Why the health system should take a lesson from 20 years ago

by Stephen Duckett

Published in The Australian Financial Review, Page 47, 3 July 2013

It is 20 years since the Kennett government introduced Victoria and Australia to the novel idea that inefficient hospitals should not be rewarded for their inefficiency.

Before what has become known as “activity-based funding”, the budgets of Victorian public hospitals were based on negotiations influenced by squeaky wheels and politics. Weak incentives for efficiency resulted in significant variation in costs per patient across the state.

All that changed on July 1, 1993, when funding for Victorian public hospitals shifted to a formula-basis in which public hospital revenue was based on the number of patients treated, adjusted for the type of patients or “case mix”.

After a two-year implementation, all hospitals were essentially paid the same for treating the same type of patient.

Expensive hospitals were no longer paid more for their inefficiency.

Twenty years on, activity-based funding is finally being rolled out nationally.

As it does so, two big questions still confront the health system: what society should pay for, and how much should it pay? Activity-based funding addresses the latter and is a core part of ensuring a sustainable health system.

But are we paying for the right things?

The question in the 1990s was: should you reward less efficient hospitals by paying them more than more efficient hospitals?

That question has been answered.

Today’s question is about quality: should you pay hospitals that have higher rates of mistakes and complications more than hospitals with lower rates?

My answer to that question is “no”.

It’s technically possible to do this but it is not clear that the other prerequisites of change – political will and management capability – are in place.

The right treatment and the right outcome are even more important than the right price. The issue of value for money – ensuring that what is done in the health system makes both clinical and economic sense – is still critical. This year is also the 20th anniversary of a requirement that new drugs listed on the Pharmaceutical Benefits Scheme must meet a cost-effectiveness threshold.

Activity-based funding proved its worth in Victoria. It has survived two changes of government (Liberal to Labor and back again). It can be extended to other areas of the health system and indeed other sectors.

Increasing the proportion of primary care activity funded on the basis of an “episode of care” is perhaps the best example of a potential extension.

General practice in Australia is primarily remunerated on a fee per visit basis, with the obvious incentive being to maximise the number of visits per illness. The alternative is a single payment for an episode of illness, or for a year of care in case of chronic illness, to maximise continuity and holistic care. The 1993 Victorian reforms proved it was possible to implement a dramatically different funding system quickly. It also showed access to care could be maintained in the face of tough budget cuts.

Both lessons are still relevant.