the larger hospitals. However, it is unclear whether this support for ABF payments to
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encourage local treatment and service model reform acknowledges that such ABF payments would be at risk
and result in less funding certainty for block funded hospitals. While Queensland Health has raised a valid
concern about the incentives that might operate for block funded hospitals, the question is whether such
incentives are best managed in a national block funding level or at state level.
4.2.7
THE ‘PRICE POINT’ AND INDEXATION OF BLOCK FUNDING (INCLUDING HOSPITAL RE-CATEGORISATION)
There was very limited feedback on the question of the ‘price point’ that the IHPA should use in setting the
national efficient cost for block funded hospitals. In general, it was assumed that the price point would be set
at average costs, using the same methodology as applied for hospitals funded through ABF.
Similarly, on the question of dealing with the time lag in the costing data and setting the national efficient cost
for 2013-14, most consultation participants suggested that the IHPA should use the same approach as it
applied for ABF. For example, the Commonwealth DoHA suggested that:
“The IHPA should adopt the same method used to calculate the NEP. Escalation of 2010-11 costs to
2013-14 prices should continue to be based upon trend analysis of the historical data used to set the
NEC.” (Commonwealth DoHA BF Submission)
Queensland Health supported using the same approach across ABF and block funded hospitals to dealing with
the time lag in costing data. It suggested that the National Public Hospital Establishment Database may not be
sufficiently accurate for this purpose and that having different indexation factors adds an unnecessary level of
complexity.
There was more discussion on the issue of how to adequately index block funding into the future. The
NHRA requires that:
 In determining the national efficient cost of block funded services, the IHPA take account of “changes
in utilisation, the scope of services provided and the cost of those services”. The Commonwealth will
fund 45 per cent of “growth in the efficient cost” from 1 July 2014, increasing to 50 per cent from 1
July 2017 (Clause A4); and
 Payments for 2014-15, 2015-16 and 2016-17 will consist of the previous year’s payment plus 45 per
cent of the growth in the efficient cost of providing the services, adjusted for the addition or removal
of block services (Clause A50);
 Payments for 2017-17 and later years will consist of the previous year’s payment plus 50 per cent of
the growth in the efficient cost of providing the services, adjusted for the addition or removal of block
services (Clause A51).
As outlined in the NHRA, ‘indexation’ is a somewhat different beast for block funded than activity based
funded hospitals. The Commonwealth funding contribution for ABF hospitals ‘grows’ in response to increases
in activity (volume) and in response to indexation of the national efficient price (costs). Both these elements
of growth are essentially rolled up into the ‘national efficient cost’ for block funded hospitals Clauses A50 and
A51 recognise that there can be additions or removals of block funded services that presumably will change
the aggregate cost base across all block funded hospitals. However, Clause A4 also specifically requires that
IHPA take account of changes in utilisation, as well as the scope and cost of services.
Consultation feedback recognised that the approach to indexation was closely linked to the choice of block
funding model. That is, block funding models that incorporated more use of service capacity and/or activity
payments might allow some separate specification of growth related to ‘changes in utilisation’. However, if
some hospitals are likely to be funded using a 100% availability payment, the indexation of their costs will
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capture all the factors resulting in higher costs (including activity changes, workforce costs, changes in scope of
services and model of care, other costs etc). (This assumes that indexation is based on the actual costs
incurred by block funded hospitals, rather than through application of an independently calculated formula on
hospital cost growth.)
There were somewhat different views as to the importance of capturing growth in activity under a block
funding model. The Commonwealth DoHA noted that “utilisation of an activity payment” (including service
capacity payments in a block funding model) should address the issue. It went on to note that:
“Capturing growth appropriately is not the primary concern of a block funding model. The primary
objective of block funding should be to provide stability in funding for low volume hospitals where
significant variations in activity may threaten a hospital’s viability.” (Commonwealth DoHA BF
Submission)
Moreover, the Commonwealth DoHA did not support incorporating both price growth and service growth in a
single index for block funded hospitals on the basis that this was not transparent. Instead, it suggested that:
“It would be better to include only price and not service (as growth is likely minimal for service) and rebase every few years”. (Commonwealth DoHA BF Submission)
As expected, states were keen to ensure that growth in activity was captured in indexation for block funded
hospitals, not only growth in costs. For example, Victoria proposed that:
“The IHPA should consider using a derived activity growth factor determined by other service stream
growth in each jurisdiction such as acute NWAUs.” (Victorian Department of Health BF Submission)
Some states were satisfied that an index based on the aggregate movement of costs of block funded hospitals
would, by default, capture changes in activity and be fit for purpose. For example, Queensland Health noted
that:
“In terms of taking into account growth in the volume of services, the proposed methodology would
appear to take this into account by basing availability payments and service capacity/ABF payments
on actual cost data which would change over time in response to changes in the volume of service
provided by different groups of hospitals.” (Queensland Health BF Submission)
In addition, states recognised that the ability to re-categorise hospitals (depending upon the final block
funding model adopted) was another mechanism for recognising growth in activity of block funded hospitals.
For example, the Victorian Department of Health noted that the volatility of block funded hospitals requires
that a process:
“...must be developed for reallocating individual small rural health services to different funding
cohorts as their characteristics change over time.” (Victorian Department of Health BF Submission)
The question of where responsibility for re-categorisation of hospitals would sit (i.e. with states or the IHPA)
was also identified in the consultations. For example, the Northern Territory Department of Health suggested
that:
“States should be able to identify, in time, if they have shifted to a higher category due to growth (or
planned expansion).” (NT Department of Health BF Submission)
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4.2.8
MULTIPURPOSE SERVICES
MPSs are fully integrated health and aged care services that provide flexible and sustainable service options
based on the local needs of small rural and remote communities. Consultation feedback identified the
following issues about MPSs, some of which are directly relevant to the block funding model and some of
which raise broader issues beyond the remit of the IHPA:

