Funding health

England is embarking on a bold undertaking to introduce a casemix funding system more broadly and quickly than most other countries have so far attempted. While there will inevitably be some bumps along the way, the track record in Australia does bear out the view that a casemix funding system is indeed the best way forward. Sharon Cannaby, Jean Drouin and Dean Westcott report

The world’s health systems are under pressure: patient expectations are rising; demand for new and expensive drugs and treatments is increasing; people are living longer; disease patterns are changing; and there are issues around workforce recruitment and retention.

All this means that health costs are escalating and that health service managers need to find new and better ways of managing costs. For England, this means the roll-out of Payment by Results, a tariff based casemix funding system which, when fully operational, will help health service managers to match costs to activity, plan future service delivery and undertake fact based discussions with clinicians.

These benefits, however, are yet to be realised; at present the skills of finance staff are still being tested by the challenge of implementing Payment by Results. ACCA and the HFMA, therefore, decided to run a study tour to the state of Victoria, Australia, where a diagnosis related group (DRG) based casemix funding system has been in operation for over 10 years. We knew that many of the daunting problems that are surfacing in England with the introduction of Payment by Results - system affordability, demand management and quality of costing and coding of information - also emerged in Victoria during the first few years following implementation. The aim of the study tour was to identify:

• the lessons learned from the introduction of casemix in Victoria, Australia, and
• whether these lessons were applicable to England.

The Victorian experience

Like the UK, Australia has divergent approaches to healthcare. The Federal Government is the major source of funding and directly manages and controls the policy around primary care. It retains an over-arching responsibility for secondary care through healthcare agreements with each of the states.

The agreements are based on individuals being able to access the public hospital system free of charge on a basis of clinical need rather than ability to pay. In addition to their share of Commonwealth funding, states will supplement this with their own revenues and are responsible for the distribution of funding to hospital providers.

Within those agreements, there is significant flexibility for each state to manage hospital care in different ways, and it is this ability to do things differently that has enabled the state of Victoria to introduce a hospital funding mechanism based upon tariffs.

Introduced alongside a 10% budget cut, the new casemix funding system had a rocky start in Victoria. Although primarily a funding tool, casemix was initially viewed as a budget-cutting instrument and was confused with the policy of fiscal restraint. There were numerous roll-out problems in the first few years, including overperformance by hospitals, several revisions to cost weights and activity coding problems. However, with a mix of experimentation and resolve from the state government and users, these and other initial problems were successfully addressed.

The Victorian hospital funding system uses a currency - known as weighted inlier equivalent separation (WIES) - by which hospitals are funded for each in-patient episode of care (both elective and non-elective) under health service agreements.

This is effectively a weighted episode of care. The weightings are calculated from the number of separations (episodes) and the costs of a particular diagnosis-related group across the whole system. For example, if the standard rate is A$3,000/WIES and a hip replacement has a weight of 5.0, the provider is paid A$15,000. Adjustments are then made for low and high outliers. If length of stay is lower than the pre-defined boundary, the hospital receives less and, if length of stay is higher than the pre-defined boundary, the hospital receives more.

This is the equivalent of using reference cost data in the UK to set relative value units. In the UK this is directly translated into the tariff. In Victoria, however, the tariff has a significant role in cost containment and takes into account both the number of WIES that the state requires and the overall budget available. Each hospital agrees a yearly target level of WIES with the Department of Human Services, which serves as the commissioner. If the hospital overperforms on the agreed WIES target, the rate/WIES declines based on a sliding scale until it reaches 2%, at which point no further payment is due. Equally, if the hospital underachieves against the WIES target, then a sliding scale of recall prices applies.

This system of capping expenditure gives hospitals the incentive to accurately project their forward workload and to manage it accordingly, and means that the funding system in Victoria is not the potentially open-ended cost commitment for commissioners that many would argue Payment by Results in England could represent and that was viewed by the Victorians as potentially high risk.

Not surprisingly, the impact of casemix funding has been felt across the Victorian health system.

Perhaps one of the more striking features of the Victorian system, though, is transparency. Hospital executives, including clinical leads, now have a detailed grasp of their cost base. Each hospital captures costs at the individual patient level, which enables:

• accurate costing by activity
• an understanding of the profitability of individual services
• a sharp focus on financial performance, and
• objective benchmarking of performance.

Lessons learned

A consistent set of lessons learned emerged during our visit:

• Casemix is a tool, not a policy. It is important to be clear about policy objectives. Within the context of policy, casemix systems help achieve transparency, equity, identification of waste, efficient use of scarce resources and accountability.
• Patient-level cost data is critical. Hospitals need this level of data to be able to accurately match cost to activity. Only then can effective benchmarking occur, waste be identified and lasting improvements be made. Victorian hospitals began collecting patient level data in the late 1980s and now have a rich historical data set from which to track performance.
• Users must have faith in the system. Victoria has formal channels of review, which allow providers to question everything from the classification of a DRG to their annual WIES allocation. The Department of Human Services makes specific efforts to engage clinicians and also explicitly recognises that it has to be willing to listen to the facts and change.
• Deliberate miscoding must not be tolerated. Getting coding right requires zero tolerance for deliberate miscoding and a gradual approach to reducing mistakes. Upon the introduction of casemix funding in Victoria, “gaming” within the system was evident with a miscoding rate of typically 8%. Victoria initially relied heavily on independent auditors to help verify that coding was done correctly. As coding improved, the Government lowered its tolerance for mistakes and began to rely less on auditors and more on software programs to help spot suspicious coding patterns.
• Casemix is not a science. Victoria has found it necessary to introduce an outlier policy to take into account legitimate variations. Where variations are systematic, such as with children’s hospitals, Victoria favours direct subsidies as opposed to further refinement or splitting of the tariff. In this way, it is possible to maintain the incentive to improve productivity of care for inliers while recognising the differential burden imposed by outliers.
• In-year changes must be avoided. Resist the temptation to make in-year changes. Hospitals need certainty in order to plan, to staff accordingly, and to maintain necessary services. In-year changes negatively impact system credibility.

Implications for the UK

Although the Victorian casemix funding system is a work in progress, all parties expressed the view that it was better than previous funding models and had no wish to return to a “block” payment system. There is talk of developing separate elective and non-elective tariffs, for example, and many would like to see more explicit benchmarking of efficiency and outcomes. Nonetheless, it is clear the UK can learn a great deal from the Victorian experience. In England, this suggests focusing on:

• developing a robust patient level database
• wider consultation and involvement of clinicians
• making no significant in-year changes to tariff
• investment in coding skills, and
• “zero” tolerance approach to miscoding and gaming within the system.

Sharon Cannaby is ACCA UK’s head of health sector policy. Jean Drouin is a consultant with McKinsey & Company. Dean Westcott is an ACCA Council member, chair of the ACCA Health Panel and director of finance at Harlow Primary Care Trust.