Pricing and funding framework - Department of Health, Victoriadocs2.health.vic.gov.au/docs/doc/C5103BC2D92D50C1CA257E6F0081044C/$FILE/Victorian...pricing and funding framework and

Pricing and funding frameworkThe Victorian approach to pricing and funding for public health services

June 2015

Pricing and funding frameworkThe Victorian approach to pricing and funding for public health services

June 2015

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© State of Victoria, July, 2015

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Available at www.health.vic.gov.au/pfg/pricing_framework

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Purpose

The purpose of the Pricing and funding framework (‘the framework’) is to advise Victoria’s public health services of the Department of Health & Human Services’ (‘the department’) approach to funding and price setting for specific clinical activities.

The framework is underpinned by three key objectives; equity, effectiveness and efficiency. These objectives help to guide the translation of the government’s budget decisions into specific funding arrangements for health services and are used to help inform decisions about the mix of funding approaches that are applied in the Victorian context.

The framework does not set out individual health service funding arrangements or the details of all funding changes; these are detailed annually in the Victorian Policy and funding guidelines.

This is the first iteration of the framework, which will be further refined and adapted over time. However, many of the fundamental elements outlined in the framework are not new and have been foundations underpinning the Victorian approach since the introduction of casemix funding.

Relationship to the Policy and funding guidelinesThis framework sets out the broad parameters used to guide funding model development and reform in Victoria and flags a number of key changes that will be implemented or further developed in the coming three to five years.

In comparison, the department’s Policy and funding guidelines 2015–16 are used to convey the changes both in policy and funding arrangements that will be effective in the next 12 months.

The Policy and funding guidelines 2015–16 articulate the outcomes of the Victorian Government’s budget decisions and sets out the system-wide terms, conditions and pricing arrangements for health services. This includes details of price and funding model changes for the upcoming year.

The Victorian contextVictoria’s public hospital system is the state government’s largest single recurring investment. In 2015–16 the health budget was $11.3 billion, representing more than 22.8 per cent of Victorian State Government appropriations.

Demand for healthcare is rising as a result of:

• an ageing and growing population

• the rise in chronic and complex diseases

• new treatments and medical technologies

• increasing patient expectations and demand for choice

• lower community tolerance for variation in health status, access and outcomes.

The Victorian Government’s investment in healthcare continues to grow. For example, the recent 2015–16 budget has seen a 6.7 per cent increase in the acute health output group. Continuing to deliver the maximum value requires the department and health service providers to prioritise the allocation of available resources to areas that are most likely to deliver the most efficient and effective outcomes overall.

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This is not a new challenge, nor is Victoria alone in dealing with it. It is also not a one-off or short-term process. Most developed health economies are turning their attention to achieving ‘value’, with an increasing focus on how to use funding and pricing approaches (alongside the range of other policy and economic levers) as a means of achieving efficiency in all its forms – technical, productive and allocative.1

The legacy of casemix and its limitations

Victoria’s achievement of significant efficiency gains is largely the result of the decision more than 20 years ago to introduce casemix funding with a clear price to be paid for clinical activity and providing health service boards the autonomy to respond to the price signals by managing all cost components.

These efficiency gains resulted from increased patient throughput, decreasing length of stay and other cost containment. While year on year these gains have become more modest over time, there is still no doubt that activity-based funding does improve efficiency when applied in the right setting. The model has proven its ability to provide a fair, transparent and accountable approach to allocating funds across health service providers, but implementation does have limitations.

One limitation is largely a result of its primary focus on bundling only the acute or subacute parts of an episode of care, rather than a person’s whole episode of care, and therefore it fails to capture the continuum of services across the whole episode of care. The model is also limited in its ability to account for differences in an individual’s level of need.

To offset these limitations Victoria has historically adopted the use of block grants for specified purposes. These funding approaches have allowed providers greater flexibility to address the individual needs of community members they serve and for the department to focus providers’ attention on specific aspects of quality and effectiveness of care.

While block payments come with less incentive to drive technical efficiency, lack transparency and can lead to perverse provider behaviours, the combination of these models has been effective in achieving a greater balance between equity, effectiveness and efficiency, when combined with governance and accountability frameworks.

New challenges

Equity, effectiveness and efficiency objectives have formed the foundation for Victoria’s approach to pricing and funding over the past two decades. These objectives remain at the heart of the Victorian approach. However, the Victorian public health service system is facing new challenges.

The community’s changing disease and age profile, along with changes in clinical practice, has placed (and will continue to place) increasing pressure on the public health service system.

Personalised healthcare, advancing technology and changes in the way healthcare is being delivered, along with the recognition of more tailored and targeted responses, are challenging the way we apply funding and pricing approaches.

