Public hospitals in Australia

1.1 In 2016–17, there were 695 public hospitals in Australia providing 62,000 beds.⁶ Table 1.1 shows the geographic distribution of these facilities.

Table 1.1: Public hospitals in Australia, 2016–17

Source: Australian Institute for Health and Welfare (AIHW).

1.2 Of the 695 public hospitals, 171 had 10 beds or fewer, and 302 had between 10 and 50 beds. The number of beds per head of population varies by location. In major cities, there are 2.43 beds per 1000 people. In regional areas, the figure is 2.79, and in remote areas, it is 3.58. On a national basis, the number of beds per head of population has remained virtually unchanged in the period 2012–13 and 2016–17.

1.3 The Australian Government does not operate any public hospitals.⁷ Each state⁸ operates its own public hospital system. Management of public hospitals within this system is through mainly regionally-based Local Hospital Networks (LHNs), of which there are 147 throughout Australia. Each LHN has an annual service agreement with the relevant state health department setting out the nature and number of public hospital services the relevant LHN will provide.

Public hospital funding under the National Health Reform Agreement

The National Health Reform Agreement

1.4 Prior to 2012, the Australian Government contributed to the cost of operating public hospitals primarily through multi-year ‘block’ funding arrangements.⁹ Payments were indexed by a range of factors, but generally included allowances for healthcare cost inflation, population and demographic changes, and higher demand for services resulting from better technology.¹⁰ During this period the Australian Government also funded public hospitals under a range of national partnership arrangements and programs.¹¹

1.5 The National Health Reform Agreement (NHRA) was agreed by the Council of Australian Governments (COAG) in August 2011. It introduced a fundamental change whereby Australian Government payments to public hospitals would be primarily made on the basis of ‘activity based funding’ (ABF) — a structure where hospitals are funded for the number and mix of patients they treat.¹² Apart from the quality and safety matters covered in Table 1.4, Australian Government funding levels under the NHRA are not dependent on the states achieving any performance benchmarks or implementing specific reform measures.

1.6 The NHRA specified the establishment of two ‘national bodies’ plus a statutory position to administer the new public hospital funding arrangements; the Independent Hospital Pricing Authority (Pricing Authority), the National Health Funding Body (Funding Body), and the Administrator of the National Health Funding Pool (the Administrator). The respective roles and responsibilities of these bodies, as well as those of other relevant Australian Government entities, are outlined in Table 1.2.

Table 1.2: Entity roles and responsibilities

Source: National Health Reform Agreement 2011 and entity documentation.

1.7 The Pricing Authority was established under the National Health Reform Act 2011 and the Administrator and Funding Body under an amendment to the Act in 2012. Separating the pricing function (Pricing Authority) from the funds administration function (Administrator and Funding Body) into distinct independent entities was intended to address concerns raised by some states that the Administrator would be handling state funds and therefore would need to be an officer appointed by the states.¹³

Calculating Australian Government funding

1.8 Figure 1.1 shows NHR funding provided by the Australian Government and the states over the life of the NHRA. Australian Government funding in 2017–18 was $19.94 billion with total state government funding¹⁴ $26.57 billion.

Figure 1.1: National Health Reform Funding 2012–13 to 2017–18

Note: Funding refers to amounts actually paid in the relevant year. State funding has been adjusted for cross border payments

Source: ANAO analysis of public reporting by Administrator.

1.9 The Australian Government’s annual NHR funding contribution is the total of three funding components: activity based funding, block funding and public health funding.

Activity based funding

1.10 Australian Government ABF payments made in 2017–18 were $17.22 billion, and constituted 86.4 per cent of its NHR funding for public hospitals.

1.11 Under the funding formula set out in the NHRA, the Australian Government’s annual ABF contribution for each state is the sum of:

• the previous year’s Australian Government ABF amount¹⁵;
• a price adjustment — 45 per cent of any change in the NEP from the previous year; and
• a service volume adjustment — 45 per cent of any change in the estimated number of services to be delivered as compared to the previous year. ¹⁶

1.12 The key steps in calculating the NEP (and thus the ABF price adjustment) are outlined in Box 1.¹⁷

1.13 Both the number of public hospital services, and the nature of those services, to be delivered change from year to year. For NHRA purposes, services are expressed as National Weighted Activity Units (NWAUs) (see Box 2).

1.14 Under transitional arrangement accompanying the introduction of the NHRA, the pre-NHRA block funding amounts each state was receiving effectively formed the ‘base amount’ from which Australian Government ABF funding from 2014–15 onwards has been calculated. The net result is that current Australian Government ABF funding levels are still influenced by the varying proportions of each state’s public hospital costs that were funded by the Australian Government under pre-NHRA block funding arrangements. These arrangements were the result of calculations based on historical costs, intergovernmental negotiation and prior government decisions. These calculations incorporated funding growth based on population estimates rather than number and mix of patients treated, whereas ABF contributions are based on activity. As a consequence, each jurisdiction receives a different Australian Government ABF contribution per NWAU as shown in Table 1.3. Tasmania receives the highest funding at $2236 and the Northern Territory the lowest at $1497. On a national basis, Australian Government funding is $1940 per NWAU.

Table 1.3: Australian Government 2016–17 activity based funding

Note: As at early December 2018, 2016–17 figures were the most recent reconciled figures. The 2016–17 National Efficient Price is $4883 per NWAU.

Source: ANAO analysis of Administrator and Funding Body documents.

1.15 The impact of the ABF formula (under which the Australian Government is funding 45 per cent of efficient growth) means the differences will reduce over time. Chapter 3 provides more information on Australian Government contributions and funding levels over time for each state.

1.16 Some people are admitted into public hospitals as private patients. Australian Government ABF is payable for such patients, but with a variable discount applied to account for the revenue received by the treating hospital from the health insurer as well as any Australian Government payments to treating doctors through the Medicare Benefits Schedule (MBS).¹⁸

Block funding

1.17 Under the NHRA some public hospital services and functions are considered to be more appropriately funded through block grants rather than ABF.¹⁹ The Pricing Authority has developed block funding criteria in consultation with the states, and these criteria determine which services and functions are eligible for block funding. Australian Government block funding totalled $2.33 billion in 2017–18.

1.18 The major categories of block funding are:

• approximately 400 small rural hospitals receive funding under the national efficient cost (NEC) process (total payments of $903 million for 2017–18);²⁰
• funding for teaching, training and research (total payments $536 million for 2017–18);
• other non-admitted services (total payments of $890 million for 2017–18).²¹

1.19 The Pricing Authority receives hospital level cost data from the Australian Institute for Health and Welfare (AIHW)²² for the NEC model to determine block funding for small rural hospitals. The Pricing Authority does not receive cost data for the remaining categories in paragraph 1.18, instead relying on advice from the states on their expected expenditure. The Pricing Authority commissioned a review in 2018 to provide better information as to whether these block funding amounts accurately reflect actual costs.²³

Public health funding

1.20 The Australian Government provided $387 million in 2017–18 for public health activities. This funding is calculated by the Australian Government Treasury and includes amounts for general public and youth health services and essential vaccines. Under the NHRA, states have complete discretion about how they use this funding in relation to their own health-related activities.

Public hospital funding flows

1.21 Under NHRA arrangements, a National Health Funding Pool (the Pool) has been created to consolidate all Australian Government ABF and block and state ABF. The Pool is comprised of separate Reserve Bank of Australia (RBA) bank accounts for each state. In addition, each state has a discrete State Managed Fund for the purpose of receiving block funding. Each State Managed Fund is administered by the individual jurisdictions and lies outside the RBA system.

1.22 The Australian Government Treasury makes monthly ABF, block and public health funding payments into the Pool, with the block funding amount flowing through the Pool to each of the State Managed Funds. Each state determines when and how much funding they deposit into the Pool and the State Managed Funds. With the exception of some payments that go direct to state government health departments, payments from the Pool and the State Management Funds are then transferred to the LHNs who are responsible for delivering public hospital services. A simplified representation of the relevant funding and payment flows is illustrated in Figure 1.2.