Diversity: As might be expected across 147 MPSs, there is considerable diversity with respect to their
service profile (for eligible in-scope’ services as well as other out-of-scope services) and cost structures.
Indeed, there would appear to be as much diversity in the service profile and cost profile of MPSs as there
are in small rural hospitals that are not MPSs. MPSs typically provide acute and non-acute inpatient,
urgent care, acute and sub-acute ambulatory care, primary and community health and residential and
community aged care services. The exemplar small rural hospitals profiled in Section 3.3 indicated the
diversity within and between MPSs and other small rural hospitals.

Alignment of policy objectives: The objectives of the MPS program are to deliver flexible and integrated
services and support innovative service delivery models to meet the health needs of the local community.
MPSs are intended for communities where the population is:
“...not large enough to support separate services, such as a hospital, a residential aged care service,
home and community care services and where there is poor access to essential health and aged care
services.”9
Consultation participants noted that the Block Funding Criteria include similar policy objectives that are
relevant to small rural hospitals (for example, responding to an absence of economies of scale and lack of
financial viability).

Funding approach: The consultations identified several inter-related points of difference between MPSs
and other small rural health hospitals, including the method of funding, the application of funds and
accountability requirements. The funding model for MPSs is based on pooling of revenues from
Commonwealth and state health departments. These pooled funds can be flexibly applied as determined
at the local level (with over-arching service agreement expectations from the respective state health
departments). In effect, there is a ‘cashing out’ of residential aged care, other DoHA grants and state
(program-based) grants. The specific terms on which funds are ‘cashed out’ and pooled is not uniform
across MPSs. Each is a negotiated outcome on the formation of the MPS, which forms part of a tripartite
Agreement between DoHA, the state health department and the MPS.
The proposed national block funding model has some of these features (for example, ‘pooling’ of funding
where funding is flexibly applied and not at risk). The key difference is that MPS pooling is more extensive
than that proposed under block funding as it includes Commonwealth funded residential aged care and
other grants. In addition, states have autonomy as system managers to determine their level of funding
contribution for public hospitals, including block funded small rural hospitals.
In general, most consultation participants supported greater alignment and consistency of funding
approaches between MPSs and other small rural hospitals. For example, Tasmania noted that:
“All the small rural hospitals are operated in a similar way, including the MPSs. Consistency for how
funding is determined is a key benefit. However, based on the current MPS funding model, there is a
risk that the MPS may need to reduce services to bring them in line with other rural hospitals.”
(Tasmanian Department of Health BF Submission)
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
Costs of eligible (in-scope) services: MPSs, along with all small hospitals, provide in-scope public hospital
services. There are also out-of-scope services including residential aged care, primary health care, and
community services. Excising costs from MPS expenditure relating to out-of-scope services appears to be
more problematic than for other small public hospitals due to the level of reporting of activity and cost for
service types. The consultations also indicated that the separation of service types in the NHRA into ‘inscope ‘hospital’ services and out-of-scope services has created an artificial distinction by ‘splitting’ what
are essentially blended services to meet individual patient need that cannot easily be ‘unpicked’ for the
purpose of distinguishing base funding of in-scope services that receive growth funding from the
Commonwealth. This is reported as ‘working against’ the intended policy direction of MPSs.

Impact of aged care reforms: Consultation participants suggested that there was likely to be minimal
impact on MPSs from the current round of national aged care reforms.

Community support: There is a broad consensus from all jurisdictions and various stakeholders with
interest in rural health provision that MPSs “have been remarkably successful”. Jurisdictions, various rural
stakeholders and the local communities where MPSs operate have a strong commitment to the
continuation (and enhancement) of MPSs. They are seen to have been an important initiative that has led
to more sustainable, flexible and innovative service models in rural Australia. In acknowledging their
strong support for MPSs, the National Rural Health Alliance argued that the growth of MPSs had been
limited in some communities with full cashing out of aged care funds. The NHRA suggested that “the
block funding system could be part of the solution” and provide a new financial driver for MPSs.
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5. Proposed approach to block funding
The consultation feedback was very valuable in sharpening the key choices underpinning the block funding
options that are being put up for decision by the IHPA. It has:

Identified some core elements of block funding across all options; and

Assisted in the development of three distinct block funding options
This has occurred in parallel with further analysis:

By Health Policy Analysis to complete the Final Analysis Report including refining the core database
(in response to advice from states on block funded hospitals and clarification of issues on the
treatment of a range of expenditures and activity), as well as preparing the risk analysis (MAPEs) used
in assessment of the options; and