1 Technical efficiency: Achieving a specified health output (outcome) with the minimum number of inputs. Productive efficiency: Achieving a specified health output (outcome) at the least cost. Allocative efficiency: Maximising the health outputs (outcomes) from a specified level of resources. Source: Palmer S, Torgerson DJ 1999, ‘Definitions of efficiency’, British Medical Journal, vol. 318, no. 7191, pp. 1136.

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Our ability to continue to drive greater value in the public health service system requires the department to review, refine and renew its approach. As such, the department has reviewed its pricing and funding framework and reaffirmed that, while the objectives remain unchanged, the approaches must continue to be developed and upgraded.

This refinement and development must also be considered in the context of national health reform.

The National Health Reform Agreement was intended to reverse decreasing Commonwealth funding contributions and provide more sustainable hospital services through activity-based funding. From 2012–13 the Commonwealth’s contribution was determined by the level of activity, largely as a means of encouraging a greater focus on technical efficiency across a widely variable national health system, and increasing the state’s accountability for the use of Commonwealth funds.

Given its long history in activity-based funding methods, Victoria determined that its existing funding approaches, developed over many years and informed by mature data collections, should be retained as the foundation of its management of the hospital system. While the link between Commonwealth funding and the national version of activity-based funding constrained the local development of other innovative funding models, work on the national system has provided classification systems and counting models in service streams that will assist in strengthening Victoria’s funding models.

The Commonwealth Government’s May 2014 announcement that it will stop using activity-based funding as the basis for its funding contribution to hospitals after June 2017 has emphasised the need for Victoria to reinvigorate its own efforts to adapt, refine and develop contemporary funding and pricing approaches.

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Victoria’s mix of funding approaches

The department recognises that funding approaches can influence the way care is delivered and the way resources might be configured across services and the system. The design of funding models can help signal the overall goal to be achieved and influence how health services organise their resources. Funding model design can also change the risk profile between purchaser and provider.

Currently Victoria uses a blend of funding models that are typically evolving and adapting to changes in the broader health system. The current models and some recent developments are summarised in Figure 1 on page 5.

Victoria is progressive in its understanding of the advantages and risks involved in making changes to its funding approaches. Therefore, while it is critical that work continues to design, test and implement new approaches, it is fundamental to provide health services with stability and predictability so they can plan their activity and expenditure.

In determining changes to the funding approach the department also takes into consideration the unique features of the Victorian system, including the level of involvement of other payers, the degree of provider autonomy and the mix of public, private and not-for-profit providers across the various components of the system.

These factors assist the department to select the funding approach and to identify the modifications to each model that may assist achieving the desired patient and/or system outcome.

Before implementation, the department also assesses how its other regulatory levers can be used to mitigate risks or accentuate advantages of the pricing and funding change.

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Service stream Funding model 2014–15 Recent developments

Acute inpatient services

57%

Emergency departments

6%

Subacute inpatient services

6%

Mental health

inpatients 3%

Acute non-�admitted

7%

Sub acute non-�admitted

4%

Mental health non-�admitted

6%

Other services

11%

Admitted activity – patients who go on to receive admitted care Activity funded as part of the acute inpatient episode of care.

Non-�admitted activity – patients are not subsequently admitted Block funding, which is calculated from a combination of availability (50 per cent) and activity (50 per cent). Capped budget, with no target. The availability component uses a health service’s share of non-same day emergency Weighted Inlier Equivalent Separation. Activity component uses the health service’s share of triage category weighted presentations. Availability data classified using diagnostic related groups and activity component uses triage category to weight presentations. There is no funding unit. Funding calculations are undertaken annually based on the previous year’s activity. There are no prices. Pre-planned activity is discounted by 50 per cent. Presentations where the patient left at their own risk are excluded. Presentations where the patient self-identifies as Aboriginal and/or Torres Strait Islander have a 30 per cent loading to their weight.

Activity-based funding model. Capped budget with targets. Activity is counted as bed days (number of midnights that patient is in hospital). Activity is classified using the interim Subacute and Non-Acute Classification system. The funding unit is a Weighted Bed Day. Weights within the interim Subacute and Non-Acute Classification system are annually adjusted using health service cost data. There is one price. Private patients have a seven per cent discount. There are loadings to the weighted bed day for activity for patients who self-identify as Aboriginal and/or Torres Strait Islander (30 per cent), patients who live in outer regional (eight per cent), remote (15 per cent) and very remote (24 per cent) areas. Recall is applied for under-performance.

Activity-based funding. Capped budget with a target. Activity is counted as bed days (number of midnights the patient is in hospital). Activity is classified using the age of the patient, with four categories. The funding unit is a Weighted Occupancy target. Weighted Occupancy targets are allocated to health services based on bed day capacity and adjusted for expected age cohort casemix. Annual update of age cohort weights are undertaken using health service cost data. There is one price. There are no discounts. Loadings are applied to activity for patients self-identifying as Aboriginal and/or Torres Strait Islander (30 per cent) and for services delivered in a rural setting. There is no recall for under- or over-performance.

