Dear Dr Sherbon

AMA submission on draft hospital pricing framework

Thank you for the opportunity to make a submission on the draft pricing framework released on 16 January 2012. Thank you also for your time and making the consultants available to us on 31 January.

The AMA’s comments on the framework are attached.

If you have any questions, in the first instance please contact Ms Georgia Morris on (02) 6270 5466.

We look forward to further opportunities to inform hospital pricing policy.

Yours sincerely

Dr Steve Hambleton
President

AMA Submission on the Hospital Pricing Framework

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Executive Summary

The method for determining the national ‘efficient’ price should be flexible and adaptable to changing and evolving public hospital services, and to respond to new evidence and changes in practice.

The AMA supports an ‘effective’ rather than an ‘efficient’ price for hospital services. An effective price is one that provides sustainable and equitable access to high quality hospital services and includes components to fund quality assurance, development, innovation and governance. An ‘efficient’ price may not achieve this.

The design principles should:

• explicitly include provisions that address the need to improve quality and access to healthcare. Improving quality should be an overarching policy objective. Service quality  is equally as important as improving cost efficiency;
• ensure that activity based funding (ABF) applies where it is the best funding option, and is not used when there is a more appropriate option. There should be proper consideration of provider characteristics in price adjustments; and
• be strengthened to minimise undesirable and inadvertent consequences and achieve public-private neutrality.

All ‘public hospital services’ as defined by AIHW should attract Commonwealth funding. Services not defined as falling within the scope of public hospital funding will become by exclusion the responsibility of Medicare Locals and others. The implications of this – for both levels of government in terms of funding responsibilities and health outcomes – should not be underestimated.

The treatment of mental health services in the proposed framework presents a high risk that those services will be inadequately funded and further fragmented. There needs to be a much stronger commitment to improve the quality of care in both community and hospital settings, a commitment which needs to be shared by all levels of government without equivocation or cost-shifting.

The price should provide the right incentives for post-hospital care.

Initially, ABF should apply only to those services for which there is a well developed classification system applied consistently across all jurisdictions. Currently, this means that ABF should only apply to acute inpatient services (the AIHW defines inpatient acute care as care in which the intent is to perform surgery, diagnostic or therapeutic procedures in the treatment of illness or injury. Management of childbirth is also considered acute care however rehabilitation care is not). The potential for extending ABF to other public hospital services can occur once robust classification systems exist.

The ‘efficient’ cost of block funded services should be determined by a hospital benchmarking process.

Investment in teaching, training and research (TTR) is critical to the future of the health system. There is currently no robust approach that allows ABF to be applied to teaching, training and research (TTR) in public hospitals. The AMA therefore fully supports block funding for TTR but supports future research into possible approaches for including TTR in ABF.

Small and medium sized hospitals should continue to be block funded (the AIHW defines small hospitals as those reporting 5000 or less separations per year and medium sized hospitals as those reporting between 5001 and 10,000 separations per year). There is considerable evidence to support that ABF is not a practicable system for funding those hospitals.

Determining price on the basis of best practice should be the policy aim. However it is recognised in the short term, IHPA will determine the price based on costs.

The proposed indexation by reference to an implicit price deflator is supported provided that it is clearly understood that it reflects productivity gains and there should be no scope to apply a further discount for productivity gain. In addition, indexed prices may not reflect real costs. As technology affects service delivery, which in turn can drive changes in practice, this can result in driving costs up or down. The effect of using this index should be monitored and reviewed.

The AMA supports a patient-related loading reflecting analysis of average case complexity for Aboriginal and Torres Strait Islander patients benchmarked against other Australians. The loading factors would need to be reviewed periodically. Once the health gap narrows, the loading factors would start to come down.

Loadings should be related to both patient factors and to provider characteristics. Equally efficient hospitals operating in different areas will have different case costs. Geographical variations in costs and wages are independent of the relative efficiency of the hospitals.

Teaching hospitals should receive a loading reflecting the complexity of the work they do, a loading for any external cost factors as well as block funding for their teaching, training and research activities which recognises both the resource demands of that work and the slower patient throughput associated with teaching and training.

The AMA fully supports measures to improve quality of care, reduce adverse events, and to report these events accurately and transparently. However we strongly caution against using ABF as a tool to address so-called hospital acquired conditions. It is impossible to prevent ‘hospital acquired’ conditions in all circumstances. The goal should be to identify hospitals where the rates for these complications lie outside the norm and to address the underlying issues causing this in the hospital. Punitive funding risks worsening the problem.