By Aspex Consulting to determine the hospital categories and the mix of availability and service
capacity payments.
This chapter outlines the proposed core elements and options for block funding, with the supporting
analysis being based on rural hospitals. While similar approaches could be used for the other hospitals that
fall below the low-volume threshold (including relevant metropolitan hospitals, subacute hospitals, designated
psychiatric facilities and mothercraft services), this will need to take into consideration the small numbers of
hospitals in some of these groups. Block funding options that are underpinned by hospital categories are not
likely to be of value in this situation. Accordingly, further analysis will be required of the variation in costs and
activity for these other types of public hospitals.
5.1
Core elements of block funding
Based upon the consultations and analysis, two core elements are proposed for inclusion in a national block
funding model.
5.1.1
GROUPING OF HOSPITALS INTO CATEGORIES BASED ON SERVICE TYPE, ACTIVITY AND LOCATION
Basis of hospital categories
It is proposed to group block funded hospitals into categories, with the parameters for this grouping
comprising:
 Service type: Acute & mixed acute/subacute; non-admitted services; subacute; designated
psychiatric; and mothercraft services;
 Location: Metropolitan; inner regional; outer regional; remote; very remote; and
 Activity: The basis of the proposed activity (total NWAU) categories is described below (with further
detail provided in the separate Aspex Consulting report titled: Data Analysis for Block Funded
Hospitals).
Activity and cost variation underpinning hospital categories
Turning to the 448 rural hospitals that are below the low volume threshold and have been nominated by
states for block funding in 2013-14, Figures 5.1 and 5.2 show the relationship (or more accurately, the lack of
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a direct relationship) between activity (total NWAU) and costs for these hospitals. This is, of course, expected
as otherwise these hospitals could be funded under ABF, albeit perhaps at a higher national efficient price.
In both Figures 5.1 and 5.2:

The horizontal or x-axis represents the 448 rural hospitals lined up in increasing order of either costs
(Figure 5.1 ) or total NWAU (Figure 5.2);
 The vertical left-hand axis represents the costs, shown on a scale up to $45 million; and
 The vertical right-hand axis represents the total NWAU, shown on a scale up to 16,000 total NWAU.
(The low volume threshold for rural hospitals is ≤ 3,500 inpatient NWAU and it has been calculated
based on acute admitted NWAU. This means that although the 448 block funded hospitals each have
≤ 3,500 (acute) inpatient NWAU, they are also providing subacute, emergency services and other nonadmitted services. That is why the right-hand axis is considerably higher than 3,500 NWAU as it is
capturing the total activity provided by these block funded hospitals).
Figure 5.1 shows the 448 hospitals lined up in order of increasing costs (the red blocks). The hospitals have
annual reported costs that range from under $100,000 to over $40 million. While there is some corresponding
increase in total NWAU in line with increasing costs, there is substantial variability in the total NWAU provided
at particular ranges of reported costs.
Figure 5.1: Block funded rural hospitals in order of increasing costs
45,000,000
16,000.00
40,000,000
14,000.00
35,000,000
12,000.00
30,000,000
10,000.00
25,000,000
8,000.00
20,000,000
6,000.00
15,000,000
4,000.00
10,000,000
2,000.00
5,000,000
0.00
1
10
19
28
37
46
55
64
73
82
91
100
109
118
127
136
145
154
163
172
181
190
199
208
217
226
235
244
253
262
271
280
289
298
307
316
325
334
343
352
361
370
379
388
397
406
415
424
433
0
Expend
Total NWAUs
Figure 5.2 shows the converse, with the 448 hospitals lined up in order of increasing total NWAUs (the solid
blue line). It can be seen that the vast majority of hospitals have total NWAU less than the 3,500 inpatient
NWAU threshold. However, the graph slopes sharply on the right hand side, representing the relatively small
number of hospital with high levels of total NWAU.
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Figure 5.2: Block funded rural hospitals in order of increasing activity (total NWAU)
45,000,000
16,000.00
40,000,000
14,000.00
35,000,000
12,000.00
30,000,000
10,000.00
25,000,000
8,000.00
20,000,000
6,000.00
15,000,000
10,000,000
4,000.00
5,000,000
2,000.00
0.00
1
18
35
52
69
86
103
120
137
154
171
188
205
222
239
256
273
290
307
324
341
358
375
392
409
426
0
Expend
Total NWAUs
The determination of activity categories had to take into consideration what might be regarded as a
‘manageable’ number of categories. If more activity categories are created, there is greater risk of block
funded hospitals regularly moving between categories. It is also apparent from Figure 5.2 that the activity of
block funded hospitals is represented by a continuous distribution, with no apparent ‘breaks’ into ‘small’,
‘medium’ and ‘large’ activity categories.
Proposed hospital categories
The approach to determining categories involved detailed examination of the distribution of hospitals
arrayed by total NWAUs to establish a line of best fit gradient on a linear basis. This distribution was
enhanced to examine particular sections of the distribution and identify how the line of best fit shifted. These
shifts in the gradient of the line of best fit were used to establish the categories based on total NWAU.
Based on this approach, seven activity categories have been defined on the basis of their total NWAU range,
with an eighth category for facilities providing non-admitted services only. Table 5.1 identifies the eight
categories and presents summary information on the activity and expenditure (including averages, minimums
and maximums) for each of the categories. The companion report prepared by Aspex Consulting includes
detailed information on the profile of hospitals within each of the eight categories.
Table 5.1: Overview data on the proposed categories of rural block funded hospitals
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The non-admitted service facilities category will require further analysis, as even after the removal of outlier
hospitals, there is considerable variation in the costs and activity for this category. It has already been
proposed in Chapter 2 that this category of non-admitted service facilities be subject to further scrutiny to
confirm that they all reported through the National Public Hospital Establishments Collection in 2010 and to
identify the extent to which they are providing in scope ‘public hospital services’. Until this further review has
been completed, it is not possible to ‘lock down’ this category.
Location dimension within hospital categories
As noted previously, the location dimension will use the four ASGC categories (inner regional, outer regional,
remote and very remote). Consultation participants were interested in whether it would be possible to use
other supplementary factors to better explain variation in costs in block funded hospitals particularly within
each of the location categories.
Chapter 2 of the Aspex Consulting report reports on the findings of using ARIA scores to identify whether they
provided additional explanatory power. The correlation between cost and ARIA score for very remote
hospitals was found to be poor. Accordingly, the location category will continue to be based on ASGC alone.
Recommendation
R2 That the IHPA endorses the proposed approach to categorisation of block funded hospitals based
on service type, activity (total NWAU) and location. This will be further refined based on:
a. Confirmation by all states as to the listings of block funded and ABF hospitals;
b. Further review of the facilities included in the non-admitted services category to confirm
their eligibility to receive a Commonwealth funding contribution as ‘public hospital
services’.
Activity data used for hospital categories (and the boundary between block funding and ABF)
One technical issue concerns the activity data that should be used in specifying the hospital categories.
The approach discussed with consultation participants was that in order to reduce volatility in activity, the
activity data that underpins the categories (as well as service capacity payments) should be based on rolling
three-year averages. This means that any major shifts in activity (either increases or decreases) would be
‘dampened’, providing greater stability of funding for block funded hospitals. This approach was generally
supported by consultation participants.
Health Policy Analysis initially used a rolling three-year average in its analysis of variation in the costs of block
funded hospitals and as the basis for setting hospital categories. However, to ensure that the most recent
activity was used in determining whether hospitals were above or below the low-volume thresholds, the
subsequent analysis was entirely based on the most recent activity data from 2010-11. (This means that the
hospital categories and service capacity payments in both the Health Policy Analysis and Aspex Consulting
reports have also been calculated based on only the 2010-11 data, rather than a rolling three-year average).
It is proposed that the principle underpinning the actual implementation of block funding should be that:

