Chapter 2The Public Hospital SystemSandra G. LeggatWhen you finish this chapter you should be able to:• Discuss the history...
Understanding the Australian Health Care System 2ewere 4.9 million public hospital separations (Australian Institute of He...
2 The Public Hospital System    For the most part, the resuscitation and emergency patients received treatmentin accordanc...
Understanding the Australian Health Care System 2ebased on scientific management principles, yet they attempt a commitment...
2 The Public Hospital SystemCouncil on Healthcare Standards 2011). Standards have been set in relation toclinical practice...
Understanding the Australian Health Care System 2eHealth professional education and researchPublic hospitals have always b...
2 The Public Hospital SystemFunding of public hospitalsPublic hospitals comprise the largest component of the Australian f...
Understanding the Australian Health Care System 2ecalculation of the amount of funding the hospital receives. Public hospi...
2 The Public Hospital System    The agreed reform includes the establishment of the Local Hospital Networks(LHN) comprisin...
Understanding the Australian Health Care System 2e         In 1993, Victoria was the first Australian state to adopt a cas...
2 The Public Hospital SystemTable 2.2Victorian budget for health services 2001–2002 to 2008–2009 ($m)              2001–  ...
Understanding the Australian Health Care System 2e         This would suggest that the WIES price was insufficient to supp...
2 The Public Hospital SystemFurther ReadingBalding C: The Strategic Quality Manager, Melbourne, 2011, Arcade Custom.Sorens...
Understanding the Australian Health Care System - Willis - 9780729541039
Understanding the Australian Health Care System - Willis - 9780729541039
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Understanding the Australian Health Care System - Willis - 9780729541039


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A updated overview of Australia’s health care system, addressing its core features, concepts and issues
Understanding the Australian Health Care System, 2nd edition is an excellent university book for undergraduate and postgraduate students alike.
Published four years after the original, this second edition has been fully revised to reflect major Australian health care reform. Its fully up-to-date content includes current governmental and legislative changes impacting Australia’s health care system.
Other topics addressed include quality and safety within the system, health insurance in Australia – both public and private – the PBS and integrated medicine.

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Understanding the Australian Health Care System - Willis - 9780729541039

  1. 1. Chapter 2The Public Hospital SystemSandra G. LeggatWhen you finish this chapter you should be able to:• Discuss the history and evolution of public hospitals in Australia• Critique the federal, state and territory funding models, procedures and practices for public hospitals• Outline the pressures faced by public hospitals and evaluate potential solutions proposed in the national health reformsIntroductionThis chapter provides an overview of public hospitals in Australia. To assist withyour understanding, the introduction focuses on the number of public hospitalsand services provided. In the next section, the changing role of public hospitals isdiscussed. Finally, the funding models and the implications of the proposed nationalreforms on public hospitals are discussed. At the time of writing (2011), there were 756 public hospitals with 56 478 avail-able beds in Australia, and while the geographic distribution of the hospitals doesnot ensure equal population access, this amounts to about 2.5 public hospital bedsper 1000 population (Commonwealth of Australia 2010c). When private hospitalbeds are included, Australia has about 3.7 hospital beds per population (AustralianBureau of Statistics 2010b). The World Bank has a website that compares varioushealth indicators among countries, including the number of hospital beds per 1000population. To compare Australia’s hospital beds with other countries, see: In Aus-tralia, public hospitals are widely dispersed geographically, with around 58% locatedin regional areas and 21% in both major cities and remote areas (ProductivityCommission 2009). Hospital patients are categorised as: (1) inpatients (patients who are admitted toa bed) and (2) non-admitted patients, such as outpatients. Inpatients can be admit-ted for same day or non-overnight care, or for multi-day stays, spending time inthe hospital overnight. In 2008–2009, approximately half of the hospital admissionswere same-day (Commonwealth of Australia 2010a). Hospital workload is oftenmeasured in terms of patients who are ‘separated’ from the hospital through: death,discharge home, discharge to another hospital or change in type of care. This meansthat a separation can be a full episode of care from admission to discharge or aportion of an episode, as a patient transfers from one type of care (e.g. acute care)to another (e.g. rehabilitation). In 2008–2009, the most recent year of data, there 13
