Department of Health

National hospital funding reform

Key messages

  • Funding reform of public hospital services has involved the adoption of a nationally consistent approach.
  • The Independent Hospital Pricing Authority (IHPA) provides a benchmark for the efficient cost of hospital services.
  • Commonwealth and state funds are pooled and provided to health services.

Please note: This website will be updated as Victoria transitions to the National Funding Model from 1 July 2021 as a basis to determine hospital funding for Victorian public health services. The information on this page is for historical reference only.

A key component of the National Health Reform Agreement was the establishment of the Independent Hospital Pricing Authority (IHPA) to administer funding of health services on an activity basis, with block funding provided where appropriate.

The agreement also established a National Health Funding Pool to make payments to hospitals, and a National Health Performance Authority to monitor and report on hospital performance.

Independent Hospital Pricing Authority

The IHPA is a Commonwealth statutory authority established to oversee the phased implementation of a nationally consistent approach to ABF. The IHPA calculates and determine a National Efficient Price (NEP) and price weights for public hospital services. It also determines a National Efficient Cost (NEC) for block funding Small Rural Health Services (SRHS).

National Efficient Price

The National Efficient Price (NEP) is used to calculate payments for public hospital services that are funded on an activity basis.

The NEP has two key purposes:

  • It comprises a major determinant of the level of Commonwealth government funding on public hospital services.
  • It provides a benchmark for the efficient cost of providing public hospital services.

The IHPA determines the NEP for a National Weighted Activity Unit (NWAU) and has responsibility for setting the NEP based on the National Hospital Cost Data Collection (NHCDC).

National Efficient Cost

The national model recognises that Activity Based Funding (ABF) may not always be practicable. The National Efficient Cost (NEC) is used to calculate Commonwealth Government payments for services that are funded on a block grant basis. Under current arrangements, non-admitted mental health, SRHS, and teaching, training and research outputs continue to be funded nationally through block grants.

The National Health Funding Pool

Both Commonwealth and state activity funding are provided to health services through the National Health Funding Pool.

Features of the national pool

  • Pool accounts exist for each state and territory.
  • Responsibility for payments and publicly reporting on payments sits with an administrator who is an independent statutory office holder.
  • The National Health Funding Body (NHFB) supports the role of the administrator.
  • The Victorian Funding Pool Account and the Victorian administrator of the pool is established in Victorian legislation.
  • A service agreement between each health service and the state government determines the volume and mix of services provided.
  • States and territories, as part of their system management role, advise the administrator on payments to be made out of the pool in accordance with their service agreements with health services.
  • Regular bi-monthly payments are directed from the pool to Victorian health services.
  • Block funding is provided through discrete state managed funds for Small Rural Health Services, teaching, training and research, as well as non-admitted mental health services.

National Health Funding Body

The NHFB assists the administrator in performing his or her functions under Commonwealth, state and territory legislation. The NHFB is established as an independent statutory authority under the National Health Reform Act 2011.

Members of the NHFB, including the CEO of the funding body, are not subject to direction from any Commonwealth minister, and undertake duties as directed by the administrator.

National Health Performance Authority

The National Health Performance Authority (NHPA) monitors and reports on the performance of each health service, as well as all private hospitals and Medicare Locals against national standards and performance indicators. The functions of the authority include:

  • identifying high-performing entities to facilitate sharing of innovative and effective practices
  • identifying poorly performing entities to assist with performance management activities.

The NHPA reports on the performance of individual hospitals and health services via the MyHospitals website.

National Funding Flows

The payment flows from the national pool are based on NWAU targets. In Victoria, the NWAU targets are derived from health service budgets and activity targets that are set using the existing Victorian casemix funding system.

The Commonwealth’s block funding component for SRHS, non-admitted mental health services, and teaching, training and research flows from the funding pool to via the state-managed fund.

National Future Funding

From 1 July 2017, Commonwealth funding will no longer be linked to the level of services delivered by public hospitals as provided under the NHRA.

Until then, the IHPA Pricing Framework, NEP and NEC determination provides the mechanism by which the Commonwealth’s contribution to growth funding for public hospital services will be calculated for 2015-16 and 2016-17.

Reviewed 24 May 2021


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