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Hospitals Efficiency and Administration - Report of Commission of Inquiry, dated 29 December 1980 - Volume 3 - Selected Studies


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The Parliament of the Commonwealth of Australia

EFFICIENCY AND ADMINISTRATION OF HOSPITALS

Royal Commission of Inquiry

Volume 3: Selected Studies

December 1980

Presented by Co mmand 26 February 198 1 Ordered to be printed 12 March 1981

Parliamentary Paper No. 22/1981 ••

COMMISSION of INQUIRY into the EFFICIENCY and ADMINISTRATION of HOSPITALS

VOLUME 3 SELECTED STUDIE S DECEMBER 1980

COMMISSION OF INQUIRY INTO THE

EFFICIENCY AND ADM! N IS TRA TI ON OF HOSPITALS

VOLUME 3

SELECTED STUDIES

DECEMBER 1980

Australian Government PUblishing Service Canbe rra 1981

© Coll1llonwealth of Australia 1981

ISBN for complete set of three volumes 0 642 05940 3 ISBN for this volume 0 642 05938 1

Printed by C. 1. THOMPSON, Commonwealth Govern men t Primer. Ca nberra

CONTENTS

PREFACE

A PRODUCTIVITY IN HOSPITALS

Cruickshank Management Resources Pty. Ltd. Authors: P. G. Davenport, T. J. Chalk and Dr. A. W. Ireland

B ACCOUNTING, REPORTING AND BUDGETING

CHS Consulting Pty. Ltd. and Price Waterhouse Pty.

Authors: M. McHarg and I. Clarke

C ISSUES OF PUBLIC AND PRIVATE IN THE HEALTH DOMAIN

CHS Consulting Pty. Ltd.

Author: M. McHarg

D SURVEY OF A SAMPLE OF RECOGNISED HOSPITALS

Commission of Inquiry into the Efficiency and Administration of Hospitals

PREFACE

To address its Terms of Reference, the Commission had available to it a wide

range of published information. During its Inquiry it also received submissions from interested groups and individuals, held public hearings, made overseas visits and commissioned studies from outside experts and from

its own staff. The full set of submissions and transcripts of the public hearings is available separately from the printed Report.

Three of the studies published in this volume were commissioned from consultants and the views expressed in them are those of the author s , not necessarily those of the Commission. The fourth presents the results of a survey of a sample of recognised hospitals, undertaken by the Commission.

Each of the studies provides information not previously ava ilable in the form now published.

Paper A

PRODUCTIVITY IN HOSPITALS

P.G. Davenport, T.J. Chalk, A.W. Ireland

This paper was prepared by Mr P.G. Davenport, Mr T.J. Chalk, and Dr A.W. Ireland, of Cruickshank Management Resources Pty Ltd, St. Leonards, New South Wales.

Cruickshank Management Resources Pty. Ltd. 504 Pacific Highway, St. Leonards 2065, Australia @ 439 4 711. Cables: Crupar.

COMMISSION OF INQUIRY INTO THE EFFICIENCY

PART I

PART II

AND ADMINISTRATION OF HOSPITALS

PRODUCTIVITY IN HOSPITALS

Hospital Productivity Study

Survey of Hospital Morbidity Data

P.G. Davenport T.J. Chalk Dr. A.W. Ireland

19 1980

Consulting, Industrial Engineering, Ad Hoc Executtves, Executive Selection, Seminars and Training

Part I

1.

2.

3.

4.

5.

6.

INDEX

Page No.

HOSPITAL PRODUCTIVITY STUDY

INTRODUCTION

SUMMARY OF FINDINGS & RECOMMENDATIONS 3

SELECTION OF HOSPITAL AND DIAGNOSES 5

VISITS TO HOSPITALS 6

MORBIDITY DATA ANALYSIS 9

COMMENT UPON CLINICIAN VARIATIONS 14

APPENDICES:

1) Summary of Visits to Hospitals

2) Comparison of Administration Practices

3) Analysis of Patient Length of Stay

4) Analysis of Reasons for Delay

5) Comparison of Bed Utilisation and Average LOS

6) Average Cost per Episode of Treatment 1978/79

7) Average Length of Stay

8) Comparative Bed Utilisation

9) Comparative Bed Utilisation - all clinical categories

9.1) Figure relating to 9

10) Aggregate Mean-score Figure relating to 9

11) Length of Stay for Individual Clinicians

INDEX

PART II SURVEY OF HOSPITAL MORBIDITY DATA

Page No.

1. INTRODUCTION 45

2. METHODOLOGY 46

3. RESULTS 52

4. DISCUSSION OF RESULTS 59

SUMMARY OF TABLES

Table I Selected Clinical Categories

II Selected Patient Samples - Proportions of Total Populations

III Length of Stay Summary (Selected Patients) IV Length of Stay Rankings (Selected Patients)

V Mean L.O.S. Comparison between "Selected Patients" and "Atypical Patients"

VI Potential Bed Savings All Hospitals

VII Comparative Bed Utilisation All Categories - Selected Patients

VIII Acute Myocardial Infarction, Age/Sex Distribution and L.O.S Characteristics in 30 Hospitals 1978

IX Myocardial Infarction L.O.S. Exceeding 18 Days

X Cholecystectomy Patient Age, Surgical Regime and L.O.S. in 30 Hospitals

XI Cholecystectomy L.O.S Exceeding 13 Days

XII Inguinal Herniorrhaphy Age Distribution and Age Specific L.O.S.

XIII Comparative Mean L.O.S. (Hospital Groupings)

APPENDICES

1) Morbidity Summary Ta.ble

PART I HOSPITAL PRODUCTIVITY STUDY

1. INTRODUCTION

Cruickshank Management Resources was asked to conduct a study, the objective of which was:

"To substantiate the hypothesis that productivity in hospitals can be improved significantly by reducing patient stay in hospitals."

For the purpose of this study, productivity in hospitals was defined as treating patients effectively at the lowest cost.

The Study Team was:

Mr. P.G. Davenport MA, MIEE Management Consultant

Mr . T.J. Chalk Grad.Dip.Admin II II

Dr. A.W. Ireland MBBS, DPH, FRACP Medical Consultant

The cost of treating a patient was calculated using the commonly accepted simplification of the number of days stay x the average daily bed cost. This is not very satisfactory, but in the absence of any job

costing systems within hospitals it was difficult to identify the true costs of an episode of treatment.

The assessment of whether patients were treated effectively was made by an analysis of recent patient records for each diagnosis studied. A s ubjective assessment was made of whether early discharge resulted in unnecessary readmission related to the original primary diagnosis.

In Queensland, New South Wales and Victoria, four hospitals were selected f rom each State, one teaching, one distric t, one base and one private hospita l. Four medical and four surgical diagnoses were selected from those which accounted for the bulk of bed days used in hospitals. Morbidity

s tatistics for the eight diagnoses were a nalysed to ob tain average lengths of stay, by doctor where possible. Unfortunately, this had to be for the

year 1977/78 because more recent information was not consistently available .

Each hospital was visited and senior staff were interviewed to try to identify why the p a tient stay was longer o r shorter than average for each diagnosis . Hospital policies , procedures for admissions and discharges, the provision of day only and aftercare facilities were recorded to see if

these influenced the lengths of stay.

The morbidity statistics study was extended by Dr. Ireland to include thirt y ­ six hospitals in six states. This information is submitted as Part II

of the report and substantiates the findings from the smaller sample of h ospitals covered in Part I.

The information was put together to determine the lowest reasonable lengths of stay for each diagnosis and how they were achieved in that particular hospital.

The participating hospitals were most helpful in this study. We would like to record our appreciation because it was only by their willingness to provide information and discuss the factors at short notice, that we were able to complete the study in the limited time available.

2

2. SUMMARY OF FINDINGS AND RECOMMENDATIONS

2. 1 Findings

1. Some hospitals are treating their patients effectively with much shorter stays than others.

2. Within the hospitals, there are differences between doctors for the same conditions and patient mix in the same environment.

3. The principal reason for differing lengths of stay appears to be different c ustomary practice of doctors in that particular situation.

4. The major impact of the hospital systems and facilities appears to be the access to aftercare, rehabilitation or nursing home facilities.

5. Planning of patient admissions and discharges was only practised b y doctors and hospitals who were interested, it was not uniformly applied in any hospital .

6. Regular reviews of doctors' performances and conscious efforts to reduce the length of stay were contributing factors to higher productivity.

7. Queensland hospitals generally had a shorter stay, particular­ ly for surgical diagnoses.

8. The daily average bed costs were also lower in Queensland which resulted in the overall cost of the average e pisode of treatment being substantially lower.

9. The incidence of readmission was not found to be significantly higher in any one hospital than others. However, not enough information was available to show whether there were more readmissions as a result of patients being discharged early.

10. Higher levels of bed occupancy did not necessarily mean lower lengths of stay, nor did reports of "pressure on the beds" necessarily i nfer lower stays.

11. The difference between the lowest and highest costs of each episode of treatment varied between hospitals by facto rs of more than two.

12. Th eoretically, productivity imp rovements of the order of 100% are possible if all doctors and hospitals achieved the lowest cost per episode of treatme nt. But practically it should be possible to obtain bed saving improvements of the order of

15% by doctors in each hospital and up to 15% between hospitals, totalling 30%, without considering the differences in daily bed cost.

3

2.2 Recommendations

1. A morbidity statistics system is needed throughout Australia which records comparable information about the age, sex, principal diagnosis, doctor's name, discharge status and readmission for the same diagnosis.

2. The system does not need to cover all diagnoses straight away, only those which are more reliably coded and account for 50% of the bed days in acute hospitals.

3. Hospitals and doctors canmonitor their performance against doctors in similar hospitals. Any reasons for variation can then be discussed at a peer review meeting or with the medical administration, and action taken as necessary.

4. A job costing system should be introduced which identifies the specific elements of patient care costs, eg. hotel services, nursing services, investigations etc. so that more accurate comparisons can be made of the costs of these episodes of treatment.

5. The use of acute hospital beds should be restricted to the acute phase of treatment and maximum use should be made of more economical beds for post operative care, convalescence and rehabilitation.

6. Elective and straightforward procedures can be done more economically and just as effectively in smaller institutions leaving patients requiring high technology treatment to the larger teaching hospitals.

7. It was apparent from the interviews with doctors, that some were aware of techniques or practices which enabled patients to be discharged earlier than previously thought. An education programme should be introduced to promulgate this information to help doctors to reduce unnecessary stay.

8. Because the average daily bed costs are not a true

indication of the actual costs relating to a procedure, a pilot study should be undertaken to obtain the true costs of the diagnoses for the hospitals in the survey. This would then be a more accurate calculation of the variation :i.n

costs of the same episodes of treatment at different hospitals.

4

I i

3. THE SELECTION OF HOSPITALS AND DIAGNOSES

For reasons of economy and time, a spread of hospitals was chosen in the Eastern States. To a certa in extent selection was based on the knowledge that information was available for those hospitals, but the other main consideration was that each hospital should be comparable with the others in their group, both in size and mix of patients.

Morbidity statistics were available for all the public hospitals, and it was possible to obtain the information from actual analysis of the medical records at two of the three private hospitals.

The diagnoses were chosen from those primary diagnoses accounting for the bulk of acute hospital bed days in most hospitals. Further, they were chosen to be those which were most likely to be reliably coded to avoid errors. Finally, to improve comparability between the information,

age brackets were determined for each diagnosis, and extremely short stays of one or two days were excluded.

The diagnoses chosen were:

ICD code

410

491-2

493

820

441

522

691-6

432-6

Diagnosis

Myocardial Infarction

Chronic Obstructive Lung Disease

Bronchial Asthma

Fractured Neck of Femur (Operation)

Emergency Appendicectomy

Cholecystectomy

Hysterectomy

Acute CVA

5

Limits

L 70 years of age

Home Discharge (AdmissionLS days excl.)

L 70 years

Home Discharge

15-69 years Home Discharge

30-79 years a) Home Discharge b) Nursing Home Disch.

L 30 years

L 60 years

(Cholecystectomy + Cholangiography ONLY)

L 50 years

(Benign Disease)

L 80 years

Home Discharge (Admissions L4 days excluded)

4. VISIT TO HOSPITALS

4.1 Methodology

Each of the related study hospitals was visited for at least one day. A summary of the visit to each hospital is given

in Appendix 1.

In order to make the most effective use of available time and to enable hospital administrators to comment on factors relevant to their hospital, the following methodology was adopted:

(i) Initial brief telephone contact was made with the hospital CEO in order to seek his co-operation in the study and to agree a tentative date.

(ii) A formal letter was forwarded from the Commission of Inquiry outlining details of the study.

(iii) A visit to hospital to:

a) Hold a brief discussion with the CEO.

b) Analyse 40 recent patient records covering the eight study diagnoses.

The analysis identified for each patient:

Unit number Age Sex LOS from admission to treatment LOS from treatment to ready for discharge LOS from ready for discharge to discharge Reasons for any related readmission. Where

there was a significant LOS during the pre and post treatment phases, the reasons were noted.

c) Meet with the CEO and the medical superintendent to complete a questionnaire on hospital procedures and to discuss the findings from the analysis of the patient records.

d) Meet with the social worker and/or discharge staff to identify factors which have an impact on discharge delays, eg preparation of patient's house to enable them to return home, or find a nursing home bed.

6

4.2 Findings

1. Administrative Systems

Although each hospital follows its own unique admission procedure, no major areas of admission delay were found which were under the hospital's control.

Patients are generally admitted on the day prior to operation. However, in three hospitals, admission on the day of operation is encouraged. Significant benefits from this approach are not evident in the LOS figures for surgical diagnoses from

those hospitals.

Similarly, administrative arrangements for discharge differ between hospitals. However, these were not seen to have any effect on the length of stay.

Appendix 2 shows a comparison of administrative practices in the hospitals studied. There is no strong correlation between any particular group of practices and hospitals with short lengths of stay.

Where it was indicated in the medical records, the date that discharge was authorised, and the date discharge occurred was noted. A practice of "OK for discharge tomorrow" occurred in 60 out of 145 cases (41%). Discussions with medical staff

suggested in some cases that the patient was probably OK for discharge 'today' but was kept overnight as a safety margin.

2. Reasons for Delays

Of the 3947 patient days covered by the medical records study, 227 (5.75%) were classified as delays.

A delay is defined as:

One day or more between admission and operation for medical patients.

More than one day between admission and treatment for surgical patients.

One day or more between "ready for discharge" and discharge.

Analysis of the delays as detailed in Appendix 3 and 4 shows that most delays are caused either by the patient's medical condition or by the patient occupying an acute bed while waiting for an after care, rehabilitation or nursing home bed.

7

This can be sununarised as follmvs:

Reason for Delay No of

Waiting for after care 138

Medical Condition 49

Non Specified 21

Administrative procedures 19

227

%

61%

22%

9%

8%

100

From information supplied by some hospitals, it appears that between 2% and 12% of the acute beds are occupied by patients waiting for an after care facility bed.

Some examples given are:

Hospitals

TV26

DN3

CQ22

CV27

% occupied by non acute patients

2.0%

4.4%

5 .. 2%

12.0%

3. Length of Stay and Cost of Treatment

As shown in Appendix 5, higher levels of bed occupancy did not necessarily mean lower lengths of stay. There was no obvious correlation between "bed pressure" and length of stay in the hospitals visited.

The average cost per episode of treatment was calculated for each hospital on the basis of:

Cost per episode: LOS that episode x the hospital's cost per bed-day as published in its annual report.

As shown in Appendix 6, the difference between the lowest and the highest costs of each episode of treatment varied between hospitals by factors of more than two.

8

I I

II

5. HORBIDITY DATA ANALYSIS

5.1 Methodology

1. Data Source

The data for this analysis was selected from the disease and operation indices, compiled by State Health Authorities in collaboration with the Australian Bureau of Statistics. The most recent data available for the range of hospitals covered was for calendar year 1978.

In respect of one hospital, data was transcribed from the statistical summary sheet of the medical records. Data relating to surgical cases at another hospital were obtained from a register of admissions and discharges. Data wa$ not available for certain surgical conditions in some Queensland hospitals.

2. Sample Selection

This study was restricted to eight clearly definable c linical conditions. This study sample in res pect of each diagnosis or procedure was the n further refined according to the crite ria tabulated in the introduction to this report. Only those patients for whom the specified condition was the PRIMARY diagnosis or procedure were included.

Patients who died or who required nurs i ng home placement or inter-hospital transfer were excluded from all study samples. Instances in which any of the required criteria were not identifiable from the data source are indicated in the legends accompanying Table I.

The manner of refinemen t of patient samples used in this study has the objectives of:

demonstrating the nee d for condition-specific data as a basis for describing hospital performance.

avoiding criticisms of pooled morbidity data (such as 'relative Stay Index' (NSW) in which calculations are based upon broad groupings of non-homogeneous tlinical conditions.

9

TABLE I

AVERAGE LENGTHS OF STAY: 1978

I

M.Infarct CVD COAD Asthma 1/NOF Append. Chole. Hy:' • 410 432-436 491-92 493 820 441 552 69. 1 TN 14 16.9 19.0 10.3 8.3 23.5 5.9 12.1 12 DN 3 17.5 12.1 11.3 6.5 36.8 6.0 13.5 12.1 PN 15 14.9 27.3 10.5 5.9 38.9 5.9 10.0 - I I CN 16 12. 1 14.9 11.6 6.1 17.7 5.4 12.6 1H i 9.03 :r PQ 19 12.6 6.9 7.4 7.0 - 4.3 8. '! DQ 20 14.5 12.3 11.9 6.5 30.92 - 8.73 8.1! TQ 21 12.2 39.3 16.2 5 . 0 36.22 - 9.23 8. :i CQ 22 15.6 20.4 9.5 10.0 27.12 - - - 'I I' DV 25 11.5 15.6 9.0 4.7 33.5 4.6 7.9 TV 26 12.3 12.8 5.9 5.1 20.4 4.6 9.8 cv 27 16.3 31.0 6.2 6.0 36.3 6.6 11.3 11. :, Overall Average 13.7 23.4 9.2 6.5 28.6 5.3 10.2 10!1 1. Nursing Home transfers not specified 2. Operative treatments not specified 3. Secondary operation codes not specified 4. Diagnosis codes not specified *Hospital Code: T = Teaching N = NSW v = Victoria Q = Queensland No.= Identifying number 10

3. Descriptive Parameters

Results have been displayed as arithmetic means (Appendix 7). Formal statistical procedure s to verify differences betwe en mean values were not considered appropriate. Of the 81 patient samples presented in this study, 63 exceeded 25

patients and 43 exceeded 50 patients. It is therefore considered likely that the descriptive pattern and trends of this study are acce ptably presented by mean values.

4. Calculations

Comparative Measures of Hospital Effic i e ncy

1. The extent of variations in mean values for condition specific length of stay betwee n hospitals is r e garded as a broad indicator of potential for achieving improved efficiency. Even when patient sample s are

carefully defined, as in this study, suc h values should serve as foundations for enquiry i nto cause of such variations, and cannot in themselves be used for judgemental purposes.

2. The calculations s hown in Appendix 8 rela te " Actual" performance to "Expected" pe rformance for the entire study population of eight clinical categories i n each hospital. The "Actual" value is the tota l bed-days

utilised b y all patients surveyed f or that hos pital. The "Expected" value is the sum of No. of Patie nts x

Group Mean LOS for each of the eight cate gorie s for that hospital. Each hospita l can thus b e shown to

use greater or l e sser numbers of b e d-days than a ppropriate for their particular cas e-mix. When vari ations between a c tual and expected scores are e xpressed as a perce ntage of the actual value , a model f o r comparing hospitals is achieved. (Appendices 9 and 9.1).

3. An alternative calculation is demon s trate d in Append i x 10. The mean LOS value for e a c h c linical c ate gory i s

aggre gated for each hospital . (Wh e n no data e xists for

a given hospital-c ategory , t he gro up-me a n value was utilis ed from Appe ndix 7.

Since this calcula tion employs one score o nly fr om e a c h clinical category for each h ospital , it a v o ids distortions due to v ery heavy c as e l o ads in any one

cate gory . The r e i s a s tro ng c orre l a tio n b e t ween the

ranking o f hosp i t a ls by this me th o d a nd t ha t achieve d in

App e ndix 9.1.

11

4. The data presented in Table 1 and in Appendices 7 and 8,

all suggest that a considerable proportion of bed consumption is due to variation in performance between hospitals. The potential for saving bed resources by achieving greater uniformity between hospitals is indicated

in the data presented in Table II, and is calculated at two levels.

a) P.B.S. (a) : The bed savings which would be achieved

if all hospitals whose mean LOS exceeded the group mean for that condition, reduced to the group mean value.

Calculation:

PBS(a) = No. of patients x (Hospital LOS - Group Mean LOS J Actual Bed Days

b) P.B.S. (b): Here the reference LOS value is arbitrarily chosen as the third shortest in the population of eleven hospitals, being considered an "attainable" standard.

Calculation:-PBS(b) = No. of Patients x (Hospital LOS - 3rd shortest) LOS Actual Bed Days

It is emphasised that these calculations are based upon specific and carefully defined patient samples. The extent of potential bed savings in each clinical category are shown in Table II. Perfect consistency of performance across a wide spectrum of hospitals and patients is an unrealistic

objective. However, it is demonstrable that approximately one-sixth of hospital beds are required for no reason other than that there are individual differences between hospitals.

Appendix II carries this technique within each hospital and examines the patterns of individual clinicians. Using the "Second fastest" clinician as the pace-setter, a further potential reduction in bed-days, again of the order of 15 percent, can be consistently demonstrated, even in hospitals with relatively short LOS values.

12

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i NGS

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tltiSPITALS

CON

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PTS

l'AYS

L . O

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P.B.S.(a)

XYOCARD

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1 21

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99

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7 117 3

7 .07

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23 . 4

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(B) 8 3 8 1 3 5

92

1 6.2

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23

C H RON

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AIRWAYS

662

6 0 6 8

9. 2 428

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959

62 7 4 6 . 8 585

9. 32

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.

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10247

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11 86

11.

58

APPENDICECTOMY

8 7 3 46 1 8 5 . 3 286

6. 1 9

CHOLECYS

T ERC

T OMY

950

9 63

5

10 .1

7 48

7.76

HYSTERECTOMY

1266 136 7 3

1 0.8

TOTALS

807 0 6

734 1

9 .10

'

(a)

Bed

savings

if

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hospit

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h ave

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24 40

1 7 .85

1 3 14

2

16.29 -------

6. COMMENT UPON CLINICIAN VARIATIONS

1. Surgical

Two surgical conditions have been .used for illustrative purposes. There are appendicectomy (emergency) and routine cholycystectomy. It is considered that these two procedures are more likely to display consensus of hospital stay performance among clinicians

than medical diagnoses and that clinician variations are likely to be the least significant. Details are given in Appendix 11. I

! I

The examples selecte d include hospitals with both relatively short ' and relatively long overall length of stay for the conditions selected. In all cases there are considerable ranges between the shortest and longest mean LOS and in all cases this range represents at least a 25 per cent increment upon the mean value for the "fastest" clinician.

It is e specially notable that, in the hospital with the shortest stay for cholecystectomy (7.9 days) six surgeons display mean LOS value s of betwe en 6.8 and 8.9 days, a range of 31 percent. If

all surgeons at this hospital achieved a mean LOS equal to the second shortest individual value, (6.9 day s) there would be an overall saving of 13.8 per cent in hospital bed days for the

condition.

It i s a lso evident that, within hospitals with the longest overall mean LOS there are individual surgeons (Surgeon 025 cv·27 Hospital and Surgeon G1 Hospital DN3) who achieve LOS values comparable to those of some surgeons in "short stay" hospitals.