  2. 2. Understanding the Australian Health Care System 2ewere 4.9 million public hospital separations (Australian Institute of Health andWelfare 2010c), which have been growing at around 3% per year for the past 6years (Commonwealth of Australia 2010c). There has been recent discussion in themedia suggesting that Australia admits more people into hospitals than other coun-tries (Gregory 2010). Australia discharges 162 patients per 1000 population, whichcompares with 158 on average for Organisation for Economic Cooperation andDevelopment (OECD) countries, 138 for New Zealand, 126 for the USA, 126 forthe UK and 84 for Canada, and includes same day admissions, which are notcounted as admissions in some of these other countries. When the same day admis-sions are removed from the totals, Australia demonstrates the OECD average rateof hospital use (i.e. 158) (Eagar 2010). However, studies have shown that there arepreventable hospital admissions within the Australian system, e.g. the VictorianAmbulatory Care Sensitive Conditions Study suggested that 7% of all hospitalsadmissions could have been prevented through primary health and preventive care(Public Health Division 2001). Public hospitals were largely established to provide acute care, but over time,have developed more of a continuum of care, including sub-acute care, such asrehabilitation, geriatric evaluation and management (GEM), palliative care forpatients with terminal conditions, and services for nursing home type patients. Thesetypes of admissions comprise approximately 3.6% of the care provided in Australianpublic hospitals. In addition, childbirth often takes place in public hospitals, makingup about 6% of all public hospital admissions (Department of Health and Ageing2010a). The top five diagnoses for public hospital admissions in 2008–2009 were:infectious and parasitic diseases, neoplasms (cancers), diseases of the blood andblood forming organs, endocrine, nutritional and metabolic disorders (e.g. diabetes)and diseases of the nervous system (Australian Institute of Health and Welfare2010c). These diagnoses illustrate the increasing number of chronic (persisting fora long time or recurring) conditions that are now part of public hospital admissions.This is discussed further in the section on the Role of Public Hospitals. Public hospitals also provide a large amount of emergency care. In 2008–2009,there were 7.2 million presentations to public hospital emergency departments,70% of which were seen on time for their category of urgency (known as the triagecategory) (AIHW 2010a). A National Triage Scale is used to allocate people present-ing to emergency departments to one of five categories defined by the AustralianCollege of Emergency Medicine (Table 2.1). Table 2.1 National triage scale 1 Resuscitation for conditions that are immediately life-threatening 2 Emergency 3 Urgent 4 Semi-urgent 5 Non urgent Source:
  3. 3. 2 The Public Hospital System For the most part, the resuscitation and emergency patients received treatmentin accordance with their category of urgency, with the other category patients oftenhaving to wait longer for care. Around 25% of emergency patients are admitted toa hospital bed (Department of Health and Ageing 2008). There were also 42 millionoutpatient services provided in public hospitals (Department of Health and Ageing2010a). Outpatient services are defined as: examination, consultation, treatment orother services provided to non-admitted, non-emergency patients through a hospi-tal (Australian Institute of Health and Welfare 2010a).The role of public hospitalsFree medical and surgical careBefore the 19th century, public hospitals were primarily charitable, sheltering thesick, the poor and the dying, and government was not directly involved. With theadvent of modern medicine, the role of public hospitals changed to active treatmentof all types of patients. Doctors such as William Osler and Harvey Cushing wereinstrumental in this altered role for hospitals, based on scientific research as thefoundation for clinical practice and formalised clinical education. In Australia, nurseLucy Osborne was an important influence on the development of trained nurses inhospitals (Godden 2006). The way that health systems have evolved in developedcountries has resulted in the development of hospitals, the most expensive part ofhealth care delivery, at the expense of primary care, population health andcommunity-based options (Kristein et al. 1977). ‘Free’ care was not always provided, with public hospitals in Australia havingperiods where means testing resulted in those who could afford care having to payfor their public hospital care. The 1945 hospital benefits tax established bed-daypayments by the Commonwealth Government for States that abolished this meanstesting. Means tests were re-introduced by the Menzies Government and