Figure 1.2: Simplified 2017–18 public hospital funding and payment flows

Note: Differences in the total funding and total payments are due to timing issues of funds moving into and out of the Funding Pool and State Managed Funds. Payments of activity based funding out of the National Health Funding Pool are made through a Department of Human Services payments system. The NSW Ministry of Health transfers the $10.09 billion shown above to NSW LHNs. See paragraph 3.9 for more detail.

Source: Administrator’s 2017–18 Annual Report and ANAO analysis.

1.23 The monthly payments made into the Pool are prospective payments based on LHN estimates of hospital service activity levels.²⁴ At the end of each six-month (July to December) and annual (July to June) period, the states provide actual hospital activity data to the Funding Body (via the Pricing Authority) to enable it to reconcile these to the previous estimates. The Australian Government’s payments are then adjusted annually in arrears to account for this reconciliation.

1.24 The Pool’s accounts are audited each year by the respective Auditor-General for each state, and each audited financial statement is published in the Administrator’s annual report.

NHRA hospital related policy objectives

1.25 In addition to increasing the proportion of public hospital costs funded by the Australian Government and promoting the transparency of how public hospitals are funded, key NHRA objectives relating to the public hospital system are listed below.

• Improving public hospital efficiency. Efficiency is usually defined in terms of minimising the cost of a specific hospital service.
• Improving patient access to hospital services. Accessibility is usually defined as being able to obtain health care at the right place and right time.
• Improving standards of clinical care. This is usually defined in terms of patient safety (avoidance of adverse events) but more recently quality of care concepts, such as clinical outcomes and a patient’s experience in hospital, are being incorporated into development of new performance indicators.

The 2017 NHRA Addendum

1.26 The NHRA commenced in 2012–13 with a transition period for the first two years, whereby Australian Government funding to the states was capped at the funding levels that would have applied under previous National Healthcare Specific Purpose Payment block funding agreement. From 2014–15 to 2016–17 the Australian Government funded 45 per cent of increased costs flowing from the ‘efficient growth’²⁵ of public hospital services.

1.27 Australian Government funding was to increase from 45 per cent of efficient growth to 50 per cent from 2017–18 onwards. However, with Australian Government NHR funding growth accelerating from 5.6 per cent in 2013–14 to over 11 per cent in both 2014–15 and 2015–16,²⁶ the Australian Government negotiated an addendum to the NHRA that retained its contribution at 45 per cent. In addition, the addendum introduced a 6.5 per cent national cap on growth in the Australian Government contribution to apply from 2017–18.

1.28 Table 1.4 summarises key provisions in the addendum.

Table 1.4: Key 2017 NHRA Addendum provisions

Source: NHRA Addendum.

1.29 At the time of the audit, a new five-year national funding agreement is being negotiated to take effect from July 2020. Figure 1.3 provides an overview of the timeframes of health care agreements from 1 July 2008.

Figure 1.3: Overview of health care agreement timeframes

Source: NHRA, NHRA Addendum and COAG Heads of Agreement.

Rationale for undertaking the audit

1.30 The Pricing Authority and Funding Body have important roles under NHRA arrangements through setting the efficient price of public hospital services and then calculating and administering Australian Government public hospital funding. The audit was selected as the integrity of key processes in both entities are highly reliant on the accuracy and completeness of state public hospital cost and service activity data.

1.31 The audit examines whether the NHR funding arrangements, including public reporting, provides transparency on the allocation of Australian Government funding. In a different context, the ANAO’s audit report Monitoring the Impact of Australian Government School Funding²⁸ highlighted a lack of sufficient assurance that relevant Australian Government funding had been distributed to schools on the basis of need as required by the relevant legislative framework. The current audit also assesses progress towards relevant policy objectives under the NHRA. The importance of monitoring the impact of Australian Government funding, and to provide greater accountability, was also a theme in the ANAO’s school funding audit.

Audit approach

Audit objective, criteria and scope

1.32 The audit objective was to assess the effectiveness of risk management, data monitoring and public reporting arrangements associated with the Australian Government’s funding of public hospital services under the 2011 National Health Reform Agreement (NHRA).

1.33 To form a conclusion against the audit objective, the ANAO adopted the following high level criteria:

• the Pricing Authority and Funding Body have appropriate processes for managing risks to the accuracy of the public hospital service and cost data and to monitor significant changes to the data; and
• relevant Australian Government entities appropriately utilise available data to provide transparent public reporting on both the Government’s funding of public hospital services and progress towards the hospital-related policy objectives of the NHRA.

1.34 The audit scope does not include an assessment of the technical process through which the Pricing Authority determines the NEP and NEC or through which the Funding Body calculates and subsequently reconciles Australian Government funding amounts.

Audit method

1.35 The audit method comprised:

• analysis of relevant aspects of the Pricing Authority and Funding Body’s operations, including data-related risk management and monitoring process associated with core business processes;
• reviewing the activities of hospital financing and medical benefits areas of the Department of Health, including advice provided to the Australian Government;
• obtaining evidence from the offices of state Auditors-General about their recent work on public hospital funding and performance²⁹;
• obtaining evidence from the Australian Institute for Health and Welfare, the Australian Commission on Safety and Quality in Healthcare, and the Productivity Commission regarding their hospital-related performance framework and reporting roles; and
• analysis of relevant data held and/or reported by the Funding Body, Administrator, Australian Institute for Health and Welfare, the Australian Commission on Safety and Quality in Healthcare, and the Productivity Commission.

1.36 The audit was conducted in accordance with ANAO Auditing Standards at a cost to the ANAO of approximately $572,785. The team members for this audit were Angus Martyn, Renee Hall, Michael Jones, Ailsa McPherson, Danielle Page, Paul Bryant and Julian Mallett.

Does the National Health Reform Agreement include provisions about data quality and integrity?

2.1 Australian and state government entities are jointly responsible for the provision of a range of data to the Pricing Authority and Funding Body to enable them to carry out their functions under the NHRA, as outlined in Table 2.1.

2.2 Under the NHRA, governments are responsible for the integrity of data they provide to the national bodies, including the Pricing Authority and Funding Body.³⁰ As part of this, all jurisdictions must have appropriate independent oversight mechanisms for data integrity.³¹

2.3 During the negotiation of the NHRA Addendum in 2016 and 2017, the Funding Body developed a range of proposed measures intended to enhance integrity and assurance arrangements relating to the ABF system. These included:

• the development of a National Data Integrity Framework to improve the quality and timeliness of state activity data; promote a consistent national approach; and establish a national standard against which state Auditors-General could undertake quality reviews; and
• that the Funding Body — on behalf of the Administrator of the National Health Funding Pool (the Administrator) — undertake a review of activity data to assist states to comply with their obligations under the NHRA.

2.4 Neither of these proposals were supported by the states as they were considered too prescriptive.³² However, agreement was reached that state governments must include a statement of assurance on the completeness and accuracy of the activity data submissions provided for the reconciliation process.

2.5 The required content of the statements of assurance, and associated administrative processes, were agreed between respective governments in December 2017. Under these processes, the statements of assurance are not made public but the Administrator does publicly report on whether a statement of assurance has been submitted by each jurisdiction.³³ In terms of content, jurisdictions are required to provide commentary against three elements, with a fourth being optional, as illustrated in Table 2.2.

2.6 As shown in Table 2.2, there was significant variation in the detail of information against the second and third elements, and in some cases no commentary was provided at all, with no explanation provided for its absence. While it is to be expected that individual commentaries will reflect differences in the maturity of data collection and governance processes between jurisdictions, the value of the statement of assurance process largely depends on a reasonable level of information being provided against all three compulsory elements. This is particularly so in light of the lack of progress in providing the Administrator with state data integrity frameworks.³⁴ Neither the Pricing Authority nor Funding Body took any follow-up action regarding the lack of commentary or information against some of the mandatory elements. However, the Funding Body did advise that it had used the statements of assurance to identify issues requiring investigation as part of the 2016–17 reconciliation process.