Survey of the raw data for individual surgeons suggested that some clinicians have a consistent policy regarding length of stay for each procedure whereas others gave a broad scatter of values. Pa tient stays which exceed the arbitrary levels specified in the

t a bles (6 days for appendic ectomy , 12 day s for cholecystectomy) are conside red to be c aused either by administrative delays in di s cha rge or clinical complications.

Th e bus i es t s urge ons o ften have a relatively short mean LOS. Th e re is some evidence that occasional operators have a high pro portion o f patients with extended stays.

14

2. Medical

Mean LOS values for individual physicians are presented in respect of Myocardial Infarction at five hospitals. The hospitals with both the longest overall mean LOS (Hospital DN3 17.5 days) and the shortest value (Hospital DV 25 Hospital 11.5 days) are included. The wide range of values within each hospital

is self evident in the tables presented.

There has been, in the past 10-15 years, a rapid evolution in orthodox practice towards shorter hospitalization for acute myocardial infarction. This development has had an enormous impact upon the demand and potential demand for acute medical beds. It is possible that a major contributory

factor to physician variation in the present survey is a variable understanding of, or agreement with, contemporary practice of shorter hospitalization.

While all hospitals show a potential for reducing bed resources in respect of this diagnosis (PBS values of 10 to 15 percent demonstrated) it is possible that an information/ educational service, especially to more peripheral hospitals may achieve considerable changes in performance.

15

APPENDIX 1

SUMMARY OF VISITS TO HOSPITALS

Twelve hospitals in the three eastern mainland states were visited. The type and location of each hospital is identified as follows:

T Teaching Hospital

D District Hospital

c Country Hospital

N N.S.W.

v Victoria

Q Queensland

No. Hospital Identity Number

16

Teaching Hospital- NSW (TN14)

Occupancy 78% LOS 7.6 days Cost/Day $174

General notes

Elective admission generally takes place on the day prior to treatment from 6.30 am, according to bed availability. However, as all emergency patients are accepted, the overnight bed availability status can change. Patients are frequently admitted, then held in an admission lounge while waiting for a bed to be allocated. Because of the teaching commitments of many staff, rounds are usually not done until p.m., resulting in a

tendency for p.m. discharges. There is, therefore, often conflict between patients to be admitted and available beds. The bed sta tus is EDP based and updated daily. However, registrars are sometimes used to 'witch hunt' looking for patients to discharge.

The hospital is currently trialling a discharge lounge where patients ready for discharge can be accommodated awaiting transport or other arrangements to be made. The hosp i tal has numerous day only facilities where the patient is admitted 9-5 for straightforward procedures.

The doctors interviewed all claimed to be aware of regarding reducing the l e ngth of stay of patients. regard include:

the latest practices Practices in this

Grading of AMI patients according to the Killip sys tem (i.e. Grade I or II patients can be discharged after 7

days with only a small likelihood o f reoccurrence) .

Assessment of suspected AMI patients in Casualty for up to 12 hours before admission.

Trialling of 4-5 day post operative stay f or cholecystectomy patients. Removal of sutures after discharge in outpatients department.

Use of prophylactic antibiotics to reduce the chance of infection in hysterectomy patients.

Testing and assessment in e mergency or outpatients de partment, particularly for cardiothoracic and gynaecological conditions.

Generally tests from known r e putable sources are accepted with the exception of blood grouping and c ross matching.

Discharge is normally authorised by the VMO who will often delegate this authority to the registrar by telephone if bed pressure is critical. 17

2.

Each patient is reviewed at a weekly meeting by the health care team (doctor, physio, social worker etc.) with respect to discharge needs.

The hospital employs a full time nursing home clerk and because of this and the number of nursing homes in the district, does not have a severe placement problem.

Smaller local hospitals often refer ill patients to the teaching hospital. However, no facilities are available for transferring recuperating patients back to the referring hospital.

18

Teaching .Hospital - Victoria (TV20)

Occupancy 84% LOS 8.6 Cost/Day $178

General notes

Elective admissions are expected to phone at 10.00 am on the day of admission to see if a bed is available. Each unit is r e sponsible for

finding its own beds, hence RMOs are sometimes used to discharge patients in order to free beds for incoming patients.

Beds are allocated on a priority of urgent, bed promised (allocated within 24 hours) and elective, under the hospital's Unit Admission System which is de fined in a standard instruction to staff.

There is no common practice between units regarding pre-admission or on-admission testing. According to the Director of Medical Services some units make more use of non inpatient assessment facilities than others.

The hospital ha s day only 9-5 wards for surgical, nedical, dialysis and oncology procedures.

Discharge authority varies from unit to unit. Approximately 20% of registrars have the VMOs authority to discharge. VMOs usually do rounds 3 times per week with some doctors doing an extra visit when needed. The Director of Medical Service feels that having the VMOs

located in a clinic on site would help the discharge s itua tion by having them available each morning to assess possible discharge patients.

Occupancy of acute beds by non acute patients is viewed by the hospital administration as a major constraint. According to a monthly census carried out by the social work department, be tween 8 and 16 acute beds were continually occupied by non acute patients who c ould be discharged

to another facility.

19

Teaching Hospital- Queensland (TQ 21)

Occupancy 83% LOS 7 days Cost/Day $110

General Notes

Elective admissions take place any time after 8.30 am the day before treatment. Bed allocation is planned via a manual 'bed board' system which works well. To avoid congestion, some Monday treatment patients are admitted on Friday then allowed to go home over the weekend.

Tests for private patients are arranged by the patient's doctor . Hospital patients undergo tests on admission as follows:

Patients 40 years and older Chest X-ray

E.C.G. Urea & Electrolytes Haemaglobin

Patients under 40 years of age No routine tests ordered,

specific tests done on the basis of clinical indications.

There are no specific short stay facilities in use. However, a holding ward is used for some overnight stay patients.

During the medical records study it was noted that a large number of hysterectomy patients are admitted 2 days before the operation. The medical superintendent was not aware of any reasons for this practice.

The hospital has its own geriatric are transferred from the acute bed are still recorded as an inpatient rehabilitation phase of treatment. level of 75%.

and rehabilitation facility. Patients as soon as possible. However, they

of the hospital in both the acute and

The rehabilitation unit has an occupanc

Discharge is carried out as soon as practicable with some surgical patients having sutures removed after discharge by the outpatients department.

20

District Hospital - N.S.W. (DN3)

Utilisation 84.5% LOS 6.7 days Cost/Day $115

General notes

Admissions are accepted from any referring doctor. However, preference is given to the hospital's VMOs. If there is a shortage of beds, 'not

so severe' emergencies or elective admissions may be referred to another hospital. Casualty department beds are sometimes used as overflow beds for inpatients. The hospital will accept X-rays from an outside source, but prefers to have its own pathology results. Blood cross matching from

an outside source is not accepted.

There is a formal preadmission anaesthetic assessment clinic in operation and where possible patients are only admitted a half day prior to the procedure.

No special short stay facilities are provided. The practice is to use all beds as required. Discharge is usually authorised by the VMO although 5-10% of discharges were authorised by registrars. Although there are no supporting figures, the hospital administrators feel that VMOs who visit frequently (at least daily) discharge their patients earlier.

Surgical patients are not discharged until sutures have been removed.

Discharge delays of up to a week are experienced if a rehabilitation bed is required and Nursing Home beds are difficult to arrange if the patient has limited means.

Two or three days notice of impending discharge is given to the social workers. However, because of the pressure of work on the two social workers, this information is generally not acted upon. Currently, between 40-50 new cases are presented to the Social Work Department

per week. Approximately 30% of these need aftercare placement. During October 1980 4.4% of the hospital acute beds were occupied by patients awaiting aftercare placement.

21

District Hospital - Victoria (DV25}

Occupancy 90% LOS 6.1 Cost/Day $115

General notes

The general practice is to admit patients between 1.30- 2.00 pm the day before operation. There is a heavy commitment to elective admissions which enable the workload and patient length of stay to be planned. This allows the hospital to achieve an occupancy level of 90%.

Confirmation of diagnosis is done as an outpatient, with workup the night before the procedure. Relevant and timely pathology tests and X-rays are accepted if they come from a known reputable source.

A 4-bed ward is available for use by day only patients.

Discharge authority is retained by some of the VMOs. However, in most cases the RMO has the authority to discharge patients if necessary to release a bed.

According to the social worker the average acute bed LOS for patients requiring after care facilities is between 30 and 40 days. This increased from around 20 days in 1973 when increased subsidies encouraged nursing homes to take otherwise unwanted patients, to over 50 days in 1975. This limited the availability of after care beds.

Since 1975 the delay has been reduced by actively involving patients' relatives in the search for a suitable after care bed.

22

Country Hospital - Victoria (CV27)

Occupancy 80.5% LOS 9.5 days Cost/Day $100.43

General notes

Generally, elective admission is arranged by the referring VMO for the day before operation or treatment. Admission is at 2.00 pm with bed allocation according to lists prepared by the afternoon and night sisters. Generally there is no shortage of beds.

There is no set routine for preadmission or on-admission testing with each admitting doctor making his own arrangements. This is highlighted by the practice of two VMO surgeons. Dr. 'A' has some testing done

prior to admission, whereas Dr. 'B' orders tests when the patient is admitted. Hip replacement patients generally have a two day preoperative delay while a total workup is done.

There are no short stay or day only beds. carried out as an outpatient, patients are procedures to an acute bed.

Where procedures cannot be admitted for short stay

Discharge is normally by the VMO. However, the RMOs have ready access to the VMO by telephone should discharge of a particular patient be appropriate.

There is no formal planning of patient discharge date resulting in examples of well patients occupying an acute bed while awaiting the next visit from the VMO or for family arrangements to be made.

The hospital has control of two nursing homes, and has access to a nearby Graded Unit, Hostel/Nursing Home facility.

A very active geriatric rehabilitation programme is followed. The aim of this programme is to rehabilitate patients so that they can reside outside the hospital and attend the day hospital for routine care. Patients requiring geriatric care are accommodated in a special 14 bed ward. Approximately 150 patients per year pass through this ward,

although at the end of September 9 patients were 'long term' waiting for placement in an aftercare facility.

Despite access to the aftercare beds, the supply of these beds is limited and so 'nursing home' patients sometimes have to occupy acute beds.

23

2.

At the end of September there were 25 patients occupying acute beds who were awaiting placement. A further 10 acute bed patients were identified as being future nursing home patients. The domiciliary nursing support service is based in the hospital premises and provides a good external support service. There are few problems in this regard if the patient can be discharged home.

24

Country Hospital - N.S.W. (CN16)

Occupancy 74.3% LOS 7.2 Cost/Day $124.70

General Notes

Generally elective patients are admitted between 11.00 am and 2.00 pm one day prior to operation or treatment. However, where appropriate to the procedure, efforts are made to admit patients a half day before the operation. This is particularly so for orthopaedic surgery.

Local specialist VMOs are available at 10 minutes notice for assessment of patients in casualty before adm±ssion if this is necessary.

There is no formal procedure for the referring doctor to specify pathology tests at admission. In an attempt to reduce delays due to post admission testing, a blood sample is taken from each patient on admission and held pending test instructions. In approximately 25 % of the admissions tests are not carried out on the sample.

The hospital has a 7.00 am- 6.00 pm day only admission ward. Discharge of patients is usually authorised by the treating VMO.

There are two major areas of concern to the hospital administrators:

1. The health support services (apthology, radiography, etc.) operate on a 9 - 5 basis. Call backs for investigations on

casualty admissions are frequent and expensive as the hospital has a large number of road trauma patients.

2. The hospital does not have adequate rehabilitation or nursing home facilities available. Patients who require non acute bed support may occupy an acute bed as an alternative to being relocated in a Nursing Home up to 100 km away.

Transfer of patients to a Teaching Hospital for high technology investigations, rehabilitation, physiotherapy and similar episodes takes place by ambulance. This requires that a member of the hospital s taff travel with the patients and is an unpopular duty because it is c onsidered wasteful of skilled staff time.

25

District Hospital - Queensland (DQ20)

Utilisation 61.6% LOS 6.1 Cost/Day $115

General Notes

Elective patients are booked approximately 6 weeks prior to operation date in order to give the patient time to make domestic arrangements, particularly with respect to help after discharge.

Admission is at 9.00 am the day before the procedure and tests and X-rays are done before the patient is admitted to the ward (ie while he is mobile).

Discharge rounds are done between 9-00 - 10.00 am so that beds are ready for the new patient by the time he reaches the ward.

X-rays from a private source are accepted by the hospital, however, pathology tests are checked during the admission procedure.

There are no day only or short stay facilities as such. patients are formally admitted to an acute bed •. Day only

Consultants do ward rounds 2 or 3 times per week. However, RMOs have the authority to discharge patients if a bed is required.

The medical superintendent is a practising surgeon who attempts to patients from an acute bed to a convalescent facility as

soon as possible after the operation. During his surgical training in the UK he had seen this approach used with success.

Generally, convalescent care is well provided for. The hospital uses small outlying hospitals for patient convalescence under supervision of the local G.P. and has a good working relationship with the 'Blue Nurse' home nursing service. Good G.P. cover is available for patients discharged horne.

The area is well served with nursing homes, having 7 homes in the immediate area and a current surplus of beds. At the time of the visit,

no patients were in hospital awaiting placement.

There are plans in hand for the construction of a geriatric rehabilitation unit and day hospital.

26

Country Hospital - Queensland (CQ_22)

Utilisation 60.1% LOS 8.0 Cost/Day $94.38

General Notes

All elective patients are booked from the outpatients department and specialist clinics. Patients are admitted on the morning of the day prior to the operation.

Pathology tests, chest X-ray, and blood cross match are done prior to admission as an outpatient. As the town pathologist is also a VMO of the hospital, test results from his labs are accepted.

The medical superintendent monitors theatre utilisation for under and over runs on a daily basis and consults with his colleagues on significant usage variances.

There are no day only beds. acute bed. Day only patients are admitted to an

Surgical and Medical registrars have the authority to discharge patients. The hospital has a good working relationship with the 'Blue Nurse' home nursing service and can confidently discharge patients who require surgical dressing attention with a referral to

the 'Blue Nurses'. Patients are often discharged prior to removal of sutures which is done as an outpatient.

A rehabilitation unit was established in 1975. However, placement in other aftercare facilities is a problem. A survey of medical, surgical and orthopaedic patients during the visit showed that 9 out of 174 patients (5%) were waiting for an after care bed to be available.

27

Private Hospital - N.S.W. (PN15)

Occupancy 70.8% LOS 6.3 Cost/Day $98.06

General Notes

Admission usually takes place between 2-4 pm on the day prior to the planned procedure. Patient tests are carried out as outpatients during the week prior to admission where possible, otherwise they are done on the day of admission. There is no casualty facility.

urgent admissions are taken 24 hours per day 7 days per week.

Test results from other sources are accepted if they are done by a recognised reputable source. Blood cross match is done by the hospital for 1-2% of admissions.

In order to reduce the chance of post operative infection, prophylactic antibiotics are used on hysterectomy patients.

Discharge by VMOs who are encouraged to do rounds each day, preferably in the morning. This practice enables 90% of discharges to take place in the morning, thus freeing beds for afternoon admissions.

Discharge is planned by forecasting the discharge date for each patient and monitoring progress towards that date.

Difficulty is often experienced finding nursing home beds. Consequently, the hospital has a number of chronic aged patients occupying acute beds. Delays of up to a month are experienced in placing a difficult patient.

28

Private Hospital- Victoria

Utilisation 68.1% LOS 6.6 days Cost/Day $111.97

General notes

Admission is arranged by patients' doctor. Normal admission time is between 2 and 4 pm on the day prior to the procedure. With the

approval of the anaesthetist, increasing numbers of admissions are being permitted at 7 pm on the night before or the morning prior to surgery.

There is no Casualty facility. However, urgent admissions are taken at any time of the day or night.

Most tests are carried out on admission by the Hospital or an external group.

There are no special short stay facilities. Patients requ1r1ng only a short stay are admitted to an area close to the theatre.

Discharge is authorised by the VMO during rounds which may be any time of the day between 7.00 am and 6.00 pm.

Generally horne help for patients can be arranged within 24 hours. However, a shortage of nursing horne beds means that patients may wait in an acute bed for a number of months before a suitable bed is available.

The hospital has a low utilisation compared with public hospitals and suggests that its facilities could be used to relieve the pressure on hospitals in the public system.

29

Private Hospital - Queensland (PQ19)

Occupancy 58% LOS 4.4 Cost/Day $114

General notes

All admissions are private patients admitted by the referring doctor who also arranges for diagnostic tests from outside facilities. Patients are admitted on demand with no special times allocated for admission or discharge.

According to the hospital administration staff the VMOs are conscious of the out of pocket costs to private patients and therefore tend to discharge patients as soon as possible. Many discharges take place immediately after the doctor's rounds which may be as late as 9.00 pm.

There are 23 short stay beds which are used for day only oncology, endoscopy, CAT scan or similar patients.

30

I

"' ,_.

1

Hospital

LOS

1

Occupancy ADMINISTRATIVE

PRAC

TICE

z

Mostl y

AM

0

Mostly

PH

...... Vl Vl ......

AM

or

PM

::>: Cl ex:

Special

day

only

beds

available

Special

short

stay

beds

available

Tests

n or

ma lly

c-rded

a t

adm

.

Tests

n ormally

do ne

pre

admission

O th er

tests

accepted

X-ray Grouping,

X-match

Ot h e r

Pat

h.

Routine

tes

t s

performed

Mostly

AM

1-U

1--tostly

Pl--1

L?

AM

or

PM

I: u Vl

1--tos

t

ly

by

VMO

...... Cl

Mostly

by

RMO

fU

J

l;IH.t.&.l\

b

COMPARISON

OF

ADMINISTRATIVE

PRACTICES

TN

14

TV

26

TQ

21

DN

3

DV

25

DQ

20

CN

16

CV

27

CQ

22

PN

15

PV

-PQ

19

7.6

8.6

7 .0

6.7

6.

1

6.1

7 .2

9 .5

8.0

6.3

5.6

4.4

I I

78.0

84 .0

83.0

84.5

90.0

61.

6

74.3

80.5

60.1

70.8

68.1

58.1

I

X X X X X

I I

X X

X X

X X X

X

X

X X

X

1--

X X

X X X

X

X X X

X X

X X X X

X X X X X

X

-- -

---

- - - - -

--

- -

--

---

---

- -----

- - - · ·

·-- -

----

- -

--

---·-

---

--·

X X X X X

---

------

---

t----

--

- - - - -

X

X X X X X

- -

--

----

-· - -

--

---· -

----

X

X

X X

:

·-- -

t--

--

-- -

t--

--

- -

---

1--- -

- -

--··--

- -

I

X --

1--_ X _

X

--

--·-

.

- · - - ·-

-----

----

-

-----

- -

--

--

r----

---

1---

--

1---

---

-- ---

1--- --

- x _ _

X

f---_1_-

1-- -

X

X

X

X

---

--

- - -

---

- -· - - - -

--

1---

- - -

X

_ x__

. .

X

X

X

X

X

I I

-'----

---

--

I

APPENDIX 3

ANALYSIS OF PATIENT LENGTH OF STAY

I

--

PRIMARY DIAGNOSIS

Tot. AMI CVA ASTH. COAD II NOF HYST APP.

-

No. of Patients 382 43 44 51 46 46 49 50

-

Actual Days A - T 277 0 10 0 0 80 71 20

T - R 3976 470 531 210 593 993 478 250

R- D 174 10 75 0 24 58 4 0 -- -- - - - - - - I 4427 480 616 210 617 1131 553 270 I ··-Average Days Per Patient A - T 0,7 0 0.2 0 0 1.7 1.5 0.4 T - R 10.4 10.9 12.1 4.1 12.9 21.6 9.8 5.0 R- D 0,5 0.2 1. 7 0 0.5 1.3 0.1 0 - -- - 11.6 11.1 14.0 4.1 13.4 24.6 11.4 5.4 % of Stay I A - T 6,3 0 1.6 0 0 7.1 12.8 7.4 T - R 89.8 97.9 86.2 100 96.1 87.8 86.4 92.6 ' R --: D 3.9 2.1 12.2 0 3.9 5.1 0.8 0 I A - T Days between admission and treatment or operation T - R Days from treatment to ready for discharge R - D Days from ready for discharge to discharge Source: Sample of Patient Medical Records 32

w w

1.

D e l

ays

Pr e

Interv

e nti

o n

N o . T o t a l

Pre-

of

Interv

e ntion

AP PE

N DIX

4

A

NALYSI

S

OF

R E AS

O NS

FOR

D E L

AY

P a t

ie nt

Ot h

er

Pr e

o peration

Co nsent

Form i n j

uries

or

T es

ts

or

Delay

Wait.

Non

in

Admitted

For

Specific

Diagnosis

Patient

s Day s

Not

signed

com

p lications

Treatments

Diagnosis

Early

Op.

List.

Del

a y

Total

II N O F

4 6

46

*

2 6 2

H ys

ter e

ct o m y

49

49

- -

*

3

C h o

le cy

st ec

t -

o my

53

53

*

1

5

9

11

148 148

3

1l

14

TI

---

L___

-----

L_____

____

--

*

Avoid a

bl e da

ys

2 .

Dela

ys

at

Di s

ch a

rg e

H o . o f

D

ia gno

sis

Pa tient

s Medi c

al

G eneral

R e ason

for

Del

a y

Medical Non

Specifi

c

Avoidable

Di s

ch a

rg e

Delay

D a y s

W a

iting

for

Waiting

for

N o n

No. Days

33 19 18 70

Decis

ion

Aft

e r

C are

!. c c.

Tr a

nsport

S pec

ific

Total

II NOF

46

14

*

42

*

1

1

58

C VA

44

2

*

72

1

75

C O AD

4 6

-

*

2 4 2 4

1

36

16

138

T

2

1 57

I

--

- - - -

*

=

Av o i d a b l e d

ays

3.

An aly

s i s

of

P o t e

nt ia

ll y A v

oidabl

e D a

ys

T o t a l W a

it i n g f

or

Admitt

e d e

arl y

Pr e

o p t

es t s

Un s i

gned

Da ys

Af te

r

C a r e

a cco

m . o n

wait

op

li s

t.

or

tr ea

tm e

nt

Con

se nt

form

N o .

1 57

138

12

3 3

% 100

87.

9%

7.6 %

l.

9%

1. 9%

*

5

*

6

13

34

5 8

*

1 1

28

6 6

T9

70

Ge ner

a l

Reason

For

De la

y N o .

of

Days

Transport

1 0.6

%

Medical

16

Waiting

for

After

Care

138

Avoidable

1

Non

Sp ec

ifi c 2

Total

p o tent

ially

avo

i d a

bl e da y s

=

157

Total

d a ys

s tudied

3947

P o t

en ti

a lly

Av o

idabl

e

=

4 %

of

days

s tudied

TI7

Bed

Uti I isation J!_

100

APPENDIX 5

COMPARISON OF BED UTILISATION & AVERAGE LENGTH OF STAY

D. HosPital

+ District HosPital

*

CountrY HosPital

0 Private HosPital

34

APPENDIX 6

AVERAGE COST PER EPISODE OF TREATMENT: 1978/7 9

M.Infarct CVD COAD Asthma NOF Append. Chole . Hyst. 410 432-436 491-92 493 820 441 552 691-6 1 $ $ $ $ $ $ $ $ Teaching NSW TN 14 2940 3010 1792 1444 4098 1027 2105 2123 $174/day VIC. TV 26 2189 2278 105 0 907 3631 8 19 1744 2492 $178/day QLD TQ 21 1342 4323* 1782 550 3982* - 1012 957 $110/day District NSW DN 3 2012 1506 1300 748 4232 690 1553 1392 $115/day VIC DV 25 13 23 1794 103 5 54 1 3853 529 909 11 50 $115/ day QLD DQ 20 1450 1230 1190 650 3090 - 870 880 $100/ day Country NSW CN 16 151 2 3112 1450 763 3463 675 1575 14 88 $125/day VIC cv 27 1630 3100 620 600 3630 660 1130 11 90 $100 /day QLD CQ 22 14 66 1917 893 940 254 7 - - -$94 I day Private NSW PN 15 1460 2675* 1029 578 3812* 578 980 - $9&'day VIC PV* No t Availab l e $ 11 2/day QLD PQ 19 1436 787 844 798 - 49 0 1026 1014 $ 114 /day *includes Rehabilitation 35

w 0'>

I

HOSPITAL TN

14

DN

3

PN

15

CN

16

PQ

. 19

DQ

20

TQ

21

CQ

22

DV

25

TV

26

CV

27

T

0

T A 1

M.