thenabolished again by the Whitlam Government with the establishment of Medibank(1975), which become Medicare (1984). Today, acute patients in Australian public hospitals receive medical care andmedical and surgical procedures at no cost due to the Medicare agreement (as dis-cussed in Ch. 1). Medical care often includes treatment with medications, and isprovided to patients with severe medical conditions such as heart attack or cancerwho do not require surgery. Patients requiring medical care are the largest groupwithin Australian public hospitals, comprising about 67% of the care provided.Medical procedures such as diagnostic procedures (e.g. colonoscopy) and treatment(e.g. haemodialysis) only comprise about 6% of public hospital admissions. Surgeryis provided to about 18% of public hospital patients (Department of Health andAgeing 2010a). In the past, medical care was largely a personal relationship between a doctorand a patient, but current organisation of hospitals means that while patients areusually admitted under the care of an individual clinician, they are cared for by ateam of multidisciplinary health professionals (e.g. registered nurses, physiothera-pist, speech pathologist, dietitian). Hospitals display a fundamental inconsistencyin that they are organised in formal, managerial and clinical hierarchies, which are 15
  4. 4. Understanding the Australian Health Care System 2ebased on scientific management principles, yet they attempt a commitment toprofessional autonomy for clinicians (Leggat & Dwyer 2005). Even though thehospital aims for more comprehensive, coordinated care of patients, the roles of theVisiting Medical Officers (VMOs) working in hospitals have not changed substan-tially since the 19th century (Egan et al. 2000). VMOs are medical practitioners(or consultants) who are appointed and paid by the hospital to provide medicalservices, but who originally were honorary, providing around 6–7 hours a week inpublic hospitals on a voluntary basis. In the mid-1970s, VMOs began receivingpayment for their services but even today, the VMOs typically spend most oftheir time away from the hospital treating private patients, relying instead onthe junior doctors, nursing and allied health professionals to treat their hospitalpatients. Health care systems have been typically organised for the clinicians (Committeeon Quality of Health Care in America 2001), but recent evidence stresses thatunderstanding how health care works for patients is essential for improved clinicaloutcomes (Nicholson 1995; Batalden 1998; Committee on Quality of Healthcarein America 2001). While there is strong rhetoric around re-orientation to a patientor consumer-focus in most health care systems, it appears that health care profes-sionals have yet to fully embrace consumer values. Patient-centred care is definedas care that is ‘respectful of and responsive to individual patient preferences, needs,and values, and ensuring that patient values guide all clinical decisions’ (Committeeon Quality of Health Care in America 2001, p. 6). One has only to attend anemergency or outpatient department to see processes organised for health profes-sionals and not for patients and families. The MyHospitals website ( is an AustralianGovernment initiative (2011) to inform the wider community about hospitals. Thewebsite provides information about bed numbers, patient admissions and hospitalaccreditation, as well as the types of specialised services each hospital provides.Where data are available, comparisons are made between individual hospitals andnational public hospital performance statistics on waiting times for elective surgeryand emergency department care. The intent is to help people access hospital careby making it easier for people to understand how individual hospitals are perform-ing. This may also help in encouraging a more patient-centred approach to theorganisation and delivery of care in public hospitals.Ensuring high quality and safe medical and surgical careAccreditation is one of the main methods used by governments to ensure standardsin public hospitals, and this is despite mixed views about the effectiveness of theprocess in achieving quality and safety improvements (Greenfield & Braithwaite2008). A spate of hospital quality problems in most Australian states has increasedconcerns about the standards within our public hospitals (Duckett 2003; VictorianHealth Services Commissioner 2004; Davies 2005; Garling 2008). The AustralianCouncil on Healthcare Standards (ACHS) was established in 1974 to develop andmaintain standards by which public and private hospitals are accredited. Accredita-tion is an independent review process aimed at identifying the level of congruencebetween practices within a hospital and defined quality standards (Australian16