A three-year rolling average of activity (based on the most recent national available data) would be
used in setting the hospital categories and also in the calculation of service capacity payments
(depending which block funding option is agreed to by the IHPA); and
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
A three-year rolling average of activity would also be used as the basis of identifying whether
hospitals are above or below the low volume thresholds for block funding.
Recommendation
R3 That the IHPA endorses:
a. The use of a three-year rolling average for national activity data used in setting hospital
categories and service capacity payments (depending upon its subsequent decision on the
preferred block funding option); and
b. The use of a three-year rolling average for national activity data in determining whether
hospitals are above or below the low volume thresholds for the purposes of defining
eligibility for block funding.
Approach to categorising and re-categorising hospitals
Given the importance of hospital categories to the block funding model, it is imperative that a consistent
approach is applied to the initial categorisation of public hospitals and any subsequent re-categorisation of
hospitals, based on changes in their reported activity levels.
It is proposed that the IHPA determine the grouping of public hospitals into the hospital categories using the
most recent national, three-year rolling average data. This is to ensure a consistent approach to the
calculation of the total NWAU that is being compiled from multiple national datasets. The hospital
categorisation is highly dependent on a consistent national approach to the treatment of outlier hospitals and
the determination of ‘in scope’ and ‘not in scope’ activity. It is suggested that this task be undertaken
nationally by the IHPA.
The next issue is the management of changes in hospital categories for individual hospitals, linked to increases
or decreases in activity levels. The options are that:
 Activity changes in the most recent year only could be used as the trigger for recategorisation of
relevant hospitals; or
 Activity changes based on a rolling three-year average could be used as the recategorisation trigger.
In order to guard against the potential volatility in activity levels, it is proposed that three-year rolling averages
would also be used as the basis for recategorisation (and this be done nationally by the IHPA).
To clarify, there would be no recategorisation across block funded categories (or between block funding and
ABF) within the course of a year in response to activity changes. This would not be compatible with stability
and predictability in funding for block funded hospitals.
Recommendation
R4 That the IHPA endorses that
a.
The allocation of block funded hospitals into hospital categories be undertaken nationally
by the IHPA using the most recent national three-year rolling average activity data.
b. Recategorisation of block funded hospitals also be undertaken by the IHPA using national
three-year rolling average activity data.
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5.1.2
A SCALABLE AVAILABILITY PAYMENT
The second proposed core element underpinning block funding is a scalable availability payment. This means
that the quantum of the availability payment will vary across the hospital categories, rather than being the
same for every block funded hospital. The availability payment is intended to recognise the fixed costs for
public hospitals in keeping the doors open.
The relative size of the availability payment depends upon which of the three proposed block funding options
is agreed. Hence, recommendations on the size of the availability payment are covered as part of the
recommendations on block funding options in Section 5.2. For now, it is worth restating that there was strong
support for the availability payment to comprise at least a majority of the total block funding payment.
Recommendation
R5 That the IHPA endorses a scalable availability payment that recognises the fixed costs of
operating public hospitals.
5.2
The three block funding options
In the absence of national block funding, the status quo is ‘historical’ funding that is generally specific to each
hospital. Chapter 3 documented the existing approaches being used by states to block funding, the majority
of which (with the exception of South Australia) did not include any systemic recognition of patterns of cost
drivers in setting budgets for block funded hospitals. Accordingly, the implementation of national block
funding will represent a (potential) major change for relevant public hospitals, the majority of which are small
and located in rural and remote areas.
While the block funding options may represent considerable change from the status quo of ‘historical funding’,
States and LHNs have the opportunity to manage this transition for their block funded hospitals. Section 2.1
outlined the ‘funding flow’ for the Commonwealth’s contribution to block funded hospitals, indicating the role
of States and LHNs in managing this funding.
Three contrasting block funding options are presented for consideration and decision by IHPA. They are:
 ‘National Average (Option 1);
 ‘Availability Plus’ (Option 2); and
 ‘Services & Fixed Costs’ (Option 3).
These options are described in the following box.
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The Three Block Funding Options
National Average (Option 1)