INFARCT. 410

Pts.

Days

(L.O.S.) 119

2011

(16.

9l

143

2503

(17

.

5)

19

284

(14

.9)

49

592

(12

. 1)

14

176

(12

.6)

106

1534

(14.

5)

339

413

1

(12.

2)

29

45 1

(15

.6)

89

1023

(11.5) 274

335

7

(12.

3)

33

537

(16.

3)

1214

16599

(13.

7)

C.V.D. 43 7

-4 36

Pts.

Days

(L.O.S

. )

173

3279

(19.0) 34

446

(13.

1)

10

273

(27

. 2)

18

449

(24.9) 80

552

(6.

9)

63

718

(12.

3)

378

14859

(39.

3)

120

24 5 2

(20.4) 58

905

(15

.6)

235

2998

(12

.8)

47

1452

(31.

0)

1216

L8 4

51

(23.

4)

APPendix

7

AVERAGE

LENGTH

OF

STAY

C.O.A.D.

ASTHMA

II N . O

.F .

491-492

493

820

Pts.

Days

Pt s .

Days

Pts.

Days

(L.O.S

. )

(1.0.S.)

(1.0

. s.)

162

16 75 1 55

1293

28

659

(10.

3)

(B .

3)

(23

. 5)

23

270

49

318

9

331

(11.

3)

(6.5)

(36.

8)

11

115

11

65

9

350

(10.

5)

(5.9)

(38.9)

34

393

35 2 1 4

21

582

(11.6)

(6.

1) ( 2 7 .

7)

14 7

1 092

129

903

C><

(7

.4)

(7

.0)

33

394

25

1 62

22

679

(11.9)

(6.

5)

(30.

9)

162

1 3 5 4

233

1155

100

3616

(16.

2) (5

.0 )

(36.

2)

57

543

102

1 025

14

379

(9.

5)

(10

. 0)

(27

.1)

11 99

60

283

22

736

(9.

0)

(4.

7)

(33.

5)

l3

77

118

602

120

2443

(5.9)

(5.

1)

(20.4)

9

56

4 2

254

l3

472

(6.

2)

(6.0)

(36.

3)

662

6068

959

6274

358

10247

(9.

2) (6

.5)

(28.6)

APPENDECT

. H01ECYST.

HYSTERECT.

4

41

522

691-696

P t s .

Days

Pts.

Days

Pts.

Days

(1.0.S.)

(1.0.

s.)

(1.0.

S.)

58

343

195

2365

512

6721

(5.9)

(

12.

1)

(1 2.

2)

172

1035

79

1067

57

690

(6.0)

(13.

5)

(12.1)

92

544

44

441

1><-

(5.9)

(10.0)

69

371

25

3 1 6

44

524

(5 .4)

(12.6) (11.9)

25

10 8

25

226

25

223

(4.

3)

(9.0)

(8.

9)

><

88

765

97

858

(8.

7)

(8.8)

>< 257

2358

352

30 76

(9.2)

(8.

7)

>< 2<

252

1169

1 35

107

3

83

830

(4.6)

(7.

9)

(10.0)

152

700

80

785

27

378

(4.6)

(9.

B)

(14.

0)

53

348

22

239

69

823

(6.

6)

(11.

3)

(11.9)

873

4618

950

9635

12 66

13673

(5.

3)

(10.

1)

(10.

8)

w -....

No.

H ospita

l

TN

14

Dll

3

PN

IS

CN

1 6

PQ

1 9

DQ

20

TQ

2 1

Cll

n

DV

2)

M. I NFARCT

410

A

E

20 11

1642

2S03

1973

284 262

692 676

1

76

1 93

1 534 1463

413 1 4 678

4S I

400

1023

1228

C VD 432 - 6 A

E

3279

4048

446 796 27 3 234

449 421

SS2

1872

778 1474

14859 884 5

24S3

2808

90S

1357

APP

ENDI

X 8

C

OMPARA

TIV

E BED

U TILIZ A

TI ON

C OAD

ASTHMA

#

NOF

APPEND

! C .

4 1 9-

2 493

820

441

A

E

A E A

E

A

E

167S

1 490

1293

1 008

659

80 1

343

308

270

2 1 2 318 318 331 257

1035

912

11S

10 1

65

72

350

2S7

S44 488

393 313 214 228 582 601

371 366

1 092

13S2

903

839

-

-

10 8

133

394

304 1

6:!

16 2 679 629

- -

1 3S4

1490

llS S I SI S 3616

2860

-

-

S43 524

1025

663 379

400

-

-

99

1 0 1

28 3

390

736 629

11 69

1 336

C H OL

E C Y

ST

HYS

T EREC

T.

TOTAL

552 69 1

-6

A

E

A

E

A

E

2365 1989 6271 SS29 1 7896

1 6R

1 5

+ 108 1

+

6 , 0%

1067 806 690

6 1 6

6660 5890

+ 770

+10.6

%

441 449

2072

1863

+209

+10 . 1 %

316

2SS

524 475 3441 333S

+1 06

+5.8

%

226

2SS

223

270 3280

4914

- 1 634

- 49 . 8 %

76S 898 858

1048 5170

5978

- 108

-1 5 .

6%

23S8 262 1

3076 3802 30S49

258

11

+ 4738

+IS.S

%

- -

--

4851 4795

+56

+1.2%

1073

1377

830

896 61 1 8 7 314

- 1196

- 1 9 .

6%

- - - -

--

w co

M .I N

FAR

C T

C V D

4 1 0

43 2 - 6

A E A E

T V

26

3 35

/

37 8 1

29 9 8 5 49 9

cv

27

537 455 1 4

52

110

A*

=

ACT

U AL

B ED

-DAY

S

UTILIZED

APP

E N D I X

8 (Contd . )

COAD

ASTHMA

-#N

O F

APPENDIC

.

419

- 2 493

8 20

44 1

A E A E A E A E

77

1 2 0 602

76 7

24 43 3432

7 00 805

5 6 8 3 2

54

2 73

472 3

72

3 48

2 81

li E = "

EXP

EC TED

"

B E D

DAYS

(NO

. P

ATIENTS

X GR

OU P-M E

AN

L . O . S

.)

C HO

LEC

Y ST

HY S

TERE

CT

TO T A L

55 2

69 1-6

A

E A E A E

785 816 3 7 8 2 9 2

1 1 34

0

15H3

- 4 17

3

-3 6 . 8 %

I

239 2 2 4 8 2 3 745 4181 3533

+ 648

+1 5 . 5 %

w \0

I

C O UPA

RA TI

V E

BED

L:TIL

I Z A TIO X

-AL

L C L

il;l

C AL

CAlEGO

i U E S

Total

D a y s

Ho s

pit a l

Act

u a l Exp e

cte d * V a r i a

tion

Perce

n tage

o f

+

A ctual

Total

TN

14

17896 16815

+

1081

+

6 . 0

DN

3

6660 5890

+

770

+

1 0 . 6

2 072

1 863

P N

1 5

+

209

+

1 0 . 1

CN

1 6

344 1 3335

+

1 06

+

3 .2

3 28

0

4914

P Q

19

- 1634 -

49.8

DQ

20

5 1

70

5978

-80 8

- 1 5 . 6

I

TQ

21

30 54 9

25811

+

473 8

+

15 . 5

CQ

22

485 1 479 5

+

5 6

+

1.2

I

D V

25

61 1 8

73 1 4 - 1196 - 1

9.6

TV

26

11 3 40

1 55 1 3 - 4173 -

36.8

':V

27

418 1 3533

+

648

+

1 5.5

*

T o ta

l

of

(Patients

x

Gr o

up

Me a n

L . O .

S.)

fo r

al l c l

inical

cate

go ri

e s .

APPE

N DIX

9 . 1

BED

UTILIZATION

PERCENTAGES

OF

EXPECTED

TOTALS

.

120-I- z UJ

u

100-

0

0:: UJ 0....

80- 60-

H O S

PITAL

TQ

2 1

CV

27

DN

3

PN

15

TN

1 4

C N

16

CQ

22

DQ

20

DV

2 5

TV

26

PQ

1 9

s:­>-'

en > < c

120 100 80

)

H O SPIT

AL

-

TQ2l

CV27

APPENDIX

10

AGGREGATE

MEAN

SCORE

--

-

-

--

PN15

DN3

CNl6

CQ22

DQ20

TN14

DV25

TV26

PQ19

APPENDIX 11

LENGTH OF STAY FOR INDIVIDUAL CLINICIANS

1. Surgeon Variations: APPENDECTOMY

DV 25 Mean 4.6

* .1..t..L Qu. ..I.QS > fi diilZS

Surgeon A 29: 132 4.6 5

B 37: 146 3.9 1

c 27: 124 4.6 4

D 32: 168 = 5.3 6

E 27: 113 4.2 0

F 46: 223 4.9 5

G: 28: 124 4.4 2

H. 18: 90 5.0 3

TOTAL 244: 1120 4.6

PN 15 Mean 5.9

Pts. Day LOS >6 days

----Surgeon A 16: 80 = 5.0 B 8: 46 5.8 c 12: 81 = 6.8 4 D 13: 93 7.2 7 Others 43: 244 5.7 11 cv 27 Mean 6.6 Pts. Day LOS > 6 days Surgeon 002 17: 113 c 6.6 10 025 17: 97 - 5.7 5 003 7: 45 6.4 2 Others 13: 107 = 8.2 7 * No. of patients staying > 6 days 42

TV 26 Mean 4.6

Pts. Day LOS > 6 day

Surgeon 1 20: 97 - 4.9 2

2 29: 118 - 4.1 3

3 25: 130 - 5.2 3

4. 28: 123 a 4.4 2

5. 24: 106 = 4.4 2

6. 22: 118 = 5.4 4

TOTAL 148: 692 = 4.6

CN l2 Mean 5.4

Pts. Day LOS > 6 Days

----Surgeon 019 20: 92 4.6 053 13: 69 5.3 3 004 17: 95 = 5.6 3 Others 19: 115 6.1 5 DN J Mean 6.0

Pts. Day 108 >6.0 da

Surgeon L1 25: 151 6.0 6

K2 35: 256 7.3 30

C1 14: 64 4.5 2

D1 24: 113 = 4.7 2

J9 17: 147 = 5.4 5

K7 17: 113 6.7 4

G3 13: 86 = 6.6 4

Others 20: 125 6.3 6

2. CHOLECYSTECTOMY

DV 25. Mean = 7.9 days TV 26 Mean 9.8 dals

Pts. Dals LOS Pts. Dals LOS

urgeon A 18: 161 8.9 Surgeon 17: 179 10.5

B 29: 197 6.8 3 11: 98 8.9

D 29: 244 8.4 4 14: 141 10.1

E 9: 73 8.1 5 14: 118 8.4

F 23: 159 6.9 6 18: 185 10. 3

G 12: 107 8.9

DN 3 Mean 13.5 days

Pts. Dal LOS

urgeon 11 10: 143 14. 3

K2 23: 338 14.7

C1 7: 120 17.1

D1 10: 129 12.9

G1 7: 73 10.4

59 6: 71 11.8

PHYSICIAN VARIATION - MYOCARDIAL INFARCTION

DN 3_ LOS = 17.5 CN 16 LOS = 12.1

Pts LOS

Pts LOS

hysician L3 30 21.4 Physician 052 23 13.0

P1 32 14 5 002 19 10.9

N6 19 14.9 * Others 7 14.3

E3 13 21.9

G4 20 17.5

(P.B.S. = 15.5 per cent) cv 27 LOS = 16.3

Pts LOS

Physician 00 1 11 21. 1

003 7 17 .1

026 10 9.2

43

Others 5 18.6

TV 26

Physician 031 027

037

029

033

035

046

LOS = 12.3

Pts LOS

29 10.9 *

52 12 . 8

38 12.8

34 10.8

35 12.7

70 12.6

21 13.2

* (P.B.S. = 11.6 per cent)

4. POTENTIAL CHANGE

DIAGNOSIS HOSPITAL

APPENDECTOMY DV25

TV26

DN15

CN16

CV27

DN3

CHOLECYSTECTOMY DV25 TV26

DN3

MY Oc.AADIAL DV25

INFARCTION

TV26

DN3

CN16

CV27

DV 25 LOS = l1.5

Pts. LOS

Physician A 21 12.0

B 28 12.9

c 27 10.6 *

D 7 9.0

Others 6 10.0

* (P.B. S. 9.1 per cent)

PRESENT 2nd SHORT-

MEAN LOS EST LOS

4.6 4.2

4.6 4.4

5.9 5.7

5.4 5.3

6.6 6.4

6.0 4.7

7.9 6.9

9.8 8.9

13.5 11.8

11.5 10.0

12.3 10.9

17.5 14.9

12.1 N/A

16.3 14.7

NOTE: Slight differences between results in this appendix and Table VII are due to the exe lusion of doctors having insignificant patient numbers.

* Change in hospital LOS if all clinicians kept patients for no longer than the present second shortest LOS.

44

POTENT I: CHANGE

-9.7% -5.6% -4.0% -5.5% -6.3% -21.9%

-13.0%

- 8%

-13.7%

-8.9% -11.5%

-15.5%

N/A

9.8%

PART II SURVEY OF HOSPITAL MORBIDITY DATA

l. INTRODUCTION

This report presents an analysis of routine morbidity data for nine selected clinical categories, in respect of calendar year 1978.

The survey of hospital morbidity comprises data relating to:

36 Hospitals

41,447 Inpatient episodes

504,637 Patient-days

45

..

N

..

2 • . METHODOLOGY

. 1. .DATA SOURCE

The data for this study were selected from the "Hospital Morbidity Statistics" prepared by the various State Health authorities in collaboration with the Australian Bureau of Statistics. The data items requested were:-age, sex, primary diagnosis, secondary diagnosis, procedure(s),

length of stay, outcome and provider (doctor) codes -in respect of each inpatient episode for each of nine specified diagnostic/ procedure categories (Table I).

The most recent data available from all sources was that for calendar year 1978.

. 1. (i) Comment upon Data Consistency

Seven Health authorities provided data, all in differing formats . One hospital provided its own computerised morbidity data; the data from one other hospital was obtained directly from original hospital records.

The availability of the requested data items in the various data systems is shown in the accompanying table.

lo 20 OUT-

SYSTEM AGE SEX DIAG. DIAG. PROC. LOS COME DR.

NEW SOUTH WALES X X X Var. X X Var. Var.

QUEENSLAND X X X - - X X -

VICTORIA X X ? X X X - X

WESTERN AUSTRALIA X X X X X X X X

TASMANIA* X X X - - X - X

A.C.T. X X X X X X X X

REPATRIATION X X ? X X X - X

* Summarised tables only.

The following comments upon the information submitted from the various institutions are based solely upon the specific response to this study: it may well be that additional data items or changes of format could be . provided if necessary.

46

wes inf pro en

~

as us i

wo t

i

va

e

s

Western Australia: Data were submitted from two teaching hospitals; similar information is available from a ll public hospitals with the exception of provider codes in respect of country hospitals . There was complete consist­ ency of data and all requested data items were available. Secondary diagnosis codes and procedure codes were consistently completed. The two minor short­ comings of this system appear to be:

(i) A single "outcome code" represents all patients transferred from primary hospital to another institution; hence patients transferred to Nursing Home accommodation cannot be identified .

(ii) The system of case-record numbering is based upon episodes of admission rather than individual patients; identification of re-admissions may be difficult.

New South Wales & A.C.T . : This system provides essentially the same data base as that for Western Australia. A more comprehensive set of outcome codes is used, indeed this is the only system in which Nursing Home placements can be identified with certainty-.---If consistently reported as designed, this system would be entirely satisfactory for basic utilisation review. However, much of the coding is performed at the local hospital level and in many cases some

items - especially 2° diagnosis, doctor codes and outcomes are omitted or variably reported.

queensland : This system is able to provide information for private as well as public hospitals. Cross-referencing of diagnosis and procedure codes, to enable full definition of patient samples, was not provi ded by the summaries submitted. Information was lacking for surgical procedures in some hospitals,

and no doctor codes could be provided.

Victoria: Only a proportion of public hospitals are covered by any morbidity service at present. The format as presented makes it difficult to determine which is the primary diagnosis in some cases . The Victorian system is open­ ended with regard to diagnosis/operation codes and up to 12 cond itions were coded for some patients. This must be costly of coders' time, and the useful­ of this amount of detail can be questioned. Outcomes are not coded, with

the exception that deaths are specified in some hospitals.

Tasmania: Only summarised tables of data were provided. The system is basic­ ally the same as that in Queensland and presumably individual-patient data could have been provided had time allowed. A comprehensive r eport of individ­ ual doctors' "performance" was provided for each c linical category.

Repatriation: As for the Victorian system, these records do not clarify whether only primary diagnoses are represented . The only outcome status recorded is death.

47

•

..

"'

..

In the present study, with its limited set of data items, the

inconsistencies between and within the various morbidity data services necessitated several compromises. Even though the hospitals were selected with regard to the availability of morbidity data, only 12 of the 36 hospitals could be assessed in all aspects of this study. Tables VIII, X and XII of

this section, which tabulate only five data items (age, sex, L.O.S., procedure code, outcome code) could be completed for only 30 hospitals, and even then some patient populations were not "pure" (see footnotes to Appendix 1.

Any detailed analysis of morbidity patterns for Australian hospitals is therefore severely hampered by this diversity and inconsistency in methods for coding, processing and tabulating morbidity data. The problem could readily be overcome. The basic data source - the statistical summary sheet

(MRl) of the hospital record - is almost identical for all states. Moreover the technical modifications required .to achieve uniformity in tabulating and presenting these data would be minor.

The dividend - an identifiable and usable description of the utiliz­ ation patterns of Australian hospitals - would be appreciable, not only for assessing resource needs and for planning, but as the foundation for enquiries into quality of clinical services .

2. SELECTION OF HOSPITALS

The primary requisite for inclusion of any hospital in this study was the availability of adequate morbidity data for calendar year 1978.

Section I of the study required the selection of hospitals in four categories - teaching, suburban (district), country and private - from each of Queensland, New South Wales and Victoria. From the two northern states these hospitals were arbitrarily chosen from many hospitals with available data; from Victoria the choice was limited to those few hospitals providing 1978 morbidity data.

Section II includes data from 25 additional hospitals. Twelve of these additional hospitals were chosen from two metropolitan Health Regions of New South Wales. The first two of these (DNl,2) were from the same region as the district hospital (DN3) selected for Section I of the study. The other ten, seven district and three 'country' hospitals (numbered 4-13 inclusive), present a substantial body of data from a group which shares a similar

geographical and administrative background.

Additional hospitals from Queensland provided comparison for the teaching hospital and country hospital .selected for Section I. Data from additional teaching hospitals in both Western Australia and Tasmania were provided, and where data permitted, smaller hospitals from Tasmania were also included .

The two general hospitals operational in the Australian Capital Territory (1978) and the Repatriation General Hospitals from New South Wales, Victoria and Queensland also provided data.

48

apP ind

2. (

2

The 36 hospitals have a current capacity of 15,385 beds or approximately 20 per cent of the "Recognised beds in Australia. (i) No individual hospital had a capacity of less than 100 beds.

2. (i) Classification of Hospi tals

Hospitals were classified into one of five groups, as follows:-(a) "Teaching Hospitals": This group comprises seven inner-city University hospitals, exceeding 400 beds, with a wide range of super-specialty services. (Some other city and suburban hospitals

which provide undergraduate medical teaching are c lassified below, according to location).

(b) "District Hospitals": This group consists of fourteen suburban general hospitals in Sydney, Melbourne and Brisbane, ranging in capacity from 100 to 400 beds.

(c) "Country Hospitals": Six Base Ho spitals, three hospi tals on the outskirts of Sydney serving essentially non-urban communities and three hospitals in cities with populations less than 250,000 make up the twelve hospit als in thi s group.

(d) Private Hospitals: Three private suburban hospita ls, administered by Church organisations were included in Section I of the s tudy. Morbidity data from two of these hospital s was available for inclusion in Section II; these two hospita ls are grouped with the

"District Ho spitals " in tables IX, XI and XIII.

(e) Repatriation General Hospitals: Although each of the three Veterans hospitals serves as a major teaching hospital these have been separately reported.

2.(ii) Code for Hospital Groups:

T Teaching Hospita l

D Distri ct Ho spital

C Country Ho s pital

P Private Ho s pital

R Rep atriation General Hospital

In addition, each hospita l is identified by a second code letter specifying its s tate, and a numb er giving its place in the summary of r esults table presented as Appendix l.

3. SELECTION OF CLINICAL CATEGORIES

The v a lue of morbidity data analysis increases in direct relation t o the clinical specificity of, and homogeneity within, the patient populations so described. Length-of-stay data, or a ny other numerical descriptions of broad diagnostic groupings or whole hospital populations have stri ct l y limited value in the assessme nt of hospital performance.

(!)(Hospi tals and Health Services Year Book 1979-80 ) . 49 Ed. J ohn Hawker .

Very specific populations can only be obtained from large hospitals, or over extended time periods from smaller institutions. The present study required data from a wide range of hospitals, and within a restricted time frame: hence some compromises were necessary.

Nine clinical categories were selected as the vehicles for this comparative study of 36 hospitals. Wherever practicable these categories represent a single (three-digit) diagnosis or procedure code as described in the International Code of Diseases. The principles for selection of the nine categories included:-

(a) Each condition be a major "consumer" of bed resources in general hospitals.

(b) The principal clinical divisions within general hospitals be represented. (The categories chosen comprise major "represent­ atives" of the divisions of medicine, general surgery, ortho­ paedics and gyt1aecology, which collectively occupy over 80 per

cent of bedsl2) in the "typical" general hospital).

(c) Each condition be amenable to consistent diagnosis and coding; the diagnosis to be based upon objective clinical phenomena and/or "absolute" clinical events (e.g. operation).

(d) Each condition have clearly defined indications for hospital admission; a limited set of clearly identifiable programmes and outcomes for inpatient care should also exist.

3.(i) Comment re Category Selection.

The selected list of nine categories was a compromise between the above principles and practical considerations. Some inclusions in, and omissions from the list deserve comment.

There is no Obstetric condition. While a significant division of many hospitals, obstetrics is represented in general hospitals,

occupies less than 10 per cent() of their beds and is entirely absent from eleven of the hospitals in this study.

Three other diagnoses - diabetes mellitus, chronic ischaemic heart disease and osteoarthritis - while all contributing heavily to general hospito caseload - were excluded on the basis of principle (d) above. Diabetics, in particular, are admitted to hospitals for such a kaleidoscope of reasons, that

the principal diagnosis is quite meaningless in the context of bed-utilisation

"Cerebrovascular disease" was included, in spite of the difficulties of definition and the wide spectrum of clinical demands it presents. This category was extended to include all five diagnostic codes (432-436 inclusive1 for non-haemorrhagic "stroke" to minimise the effects of variations in diag­ nostic fashion between hospitals. Only patients whose L.O.S. exceeded three days were included in the hope of excluding patients admitted solely for diag-nostic procedures. ·

(2) Ireland,A.W., Westphalen, J.B., Bemie,A., "The One-Day Bed Census", In Preparation 50

In spite of these manipulations (and the wide range of L. O.S. values still suggests non-homogeneity of hospital populations) the massive demand of this condition upon hospital r esources(3) necessitated i t s inclusion.

