1. Changes in Funding in the Health System For Moir Group Event By Carrie Schulman & Julia Smith pwc.com.au

2. PwC Today’s presentation 1.Drive for funding reform 2.National Health Reform Agreement 3.Funding component of health reform - Commonwealth funding at ‘efficient’ levels 4.Activity Based Funding 5.National Efficient Price 6.Hospital costing and cost management under ABF 2

3. PwC Driver of funding reform in Australia Australian Government expenditure on health in 2012-13 was $98.2 billion representing 19.4% of total government expenditure This represents 6.46% of GDP Over the past decade health expenditure rose by over $40 billion (74%) in real terms. This was driven by an increase in the volume of services consumed – “people of any age saw doctors more often, had more tests and operations and took more prescription drugs.” 3 Source: Grattan Institute Budget pressures on Australian governments, April 2013

4. PwC Driver of funding reform in Australia Simply, if health expenditure is = (cost or price) x volume, the cost curve is unsustainable and the volume figures has a large population soon to hit Source: AIHW statistics and average trend growth projects 4

5. PwC National Health Reform Agreement (NHRA) 1 objectives 1.improve patient access to services and public hospital efficiency through the use of activity based funding (ABF) based on a national efficient price (NEP) 2.ensure the sustainability of funding for public hospitals by increasing the Commonwealth’s share of public hospital funding through an increased contribution to the costs of growth 3.improve the transparency of public hospital funding through a National Health Funding Pool and a nationally consistent approach to ABF 4.improve standards of clinical care through the Australian Commission on Safety and Quality in Health Care (ACSQHC) 5.improve performance reporting through the establishment of the National Health Performance Authority (NHPA) 6.improve accountability through the Performance and Accountability Framework 7.improve local accountability and responsiveness to the needs of communities through the establishment of Local Hospital Networks and Medicare Locals 8.improve the provision of GP and primary health care services through the development of an integrated primary health care system and the establishment of Medicare Locals 9.improve aged care and disability services by clarifying responsibility for client groups 1 Signed by all First Ministers in August 2011. 5

6. 6 Funding of most hospitals on ABF, national efficient price basis FY13 FY12 FY16 FY11 FY15 1 July 2012 National system of ABF introduced; LHN and Medicare Locals established 2011 NHRA: IHPA and NHPA, ACSQHC established FY17 C’wealth share of ‘efficient growth’ to 50% FY14 C’wealth share of ‘efficient growth’ to 45% 1 July 2012 National funding pool Performance Management C’wealth, IHPA, NHPA drive the system design States and C’wealth refine data gathering and define compliance feedback loops Devolution of budgets to LHNs based on ABF targets (variable by State) Annual cycle of classification refinements and target setting. evidenced based with transparent benchmarks, activity and cost data, quality indicators, patient experience and sustainability Health Reform Agreement journey

7. PwC National Health Reform - funding A key feature of the reform is Activity Based Funding (ABF). Commonwealth funding for hospitals from 1 July 2012. 1 July 2012 – 30 June 2014 is a transition period, with capped Commonwealth funding; 2014-15, Commonwealth will contribute 45% of efficient growth; 2016-17 +, Commonwealth will contribute 50% of efficient growth. This new funding model based on principles of: Transparency Value for money National comparability Efficiency 7

8. PwC Commonwealth funds ‘efficient’ growth from FY14/15 Under the National Health Reform Agreement, the Commonwealth has guaranteed an additional $16.4 billion in payments to states and territories from 2014-15 to 2019-20. Public Hospitals $14.9 billion in 2013-14, $871 million more than in 2012-13. Activity based funding growth of Commonwealth portion will be uncapped from 2014-15. 8

9. 9 PwC The National Health Reform Agreement (NHRA) The NHRA provides a mechanism for the Commonwealth’s share of the (efficient) growth in public hospital expenditure to increase. Commonwealth's Share of Hospital Funding Increases State (and other) Share of Hospital Funding Decreases Sources: 1. AIHW Australian Hospital Statistics 2010/11 2. Treasury: Mid Year Economic and Fiscal Outlook, 2012/13 Projections are based on extrapolations of these data sources. However this outcome assumes that a State / Territory’s hospital costs grow at the “efficient” rate. no State will be worse off in the short or long term, because they will continue to receive at least the amount of funding they would have received under the former National Healthcare SPP and their share of the $3.4 billion in funding the Commonwealth guarantees that it will provide at least $16.4 billion in additional funding over the 2014-15 to 2019-20 period

10. 10 PwC At a State level, the consequences of not managing cost growth to National Efficient Price growth are ……. The State’s share of hospital funding continues to grow, placing pressure on State budgets. So it is important to understand how hospital costs compare to an Efficient Price benchmark. This scenario assumes that a State’s cost growth is 1 percentage point higher than National Efficient Price growth Commonwealth's Share of Hospital Funding Decreases State (and other) Share of Hospital Funding Increases Sources: 1. AIHW Australian Hospital Statistics 2010/11 2. Treasury: Mid Year Economic and Fiscal Outlook, 2012/13 Projections are based on extrapolations of these data sources.

