Page contents: Brief history | Health funding policy objectives | Broad steps in allocating State funding to hospitals | What is Casemix funding? | Basic requirements for Casemix funding | Basic casemix funding model | Victorian casemix model | WIES | DRG boundary policy | Sameday and overnight WIES | Co-payment WIES | Calculating WIES | Annual WIES formulation | Casemix funding hospitals | WIES Targets | WIES recall policy | WIES prices | Grant funding

Brief history

Prior to July 1, 1993 Victorian hospitals were funded by historic budgets. Historic block funding pays hospitals for their intention to treat patients (i.e. availability) rather than the actual work performed. This funding approach makes it difficult to encourage accountability and to increase technical efficiency within health services.

Circa 1986, Victoria began work towards implementing a casemix funding model for inpatients (e.g. electronic reporting of patient episodes to the Department of Health (DH), costing inpatient episodes, etc.).

From July 1992, casemix funding shadowed existing funding arrangements for selected hospitals for one year.

From July 1993, a basic casemix funding model was introduced to fund acute care provided by Victorian public hospitals. Casemix has since been refined and expanded to fund sub-acute (rehabilitation, since 1999) and outpatient activity (since 1997) in public hospitals.

Health funding policy objectives

Equity

• Allocate services in accordance with need for services

Allocative Efficiency

• Promote the delivery of appropriate care at the appropriate time and setting to maximise quality of health care

Technical Efficiency

• Deliver highest quality and quantity of care for the resources used

Consumer choice and competition

• Provide patient choice
• Support competition between service providers

Broad steps in allocating State funding to hospitals

• Department of Health (DH) & Department of Treasury and Finance (DTF) negotiate:
  • Fixed amount of money to fund:
    • Agreed volume of activity
    • Agreed price for agreed output
• DH allocates funds to broad areas:
  • Acute admitted patients
  • Non-acute admitted patients
  • Emergency
  • Non-admitted patients
  • Incentive schemes
  • Specified grants
• DH negotiates with each hospital nominal budgets consisting of:
  • Variable funding
    • Agreed volume of patients payed at agreed prices
    • Measured and allocated via casemix funding models
  • Fixed grant funding

What is Casemix funding?

A method of allocating funds (Output funding model)

• A well developed activity based funding model
  • Funding for what hospitals do
  • Pay for patients treated (type & number)
  • Pay on the basis of relative cost of patients treated
  • Reward improved performance (quantity, efficiency)
• Funding to purchase an agreed volume of work at an agreed price
  • Victoria budgets a fixed pool of money for inpatient care
  • This fixed budget is used to purchase an agreed service at an agreed price

Funding that provides equity, transparency and accountability

• Casemix distributes a fixed State budget based on the type and number of patients treated and the average cost of treating patients as reported by hospitals
• Financial risk is shared between purchaser (Department of Health) and service provider (public hospital)

A platform for driving allocative and technical efficiency

• Casemix funding is based on the average cost of treating patients
• Casemix provides incentive to treat patients for the fewest inputs (e.g. a hospital is able to manage bed days, doctors tests, etc. to provide a service at or below average cost)

Other facts about casemix

What Casemix is NOT	What Casemix IS
Casemix is not a health policy in its own right	Casemix is a funding tool within a health policy Casemix allocates funds in a way that promotes Victorias health funding objectives (i.e. equity, technical & allocative efficiency, consumer choice)
Casemix does not determine the level of hospital funding, nor the size of the States health budget	Casemix influences each hospitals fair share of a fixed State budget
Casemix is not about cutting hospital budgets	Casemix is about the fairest possible allocation of available funds to hospitals
Casemix does not fix the budgets of individual clinical units with hospitals	Casemix helps determine hospital budgets, and hospital management allocate resources within organisations
Casemix does not limit the amount hospitals can spend on individual patients	Doctors determine the amount of care needed for individual patients; casemix funds hospitals based upon averages; some patients cost more, others cost less

Basic requirements for Casemix funding

Victorias casemix model is based on the ability to:

1. Classify patients treated (Diagnosis Related Groups (DRGs))
2. Count numbers of patients treated (Administrative health data collections)
3. Cost patients treated (Hospital cost data collections)

1. Classify patients treated: Diagnosis Related Groups (DRGs)
Diagnosis related groups are a method of classifying treated patients that have similar clinical conditions and similar levels of resource use.