The issues around public-private neutrality should not be limited to neutrality from the patient’s point of view. There is a range of issues around neutrality (or otherwise) from the provider’s point of view.

IHPA needs to consider issues including: the incentives for the hospitals to seek to change their public-private mix for inpatient services; the incentives for the hospitals to seek to change their mix of publicly and privately referred outpatients; and the related issues around doctors’ rights of private practice. The AMA is concerned that doctors may be pressured by hospital management to change their admission practices so as to maximise income for hospitals.

Principles

The AMA notes a number of issues relating to the three tiers of principles that should be reconsidered.

The principles focus primarily on improving cost efficiency without mentioning improving quality. Improving quality should be a key objective, ranking equally with improving cost efficiency. There is a real risk that the pursuit of improved cost efficiency will be achieved at the expense of safe, quality care for patients.

The AMA supports an ‘effective’ rather than an ‘efficient’ price for hospital services. An effective price is one that provides sustainable and equitable access to high quality hospital services and includes components to fund quality assurance, development, innovation and governance. An ‘efficient’ price will only support these activities if the method used to determine the price includes them.

Regarding the third classification and system design principle, ABF design should minimise susceptibility to gaming, inappropriate rewards and perverse incentives, the AMA considers this will be a challenging objective that will be difficult to meet. The AMA would like to see more detail about how the design of the pricing framework will address these risks.

Regarding the fourth classification and system design principle, ABF should be used for funding wherever practicable, the AMA believes that ABF should be used where it can be demonstrated that it is the best option. In some cases, ABF might be judged as practicable, but it will not be the best option. Its use in those circumstances will result in sub-optimal outcomes, outcomes that are inconsistent with the second over-arching principle relating to efficiency.

Regarding the sixth classification and system design principle, Adjustments to the standard price should be, as far as is practicable, based on patient-related rather than provider-related characteristics, the AMA contends that provider-related characteristics will have to be considered in price adjustments, particularly where there are differences in cost levels between geographical areas and this is reflected in labour costs which are a large component of recurrent hospital costs. Failure to do so will breach the first three over-arching principles (timely-quality care, efficiency and fairness).

Regarding the seventh classification and system design principle, 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, it is not at all clear that the current incentives are set correctly to give effect to the principles underlying Medicare. There is no mention of other key aspects of public-private neutrality, namely: the incentives for the hospitals to seek to change their public-private mix for inpatient services; (the incentives for the hospitals to seek to change their mix of publicly and privately referred outpatients; and the related issues around doctors’ rights of private practice. The AMA is concerned that doctors may be pressured by hospital management to change their admission practices to maximise income for hospitals. This seventh principle should be expanded to deal with these issues.

What public hospital services should be included in the new funding arrangements?

All ‘public hospital services’ as defined by AIHW should attract Commonwealth funding. Services not defined as falling within the scope of public hospital funding will become the responsibility of Medicare Locals and other community-based services. The implications of this – for both levels of government in terms of funding responsibilities and health outcomes – should not be underestimated.

For example, the AMA is concerned that mental health services may become inadequately funded and fragmented. There needs to be a much stronger commitment to improve the quality of care in both community and hospital settings, a commitment which needs to be shared by all levels of government without equivocation or cost-shifting.

When should public hospital services be funded on an activity basis or a block grant basis?

Initially, ABF should apply only to those services for which there is a well developed classification system which is applied consistently across all jurisdictions. In practice, this means that ABF can only be applied to acute inpatient services (the AIHW defines inpatient acute care as care in which the intent is to perform surgery, diagnostic or therapeutic procedures in the treatment of illness or injury. Management of childbirth is also considered acute care but rehabilitation care, for example, is not). The draft paper has a strong focus on admitted inpatient services and does not propose a way forward for developing the classification systems that would extend ABF to other non-acute public hospital services.

In addition, the price for acute inpatient services should provide the right incentives for comprehensive post-hospital care.

Even in relation to acute inpatient services, there are episodes of care where ABF is problematic. Complex medical cases, those involving a long and unpredictable length of stay, are not a good fit to ABF. The most appropriate funding system in those cases may be a daily payment. This should also be considered for unplanned admissions to intensive care units.

The ‘efficient’ cost of block funded services should be determined by a hospital benchmarking process.

Small and medium sized hospitals should continue to be block funded (AIHW defines small and medium hospitals as those reporting less than 5000 separations per year and those reporting between 5001 and 10,000 separations per year respectively). There is a wealth of experience to show that ABF is not a practicable system for funding those hospitals.