Every block funded hospital would receive the same level of block funding from the Commonwealth.
The Commonwealth funding would be based on the average cost across all block funded hospitals.
Availability Plus (Option 2)


Block funded hospitals would receive different levels of Commonwealth funding related to which of 32
categories they sat in (8 categories of activity by 4 categories of location).
The Commonwealth funding would be paid as a single block (Availability funding) for low activity hospitals
and as two blocks (Availability and Service Capacity) for high activity hospitals.
Services & Fixed Costs (Option 3)

Block funded hospitals would receive different levels of Commonwealth funding through multiple block
payments that will vary according to: their hospital category (based on location and size), the mix and
volume of services provided, the share of Indigenous patients, their remoteness, and they would also be
able to receive ABF.
For each of these options, a brief outline is provided of: its rationale, current level of support and risks, and the
methodology to determine payments.
5.2.1
NATIONAL AVERAGE (BLOCK FUNDING OPTION 1)
Rationale/support/risks: The National Average option was not canvassed during the consultation meetings
and, as such, has no current proponents. However, it might be argued that the references to block funding in
the NHRA implied that the same payment would be applied to all block funded hospitals. At the very least, the
NHRA did not foreshadow the use of multiple block payments or the linking of specific blocks to particular
factors impacting on the cost structure of block funded hospitals (which are integral to the other two options).
So, by default, a simple or minimalist approach to block funding is consistent with a literal interpretation of the
NHRA. The risks associated with this option are obvious: there is huge variation in reported costs of block
funded hospitals, meaning that block funded hospitals will be either significantly under-funded or over-funded
under this option.
Methodology: This option provides the simplest approach to calculating the national efficient cost of block
funded hospitals as it is based on the average cost of all block funded hospitals. It could be argued that, given
the skewed distribution of costs shown in Figure 5.1, an alternative measure of central tendency such as the
median could be used.
The ‘vanilla’ National Average methodology could be extended to calculate the ‘national average for hospital
categories’ of block funded hospitals. This extension starts shifting the National Average option closer towards
the second option, Availability Plus. Hence, it serves to highlight how the three options represent points on a
spectrum of increasing specification of a block funding model.
5.2.2
AVAILABILITY PLUS (BLOCK FUNDING OPTION 2)
Rationale/support/risks: This option received the strongest support through the consultation meetings and
submissions. In part, the concept of paying low volume hospitals a fixed availability payment for keeping the
doors open (irrespective of the number of patients treated) was easy to explain and ‘rang true’. It provides
block funded hospitals with security from funding volatility associated with changes in activity. It also provides
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the funding flexibility for these hospitals to safely contemplate changes to models of care, unrestricted by the
reporting and accountability requirements that accompany ABF or, even, programmatic funding.
In terms of the ‘Plus’ element of this option, there was strong support for providing a supplementary service
capacity payment to larger volume block funded hospitals. It was argued that this sent positive signals about
treating patients locally and encouraged consideration of the possible transition to ABF for hospitals that
might face growing demand for their services. Together with the National Average option, the Availability Plus
option provides substantial autonomy to states in how they decide to implement national block funding.
Risks associated with this option relate to the calculation of the categories (including the extent of cost
variation within categories, and movement of hospitals between categories). Getting the ‘right level’ of
service capacity payment may be challenging if there is substantial variability in costs in the high activity
hospital categories. In particular, ‘over-funding’ through service capacity payments may create perverse
incentives for hospitals to remain block funded, even if they would be viable under ABF. Most of the risks with
the Availability Plus option will probably occur at the high-volume activity end. This reflects the challenge in
attempting to manage and adequately fund the steep tail of activity in Figure 5.1, much of which is attributable
to non-admitted services (where there are likely to be major issues with the consistent counting, classification
and reporting of services between block funded hospitals).
The Availability Plus option is likely to be preferred by the Commonwealth, Victoria, South Australia, Western
Australia, Tasmania and ACT (noting that views may evolve).
Methodology: The Availability Plus option involves three main tasks:



Determining hospital categories;
Deciding which hospital categories will receive only an availability payment and which hospital
categories will receive availability plus a service capacity payment; and
Determining how to calculate, and present, the basis of service capacity payments, which is
dependent upon the relative split between the availability and service capacity payment.
The approach to determining hospital categories has been described earlier in Section 5.1.1. The decision
about which hospital categories will be funded solely through an availability payment is based on reviewing
the data and applying some judgement as to the likely size of facilities for which most costs will be fixed.
There is no technically right answer. The option that is being proposed is to draw the line between Categories
E and F, so that block funded hospitals in Categories F and G would get access to service capacity payments.
This means that 75 rural hospitals would receive a mix of availability and service capacity payments.
The final task involving the calculation of service capacity payments is the most challenging. The first part of
this task is setting the relative split between the availability and service capacity component. Consultation
feedback indicated that the availability payment should comprise at least 60% of the total costs. The impact of
increasing this to 90% has also been examined, with the results modelled for hospitals in Category F in Table
3.2 of the Aspex Consulting report. The analysis indicates that the benefits of a higher availability payment are
for hospitals at the lower activity ends of the category as would be expected.
The second part of this task involves specifying the number of bands of service capacity payment and is
obviously dependent upon the final decision as to the relative size of the availability payment. The initial
proposal outlining the concept behind service capacity payments was that they would be notionally tied to
broad ranges of activity (total NWAU). In theory, this suggests that the service capacity payment would be
internally calculated through an imputed, discounted NWAU price. However, in practice, it may not be
possible to apply this methodology given the lack of a direct relationship between activity and costs in these
hospitals. Instead, it may be necessary to apply a simple stepped service capacity payment of somewhere
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between two and four bands within each of the relevant hospital categories. Approaches to modelling service
capacity payments are included in Chapter 3 of the Aspex Consulting report.
5.2.3
SERVICES & FIXED COSTS (BLOCK FUNDING OPTION 3)
Rationale/support/risks: This option is likely to generate the smallest difference between actual and expected
costs for individual hospitals. The main reason for its predictive value is that it involves the calculation of
service capacity payments based on the actual activity provided at each hospital. Moreover, the activity can
be specified for different activity streams such as acute admitted services, subacute care, emergency services
and non-admitted services. Another factor that contributes to its predictive value is the use of supplementary
adjustments for other cost drivers, in addition to an availability payment and a service capacity payment for
each hospital.
The Services & Fixed Costs option moves much further along the spectrum of increasing specification of block
funding and approaches ABF, albeit that the service capacity payments would not be at risk in any one funding
year. However, because the calculation of block funding is highly dependent on the accurate specification and
counting of all service streams, this option imposes high data reporting and accountability requirements on
block funded hospitals in exchange for a ‘tighter fit’ between actual and expected funding. This option is likely
to be complex for the Administrator of the National Funding Pool to manage. Another risk with this option is
whether it results in reduced flexibility for block funded hospitals to change their models of care either within
or across years, given that funding is calculated based on actual services delivered. Finally, the Services &
Fixed Costs option relies on a very small availability payment to achieve its predictive value flowing from the
multiple service capacity payments. A small (% share) availability payment was strongly rejected in most of the
consultation meetings as not being consistent with the relatively high fixed costs of block funded hospitals.
The Services & Fixed Costs option is currently favoured by Queensland and the Northern Territory. While NSW
is yet to provide a written submission, it is expected that NSW may also be interested in this block funding
option.
Methodology: The Services & Fixed Costs option is based on multiple elements. As these elements are closely
interdependent, it means that there are also multiple approaches to calculating the various components of this
option. Given this complexity, what follows is a high-level summary of the various tasks.
The tasks include:





Determining hospital categories that will be used as the basis of availability payments;
Determining the size of the availability payment relative to total block funding payments;
Calculating the costs of each of the service streams (acute, subacute, emergency and other nonadmitted services) at each block funded hospital;
Determining whether other adjustments (such as remoteness and Indigeneity) should be
included (depending on how much these factors are already accounted for in other funding
elements), the basis for their calculation and to which services they will be applied;
Determining which hospitals or which types of services will be eligible to receive additional at risk
ABF payments (including distinguishing these payments and services from other elements of the
block funding model).
There are multiple choices and decisions points within most tasks, meaning that the Services and Fixed Costs
option is almost ‘continuously variable’ in terms of its specification. For example, the specification of what
was then described as Option C1 in the Initial Analysis Report used hospital categories based on quartiles of
total NWAU and location. But, depending on the relative size of the availability payment and the relative $
that are directed through adjustment payments for remoteness, the hospital categories could include less
reliance on location and more on the distribution of activity across block funded hospitals.
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Another key choice in the calculation methodology is whether particular elements will be determined at the
hospital category level or at the level of individual hospitals. The more the methodology relies upon
calculating funding elements that are hospital-specific, the more it approximates funding based on the actual
costs incurred by individual hospitals.
Recommendation
R6 That the IHPA endorse the “Availability Plus” option (Option 2) as the preferred approach to
setting the national efficient cost of relevant block funded rural hospitals in 2013-14. Further
analysis will be undertaken to finalise the measurement of the efficient cost including sensitivity
analysis of the funding elements in this option.
R7 That the IHPA note that further analysis is being undertaken to propose a block funding
approach in 2013-14 for:
a.
b.
The rural hospitals that are ‘outliers’ and have been excluded from the modelling of block
funding options; and
The other public hospitals that fall below the low-volume thresholds in the Block Funding
Criteria (relevant metropolitan, subacute, designated psychiatric and mothercraft services).
5.3
Other issues
5.3.1
THE ‘PRICE POINT’
Based on the consultations, there was general acceptance that IHPA should use the same approach across
block funded and ABF hospitals in setting the price point.
Recommendation
R8 That the IHPA endorses setting the national efficient cost of block funded hospitals using an
approach that is based on the average costs for the relevant funding elements within the preferred
block funding model.
5.3.2
INDEXATION
The indexation question is in two parts:
 The first issue is about the need to index the costs, given the lagged availability of costing data.
 The second issue concerns how IHPA will measure growth in the efficient cost of block funded
services from 1 July 2014 (and whether this will incorporate growth in activity as well as costs).
On the time lag indexation issue, the expectation from consultation participants was that IHPA would use the
same approach for block funded and ABF hospitals. However, it is likely that block funded hospitals will not be
facing the same cost drivers as ABF hospitals. The main cost drivers for block funded hospitals will be
staffing; they will not bear the utilisation growth and technology risk of larger hospitals.
There is also less robust costing data available for block funded hospitals. While block funded hospitals report
expenditure through the National Public Hospital Establishment Database, only a small number report costs
more rigorously through the National Hospital Cost Data Collection. It may be necessary to supplement these
data sources.
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Recommendation
R9 That the IHPA will consider possible approaches to indexation of block funded hospitals. These
may include using a subset of the National Public Hospital Cost Data Collection, the National Public
Hospital Establishment Database or other measures of wage cost indexation in the health sector.
The second issue relates to measuring growth in the efficient cost of block funded hospitals from 2013-14.
The IHPA is required to make adjustments “for the addition or removal of block services”. As outlined in
Section 4.2.7, there were different interpretations of whether, and how, the IHPA should measure growth in
activity provided by block funded services, in addition to growth in their efficient costs. This is confounded by
the fact that in setting the national efficient cost of block funded hospitals, the IHPA is measuring the total cost
of these services (not the unit cost as occurs with ABF services). Movements in the total cost of block funded
hospitals will reflect all the factors identified in Clause A4 of the NHRA, namely: “changes in utilisation, the
scope of services provided and the cost of those services”.
While this interpretation was generally accepted by states, the Commonwealth DoHA suggested that it would
be preferable to include only price growth in measuring growth in the efficient cost of block funded hospitals.
However, there is no straightforward approach to splitting out the ‘price growth’ from all the other factors
contributing to growth in the total cost of block funded hospitals. Moreover, block funding is not intended to
directly reflect activity; hence, extracting out changes in activity from the total cost of these services would
seem to be incompatible with the policy intent of block funding. On this basis, it is proposed that growth in
the total cost of block funded hospitals (attributable to all factors) should be used in determining growth in the
national efficient cost of block funded services under Clauses A50 and A51 of the NHRA.
Recommendation
R10 That the IHPA endorses an approach to measuring growth in the efficient cost of block funded
hospitals, noting that 2013-14 is the base year from which changes will be measured, that:
a. Makes adjustments for the addition or removal of block funded services; and
b. Is based on examining the total cost of block funded hospitals, where total costs will reflect
“changes in utilisation, the scope of services provided and the costs of these services”.
5.3.3
MULTI-PURPOSE SERVICES
An analysis undertaken by Health Policy Analysis indicated that the cost structures of MPSs are similar to that
of other small rural hospitals, many of which also provide aged care. (For clarification, it should be noted that
this analysis was based on excluding the funding that MPSs received from the Commonwealth for the
provision of aged care services). This is consistent with the consultation feedback that highlighted the diversity
within MPSs, similar to the diversity within other small rural hospitals. On this basis, MPSs have not been
separately categorised from other rural block funded hospitals.
Recommendation
R11 That the IHPA endorse the approach of including MPSs with other rural hospitals in the
categorisation of hospitals for block funding purposes.
Moving beyond this short-term issue, the consultations suggested that consideration needs to be given to the
potential, longer-term alignment of the MPS funding model with block funding for relevant rural hospitals.
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There was strong feedback from most jurisdictions and the National Rural Health Alliance that consideration
be given to the enhancement of the MPS program, or a funding model more akin to the MPS model, that
incorporates all (relevant) non-MPS block funded hospitals. In other words, meld the two funding models into
a single MPS-style funding approach. However, any broadening of the scope of included services for other
relevant rural hospitals is clearly an issue for governments and is outside the remit of IHPA.
Nevertheless, IHPA’s role in determining the national efficient cost can influence (positively or negatively) any
move toward the broadening of the MPS model and addressing the many elements of funding (and associated
funding risks) that would need to be considered by DoHA, states/territories and small rural health services in