• Victoria currently uses Australian Refined DRGs (AR-DRGs)
• AR-DRGs incorporate the
  • ICD-10-AM (International Statistical Classification of Diseases and Related Health Problems Australian Modifications)
  • ACHI (Australian Classification of Health Interventions)
  • ACS (Australian Coding Standards)
• Victoria makes minor modifications to AR-DRGs to suit local funding requirements; the majority of these modifications have been incorporated in subsequent versions of AR-DRGs; past examples include:
  • Splitting ARDRGs
    • AR-DRG D06Z Sinus, mastoid and complex middle ear procedures
    • Split into
    • Vic-DRG D06A Mastoid procedures
      Vic-DRG D06B Other sinus and complex middle ear procedures
  • Modifying DRG grouping rules
    • Episodes involving ECMO or VAD may group to a variety of AR-DRGs
    • Victoria groups all ECMO or VAD to A40Z ECMO W/O Cardiac surgery
  • Creating new DRGs
    • L61Y Admit for peritoneal dialysis; a new Vic-DRG code in recognition of cost differences between peritoneal and haemodialysis

2. Count numbers of patients treated
A condition of funding is that Victorian public hospitals collect and report electronic records for every inpatient treated. DH maintains health data collections that span a range of health care settings, including admitted patients, emergency department presentations, outpatient encounters, and elective surgery waiting lists.

• Inpatient activity is reported to the VAED (Victorian Admitted Episodes Dataset)
  • All admitted patients, all episodes of care
  • All public hospitals (~145; funding depends upon timely data submissions)
  • Most private hospitals & day procedure centres (~145; regulatory requirements to submit)
  • Contains ~380 data items on each inpatient separation, including
    • Clinical details (diagnoses, procedures)
    • Admission and separation details
    • Patient demographics
• VAED data quality measures
  • DH provides ongoing information and assistance to hospitals in relation to health data standards and systems
  • Ongoing coding audits to monitor
    • Accuracy of coding
    • Under or over coding
    • Appropriateness of coding
    • Fairness and integrity of funding formulas

3. Cost patients treated
Victorian public hospitals are required to report costs for all state-funded activity, and are expected to maintain activity and costing systems as part of good hospital management practice. DH currently maintains health cost data collections for both admitted and non admitted activity that span a range of health care settings, including admitted acute and rehabilitation care, outpatient encounters, and emergency department presentations.

• Methods and scope of costing patient activity
  • Patient costing (bottom-up costing)
    • Allocates costs directly to individual patient episodes using service volumes (e.g. actual tests, minutes in theatre etc.)
    • Minimises assumptions used in cost allocation
    • Achieves improved cost granularity within a DRG
  • Cost modeling (top-down costing)
    • Allocates costs to DRGs using prescribed formulas
    • All patient episodes in a DRG are equivalent
    • Achieves cost granularity between DRGs
  • All hospitals model to some extent, but hospitals differ widely in the extent to which they model
  • Allocated costs must reconcile with the general ledger
    • Operation expenditure costs (direct and indirect) are allocated
    • Capital and depreciation costs are excluded (not allocated)
  • Only public hospitals report costs to DH
    • All metropolitan hospitals
    • Most large and some smaller rural hospitals
  • Data items collected
    • Total episode cost
    • Category costs (13): Nurses, doctors, surgeons, theatre, pharmacy, imaging, ICU, prostheses, etc.
    • Direct and indirect costs
    • Variables collected to enable linkage with the VAED
• Cost data quality measures
  • DH works closely with stakeholders to ensure accuracy and timeliness of reported cost data
  • A formal review process is performed of total and category costs by DRG, financial year, and hospital
    • Edit checks are applied and feedback given to hospitals
    • Modifications and exclusions are applied where indicated; resubmissions are allowed if needed and advised

Basic casemix funding model

From 1993-94 a basic casemix model was used in Victoria to fund acute care admissions.

Key features of a basic model

• Each DRG has a single cost weight that is applied to each patient episode grouped to the DRG (i.e. cost weighted episode)
• Every eligible patient episode is funded at a flat rate based upon the DRG cost weight and price paid per cost weight
  Episode Funding = DRG Cost Weight * Price
• Hospital funding also depends on the number of patients treated (e.g. more patients treated, the more funding (up to an agreed limit))

Basic cost weight formulation

• Basic cost weight formula:

• For example, DRG A01Z Liver Transplant has a cost weight of 27.3869
  • i.e. A liver transplant patient is on average 27.3869 times more expensive the average cost of all patients
• Cost weights reflect the costs incurred by hospitals in treating patients

Limitations of a basic casemix model

• One cost weight is used to fund each and every patient in a DRG
• Not every patient in a DRG needs exactly the same level of care
• A flat rate of funding does not adequately track cost variation with time and across levels of severity within a DRG
  • Some groups of patients tend to be sicker than others, even within the same DRG
  • Some hospitals treat more complex patients because of their role
  • This approach creates financial risk to providers and purchasers of health care

Victorian casemix model

Since the introduction of casemix funding in 1993-94, Victoria has continued to make significant refinements to the casemix model to promote funding policy objectives, to better moderate financial risk between hospitals and DH, to address funding inequities and gaming issues not apparent when casemix was first introduced, and to more closely align funding with changes in clinical practice and the adoption of new technologies.