2.7 The Pricing Authority considered the statements could be enhanced if the results of any steps taken to promote completeness and accuracy of data (such as coding³⁵ audits) were required to be included in the statement. This is a matter that could be usefully considered in the review of the content of the statements that is due to occur under the auspices of the cross-jurisdictional Health Services Principals Committee.

2.8 Cost data is accompanied by data quality statements, an arrangement that predates the introduction of statements of assurance. While under NHRA arrangements, jurisdictions are not required to provide these statements, all did so for the most recent (2016–17) round of cost data provided to the Pricing Authority. Jurisdictions provide information against four elements, as illustrated in Table 2.3.

Have the Pricing Authority and Funding Body embedded systematic risk management strategies and practices into those key business processes that use state data?

2.9 The Commonwealth Risk Management Policy (CRMP) supports the Public Governance, Performance and Accountability Act 2013 (PGPA Act) and aims to strengthen the risk management practices of Australian Government entities. Entities subject to the CRMP ‘must ensure that systematic management of risk is embedded in key business processes’.

Risk management documentation

2.10 The ANAO reviewed the Pricing Authority and Funding Body’s key risk management policy and operational documents against the CRMP and relevant PGPA Act principles. The results of the review are outlined in Table 2.4.

Table 2.4: Pricing Authority and Funding Body risk management policy alignment

Note a: It is not mandatory for corporate Commonwealth entities (CCEs) to comply with the required elements of the CRMP however it states that CCE’s should review and align their risk management frameworks with the CRMP as a matter of good practice.

Source: ANAO analysis of entity risk management documentation.

2.11 The risk management policies and operational documents were largely aligned with the CRMP. The following minor improvements could be made:

• Pricing Authority³⁶ — clear linking of its risk management policy to strategic objectives; and identifying the specific shared risks it manages through its communication and consultation practices. The management of shared risks between the Pricing Authority and the Funding Body is further discussed at paragraphs 2.33–41.
• Funding Body — clarifying its approach for measuring risk management performance.

2.12 In relation to the data required by the Pricing Authority and Funding Body to undertake their primary functions, a key risk identified by both entities is that data is of poor quality, not reliable or cannot be used. To assist in managing this broad risk, each entity publishes a rolling three year data plan. The data plans, which are developed with input from all jurisdictions and are updated annually, set out the approved data classifications³⁷ and specifications³⁸ for the required data, submission schedules and compliance reporting requirements.

2.13 The respective data plans of the Pricing Authority and Funding Body are appropriately aligned through setting common requirements such as data specifications.³⁹ They are consistent with the data rationalisation objective in the NHRA, particularly the ‘single provision, multiple use’ concept.

Pricing Authority — key data review strategies and practices

ABF data quality

2.14 Consistent with its Data Quality Assurance Framework⁴⁰, the Pricing Authority applies a range of quality-related processes to the activity and cost data it receives from states. These processes are intended to deliver improved data over time.

2.15 Since March 2017, all cost and activity data is submitted to the Pricing Authority through a secure data management system (SDMS) portal.⁴¹ Developed and owned by the Pricing Authority, the SDMS allows each state to run a validation check against the required data specifications contained in the Pricing Authority’s data plan before it submits the data. Validation reports that show the type and number of any errors in the data are also produced by the SDMS for the Pricing Authority once the data is submitted.⁴² In October 2018, the Pricing Authority completed a post-implementation review of the SDMS. The review indicated that data preparation and validation processes introduced under the SDMS have led to a reduction in the number of errors contained in relevant submissions and thus contributed to better data quality.

2.16 Following validation, activity and cost data is linked to create a merged data set. Quality assurance reports are produced both at the individual hospital and state level. The quality assurance reports include information on anomalies⁴³, outliers⁴⁴ and comparison of data with previous year’s results.⁴⁵ The merged data and quality assurance results are then classified into three categories — ‘no material issues’, ‘some issues’ and ‘many issues — review required’. The results are provided to the Pricing Authority’s costing and pricing teams for review and comment, and any significant issues are referred back to the states, requesting comment or corrective action.

2.17 The ANAO reviewed the eight state level quality assurance reports for the 2016–17 cost and activity data that are being used to determine the NEP for 2019–20. As shown in Figure 2.1, the reports noted ‘some issues’ were found in most submissions in the five activity data streams, with three jurisdictions requiring review due to ‘many issues’ with acute or subacute activity data.

Figure 2.1: Number of jurisdictions overall data quality assurance result for 2016–17

Note: The Pricing Authority reporting indicates that ‘many issues’ represents the volume of issues represented in a data stream. For example, in one state’s result ‘many issues’ in the non-admitted activity data stream was due to the identification of 13,637 outliers.

Source: ANAO analysis of jurisdiction-level quality assurance reports.

2.18 Issues may be resolved through the relevant jurisdiction providing confirmation that the submitted data is correct, or in some cases formal resubmission of amended data. The resolution of issues is monitored by the Pricing Authority through its executive committee.⁴⁶ Major data issues that continue over multiple submissions from the same state without improvement or resolution are publicly reported on the Pricing Authority’s website.⁴⁷

2.19 Since 2015 there has been only one instance where public reporting of non-compliance directly relating to data quality has been required. That was caused by technical issues that prevented the relevant state from being able to provide non-admitted patient level activity data within agreed deadlines. The state subsequently provided the required data.

Financial reviews of ABF cost data

2.20 As an additional data validation measure, the Pricing Authority commissions an annual financial review to assess whether the cost data submitted by a sample of hospitals and LHNs reconciles with broader financial data in the relevant hospital and Local Hospital Network (LHN) systems. Participation by the states in the review process is voluntary, however all states engage in the process. The review of 2015–16 cost data was published in January 2018. The review did not find any significant deficiencies in the cost data⁴⁸ and concluded that recent measures introduced in a number of jurisdictions had contributed to a more robust costing process. It also noted that some additional quality-related measures would be incorporated into the 2016–17 cost data collection process.⁴⁹

2.21 Selection of the specific hospitals and LHNs to participate in the review is undertaken by the respective state health departments from a shortlist of ABF-funded hospitals and LHNs provided to them by the Pricing Authority. The mix of hospitals and LHNs on the shortlist are designed to achieve a variety of hospital sizes, complexity of services provided, and geographic locations.⁵⁰ The size of the sample selected of the 2015–2016 cost data represents approximately four per cent of relevant hospitals and less than one per cent of LHNs. The sample size and selection process is not underpinned by a specific methodology to provide confidence that the review findings apply to ABF cost data in general or that the review is targeting higher risk hospitals or LHNs. The Pricing Authority advised the ANAO that the review sample size reflects a need to ‘balance the cost and effort of increased scope, with the improved benefits that may result from widening the scope’.⁵¹

Block funding

2.22 The major data input for the calculation of the NEC, which relates to Australian Government block funding of small rural hospitals under the NHRA, is the public hospital expenditure reported in the National Public Hospital Establishments Database (NPHED). The NPHED is a national dataset which comprises a core set of data elements agreed for mandatory collection and reporting at a national level. The NPHED is maintained by the Australian Institute for Health and Welfare and provided annually to the Pricing Authority. A data quality statement on the NPHED is published online.

2.23 The NEC Determination includes other categories of block funding, for services such as teaching, training and research and non-admitted mental health services (see paragraph 1.18). The funding amounts for these services are determined by the Pricing Authority on advice from the states. Where a state or territory advises an amount that would result in funding growth rate for these services greater than the NEC growth rate in that year (which was 2.9 per cent in 2018–19), the Pricing Authority requires additional evidence from the state before agreeing to this amount such as publicly available state budget papers. Where a state is unable to provide such supporting evidence, the Pricing Authority sets the relevant funding at the previous year’s amount, indexed by the NEC growth rate.⁵²

2.24 As mentioned in Chapter 1, the Pricing Authority has undertaken a review on block funding to gain better information on whether the data underpinning jurisdictional advice, including the processes in place in each state to determine their block funding amounts, and the link between the amounts included in the NEC Determination and the funding provided by states and territories. The review found that the requirements to justify block funded amounts requested by the states have become more stringent over time and that the majority of states could break down block funding amounts with actual costs or expenditure on the services. The review also made three recommendations for improving the process of states nominating block funding amounts for the NEC Determination. The report was provided to Australian and state government health ministers for comment in early December 2018.