"Acute myocardial infarction" was another diagnosis in wh ich some inconsistencies of c od i ng were f ound. Some centres apparently apply this diagnos is to a ll patients admitted with suspicious chest pain. Patients dis­ charged home within five days of admission wer e not considered " genuine" and

thus excluded (these accounted for up to 15 per cent of " infarcts" in some hospitals).

Patients with a primary diagnosis of " Chronic Bronchitis" (ICD 491) or "Emphys ema" (ICD 492) were included in the category " chronic airways di sease". In some centres many of these patients were coded differently as

I

" chronic obstructive lung disease" (ICD 519) but this practice was not sufficiently regular to warrant broadening the definition of this category. I 1 3 . (ii) Selected Patient Populations Within each of the nine categories a sampl e of patients was selected

according to the criteria limits descri bed i n Table I. Th e purpose of t hese criteria is to subtract from the tota l population of each cat egory, those patients who se L.O.S. be haviour is consistent l y affected by factors of age , unu sual procedures, or outcomes. (The most gl aring instance relates to acute myocardial infarction: most hospital deaths occur early, so a very high mortality rate would result i n a flatteringly s hort mean L.O. S. ) .

The r emaini ng " Sel ect ed Patie nt Populations" can therefore be ex pected to display an i mproved l evel of i nternal consistency with regard to l ength of hospital stay. Comparisons between hospital groups, between individua l hospit­ a ls, and between individual c linicians within the same hospital, are described

in respect of these defined and "refined" patient populations only .

There are num erous other variables, both c linical and administ rative, which could have some bearing upon the vari ations in performance whi c h this s tudy describes. It is em phasised t hat the use of morbidit y data in this manner, and ana lyses at this l evel of detail, are not intended to impose value

judgements, but rather to incite inte lligent enquiry.

NOTE: As this stud y conce rns data for 19 78 , all diagnosis and oper a t ion codes refer t o the Eighth Revision of the International Code of Diseases (ICD).

(3) N.S .W . Hospital I npatient Stat i stics, 1977. (cd . A. 51

3. RESULTS

The information presented in Tables II to XIII inclusive and in Appendix 1 illustrate only a few of the potential applications of the data submitted.

Table II shows the population of patients for each of the nine clinical categories. The numbers presented as "Total Patients" (Colunm 1) include every patient in every hospital with the given primary diagnosis/ procedure. The sum of the inpatient episodes, 41,447 is the gross study population. The total of 504,637 patient-days which these patients

utilized, comprises between 12 per cent and 15 per cent of the caseloads of the selected hospitals, and represents over $60 million of hospital resources.

The rema1n1ng two colunms of Table II show the "selected patient populations" in each category, and the percentage relationship of these samples to each total category population. The generally . lower percentage of "Selected" patients in the medical categories, and fractured neck of femur,,

reflects the greater numbers of patients at the extremes of age, and the greater diversity of outcomes for these categories.

Tables III and IV display the L.O.S. characteristics for each of the nine clinical categories in respect of the selected patient populations. The range of mean values across the 36 hospitals is shown in Table III, and in five of the nine categories the highest value is more than double the

lowest value. It is emphasised that patient selection in each instance is· directed towards minimising "obvious" causes of L.O.S. variations, such as patient-age, mortality or inappropriate diagnosis.

The group-mean L.O.S. values shown in Table III are genuine means of their appropriate populations. The median values and centile-rank scores of Table IV are obtained from the mean scores of the 36 hospitals.

Table V displays the relationship between mean L.O.S. values for tt selected patient population in each category and those additional patients in each category and those additional patients in that category who fall outside the criteria of Table II and are therefore termed "atypical".

For the medical categories, mean L.O.S. is generally shorter for "atypical" patients - a reflection of the significant mortality of vascular diseases, less intensive short term rehabilitation of very old patients, and the preponderance of childhood asthma. The "atypical" surgical patients, almost all being older than the seletted population, have a relatively long hospital stay.

52

The L.O.S. values for the Total population of each category are given in the third column of Table V. TI1ese figures provide probably for the first time, an indication of the demand upon Australian hospital resource s presented by a specific diagnosis or operation, across the entire patient population and clinical spectrum of that condition.

The data of Tables III and IV - which is shown in detail in

Appendix 1 demonstrate the extent of variation in bed utilisation between hospitals in respect of very similar clinical services provided for ver y similar patient populations.

Tab le VI looks at the potential savings of resources which could result if greater degrees of conformity between hospitals were attained. The formulae for the calculations of Potential Bed Savings (P.B.S.) are shown on Page 12 Part I. The overa ll result of these calculations is that

1:12 beds (8.48 percent) could be " saved" if every hospital with mean L.O.S, values exceeding the group-mean for any category, could shorten its L. 0. S. to reach tha t value (P.B.S.a). A reduction of more than 1:6 beds (17.51 percent) wou ld be achieved if the 25 th centile ranking values could be achieved by all hospitals.

Even within the limited parameters of this study, the latte r value represents 48,360 bed-days. It is emphasised that the L.O. S. " s t andards" for these calculations are not hypothetica l nor ideal values, they are actual achievements of real-life institutions.

A further calculation of the extent and s ignificance of variations between hospitals in respect of L.O.S. is presented in Table VII and illustrated in Figure IV. Aga in the formula for calculation of "expected" bed-days (bas ed upon gr oup-mean values) is given on Page 12 Part I. The range

of these calculated values, with hospitals using between 67.4 percent and 129.8 percent of their expected bed-days, is again very appreciable.

These numer ical data are illustrated in the continuous polygon of Figure I : each horizontal level represents a hospital, and hospita ls a r e ranked in descending order of relative bed utilisation.

Addi tional details of the pooled data for individual clinical categories are il lus t rated in Tables VIII to XII inclusive and in Figures II anJ III. These represent only a few samp l es of the anlayses are possible

when data of thi s type are collected from large populations.

The age/sex distribution of the total s tudy popu l ation ("selected" plus "atypica l" ) with a principal diagnosis of myocardial infarction is shown in Table VIII. Adequate data was available for on l y 5,763 of the 7,001 patients in this category, r epresenting 30 of the 36 hospitals.

53

Comparative bed utilisation

Percentage of expected* bed days

selected patients, a 11 categories# Fig I

* Expected days sum of (patients x group-mean LOS) for each of nine clinical categories

# See Table II

-120

-110

100

-90

-80

-70

< J c­

UI

Q)

'"

u 1- U> Cl_

-40

-3 0 z o

- 1

n

/ •

• " , , 'I \ I

l - ·

I

I

i \

I

I

I

I

I I I I •

M y o ca

rdial

Infar

c ti o n Fig . 2

L.O.S

.

ex c

eeding

18

days

(16

. 5

per

c e nt

of

3 ,34

3

se le

c ted*

patient

s )

•

.

.

/\\

\

.

\\

· -

- - . .

/ • • • /

\

I " · - · - ·

/

\I

•

•

N. S . W .

:A. C.

T:

QLD.

VIC :

I ·J./\ . :

*

Se lected

patients

<70

years,

home

discharge

(Table

II)

40 -

•

3 0 -

1\

-o (]) '

\

20 -

•

"'

-

rt

"" - X • l

0

-

R.G.H.

Cholecystectomy

Fig. 3

·

L.O.S.

exceeding

13

days

14.3

per

cent

of

2,708

selected*

patients)

•

,

j-j

'\

;\

1\ \ .

;\ ;\ I

\

20 -

;

-10

·-·

•

1\

.-·

·-·

rl

• •

·-·

•

-

i

'

'•-\/

.-·

10-

•

N.S.W.

:

A.C.T:

QLD.

VIC.

1

W.A.:

TAS.

R.G.H.

* S elected

patients

= <60

years,

cholecystectomy± cholanqiogram

ONLY

48 per cent of male patients were under 60 years of age, whereas 75.5 per cent of female patients were aged 60 years or over. L.O.S. rose steadily with patient age and was consistently higher for females below 80 years . One quarter of all bed-days in this category were provided for patients

aged 70 years and over.

Table IX and Figure V show the percentages of selected patients with myocardial infarction whose stay exceeded the arbitrary limit of 18 days. While patient numbers in some hospitals were small, the range of values is extensive- from 3 percent (1:29 patients) to 59 percent (16:27 patients). While teaching hospitals had the lowest overall proportion of "long-stay" patients in this category, (less than half that for Repatriation and District hospitals) there was a wide range of values within each group of hospitals.

Table X shows the mean L.O.S. values for the total population undergoing cholecystectomy as a primary procedure in 30 hospitals. There were insufficient data to classify 358 patients from the remaining six hospitals.

Fifteen per cent of cholecystectomies were performed on patients under 30 years of age, while 30 per cent of patients were age 60 years or more. L.O.S. increased with patient age and rose sharply above 60 years. The per­ formance of "non-routine" procedures (as defined in legend) additional to

cholecystectomy was associated with increased hospital stay of the order of five days. Patients aged over 60 years with "non-routine" surgery required more than double the hospital stay of patients under 45 years with "routine" operations.

The percentages of selected patients whose stay exceeded the arbitrary level of 13 days is shown for each of 34 hospitals in Table XI and Figure VI. The range of values is somewhat narrower than for myocardial infarction, extending from 4 percent (6:135 patients) to 38 percent (8:21 patients).

District hospitals had the lowest overall percentage of "longstay" patients in this category, but again, each hospital group contained both high and low values. The relatively short L.O.S. values for Queensland and Victorian (city) hospitals are reflected in the consistently low proportions

of longstay patients in these hospitals.

Age-specific L.O.S. values for patients undergoing inguinal herniorrhaphy in 30 hospitals are shown in Table XII. The data were inadequate from six further hospitals (378 patients). One-eighth of these operations were performed on juveniles, and their stay averaged less than three days (some hospitals achieved an average L.O.S. well below two days). L.O.S. rose pro­

gressively with patient age; the mean value for patients aged 60 years and over was 8.6 days compared to 6.7 days for the selected patients (15-59 years). The mean L.O.S. in several hospitals exceeded 10 days for the oldest age­ group.

57

TI1e final calculations (Table XIII) shows average L.O.S. values in each category for four groupings of hospitals. While, once again, there were considerable variations within each group, the consistently shorter values for Teaching hospitals are evident.

58

4. DISCUSSION OF RESULTS

The information presented in this study is not intended to be, nor should it be interpreted as, a concrete statement regarding the 'efficiency' of any individual hospital. This study does attempt to demonstrate that an examination of hospital utilization can be conducted with some relevance to the prime function of hospitals -specific care of patients with specific problems.

The data presented by this study also demonstrate very substantial diffe rences in 'performance' between and within hospitals and attempt to quantify the potential improvements in resource utilization which could be achieved through greater conformity.

Morbidity Statistics

This study is based entirely upon Hospital Morbidity Statistics and these have been a somewhat contentious matter across Australia, with regard to both their generation and interpretation.

An enormous amount of professional, clerical and technical time is involved in recording and processing over 20 data items for approximately two million inpatients episodes each year. The cost and administrative complexities involved in such a task have caused some authorities to regard the entire process as extravagant. At

the present time, with very little constructive analysis of a very large body of data. the claim of extravagance may be justified. However, the potential for achieving very real cost-benefits through application of these data in selective fashion, has, hopefully been

suggested by this study.

The r eliability of hospital morbidity statistics has been questioned by both administrators and clinicians. In spite of the quality-control checks within the various data systems, it is true that no sufficiently detailed review of morbidity data against the original hospital records

has been performed. There are also disparities in coding fashions between and within data systems and also an error rate (between one half and one per cent) in transcription of data by the central data processing services.

In spite of the se reservations, morbidity data behave with a very acceptable degree of internal consistency, when sufficiently large numbers of a given clinical condition are examined. A limited study of coding accuracy at one hospital(4) showed that 95 per cent of

medical cases and over 98 per cent of surgical cases were appropriately represented in the morbidity statistics.

59

Whenever morbidity data is employed to review large populations of patients, with due regard to diagnostic and population specificity , the results are sufficiently reliable to present pertinent questions relating to the behaviour patterns of hospitals or individual clinicians. Such questions should not be discredited nor disregarded simply because existing morbidity

systems cannot provide all the required answers.

Application of Morbidity Data

As indicated at the opening of this discussion section, the intention should not be the establishment of rigid standards, nor to glorify the average. The basic service which morbidity da ta s ystems sustend is the provision of information to both administrators and clinicians and especially the latter, which can be seen as useful and meaningful to clinical practice.

Th e provision of data which is condition specific, and which relates directly to recognisable clinical activity, is an ess entia l factor in a chieving credibility with clinicians.

Wh en this is done, and data is presented with appropriate .degrees of courtesy and c onfidentiality, a capacity to influence Cl i nician (and thus hospital) behaviour as demonstrable (4)

(4) I r e l and AW ; Scar f CG and Harris JJ, Hornsby Hospital Utilization Revi ew Proj ec t 1977-1979 (Report to Federal Dept.of Health)

60

TABLE I

SELECTED CLINICAL CATEGORIES

ICD Code Category

Diagnosis:

410 Myocardial Infarction

432-6 Acute CVA

491-2 Chronic Obstructive

Lung Disease

493 Bronchial Asthma

820 Fractured Neck of Femur

(Operation)

Operation:

441 En:ergency Appendicectomy

522 Cholecystectomy

691-6 Hys terectorny

411 Herniorrhaphy

61

Limits --

(70 years of age Home Discharge (Admission < 5 days excluded)

.(80 years Home Discharge (Admissions <·4 days excluded)

< 70 years Home Discharge

15-69 years Home Discharge

30-79 years Home Discharge

(30 years

(60 years (Cholecystectomy Cholangiography ONLY)

(50 years (Benign Disease)

15-59 years

TABLE II

SELECTED PATIENT SAMPLES

PROPORTIONS OF TOTAL POPULATIONS

TOTAL SELECTED

PATIENTS PATIENTS PERCENT

MYOCARDIAL INFARCTION 7,001 4,000

57.1

CEREBROVASCULAR 6,030

3,340 55.4

CHRONIC AIRWAYS 3,995 2,169

54.3

ASTHMA 5,131

2,713 52.9

FRACTURED N. 0. F. 2,902

1,154 39.8

APPENDECTOMY 4,703 3,887

82.7

CHOLECYSTECTOMY 4,330 2,752

63.6

HYSTERECTOMY 3,779

2,831 74.9

HERNIORRHAPHY 3,576 1,653

46.2

TOTAL: 41,447 24,499

62

TABLE III

LENGTH OF STAY SUMMARY (SELECTED PATIENTS) *

CATEGORY PATIENTS DAYS MEAN LOS RANGE

Myocardial Infarction 4,000 56,029 14.0 10.2 - 23.6

Cerebrovascular 3,340 69,812 20.9 6.9- 39.3

Chronic Airways 2,169 22,421 10.3 5.9- 14.1

Asthma 2, 713 17,063 6.3 3.3- 10.0

Fractured N.O. F. 1,154 33,050 28.6 20.4 - 38.9

Appendectomy 3,887 22,190 5.7 4. 2 - 7.0

Cho 1 ecys tectomy 2,752 29,090 10.6 7.9 - 13.9

Hysterectomy 2,831 30,403 10.7 8.7 - 14.3

Herniorrhaphy 1,653 10,994 6.7 4. 2 - 9.3

* Criteria for Selection as in Table I

63

TABLE IV

LENGTH OF STAY RANKINGS (SELECTED PATIENTS) *

25TH 75TH

CATEGORY HOSPITALS CENTILE

MEDIAN CENTILE

Myocardial Infarction 36 12.7 14.2

15.9

Cerebrovascular 32 12.5 14.8 20.8

Chronic Airways 32 9.0 10.1

11.5

Asthma 32 5.1 6.1

6.9

Fractured N.O.F. 26 24.9 29.0

33.5

Appendectomy 30 5.0 5.7

6.0

Cho 1 ecys tecto my 35 9.8 10.8

12.1

I

Hysterectomy 30 10.0 11.5

12.4

I,

Herniorrhaphy 33 6.3 7.1

8.2

* Criteria for Selection as in Table I

64

TABLE V

MEAN L.O.S. COMPARISON BETWEEN

"SELECTED PATIENTS" AND "ATYPICAL PATIENTS"

SELECTED ATYPICAL

----PTS . .!:~ PTS. L.O.S.

MYOCARDIAL INFARCT 4000 14.0 3001 11. 1

CEREBROVASCULAR 3340 20.9 2690 16.1

CHRONIC AIRWAYS

2169 10.3 1826 11. 7

ASTHMA

2713 6.3 2418 4.4

FRACTURED N. 0. F.

1154 28.6 1748 27.0

APPENDECTOMY

3887 5.7 816 7.7

CHOLECYSTECTOMY

2752 10.6 1578 15.8

HYSTERECTOMY

2831 10.7 948 13.2

HERNIORRHAPHY

1653 6.7 1923 7.2

65

TOTALS

PTS. L.O.S.

7001 12 . 8

6030 18.8

3995 11. 0

5131 5.4

2902 27.7

4703 6.1

4330 12.5

3779 11.4

3576 7.0

TP.BLE VI

POTENTIAL BED SAVINGS - ALL HOSPITALS

GROUP 25TH

MEAN PBS (a) CENTILE PBS (b)

CATEGORY PTS. DAYS LOS DAYS % LOS DAYS %

Myocardial Infarction 4000 56029 14.0 3499 6.25 12.7 6281 11.21

I

Cerebrovascular * 2962 54953 18.6 8447 15.38 12.5 19186 34.91

Chronic Airways 2169 22421 10.3 1683 7.51 9.0 3503 15.63

Asthma 2713 17063 6.3 1777 10.42 5.1 3746 21.96

Fractured N.O.F, 1154 33050 28.6 2505 7.58 24.9 5214 15.78

Appendectomy 3887 22190 5.7 1107 4.99 5.0 2920 13.16

Cholecystectomy 2752 29090 10.6 1726 5.94 9.8 3051 10.49

Hysterectomy 2831 30403 10.7 1622 5.34 10.0 3079 10.13

Herniorrhaphy 1653 10994 6.7 1052 9.57 6.3 1380 12.55

TOTALS: 24121 276193 - 23418 8.48 - 48360 17.51

I

I

* Hospital 21 Excluded. (a) Bed Savings if all Hospitals have L.O.S. "? Group Mean L.O.S.

(b) Bed Savings if all Hospitals have L.O.S. 25th Centile L.O.S.

6 6

TABLE VII

COMPARATIVE BED UTILIZATION

ALL CATEGORIES - SELECTED PATIENTS

* EXPECTED# 100 A/E

* EXPECTED # 100 A/E

HOSPITAL ACTUAL (PER CENT) HOSPITAL ACTUAL (PER CENT)

1. 10317 10432 98.9 19. 3280 4869 67.4

2. 2917 3410 85.5 20. 5355 6193 86.5

3. 7091 6250 113.5 21. 31372 26257 119.5

4. 7813 7366 106.1 22. 4851 4543 106.8

5. 9782 9013 108.5 23. 19914 23184 85.9

6. 9108 9383 97.1 24. 5002 5393 92.8

7. 3126 2837 110.2 25. 11721 16518 71.0

8. 2651 2678 99.0 26. 6408 7715 83 . 1

9. 3196 3382 94.5 27. 4344 3594 120.9

10. 4850 5159 94.0 28. 14898 13162 113.2

11. 2778 2713 102.4 29. 24080 23038 104.5

12. 7229 8058 89.7 30. 3686 3376 109.2

13. 3065 3120 98.2 31. 2629 2340 112.4

14. 15848 14837 106.8 32. 2773 2722 101.9

15. 2072 1904 108.8 33. 6111 6300 97.0

16. 3662 3575 102.4 34. 13933 14659 95. 1

17. 10991 10919 100.7 35. 5336 6417 83.2

18. 7683 6996 109.8 36. 111 80 8614 129.8

* Actual Total bed days utilized, all clinical categories Expected= Sum of (No. pts. x group-mean L.O .S . ) f or ea ch cli nical category

67

TABL E VII I

MY OCAR DI AL I NFARCT I ON

AGE/ SE X DI STRIB UTI ON AND L. O.S .

CHAR I' STI CS IN 30_ J2]8

I

M ALE S FEMALES ---- --- I

PATIE NTS PE RC ENT DAYS L.O.S. L. O.S. DAYS PERC ENT M AlEffi. 1DAY1) @YS ) FE MAlTPTS . - - --- ·-- --·-----39 yrs . 108 3. 2 1323 12. 3 12. 7 165 0. 9 13

40-4 9 yrs 477 14. 2 623 0 13. 1 ; 4 . 5 1059 5. 2 73

50- ::d yrs. 1025 30.6 14125 13 . 8 14 . 5 3756 18 . 5 260

60-69 yrs . 1058 31.5 15569 14.7 15. 3 659 1 30 . 7 432

70-7 9 y rs. 575 17. 1 8204 14. 3 15 . 1 8452 33 . 4 470

80 + y rs·. 112 3, 3 1/68 15. 8 15.4 2461 11. 4 150

lO TALS : 335 5 - 47 219 14. 1 16. 0 2248 4 - 1408

I

68

HOSPITAL

D-N-1

D-N-2

D-N-3

D-N-4

D-N-5

D-N-6

C-N-7

C-N-8

O-N-9

O-N-10

C-N-11

0-N-12

D-N-13

T-N-14

P-N -15

C-N-16

C-A-17

C-A-18

TABLE IX

MYOCARDIAL INFARCATION

L.O.S. EXCEEDING 18 DAYS

(PATIENTS <70 YEARS, HOME DISCHARGE)

PATIENTS PER CENT HOSPITAL

20 13 P-Q-19

8 12 D-Q-20

50 35 T-Q-21

39 43 C-Q-22

60 42 T-Q-23

18 15 C-Q-24

16 59 D-V-25

5 29 T-V-26

5 16 C-V-27

9 15 T-W-28

5 36 T-W-29

17 14 C-T-30

15 37 C-T-31

37 31 C-T-32

5 26 T-T-33

3 6 R-N.-34

N/A R-Q-35

9 10 R-V-36

PATIENTS

2

16

31

1

22

4

6

17 10

20

37

N/A

N/A

N/A

N/A

35 19

15

TOTAL: 31 Hospitals: 551 Patients

= 16 .1 Percent

Teaching Hospitals (6) 153 pts. = 10.1% Range

Country Hospitals (8) 53 pts. = 17.6% Range

Repatriation General (3) 69 pts. = 22.2% Range

District Hospitals (14) 276 pts. = 22.6% Range

69

PER CENT

14

15

9

3

9

6

7

6

30

11

11

.-30 19

16

(7-31) (3-59) (16-30) (6-43)

PATIENTS

-29 yrs. 545

30-44 yrs. 921

45-59 yrs. 991

60 + yrs. 1013

TOTALS: 3470

---

TABLE X

CHOLECYSTECTOMY --·----

PATIENT AGE, SURGICAL REGIME

AND L.O.S. IN 30 HOSPITALS

ROUTINE SURGERY* - ·--·-- · --

PERCLNT DAYS L.O.S, ROUT. -F,fS. -- TJ!A'vsT

15.7 5254 9,6

26.5 9321 10,1

28.6 11207 11. 3

29.2 15549 15.!