  5. 5. 2 The Public Hospital SystemCouncil on Healthcare Standards 2011). Standards have been set in relation toclinical practice, as well as support, operational and corporate functions within thehospitals. In June 2009, 87% of Australian public hospitals were accredited (Depart-ment of Health and Ageing 2010a). Public hospitals are established under Commonwealth, State or Territory legisla-tion to provide treatment and care to patients. The role of the hospital continuesto change as medical practice and technology advances. In this case, technology isbroadly referred to as the medications, equipment, medical devices and instrumentsthat support clinical practice. For example, as surgical technology has improved,many operations that previously required open incisions can now be completedwith small laparotomy incisions or with laser and no incision. New technologieshave meant significant improvement in patient outcomes, because patients can beadmitted on the day of surgery and often go home the same day of the surgery.While there have been continuing increases in the proportion of same day patients,in recent years the increases have been much less (Schofield & Earnest 2006). Health technology has also impacted on an indicator of hospital performance:average length of stay (ALOS). The average length of stay is the mean numberof days that admitted patients stay in the hospital. The public hospital ALOS hasdecreased from 4.8 days in 1994–1995 to 3.7 days in 2008–2009 (AustralianInstitute of Health and Welfare 1997; Australian Institute of Health and Welfare2010a), but there is some suggestion that further decreases in ALOS may be dif-ficult to achieve (Schofield & Earnest 2006). While these changes in same-dayadmissions and early discharge have masked the pressures on demand from theageing population and increasing chronic and complex conditions experienced bypatients, future demand for public hospital beds has been projected to outstrippopulation growth, with an 80% increase in demand projected for public hospitalservices by 2050 (Schofield & Earnest 2006). Another point of view suggests theincreasing costs of providing public hospital services will have greatest impact onthe costs of public hospitals in the future. The Australian Government Intergen-erational Report (Australian Government, The Treasury 2010) indicated that pop-ulation growth and ageing accounted for about 1.78% of the increased health carecosts from 1984–1985 to 2007–2008, while other factors (e.g. more medicationsand more expensive medications) were related to a 3.31% increase over the sametime period (Commonwealth of Australia 2010a). A major issue facing public hospitals is labelled as ‘access block’ or ‘bed block’,whereby patients presenting to emergency departments cannot be admitted to aninpatient hospital bed, as the beds are all full of patients (Cameron et al. 2002).Access block has been associated in the literature with a 20–30% increase in mortal-ity (Forero & Hillman 2008). Access block has resulted from a change in the needsof the population from episodic acute care to ongoing care requirements associatedwith the increasing incidence of chronic diseases. In addition, hospitals have diffi-culty in discharging patients with aged care needs and an increasing proportion ofacute public hospital beds are filled by patients awaiting nursing home care. It isgenerally suggested that insufficient availability of inpatient public hospital beds tomeet the health care needs of the population, resulting in high occupancy rates, isthe major cause of access block (Forero & Hillman 2008). 17
  6. 6. Understanding the Australian Health Care System 2eHealth professional education and researchPublic hospitals have always been the primary provider of medical, nursing andallied health care education and training and have been the site of health research,because of the steady stream of patients. In the past, the VMOs also donated theirtime for teaching and research. It has long been confirmed that teaching andresearch activities in public hospitals increase the operating costs of these hospitals(Productivity Commission 2009). Research and tertiary education are consideredthe responsibility of the Federal Government, but need to take place in publichospitals, and the pressures on State budgets for public hospital operations has ledto attempts at cost-shifting between National and State/Territory Governments(Pennington 2008), with concerns that public hospital functions in teaching andresearch are being diminished. There has been a focus on encouraging innovation in the public hospital sectorto address the increasing demands for service and the increasing costs of providinghospital care. At the national level, these include the National Demonstration Hos-pitals Program (Department of Health and Ageing 2008), the Clinical SupportSystems Program, the National Institute of Clinical Studies and the AustralianResource Centre for Hospital Innovation (ARCHI). At State/Territory level, fundinghas been provided for the Simpson Centre (Sydney), the Centre for Clinical Effec-tiveness (Melbourne) and the Clinical Epidemiology Units (Adelaide teaching hos-pitals), with the aim of making evidence and new models of care available