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Hospital Financing. Jim Butler ACERH, ANU A presentation to the ACERH 2008 Policy Forum, Brisbane, 22 February 2008. Overview. Background to current arrangements Turning to 2007 … Why reform? Medicare Hospital Benefits Scheme – General Features Some specifics Financing Criticisms.

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hospital financing

Hospital Financing

Jim Butler


A presentation to the ACERH 2008 Policy Forum,

Brisbane, 22 February 2008

  • Background to current arrangements
  • Turning to 2007 …
  • Why reform?
  • Medicare Hospital Benefits Scheme – General Features
  • Some specifics
  • Financing
  • Criticisms
background to current arrangements
Background to current arrangements
  • Since federation, constitutional responsibility for public provision of health services has rested predominantly with the States (exceptions include ‘national public goods’ like quarantine services)
  • For first half of 20th century, both production and financing of public hospital services rested with the States

In the second half of the century, Commonwealth financing of health services increased markedly, primarily as a result of:

1) Constitutional amendment in 1946 regarding ‘sickness and hospital benefits’

2) Medibank national health insurance program in 1975


Even before 1946, the Commonwealth’s Hospital Benefits Act of 1945 provided for payments to States for hospital services

  • An example of s.96 specific purpose payments to States
  • Earliest example of use of these was in 1949-50 – grants to States for control of TB

Choice of s.96 grants to States, rather than hospital benefits scheme, has characterised Labor administrations since Chifley government in 1945 (embraced by Whitlam, Hawke, Keating and have been retained by Howard – and Rudd?)

  • Note that s.96 route was retained even after the 1946 Constitutional amendment

Why did Labor administrations favour s.96 grants rather than hospital benefits?

  • Believed “… that the best care for ‘hospital patients’ would be provided through a system of salaried, sessional or contract services” (Sax 1984)
  • Desire to protect public patients fully from any financial costs involved in hospital treatment
turning to 2007
Turning to 2007 …
  • Hospital financing is a topic of public policy debate
  • Previous Australian Govt: Buy one public hospital
  • New Australian Govt: Additional $2bn for hospitals + “take control” of public hospitals if performance benchmarks are not achieved (Commonwealth financing and ownership?)

Some questions:

  • What is the Constitutional basis of Commonwealth “take over” public hospitals?
  • Would Commonwealth ownership and financing of public hospitals reduce “duplication” as argued by some?

“Australia conservatively wastes $14 billion in tax each year due to the combined effects of

  • perverse incentives for private healthinsurance
  • Commonwealth/State duplication
  • poor workforce productivity, and
  • avoidable mistakes and accidents in thehealth system.”

(Australian Health Care Reform Alliance, Media Release (Reform Directions), 31 July 2007)

why reform
Why reform?
  • Australia has universal, compulsory, tax-financed public health insuranceplusvoluntary, subsidised private health insurance→ duplicate coverage

Duplicate coverage:If insurance cover for private hospital treatment is purchased, insurance cover for public hospital treatment as a public patient is still compulsorily retained


Privatehealth insurance

Publichealth insurance


Which direction to move?

43-45% of population have PHI for hospital and/or general treatment insurance

PHI funds 8.7% of health exp. (excludes exp. funded by individuals

Private health insurance only

Public health insurance only


Two broad options to address duplicate coverage

  • Reduce private health insurance coverage with public coverage taking up the ‘gap’
  • Reduce public coverage with private coverage taking up the ‘gap’
medicare hospital benefits scheme general features
Medicare Hospital Benefits Scheme – General Features
  • Remove s.96 grants for hospitals
  • Remove private health insurance rebate
  • Replace with a hospital benefits scheme
  • A hospital benefit of pre-determined value would be paid for each hospital admission
  • Commonwealth role would be financing, not provision, so ownership of public hospitals remains with the States

Develop a Hospital Benefits Schedule (HBS)

  • HBS items would be casemix-based
  • Each item would have a defined rebate as in MBS
  • Rebate can be set to ensure public hospital patients face no charge for an inpatient episode as at present


