Funding incentives resulting from the formulation of acute admitted funding models ABF 2013 Conference

1. Funding incentives resulting from the formulation of acute admitted funding modelsABF 2013 Conference Amy McDowell Hospital and Health Service Performance Division

2. Introduction • The principle of developing an activity-based funding model to be purely reflective of costs is a sound one. • A number of lower level pricing principles also need to be developed to address specific issues. • In practice there are a range of possible statistical and parametric treatments of the data that produce different funding incentives, allocations and risks.

3. Today’s Presentation Presentation focuses on three significant pricing model features: • Outlier cost weight calculation methodology • Rebasing • Private patients adjustment • For each of the funding model features considered • What is it? • Why is it important? • Compare IHPA approach with approach taken in Victoria • Worked examples.

4. Outlier Cost Weight Calculation Methodology

5. Outlier Cost Weight Calculation Methodology • What is it? • The outlier per diem weights are used to allocate WIES/NWAU for all days of stay outside the inlier boundary points that define the episodic payment. • In the case of high outliers, this is in addition to the inlier payment • Why is it important? • The rate at which the outlier weights are set has important implications for the incentives contained within the pricing model. • There is a risk that delayed discharge could be inadvertently incentivised.

6. Victoria’s Outlier Cost Weight Calculation Methodology • Principle: Low outliers should not be priced too low so as to make it attractive to achieve inlier payment. High outliers should reflect marginal cost of additional day of treatment. • Low Outliers:Usually derived from the average cost of multiday inliers divided by the low boundary. • High Outliers: Usually based upon the avg cost of inliers (excluding all prosthesis and theatre costs for non-medical DRGs only). Attempt (though imprecise) at reflecting marginal cost.

7. IHPA’s Outlier Cost Weight Calculation Methodology • Principle:Ensure cost model application results in the equalisation of predicted cost with actual reported cost for each DRG. Ensuring the funding model ‘returns all costs’. • Low outliers Set on the average cost per bed day for low-outlier cases. So, in contrast to WIES, cost weights are set independently from inlier cases. • High outliers: Set by a combination of measures: • Inlier variable cost per bed day (similar to Victoria). • Regression of total cost on LOS.

8. Worked example: Low Outlier Payments • Significant benefit in extending length of stay

9. Rebasing

10. Rebasing • What is it? • A mathematical phase in the cost-weight formulation aimed at avoiding an inadvertent increase or decrease in the overall pool of weighted activity. • Why is it important? • According to the formula outlined in the NHRA, growth funding from the Commonwealth will be based partially on year on year shifts in activity levels. • In the absence of rebasing, NWAU increases or decreases may occur for reasons unrelated to casemix and volume changes, e.g. changing classifications, improved cost data. • As there is real money attached to NWAU growth, it is important that these effects are well understood and appropriately compensated for.

11. Rebasing methodology applied in Victoria • Principle: Apply rebasing to all ABF funded services. Recency of underlying data is paramount for the effectiveness of rebasing. • Using latest available 12 months of WIES-funded activity data, apply the current and newly formulated WIES versions to the activity dataset • (e.g. WIES18 was rebased using 2010 calendar year activity data and employed to fund 2011-12 activity, i.e. ~1 year time lag). • Apply a single scaling factor to all new cost weights to ensure that the latest-available state-wide pool of weighted activity is equivalent under the two consecutive versions of WIES. • For VACS (non-admitted), methodology is essentially the same, but performed separately as cost weights for these streams are different and are not interchangeable.

12. Rebasing methodology applied byIHPA • Principle: Under development? • Acute Admitted approach in the 2013-14 NEP is broadly similar to Victoria. However, there is a 3 year time lag between the year in which the funding model will apply (e.g. 2013-14), and the activity data used in the development of the model (e.g. 2010-11) • This is potentially of material significance.   • It is not clear that the IHPA cost-weight models for emergency  and non-admitted activity were rebased (possibly due to incompleteness of datasets). • As the Mental Health and Subacute models are new for 2013-14, this will only become relevant for them in the following years.  

13. Rebasing methodology – worked example • Home and in-centre dialysis currently attract the same NWAU price weight (0.1118). Over time this may change as the cost data improves. • Victorian and Kidney Health Australia cost data suggests that home based dialysis is around 33% cheaper per annum than In-Centre dialysis. • So, if home based peritoneal dialysis is a daily activity then NWAU weight could drop to 0.0307 • In centre funding per annum assumed at $87,082 = 3 times per week x 52 weeks x NEP($4993) x price weight (0.1118) • Assuming home dialysis costs 33% less than in-centre dialysis, and is a daily treatment, equivalent price weight is .0307 = ($87,082 x 64%)/(7 x 52)/$4993

14. Rebasing methodology – worked example • In Victoria there are around 430 patients on home based peritoneal dialysis. • At current NWAU value of 0.1118 this will generate around 17,500 NWAU or $87m • If weight was reset to 0.0307 then only around 4,800 NWAU worth $284m would be generated. • In this example, 12,700 NWAU, or $63m has disappeared if rebasing does not occur! Outlier Cost Weight Calculation Methodology

15. Private Patent Adjustment Methodology

16. Private patient adjustment • What is it? • As defined in the National Health Reform Agreement, it is an adjustment to take into account patient charges for private patients including: • prostheses; and • accommodation and nursing related components/charge equivalent to the private health insurance default bed day rate (or other equivalent payment). • Why is it important? • As hospitals receive additional revenues in respect of private patients, it is appropriate that adjustments are made to take this into account to avoid windfall gains.

17. Private patient adjustment • IHPA Methodology • Principle: Maintain current incentives to treat private patients. • Methodology: DRG-specific cost weight adjustments using revenue estimates derived from other data sources (enhanced methodology in 2013-14 NEP). • Victorian Methodology • Principle: There is public interest for public hospitals to treat private patients. This is codified in the National Healthcare Agreement. • As private health insurance is publicly subsidised and given not all services are provided in the private sector, and not all privately insured patients have access to private hospitals. • Methodology: Uniform price discount of 24 per cent across all DRGs.

18. Private patient adjustment – worked example • abc Analysis from a Health Service in Victoria using actual patient revenue

19. Analysis from a Health Service in Victoria using actual patient revenue

20. Private patient adjustment approach in Victoria • abc Analysis from a Health Service in Victoria using actual patient revenue

21. Private patient adjustment approach taken by IHPA • abc • Removes incentive to seek out private patient election Analysis from a Health Service in Victoria using actual patient revenue

22. Conclusion • Choice of approaches used in formulating an ABF model can have an impact on the incentives and stability of the model, intentional or not. • Sound clinical practice is a dominant business driver for hospitals, but… • As ABF becomes more ingrained in the way hospitals conduct their business, and given increasing scarcity of funding, pricing signals will take on an increased significance in decision-making. • It is therefore important that these pricing signals are carefully designed, and that technical funding model decisions appropriately take into account their policy implications. • The line between ‘policy’ and ‘technical’ is not fixed.