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 New Pricing Recommendations for Services at Australian Public Hospitals.

Werribee hospital at night

The Independent Hospital Pricing Authority (IHPA) today released the National Efficient Price and National Efficient Cost Determinations for 2022–23.

The Determinations play a crucial role in the calculation of the Commonwealth funding contribution to Australian public hospital services, and offer a benchmark for the efficient cost of providing those services as outlined in the National Health Reform Agreement.

The Determinations rely on activity and cost data from the 2019–20 financial year.

Accounting for the impact of COVID-19

Coronavirus disease 2019 (COVID-19) has resulted in significant and potentially long lasting changes to models of care and service delivery in Australian public hospitals.

IHPA notes the importance of ensuring that the impact of COVID-19 is adequately accounted for in the national pricing model, however, acknowledges that it is not possible to definitively account for the ongoing impact that COVID-19 may have on hospital service delivery and costs in 2022–23.

The Chair of the Pricing Authority, Mr David Tune AO PSM, said ‘Throughout the development of this Determination, transparency has remained central in our approach to ensuring IHPA’s work continues to support the delivery of safe and efficient high-quality care in Australia’s public hospital system’.

IHPA will continue to prioritise assessing the impacts of COVID-19 to ensure public hospital costs, activity and evolving models of care are accurately accounted for in the national pricing model as more data becomes available.

Better pricing of mental health care

For 2022–23, IHPA will price admitted mental health care using the Australian Mental Health Care Classification (AMHCC) Version 1.0, which represents a more clinically meaningful classification system for the pricing of admitted mental health care services and will result in more accurate pricing of these services.

With the introduction of the AMHCC for pricing admitted mental health care, the national pricing model will include pricing adjustments to capture and account for legitimate and unavoidable variations in the costs of delivering those services.

National Efficient Price Determination

As part of the activity based funding model, the efficient price of a public hospital service is calculated by multiplying the National Weighted Activity Unit (NWAU) allocated to that service by the NEP for that financial year. For example:

  • A tonsillectomy has a weight of 0.7400 NWAU which equates to $4,290.
  • A coronary bypass (minor complexity) has a weight of 5.3925 NWAU which equates to $ 31,260.
  • A hip replacement (minor complexity) has a weight 3.4152 NWAU which equates to $19,798.

National Efficient Cost Determination

Public hospitals that are not suitable for funding based on activity alone are funded through the national efficient cost (NEC) based on a on a fixed-plus-variable structure.

For 2022–23, the NEC fixed cost is $2.265 million and the variable cost is $5,850 per NWAU. An additional loading of 44.1 per cent is applied for very remote hospitals.

Approximately 480 public hospitals nationwide receive funding based on their activity levels whereby they get paid for the number and mix of patients they treat. Funding based on a block grant basis applies to around 370 small rural hospitals.

Open and consultative approach to setting the price

IHPA consulted extensively with all Australian governments, stakeholder groups and the wider public to ensure its decisions align with national health objectives.

Prior to releasing the NEP and NEC, IHPA published the Pricing Framework for Australian Public Hospital Services 2022–23, which includes the major policy decisions that inform the NEP and NEC Determinations. 

About Independent Hospital Pricing Authority (IHPA)

IHPA is an independent government agency established as part of the National Health Reform Agreement that works in partnership with all Australian governments to improve health outcomes for all Australians.

IHPA is charged with implementing national activity based funding by determining the national efficient price and national efficient cost for public hospital services each year. Activity based funding improves transparency and strengthens incentives for efficiency in the delivery of public hospital services.

The Federal Budget 2021–22 was delivered on 11 May 2021 and contains two significant measures that impact IHPA’s current role.

The first measure, in response to the Royal Commission into Aged Care Quality and Safety, is the expansion of IHPA, which will be renamed the Independent Health and Aged Care Pricing Authority.

Under this measure, IHPA will inform Australian Government decisions on annual funding increases in residential aged care from 1 July 2023. IHPA will also have a role in home aged care pricing advice from 1 July 2023.

The second measure involves working with the Department of Health and key stakeholders to support reform to the Prostheses List to reduce the cost of medical devices used in the private health sector and streamline access to new medical devices.