Funding Body — key data review strategies and practices

Calculation of Australian Government ABF contribution

2.25 Each state government provides the Funding Body with estimates of the number of public hospital services (expressed as NWAUs) that they anticipate each of their LHNs will provide for the upcoming financial year. This is a key data input into the Funding Body’s calculation of the level of Australian Government ABF. Estimates are provided at agreed milestone dates⁵³ and are then updated when required.⁵⁴

2.26 Once the NWAU estimates from each LHN are received, the Funding Body compares these with the NWAU figures contained in the service level agreements (SLAs) that each LHN has established with their relevant state health department.⁵⁵ The ANAO conducted targeted testing of a sample of 15 LHN NWAU estimates against the relevant SLAs from a total population of 147 received by the Funding Body. All NWAU estimates tested matched the NWAU figures contained in the corresponding SLA.

2.27 The Funding Body also undertakes a review of the submitted NWAU estimates to identify any significant changes in the various activity categories (such as acute care or non-admitted services) from the previous year. Where the Funding Body identified such significant changes in 2018–19 estimates, there was evidence that it contacted the relevant jurisdiction to confirm whether there was a reasonable explanation for the change.

2.28 Figure 2.2 shows that, since the start of the NHRA, the number of NWAUs delivered each year on a national basis has consistently exceeded the estimates provided by the states. This has contributed to significant additional Australian Government ABF payments being made through the reconciliation process, particularly for 2015–16 ($512 million above original forecasts) and 2016–17 ($661 million above original forecasts). However, NWAU estimates for 2017–18 were much more accurate.

Figure 2.2: National estimated and actual National Weighted Activity Units

Source: ANAO analysis of Funding Body data.

ABF reconciliation process

2.29 State government health departments provide actual activity data to the Funding Body via the Pricing Authority twice annually — 31 March for the preceding July to December half year period, and 30 September for the full year. The Funding Body uses this to calculate whether any reconciliation adjustments should be made to Australian Government ABF payments.

2.30 Actual activity data is submitted through the Pricing Authority’s SDMS, and goes through the validation process referred to in paragraph 2.15 before being forwarded to the Funding Body. The Funding Body reviews the data to determine whether data characteristics (such as age profiles, indigenous status, location of services, types of services) indicate that the data is reasonable for use in the funding reconciliation and again contact relevant jurisdictions as considered necessary to gain an understanding of any major changes in underlying data. Funding Body records show that for the 2016–17 reconciliation, some outstanding data issues were discussed through formal meetings with state health departments and other stakeholders (including the Pricing Authority) and/or discussed at the Administrator’s jurisdictional advisory committee (JAC).⁵⁶

2.31 Following the completion of the reconciliation process, including technical input from the Pricing Authority, the Funding Body prepares advice for the Administrator on any proposed retrospective adjustments to Australian Government ABF. The Administrator then provides detailed advice to the Treasurer (the decision-maker) on any recommended adjustment, including how this was calculated. Based solely on actual NWAUs delivered in 2016–17, the indicative additional Australian Government ABF payment was $791 million above what had been estimated for the relevant period by the states. However, the Funding Body applied a range of adjustments⁵⁷ to reduce this to $307 million.⁵⁸ The Administrator’s advice to the Treasurer noted that the states were critical of the methodology used in some of these adjustments⁵⁹ but considered the adjustments were consistent with the ‘back-casting’⁶⁰ provisions in the NHRA and that they were supported by the Minister for Health.

2.32 The Treasurer’s determination for 2016–17, incorporating the adjustment recommended by the Administrator, was made via legislative instrument registered on 2 October 2018. Following a regular meeting of the Council of Australian Governments (COAG) Health Ministers on 12 October 2018, state governments announced that they did not accept the adjustment determined by the Treasurer. The issue of public hospital funding and future reconciliation processes was discussed at the December 2018 COAG meeting but no change was made to the Treasurer’s determination regarding 2016–17 Australian Government funding.

Are effective processes in place between the Pricing Authority and Funding Body to communicate and manage shared risks regarding data received from the states?

2.33 The Commonwealth Risk Management Policy (CRMP) defines shared risks as:

those risks extending beyond a single entity which require shared oversight and management. Accountability and responsibility for the management of shared risks must include any risks that extend across entities and may involve other sectors, community, industry or other jurisdictions.⁶¹

2.34 While the Pricing Authority and Funding Body are independent statutory entities, their respective roles in administering NHRA public hospital funding arrangements means that their operations impact on each other. Notably, changes to pricing methodology and hospital services classifications by the Pricing Authority can have significant impacts on the Funding Body’s calculation of Australian Government ABF payments. These impacts have contributed to delays in determining the final Australian Government reconciliation payments for 2015–16 (determined in April 2018) and 2016–17 (determined in October 2018).

2.35 The degree of explicit articulation of shared risk issues and their management varies between the two entities. A key risk identified on the registers of both the Pricing Authority and Funding Body is that data is of poor quality, not reliable or cannot be used. As previously mentioned, the entities have prepared and aligned three year data plans to assist in managing this broad risk.

2.36 The Funding Body recognises the Pricing Authority’s role with regard to data provision in its risk management documentation, in particular in its: external systemic risk framework⁶²; enterprise risk register; and draft funding pool risk register.⁶³ In some instances, specific Pricing Authority processes are recognised as a control to manage Funding Body risks such as the inaccurate calculation of Australian Government funding.

2.37 While the Pricing Authority does not do the same, its current risk management policy provides that communication and consultation processes are used to manage shared and cross-jurisdictional risks. Shared risks are not explicitly identified.

2.38 The ANAO’s review of Pricing Authority advisory committee and working group records indicate that there has been communication about, and consultation on, an extensive range of data-related matters, including:

• understanding the impacts on jurisdictions of collecting the required data;
• timelines to incorporate standardised data collection methodologies;
• processes that ensure data accuracy;
• preliminary results from hospitals; and
• data quality.

2.39 Transparency is provided through the Pricing Authority’s advisory processes. For example, the Pricing Authority’s review of activity data is tabled at its technical advisory committee (TAC)⁶⁴ and jurisdictional advisory committee (JAC)⁶⁵ meetings. The Funding Body and Department of Health also attend the Pricing Authority JAC meetings.

2.40 The Administrator’s policies articulate the reconciliation and calculation processes, including the required data specifications provided to external stakeholders. The jurisdictions are able to comment on these documents prior to their publication at the Administrator’s JAC. During the reconciliation process, the Funding Body works with the Pricing Authority to discuss issues relating to the activity data and the calculation process and confirm NWAU calculations have been applied correctly.

2.41 A cooperation and information exchange memorandum of understanding (MOU) was in place between the two entities up until 2015. As at November 2018, the Pricing Authority and Funding Body had commenced discussions about developing a new MOU.⁶⁶

Are the effectiveness of data-related risk management strategies and practices periodically reviewed?

Pricing Authority

2.42 The Pricing Authority started a review of a broad range of its governance and security policies during the conduct of the audit in August 2018. The review included its risk management policy and strategic risk register.⁶⁷ As at November 2018, the Pricing Authority’s risk appetite statement had been updated and communicated to all staff, however remaining risk management aspects of the review have yet to be completed.

2.43 Prior to the review, the risk management policy was last updated in August 2016. As at October 2018, the risk register reflects recent developments such as the introduction of the SDMS in 2017, organisational changes⁶⁸ and policy/process changes.⁶⁹

2.44 Key policies identified as treatments in the Pricing Authority’s strategic risk register such as its three year data plan and data compliance policy have been updated in the last two years, however the data quality assurance framework, which is relied on as a key risk treatment, has not been reviewed since May 2012. While the data quality assurance framework document includes procedures that are currently undertaken by Pricing Authority staff, the policy terminology is outdated. A review of the data quality assurance framework would be timely.