to staffand hospitals in a timely way and inform policy and clinical practice. While theclinical focus of these innovation drivers has been important, there is an argumentthat such investment should be extended to the management, governance and policyreform tasks facing the system (Dwyer & Leggat 2002).Contributing to community wellbeingPublic hospitals have a role beyond direct care delivery. As large employers, hospitalscan enhance the health status of local residents through employment, given thatincome has been identified as an important modifiable determinant of health andwellbeing (National Health Strategy 1992). In addition, public hospitals make apositive contribution to local economies (Rotarius et al. 2003). Area health authori-ties are often faced with the debate that on financial terms, a public hospital maynot be viable, but closing the hospital may have a detrimental impact on the healthstatus of the local population, e.g. Mersey Hospital in Tasmania (Martin 2007). Ingeneral, Australians have moderate trust in hospitals, but are more trusting of privatethan public hospitals (Hardie & Critchley 2008). Pause for reflection Could public hospitals be supported at a financial loss because of the broader community wellbeing and economic benefit of retaining the hospital within the community? If we could accurately measure the benefits (financial and other- wise), would the benefits to health status outweigh the financial costs of the operation of the hospital?18
  7. 7. 2 The Public Hospital SystemFunding of public hospitalsPublic hospitals comprise the largest component of the Australian federal health carebudget, at around 30% of the $103 billion spent on health care services in 2007–2008. The National Government funded about 39% and the State/Territory Gov-ernments funded about 54% of the costs of public hospitals, with the remaining 7%provided by private health insurance and out-of-pocket payments by individuals(Department of Health and Ageing 2010b). The cost of care in a public hospital hasincreased substantially over time. In 1998–1999, the average cost per public hospitaladmission was $3640 and in 2008–2009 was $4471 (measured in 2008–2009 dollarrate) (Department of Health and Ageing 2010b). Australian citizens are entitled toreceive free health care and emergency hospital services, on the basis of clinical need.This entitlement has been maintained through Australian Health Care Agreements(AHCAs) between the National, and State and Territory Governments.Australian Health Care Agreements and the National Healthcare AgreementThe AHCAs were the mechanism by which the National and State/Territory Gov-ernments committed to the provision of public hospital services. Effective until2009, a separate agreement was signed between the Commonwealth and each Stateand Territory. Under this structure, the National Government provided grants tothe States and Territories for public hospitals and related services. The States andTerritories own and manage the public hospital system, using the national grants,as well as contributing funds. The principles underlying the AHCAs (Biggs 2003)included:• Public hospital services must be provided free of charge to public patients• Access to public hospital services must be on the basis of clinical need and within a clinically appropriate period of time• Australians should have equitable access to public hospital services regardless of their geographic location in Australia.In Australian States and Territories, except for Tasmania, the Australian CapitalTerritory and Northern Territory, funding for acute inpatient services is based tovarying extents on an output activity-based or casemix scheme. ‘Casemix’ simplyrefers to the use of classifications that group patient care episodes into clinicallycoherent and resource homogeneous groups. Most States, except Western Australia,use the Australian Refined Diagnosis-Related Group (AR-DRG) Classification todefine the casemix groups. Each AR-DRG casemix group represents a group ofpatients with similar clinical conditions that require similar hospital services. Usually,the process requires a budget to be set at the beginning of the financial year andthen the hospital makes decisions about the numbers of patients in each casemixgroup that will be treated within that budget allocation. This allocation is usuallybased on past practice and the facilities and medical staff available. There is concernthat this prospective process does not ensure public hospitals are providing theservices most required for the changing needs of the populations served (AccessEconomics 2009b). The casemix funding approach does not consider the outcomes to the patients.Information on whether the patient got better or worse, and whether the patientwas able to return home and/or go back to their job, is not included in the 19