Block funding based on historical allocations. Capped budget with no targets. Activity is counted as contacts and service events although there is no link to funding. Activity is classified within the Tier 2 classification system, with no link to funding. There is no funding unit. There are no prices, loadings or discounts. There is no recall. There are separate funding streams for specialist clinics, Home Enteral Nutrition and Total Parenteral Nutrition.

Block funding model. Capped budget. Health Independence Program has targets. Community Palliative Care has shadow targets. Activity is counted as contacts. Activity is not classified. There is no funding unit with funding based on historical allocations. There are no prices, loadings or discounts. HIP activity is subject to recall. There is no recall for other programs.

Block funding model. Capped budget with targets. Activity and funding unit is ‘Service hours’. Activity is not classified. The price per service hour is indexed annually. There is one price. There are no discounts or loadings. There is no recall.

Activity-based funding for non-admitted radiotherapy and community alcohol and drug programs. Block funding and Weighted Inlier Equivalent Separation funding for renal dialysis that includes cross-charging between providers. Block funding for statewide services, high-cost, low-volume services, small rural health services, residential alcohol and drug programs and training and development activity.

Trial of pricing for hip and knee prostheses that is based on the median (lower than the average) due to evidence that more expensive prostheses do not translate to better patient outcomes. Pricing for quality associated with positive reinforcement through reward for eliminating intensive care unit central line blood stream infections.

Reduction in the number of price groups from four to three as evidence of cost differences is diminished.

Short stay units attached to emergency departments have been introduced, which has changed models of care to streamline the flow of patients out of emergency and into admitted care. This has improved efficiency.

Within the specified grant structure, funding has been provided for specific programs such as improving safety and security of healthcare workers and improving the interface between emergency departments and ambulance services.

Development and introduction of Victoria-specific classification, the interim Subacute and Non-Acute Classification System, and funding approach (weighted bed day) in order to begin the journey to an activity-based funding approach to drive greater technical efficiency.

Development of Weighted Occupancy target model, informed by local costing and counting systems as a way to reduce the variation in length of stay between health services.

The Victorian Ambulatory Classification System was ceased as part of the transition to a more comprehensive approach to funding non-admitted acute activity. Counting systems have been introduced that capture a wider array of activity and classify into the national Tier 2 classification system.

Consolidation of individual streams to the Health Independence Program as part of the progress towards an activity-based funding approach and mechanism to increase health service flexibility in providing integrated care.

Identified Victorian Artificial Limb program funding and removed from Weighted Inlier Equivalent Separation model in order for later inclusion in activity-based funding model.

Remodelling of home-based outreach support, day programs, care coordination, aged intensive support and special client packages funding streams into Individualised Client Support Packages.

Activity-based funding model. Capped budget with targets. Activity is counted as episodes of care (from admission to separation). Activity is classified using a Victorian modified diagnostic related group system. Funding unit is a Weighted Inlier Equivalent Separation. Annual rebasing of activity weights using health service cost data. Three Weighted Inlier Equivalent Separation prices based on the health service’s peer group. Private patients have a 24 per cent discount on the public price. Activity for patients self-identifying as Aboriginal and/or Torres Strait Islander receive a 30 per cent load on the price. Recall is applied for over – and under – performance.

Consolidated grants into price. Funding for allied health service events associated with radiotherapy transferred to hub hospitals.

Recurrent

health

service

budget

for

clinical

care

Figure 1: Summary of 2014–15 Victorian funding models and recent developments

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Aims of the framework

A sustainable healthcare system is fundamental. Good health and access to effective healthcare are inextricably linked. Ensuring Victoria’s healthcare system remains sustainable into the future relies on our long-term ability to deliver healthcare that is affordable while also meeting the needs of its patients. Victoria’s public hospitals work within a capped funding system that requires active demand management and an ongoing focus on improving efficiency in the way it provides care.

Victoria’s health system also recognises the importance of access to good healthcare for all people, which is why it continues to focus on issues of equity and effectiveness. Ensuring all Victorians have access to high-quality care can require a trade-off between efficiency and equity.

The framework also aims to consider the opportunity cost of each decision and the cumulative impacts these decisions may have on the overall performance of the system.

Figure 2: Key objectives of the Victorian funding and pricing approach

EQUITY

EFFICIENCY

EFFECTIVENESSFairness

Justice

Obj

ectiv

ity

Integrity Honesty

Integrity

Rightfulness

Rea

sona

ble

DisadvantageEqual

Logicality

Productivity

Pro

ficie

ncy

Adeptness

Coh

eren

ce

Expertise

effectiveness

powerValue

HelpfulnessUsefulnessSuccess

Bal

ance

Objectivity

Neutrality

Parity

Need

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Achieving these objectives with a limited pool of resources and in the face of emerging demand challenges requires decisions to be made about which healthcare services should be delivered, and where, and how they should be funded.