- 41331 11. 9

- NON-ROUTINE SURG_EB.)'._ # -~----- L.O.S. DAYS PE.RCENT fll:_ ThAis) -- [~lf.)TS. 12.4 694 11. 2 56

14.0 1256 17.9 90

15.6 1978 25.3 127

20.5 4697 45.6 229

17.2 8625 - 502

* Routine Surgery = Cholecystectomy ± Cholangiography ONLY

# Non-Routine Surgery = CholecystectorrlY ± Cholangiography + Other Procedure(s)

70

TABLE XI

CHOLECYSTECTOMY

L,O,S, EXCEEDING 13 DAYS

(PATIENTS <60 YEARS, ROUTINE SURGERY)

HOSPITAL PATIENTS PERCENT HOSPITAL PATIENTS PERCENT

D-N-1 7 7 P-Q-19 4 16

D-N-2 5 31 P-Q-20 10 11

D-N-3 27 34 T-Q-21 28 11

D-N-4 14 14 C-Q-22 N/A

D-N-5 11 15 T-Q-23 20 9

D-N-6 26 24 C-Q-24 5 9

C-N-7 8 38 D-V-25 6 4

C-N-8 6 21 T-V-26 10 13

D-N-9 11 19 C-V-27 5 23

D-N-10 10 12 T-W-28 11 15

C-N-11 3 12 T-W-29 18 16

D-N-12 16 18 C-T-30 13 22

D-N-13 8 12 C-T-31 7 16

T-N-14 37 19 C-T-32 10 16

P-N-15 2 5 T-T-33 19 26

C-N-16 7 28 R-N-34 16 29

C-A-17 N/A R-Q-35 1 11

C-A-18 8 11 R-V-36 5 13

TOTAL: 34 Hospitals: 394 Patients

14.3 Percent

District Hospitals (14) 157 pts. 12.8% Range (4 38)

Teaching Hospitals (7) 143 pts. = 14.1% Range (9 26)

Country Hospitals (10) 72 pts. = 17.6% Range (9 38)

Repatriation General (3) 22 pts. 21. 2% Range (11 29)

71

-15 yrs.

15-29 yrs.

30-44 yrs.

45-59 yrs.

60 + yrs.

TOTALS:

TABLE XII

INGUINAL HERNIORRHAPHY

AGE DISTRIBUTION AND

AGE-SPECIFIC L.O.S. (30 HOSPITALS)

PATIENTS PERCENT DAYS

--

406 12.7 1164

265 8.3 1451

410 12.8 2530

749 23.4 5421

136 8 42 . 8 11821

3198 - 22387

72

L.O.S.

2.9

5.5

6.2

7.2

8.6

7.0

...... w

M. INFARCT.

CVD

410

432-6

PTS.

LOS

PTS.

LOS

TEACHING

1743

12.8

1649

24.4

(7 Hospita 1

s)

SUBURBAN (14

Hospitals)

1201

15.1

688

12.7

COUNTRY

343

14.1

314

22.3

(12

Hospi

ta

1 s)

•

744

14.0

465

22.6

REPATRIATION

311

16.2

538

19.4

(3 Hospitals)

TABLE

XIII

COMPARATIVE

MEAN

L.O.S.

(HOSPITAL

GROUPINGS)

C.O.A.D.

ASTHMA

#

N.O.F.

491-2

493

820

PTS.

LOS.

PTS.

LOS

PTS

.

LOS

671

10.0

1290

6.0

657

28.0

609

10.0

815

5.7

210

29.0

81

31.4

225

10 . 7

394

6.8

159

32.7

664

10.8

214

9.4

128

26.5

*

3 hospitals

in major

provincial

cities

included.

APPEND.

CHOLECYST.

HYSTER.

HERNIA

441

522

691-6

411

PTS

.

LOS

PTS.

LOS

PTS.

LOS

PTS.

LOS

822

5.1

1012

10.0

1105

10.5

487

5 . 4

2109

5.8

999

10.8

1004

10.5

599

7.4

598

6.0

286

10.8

414

11.5

214

7.2

i

907

6. 1

637

10.9

722

11.4

438

6.6

49

4.8

104

11.2

129

7.7

" .1>-

AP PE

ND I X

l

M O RBIDITY

TA B

LE

M.

I NF

AR C T.

C. V . D . C

.O . A.D.

ASTHMA

N N . O

.F.

APP

EN D.

CHOLECYST.

HO S P IT A L 410

43 2

-6

4 9 1-2

49 3

820

441 522

P TS

.

DAY

S

l' TS. D A

YS

P T S . D A

YS

P TS

.

DAY

S P

TS . D

AYS

P T S.

DA Y S PTS.

DAYS

(L .O. S . ) (L. O . S . ) ( L .

O. S.)

(L.O. S

.)

(L .O. S

.)

(L. O

.S.)

(L.O.S.)

+

@

1 53

2 2 34

58

856

41

4 5 5 8 7 466

4 0

.1160

109 1210

94

1006

D -N-1 ( 1 4 .

6)

(1 4 . 8)

(11.1

)

(5. 4 )

(29.

0 )

(5.8)

(10.7)

D-N

-2

65

88 5

47

4 3 3 1 7 4

3 0

174

11

29 6 4 9

2 9 0

16 199

(1 3 . 6 )

(10.6)

( 9 .5)

( 5. 8)

(26.

9)

(5. 9)

(12.4)

D -N

-3*

143

2 503

3 4 446 2 3

27 0

4 9

31 8 9 331 172

1035

79

1067

( 1 7 . 5 ) ( 13. 1) (1

1.

7 ) (

6.

5)

(35.

4 )

(6.

0 )

( 13,5

)

D-N-4

9 0

16 22

64 758

42

577

46

318

12

33 9 145

940 102

1 2 38

(18.

0)

(11.

8) (1 3 . 7) ( 6 . 9 )

(28,3

)

(6.5)

(12.1)

D - N - 5

142

2 81

2

74

10 8 0

54 7 64

42

3 41

34

7 9 4 234 1379 73 829

(1

9,8)

(14.6)

(14.

1 )

(8. 1) ( 2 3

,4)

(5,9)

(11.4)

D-N

-6

123 1 7 3 2

68

9 14

77

659

101 6 9 0

19 4 38 255 1658

110

1358

( 14. 1) (14 . 9) ( 8

.6)

(6, 8)

(23.

1) (6 . 5)

(12.4)

C-N-7

2 7 63 8

24

597 1 3 116 2 3 116

-

-137 955

21

291

(

23 . 6 ) ( 2

4.9)

( 8 .9)

(5. O)

(7,0)

(13.

9 )

C-N- 8

17

270

16

200

1 8

2 20

2 7 193

- -

1 2 3 6 9 6 29 3 49

(15.

9)

(12.5

) (1 2 . 2)

(6, 4)

(5.7)

(12.0)

D - N-9 3 1

490

1 8 1

95

27

242

25

8 3

- -

136 829 59 615

( 15. 8 )

(1 0

.8)

(9.0)

(3. 3 )

(6.1)

(10.4)

D-N-10

6 2 787 1 4 1 6 7 1 6

14 8 3 3 19 8

10

331 254 1367 82 874

(

12.

7 )

(11.9)

(9 ,3)

(6, O )

(33,1)

(5.4)

(10.7)

C-N-11

14

19 9

19

3 88

28

449

37

214

- -

125 614

25

254

(14.

2 )

(20.4

)

(16.0)

(6 . 1)

(4. 9)

(10.2)

D -N

-12

1 2 4

150 8

76

10 29

67

72 1

10 6

476 2 2 629

206

1225 91

1074

(1 2. 1) ( 1

3.

5 )

(10.

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if i ed i n T ex

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ls

includ

e d

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Section

1.

HYSTERECT

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(

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(7. 2)

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179

(14.3)

(8.5)

57 692 46 429

(12.1)

(9.3)

1 2 4 1397

70

624

(11.

3)

(8. 9)

98 1128 79

655

(11.5)

(8,3)

126 1 2 75

45

384

(10.1)

(8.5)

22

273

19

140

(12.4)

(7,4)

62

647 12 76

(10,4)

(6, 3)

57 617 19

125

(10.8)

(6. 6)

63 614 52 364

(9, 7)

(7.0)

45

506

21

154

(11,2)

(7. 3)

40

371

27

196

(9.3)

(7. 3)

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( 1 4 . 9)

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( 1 2 . 1 )

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(1 3

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1 76

( 1 2 . 6 )

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1 4 . 5

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(12 . 2 ) 29

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4 49

(2 4

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7 1

1 0 43

(14 . 7) 8 0

2 445

(30 . 6)

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5 5 2

(6 . 9)

63

778

( 1 2 . 3 )

37 8

148 5 9

( 39.

3 )

1 20

2453

(2 0

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2 73

4 963

(18 . 2) 70

1 45 8

(2 0.

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C . O . A .D. 49

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(L.

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27

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(9 . 5)

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167 5

( 1 0 . 3) 11

11 5

( 10. 5) 34

393

( 11. 6 )

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57

(9 . 2) 14 7

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(7 . 4 )

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25

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269

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(9.0

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(L .O. S

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(L. O

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(L.O.S.)

(L.O.S.)

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1073

83

830

57

290

(4 . 6 )

(7 . 9)

(10.0)

(5 .1)

152

7 00

8 0

785

27

378

43

2 41

( 4.6

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9.

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22

156 '

(

6.

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(11.9)

(7 .1)

9 9

46 5

74

721

17

2 03

37

2 38

( 4 .7)

(9.7)

(11.

9) (6

.4)

2 7 9

1 406

111 1246

15

203

45

370

(5. 0 )

(11.2)

(13.5)

(8 . 2)

I I

125 859

47

578

--

14

107

( 6.9)

(12. 3)

(7.6)

4 3 285

44

430

92

1140

42

365

( 6

.6)

(9.8)

(12.4

) (B. 7)

4 8 3 3 4

64

690

45

527

19

151

(7.0)

(10.8)

(11.

7)

(7.9)

2 34

1277

68

776 63 871

44

309

(5.5

)

(11.4)

(13.8)

(7. 3)

23

1 29

55 727

-

-62

556

(5.6)

(13.2)

(9.0)

- -

9

72

- -

30

189

(8.0)

(6. 3)

26

109

40

364

-

-37

242

(4. 2)

(9.1)

(6.5)

3887

2 2 190

29090

2831

30403

1653

10994

(5.7)

(10.6)

(10.7)

(6.

7 )

Paper B

ACCOUNTING, REPORTING, AND BUDGETING

(Malcolm McHarg and Ian Clarke)

This document was prepared by Mr Malcolm McHarg, of CHS Consulting pty Ltd, Melbourne, and Mr Ian Clarke,

of Price Waterhouse Associates pty, Mel bourne.

To:

Mr J. H. Jamison, OBE Chairman Commission of Inquiry into the Efficiency and Administration of Hospitals

ACCOUNTING, REPORTING, AND BUDGETING: A system which gives leverage to policies for increasing effectiveness, improving efficiency, and containing costs in hospitals

From :

Malcolm McHarg, Principal Consultant, CHS Consulting Pty Ltd Ian Clarke, Associated Consultant, Price Waterhouse Associates Pty

14 November, 1 980

Consullon:s lor Health Serv1c es

!I .,

' i

• Consulting Pty Ud

Mr J H Jamison, OBE Chairman Commission of Inquiry into the Efficiency and Administration

of Hospitals 9th Floor, St James Centre 111 Elizabeth Street Sydney NSW 2000

Dear Mr Jamison

58 Gatehouse Street PO Box 125 Parkville Victoria 3052 Telephone 347 9844

19 December, 1980

re: ACCOUNTING, COSTING, AND BUDGETING: A system which gives leverage to policies for increasing effectiveness, improving efficiency, and containing costs

in hospitals

In accordance with the brief from the Commission of Inquir y into the Efficiency and Administration of Hospitals, I have pleasure in presenting to you the report on Accounting, Costing, and Budgeting.

Ll:J

Malcolm McHarg Principal Consultant

Con sultants for Hea lth Serv1ces

CONTENTS Page

SUMMARY OF FINDINGS AND RECOMMENDATIONS !·IV

EXECUTIVE SUMMARY 1-11

GLOSSARY

WHY HAVE MORE EFFICIENT HOSPITALS? 1

1.1 OVERALL OBJECTIVE 3

1.11 Why Hospital Cost Inflation Invokes a Public Policy Response 3

1.111 Hospital Costs: Victims or Cause of Inflation? 4

1.112 How Hospital Costs Contribute to Inflation 4

1.113 Reimbursement of Hospitals Requires Clear National Policies 5

1.2 HEALTH EFFICIENCY AND COST CONTAINMENT 7

1.21 Service Efficiency 7

1.22 Health Efficiency 8

1.23 Policy Stances on Cost Containment 9

2 ISSUES OF MANAGERIAL CONTROL 11

2.1 FUND ALLOCATION AND ACCOUNTING BY GOVERNMENTS 12 2.11 Cash Limit Accounting Without Resource Accounting 12

2.12 Accounting for Expenditure Under Subjective Codes 13

2.121 The Limited Scope of Budgeting Under Subjective Codes 13

2.122 The Need for More Imaginative Budgeting and Accounting 14

2.1 3 Accounting for Expenditure by Function or Responsibility 16

2.131 Who Is Benefiting? 0 . 0 And Who is Meeting the Costs? 16

2.14 A Standard Functional Accounting, Reporting, and Budgeting System is Required 18

202 CASH BUDGETING AND MANAGEMENT EFFICIENCY 19 2021 Cash Budgeting and Accountability 19

2022 Budgeting, Efficiency, and Cost Containment 20

2.23 The 'Bid System', Budget Timing, and Efficiency 21

2.231 Commonwealth and State Budgets 21

20232 Static Hospital Budgets 22

2.233 Flexible Budgets and Efficiency 22

2.3 EXTERNAL AND INTERNAL INFORMATION NEEDS 24

2.31 Present Information Has Little Value 24

2.311 Expenditure Data 24

20312 Patient Statistics 24

2.32 Equity and Value in Funding Require Better Information 25

2.4 THE USE OF COMPUTERS 26

2041 Differing Approaches in Different States 26

2.42 Computerisation is Mandatory 27

2.421 Input and Output Standardisation Will Require Consultation 27

2.5 EVIDENCE TO THE INQUIRY ON l\1ANAGERIAL CONTROL ISSUES 28

2.51 Summary of Evidence 28

2.52 Mechanisms for Reimbursing Hospitals 30

2.53 The Structure of the Budget 31

2.54 Accounting Methods 32

2.541 Full Accrual Accounting 32

2.55 Management Reporting 33

CONTENTS (con tined) Page

3 MANAGERIAL CONTROL PRACTICES AND ATTITUDES TO CHANGE: RESULTS OF A SURVEY 34

3.1 HOSPITALS WITH CAPACITY IN EXCESS OF 400 BEDS 35

3.11 General Characteristics 35

3.12 Accounting Functions 36

3.121 Staff Structures 36

3.122 Reporting and Computer Processing 36

3.123 Accounting Principles and Procedures 37

3.13 Other Significant Points 43

3.2 HOSPITALS WITH CAP A CITY BETWEEN 200 AND 400 BEDS 44 3.21 General Characteristics 44

3.22 Accounting Functions 45

3.221 Staff Structures 45

3.222 Reporting and Computer Processing 45

3.223 Accounting Principle s and Procedures 46

3.23 Other Significant Points 51

3.3 HOSPITALS WITH CAPACITY UNDER 200 BEDS 53

3 .31 General Characteristics 53

3.32 Accounting Functions 54

3.321 Staff Structures 54

3.322 Reporting and Computer Processing 54

3.323 Accounting Principles and Procedures 55

3.33 Other Significant Points 59

3.4 REPATRIATION/VETERANS' AFFAIRS HOSPITALS 60

3.41 General Characteristics 60

3.42 Accounting Functions 60

3.5 GERIATRIC HOSPITALS 62

3.51 General Characteristics 62

3.52 Accounting Functions 62

3.6 REHABILITATION HOSPITALS 65

3.61 General Characteristics 65

3.62 Accounting Functions 65

3.7 BUDGETING, REPORTING, AND MANAGERIAL CONTROL 68 3.71 Responsibility Budgets Are Not Appropriate for Inter-Hospital Comparisons 68

3.72 Functional Budgets Can Give Reliable and Valid Cost Comparisons 69

3. 73 Creating the 'New Style' Functional Budget 70

3_74 Disease Costing: An Option for Future Consideration 71

3. 741 Excessive Utilisatio n Can Be Identified 71

CONTENTS (con tined) Page

4 GENERAL POLICY CONSIDERATIONS CONCERNING EFFICIENCY 72

4.1 OPTIONS FOR STRENGTHENING MANAGERIAL CONTROL FUNCTIONS 73

4.11 Greater Regulation or More Private Market Discipline? 73

4.111 Regulating for the Public Interest 74

4.112 More Market Discipline 75

4.113 A Combination of Public Regulation and Private Market Discipline 75

4.2 SPECIFIC OBJECTIVES FOR EFFICIENCY AND COST CONTAINMENT 76

4.21 Making Cost Comparisons Between and Within Hospitals as Reliable and Valid as Possible 77

4.211 An Ideal Set of Benchmarks 78

4.212 Using Minimum Cost for Comparative Purposes 79

4.213 Minimum Cost Criteria Provide a Solution to a Political Dilemma 80 4.22 Allow for a Review of Hospital Costs Relative to Capacity and Utilisation 82

4.221 Competing Demands for Public Funds 82

4.222 Finding Causes for Hospital Cost Inflation 83

4.223 Accounting for Capital Costs 83

4.23 Ensure Efficient Production of Services Taking into Account Capacity Constraints 84

4.231 Obtaining Measures of Output 84

4.232 Differentiating Between Fixed and Variable Costs 84

4.233 Developing Formal Management Policies on Efficiency 85

4.24 Provide a Focus and Direction for Cost Containment Decisions 86 4.241 Reduction of Under-Utilised Hospital Capacity 87

4.242 Reduction of Excessively Utilised Capacity 88

4.243 Improved Efficiency 89

4.244 Would Standards of Care Suffer? 90

4.25 Identify the Reasonable Financial Requirements Consistent with Efficient Production of Services 91

4.251 What is Reasonable? 92

4.26 Allow for Equity of Reimbursement 94

4.261 Equity in Relation to Services 94

4.262 Equity in Relation to Payors 95

4.263 Equity Goals, Reimbursement, and Management Control 96

CONTENTS (con tined) Page

5 PROPOSALS FOR STRENGTHENING MANAGERIAL CONTROL FUNCTIONS 98

5.1 ACCOUNTING AND REPORTING SYSTEMS: OVERVIEW 99

5.11 Accountability: Preferably All Hospitals

99

5.12 Accounting Philosophy: Accrual Accounting 100

5.121 Comparability Cannot Be Obtained Without Accrual Accounting 100

5.122 Comparability Requires Unity of Approach and Consistency of Presentation 101

5.123 Decisions Required in Implementing Accrual Accounting 102

5.13 Standard Chart of Accounts

103

5.14 Standard Functional Structures

104

5.141 A Reporting and Management Information Manual 104

5.15 Accounting and Reporting Period: Annually and Monthly 108

5.16 Cost Finding and Management Reporting

109

5.17 Budget Process

110

5.18 Major Components of the Accounting, Reporting, and Budgeting System 112

5.181 An Imaginative Development to Meet the Needs of Various Parties 112

5.182 System Overview

113

5.2 ACCOUNTING, REPORTING, AND MANAGERIAL CONTROL 116

5.21 The Development of Minimum Cost Criteria 116

5.22 Minimum Cost Ceilings: Benchmarks for Reimbursement 118

5.23 Good Payroll Systems are Essential

119

5.24 Control Over Reimbursement

120

5 .. 25 Consultations Leading to a Program of Implementation 121

5.3 ASPECTS OF IMPLEMENTATION

122

5.31 Staff Capabilities in the Finance Function 122

5.311 Building Up Staff Capabilities

124

5.32 Getting Agreed Policies on the Use of Computers 125

5.321 Computing Methods

126

5.33 Setting a Time Frame for Implementation 127

5.331 An Important and Urgent Task

127

5.332 Achieving National Objectives Without Losing Momentum 127

5.333 A Schedule for Implementation

128

5.34 In Summary

129

6 REFERENCES AND

SOURCES OF INFORMATION 130

CONTENTS (con tined)

EXHIBITS

TERMS OF REFERENCE FOR THE COMMISSION OF INQUIRY

After Page

3

2 SOURCES OF REIMBURSEMENT FOR HOSPITAL ACTIVITIES 12

3 SAMPLE COMMONWEALTH/STATE HOSPITAL COST SHARING AGREEMENI' BUDGET DOCUMENTS 13

ANNEXURES

STANDARD FUNCTIONAL STRUCTURES FROM THE CALIFORNIA HOSPITAL COMMISSION ACCOUNTING AND REPORTING MANUAL

2 MATERIAL FROM MANUAL ON HOSPITAL MANAGEMENT INFORMATION SYSTEMS (VERSION 11 ), HEALTH COMMISSION OF VICTORIA

3 ACCOUNTING, COSTING, AND MANAGEMENT REPORTING PRACTICES QUESTIONNAIRE

SUMMARY OF FINDINGS AND RECOMMENDATIONS TO

THE COMMISSION OF INQUIRY INTO THE EFFICIENCY AND ADMINISTRATION OF HOSPITALS

This study is directed to answering the following question:

Should managerial controls over hospital activities be developed to improve efficiency and administration within hospitals, and if so, how should they be developed and implemented?

A summary of our findings and recommendations in relation to these issues is presented in this section. These findings and recommendations need to be read and considered in the context of the chapter and section of the report where they are discussed, as well as within the context of the report as a whole:

1 On the basis of our findings on fund allocation and accounting by Governments for recognised hospitals, we conclude that a standard functional accounting, reporting, and budgeting system is required.

For improved information which is relevant to managerial control and for the clarification of policy choices, the accounting and reporting system must be developed in terms of tightly defined functional codes and measures which will quantify the output from various hospital activities. For the system outputs to be use­ ful at the Commonwealth level, common reporting requirements would be required across the nation. To ensure the reliability, validity, and comparability of the information, the definitions and structure of the accounting, reporting, and administrative system would need to be set down by the Commonwealth.

Although it is outside the scope of this report to make recom­ mendations on the details of implementing the system, it needs emphasising that the fulfilment of mandatory reporting standards could be a requirement for continued Commonwealth participa­ tion in the funding of hospital services.

se ction 2.14, page 18 of this report

2 On the basis of our findings, we conclude that the system of func­ tional accounting, reporting, and budgeting recommended above become the foundation of a system of managerial control within the hospitaL Our basic system could satisfy the dual needs of external reporting and reimbursement and internal performance and efficiency evaluation_

section 2-233, page 23 of this report

3 Based on our findings, we recommend that the lowest practical level at which data should be collected and reported is the

function performed.

section 3. 72, page 69 of this report

4 We recommend that functional budgets should be set in the con­ text of a planned level of activity and related to an achievable or prescribed treatment capacity. section 3.73, page 70 o f this report

5 We find that the minimum is the appropriate benchmark for quan­ tifying the opportunity cost of excess hospital capacity and unnecessary hospital output. Minimum cost is the proper basis for making cost comparisons between and within hospitals.

section 4.12, page 79 of this report

6 We find that the use of minimum cost criteria developed from reli­ able and valid costing data provide governments and the health insurance industry with a solution to a political dilemma.