  8. 8. Understanding the Australian Health Care System 2ecalculation of the amount of funding the hospital receives. Public hospitals receivetheir casemix funding irrespective of the clinical outcomes achieved. As part of thehealth reform discussed below, the National Government is providing financialsupport to assist all of the States and Territories to adopt a consistent approach toactivity-based funding that will enable the description and comparison of hospitalservices for funding and management purposes. In 2009, the National Healthcare Agreement (NHA) between the NationalGovernment and State and Territory Governments was meant to replace the ACHAs,but not all of the State Governments signed the Agreement. In early 2010, all ofthe State and Territory Governments signed a Heads of Agreement for NationalHealth Reform and the National Health Reform Agreement – National PartnershipAgreement on Improving Public Hospital Services (Council of Australian Govern-ments, COAG 2010a, p. 2). This will lead to the establishment of a national fundingpool comprising both national and state funds for public hospitals, with an Inde-pendent Hospital Pricing Authority (IHPA) that will set the national efficient pricefor public hospital services (COAG 2011a). A national casemix funding system willreplace the existing state and territory-based casemix funding systems. Pause for reflection What do you think would happen in both the short- and long-term if the gov- ernment reimbursed public hospitals based on the amount of improvement in the health status of the community served by the hospital? Public hospitals can also admit private patients who are charged for their careby both the hospital and the doctor, with some of the charges covered by theirprivate health insurance. The proportion of public patients in public hospitals hasdecreased from 92% in 1998–1999 to 86% in 2008–2009 (Department of Healthand Ageing 2010b) as public hospitals aim to increase their revenue through privatehealth insurance payments for private patients.Public hospitals and health reformAfter continuing concern about the future viability of the public hospital system,based on the ageing population, the growing burden of chronic disease and theincreasing costs of providing health care, the National Health and Hospitals ReformCommission was established in 2008 to develop practical long-term strategies toreform the health care system. The Commission concluded that while Australia’shealth outcomes were among the best in the world, we had a ‘fragmented healthsystem with a complex division of funding responsibilities and performance account-abilities between different levels of government’ (National Health and HospitalReform Commission 2009, p. 3) that needed to be addressed. As discussed above,this has led to the agreement of the States and Territories and the National Govern-ment to confirm their respective responsibilities for the health care system, as wellas agreeing to new financial arrangements to equally share the costs of growth inthe public hospital system.20
  9. 9. 2 The Public Hospital System The agreed reform includes the establishment of the Local Hospital Networks(LHN) comprising one or more functionally or geographically connected publichospitals, with the aim of giving local communities and clinicians greater influencein the delivery of local health services (COAG 2011). The States and Territories willmaintain responsibility for the day-to-day operation and system-wide hospitalservice planning and policy, with the addition of Service Agreements between theState and each LHN. The Commonwealth funding will then flow directly to theLHN on the basis of these Service Agreements. This aspect of the reform is inresponse to the perception that with the centralisation of hospital management toarea health services or directly to State and Territory health departments, communi-ties have lost their connection and engagement with their local hospitals. Victoriahas been the only State to retain boards of directors as the governing body of thepublic hospitals in the State. The other States have progressively implemented morecentralised structures. In addition, there is a perception of increasing tensions between clinicians andsystem managers, with clinicians aiming for the best possible care for individualpatients, while managers take a broader perspective in ensuring the best care for thepopulation (Prideaux 1993). Clinicians have recently voiced concern at beingexcluded from the planning and operating decisions of public hospitals (AustralianMedical Association 2010) and the clinical representation on the LHNs is aimedat increasing clinician engagement. A commitment has been made to review thegovernance and financial arrangements established in these reforms in 2015 andevery 5 years thereafter (COAG 2011). Pause for reflection What benefits and drawbacks can you identify of disaggregating public hospitals from area health services into smaller Local Hospital Networks? The Australian Medical Association (AMA), an organisation which is recognisedas presenting the views of doctors, regularly releases a Report Card on the AustralianPublic Hospital System. The