Pricing and funding approaches each have a range of strengths and weaknesses and depending on the application may promote one of the three objectives more strongly than others.

As the funder of services, the department assesses the relative strengths and weaknesses of various approaches against a range of factors including the approach’s ability to achieve the following.

Promote patient outcomes by:

• supporting patients to receive appropriate care in a timely way, and in the most appropriate setting, by the right providers

• allowing flexibility so that service models can respond to the needs of defined groups of patients and enable sufficient flexibility to ensure health services can innovate and test new approaches to care

• ensuring the patient’s needs along their journey of care and/or desired clinical outcomes are appropriately supported.

Improve system outcomes by:

• encouraging accountability for both health service providers and government

• being predictable so health services can plan effectively for changes

• remaining simple and transparent

• supporting efficient and sustainable health service operations.

These attributes, along with the equity, effectiveness and efficiency objectives, form the basis for Victoria’s funding and pricing approach.

Scope of the Victorian pricing and funding approach

While the framework sets out the broad objectives which could reasonably be adopted across all payers and all service streams, the department is responsible for funding only some components of the system.

The department’s approach to funding and pricing has been largely focused on those programs and services delivered by public health services, denominational hospitals, privately operated public hospital services and public hospitals as defined by the Health Services Act 1998, as these account for a significant proportion of the total state health budget.

In some cases non-government organisations or stand-alone community health centres also provide these public health services, thus the Victorian approach to pricing and funding is also relevant for these agencies.

Pricing and funding approaches can be considered in two categories: those that apply to recurrent funding for acute, subacute and mental health services provided in admitted, non-admitted and emergency settings; and those applied to capital and infrastructure funding. While the framework’s objectives are relevant across both, the focus in the immediate future is on the recurrent component.

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Delivering on the objectives: the forward program of work The framework is designed to help shape new, and refine current, funding approaches. It is also used to support the translation of the government’s annual budget decisions into specific health service funding arrangements.

In this first iteration, the focus has largely been on addressing a range of immediate reforms that have potential to be implemented in the short term (2015–16 or 2016–17).

However, the department intends to use the framework to inform its longer term funding reform agenda and as a tool to ensure reforms continue to deliver the intended policy outcomes, and to drive greater value for the community. In assessing proposed changes, consideration will be given to the total impact on the system and the ability of the system to effectively respond to the change.

In the shorter term a number of key reforms have been flagged, and these are outlined in the actions below. They have been grouped under the areas of ‘equity’, ‘effectiveness’ or ‘efficiency’ corresponding to the main objective being sought from the reform.

Fostering greater equityEquity is typically defined as the fair distribution of benefits across the population rather than the fair distribution of resources. Achieving equity often requires a re-organisation of services and redistribution of resources to ensure those with equal needs are able to achieve equal benefits. When considering equity, it is important to remain cognisant of both horizontal equity (the equal treatment of equals) and vertical equity (the unequal treatment of unequals).

Factors such as geographic location, socioeconomic status and health service availability all impact on a patient’s ability to access healthcare.

Victoria’s pricing and funding arrangements need to support the ability of health services to reduce the access barriers and ensure that all patients who use the public hospital system receive the care appropriate to their needs and personal circumstances.

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Action 1: Delivering more equitable access to patient transport so care is delivered in the right place

Ensuring patients have access to the right service can result in some patients being transported to another health service for their care. Decisions to transport patients are based on clinical factors and it is important that funding approaches support the appropriate decisions being made. Under the current casemix approach, transport is considered an appropriate cost in delivering care and therefore average transport costs are included in the activity price set for health services.

However, the department recognises that currently some smaller regionally located health services bear significantly greater than average costs for patient transport, for two reasons:

• Transport costs are not fully amenable to management control; for example, patients at health services that are a long way from Melbourne are more likely to be transferred by air, which is substantially more costly.

• Transfers occur either prior to the patient being admitted, or soon thereafter, which results in the health service receiving no or little revenue, yet incurring the full costs of transport.

Adequately compensating those services with significantly higher than average costs for appropriately transporting patients is therefore considered appropriate. In 2015–16 the department will introduce a specific payment to ensure patients have access to care in the right place. Health services that have transport costs (as a proportion of total funding) twice the state average will receive additional funding. Health services deemed to be eligible will receive funding equal to 75 per cent of their costs above the threshold. These health services will also be encouraged to consider strategies that will assist in reducing inappropriate costs associated with patient transport. The department will cease the funding (negative and positive grants) provided to health services in 2014–15 as a result of the new Ambulance Victoria pricing approach.