2.45 To address risks with data management processes, including the effectiveness of the full lifecycle of processes and controls from data submission to management, use and disposal, the Pricing Authority has established a rolling annual internal audit ‘to review the design and operating effectiveness of the controls in place at the … [Pricing Authority] … in relation to Data Governance Processes.’ There have been six recommendations arising from the first two data management internal audits (July 2015 and February 2017) and all recommendations have been reported as implemented to the audit risk and compliance committee within six months. A third audit in September 2017 resulted in no recommendations.

Funding Body

2.46 The most recent review of the Funding Body’s overarching risk framework and risk policy, which also looked at implementation issues, was completed in March 2018. Two key findings in the review were that:

• the Funding Body’s risk management documentation was detailed, comprehensive and aligned with the Commonwealth Risk Management Policy; and
• the complexity of the risk framework and other shortcomings meant that staff did not always use it to inform their own day-to-day risk management practices.

2.47 The Funding Body has implemented the recommendations in the review.⁷⁰ Notably, the number of risks in the Funding Body’s risk register was reduced from 28 to 11. While the current version (July 2018) was updated to better document risk management controls, some controls such as the comparison of state provided estimates to LHN service level agreements (part of the process to calculate Australian Government ABF payments for the coming year) and the comfort gained by the use of the Pricing Authority’s SDMS portal, were not included in the register. The Funding Body should continue to improve its documentation of risks and their treatments, including that the documented controls reflect the underlying controls in place.

2.48 Following the Funding Body’s implementation of the 2018 risk framework and risk policy review, the ANAO examined the updated risk management documentation against the elements of the CRMP that were directly relevant to the scope of the audit. The only gap identified was that the enterprise level Risk Management Framework and Policy did not outline the Funding Body’s approach for measuring and reporting against risk management performance. The Funding Body has risk management KPIs in place, but as at November 2018 they required updating to reflect changes following the review, and it was unclear how the results of performance against these KPIs are reported on or otherwise used to inform ongoing risk management.

2.49 The Funding Body made improvements to data related processes in light of issues that came out of the 2015–16 reconciliation process. This included providing a more detailed Reconciliation Framework for 2016–17 and Funding Body staff identifying issues requiring further investigation in a more timely manner in 2016–17 than during the 2015–16 reconciliation.

2.50 In addition to changes made through formal review processes, Funding Body business units update their individual risk management plans yearly as part of their business planning processes. The Data Modelling, Policy and Analysis section, which primarily deals with state government data, updated their risk management plan a number of times over 2016 and 2017, including responding to comments from the Funding Body audit committee. The Funding Body also participates in the annual Comcover Risk Management Survey.⁷¹

Do the Pricing Authority and Funding Body monitor public hospital service and cost data to identify and analyse any significant changes and provide appropriate advice to decision makers?

Pricing Authority

2.51 During the Pricing Authority’s data quality review process, cost and activity data is assessed for growth when compared with the previous year’s data, and outliers and anomalies are identified.⁷² The initial analysis and monitoring of changes in the data is conducted at the hospital level and jurisdiction level using the quality assurance reports⁷³ shared with Pricing Authority teams and the states.

2.52 After each six monthly submission of activity data by the states, and following completion of data quality review processes, the Pricing Authority analyses the data and provides a report on trends and significant drivers of services growth for the whole data set. The resulting data reports are presented for review by all jurisdictions through the Pricing Authority’s technical advisory committee and jurisdictional advisory committee, providing an opportunity for identification of trends or errors in reporting.⁷⁴

2.53 Following this, the analysis is provided to Pricing Authority Board meetings. In response to a significant growth in Australian Government funding in 2015–16, a detailed analysis of activity data has also been provided to the Board for both year-on-year and over the life of the NHRA.⁷⁵ As a result of this analysis, the Board has directed that Pricing Authority staff undertake further work with the states to understand the drivers of growth and also with the Funding Body to determine the best treatment of newly reported activity in the calculation of efficient growth.

2.54 Cost data analysis reports are publicly released annually at the end of each round of cost data collected. The reports are presented to the Pricing Authority cost data committee and jurisdictional advisory committee for comment before tabling at Board meetings.⁷⁶ Stakeholders use the cost data reports for a range of purposes including benchmarking and contractual arrangements. The cost data reports summarise the: number of hospitals/local hospital networks that provided data, total expenditure by data stream; average costs; and average cost per weighted separation. The reports can also include information from the data quality statements supplied by each state to highlight key aspects that can influence a jurisdictions results.

2.55 The Pricing Authority is currently expanding its capability for data analysis and trends reporting, and recently introduced tools such as dashboards for reporting to decision makers. Additionally, the Pricing Authority’s 2018–19 plan requires that activity data be submitted quarterly, rather than six-monthly.

Funding Body

2.56 The Funding Body monitors activity data received from the states as part of the reconciliation process, including reasonableness checks on the distribution of data and NWAU outcomes by state, local hospital network and service category. Statements of assurance on activity data provided by the states are also used by the Funding Body to identify issues within the data sets. As referred to in paragraph 2.30, issues identified through this process are discussed with states and the Pricing Authority, and outcomes formally presented at the Administrator’s jurisdictional advisory committee.

2.57 The Funding Body has also undertaken additional analysis at the request of the Australian Government Treasurer in response to the significant growth reflected in the 2015–16 reconciliation process.⁷⁷ The report on this analysis, released to jurisdictions in June 2017, attributed the major underlying drivers of this growth to NWAU increases of 6.8 per cent, flowing from both an increased number of services delivered plus changes to the case mix. Price increases accounted for another 3.7 per cent of ABF growth. This reporting led to further referrals to the Pricing Authority to address a number of issues that arose in the 2015–16 data.⁷⁸ The conclusion presented to jurisdictions in February 2018 was that there were issues in relation to pricing, counting methodology and classification. As a result, the final 2015–16 reconciliation payment was reduced by $123 million⁷⁹ compared to from what had originally been calculated by the Funding Body and Administrator.

2.58 In December 2017, the Funding Body commissioned further work on the changes in activity data from 2015–16 to 2016–17. Included in this work was a review of outliers and anomalies contained within the state data sets, the reasonableness and proportionality of state data and insight into the underlying drivers of activity, and Australian Government contribution growth and changes between 2015–16 and 2016–17. The key points from this analysis were presented to state government officials and other stakeholders in May 2018. Notably, the analysis concluded that a change in how some hospital services were classified under the Pricing Authority’s national standards system resulted in an unexpected increase in the number of NWAUs delivered which then affected funding growth.⁸⁰ The impact of this change was addressed by the Pricing Authority applying a ‘back-casting’ adjustment to the previous year’s (2015–16) activity data in order to account for changes in classifications.⁸¹ This enabled consistency between years when calculating the Australian Government’s efficient growth between 2015–16 and 2016–17 in accordance with clause A40 of the NHRA. The Administrator’s advice to the Treasurer provided information on the treatment of the issue, including the views of the states. As referred to in paragraph 2.32, state governments have challenged the Treasurer’s determination of 2016–17 reconciliation payments.

2.59 Broader monitoring and analysis of data by the Funding Body has been prevented by concerns from jurisdictions around its mandate to be able to perform such work. The analysis report on 2015–16 activity data that was requested by the Treasurer saw a jurisdiction obtaining legal advice that the analysis within the report was outside of the Administrator’s authority, and that the Treasurer’s request should have been directed to the Pricing Authority.

2.60 The states have also previously expressed concerns with the Funding Body’s capacity to undertake analysis and provide strategic advice to governments on linked hospital activity and MBS/PBS data sets.⁸² The states indicated that they consider such work could ‘potentially undermine its role of ensuring equity, accuracy and integrity in the distribution of Commonwealth funding between states’. A lack of definition around the mandate for the Funding Body to perform analysis has restricted its ability to undertake detailed analysis of the datasets it receives and to provide advice to stakeholders.