most recent release in 2010 was presented as a mecha-nism to draw the new Labor Federal Government’s attention to areas for reform.The AMA stressed the need for 3870 more acute public hospital beds across Aus-tralia and welcomed the reform measures aimed at increasing doctors’ participationin the planning and management of Australian public hospitals and the broaderhealth care system through the Local Hospital Networks. CASE STUDY 2.1 Do Victoria’s public hospitals have adequate financial resources for the services they are expected to deliver? Note: This case study has been adapted from a study completed by Access Eco- nomics for the Victorian Healthcare Association (Access Economics 2009b) to provide a detailed example of casemix funding for public hospitals in Australia. 21
  10. 10. Understanding the Australian Health Care System 2e In 1993, Victoria was the first Australian state to adopt a casemix funding model for public hospital services (Duckett 1998). Like many other health care systems, Victoria groups medical conditions plus medical and surgical proce- dures into Diagnosis Related Groups (DRGs). DRGs define groups of patients that have similar hospital resource needs for the provision of their care. In Vic- torian public hospitals, a Weighted Inlier Equivalent Separation (WIES) is a cost weight that is adjusted for time spent in hospital and represents a relative measure of resource use for each episode of care in a DRG. Public hospitals are funded for their operations based on the WIES recorded for their separated patients. The WIES values recognise that larger hospitals may have economies of scale and therefore assign a larger WIES dollar value for rural hospitals. For example, major metropolitan public hospitals (2008–2009) received $3635 per WIES and rural hospitals with fewer than 5000 WIES overall, received $3864 per WIES (Victorian Government Department of Human Services 2008). The amount of WIES a public hospital will receive is set in advance at the beginning of the budget year. The hospitals are then able to determine the mix of services they will provide, allocating their WIES to their various services, such as ortho- paedics, cardiac, etc. The WIES allocations are solely for recurrent or operating funding. Capital funding, for the construction of new buildings or purchasing large expensive equipment, is allocated through a separate budgeting process. Despite the rec- ognition that major capital planning needs to take a long-term approach, and that in many circumstances productivity gains cannot be achieved without investment in new facilities and equipment, the current capital allocations process tends to be only an annual process, based largely on perceived immediate need (Access Economics 2009b). Since 2002–2003 in the Victorian system, the actual WIES separations have exceeded the target WIES allocations agreed by the public hospitals with the State Government by only a small amount, between 0.6% and 1.5% per year (Access Economics 2009b). This suggests that the casemix method of funding has been useful in enabling the State Government funder to negotiate the volume of hospitals services to be provided and thereby control the volume and costs paid for the delivery of these services. However, recent analysis by both the Auditor General, Victoria (2007) and Access Economics (2009b, p. 30) found that ‘the public hospital system in Victoria remains under significant financial stress’. Both studies identified that nearly half of all Victorian public hospitals ran an operating deficit. The Victo- rian Healthcare Association retained Access Economics to determine the true cause of the financial pressure experienced by Victorian public hospitals (Victo- rian Healthcare Association 2009). Access Economics completed three financial analyses. The first related to whether the amount of funding provided for operations to the hospitals was sufficient to cover the number and volume of services provided. This was anal- ysed by reviewing the Victorian budget for hospital services from the period from 2001–2002 to 2008–2009 (Table 2.2). They determined that the budget growth of an average of 7.8% per annum was well above the annual growth of22
  11. 11. 2 The Public Hospital SystemTable 2.2Victorian budget for health services 2001–2002 to 2008–2009 ($m) 2001– 2002– 2003– 2004– 2005– 2006– 2007– 2008– 2002 2003 2004 2005 2006 2007 2008 2009Acute 4130.2 4467.3 4694.5 5177.0 5650.5 6072.8 6482.0 7015.7healthservicesMental 527.3 588.5 616.4 651.7 732.5 782.7 819.1 883.8healthservicesTotal 4657.5 5055.8 5310.9 5828.7 6383.0 6855.5 7301.1 7899.5Percentage 8.6 5.0 9.7 9.5 7.4 6.5 8.2increaseonpreviousyear Source: Access Economics 2009b, p. 18.2.4% in services provided by the public hospitals. It appears that the amountof funding the hospitals received was adequate to cover the increased servicesbeing provided during this timeframe. The next question concerned whether the WIES payment was sufficient tocover the costs associated with providing