- Activity based funding is the standard method for funding public hospitals
- It is not a good method for determining whether to purchase or use devices
State and Territory public hospital systems in Australia are largely funded through activity-based funding (ABF).
The Independent Hospital Pricing Authority (IHPA) takes data from public hospital services and procedures and uses this to determine a National Efficient Price (NEP) or National Efficient Cost (NEC) for each type of activity provided by the public system to treat patients.
These prices and costs are then applied to the total anticipated services of the public system to determine how much funding they receive. The NEC is used to calculate block payments for smaller or unique services such as rural or regional hospitals.
Over 80% of funding for public hospitals is through ABF. There is a close but indirect relationship between ACF and the purchasing of medical devices.
In the first place the cost of devices is incorporated into the costing of specific hospital activities. Therefore, if a pacemaker is implanted into a patient, the cost of the pacemaker itself will be captured in prices that IHPA gathers to set the NEP or NEC.
Secondly, state or regional hospital procurement may use the NEC or NEP to help determine purchasing arrangements or use. A more expensive item may be limited in its use if the hospital strictly applies ABF.
However, it is important to realise that ABF is a good methodology for funding hospitals, but it is not granular enough to determine individual product prices or when devices should be used.
It is a misuse of ABF to limit or block access purely on the basis of a mismatch between the NEC for a procedure and the price of the device itself. ABF is designed to cover the average case, which will include cheaper procedures some of the time, and more expensive procedures at other times.
Good funding models for state hospitals will take into account this variability and individual patient need. They will also take into account clinician input when determining device purchasing and use. The temptation is to simply reduce cost, without regard to value.