11. PwC Case-based payment has been adopted by more than 20 countries, or 70% of the OECD** There are links between changes in health system costing/funding and measures of service delivery (access, volume, cost) Case based payment has been variously named Payment by Results (UK), Prospective Payment (US) There is a trend towards using different models and funding to outcomes – sophistication in purchaser/provider relationships is growing **Source: PwC 2008 – You Get What You Pay For (2007) 11

12. PwC The ‘lens’ on ABF is important – variable impacts and incentives Commonwealth – as ‘payer’ financer States – as ‘system manager’ & Treasury as financer Providers: o Clinician: model of care / income o Management: cost control / data & cost capture o Planners: demand management & prediction Patients and broader consumers: access Suppliers: value for money 12

13. 13 Infrastructure of Activity Based Funding Pricing Framework: National Efficient Price (NEP) released annually ;applies rules, eg inlier, outlier, loadings National Hospital Cost Data Collection (NHCDC): Patient level costing captures direct costs via feeder systems, allocation of indirect costs, costing according to Australian Hospital Patient Costing Standards (AHPCS) Reporting of activity levels / Service level agreements (SLAs): Activity is counted by product and subject to estimated activity levels and demand management. Hospital products: ED stays (URG/UDG), admitted separations (ARDRG), non-admitted (Tier2), Subacute (ANSNAP), Mental Health (TBD), Teaching/Training/Research (TBD) Improving source data: coding of medical record information (diagnoses, procedures); capture of costs by patient Counting Classification of activity by product Activity Based Costing Funding methodologies Medical record & data management Governance & management

14. PwC How will the funding under ABF function? ABF operates through a national efficient price established for the services provided by a public hospital: It has a single unit of measure and relative weights called National Weighted Activity Unit (NWAU):. Patient-based: Adjustments to the standard price should be, as far as is practicable, based on patient- related rather than provider-related characteristics. Public-private neutrality: ABF pricing should not disrupt current incentives for a person to elect to be treated as a private or a public patient in a public hospital. 14 Counting Classification of activity by product Activity Based Costing Funding methodologies Medical record & data management

15. 15 DRG Same-dayOvernight Short-stayInlierLong-stay ICU Adjustment Paediatric Adjustment Indigenous Loading Remoteness Loadings Specialist Psychiatric Age Loadings Unit record dataset 1.Patient-level costs 2.Calculate NWAU for an individual patient 3.Calculate expected revenue = NWAU x Efficient Price Understanding the NEP funding formula

16. What is Patient Level Costing? Patient level costing / clinical costing is:...“identifying the resources used by a patient from the time of admission until the time of discharge and calculating the expenditure of those resources using the actual costs incurred by the hospital. “ Total hospital costs $100 Wards $50 Pharmacy $15 Radiology $15 Overheads $20 Activity data from multiple systems; i.e. Patient X length of stay 4 days for DRG x Cost per episode per DRG Counting Classification of activity by product Activity Based Costing Funding methodologies Medical record & data management 16

17. Implementation of patient level costing 17

18. PwC 18 The NHCDC is an annual costing study performed across public and private hospitals which produces a range of detailed hospital costs mostly by Australian Refined Diagnosis Related Groups (AR-DRGs). What is the National Hospital Cost Data Collection (NHCDC)? How is the data used? The NHCDC’s primary early use was to collate information in order to determine cost weights and relativities among (mainly) acute hospital products and was used for the refinement of the DRG classification system. The output from the public sector costing study is now used by IHPA in determining the National Efficient Price (NEP). The output of the costing study can be used for benchmarking, allocating resources within the hospital and understanding the costs of resources, inputs and cost weights.

19. PwC Approach to cost management in ABF There are a number of stakeholders involved in determining how ABF is implemented In the near term – their engagement, understanding and appreciation of information, costing and funding processes is critical In the long term – refining decision making using evidence and supportive processes between clinical, operational and financial staff will create results for patients, providers and funders Costs are mostly direct at the patient level Costs are mostly allocated Costs are mostly fixedCosts are mostly variable Most addressable through clinical decision making 19

20. PwC Key Contacts Julia Smith Director p: 02 8266 3991 m: 0403 499 129 E: julia.smith@au.pwc.com Carrie Schulman Engagement Partner p: 02 8266 3170 m: 0438 201 475 e: carrie.c.schulman@au.pwc.com 20

21. Questions?