Action 2: Supporting equitable access to interpreter and language services

Effective communication is essential for high-quality healthcare. Departmental policy requires health services to provide professional interpreting and translating services for people faced with significant health decisions who speak limited or no English. The cost of providing these services is variable and depends on: the size and characteristics of the patient cohort at each health service; the model of interpreter services the health services uses; and the availability of appropriately trained interpreters and translating services.

Funding for interpreter services is currently incorporated into the prices for admitted and non-admitted care, but health services have substantially different levels of demand for interpreters despite each health service receiving a similar activity price.

In 2015–16 the department will introduce a specific payment to health services with significantly higher than average interpreter service expenditure in recognition that some health services are more likely to use greater volumes of interpreter services and have demand from communities more likely to require these services. The department has reviewed population characteristics and health service expenditure to ensure there is broad alignment between expected demand and actual supply of these services.

From 2015–16, health services with reported 2014–15 interpreter costs that exceed 0.2 per cent of their total funding will receive additional funding. The additional funding will be 75 per cent of the reported costs for 2014–15 above 0.2 per cent of total funding.

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Promoting effectivenessEffectiveness is achieved when resources are utilised to produce the highest quality outputs. The department is committed to ensuring resources are directed to delivering care that is demonstrated to have the greatest value to the community. However, the department recognises the importance of not over-estimating the capacity of pricing to influence the provision of safe, high-quality public hospital services.

The Independent Hospital Pricing Authority and the Australian Commission on Safety and Quality in Health Care have jointly explored the role of pricing in promoting effectiveness and found there is little firm evidence available to prove that pricing approaches alone will drive improved effectiveness.

In this context Victoria has opted to take a measured approach to its use of pricing and funding while also continuing to explore all available levers, including: performance management; regulation and standard setting; data and information; clinical leadership and professional development; use of clinical guidelines; and consumer voice as means to improving effectiveness.

Action 3: Supporting effective care for patients with chronic diseaseChronic disease and the demand for longer term care is a challenge being experienced by all developed health systems. Alternative models of care are being driven by the rise of chronic disease, the increasing number of older patients, an increasing desire by patients for better outcomes and the ability to receive care in the community or as close to home as possible. To date funding models have largely focussed on acute episodes, with many failing to encourage health services to provide critical elements of care such as integration, coordination and longer term maintenance of health conditions.

While clinicians have recognised that doing more of the same is unlikely to achieve better outcomes, the current funding model is still based on compensating service providers for a series of efficiently delivered but stand-alone interactions that, in sum, may not provide the effective and integrated care required by patients with chronic or complex care needs.

Recognising the need to shift the paradigm for these patients, effective management of chronic disease requires models of care that are built along integrated pathways, provided by multidisciplinary teams, using alternative approaches and in a variety of locations. The department will therefore trial funding models that are better aligned to the care of these patient groups.

In 2015–16 the department will pilot a new approach, ‘HealthLinks: Chronic disease’. This alternative funding approach will shift the focus on paying for episodic inpatient encounters to one that encourages health services to pool funds around specific high-risk patients so they can intervene earlier and wrap the appropriate care around the individual. By creating a more flexible capped pool of funds for this group of patients, health services will be encouraged to reduce overall expenditure for patients with complex and chronic disease by adopting service innovations and alternative models of care while achieving better outcomes, without the risk of losing revenue. These new arrangements will also mean health services also carry some risk through risk-sharing arrangements with the department for any expenditure that exceeds the cap for this group of patients.

The approach is similar to those being promoted elsewhere under the banner of ‘accountable care’, but unlike some models this trial will see existing funds converted to encourage new innovation, rather than being funded as a stand-alone approach. This conversion is important because it focuses on the need to deliver greater value from existing investments rather than encouraging ‘add on’ approaches that are less likely to achieve systemic change over time.

In the first phase, a limited number of large health services will collaborate with the department to pilot the new funding approach, with the pilot commencing in the second half of 2015–16. Participating health services will share in the potential gains, and the risks, that are achieved through developing better patient identification, early intervention and care management responses.

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Action 4: Encouraging effective patient transition between providersFor many patients, their episode of care spans a number of providers and settings. The transition for a patient as they leave hospital to continue their care in the community is critical. If the planning for discharge from a hospital is not adequate, it can lead to the patient being readmitted unnecessarily.

The quality and timeliness of the information health service teams provide to community providers, such as general practitioners and allied health professionals, can impact on the patient’s likelihood to be readmitted.

Patients are well placed to assess if their transition from one provider to another has been successful, and this experience is currently assessed as part of the patient experience survey undertaken at each health service.

The flow of information between providers and well-planned and communicated discharge planning is fundamental to ensuring patients have the right supports in place to enable a successful transition of care and reduce the risk of unplanned readmissions.