WIES (Weighted Inlier Equivalent Separation)

• Since 1996-97, the basic casemix model has been refined to include different cost weights for funding different types of stay, thereby moderating financial risk
  • Extended hospital stay (high outlier cost weight)
  • Typical hospital stay (inlier cost weight)
  • Short hospital stay (low outlier cost weight)
  • Sameday & overnight stay (Sameday & overnight cost weights)
• WIES represents a cost weighted (W, weight) separation, where the DRG cost weight is adjusted for time spent in hospital (IES, inlier equivalent separation)
• Victoria currently uses 6 different cost weights to fund a patient in a DRG
  • Multiday inlier cost weight
  • Multiday high outlier cost weight
  • Multiday high outlier cost weight for hospital-in-the-home days
  • Mutliday low outlier cost weight
  • Sameday cost weight
  • Overnight cost weight
• A patients DRG and stay type determines which cost weights are used for funding
• Cost weights are based upon the recurrent costs of treating patients as reported by hospitals to DH

DRG boundary policy

• Victorian DRG boundary policy is about more closely aligning funding with the actual costs of treating patients, thereby moderating financial risk
• A boundary policy categorises a patients length of stay (LOS) for each DRG as
  • Inlier (LOS equal to or within the DRG stay boundaries)
  • Low outlier (LOS less than the DRG low stay boundary)
  • High outlier (LOS more than the DRG high stay boundary)
• DRG boundary policy is used to adjust DRG cost weights (W) for time in hospital (IES, Inlier Equivalent Separation); DRG cost weights (W) are:
  • Increased at a per diem rate for patients with extended stay (IES > 1)
  • Decreased at a per diem rate for short-stay patients (IES < 1)
  • Not adjusted for patients with a typical stay (IES = 1)
• Victoria uses a multiplicative boundary policy
  • For most DRGs (1/3, 3):
    • Low boundary = 1/3 x Average LOS
    • High boundary = 3 x Average LOS
    • A (1/3, 3) boundary setting is a policy decision (not a statistical approach) that aims to balance financial incentives to drive inpatient throughput with financial disincentives to keep patients in hospital
  • For DRGs with very expensive, long stay patients (2/3, 3/2):
    • Low boundary = 2/3 x Average LOS
    • High boundary = 3/2 x Average LOS
    • A (2/3, 3/2) boundary setting is a policy decision to reduce financial risk to hospitals by placing a greater reliance on per diem funding and more closely aligning funding with cost
  • In Victoria, multiplicative boundaries have been shown to be more stable (e.g. compared to inter-quartile ranges)

Sameday and overnight WIES

The basic casemix model introduced in 1993-94 over-payed sameday and overnight cases, and provided inappropriate funding incentives that shifted patient care from outpatient to inpatient care settings. To address this allocative inefficiency, separate cost weights are calculated for Sameday (SD) and Overnight (ON) cases.

• For most DRGs:
  • SD (ON) Weight = Inlier weight * Discount factor
    (i.e. SD (ON) weight is derived from the Inlier weight)
• For a minority of DRGs where SD (ON) costs are significantly different from multiday costs:
  • SD (ON) Weight = Average cost of SD (ON) cases
    (i.e. SD (ON) weights are calculated from the actual cost of SD (ON) cases)

Co-payment WIES

Since 1996-97, Victoria included additional cost weight co-payments to moderate financial risk for hospitals that provide special types of care. These copayments are in addition to base WIES allocation determined by the patients DRG and length of stay.

