Lost about health-care reform? Here’s where we got to in 2011

The unfurling National Health Reform Agreement should start to deliver changes to Australia’s health-care system in 2012. AAP

Health-care reform was one of the policy areas where much had been promised but little delivered by the start of 2011. Prime Minister Julia Gillard promised that 2011 would be a year of implementation and sure enough, 2012 will start with a different picture.

A new National Health Reform Agreement was reached by the Commonwealth and all the state and territory governments earlier in the year, whereas Western Australia had refused to sign the 2010 National Health and Hospitals Network Agreement.

Agencies responsible for the reforms have been established and started functioning. The Australian National Preventive Health Agency, for instance, commenced operations at the beginning of 2011 and the legislation establishing the National Health Performance Authority and the Independent Hospital Pricing Authority have been passed.

What’s more, chairs have been appointed and further board and operational appointments are underway, states are establishing Local Hospital Networks, and the old Divisions of General Practice are turning into Medicare Locals.

Local control

The National Health Reform Agreement has continued the theme of a national system with local control, which has been part of the discussions for the two years that we’ve been discussing and implementing health-care reform. However, it has delivered a far greater degree of control and system management to state and territory governments.

The states now keep their full GST revenue, but in return the Commonwealth has reduced its share of public hospital funding from 60% of efficient costs (of procedures), to 50% of the growth in the cost of providing hospital services. So the states have kept far more of the financial contribution and risk.

The implementation of local control is through two forms of independent legal entities: local hospital networks (LHNs) have primary responsibility for managing the provision of hospital services for their local population, while Medicare Locals have the general aim of improving access and better integrating general practice and primary care.

The intention was for the Networks and Locals to effectively be paired geographically. Logistically, this pairing is essential to facilitate the necessary links between primary and secondary care, although this has not happened uniformly and the extent to which it will mitigate against effective coordination remains to be seen.

Winds of change

The often overlooked highlight of the Agreement is the replacement of the political grandstanding and brinkmanship of five-year funding agreements between the Commonwealth and the states, with an activity-based Commonwealth contribution. Both the states’ and Commonwealth contributions to hospital funding will be paid to local hospital networks through a National Health Funding Pool, with an administrator overseeing the funding of the public hospital system.

Previously, Commonwealth funds flowed to state treasuries so the new arrangements offer greater transparency and, potentially, more financial certainty for the hospital networks. The Commonwealth’s contribution will be based on the efficient price per service, for as many services as are actually provided.

But it’s not clear whether the states will be bound to use the national efficient price for their funding contributions. As managers of the public hospital system, states will negotiate service agreements with their Local Health Network.

Setting efficient prices

The efficient price used by the Commonwealth to pay for its contribution will be determined by the Independent Hospital Pricing Authority. The stated aim of the efficient price is not to minimize costs, but to reflect “an appropriate balance between reasonable access, clinical safety, efficiency and fiscal considerations”. The Agency is also charged with establishing the criteria by which small rural and remote hospitals will receive block funding.

The pricing function presents a major challenge in terms of data and methods of analysis. Costing a complex set of services, such as hospital procedures, involves distributing a high proportion of joint costs to individual product lines, so there are many ways of determining actual costs.

The National Health Performance Authority (NHPA) will generate hospital performance reports and healthy communities reports on primary health-care performance. These will be used to monitor performance of both local hospital networks and Medicare Locals.

The NHPA will also report on the extent to which local hospital networks meet emergency department and elective surgery waiting time targets, and provide reward funding to networks that meet them.

Queensland premier Anna Bligh, prime minister Kevin Rudd, NSW premier Kristina Keneally and Western Australia premier Colin Barnett during a press conference in Canberra, Tuesday, April 20, 2010. WA was the only state not to sign up to the federal government’s health reform proposals. AAP

Incentive structure

The reforms provide incentives for hospitals to ensure the average cost per case doesn’t exceed the funding they receive for it and to minimise the cost and level of hospital inputs. But these same incentives can also lead to shifting costs to other providers – through earlier discharge and encouraging greater demand for community services, for instance.

This reinforces the need for effective linkages between the local hospital networks and Medicare Locals as the twin assessment of hospital and primary health-care performance is important. But it’s also vital that outcome data are collected so that the NHPA can monitor the extent to which outcomes might be being traded for timelines and to hand out rewards.

The issue of rewards is a very interesting one. Better performing hospitals will generate a greater surplus (when costs fall below the efficient price), so should they also get more incentive payments that reward performance? Such payments could lead to the better getting better and gap between good and bad becoming bigger.

A delicate balance

Reward distribution also highlights the importance of appropriate risk adjustment in setting the efficient price so hospitals aren’t penalised for factors that increase costs but are outside their control. Although the degree to which risk adjustment is consistent with a uniform national approach remains open for debate.

What’s more, it raises the issue of the autonomy of LHNs in appointing managers to work across the Network, and within specific hospitals. The potential dangers of too much autonomy are wage inflation and “fat cat” media headlines. Better performing local hospital networks will have greater surpluses and so be able to attract the best quality personnel.

To counter these dangers, discretionary state funding may be used as a support mechanism for poorly performing local hospital networks and will presumably be linked to changes in personnel and remedial action plans.

Maybe a centralised process is required to assist the worst performing local hospital networks. The Commonwealth could impose a salary cap, which might incorporate performance-related bonuses – rewards for managers rather than hospitals.

The danger is that the quality of hospital management may be constrained and so the cap would need to carefully estimated and continually updated. The government could also provide a service for identifying good managers and provide them with additional incentives to move to poorly performing LHNs.

The way forward

The effect of the much heralded uncapped budget for Commonwealth contributions to public hospital spending will be interesting to observe, as the states will determine levels of service provision through a system agreements with the LHNs. States can maximise Commonwealth funding by increasing service levels, at the expense of other areas of the health service funding, or indeed government funding.

The implied objective of local hospital networks will be to purchase required services from their constituent public hospitals, and potentially private providers and hospitals outside of their network. This has the potential for a stronger split between purchasers (LHNs) and providers (hospitals) – an area where we can learn significant lessons from the United Kingdom and their internal market. Medicare Locals, with their responsibilities for coordination of care, meeting service gaps and promoting population health, could also potentially be purchasers.

Finally, there’s a commitment to providing public patients with access to all services available to private patients. In combination with waiting list targets, this pledge could have the biggest impact of all on the health-care budget. However, implementation will presumably be at the discretion of the states, through their service agreements with the LHNs.

The new National Health Reform Agreement contains a range of initiatives that have the potential to have a beneficial impact on the Australian health-care system. Unsurprisingly, there are also a number of risks that will need to be carefully monitored and managed in order to avoid potentially significant harms to the system. More than ever, there’s a great need for good research to provide evidence for and to evaluate the progress of the implementation of the reforms.