Minimum cost criteria, based on service efficiency and health effi­ ciency criteria, can measure how well an activity satisfies the needs and wants of the community served. Minimum cost criteria could work to improve efficiency by identifying where to concentrate the effort for health results and cost containment. Minimum cost

criteria could also be applied to improve resource distribution. In most communities there will be regular changes in the distribution of health resources if they are being used efficiently. Changes which, on balance, bring gains for the patient and the community,

will inevitably deprive some existing health care functions of resources. Minimum cost criteria could provide the signals for directing service development in socially desirable directions. section 4.213, page 80 o f this report

7 We recognise that a process of consultation is required before there can be a specific policy commitment on the above proposals. Our recommendation, however, is that the accounting and report­ ing system should be developed and implemented in all recognised,

community, and proprietary hospitals. section 5. 11, page 99 o f this report

ii

8 Based on our findings, we conclude that the accounting systems required in Australia's hospitals should be based on those concepts commonly described as accrual accounting. In line with the adop· tion of this accounting approach, we recommend that all hospitals should establish and maintain asset registers. These registers should be integrated into the accounts of the institution and should be depreciated.

section 5.12, page 100 of this report

9 To enable the universal implementation of a common system of accounting, reporting, and administration requires standardisation and uniformity. We therefore recommend a common chart of accounts for all Australian hospitals which are in receipt of tax· payer subsidies and/or community rated health insurance. Stan· dardisation and uniformity commences with a common chart of accounts.

section 5.13, page 103 of this report

10 We further recommend that standard functional structures be established. For each cost centre, the costs which should be recorded against it and the classification of these costs into fixed costs and variable costs should be established. Recording systems, methods, and measures of input and output for each such centre should also be described, together with the manner in which theo· retical and attainable capacity for each cost centre is to be estab· lished.

section 5.14, page 104 of this report

11 We recommend that the accounting period should remain one year with reporting periods each month within the year. section 5.15, page 108 of this report

12 We recommend that a description of accounting principles and concepts, the standard chart of accounts, standard financial struc· tures, and methods for assigning and allocating costs should be set down for all to follow in a Reporting and Management Informa· tion Manual. This manual should also contain the prime elements of how results are to be reported, in terms of contents, layout, and timing.

section 5.16, page 109 o f this report

13 We recommend that the budget process for hospitals should be based on the integrated prov1sion of services for the community and the prescription of levels of bed capacity and intensity capa· city by location.

section 5.17, page 110 of this report

all iii

14 We recommend that the budget process should start with the establishment of practical capacity levels for each function and the estimation of fixed charges associated with those functions. section 5.17, page 110 of this report

15 We recommend that the establishment of capacity and utilisation levels be performed by the staff members responsible for the functions. section 5.17, page 110 of this report

16 We recommend that the budget costs associated with interdepart­ mental service groups should be spread back in accord with the standard methodology, and total unit and operating costs estab­ lished for the function.

section 5.17, page 111 of this report

17 We recommend that functional cost centres should then be 'rolled up' in accord with the responsibility structure existing in the hos­ pital to arrive at departmental, institutional, and areawide budgets. section 5.17, page 111 of this report

18 We recommend that payroll systems be installed in Australia's hos­ pitals (and perhaps associated or related institutions) which will identify and segregate staff costs by function, allowing for mul­ tiple dissections of a single staff member's time.

section 5.23, page 119 of this report

19 We recommend a systematic program of building up staff capabi­ lities within the finance function of hospital administration. section 5.311, page 124 of this report

20 We recommend that any computerised system which is installed for accounting, reporting, and administrative purposes should assist the individual hospitals in the creation of their budgets at the functional and responsibility levels.

section 5.321, page 126 of this report

iv

EXECUTIVE SUMMARY

In this report, we describe a reliable and valid method of costing hospital activitie s. The method provides a foundation for improving efficiency within the hospital system. It also provides a basis for reimbursing hospitals according t o efficiency and equity criteria.

The costing system which we are recommending is based on the imple· mentatio n of full accrual accounting in all hospitals. The accounting system would hav e a standard chart o f accounts, coding structure, account description, and reporting and disclosure provisions.

Within the system , the recommended unit fo r costing, reporting, and budgeting purpo ses would be the function. A function is the lowest level o f activity within a hospital where costs can b e associated with a significant degree of logical coherence. The activity of surgery and recovery, for example, would constitute a function. No two h ospital functions would carry out the same activity or set of activities. We recommend that the function become the unit fo r reporting on hospital e fficien cy.

The pro po sed accounting, reporting, and budgeting system could give interested part ies- doctors, health administrators, intermediaries fund· ing hospital activities, policy-makers- the following data on hospital costs and efficiency :

* By function, and by each grouping o f functions, within and between hosp itals and associated or related institutions and services.

* By area: district, regio n, t errito ry, o r Stat e (for each grouping of functions). * By client gr oup (for each grou ping of func t io ns). * By health program : acute care , long term care, primary prevention

(for each grouping o f functions). * By source o f reimbursement: Commonwealth Government, State Gove rnments, health bcnefit organisations, direct patient/client pay· ments, local governments (fo r each gro uping o f functio ns).

While the standard unit fo r costing, effi ciency evaluatio n, and reporting is the fu nctio n, functio ns could be 'rolled up' to represent organisa­ tional respo nsibilit y. 'Rolling up' is th e gro uping of cost s classified by functio n to represent organisa tio nal res ponsibility in accordance with responsibility accounting. R olling up co uld be both internal to the hospital and ex ternal in terms o f area, health program , o r client group­ ing. A res po nsi bility structure CO L\ld be created wh ere pers o ns at each le vel o f responsibility co uld be held ac co untable for the costs associated with tha t le ve l o r that positio n.

lail

Hospitals in Australia are presently reimbursed for the services they provide and the costs that they incur. Doctors, patients, health admini­ strators, and even communities have every reason, under present mechanisms for funding hospitals, to seek the provision of more ser­ vices and higher expenditures. More could mean some potential benefit to someone. Clearly, this mechanism is inflationary. It also restricts the

alternative uses of resources to accomplish health and welfare goals.

The great weakness of present reimbursement arrangements is that no one has the responsibility or incentive to relate potential benefits to costs. Certainly not the doctor, the patient, or the health administrator. With costs not taken properly into account, the opportunity cost of

providing more hospital services exceeds the potential realisable benefit. Unless reimbursement policies for hospitals are consistently restrictive to compensate for this bias, other policies designed to increase effec­ tiveness, improve efficiency, and contain costs in hospitals are unlikely to have the desired effect.

The accounting, reporting, and budgeting system which we are recom­ mending would make it practical to evaluate the factors which contri­ bute most to efficient output and desired health outcomes from hospital activities. For any health care function, service, or program, criteria could be developed to ev aluate performance in terms of quality, quan­ tity, and cost. Taken over time, minimum cost criteria for target levels of efficiency could be isolated. Minimum cost criteria could work to improve efficiency by identifying where to concentrate the effort for

health results and cost containment.

Minimum cost criteria could also be used to improve resource distribu­ tion in relation to clients, health programs, and areas. Changes which, on balance, will bring gains for clients will inevitably deprive some existing functions of resources. Minimum cost criteria could provide the signals for shaping service development in socially desirable conditions.

The proposed system of accounting, reporting, and budgeting is simply an imaginative development from systems which are operating already in some Australian hospitals. We envisage consultations between the Commonwealth and other involved parties before a policy commitment

is taken to implement these developments. Given this commitment, the uncertain aspect of implementation is the time frame . It is likely that different rates of progress would he achieved by the various States and Territories and between recognised, community, and proprietary hospi­

tals. A three- to five-year period would appear to be necessary to accomplish most of the objectives outlined in the report.

The accounting, reporting, and budgeting system recommended in this report would give substantial leverage to national and State policies designed to increase effectiveness, im prove efficiency, and co ntain costs in the provision of hospital services. T hese ga ins can be achieved by

restructuring rather than adding to the costs of administering Austra­ lia's hospitals.

ii

GLOSSARY

Service Efficiency

Health Efficiency

Minimum Cost Criteria

Function

Subjective Accounting

Functional Accounting

Responsibility Accounting

'Rolling Up'

Variable Cost

Fixed Cost

Hospital Capacity

Excess Ho spital Capacity

Under- Utilised Hospital Capacity

Quantifying the extent to which any health service or activity is accomp­ lished with minimum utilisation of resources.

Quantifying the extent to which ser­ vices are successful in maintaining and promoting the health status of the

areawide population with minimum utilisation of resources.

Target levels of performance for

health service provision in terms of quality, quantity, and cost which are developed from service efficiency and health efficiency analyses.

The lowest level of health service acti­ vity where costs can be associated with a significant degree of logical coherence.

Classifying financial transactions by grouping like items under common generic 'subjective' or 'natural' codes.

Classifying financial transactions by function.

Classifying financial transactions according to accountability within an organisational framework.

The grouping of costs classified by function to represent organisational responsibility in accordance with responsibility accounting.

A cost which is uniform per unit but which fluctuates in total in direct

proportion to changes in total activity.

A cost which, for a given period of

time and range of activity, does not change in total.

A measure of the volume and inten­ sity of hospital functions in theore­ tical and practical terms.

Resource consumption by a hospital in excess of minimum cost criteria.

Capacity in excess of that required according to minimum cost criteria.

WHY HAVE MORE EFFICIENT HOSPITALS?

This study is directed to answering the following question:

Should managerial controls over hospital activities be developed to improve efficiency and administration within hospitals, and if so, how should they be developed and implemented?

The motivation for the study lies in the rapidly increasing cost of medical services and the contribution of rising hospital costs to inflation. The increasing cost of hospital activities closely reflects the particular interests and patterns of incentives which shape the

behaviour of the various parties responsible for incurring hospital expenditure.

Doctors, for example, although they make most of the decisions con­ cerning patient management, do not bear the costs of the resources employed. It is a simple matter for doctors to provide and order ser­ vices where the economic and social costs of the services exceed the

potential benefits to the patient and the community .

Administrators in most Australian hospitals have their income and status determined by the magnitude of the hospital's expenditures. As long as funds have b ee n available to reimburse the additional services provided by doctors, whether more services or more intense services, administrators invo lved with hospitals have had no reason to resist growth in aggregate expenditures.

Patients and communities served by particular hospitals are motivated to reinforce these biases of doctors and health administrators. Our mechanisms for reimbursing hospitals remove from patients and com­ munities any direct responsibility for paying for hospital services. Because the costs are borne by taxation and community rated! health insurance, both the patient and the communit y2 have an incentive to

maximise the services they receive or have available.

Community rating for a health benefit organisation simply means that every contributor pays the same rates for th e same le vel of benefit regardless of age, sex, employment status, class of employment, state of health, or health risk. The only differential within the community rating principle in Australia is that single contributors pay ha lf the rates applicable to married contributors. The

principle sets community health insurance apart from other forms of insurance. 2 In this respect, the community could be a district, a region, a State, or a Terri­ tory.

The end result of these particularist interests and associated incentives has been a continual increase in the number and intensity of services provided by hospitals in Australia and rapidly rising aggregate expendi­ tures. Many services have been developed and are being provided with little consideration being given as to whether the benefits to patients and the community are worth the full cost.

Accordingly, the cost of services provided by hospitals has increased much more rapidly than the Consumer Price Index. Over the period fiscal year (FY) 71 to FY77, for example, bed-day costs in Australia's recognised hospitals increased by 24 7 per cent while the Consumer Price Index rose by about 95 per cent. Apart from the inflationary effect, one social cost of this growth in resource consumption by hospi­ tals is a rationing of alternative forms of publicly funded medical care and social service.

Although this study focusses on improving efficiency and administra· tion within hospitals, it is important to consider the findings and recommendations in the context of these broader issues of health and social policy.

The remainder of this chapter relates the above matters to the terms of reference for the Commission of Inquiry into the Efficiency and Ad­ ministration of Hospitals and the social policy issue of cost contain· ment in hospitals.

In the two chapters which follow, the state of the art in managing for efficiency in Australia's hospitals is assessed. The attitudes of health administrators to possible changes in managerial control mechanisms are also evaluated in these chapters. The findings from these analyses lead to a number of conclusions of considerable policy significance. The fourth chapter provides a detailed analysis of these policy issues. In the final we present a number of imaginative modifications to

presently operating managerial control systems.

With a strengthened system of managerial control, the parties most directly concerned with incurring hospital expenditures can be con­ fronted with a more realistic picture of the costs and benefits. The modifications clearly satisfy the aspirations of hospital administrators for improved managerial control. The system should enable policy­ makers and financial intermediaries3 to find solutions which are better administratively and in terms of political cost/benefits to present dilemmas in reimbursing hospitals. The system provides a framework for harnessing the energies of involved parties to work together to achieve health efficiency4 goals, ie, to raise the health status of Austra­ lians with minimum utilisation of resources.

3 The major financial intermediaries are the Commonwealth Government, State and Territory Governments, and Health Benefit Organisations. 4 Health efficiency is defined in the glossary following the Executive Summary.

2

1.1 OVERALL OBJECTIVE

The overall objective for the study is as follows:

To develop, through a process of analysis and consultation, a set of guidelines on the core managerial control functions which are required to manage Australia's hospitals and associated or related health systems.

These guidelines on managerial control are to be developed within the terms of reference for the Commission of Inquiry. The key terms of reference are:

* Number 4, 'Ways in which cost increases in hospital and associated or related services can be constrained.'

* Number 3, 'Ways in which the efficiency of the hospital and associ­ ated or related health systems and services might be improved.'

* Number 2, 'Effectiveness of machinery for determining objectives, policy, and resource allocation in hospitals and associated or related institutions and services.'

Associated terms of reference are:

* (a) 'The budgetary process for, and cost accountability of hospi­ tals.'

* (b) 'Staff utilisation and trammg, purchasing policy, management methods, and advisory services.'

The complete terms of reference for the Commission of Inquiry are given in exhibit 1.

1.11 Why Hospital Cost Inflation Invokes a Public Policy Response

Two national policy issues which are prominent in the thinking of the major political parties and about which there is substantial political and community consensus are:

* That the rate of inflation in Australia should be kept under control in the national interest.

* That higher rates of personal income tax are not acceptable to the majority of voters.

The specific issue of hospital cost inflation (and how to improve effi­ ciency and constrain cost increases in hospital and associated or related services) links back to both of these broader public policy issues.

3

Exhibit 1: TERMS OF REFERENCE FOR COMMISSION OF INQUIRY

COMMISSION OF INQUIRY INTO THE EFFICIENCY AND ADMINISTRATION OF HOSPITALS The Commonwealth Government, in conjunction with the States and the Northern Territory, has established a Commission to inquire into the Efficiency and istration of Hospitals and associated Institutions, and Services. The members of the Commission are Mr. J. H. Jamison, O.B.E. (Chairman), Dr. J. S. Yeatman and

Mr. C. W. L. de Boos. The full Terms of Reference of the Commission are set out below. Persons, organisations or bodies wishing to place evi­ dence before the Commission are invited to make de­ tailed written submissions as soon as possible. The Commission requires to be advised of th e intention of any person, o rganisation or body to make a submission and, where practicable. of the particular aspects of lhe Terms of Reference th e submission will cover. missions should contain a one (1) page summary cover­ ing the main points of the submission. The Co mmission requests that submissions be in the form of an affidavit and be duly sworn. Format for affidavits will be for­

warded upon notice of intention to submit. Submissions and enquiries should be addressed to: The Secretary, Commission of Inquiry into the Efficiency

and Administration of Hospitals, G.P.O. Box 4284, SYDNEY, N.S .W. 2001. Telephone: (02) 231 6800. Only persons who have lodged a sworn written sub­ mission will be entitled to be heard at a hearing. Oral evidence wi ll be heard in public and private hearings

which the Commission intends to hold in all capital cities and such other locations as seem desirable. Oates and venues for these hearings will be advertised from time to time. The Commission intends to make public as much of the evidence as possible. It does, however, recognise that

certain evid ence or submissions may need to be treated on a confidential basi s. Persons who feel all or any part of their evidence or submission should be so treate-d should notify the Commission at the time that the evidence or submission is give n. The Commission

rese rves its right under Section 60 of the Ro yal missions' Act 1902 (Commonwealth) to determine what part or paris of evidence or submissions should be c lassified as confidential

TERMS OF REFERENCE To i nquire into and report upon ·

1. Factors behind the costs and escalation of costs of

hospitals and assoc iated or related institutions and serv1ces: 2 . Ellective ness of mac hinery l or determining objectives. policy and resource al location in hospitals and asso­

ciated o r relate d institutions and services: 3. Ways in which the efficiency of the hospital and asso­ c iated o r related health systems and services might be improved : and 4. Ways in which cost increases in hospital and asso-

c iated o r related services can be constrained : an d to recommenda ti ons arising out of the inquiries

into the above matters W it hout re st r ict ing the scope of the Inq uiry, the Com missio n is to give part ic ular attentio n to the following matters: (a) The b udgetary proce ss for, and cost accountability of.

hospitals : (bl The eHec t1veness of existing organisational structures. and th e re lation ships between central health author­ ities (Commonwealth. Stale and Territory) , hospital

boards and managements, and medical and other staH, including any co nstra ints adverse ly affecting efficiency 1n hosoi:at m anagem ent; (c) Staff util 1sat ion and training, purc has ing policy, man· Bgement methods and advisory services; (d) Methods of payment and condi tions af service f o r

medical and other practitioners using ho spita l facili· lles and o ther associated or re lated services.

Including cha rg ing practitio ners for use o f hospital faci litieS and resources and : he effect of these matters on the leve l of se rv ices provided: (e) The effect of current finan cing methods (including

healt h insurance) on hospi tal utihsation including the prov 1S 1o n ol medica l services in hospi tal s : (f ) The relat ionship between community bAsed health and related services and hosp itals : (g) The "alue of accreditation of hospitals: (h) Existing and possib le Commonwealth/State arrange·

ments fo r meeting operating costs of hospitals and associated o r related services: and (1) Any o the r matters or s ignificont importance to (1) to

(4) above .

The Comm1sS10n. in making its recommendations . is to have regord to th e scope lor ra tiona li sati on of facil ities, services and resourr: es of all types (including tho se provided by the Depar tment o f Veterans" Affairs. private hospital s. medical pract itioners and other health-care practitioners) and to any berrrers to the achie .... ement of such rationalisation.

1.111

1.112

Hospital Costs: Victims or Cause of Inflation?

Australia's hospitals are undoubtedly victims of inflation in the general economy. In the Interim Report of the Commission of Inquiry into the Efficiency and Administration of Hospitals it was stated that 86 per cent of the increase in the total health bill for the decade ending in

FY79 was due to inflation. This inflation was felt most keenly in the hospital sector.

If the costs of reimbursing hospitals had risen no more than prices generally in the Australian economy (as measured by the Consumer Price Index), then hospitals could not be cited as a special cause of inflation. The evidence is t o the contrary, however. General acute care

hospitals consumed 43 per cent of total health expenditures in FY78. The incentives influencing the parties directly responsible for hospital expenditures have, over the last 15 years, resulted in hospitals consum­ ing an ever-increasing proportion of available resources. Hospital cost

increases are definitely contributing to inflation.

How Hospital Costs Contribute to Inflation

Rapidly rising costs associated with the provision of services by Austra­ lia's hospitals have contributed to inflation in the following ways:

Through demands on Governments for deficit funding and per diem reimbursement.

For the period FY67 to FY78, current expenditures on hospitals, as a per cent of total health expenditures, increased from:

* 29.7 to 37.9 for recognised hospitals; * 2. 7 to 4.8 for community and proprietary hospitals.

By way of contrast, current expenditures on forms of medical care other than institutionally provided services (which arc dominated by general, acute care hospitals) declined fr om 48.9 to 38.8.

To a mino r degree, some of this increased allocation of resources to the provision of hospital services reflects the effect on demand of more people and an aging population.

Much more significant, however, are the imp ac ts of more intense provi­ sion of services and higher prices. To the extent that these impacts res ult in a greater proportion of Gross Domestic Product being commit­ t ed to funding hospitals through Government budgets, they contribute indirectly to inflation.

4

1.113

Through increased prices for hospital services in the forms of higher health insurance contribution rates and increased out-of-pocket pay­ ments by patients.

Although only about 3.5 per cent of the Consumer Price Index com­ prises the health service group of items, the relative impact of rising costs on these items, particularly insurance contribution rates, can be quite substantial.

In the December quarter of 1979, for example, one quarter of the rise in the index was attributable to rising prices for health services (Scott, 1980).

Apart from the direct effect of these price increases on inflation, there is an indirect multiplier effect which is even more significant. The Aus­ tralian wage fixation system uses movements in the Consumer Price Index to apply cost-of-living escalators to wages and salaries throughout

the workforce. Similar mechanisms apply to some superannuation schemes (particularly those which are Government-provided schemes) and some income maintenance programs. These escalators further add to costs and prices generally and increase the obligations of taxpayers.

A Commonwealth Government concerned with controlling the rate of inflation and holding tax rates would feel obliged to respond to these inflationary influences resulting from increased hospital costs. For this reason, the management and reimbursement of Australia's hospitals is becoming increasingly important as a national issue of public policy.

Reimbursement of Hospitals Requires Clear National Policies

The Interim Report of the Commission of Inquiry disclosed that in FY78, less than 3 per cent of funds for hospital services provided was paid directly by the consumer. Taxpayers contributed 77.6 per cent of the reimbursement monies and contributors to Health Benefit Organisa­ tions 15.6 per cent.

The reimbursement of hospitals with a combination of public subsidies (taxpayer monies from Commonwealth and State Governments) and quasi-public subsidies (community rated health insurance) makes decisions on what costs will be allowable for reimbursement purposes and how they will be reimbursed matters of national policy.

The present demands of providers of hospital services, as shown in their submissions to the Commission of Inquiry and their statements at the public hearings, are already outpacing the capacity of taxpayers and health benefit contributors to reimburse these services on the same basis as in the past. Hospital expenditure decisions made by doctors, health administrators, and patients have costs which extend beyond the boundaries of the hospital. Decisions which are made simply to serve the interests of these parties do little to promote health efficiency from a national standpoint.

5

N ationalleadership is required:

* To establish how national resources should be allocated between alternative health programs and services according to national priorities. * To identify how changes to reimbursement policy for hospitals can

lower inflation in per capita expenditures on health as well as allevi­ ate some general inflationary pressures. * To preserve the elements of voluntary choice and private incentives in a manner consistent with the attainment of public policy objec-

tives.

Only with national leadership can we be confident that the benefits which will come from successful innovation in managerial control and reimbursement of hospitals are not limited to particular jurisdictions. The gains should be national in scope, benefiting all Australians as con­

sumers of health services and as taxpayers.

6

1.2 HOSPITAL EFFICIENCY AND COST CONTAINMENT

The Commission of Inquiry is charged with recommending to Common­ wealth and State Governments how the costs of Australia's hospitals can be contained through more effective and more efficient operations.

Effectiveness analysis of health programs and services requires an assess­ ment of health impact5 as well as efficiency in the delivery of services. From a public policy perspective, effectiveness analysis involves trading off two distinct concepts of effectiveness.

First, there is the effectiveness of services delivered to those who actually receive the services. But this effectiveness must be traded off against the effectiveness of services in maintaining or improving the health status of the areawide population in a manner consistent with social policy goals.

An overall index of effectiveness therefore involves a trade-off between the effectiveness of services provided to patients and the impact of all health activities on the well-being of the areawide population. A primary function of health policy should be to shape the mix of health programs and services, taking into account what is known about effec­ tiveness as well as the availability of resources, both public and private.

1. 21 Service Efficiency

In comparing health services, individual services can be evaluated according to the resources used to provide a specific output. Efficiency evaluation identifies what output results from a given input. It does not take into account, however, the health outcomes or benefits which result from this output. The type of efficiency evaluation most perti­ nent to hospitals and allied or related services is called service effi­ ciency. Service efficiency is concerned with quantifying the extent to which any health service or activity, say surgery and recovery, is accom­

plished with the minimum utilisation of resources.

5 Health impact can be expressed in terms of units of morbidity or mortality pre­ vented or cured, units of discomfort or dissatisfaction eliminated, and an assessment of the ultimate value to the individual, family, and the community.

7f

1.22 Health Efficiency

In comparing health services, the areawide mix of services can also be evaluated according to the inputs required to maintain the health status of the population at policy-determined, adequate levels. Whereas effi­ ciency evaluation relates resource use to outputs, effectiveness evalua­

tion relates patterns of resource use to outcomes and benefits.