In 2015–16 the department will trial the use of financial rewards for health services that support effective patient transitions. The department will use the patient experience survey information to identify the best performers and inform the reward payment.

Improving system efficiencyEfficiency requires all payers to allocate available resources between alternative healthcare approaches in a way that maximises health and wellbeing gains to society. It also means that the providers of this care must deliver the right services using the least amount of resources necessary.

Achieving efficiency requires services and government to make decisions about which services should be provided, or expanded, on the basis that the expected benefits outweigh the benefits of providing other potential services.

Action 5: Encouraging greater efficiency in admitted subacute services through a more refined activity-�based funding model

Previously the admitted subacute program had a series of unrelated bed day prices aligned to the type of care the patient received. The prices were not directly associated with patient characteristics; however, more recently the department moved to introduce a classification system known as the Interim Subacute Non-Acute Classification for all admitted subacute services. This classification system focuses on patient characteristics to help predict resource use. In 2015–16 the department will further progress the introduction of this activity-based funding model with the introduction of the Australian National Subacute and Non-Acute Patient classification system for admitted subacute activity. This model has been shown to have higher statistical and clinical validity than the Interim Subacute Non-Acute Classification because it includes additional patient characteristics such as age and functional status, which influence the overall length of stay. The new funding model will count and fund episodes of care rather than bed days as is the current situation.

In 2015–16 health services will not experience any change in funding or counting units, with the department assessing the suitability of the new approach during 2015–16 and working with providers to identify improvements or modifications.

The introduction of a new classification system aims to encourage health services to reconsider their model of care and use of resources for admitted subacute patients.

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Action 6: Refocussing on the efficiency of specialist clinic services

Prior to 2011–12 Victoria funded non-admitted specialist clinic services using an activity-based funding approach. This approach aimed to focus service providers on the technical and allocative efficiency of their services, ensuring the right level of resources were assigned to these services while also ensuring the mix of the various services were best matched to the needs of the health service’s patients. With the promise of a national funding model, Victoria ceased this approach, reverting to block funding as an interim measure.

While the national model is still under development, the department has determined there are benefits to introducing a new activity-based funding approach for specialist clinics. In 2015–16 the department will use a modified version of the nationally developed classification system for non-admitted care, which is known as the Tier2 classification system,2 and assess its appropriateness. The department anticipates further refinement of the model prior to its introduction in future years.

Only Tier2 classes relevant to Victorian specialist clinic activity will be included, and shadow cost weights will be developed using Victorian cost data.

Further modification of the funding approach will focus on the feasibility of defining an episodic counting unit as a basis for further incentives for efficiency.

Action 7: Supporting efficient management of blood and blood products

The department provides the current funding for blood and blood products to the national organisations that collect, process and deliver blood products to health services. A range of national and local efforts are underway to reduce the waste of fresh blood products. However, the current funding approach has resulted in a weak price signal for health services, which reduces the incentive for providers to achieve further efficiency. To promote optimal management of the limited blood resources a stronger financial incentive is considered necessary.

Achieving the same or better outcomes for patients at a reduced cost is beneficial for the system because it frees up often limited resources to be used elsewhere. Blood and blood products are scarce resources that require effective management, and reducing overall cost through reduction in waste has significant benefits to the system and the community.

In 2015–16 the department will provide nine health services with a budget equal to the cost of the blood estimated to be required for their patients. Health services that efficiently manage their blood and blood products will retain the unused funding, providing an additional incentive to improve their management of blood and blood products beyond those strategies already in place.

2 Tier 2 categorises a hospital’s non-admitted services into classes that are generally based on the nature of the service provided and the type of clinician providing the service. The structure of the classification is first differentiated by the nature of the non-admitted service provided. The major categories are: procedures; medical consultation services; diagnostic services; allied health and/or clinical nurse; and specialist intervention services.

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Action 8: Supporting the efficient use of genetic specialist services

Genetic and genomic services are becoming recognised as part of routine clinical practice, and they are expected to deliver significant future improvements in health outcomes. While this practice is encouraged and aligned to the policy directions, the current funding model does not support the efficient use of available resources.

Genetic testing is becoming more advanced and more accessible. As a result, the demand for this activity has grown considerably and is now consuming significantly more resources. As with all scarce resources, there is a need to ensure they are being used in the most productive way. This means ensuring clinicians order only those tests that are best for the patient’s circumstances and that the funding model supports the appropriate use of the available resources.

In 2015–16 the department will change its funding approach for genetic tests, with funding to flow to the clinical services that order the tests. This change aims to provide clinicians with knowledge of the resources they are consuming and support them to make active decisions about how best to allocate those resources to ensure patients receive the appropriate care. At present the laboratories are funded separately, therefore there is little transparency for the decision about the level of resources being consumed, with pathology suppliers then left to implement demand management strategies such as ceasing or delaying supply of tests or operating beyond their current financial means.