Data Matching under A6 of the Agreement.

2.63 The NHRA specifies that the Australian Government will not fund a hospital service if the service is funded through any other Australian Government program, including the Medicare Benefits Schedule (MBS)⁸³ and the Pharmaceutical Benefits Scheme (PBS).⁸⁴ There are similar provisions in the MBS legislation to prevent double funding.

2.64 The NHRA does not specify a mechanism to prevent and/or recover Australian Government duplicate funding for services. In 2013, the Funding Body developed data matching business rules to identify situations where services are funded by both NHRA and MBS sources, and applied these to deterministically linked⁸⁵ data using Medicare PINs (de-identified Medicare numbers).⁸⁶ This data matching process identified potential situations of duplicate funding yet did not result in adjustments to Australian Government funding as further investigation was required to confirm a duplicate payment actually occurred. In addition, the states requested that the Australian Government undertake MBS compliance activities to prevent double funding and recover payments from health providers, rather than adjusting NHRA funding.

2.65 Since 2014 Australian and state government ministers and officials have discussed options to improve data matching under the NHRA provisions. In-principle agreement was reached in August 2016 for the Department of Health (Health) to conduct a data matching pilot for MBS compliance purposes that would require access to, and the use of, the matched data sets held by the Funding Body. Concerns from the states about the scope of the pilot and the end use of the data sets by Health resulted in delays, with the issue being referred to COAG health ministers in April 2018. In March 2018, Health also sought advice from the Australian Government Solicitor about other options for obtaining state public hospital activity data for matching with MBS/PBS data for compliance purposes. These options were not pursued at that time.

2.66 Following agreement by Ministers in April 2018 to proceed with the data matching work, the Funding Body reviewed and updated the business rules developed in 2013 and applied these rules to data from 2014–15 to 2016–17. From this work, Table 2.5 shows the estimates of MBS benefits paid that have been identified through data-matching, noting that these matches have not been investigated further to confirm that duplicate MBS/NHRA funding actually occurred.⁸⁷

2.67 The difference in the amounts in the two rows in Table 2.5 relate to data-related difficulties in establishing whether a MBS claim relating to medical service provided on the day of a patient’s hospital admission or discharge was actually provided by the hospital rather than another person or facility. Excluding all MBS payments relating to admission and discharge days in 2016–17 gives a lower estimate of $172 million of potential duplicate payments. If admission and discharge days are counted, the estimate rises to $332 million.

Table 2.5: Estimates of potential Australian Government duplicate payments for public hospital services

Note: Because of technical difficulties regarding matching of non-admitted care records, the above amounts likely underestimate potential duplicate payments for non-admitted care.

Source: ANAO analysis of Funding Body documentation.

2.68 As at November 2018 the data had not yet been provided to Health, in part due to ongoing concerns from the states regarding the scope of the pilot and intended use of the data. Health advised the ANAO that:

The timeframe for the release of data to the Commonwealth is a decision for the Administrator. However the Department hopes to be in a position to act on outcomes from the data matching pilot mid–2019.⁸⁸

2.69 In addition to ‘business as usual’ MBS compliance activities, in 2012 Health was provided with $1.8 million to implement the ‘Fraud prevention and compliance — Improve billing practices within public hospitals’ budget measure over a four year period. This measure was originally aimed to address inappropriate billing by hospital emergency departments for pathology and diagnostic imaging services, and was expected to provide savings of $24.7 million. In 2014 the scope was expanded to include education and compliance for all public hospital services. Health estimates $22.5 million in savings were achieved over 2012 to 2016, with 98 per cent of these savings a result of behavioural change in providers.⁸⁹ In 2018, Health developed a new ‘behavioural change’ evaluation methodology to assist in measuring the impact of MBS compliance activity. Health does not currently report on the impact of its ongoing MBS compliance work on possible inappropriate MBS claiming from providers working in the public hospital sector.

2.70 An April 2017 report by Health on the outcomes of the 2012 budget measure included eight recommendations to further enhance Medicare program integrity in public hospitals and address compliance barriers. To date these recommendations have not been finalised. An amendment made to the Health Insurance Act 1973 introduces a shared debt recovery scheme from 1 July 2019, so that where contractual or other arrangements exist between a practitioner and an employer or corporate entity, both may be held responsible for the repayment of the debt. However, the terminology in the Business Rules for the NHRA regarding the use of Medicare in public hospitals has not been amended for clarity and consistency with the Health Insurance Act 1973.

2.71 The amounts outlined in Table 2.5 show potential duplicate MBS and NHR payments are increasing every year. Given the lack of an effective mechanism to prevent their occurrence, or achieve their recovery, these payments represent a significant inefficiency in the Australian Government funding for some public hospital health services. The payments are also contrary to the NHRA. The draft new funding agreement does contain additional clauses related to MBS compliance activities, which if adopted in the final agreement, would facilitate Health’s ongoing access to the necessary data to underpin more comprehensive compliance activities regarding public hospital services.

Is there a national framework in place for public hospital performance reporting?

3.1 An important element of the NHRA agreed by the Council of Australian Governments (COAG) in 2011 was the development of ‘clear and transparent performance reporting’ in relation to health and hospital services through the establishment of a Performance and Accountability Framework. The Performance and Accountability Framework was intended to underpin public reporting across three broad objectives:

• equity (patient access);
• effectiveness (safety and quality, and patient experience); and
• efficiency in the delivery of services.

3.2 Reporting was to be undertaken by the National Health Performance Authority (Performance Authority), established under the National Health Reform Act 2011.

3.3 The Performance Authority was to publicly report on the performance of Local Hospital Networks (LHNs), and the public hospitals within them, against 17 indicators across the above three objectives. The NHRA also provided that the Performance Authority would use the reporting arrangements to identify:

• high-performing Local Hospital Networks … and hospitals … [to] … facilitate sharing of innovative and effective practices; and
• poorly performing Local Hospital Networks … to assist with performance management activities.

3.4 The Performance Authority would provide advice to the Australian and state governments on identified poor performing LHNs, with the states agreeing to remediate any ongoing poor performance. This LHN-level reporting system was never implemented as governments did not reach agreement on a process to identify poor performing LHNs.

3.5 In 2016, the Performance Authority was abolished, with reporting functions transferred to the Australian Institute of Health and Welfare (AIHW) and the Australian Commission on Safety and Quality in Healthcare (Safety and Quality Commission). As at November 2018, the AIHW ‘MyHospitals’ website reports on six of the 17 Performance and Accountability Framework hospital indicators.⁹⁰ Specifically:

• healthcare associated staphylococcus aureus infections (these can cause can cause serious complications such as bloodstream infections, pneumonia, or bone and joint infections);
• Emergency Department waiting times by urgency category;
• percentage of emergency department patients transferred to a ward or discharged within four hours, by triage category;
• elective surgery patient waiting times by urgency category;
• average length of stay; and
• cost per average admitted hospital service.

3.6 A review of Australia’s health system performance information and reporting frameworks was commissioned by the Australian Health Ministers’ Advisory Council in 2016–17. The review found that the purpose and audiences of the frameworks were unclear and that there were gaps in the current range of performance indicators, including too few indicators measuring the patient’s experience or clinical outcomes. In September 2017, the COAG Health Ministers Council agreed to combine the Performance and Accountability Framework with the National Health Performance Framework⁹¹ to form the Australian Health Performance Framework. The Australian Health Performance Framework is intended to:

provide a single, enduring and flexible vehicle to support system-wide reporting on Australia’s health and health care performance, to support the assessment and evaluation of value and sustainability, and to inform the identification of priorities for improvement and development.

3.7 In July 2018, agreement was reached between all jurisdictions to develop a consolidated set of indicators under the Australian Health Performance Framework for future public reporting. This work, to undertaken by a cross-jurisdiction working group, co-chaired by Department of Health (Health) and the AIHW, is due to be completed in the first half of 2019. While the Australian Health Performance Framework does not explicitly mandate LHN level performance reporting, it is intended that the data collected under the framework will enable ‘tiered reporting’, including at the LHN level.