The type of effectiveness evaluation most pertinent to hospitals and allied or related services is called health efficiency. Health efficiency is concerned with quantifying the extent to which services are successful in maintaining and promoting the health status of the areawide popula­

tion with minimum utilisation of resources. The alternative to surgery, recovery, and inpatient nursing care, for example, could be medication and bed rest at home. Health efficiency extends the accounting for benefits and costs beyond the patient to include the community. In everyday language, health efficiency is closely equated with effective­

ness.

Health efficiency, with its focus on outcomes and benefits, is the preferred concept of efficiency. However, because medical services are only partly and imperfectly related to health, its use as a tool for policy analysis is problematic. There is an unavoidable element of subjectivity in the values and measures which could be used to define an index of

health efficiency. What we know already about outputs, outcomes, and benefits, however, is valuable for sharpening health policy options. The provision of this information to the policy-maker would considerably strengthen his influence as he 'muddles through' to a decision.6

In this study, we apply the tools of service efficiency and health efficiency to create a managerial control mechanism which will provide ans':ers to the following questions concerning the provision of hospital serv1ces:

* What types of cost containment can be achieved? * What types of cost increases can be constrained?

6 In the world of political debate, ends and means are inextricably linked. See, for example, Charles E. Lindblom, 'The Science of "Muddling Through" ', Public Administration Review, 19, 1959, pp 79-88.

8

1.23 Policy Stances on

Cost Containment

The interim report of the Commission of Inquiry examined factors behind the costs and escalation of costs of hospitals and associated or related institutions and services.

From evidence presented before the Inquiry, it would appear that the terms 'cost containment' and 'cost increases' can have different mean­ ings to different groups of decision-makers according to where they are located in the health policy domain. On such issues, there is a diverg­ ence of opinion between those who are funding hospital services and those who are providing services.

The major financial intermediaries, on the one hand, appear to be broadly in agreement that the term 'cost containment' embraces some combination of the following components:

* The magnitude of Commonwealth and State Government expendi­ tures on recognised hospitals.

* The magnitude of total expenditures by taxpayers, health benefit fund contributors, and private individuals on inpatient medical services.

* The rate of increase in inflation in per capita expenditures on

personal medical services.

* The amount of Gross Domestic Product consumed by health services.

The Commonwealth Government and the Health Benefit Organisations, in their evidence to the Commission of Inquiry, were clearly of the opinion that cost containment objectives could be achieved, but sub­ stantial strengthening in the mechanism of manag<::rial control over hospital activities will be required. The Commonwealth Department of Health said that: 'There is an urgent need for the development of alter­ nate accounting and budgeting strategies.' The Voluntary Health Insur­ ance Association of Australia recommended that the Commission of Inquiry should propose (to Governments): 'That Australia's hospitals should move quickly in adopting a standard system of accounting, cost­ ing, and management reporting.'

The providers of hospital services, on the other hand, tend to argue that there is little scope for cost containment and that increases in costs of services provided by hospitals result from influences largely outside the control of hospitals. The Australian Hospital Association, for example, commenced its submission to the Commission of Inquiry with the state­ ment that

Cost increases in individual ho spitals during the last decade have been due to factors largely beyond hospital managerial control.

The Association also stated that it is 'doubtful whether significant fur­ ther cost containment is possible within the majority of hospitals'.

* * *

9

The two chapters which follow evaluate these policy stances by examin­ ing present managerial control practices in Australia's hospitals. Chapter Two presents an analysis of the influence of the regulatory environment on managerial control practices. Within this chapter, evidence presented

to the Commission of Inquiry on managerial control issues is also reviewed and summarised. Chapter Three presents the results of a survey undertaken in association with this assignment to gain detailed information from hospital administrators on existing accounting and reporting policies and practices. The attitudes of these administrators to possible change were also sought.

From these findings we conclude that managerial control functions in Australia's hospitals do need strengthening. There is strong support from hospital administrators for prompt action. Putting into effect these changes can lead to the achievement of cost containment objectives.

10

2 ISSUES OF

MANAGERIAL CONTROL

In this chapter we evaluate the influence of the regulatory environment for hospital reimbursement on managerial control practices. We look at the issue of whether public sector budgeting and reporting requirements used for deficit funding of recognised hospitals conflicts with sound management principles.

We also evaluate the evidence which was presented to the Commission of Inquiry on issues of managerial control in hospitals. We identify a number of areas where action is being sought in the interests of better management.

From our findings, we conclude that the first step in strengthening managerial control practices is to develop a standard system of functional accounting, reporting, and budgeting in hospitals;

11

,, I

2.1 FUND ALLOCATION AND ACCOUNTING BY GOVERNMENTS

The taxpayer, through Commonwealth and State Governments, is the dominant source of funds for reimbursing recognised hospitals (see exhibit 2). Approximately 80 per cent of recognised hospital revenue is provided prospectively under deficit funding arrangements.

The cornerstone of the budgeting process used in most of Australia's recognised hospitals is the Commonwealth/State Hospital Cost Sharing Agreement. This Agreement is largely concerned with determining current (or maintenance) expenditures which are to be deficit funded jointly by the Commonwealth and States. The Agreement is not con­

cerned with budgeting for capital expenditures on recognised hospitals, but does allow, as a current expenditure, capital expenditures on replacement items of equipment, repairs and maintenance, and additional works and services which amount to under $50,000 a project.

2.11 Cash Limit Accounting

Without Resource Accounting

The system of measuring and limiting expenditures for the Common­ wealth Government under the present Commonwealth/State Hospital Cost Sharing Agreement is one of cash limits. Cash limits must not exceed the dollar amounts agreed to by the various Standing Commit­

tees for the Cost Sharing Agreement. These dollar amounts are an­ nounced in the Commonwealth Budget early in Auf.,rust.

The cash basis of accounting adopted by the Cost Sharing Agreement brings recognised hospital expenditures in line with Commonwealth Government budgeting practices and the general accounting approach required by the Commonwealth Department of Finance. In the context of this report, however, it is important to differentiate between the Commonwealth's accounting and reporting system, which monitors and

controls expenditures against cash limits, and accounting and reporting systems which will measure and monitor costs and performance in hos­ pitals. In this respect, as explained later in this report, spending control is an insufficient basis for controlling or monitoring efficiency. Accounting for expenditure is not the same as accounting for cost or

performance.

12

Exhibit 2:

Source of Funds

SOURCES OF REIMBURSEMENT FOR HOSPITAL ACTIVITIES CURRENT EXPENDITURE FY78 Per Cent of Total Current Expenditure

Financial Intermediaries Hospitals

Private----- 2 ---------------------,

J 17-Health Benefit 111 3 Organ1sat1ons , 5 1 36 Enterprise- 22 I Ill 33 i 6=1

j Workers' Compensation 3 j

'-5 .. -Third Party Insurance

100

Other----

r 43 -Commonwealth jl

Government - - - /

I I

Public --76 _, I

L 33 --State & Local I

Government ----

- Health Benefit Organisations -- Direct Private Payments - -Other -- Commonwealth Government State & Local Government

Recognised-0 Hospitals

Community & Proprietary -2 Hospitals

Repatriation-a Hospitals

Exhibit 3: SAMPLE COMMONWEALTH/STATE HOSPITAL COST-SHARING AGREEMENT BUDGET DOCUMENTS

Form Purpose

RH1 * The purpose of this form is to provide the Commonwealth with preliminary esti·

mates for the ensuing financial year. The estimates are not 'agreed' in any way and do not imply a commitment on the part of either the State or the Commonwealth.

RH3* This form is to provide the Commonwealth with details of a proposed budget­ either initial or revised. The form provides a cash flow table which forms the basis for the Commonwealth's monthly advances to the State.

RH4 This form is to provide the Commonwealth with details of each month's actual net

operating cost. It is used to reconcile the Commonwealth's monthly advances with actual receipts and payments.

RHS* This form is to provide the Commonwealth with details of each month's actual net operating cost. It is used to reconcile the Commonwealth's monthly advances with actual receipts and payments.

RH7 The purpose of this form is to show in detail the variations that have occurred or are expected to occur to the base year budget figures to produce the proposed bud· get for the subject year. The form provides for details of statistical data supporting the proposed budget estimates.

RHB The purpose of this form is to show details of the nature and extent of a proposed

revision to an approved budget. The amount of the proposed revision is broken up into the various components that go to make up the revision.

Source: South Australian Health Commission

*Samples from these forms appear on the following pages.

Exhibit 3 (continued): BUDGET TIMETABLE

l o U W'> '!:K.i:.\5!.1 111 t Ct•:-U·'(•::, G•L'I"I I

., p)

• .• a>· :::.;. t: .. • . !t'L' :'ICJitt yr . r.;

J•: ·.·J C'! c.:: l-;:0., ' • '"' ;(,, fC'r r .• r:5

no;:;•J'l':J..S

<• I : ;)Brol 'l l ' H; :> t•':.o:t

e C.:l!; t tr. co;,: .• !•,

o i'l.a.··,nf'd

Jo\t'11: ... ("(: " ftt·l r.st.· oJtcs -

S•J:O'n

Cosls Cf;H.:)

'"" 15\.LO::gct !or CUrrent l'e.H

r·uc t i vn c! t..>•: h:ut.e::o !or

CVrrt>nt. r .:-a. r (i?.JI:) Rcvisio.t of budget (,n- Curr ... nt 'lc.ar (i\.' ! :.;"

""'

.,.,

...

Pral11'1!.1 .. 1:y fc.r

4

"'" .... ""'

., ..

.,,.

"'"

xhibit 3 (continued): FORM FOR PRELIMINARY ESTIMATES

Covernrn!-: nt Hospitr:!s

PI{ELII\llf"ARY ESTiki/.>. H:S I'Oi\ fll.L Rl'COGNISED HOSF'ITi\LS

/\ND C!:I.JTi1AL SERVICI'S IN THE S1 A

FOR YEAR 30 .IUNE 19 .........

;:nd tu',.nilt.:J;f t')n t;r: r::!f of ...

by ....

.... . •.... . ..••..•.•. . fl1H1 •.

Fc.1m r:h 1 11

Exhibit3 (continued): FORM FOR PRELIMINARY ESTIMATES

DET:.\ILS OF AT ri:OJF.CTED VAL:_:U:::E.::S-,.--------.------.

_ __ I / June . j __ -r_o_T-AL_ · _

----··---- ESTIMATED GROSS OPERATING CO._:S:;.T.:_S_:I.:..:_:$00_:0_:''_:_) ---1

HO'SPlfALS

Svlaries & vJago!{non-mtrlical)

& {medical)

Paymenu to vi.oiting medical off1,erJ-

fU Senionel .

(ii) Contr&ct •.

(iii) Fee-for-se rvice

food suppl in ..

(i) Drug supplies.

(iii & surgical t uppl•tll ..

(iii} $ptdel service

Fuel, light t( p?"Yer

Oo;1"1t:stic ehurges ..

& edditional & servic" ..

n eplacem.nt & equipment

& maintenance .. ·······t . ..... .

upenses .

Other expenset ..

Sub-Totill Hospitals

CENTRAL SERVICES

Ht'l'ld .. J.-·-···_ ···_···_ ··_ ···_····_ I Hoad oW: Othe< .. ...................•..•. ····â€¢· ·· ·· ..............•..•.....

.. _________ _ ___ , __ -... -.. - ... -... -... -... ----.--- .. -- .....

Govemment grenu:-

••• u ••••••••••• • • ••••• u •• • ··· r

fi) Unfveniti" Commiuion (recurrttnl) •• u • • •••u •••••• •• •• I

I ....... .. ..... ..................... .. , (;I) Home nursing svbtidy fiiil Other

•• •u ••t ••

"· .. ----·· .r J- .. ·······I· .. . J·.

. ....... I .... . . ... _:__j

---j

____ _j, ___ ....J _____ _j ____ __.__ __ __ --

Exhibit 3 (continued): PROPOSED CASH LIMITS SCHEDULE

Co rMn c mvt: .e!th O:.! p.:n·tmen t of Health

. Comrnonw8.:t!th -State :iospitals. Agrecmtr.t

PROPOSED BLIDGt:T ESTIMATES OF ALL RECOSNISf.D HOSPITAL S

F orm OH J 1 7

AND CENTRAL SERVICES IN THE STATE OF ........................................... .......... .

FOR YEAR ENOING 30 JUNE 19 ....... .

CASH FLOW TASLE Estimates at valuas ($'000)

I

l j Montt> Gross Oper:sting Revenue O;xraung

Con• Cas u {50 % of ne t

. -1

l.'::·r :__ ___ ---

----- -----,------

_ ___ _ _j__ --- - -·-f ------ ------- ----- --l

______ ____ J ___ __ __ L__ I_ --l

! .... I .

r ------ - --+-

---+ ---

t:: ·----t -··---- ·- - - - ---- 1 - · - - - ---j----- --j

I I I

L _j__ ____ _j _ ____ ,

rro•p;. rr J and 111bmin..:t on ol .. ,

!:.y • . ......................... .......... .

... ...... . :.c. ..

Exhibit 3 (continued): SUMMARY OF NET OPERATING COSTS FOR A STATE

C.x.1:nonweahh Departme:1t of Health Form F!H 5

OCT 76

Hospita:s Agreement

CEBTifiCATE Afllu ANNUAL SUr·,·m1P.RY OF AUDITED NET OPERATING

COSTS OF ALL RI:COGNISED HOSPITALS AND CENTRA L SERVIC ES IN THE STATE OF

C,FIOSS OPERATING COSTS

l!O'SP ITft,LS

S:' liJrioS & WUQ85 {n•Jn-mc:dfcafl

Supert'nnuJtion

f-Gymcnu to visiting m£'dical officf!rs -fi) Sc-:sionsl

lii l Contract .. ..

fii i)

& surgical .

F U'!l, lig!ll & ?Ow er

Domestic cha•gct

Administrative

C!::NlRJ.l SE RVICES tt.l

Head offict otlu.or

Year ending 3C June 19 ......... .

FINA L AMQU,\I TS AS IN AUDITED

ANNU A L ACCOUNTS $

REVENUE

Governmcr.t Grants :•

(i) Universities Co n1mlnion (recurrent)

Iii ) N.H . & M.A .C ...

(iii) Other (specify)

State Government matching granu

Meals & ac;co mmodation

Othor hospital tcvenue .

- ---1--:'.Central servites revenue (b) / - - -

1'01 Al AEVfNUE I - -----

===_j cosrs (ol

from !. t.;tc from I

G.:n crr.ment r-: sources 111

----- =,._- I ---- ------ --- - I rom Cornrr.onwe,l •th --r--

---- __J If & C"' " payment hy hOSPIICIIS ______ j _ fb; Agreed proporr.on ('lnly

b ' __ '"resp ec t C'f _____ ---

.. , ,,, ,

STAT[ /,UD!TOH ·GLi...:fR/.L'S Clil fiFICAfl:: TO A.PP[:oR BELO\':.' ___ --- - - - - ----· - - - -··

Cash flow planning and control is important in all economic enterprises. The flow of money through the public sector is an important control variable in the management of the economy by the Commonwealth Government. Although this report proposes guidelines for improved

systems of accounting and reporting for Australia's hospitals, these proposals do not imply that there should be an abolition of cash limits of expenditure by Commonwealth and State Governments. The use of controls on cash expenditures by Governments, however, is no justifica­ tion for any departure from proper resource use accounting in Austra­

lia's recognised hospitals.

2.12 Accounting for Expenditure Under Subjective Codes

2.121

The budget ing process for recognised hospitals under the Cost Sharing Agreement can be characterised as institutionalised incrementalism. When the Agreement was implemented, last year's item classifica­ tions and figures were as good a starting place as any other (see exhibit

3). The budget process since then has been largely one of doing every· thing as it was done last year with some incremental adjustments for anticipated changes.

The Limited Scope of Budgeting Under Subjective Codes

Under the existing arrange ment for funding, reporting, and budgeting, all sums arc aggregated on the basis of 'subjective' or 'natural' codes.l These subjective codes provide for the grouping of like items under common, simple ge neric headin gs such as salaries and wages , payments

to Visiting Medical Officers, food supplies, medical and surgical sup· plies, and so on (sec exhibit 3). Subsidiary breakdowns of these main headings may be used, but the classification docs not and cannot pro­ vide for the identification o f the operational area where the cost or expense arose .

The terms 'subjective' o r 'natural' represent accounting terminology for one way of classifying finan cia l transactions. Othcr classifications referr ed to in this report are 'functional', ie , grouping by service activity and 'responsibility', ie, grouping according to organisational accountabilit y.

13

2.122

As funding is performed on this subjective basis, all institutions in receipt of funding report their operating results against this coding structure. These periodic reports provide a measure of performance relative to budget. Reports at the highest level of these subjective codes cannot be used to evaluate relative performance as the sums contained within the group are an admixture of various figures.

For example, at the highest level of wages and salaries, the gross sum shown will consist of payments to all levels of staff at all classifications and include standard and penalty rates. Therefore no useful relation­ ships can be drawn. At the lower levels within the coding structure limited comparability exists. If the structure in use differentiates be­ tween the various classes of staff and the payment types, then simple ratio analysis can be performed across institutions. These simple factors would be of the 'average salary/wage per employee' or 'percentage of overtime dollars to standard rate dollars' type. Such analysis is of limited value as significant variables exist within the classification. At a Commonwealth level, the absence of a common classification or degree of detail in the subjective codes precludes their use for any measure­ ment purpose other than the 'Hospital Wages and Salary expenditure per head of population' type indicators. ·

As a consequence, the need for subjective codes is difficult to justify for any purpose other than the identification of 'tied funds'.

From the point of view of recognised hospitals, this method of allocat­ ing and accounting for funds tends to be characterised by

* Rigid, public-sector budgeting traditions, procedures, and time schedules * Bureaucratic insularity * A preoccupation with form rather than substance.

The Need for More Imaginative Budgeting and Accounting

The institutionalised incrementalism of budgeting under subjective codes perpetuates many of yesterday's mistakes and today's faulty pro­ cesses within the recognised hospital system. The allocation of funds is largely unrelated to the comparative values of institutions and services in meeting the Commonwealth's important policy goals2 such as:

* treatment of all Australians.

* Service responsiveness to differences in need between and within communities.

* Management flexibility in adapting to changed circumstances (includ­ ing the vexed question of how to control inflation in per capita expenditures on health).

* Professional accountability for outputs and outcomes. * Public accountability for taxpayer subsidies and funds.

2 These goals have been extrapolated and condensed from evidence from the Commonwealth Department of Health to the Commission of Inquiry.

14

The Australian hospital system has reached a stage in its development where more imaginative approaches to budgeting and accounting are required. The Australian electorate needs a process which will adapt the mix of services to patient and community needs while also controlling the cost of providing these services.

Incrementalism under subjective codes coupled with cash accounting practices of limited scope conflict with these needs for service respon­ siveness and cost containment. Present political and bureaucratic pro· cesses for allocating funds are most non-responsive to changing com­ munity need. Cash accounting data have been unable to provide Governments and health administrators with politically acceptable solu­

tions to cost containment dilemmas. A decision to leave present-day accounting and budgeting practices for recognised hospitals unchanged would be a decision to perpetuate today's policy problems relating to issues of effectiveness, efficiency, and cost containment in hospitals.

In the section which follows, we introduce a practical solution which can fulfil the accounting and budgeting requirements of both financial intermediaries and service providers.

15

2.13 Accounting for Expenditure By Function or Responsibility

2.131

Methods of grouping costs other than by subjective codes are available. These alternative means can be used with specific purpose grants3 to provide increased informatio n on the purpose and application of funds. The information provided by this reclassification can:

* Be used within the recipient organisations. * Provide the basis, with suitable statistical support, for inter­

institution comparisons.

* Allow for simple analysis of the application of funds.

These benefits would accrue once expenditures and costs were recorded and reported in activity (functional) or organisational (responsibility) groups within a ' type of institution' framework.

The use of such groupings does no t preclude the reclassification o f figures to provide for the reporting o f expenditure by subjective group­ ings. The provision of these subjective totals simply requires that ex· penditure for each of the subjective codes be accumulated across the boundaries set by the functional or responsibility groups. Such dual analysis reporting is currently being undertaken, o n a pilot study basis, by those hospitals involved in the Victorian Cost Centre reporting system. However, the requirement fo r subjective codes needs to be questioned particularly when, at the Commonwealth level, these group­ ings do not provide the information which is required if hospital cost inflatio n is to b e controlled or contained in any way other than the arbitrary. Subjective code budgets cannot t ell the policy-maker o r health administrat or where and by ho w much costs can b e contained.

Who is Benefiting? ... And Who is Meeting the Costs ?

With a different reporting structure it wo uld be p ossible to create multi· dimensional matrice s and conduct actual or simulat ed analyses of fund· ing in relation to :

* Programs such as acute care, long-term care, and primary prevention. * Client groups such as children, adolescents, women, the aged, and the disabled.

* Sources of funds and income beneficiaries.

3 The Commonwealth/State Hospital Co st Sharing Agreement represents a Specific Purpose Grant under Section 96 of the Constitution, which allows the Commonwealth Parliament to grant fin an cial assistance to any State on such terms and conditio ns as the Parliament thinks fit.

16

If the coding system introduced was functionally based, at a state and institutional level, then expenditure on the various functions could be examined and relative movements between functions and provider types monitored. Policy-makers, providers, and health administrators would be able to identify who was benefiting from the services and who

was meeting the costs.

With appropriate statistical support, unit costs of the service provided by these functions would b e available, so allowing cost and efficiency comparisons to be made. In any particular hospital these functional costs would, in themselves, provide improved management information

and allow for the creation of a reporting framework within the hospital with clearly defined accountability.

17

2.14 A Standard Functional

Accounting, Reporting, and Budgeting System Is Required

Under the present Cost Sharing Agreement, the mandatory reporting by hospitals is based on the subjective code structure. Consequently internal accounting, reporting, and administrative systems are designed with the primary aim of meeting these reporting requirements.

On the basis of the above findings on fund allocation and accounting by Governments for recognised hospitals, we conclude that a standard functional accounting, reporting, and budgeting system is required.

For improved information which is relevant to managerial control and for the clarification of policy choices, the accounting and reporting sys­ tem must be developed in terms of tightly defined functional codes and measures which will quantify the output from various hospital activi­ ties. For the system outputs to be useful at the Commonwealth level, common reporting requirements would be required across the nation. To ensure the reliability, validity, and comparability of the informa­ tion, the definitions and structure of the accounting, reporting, and administrative system would need to be set down by the Common­ wealth.

Although it is outside the scope of this report to make recommenda­ tions on the details of implementing the system, it needs emphasising that the fulfilment of mandatory reporting standards could be a requirement for continued Commonwealth participation in the funding of hospital services . 4

4 Apart from Section 96 Specific Purpose Grants, the Co mmonwealth also subsi­ dises hospital bed day payments for patients insured with community-rated health benefit organisations under Section 51 of the Constitution.

2.2 CASH BUDGETING AND MANAGEMENT EFFICIENCY

The cash 'budgeting' process used to prospectively reimburse current (or maintenance) expenditure for Australia's recognised hospitals uses subjective codes for classifying expenditures and incrementalism to quantify changes in the level of reimbursement.

It is apparent to even the most casual observer that the 'budgetary' control mechanism, which has become general throughout Australia's recognised hospitals under the Commonwealth/State Hospital Cost Sharing Agreement, is inherently inflationary and is a very imprecise

tool for controlling the distribution and supply of hospital services. The task of managerial control is made even more difficult with this budget­ ing process when substantial pockets of under-utilised hospital capacity exist.