A mix of ABF and block funding will be complex and difficult to administer in a way that maintains sufficient funding, discourages gaming and also retains the incentives that ABF seeks to offer.

The AMA considers that it will be difficult to develop a workable method of funding teaching, training and research (TTR) via ABF. It has not yet been possible to develop an authoritative, generally accepted method for calculating the costs of education and training in public hospitals largely because TTR is incorporated in the delivery of care, and consequently, teaching slows patient throughput.

AMA supports further research in this area but continues to support block funding for TTR at this stage. TTR is too important to risk under funding.

A high quality health care system requires that every medical student and graduate be provided with a quality clinical training experience from medical school through to the completion of vocational training.

In the determining block funding contributions, the full range of teaching and training activities in public hospitals must be taken into account. The majority of clinical teaching and training in public hospitals is delivered in conjunction with patient care. Funding mechanisms must adequately recognise these ‘integrated’ activities and reflect the numbers of medical students and junior doctors coming through the system.

Poor outcomes will follow if funding for TTR is limited to stand alone more easily defined and costed activities such as lectures and tutorials and does not recognise the full complexity of medical supervision and training. The block funding for TTR must be sufficient to cover the costs of teaching hospitals including the increased time required for each and every service when it is provided in the context of teaching and training. The clinical education community should be consulted in determining block funding to ensure it reflects the true costs involved.

How should the national ‘efficient’ price be set?

If the IHPA sets the national ‘efficient’ price too low, even the best-run hospitals will not be able to provide episodes at or below the benchmark; hospitals will not have the financial resources to implement effective new technologies; and adverse events will increase as quality of care declines. It is critically important to understand that key performance indicators are showing poorer performance in public hospitals than achieved a decade ago.

A nationally uniform strategy will be needed to manage the risk if hospitals or health services become technically insolvent as a result of their costs exceeding the funding they receive and State and Territory governments do not cover any shortfall.

It should be a policy objective in the longer-term to include best practice as a factor when determining the price. Best practice implicitly requires a certain quality standard which in turn requires commensurate funding. Best practice not only implies changes in the way care is provided; it requires patients to get access to services within an appropriate time frame. Therefore, best practice demands action to deal with the backlog of services involving clinically inappropriate waits. It is unlikely that the current mean or medium price will support best practice service delivery.

Indexation

The AMA supports the proposed output cost index based on the Government final consumption expenditure on hospitals and nursing homes with the caveat that it be monitored, reviewed and adjusted as necessary depending on its impact.

It is important to understand that an implicit price deflator is measuring a number of factors and it is not a pure price index per se. An implicit price deflator measures the relationship between output in real (constant price) and nominal (current price) terms. If there is productivity gain, then there is more real output for the same nominal cost. Therefore, the increase in the deflator will be smaller (or the decrease larger).

Cost shifting by governments onto patients and private health insurers reduce Government consumption expenditure and therefore also results in an increase in the deflator being smaller (or the decrease larger). Implicit price inflators are also affected by changes in the composition of services provided.

By adopting a deflator of this nature, it is implicit that productivity gains and cost shifting need to continue at the same rate (at least) as in the past if the indexation factor is to be adequate. However if the indexation is inadequate, the State and Territory governments will not have the financial capacity to take up effective new technologies and public hospitals will miss out on the productivity and quality improvements they bring.

The AMA therefore has some concerns about the potential impact of the proposed deflator for indexation purposes but does not rule it out. If governments impose an additional productivity gain over and above that which is implicitly reflected in the index, then the system of indexation will decrease the funding public hospitals need. Accordingly the deflator must not be further discounted.

While an indexation method may prove suitable for adjusting the ‘efficient’ price of some services, there will be others where there are significant changes in the way a service is delivered. These changes could increase or decrease the resources used and could result in the service being under or over-priced.

Should there be any adjustments to the national ‘efficient’ price?

The AMA does not agree that that patient-related factors should always have pre-eminence over geographical or other factors.