The new arrangements aim to support more efficient genetic testing by providing greater clinician transparency and accountability for managing these limited resources.

Action 9: Driving efficiency through consistent price signals

Historically, Victoria has used different admitted acute prices for peer groups of hospitals to recognise cost differentials that are outside the management control of individual health services. The different prices cluster providers with similar cost profiles together and drive a degree of efficiency within each group as each tries to reduce costs further below their set price.

With advances in the way cost data is collected and in the way services can and are being delivered, there is now less evidence of the need for multiple price bands. The department is exploring how to move towards a single price for specific services, recognising that other funding mechanisms such as specified grants may be needed to address unavoidable cost variations.

Setting an appropriate price for any given output is contingent on good cost data and the ability to understand changes in the cost drivers. Continuous improvement of the cost data collection and reporting system will help ensure prices are set accurately and drive efficiency in the system.

The move towards a single price will be staged over a number of years to ensure health services have transitional arrangements in place. Moving to a single price recognises that different price signals should reflect the efficient production of different models of care, not different efficiency levels for the same care.

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Action 10: Continuing to drive efficiency through activity-�based funding

Health services experience changing patterns of demand, patient casemix, clinical practice and costs of delivering services. An activity-based funding model needs to be able to keep pace with these changes or it will become out of date. Without monitoring and regular adjustment of activity-based funding models, they can become inaccurate in allocating resources.

In Victoria, Diagnostic-Related Groups and Interim Subacute Non-Acute Classification cost weights are adjusted annually to reflect the most up-to-date policy parameters, classification systems, coding editions, activity and cost data. In particular, this adjustment includes scaling the new cost weights to ensure:

• the statewide volume of weighted activity is the same under consecutive versions of cost weights

• changes in casemix and volume growth remain separated (isolated) from changes in price (inflation and indexation).

This scaling process is referred to as ‘rebasing’, but the term ‘rebasing’ is sometimes used more broadly to refer to the overall process of adjusting cost weights.

Annually adjusting cost weights allows for efficiency gains to be reflected in the new cost weights, therefore continuing to encourage health services to provide more efficient care.

Changes that result from rebasing can impact on health service budget stability, therefore the department uses a compensation approach to help minimise shocks where appropriate. The department’s approach to compensation will continue to be reviewed to ensure it supports the goals of a casemix funding model.

Action 11: Efficient emergency department activity

Patients who attend emergency departments can either be admitted to the hospital to which they first present, be assessed and then transferred to another facility, or may be treated and discharged home. The funding approach for emergency department activity attempts to mirror this patient flow through two main streams of funding:

• For those patients who go on to be admitted, health services receive funding through the inpatient price, which includes allowances for the cost of the emergency department care.

• For those patients who present to an emergency department but who do not go on to be admitted at that hospital, health services receive funding as a specified grant that comprises two parts: an availability component and an activity component.

In 2015–16 the department will maintain this split funding approach for the different patient pathways (admitted or non-admitted) but will better align the non-admitted and admitted acute funding pools to reflect the activity that is being reported. This shift will see some funds being transferred between the non-admitted emergency department activity grant into the admitted funding mechanism.

Improving the specificity of the two funding streams will provide a clearer signal to health services about the efficient level of resources required for admitted and non-admitted emergency care.

In addition to improving the alignment between cost and funding for non-admitted emergency care, in 2015–16 the department will use different measures to allocate the availability and activity component of the funding. The funding model design will retain the two components.

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The availability component will change from being an emergency department’s share of the total non-same-day emergency activity measured using weighted inlier equivalent separations to using the health service reported costs against a range of fixed ‘base’ costs, including salaries and wages of emergency department clinical and administrative staff and the costs for hotel services. This measure has been chosen because these costs are often unavoidable for emergency departments and are borne by the health services regardless of the activity throughput of the emergency department.

In 2015–16 each emergency department will receive 80 per cent of its reported costs as an availability component. The remaining funding within the capped budget will be used for the activity component.

The activity component is currently provided to health services in proportion to their share of the total (triage category) weighted emergency presentations. In 2015–16 the department will remove the weighting from the calculation of a health service’s share of activity as there is little evidence to suggest there is a robust alignment between cost and weighting. The activity component is designed to cover the marginal costs associated with activity and will aim to reduce incentives to increase non-admitted emergency department activity.

The 80:20 settings within this model represents a significant shift from the current 50:50 split between availability and activity, which improves the overall alignment between cost and funding for emergency departments.

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Future areas of reform

The department has identified a number of priority areas for future reform. These include approaches that better support the delivery of chronic disease care and care that requires coordination and integration across sectors and providers, including the use of advancing technologies.