Does existing public reporting provide transparent information about the level of Australian Government funding of public hospitals to states and the local hospital networks within them?

3.8 Public reporting by the Administrator provides detailed information on Australian and state government National Health Reform (NHR) funding, including the amounts received by individual LHNs.

3.9 The Funding Body receives data from the states that it uses to create the Administrator’s reports. For Australian Government block funding, the Funding Body relies on advice from the states that relevant amounts have been transferred from state managed funds to LHNs. For Australian Government activity based funding (ABF) amounts, the relevant amounts are checked back to the ‘Commonwealth Contribution Model’ entitlement for each LHN. Entitlement amounts are uploaded to an Australian Government Department of Human Services hosted payment system, to assist in allocating the calculated entitlement to the relevant LHNs when payments are scheduled. Under the NHRA, amounts can be paid directly to LHNs or third parties on the behalf of an LHN or a number of LHNs within a State. In all but one jurisdiction, Australian Government ABF amounts (the Commonwealth Contribution Model entitlement) were paid directly to the individual LHNs. The exception was NSW where in 2017–18 $10.09 billion of combined Australian Government and New South Wales (NSW) government funding⁹² was allocated through the NSW Ministry of Health under a shared services arrangement. The Funding Body relies on advice from NSW regarding the subsequent transfer of funds on to the relevant LHNs.⁹³

3.10 NHR funding by all governments represents 82.4 per cent of estimated total funding of public hospital services.⁹⁴ Public reporting by the AIHW provides information on the level of funding outside NHRA arrangements, including government and non-government funding associated with private patients.

3.11 As shown in Figure 3.1, Australian Government NHR funding has increased from $13.13 billion in 2012–13 (the first year of NHRA arrangements) to $19.94 billion in 2017–18, an overall increase of 51.9 per cent over five years.⁹⁵ Total state government NHR funding has increased by 16.5 per cent over the same period.⁹⁶

Figure 3.1: National Health Reform funding 2012–13 to 2017–18

Note: Funding refers to amounts actually paid in the relevant year. State funding has been adjusted for cross border payments.

Source: ANAO analysis of public reporting by Administrator.

3.12 As at November 2018, Australian Government NHR funding payable in 2018–19 is estimated to be $21.42 billion.⁹⁷ From the implementation of the NHRA Addendum in 2017–18, annual Australian Government funding growth is limited by the operation of the 6.5 per cent funding cap.⁹⁸ As at November 2018, total Australian Government funding growth for 2017–18 hospital services⁹⁹ is estimated to be under the cap at around 4.2 per cent, mainly due to a slight decline in the number of NWAUs delivered by public hospitals.¹⁰⁰

3.13 Figure 3.2 shows the proportion of total NHR funding provided by the Australian Government to each state in 2017–18 as compared to 2012–13. Consistent with the intent of the NHRA, the share of NHR funding provided by the Australian Government has increased nationally from 36.5 per cent in 2012–13 to 42.9 per cent in 2017–18. Figure 3.2 also shows that the share of NHR funding provided by the Australian Government varies between jurisdictions. In part, these variations reflect that initial NHR funding levels were based on the previous block funding arrangements outlined in Chapter 1. Fluctuations from year to year in the Australian Government’s share of NHR funding reflects changes in public hospital funding levels by individual states, or potentially because states are funding NHR eligible services outside of NHRA arrangements.¹⁰¹

Figure 3.2: Australian and State Government funding as a proportion of total National Health Reform funding 2012–13 and 2017–18

Note: Analysis is based on amounts actually paid in the relevant year. State funding has been adjusted for cross border payments

Source: ANAO analysis of public reporting by Administrator.

3.14 The NHRA provides that state governments agree to maintain their own 2017–18 to 2019–20 funding of public hospital services to at least at 2015–16 levels. This provision does not specify that funding must be directed through NHR arrangements, nor does it outline how compliance will be assessed. According to public reporting by the Administrator, the level of NHR public hospital funding by the Western Australian Government has decreased from $3.18 billion in 2015–16 to $2.36 billion in 2017–18. AIHW reporting indicates that total Western Australian Government public hospital funding (including funding outside the NHRA) has decreased from $2.98 billion in 2015–16 to $2.73 billion in 2016–17, with 2017–18 figures not available as at November 2018.

3.17 Under the NHRA, hospital funding is to be provided by the Australian and state governments using ABF where practicable and block funding in other cases. Figure 3.3 shows the relative proportions of total NHR funding provided via ABF. On a national basis, ABF has risen from 73.3 per cent in 2012–13 to 84.4 per cent in 2017–18.

Figure 3.3: National Health Reform funding type 2012–13 and 2017–18

Note: Analysis is based on amounts actually paid in the relevant year. State funding has been adjusted for cross border payments. Cross border payments are counted as ABF.

Source: ANAO analysis of public reporting by Administrator.

Does the existing public reporting provide transparent information about the volume of services delivered by local hospital networks that receive Australian Government funding?

3.18 The volume of services (expressed as NWAUs) forecast to be provided annually by each state and LHN is publicly reported by the Administrator on a monthly basis. The actual volume of services delivered by each LHN is provided by the states to the Funding Body but is publicly reported only at the national level on an annual basis. Total NWAUs have increased from 5.904 million in 2012–13 to 8.413 million¹⁰² in 2017–18, an overall increase of 42.5 per cent over five years. As referenced in Chapter 2, the Pricing Authority and Funding Body carry out a range of data validation and quality processes to mitigate the risk of inaccuracies in the service activity data supplied to them by the states. Figure 3.4 shows the growth in the number of NWAUs delivered in each jurisdiction¹⁰³ between 2012–13 and 2017–18.

Figure 3.4: Number of National Weighted Activity Units delivered 2012–13 and 2017–18

Source: ANAO analysis of public reporting by Administrator and Funding Body documentation.

3.19 ANAO analysis shows variations between the jurisdictions on the volume of NWAUs delivered per head of population. As shown in Figure 3.5, in 2016–17, while most jurisdictions delivered around 300 to 400 per 1000 people, in the Northern Territory the figure was over 600. This is likely connected with the high proportion of Indigenous Australians in the Northern Territory combined with the fact that Indigenous Australians in the territory receive five times the number of episodes of hospital care per head of population as non-Indigenous persons.

Figure 3.5: Number of National Weighted Activity Units delivered per 1000 people 2012–13 and 2017–18

Source: ANAO analysis of public reporting by Administrator, Funding Body documentation and Australian Bureau of Statistics data.

3.20 Jurisdictions provide the Funding Body with estimates of the number of NWAUs they anticipate their respective LHNs will deliver in the upcoming year. This is a key input for determining how much the Australian Government will contribute. Significant under estimations in 2015–16 and 2016–17 have contributed to the Australian Government being required to make additional NHR funding payments following the reconciliation process. For 2016–17, the additional Australian Government NHR reconciliation payment was $661 million in total across the jurisdictions.¹⁰⁴

Does the existing public reporting provide transparent information about progress towards the hospital-related policy objectives of the National Health Reform Agreement?

3.21 In addition to increasing the proportion of public hospital costs funded by the Australian Government, the NHRA objectives include improving:

• public hospital efficiency;
• patient access to hospital services; and
• standards of clinical care.

3.22 Public reporting by the Administrator, the Productivity Commission, the AIHW and the Safety and Quality Commission provides information on a range of indicators connected to the above policy objectives.

3.23 There are no nationally agreed performance targets in relation to these objectives. Targets for patient access were in place under the National Partnership Agreement on Improving Public Services. However, the Australian Government terminated this agreement with effect from July 2015.¹⁰⁵

Efficiency

3.24 ‘Efficiency’ is not defined in the NHRA. However, the average cost per admitted acute weighted separation¹⁰⁶ is commonly reported as an indicator of efficiency¹⁰⁷ in the Productivity Commission’s annual Report on Government Services.¹⁰⁸ Cost per NWAU measure can also be indicative of efficiency, as it is derived from the weighted average cost of separations, but with a range of costs removed and various adjustments made to account for cost difference in delivering the service (such as remoteness). As shown in Figure 3.6, the rate of growth of both indicators¹⁰⁹ has slowed since the commencement of the NHRA in 2012–13.