  • Eligible hospitals – public and private hospitals could be included in the scheme (hospital benefit would be portable between public and private hospitals)
  • Eligibile patients – all eligible residents as defined for Medicare Medical Benefits Scheme
some specifics hbs items
Some specifics – HBS items
  • Casemix classification scheme - DRGs an obvious candidate
  • Rebates would be per episode and not per diem
  • Hospital typologies could be incorporated in the Schedule to differentiate DRG rebates by hospital type
some specifics hbs drg fees
Some specifics – HBS DRG fees
  • If full coverage (zero out-of-pocket expense) in public hospitals is an objective, set DRG fees accordingly
  • Private hospitals could charge above DRG schedule fee but could also opt to bulk bill
  • Two-part tariff could be used (and may be desirable), e.g. flat fee per admission + DRG-specific fee
  • Commonwealth would have considerable monopsonistic power in fee setting
some specifics gap cover
Some specifics – gap cover
  • Role for PHI in providing gap cover for private hospital charges in excess of HBS DRG fees (in addition to ancillary cover)
  • No public subsidy
  • No Medicare Levy surcharge
  • Removes duplication in insurance
some specifics medical services
Some specifics – medical services
  • Pay medical practitioners on fee-for-service basis in both public and private hospitals (remove current ‘uncertainty’ about status of outpatient clinics)
  • Any need to adjust DRG prices for medical services component of inpatient fees?
  • Any need to adjust for ‘practice cost’ component of fees for hospital-based medical services?
some specifics utilisation
Some specifics - utilisation
  • If private hospitals included, increase in utilisation can be expected from those previously without PHI
  • Public hospitals also have an incentive to increase throughput
  • Moral hazard unlikely to be as severe as for medical services (lower price elasticities)
  • Upside – reduced waiting times
some specifics quality
Some specifics – quality
  • Scheme gives Commonwealth greater leverage over quality
  • All hospitals must be Approved Providers to qualify for HBS rebates
  • Individual hospitals can be disapproved if quality (however measured) is sub-standard (cf. nursing home experience)
  • Commonwealth can directly target avoidable deaths in hospital (200 avoidable deaths per week)
  • Scheme entails considerably greater Commonwealth financing than at present
  • Sources of expenditure savings for C’wealth:1) Reduction in SPPs (M/care Agreements)2) PHI rebate

Sources of expenditure increase:

  • State share of public hospital financing
  • Public and private hospital financing formerly covered by PHI
  • Increase in private hospital utilisation

Net funding requirement: $11.8 bn

In 2006-07:

  • Medicare levy revenue: $7.3 bn
  • GST payments to States: $39.6 bn

Jeff Richardson

“Following US experience, there is widespread agreement that passive indemnity insurance is a powerful engine of inflation, fuelling medical incomes and the proliferation of cost-ineffective technologies”

Response: Proposed Medicare HBS is very far removed from the US health insurance arangements


Dick Scotton

“The two basic weaknesses are:

(a) The abolition of ‘public patient’ status would result in a version of the Canadian system but without two distinctive features of that system that are absolutely critical to its performance …”

  • Price controls on medical services
  • All hospitals required to provide free standard ward care and funded with global budgets


  • Australian experience has shown price controls are not necessary to secure ‘reasonable’ prices of medical services (cf. 70-80% bulk billing)
  • Global budgets do not achieve efficiency gains that can be achieved from DRG funding

Second basic weakness:

“Hospital care in general, and inpatient care in particular, are treated in isolation from other components of health care …”


Agree that substitution of less expensive modes of care for inpatient care may be efficient – but Scheme gives C’wealth a much finer degree of control of relative rebates across IP/OP settings

  • Medicare hospital insurance is one option for reducing duplication in insurance coverage under current arrangements
  • It increases Commonwealth involvement in hospital financing without necessitating C’wealth ownership of hospitals
  • Another option – increase role of private health insurance by allowing ‘opting out’ with risk-adjusted subsidies for PHI (Van de Ven, Scotton)