There should be a patient-related adjustment for the costs of treating Aboriginal and Torres Strait Islander people. There is a significant gap in health and life expectancy between Aboriginal and Torres Strait Islander peoples compared to other Australians. An Aboriginal person or Torres Strait Islander is 2.6 times more likely to die at any age due to ill health or injury than another Australian. The health conditions experienced by Aboriginal people and Torres Strait Islanders are more likely to be chronic, complex and involve multiple and compounding factors. Best practice provision of heath services to Aboriginal and Torres Strait Islanders also calls upon particular skills, sensitivities and case-management arrangements. The national ‘efficient’ price should be adjusted to reflect these differences, with a level of adjustment based on an analysis of average case complexity for Aboriginal and Torres Strait Islander patients benchmarked against other Australians. The loading factors would need to be reviewed periodically.

The case for having specialist children’s hospitals and units is that they bring together the expertise to deal with more difficult cases on referral from general hospitals.  We are not convinced that the classification system is good enough to detect the additional complexity of the caseload and the patient-related adjustments will provide an appropriate loading. Our members report that it is significantly more expensive to provide a paediatric service than a comparable service to an adult due to many factors including the need to make allowances for different cognitive abilities and parent involvement.

There must be adjustments to the national ‘efficient’ price to satisfy the over-arching principle of fairness. Equally efficient hospitals operating in different geographical areas will have different costs because the cost structures vary geographically.

There will be no single price in practice.

The variation in cost structure is evident from wage rates and average earnings measures. Where the cost of living is higher (reflected in housing, food, etc), wages will be higher. For example, there are some geographical areas in Australia where the cost of housing has become so high that people on modest incomes (nurses, teachers) cannot afford to buy or rent in the area.  These wage cost differences have nothing to do with the efficiency of the hospitals or indeed a nationally ‘efficient’ price for funding. Employees involved in the provision of clinical services should not be disadvantaged if the ‘efficient’ price falls short of local costs.

Therefore, both patient-related and provider-related factors need to be considered on their merits on an equal footing.

The AMA fully supports measures to improve quality of care, reduce adverse events, and to report these events accurately and transparently, but the ABF is not an appropriate tool to address so-called hospital acquired conditions.

It is impossible to prevent ‘hospital acquired’ conditions in all circumstances. The types of infections, embolisms and falls listed in the United States’ Medicare List of Hospital Acquired Conditions will occur even in the best hospitals and even following best practice. The goal should be to identify hospitals where the rates for these complications lie outside the norm and to address the underlying issues in the hospital causing this.

While no foreign object should be left in patients after surgery or incorrect blood-types administered, applying financial penalties to hospitals where errors occur risks worsening performance. These hospitals are those most likely to need additional funding support, rather than less.

Instead State governments, as the system managers, need to identify and address the underlying problems whether they be poor hospital management, procedures or other issues. Current ABF design already provides incentives for quality care (and by extension, disincentives for hospital acquired conditions with their related longer stays, readmissions and so forth).

Reports on individual hospitals by the National Health Performance Authority will also make it abundantly clear which hospitals are falling behind on quality measures. We submit that issues relating to the quality of services are best left to the Performance Authority and not crudely addressed through ‘price’.

How should the national ‘efficient’ price be set for private patients in public hospitals?

The health of Australians is best supported by a strong private hospital sector complementing a strong public hospital sector in a non-partisan political framework where both sectors are valued and respected for their contributions to the community.

There are two aspects to achieving public-private neutrality in the proposed pricing framework.

The first is to ensure that arrangements are neutral from the patient’s point of view, that they support patient choice as per the key tenets of Medicare, and do not seek to influence the patient in one direction or another.

The second is to ensure that the arrangements are neutral from the provider’s point of view, that there is no incentive for States and Territories to influence the patient to choose one direction over another.

It is difficult to achieve both simultaneously, in part because of the complexity of private health insurance policies. Depending on the cover they have, privately insured patients are confronted with a mix of front end payments, known gaps and, in some cases, unknown gaps. There is no universal arrangement which engenders public-private neutrality for all privately insured patients. As well, there is another cohort of patients whose funding comes from compensation insurance.

Some consideration should be given to the implications of the proposed arrangements on the second aspect. For example: 

• What are the incentives (currently and prospectively) for hospitals to seek to change the mix of public and private inpatients so as to maximise their revenue?
• What are the incentives (currently and prospectively) for hospitals to seek to change the mix of publicly and privately referred outpatient services?
• What are the implications for the medical workforce more generally and doctors’ rights or private practice more particularly?
• What risks are involved in hospital managers pressuring doctors (even more than they are now) to change their admission practices so as to maximize the income for the hospital?

The ultimate solution should be sustainable for funders and providers alike.

February 2012

Contact:

Ms Georgia Morris
Senior Policy Advisor
Ph: (02) 6270 5466