• Patients in approved intensive care units (ICUs) receive WIES co-payments based on the number of continuous hours of mechanical ventilation received (DRG thresholds of 6 or 96 hours apply)
  • A per episode co-payment of 0.6980 WIES
  • Per diem co-payment of 0.7729 WIES
• Patients undergoing an endoluminal repair of an aortic Aneurysm (AAA stents copayment) receive a 3.1421 WIES co-payment
• Patients receiving an atrial septal defect closure device (ASD copayment) attract a 2.4713 WIES co-payment
• Thalaessemia patients receive 0.2648 WIES co-payment
• Aboriginal and Torres Strait Islander patients receive an additional 30% WIES bonus co-payment on top of their base WIES

Calculating WIES

Total WIES allocated to a patient consists of:

• Base WIES (dependant on DRG & LOS)

PLUS

• WIES co-payment for special types of patients

Total WIES can be determined using:

• Cost weight table published in the annual Policy and Funding Guidelines
• WIES calculator EXCEL spreadsheet

Annual WIES formulation

Updating cost weights annually recognises that clinical practice and costs can change rapidly. Moreover, implementing annual updates to the formula makes change more manageable over time, whereas holding policy constant results in pressure to make much larger, more dramatic one-off adjustments.

Cost weights for all Victorian casemix models are reformulated every year to ensure funding policy captures:

• Latest cost data
• A wider range of hospital activity (more hospitals & services)
• Changes in clinical practice
• New technologies
• New policy initiatives
• Update existing policies

DH works closely with hospital representatives to ensure that:

• Cost data supplied to DH is accurate as possible
• DH does not inadvertently disadvantage groups of patients or hospitals when calculating the weights

All relevant cost information and modelling used to construct cost weights is made available for review and comment by DH and by hospital representatives appointed to the Victorian Advisory Committee on Casemix Data Integrity (VACCDI)

Casemix funding hospitals

Variable funding allocated to hospitals is dependant on:

• DRG cost weights (WIES)
• WIES target allocation
• Price payed per WIES

All three of these funding components combine to determine a hospitals level of variable funding.

For the forthcoming financial year, DH negotiates with each health service a nominal budget consisting of:

• Inpatient activity targets (WIES, variable funding)
• Specified grants

  that is,
  Budget = Grants + WIES Target * Price

At the end of a financial year:
Actual Funding = Budget - Recall adjustments

where

• Recall Adjustments
  • Failure to reach target
  • Penalties
• WIES funding represents about 60% of a hospitals budget
  

DH also determines with each health service:

• A Statement of Priorities (SoP) that sets out the core policy priorities of the government,
• Expected levels of achievement of performance benchmarks and Key Performance Indicators (KPI)

WIES Targets

• DH agrees to fund a set number of WIES (Target) for each health service.
• WIES targets are adjusted annually to account for growth in demand, government priorities (Statement of Priorities), annual WIES formulation that accounts for latest measures of hospital costs, etc.
• Variable payment for a Health Service = WIES Target * WIES price
• Hospitals largely decide which DRGs to WIES fund
• WIES target payments are made by regular instalments throughout a financial year

WIES recall policy

In recognition of the difficulty in achieving absolute precision in demand management:

• DH agrees to fund for each hospital an agreed or target amount of WIES by instalments throughout the year
• Below target: A hospital performs less work than the agreed target amount as measured by WIES
  • For WIES not performed by the financial year end, the DH takes back an amount of funding (recall adjustment policy)
• Above target: A hospital performs more work than the agreed target amount as measured by WIES
  • WIES performed in excess of target is funded at a marginal or zero rate

WIES prices

To further moderate the financial risk associated with funding acute health care, the DH utilises different WIES prices for different types of hospitals and different types of patients.

WIES price varies by hospital type to acknowledge:

• Different economies of scale
• Different levels of specialisation
• Different levels of remoteness

WIES price also varies by patient type to acknowledge different funding mechanisms within the health sector; for example:

• Public patient: funded by State and Commonwealth Governments
• Private patient: funded by private health insurers, Commonwealth Government and out-of-pocket expenses
• DVA (Department of Veterans Affairs) patient: funded by Commonwealth Government
• TAC (Transport Accident Commission) patient: funded by non-government organisation
• VWC (Victorian Work Cover Authority) patient: funded by non-government organisation

WIES prices are set to cover about 70-80% of the average cost of treating a patient.

WIES prices are not set to cover 100% of cost because

• Victoria does not rely 100% on casemix funding
• Victoria complements casemix funding with other sources of funding (e.g. specified grants)

WIES prices must increase annually to account for increases in average costs of treating patients.

Grant funding

Victoria also uses block funding to complement casemix funding of hospital activity. Types of block funding used to support hospital activities include:

• Teaching and Research
• New technology
• Patient complexity
• Availability of services
• Incentive schemes
• Compensation grants