These longer term approaches will need to be developed in consultation with the sector and in light of changing demand and service models. In the immediate term, the department will seek to focus its efforts on the following major areas for actions.

Mental health Public hospitals are challenged with the increased complexity of patients requiring inpatient mental healthcare. Bed-based services also experience pressure as a result of the large number and type of community providers, each with obligations to different payers – private insurance, the Commonwealth Government and the Victorian Government.

In 2015–16 the department will continue to rethink and challenge the merits for the current funding arrangements, including the separation of acute mental health and acute inpatient funding streams within health services. The department will work with the sector to identify if other funding approaches can assist to better integrate mental healthcare within health services and also improve a patient’s continuity of care across the many community providers likely to be involved in a person’s care.

The work will include looking at the mechanisms involved in consultation and liaison psychiatry programs, funding used to support mental health clinicians in emergency departments, the bed day price for high dependency care, and how funding can contribute to creating innovative and more effective models of care within the community. The work will also consider whether changes are needed to the current accountability measures collected by health services and if there are client outcome measures that can be trialled for monitoring service delivery.

Renal servicesManagement of end-stage kidney disease by public hospitals costs the Victorian public health system more than $165 million each year. Without targeted action to prevent disease and promote health, to detect and intervene earlier, to avoid or limit disease progression and to optimise choice and independent treatment options, these costs at the individual and system levels will continue to grow. Service improvements are already being delivered, such as increasing use of home care options for both dialysis and supportive care patients, and action is being taken to ensure care is based on evidence of best practice. However, there remains room for further service improvement and a need to ensure the current funding approaches are supporting the delivery of efficient and effective models of care.

Victoria’s renal service system has a defined hub and spoke model centred largely on the delivery of dialysis, with 80 sites providing dialysis, including the 11 hubs. The current service model is complex, and the funding approaches used to support the delivery of renal services are not transparent.

In consultation with the sector, the department will undertake work to redefine the renal service system and design a new funding model that is better suited to the needs of all renal patients.

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The funding approach will aim to achieve better alignment between the cost of delivering care and the funding provided, with consideration given to whether dialysis is provided at home, in an ambulatory or acute setting and how best to align funding to the patient’s care requirements. Consideration will also be given to how clinical interventions and services such as preparing a patient for transplantation and provision of supportive care can best be supported.

Cancer clinical pathwaysFuture treatment of cancer will put pressure on Victoria’s health services due to the growing incidence and prevalence of the disease, with a 30 per cent increase predicted in the next decade. Worldwide advanced economies are tackling the challenge of making cancer care affordable in light of the expected growth in costs.

In 2015–16 further work will be undertaken to identify if evidence-based clinical pathways can be combined with alternative funding approaches to support better clinical and patient decision making that reduces waste and promotes better standards of care.

The department will commence work to design a payment system that better aligns with a patient’s clinical pathway and seek to pilot alternative models of funding and accountability for cancer care in the future.

Small rural health service fundingSince 2003–04 small rural health services have received block funding as a means for providing budget stability. This has allowed flexibility to provide services required by their local communities. However, this funding approach has limitations, including a lack of transparency, inability to directly measure efficiency and productivity (and therefore the value being delivered) and the challenge of determining whether funding levels are appropriately compensating the cost of delivering services. The model is also insensitive to changing demand as communities change over time. This is because activity is capped to budget and typically not recorded because the funding model is not bound to an activity-based accountability framework.

In 2014–15 the department began a comprehensive review of the small rural health services funding model. The findings of the review will be available in 2015–16 and the department will work to implement the adopted recommendations from 2016–17.

Other areasIn addition to the above four major areas of work, the department will also begin to explore areas such as funding approaches that support better patient outcomes, greater regional health service collaborations and cross-sectoral approaches such as through joint projects between Primary Health Networks and Victoria’s public health services.

These reforms will also be complemented by a range of smaller pieces of work that will support Victoria’s continuous improvement approach. These will include work on specific program areas such as lithotripsy, home enteral nutrition and total parenteral nutrition, specialist clinics and maternity care.

Work in 2015–16 will also continue to refine the episodic funding for admitted subacute care and further develop the counting and classification approaches for non-admitted specialist clinics.

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Next steps

This framework has been used to inform the department’s Policy and funding guidelines 2015–16; however, importantly it has also been used to identify a number of areas of work that will be further developed in 2015–16.

The department is grateful for the input provided by members of the Victorian Health Service Pricing and Funding Model Reference Group and other key informants and will continue to engage with these groups and other stakeholders in the development of the 2016–17 framework.

Future versions of the framework will be released earlier in the annual cycle to provide the sector with an opportunity to consider the immediate reforms, help shape the implementation of the proposed changes through a range of existing forums and plan for transition towards the identified future reforms.