the care. Access Economics determinedthat the annual average growth in the WIES price was 5.6% each year between2000–2001 and 2008–2009. This level of growth was greater than the increasein the health consumer price index (5.1% per annum), the health consumptiondeflator (4.6% per annum) and the Australian Institute of Health & Welfarehealth deflator (3.6% per annum) (Access Economics 2009b). The analysisrevealed that the largest growth in the WIES price occurred 2002–2003 to2004–2005, with increases in more recent years closely related to health priceinflation. Overall, it was concluded that Victorian hospitals were receiving oper-ating price increases at rates that were close to or above national health pricetrends (Access Economics 2009b). If the WIES prices were being increased at a more favourable rate thaninflation and service growth, were the financial pressures a result of inefficientdelivery of care services by the hospitals or a WIES price that was insufficientto cover the costs of service delivery? In comparison to the staffing expendituresper separation of the other States, Victorian public hospitals were seen to beefficient (Table 2.3).Table 2.3Recurrent public hospital expenditure on salary and wages per separation 2006–2007 NationalNSW VIC QLD WA SA TAS ACT NT Aus$3832 $3222 $3609 $3667 $3153 $3592 $3571 $2766 $3521 Source: Access Economics 2009b, p. 31. 23
  12. 12. Understanding the Australian Health Care System 2e This would suggest that the WIES price was insufficient to support the costs of public hospitals care. However, Access Economics reported high levels of cross-subsidisation among hospital departments and services that made it diffi- cult to determine the true nature of the financial issues. In many cases, inade- quate information systems made it difficult for public hospital managers to have the necessary understanding of which services performed well in relation to the assigned WIES prices and which services did not perform as well. As a result, Access Economics (2009b, p. 48) strongly recommended the development of ‘standard reporting tools to allow detailed benchmarking and cost comparisons across public hospitals’ as well as a 10-year capital funding plan and annual review of the WIES prices and suitability of the services being funded. The suggestion from this case study is that it is difficult for public hospitals andgovernments to accurately determine the true costs of the provision of hospitalservices to set a precise payment. Substantial work will be required as the healthreform process progresses with the establishment of the national efficient price forpublic hospital services.CHAPTER SUMMARYIn this chapter, we have shown that public hospitals comprise an important andexpensive component of the health care system and are facing significant capacityand cost pressures. Although casemix has been shown to be a useful mechanism toinfluence hospital productivity, further efficiencies in the public hospital system mayneed to come from the strengthening of primary and preventive care services toreduce the demand for public hospital services. The local hospital networks envi-sioned in the health reform program may provide a mechanism to better aligncommunity need with hospital system care delivery. REVIEW QUESTIONS 1 What are the factors that have had an impact on reducing the length of stay of acute patient admissions in public hospitals? 2 Why would the Government prefer to fund public hospitals using a prospec- tive casemix approach over reimbursing hospitals for the costs incurred in providing care after the care has been provided? 3 What are the disadvantages to public hospitals of casemix funding? 4 What difficulties can you see in having both the National and State Govern- ments involved in setting policy for public hospitals in Australia? 5 What do you believe the key reforms should be to improve access, equity and efficiency in Australian public hospitals? Why?24
  13. 13. 2 The Public Hospital SystemFurther ReadingBalding C: The Strategic Quality Manager, Melbourne, 2011, Arcade Custom.Sorensen R, Iedema R: Managing Clinical Processes in Health Services, Chatswood, 2008, Elsevier.Online ResourcesAustralian Commission on Safety and Quality in Healthcare: Council on Healthcare Standards: MemberID=0&screenheight=1024&screenwidth=1280#Australian Healthcare & Hospitals Association: Institute of Health and Welfare: Party Health Reform: Party Real Action on Public Hospitals and Nursing: News/2010/08/05/Real-Action-on-Public-Hospitals-and-Nursing.aspxMyHospitals website: South Wales Hospitals: Territory Department of Health Hospitals: index.aspxProductivity Commission Public and Private Hospitals Research Report: projects/study/hospitals/reportQueensland Public Hospitals Commission of Inquiry: Department of Health, Your Hospitals. An overview of public hospital activity: http:// Healthcare Association and Access Economics:, Australia Department of Health Hospital Services: category.cfm?Topic_ID=2The World Bank: 25