Figure 3.6: Cost of public hospital services 2007–2008 to 2018–19

Source: ANAO analysis of Funding Body, Productivity Commission and Pricing Authority data.

3.25 Change in the national efficient price is also relevant as a more up to date indicator of efficiency. As Figure 3.6 shows, it has remained reasonably flat for most of the period where the NHRA has applied. Notably, the cost indexation factor used in national efficient price calculations has declined from 5.1 per cent per annum in the initial (2012–13) national efficient price to 1.6 per cent in the most recent period (2018–19). Given this indexation factor is below the forecast underlying Australian inflation rate of two per cent in 2018–19, this may indicate a modest improvement in efficiency. The Pricing Authority’s forecasts out to 2021–22 project an average annual increase in the national efficient price of 1.1 per cent.

3.26 ANAO analysis in Figure 3.7 shows that, from 2012–13 to 2017–18, the number of NWAUs delivered per $1000 of combined Australian Government and state NHR funding has increased on a national basis from 0.16 to 0.18 (a 12.5 per cent increase).¹¹⁰ On a jurisdictional basis, the number of NWAUs delivered per $1000 of total NHR funding in 2017–18 varies between 0.12 in the Northern Territory to 0.20 in New South Wales.

Figure 3.7: Number of National Weighted Activity Units delivered per $1000 of National Health Reform funding 2012–13 and 2017–18

Note: Analysis is based on amounts actually paid in the relevant year.

Source: ANAO analysis of public reporting by Administrator.

3.27 The time a patient spends in hospital compared to expectations based on their medical condition can also be used as an efficiency indicator. While changes to the patient data included in this measure limits the direct comparability of year on year figures, this ‘relative stay index’ measure indicates a steady improvement (an average of 3.1 per cent a year) on a national basis in efficiency in public hospitals since the commencement of the NHRA.

Patient access

3.28 Performance regarding patient access to public hospital services is currently measured by both emergency department and elective surgery waiting times.

3.29 Patients attending emergency departments are triaged into five urgency categories, each of which have a prescribed time in which they should start to receive clinical care. Specifically:

• resuscitation (immediate);
• emergency (within 10 minutes);
• urgent (within 30 minutes);
• semi-urgent (within 60 minutes); and
• non-urgent: (within 120 minutes).

3.30 Figure 3.8 shows the proportion of patients seen within the prescribed time for their urgency category in both 2012–13 and 2017–18. On a national basis, performance has dropped slightly from 73 per cent to 72 per cent. Reports by some state Auditors-General in recent years have highlighted data quality and governance issues in relation to emergency department performance reporting.¹¹¹

Figure 3.8: Proportion of emergency department patients seen within recommended time 2012–13 and 2017–18

Source: AIHW data.

3.31 In relation to elective surgery, at the time a person is being placed on the public hospital elective surgery waiting list¹¹² a clinical assessment is made of the urgency with which the person should undergo the relevant surgical procedure. This ranges from 30 days for the most urgent category, to one year for the least urgent. Figure 3.9 shows that, in all but one jurisdiction, the proportion of surgery conducted within recommended times has increased over the life of the NHRA.^113,114

Figure 3.9: Proportion of elective surgery patients operated-on within the recommended time 2012 and 2017–18

Note: 2012 data was published on a calendar year basis. Subsequent data was published on financial year basis.

Source: AIHW data.

Safety and quality of clinical care

3.32 A range of safety and quality indicators have been publicly reported in recent years. Other measures such as mortality indicators have been developed, but are not nationally reported, largely due to the inconsistent coding of data between states. Consolidation of safety and quality indicators is within the scope of the previously mentioned Australian Health Performance Framework development work, including aligning safety and quality reporting between public and private hospitals.

3.33 Improved data collection and reporting of safety and quality is also being driven by changes introduced through the 2017 Addendum to integrate safety and quality into NHR funding. From 2017, the Australian Government will not fund a hospital service that was provided to a patient during which a sentinel event occurs. From 2018, funding will also be reduced for a service in which a hospital acquired-complication occurs. As at November 2018, the timetable for introducing reduced funding for avoidable readmissions had yet to be finalised.

3.34 Adverse events are incidents in which harm resulted to a person receiving healthcare. They include adverse effects of drugs, injuries that occur during care and conditions that occur following procedures such as infections and bleeding. According to the Pricing Authority, estimates in Australian and internal costing studies indicated that adverse events constitute between 12.0 and 16.5 per cent of total hospital costs. As shown in Figure 3.10, the rate of occurrence of adverse events in public hospitals has not changed significantly (6.5 to 6.6 events per 100 separations) between 2012–13 and 2016–17.

Figure 3.10: Separations with an adverse event per 100 separations in public hospitals 2011–12 to 2016–17

Source: Productivity Commission data.

3.35 Figure 3.11 shows the number of sentinel events in public hospitals between 2011–12 and 2015–16.

Figure 3.11: Number of sentinel events in public hospitals 2011–12 to 2015–16

Source: Productivity Commission data.

3.36 Public reporting on unplanned/avoidable readmissions is limited, with the AIHW reporting relating to selected surgical procedures only, as shown in Figure 3.12. Four out of the seven reported procedures show increases in unplanned readmission rates. In 2018, the Safety and Quality Commission developed an agreed list of conditions considered to be avoidable hospital readmissions and associated condition-specific time intervals.¹¹⁵

Figure 3.12: Selected unplanned public hospital readmissions rates per 1000 separations, by surgical procedure 2011–12 to 2016–17

Source: ANAO analysis of AIHW data.

Use of data to inform Australian Government public hospital funding policy objectives

3.37 As covered in paragraphs 3.21–3.36, there is extensive public reporting of indicators relevant to NHRA hospital-related policy objectives. As the lead Australian Government entity for hospital funding policy, the Department of Health has provided advice to the Minister for Health regarding some of the reported results. The department advised the ANAO that it sought to achieve:

efficiency and improved outcomes in the [hospital] system largely in the context of negotiating the NHRAs, with the implementation of such reforms taking place over the course of the agreement. Examples of this include the department drawing on data to identify adverse impacts on access and system sustainability as a result of an increase in the numbers of private patients in public hospitals and to press for reform in this area.

3.38 Significant changes were made to the NHRA through the 2017 Addendum. Changes addressed the high growth rates in Australian Government funding (through the introduction of the 6.5 per cent funding cap) reducing health costs more generally (through various measures to decrease the avoidable demand for public hospital services) and improving standards of clinical care (including by incorporating quality and safety factors into how future Australian Government funding was to be calculated). Health has also chaired a working group to develop a National Clinical Quality Registry¹¹⁶ Strategy. The strategy seeks to achieve the better use of data at the clinical level, including in public hospitals, to promote NHRA-related objectives of improved efficiency, patient access and standards of clinical care.

Appendix 1 Entity responses

Formal responses received by ANAO following circulation of the draft report are reproduced in Appendix 1.

Responses were received from:

Department of Health

Independent Hospital Pricing Authority

National Health Funding Body

Appendix 2 State audit reports of public hospital activity and performance data

Appendix 3 Performance and Accountability Framework: hospital-related indicators

Source: ANAO Analysis of the National Health Reform Performance and Accountability Framework and performance indicator reporting in AIHW My Hospitals website.

Appendix 4 Costs in individual jurisdictions

Figure A.1: Average cost per jurisdiction for admitted acute weighted separation (2015–16)

Source: ANAO analysis of Productivity Commission data.

1. Average costs can also vary considerably between comparable hospitals. According to a November 2018 AIHW report, cost per NWAU in 2014–15 at individual large metropolitan public hospitals included in the AIHW study ranged from $3500 to $6300, with an average of $4460. The average 2014–15 cost of the all 27 hospitals in the AIHW study was $4860, an inflation adjusted decrease of 1 per cent from 2012–13.