order to achieve a workable operational model, particularly the ‘cash out’ rates and accreditation regimes.
Recommendation
R12 That the IHPA note that broader issues about the long-term alignment of funding approaches
for MPSs and relevant rural (non-MPS) hospitals could be considered by the Commonwealth and
State governments.
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Appendix 1: Submissions
As at 26 October, submissions on the Public Hospital Block Funding Discussion Paper had been provided by the
following individuals, organisations and government departments.
1.
2.
3.
4.
5.
6.
7.
8.
9.
National Rural Health Alliance
Commonwealth Department of Health and Ageing
Australian Healthcare & Hospitals Association
Tasmanian Department of Health
ACT Department of Health
Victorian Department of Health
Professor Dobb, Vice-President AMA
NT Department of Health
Queensland Health
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Appendix 2: Late submission
The NSW Ministry of Health provided its submission on 1 November. This was after the circulation of this
report to the Small Rural Hospitals Working Group. Below are the Key Points (extracted verbatim) from the
Executive Summary of the NSW Ministry of Health submission.
Multiple Payments Block Funding Model: Simplicity and ease of application should be a major factor in
deciding on structuring block funding arrangements. Any new block funding model must minimise transaction
costs and promote flexible service delivery. The effectiveness of a multiple payments model outlined in the
Discussion Paper will also depend on payments being appropriately proportioned and balanced in relation to a
particular hospital. Key principles which could be adopted in designing the model are outlined in the
submission. IHPA’s current consideration of a simpler option to the four payment model outlined is
supported.
Costs of Small Hospitals: Further investigation of cost factors in small hospitals is essential. A more structured
analysis of rural hospital costs is necessary as many issues are not addressed in the Discussion Paper and have
significant net cost impact. The analysis in the Health Policy Analysis report commissioned by IHPA is a more
relevant and up to date analysis of these issues, and the multivariate statistical analysis used is an appropriate
method to assess the impact of various factors on costs.
Cost Drivers/Cost Disabilities: Specific cost driver/cost disabilities which should be considered in relation to
each category/group of hospitals have been identified by Rural and Regional LHDs.
Categorisation /Grouping of Small Hospitals: The proposal that block funded hospitals be categorised for
funding and determining efficient costs is supported in principle provided there is confidence in the activity
and costs data supporting the model, that categorisation accounts for both cost and service profiles (not based
on an analysis of cost only), and that it is not only based on National Weighted Activity units (NWAUs). The
model must recognise that NWAUs are not inclusive of the cost relativities of smaller block funded hospitals,
and issues concerning private/compensable patient activity must be addressed. A process for changing the
categories of hospitals as services or activity changes should be established.
Methodology for Categorisation: This should not be overly complex. Recognition of different cost drivers
should be taken into account. Financial incentives for “gaming” of categorisation should be avoided. If NWAUs
are used for category determination they should be adjusted by private patients and compensables activity.
Determining the efficient cost: The Discussion Paper proposes to use the ‘lowest cost’ hospital in a category as
the base determinant of funding levels. Without adequate data and assessment this would present an
unacceptable risk to small block funded hospitals at this time. Until data is more robust, use of an ‘average’
group cost for hospitals in agreed categories may be appropriate.
Components in the Funding Model:
Availability Component: The Discussion Paper proposes the ‘availability payment’ be set as the total cost for
the lowest hospital in a group. This is not an appropriate basis for determining this payment. Consideration
should be given to the distribution of hospital costs within a category or group of hospitals (determined on the
basis of services).
Service Capacity Payments: Further explanation is required regarding calculation of these payments including
methodologies for the definition and measurement of services, calculation of admitted and non admitted
activity, consideration of private patients and compensable activity.
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Adjustment Payment Component: This is not needed. The cost drivers which might be included in adjustment
payments should be covered by other factors in the other payment components.
ABF component: If include, key issues need to be addressed including determining what services would be paid
on this basis and how they would be selected.
Indexing Block Funding Payments: Rural and Regional Local Health Districts raised concerns about the
preferred approach outlined in the Discussion Paper to derive a cost index measure specific to block funded
hospitals using the latest available National Public Hospital Establishment Data Collection data (2010-11). They
are concerned about the data lag as decisions on data three years ago may not be based on the same model of
care now operating.
Growth Funding: The indexation methodology for the National Efficient Cost will need to accurately capture
the requirements of the NHRA and take account of changes in utilisation, the scope of services provided, and
the cost of those services annually. At this stage it is not clear that the proposed indexation approach
adequately captures the requirements of the NHRA.
Data Issues: Current national data collections for small hospitals will need to be enhanced to provide the
required data set for accurate calculation of national efficient cost and appropriate block funding allocations.
It will take time for some block funded facilities to become ready for a National “Efficient” Cost, and for data
collection systems to provide reliable volume data.
Funding of Multipurpose Services under the National Health Reform Agreement: MPSs must be in scope for
funding under the National Health Reform Agreement. A hybrid funding model (existing aged care funding and
additional public hospital block funding) for MPSs is supported in principle.
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References
1
National Rural Health Alliance 2011, Australia’s health system needs rebalancing: a report on the shortage of
primary care services in rural and remote areas, Available at:
http://nrha.ruralhealth.org.au/cms/uploads/publications/nrha-final-full-complementary-report.pdf
2
Australian Institute of Health and Welfare 2011, Australian health expenditure by remoteness: A comparison
of rural, regional and city health expenditure, Cat. No. HWE 50, Available at:
http://www.aihw.gov.au/publication-detail/?id=6442475421
3
South Australian Department of Health, Technical Bulletin No 94:2, Funding for low volume rural hospitals,
Available at:
http://www.sahealth.sa.gov.au/wps/wcm/connect/9c398180440863598a37aa5fc19a2cbb/CFMTechnicalBulle
tins1112-HSP-20120330.pdf?MOD=AJPERES&CACHEID=9c398180440863598a37aa5fc19a2cbb
4
South Australian Department of Health, Technical Bullet No 94:2, Funding for low volume rural hospitals,
Available at:
http://www.sahealth.sa.gov.au/wps/wcm/connect/9c398180440863598a37aa5fc19a2cbb/CFMTechnicalBulle
tins1112-HSP-20120330.pdf?MOD=AJPERES&CACHEID=9c398180440863598a37aa5fc19a2cbb
5
Queensland Health 2011, Business rules & guidelines 2011-12, Finance Branch, Available at:
http://www.health.qld.gov.au/qhpolicy/docs/gdl/qh-gdl-909.pdf
6
Younis, M.Z. 2003, ‘Comparison study of urban and small rural hospitals financial and economic
performance’, Online Journal of Rural Nursing and Health Care, 3 (1):Fall, Available at:
http://www.rno.org/journal/index.php/online-journal/article/view/110/106
7
Rosko, M.D. and R.L. Mutter 2010, ‘Inefficiency differences between critical access hospitals and
prospectively paid rural hospitals’, Journal of Health Politics, Policy and Law, 35(1): 95-126.
8
Tasmanian Department of Health and Human Services 2012, Tasmania’s rural hospitals: Sustainability report
2012.
9
Information on the Multi-Purpose Service Program, Available at:
http://www.health.gov.au/internet/main/publishing.nsf/Content/ruralhealth-services-mps-introduction.htm
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