2.21 Cash Budgeting

And Accountability

Budgetary control over subjective line item expenditures amounts to no more than checking on the propriety of use of funds according to statutory appropriation requirements. Such custodial accountability does not and cannot provide a basis for identifying a focus and direc­

tion for cost containment decisions. Any argument that such expendi­ ture recording and reporting equates with efficient production of ser­ vices and the containment of costs is but empty rhetoric.

19

2.22 Budgeting, Efficiency, And Cost Containment

During the course of the Commission of Inquiry, a number of issues concerning hospital efficiency and cost containment have been pre­ sented, argued, and discussed. The Commission has heard at length of:

* Problems associated with present cash budgeting procedures described above, their timing, and 'the bid' system in general.

* The limited value of 'institutionalised incrementalism' without flexible budgeting.

* The dilemma of underspending where underspending can make bid­ ding for funds in future years more difficult.

* The lack of performance incentives for good management other than professional standards and pride. * The inappropriateness of cash accounting to a multiple product and service institution such as a recognised hospital which charges insured

patients for some of these services. * The lack of contribution from departmental and medical staff to the creation of the hospital's budget and a consequent lack of commit­ ment from these staff to the budget. * Transfers of 'bonus' funds (ie, unplanned and unbudgeted monies)

by Statutory Health Authorities immediately prior to the close of the financial year and the consequent inefficiencies and subversion of managerial control that this practice produces.

* Additional costs created by allowing salaried medical staff to have the right of private practice. * The lack of planning for service levels and distribution of services with resulting inefficiencies in under-utilised and excessively utilised

hospital capacity. * Internal recording and reporting systems which do not provide com­ parable statistics between like activities in similar hospitals or within one hospital over time.

Managerial control problems associated with existing budget and mana­ gerial systems have been widely reported. In section 2.1 above, we were critical of reliance on subjective codes and recommended the develop­ ment of functional accounts. We now look at the effects on efficiency and hence on cost containment of the 'bid system' of budgeting and the timing schedule within the budget process.

2.23 The 'Bid System',

Budget Timing, And Efficiency

Early in each calendar year, each recognised hospital submits to its appropriate Statutory Health Authority a budget for the forthcoming financial year. This budget is based on the assumption that the hospital will continue to supply the same level of services in the year ahead with

minor incremental adjustments for:

* Cost movements * Changes in patient case load and case mix * Changes in revenue (other than deficit funding).

2.231 Commonwealth and State Budgets

The costs so derived are then collected under subjective headings and forwarded to the appropriate level of the Statutory Authority. Follow· ing examination and perhaps adjustment of figures, a regional, territory, or State budget is prepared. This State budget then becomes the basis

for a 'bid' for Commonwealth funds. Bargaining and negotiation at the Commonwealth/State Standing Committees and at the Health Mini­ sters' Conference is limited to the broad terms of the budge t and the size of the bid. With subjective code budgeting, this is really the only

choice open to policy-makers.

Towards the end of the financial year, the States are informed by the Commonwealth of the amount which will be provided under the Cost Sharing Agreement. State budgets are then prepared. By the time both Commonwealth and State budgets have been presented and approved ,

four months of the budget year for recognised hospitals may have elapsed.

21

2.232

2.233

Static Hospital Budgets

Each recognised hospital within the State is informed, at about the same time, of its approved budget. This will vary, possibly significantly, from that submitted in January or February. The hospital concerned then has some seven to nine months in which to effect changes to a year's proposed expenditure patterns. In some States, in the period prior to the formal communication concerning budget appropriations, the hospital has no guidelines within which to control expenditure other than the January/February bid which it knows must now be re­ garded as an approximation only. These timing and adjustment prob­ lems with recognised hospital budgets create uncertainty which under­ mines efficient management and effective control within the hospital.

The budget process for the recognised hospital is based on the previous year's expenditures plus a margin. A budget created on this basis, which is then modified according to funding pressures and then enforced with­ out variation, is a very weak management tool. It is wrong to expect hospitals to use this management tool developed for other purposes to measure performance and efficiency. Existing methods of cash budget­ ing are not concerned with performance and efficiency.

The static budget precludes hospitals from moving expenditures from one activity area to another in response to variations in demand. The end-of-year result produced by this budgetary process may often be viewed as a measure of the effectiveness of management in manipulat­ ing timing differences in account transactions more than as an example of sound and reliable budgeting.

Flexible Budgets and Efficiency

We contend that expenditures and the reimbursement of hospitals should be related to service provision, that is, the budget should be flexible.

The use of flexible budgeting, however, presupposes knowledge of service capacity in all areas of each hospital (the theoretical capacity) as well as the existence of practical capacity levels based on physical resource constraints of all types. This practical, or achievable, capacity would be used in the establishment of service objectives for each activity area in line with admissions policy and a delineated role for the hospital. Recognition would also be given to past demands and activity levels.

22

Movements in actlVlty levels against those predicted in the budget would give rise to differential cost requirements. Such cost movements should be evaluated in terms of budgets adjusted for those movements. If activity was higher in a particular area, then variable costs would

increase.5 Unless these cost increases can be evaluated in terms of the new service levels, then no efficiency criteria can be used.

Similarly, reductions in activity would increase the fixed cost content per unit of service in particular areas.6 Unless adjustments are made to the budget to compensate for this reduction in the base load for over­ head absorption, no conclusion can be drawn regarding the cost efficiency of the service delivered by the area.

Movements in service base load are, to a certain extent, outside the con­ trol of a particular hospital. Cost movements arising from changes in service base load should not necessarily be viewed as indicating control or performance problems. It is unlikely that any single hospital would

face service increases in all areas of activity such as to require changes in total reimbursement in a period. What is more likely is that there will be shifts in the locations of service costs which would require move­ ments of funds across cost centres. Provided the subjective classification

of the cost does not alter, such movements should be regarded as a normal management function, given that the movements relate to changed activity levels.

On the basis of the above findings, we conclude that the system of functional accounting, reporting, and budgeting previously recom­ mended become the foundation of a system of managerial control within the hospital. One basic system could satisfy the dual needs of external reporting and reimbursement and internal performance and efficiency evaluation.

5 By definition, a variable cost changes directly with movements in the level of activity. Pharmacy supplies are an example of a variable cost. The cost of phar· macy supplies will be a direct function of the number of patients and the intensity of care being provided. 6 Fixed cost is that component of total cost which remains constant irrespective

of changes in the level of activity. The cost of investments in medical equ.ip­ ment is a fixed cost.

23

2.3 EXTERNAL AND INTERNAL INFORMATION NEEDS

During the course of the Commission of Inquiry, many participants have commented, at times with dismay, at the lack of information on hospital activities. This paucity of information is evident at all levels, from within the individual institution to all levels of external reporting.

2.31 Present Information

Has Little Value

2.311

2.312

The recognised hospital system does produce a limited amount of infor­ mation concerning the activities of its hospitals. The majo.rity of this information has little, or marginal, value for the management purposes of:

* Financial control * Decisions on budget allocations * Planning and management * Policy decision-making.

Hospitals do provide information in two areas, expenditure and patient throughput.

Expenditure Data

Details of expenditure by subjective classification is available, but this does not provide a basis for identifying what costs could be contained nor how they might be contained. Further, as the cost data is expendi­ ture based, timing differences in relation to payments prevent compari· sons within an institution over two or more periods.

Patient Statistics

Patient throughput statistics are reported in terms of measures such as inpatient days, average bed occupancy, outpatient services, and number of patients. Measures of this type fail to account for differences in the kind of patients a hospital admits 'Or sees as outpatients, ie, differences in case mix, or differences in the level of care provided (differences in medical and nursing intensity). Some attempts are being made to mini· mise the problems of comparability by grouping hospitals but, given the differing specialties practised and the communities served, such group­ ings can never eliminate the problems associated with patient

differences.

2.32 Equity and Value in Funding Require Better Information

To be equitable in allocating finite resources between competing insti· tutions and services, decision-makers need t o be able to determine the reasons for expenditure differences between hospitals for patients with the same diagnosis.

Policy-makers and health administrators must be able to determine whether any cost differential is:

* A result of unit cost differences between the hospitals for the service provided.

* Due to the number and type of services provided. * Associated with the clinical condition of the patients. * Some combination of the above factors, including capacity costs, and physical restraint penalties.

Since the demand for hospital services increases with the supply of hos· pita! capaci ty, such data also needs to be supplemented with informa­ tion concerning client groups, service mix, and services responsibility.

Present-day accounting and reporting practices in recognised hospitals cannot provide the core cost data. In the absence of this data and the identification of cost criteria in the provision of services, there is no sound base for making choices on how available resources should be allocated according to value and equity criteria. When resource con­

straints are imposed without regard to equity and value, they impact without preference on the necessary as well as the unnecessary, the efficient as well as the inefficient.

25

2.4 THE USE OF

COMPUTERS

Computers have a vital role in satisfying information needs for external reporting and internal management.

2.41 Differing Approaches in Different States

Use of computers within hospitals in this country does not, in general, show a unity of approach, commonality of services, or compatibility of applications. The major exception to this general statement is the use, or impending use, in two other States of the Victorian-developed HosPay and HosPower systems.

In Victoria and New South Wales, differing approaches to computerisa­ tion of non-technical areas have been adopted. In Victoria, the major hospitals are using a central computing service with common applica­ tion software and on-line communications. In New South Wales, major hospitals are equipped with their own in-house computers performing similar administrative functions. South Australia is currently exploring an approach based on regional computer services.

Whilst these States show a different approach to the supply of compu­ ter services, there is a common recognition of the role computers must play if hospital efficiency is to be improved. There is, however, some doubt as to whether the systems in use or under development through­ out the country are compatible in terms of definitions and relative priorities of the various applications.

all 26

2.42 Computerisation

3.421

Is Mandatory

Computers will be required to upgrade significantly the quality of administrative management and patient management systems in hos­ pitals. The use of computers as processing and recording mechanisms is the only manner in which large volumes of information can be cate­ gorised, analysed, and reported upon in time frames which allow for effective executive action. The amount of computer use by any institu­

tion will be a factor of the size of that institution. It is possible that small hospitals could maintain manual or mechanical records. However, the aggregation of information for any area, group of hospitals, or category of institution will require computer processing.

That all States show differing approaches to computerisation need not handicap the implementation of common reporting. Similarly, the large variety of computer equipment from various manufacturers need not disrupt or delay the development and implementation of national reporting standards.

Management and financial reporting systems which are currently in­ stalled in some hospitals will require modification if the reporting standards are to be met. The cost of these modifications may be sub­ stantial if the software in use is not based on similar concepts or is not

flexible in approach. Such systems should not be common, however, unless they were specifically written for a particular organisation. Modern packaged software which is generally available for purchase should present few problems in being modified to meet external and internal reporting requirements.

Information and Output Standardisation Will Require Consultation

The minimisation of potential computer difficulties can be achieved by having finite definitions of information and output requirements at a State level. The means by which these outputs are to be achieved is a matter for consultation between financial intermediaries, Statutory

Health Authorities, and the private hospital system. Outputs defined at the State level should include both printed material of a summary nature and computer media (tapes, disks, or on-line communications) for the transmission of detailed information.

27

2.5 EVIDENCE TO THE INQUIRY ON MANAGERIAL CONTROL ISSUES

In accordance with the terms of reference for the Commission of Inquiry, most of the evidence before the Inquiry dealt, either directly or indirectly, with issues of managerial control.

2.51 Summary of Evidence

The evidence presented before the Commission of Inquiry, both in submissions and the public hearings, pinpoints a number of interrelated areas where action must be taken in the interests of improved mana­ gerial control. These areas of action can be classified as follows:

* Mechanisms for Reimbursing Hospitals * The Structure of the Budget * Accounting Methods * Management Reporting.

These are the same areas where action is required if there is to be a mechanism for accomplishing the objectives outlined in Chapter Four of this report.

Propositions have been put to the Commission of Inquiry that the current reimbursement mechanisms should be changed from an annual base to a three-year or other period, either for capital works alone or for all expenditure. The Australian Hospital Association, for example, criticised the present timing of the budgetary process and recom­ mended a rolling triennium with immediate notification of approved

budgets. The Association also recommended giving managerial flexi­ bility within approved budgets, retention of a significant proportion of the operating surplus within hospitals and regions, the development of measures of efficiency, and the introduction of accrual accounting.

Suggestions have also been made to the Commission of Inquiry that the existing budget methodology should be altered to zero- or activity­ based and funded on a global basis. It has also been argued that funding of hospital services should be need-based, ie, the hospital should be funded on the basis of assessments of need determined from the charac­ teristics of the population being served.

II!

In the majority of submissions which dealt with accounting methods, accrual accounting was promoted, either in. total or for selected items.

Improved methods of management reporting were heavily supported with protagonists for 'responsibility' (ie, according to organisational responsibility), 'functional' (ie, according to activity), and 'disease or episode of illness based' systems being in evidence.

Whilst the various parties have canvassed a wide range of management issues, there was a common thread through many of the submissions and much of the public hearings, namely, that existing methods of funding, reporting, and control are inappropriate to the demands placed on today's hospitals (particularly teaching hospitals), given their more

complex role and likely restrictions in the funds available for the provi­ sion of hospital services. This is not to say, of course, that there is agreement between the providers and financial intermediaries as to the most appropriate solution.

Arguments have also been put that reimbursement mechanisms need to be altered to provide an incentive to hospital boards and health service administrators for 'better than budget' performance. Considerable emphasis has also been placed on the need for medical practitioners to become more involved in cost-justified medicine and to take responsi­ bility for the costs which flow from their treatment decisions.

Most of the Statutory Health Authorities have recognised these issues and, to a limited extent, are examining aspects of the management pro­ cess in relation to recognised hospitals. Our own assessments of the proposals before the Commission of Inquiry for improving the manage­

ment performance of hospitals is as follows.

29

2.52 Mechanisms for

Reimbursing Hospitals

We believe that Government funding for health service organisations should not be tied to subjective codes on a budget line-by-line basis. This practice is inherently inflationary, obscures the policy options for politicians and administrators alike, and creates inflexibility in the dis­

tribution of resources in accordance with policy priorities. We have no objection to a dual system of budgeting based on detailed functional allocations which are cross-walked7 into subjective codes.

As far as capital works are concerned, we can see benefits in changing the funding period and mechanism. Once the capital wedge has been driven, it is obviously desirable to complete the project as quickly as possible and reduce the degree of vicissitude associated with annual appropriations. Delays only add to the aggregate cost.

We are less convinced that changes need to be made to funding operat­ ing (or maintenance) expenditure on any period greater than a year. Rather we would prefer to see much more vigorous negotiating and bargaining so that the allocation of funds accords with due process, reflects performance in relation to goals, and resource distribution in accordance with priorities.

Although global budgets for hospitals can be supported on an intel­ lectual basis, given the present lack of managerial control within recog­ nised hospitals, we cannot support their introduction as a practical pro­ position in the short term. Other steps must first be taken to improve hospital performance. Once managerial control systems within hospitals have been substantially strengthened, then global budgeting could become an option.

The Commonwealth Government, in iu own budgetary process, cross-walks subjective codes for appropriation purposes into functional chusifications for the Budget Speech and Statements.

3(

2.53 The Structure of the Budget

We agree with those submissions which argue for a change from the existing, subjective code-based approach to determining a budget. The inflationary and distributional shortcomings of this process are dis­ cussed elsewhere in this report.

As part of the management process, a budget structure, if it is to be used to provide pertinent information, will reflect the organisational structure in which it operates. There is, therefore, considerable support for a budgeting process which will meet the requirements of a

hierarchical organisational structure. It is not possible, however, to pro­ vide reliable and valid cost comparisons between hospitals at an organi­ sational level. Even similar types of hospitals may have quite different approaches to the task of planning the organisation. We do not believe it would be appropriate, therefore, to set down a responsibility struc­

ture for budget purposes. Any such structure so described would be a compromise and present practical problems for many users of the sys­ tem. For example, the budgets as forwarded could not be related to the existing organisation. Similarly, performance reports in the same structure would not provide the necessary control points.

At the detail level of the budget, whilst we are sympathetic to the aims of those who promote disease- or diagnosis-based information, we see a number of practical difficulties. The storage and classification of infor­ mation at this level, together with the agreement needed on bases to be

used for cost allocations, would create significant problems, particularly in those hospitals without large administrative support or unaccus­ tomed to detailed budgets.

Therefore we propose that the lowest level for budget purposes should be 'the function' performed.8 The choice of a functional base for budget preparation and reporting will allow reliable and valid cost com­ parisons. Apart from the development of minimum cost criteria, costs

can be accumulated on an areawide basis for any particular function and 'model' responsibility structures created. For the individual hospi­ tal it will allow them to create, for internal use, responsibility budgets based on conservative use of funds and related in a simple way to their

own structures.

We do not dismiss out of hand the advantages of more complex record­ ing needed for disease costing. Rather we suggest that this topic be re· examined in the future when accounting, re porting, and managerial control systems in use throughout Australia's hospitals are more

advanced.

8 A function 15 an activity which can be treated as a cost centre. Examples of hospital functions are medical/surgical acute, skilled nursing, intermediate care, residential care, labour and delivery, surgery and recovery, surgical day care, pharmacy, clinics, home health services, school of nursing, cafetaria, dietary, accounting, medical records, and medical staff. Functions are discussed in

greater detail in Chapter Five and are described in annexure I.

31

2.54 Accounting Methods

2.541

Recent years have seen changes to the accounting methods employed in some of Australia's recognised hospitals. Regrettably, these have been regressive changes from the point of view of accounting for cost and for performance. The key issue concerns cash accounting versus accrual accounting.9

Full Accrual Accounting

Prior to the introduction of the Commonwealth/State Hospital Cost Sharing Agreement in FY76, many major hospitals were using a modi­ fied form of accrual accounting. Since that time, they have been operat­ ing on cash accounting.

We agree with the view put consistently to the Commission of Inquiry (with the exception of the Commonwealth Department of Health! 0) that hospitals introduce full accrual accounting. We accept that this step will be difficult to achieve in the short term. However, we cannot see how meaningful cost data can be gathered on hospital activities unless accrual accounting is introduced.

Given that most hospitals do not maintain asset registers, we accept that arbitrary decisions may need to be made in some cases and that depreciation figures may be mis-stated. The accuracy of these asset and depreciation figures will improve over time. If the initial inaccuracy was thought to be too substantial for incorporation into the accounts, then figures should be shown on a Memorandum basis. We would expect that the level at which assets are included in the accounts or the decision as to whether an item would in the asset register by individually recorded or group recorded to be determined on the basis of materiality.

9 Accrual accounting is simply the matching of revenue and expenses over a period in accordance with prescribed accounting principles. 10 The Commonwealth Department' of Health is clearly of two minds on this issue. In its submission to the Commission of Inquiry it states that cash flow

budgeting is a practical method of funding under the Commonwealth/State Hospital Cost Sharing Agreement. Practical for who is a question which is not addressed. The Department appears prepared to give consideration to accrual accounting, however, if it will provide 'additional worthwhile information' or 'contribute to improved accountability and reporting' and 'provide the cash information required under the Cost Sharing Agreements'.

2.55 Management Reporting

In the evidence given and submissions presented to the Commission of Inquiry, a number of issues have been raised in relation to management reporting. There has been a uniformity in the cases presented for increased management reporting to be provided and the advantages that

could accrue if improved information was available to hospital manage­ ment. Details were presented of a number of management information systems which have been implemented either on a trial basis for parti­ cular hospitals or for a group of hospitals.

There has been a wealth of information presented. Given the strength of these submissions, we are forced to ask why these systems, as out­ lined, have not been in use for many years? The need for them has been well documented in the submissions.

Our guidelines for management reporting do not deviate from the majority views expressed, and we consider the following to be impor­ tant aspects of any such reporting system:

* Reports must be timely at the end of a 'period' and contain informa­ tion which provides insight into the costs and activity levels during that period. These reports must be available to the persons who have both the responsibility for the area reported upon and the authority to make changes to its method of operations. * No report presented to an individual should include the total detail

results of any other area. Information should at all times be relevant and detailed only in relation to the area of personal responsibility. * Reports should segregate the cost elements into direct and indirect, variable and fixed components, and highlight the direct variable

costs.

* AU reports should show budget comparisons for both costs and activity levels on a period and year-to-date basis. Preferably the budget information should be presented in two ways-as approved and as adjusted, to reflect activity level changes.

* All management reports should follow the organisational structure of the institution.

IHI 33

3 MANAGERIAL CONTROL PRACTICES AND ATTITUDES TO CHANGE: RESULTS OF A SURVEY

To assist in the evaluatio n o f managerial control needs in the develop­ ment of p roposals for strengthening m an agerial control mechanisms, we sought information from a range of recognised, community, and proprietary hospitals. A questionnaire! was po sted to a sele cted sample o f m ajo r institutions co mprising the following t ypes:

Type of Hospital Number in Sample

General, capacity in excess of 400 beds General, capacity 200 to 400 bed s General , capacity under 200 bed s Repatriation/Veterans' Affa irs Geriatric

Rehabilitation

16 13 14 2

4

3

In terms o f their numbers, small proprietary hospitals were under­ represented in the sample.

The questionnaire was d esigned to provid e detailed information on existing accounting and reporting policies and practices. Major issues relating to possible changes to these existing m ethods were also raised in order tha t the attitudes of ho spital administrators to change could be evaluat ed . The results were summarised in this chapter (b elo w, section 3.1 to se ctio n 3.6).

Whilst there was not unanimity of opinio n on all such issues, there was strong m aj ority support fo r the introductio n of accrual accounting, o utput measures, and m ore d etailed repor ting.

The commentary supplied shows that many o f th e principles, practices, and procedures recommended in later chap ters of this report are actively sought by administrato rs in Australi a's major hospitals. Clearly they beli eve, as we do, that the pro posed changes are no t onl y d esirable but also practical. Subseq uent discussio n b y hospitals, therefore, con­ cerning recommendatio ns fo r strengthening m anagerial contro l is likely t o be co nfined t o matters o f d et ail and im ple mentation.

Questions were asked of hospital administrators regarding im plementa­ tion times fo r the introductio n of possib le changes to managerial control sys tems. The replies tended su p port our proposed t im etable.

Detailed information from t he survey, as analysed, provid ed co nsid er­ able insight in to the hospitals involved a nd will prove valu able during the further development o f the recomm ended accounting, budgeting, and reporting system.

1 The questio nnaire accom panies this repo rt as ann exure 3 .

34

3.1 HOSPITALS WITH CAPACITY IN EXCESS OF 400 BEDS

3 .11 General Characteristics

Most of the sixteen hospitals in this group of our sample made submis­ sions to the Commission of Inquiry. These hospitals had 10,704 beds available and staffed which, during the last financial year, were used by in excess of 413,000 inpatients. During the same period some 940,000 occasions of service were provided to casualty outpatients and almost

4,750,000 occasions of service were delivered to other outpatients.

All hospitals in this group were general, acute-care hospitals, and all except one had a teaching role. Staff numbers were as follows:

Type of Medical Staff

Full time medical Staff specialists Visiting medical staff

Numbers

2109 429 1757

There were 600 staff engaged in accounting functions, of which 71, or 11.8 per cent held accounting qualifications.

Hospital organisation structures in this group were similar to those in other groups, with a 'chief executive officer' usually responsible for all activities. In some cases, the person in this position was also the senior medical officer of the institution.

35

3.12

3.121

3.122

Accounting Functions

Staff Structures

Accounting/finance structures showed similar variatiOns to those discussed elsewhere in the number of non-accounting functions within the structure. Where non-accounting staff were within the structure,

these were usually supply, personnel, and computer staff.

Reporting and Computer Processing

In accordance with the size and complexity of the institutions, report­ ing other than the statutory minimum was produced by all but one in the group. These reports emphasise results relative to budget, and many hospitals in the group circulate these reports widely, particularly to departmental heads. In the sample reports received, variations against budget were normally noted and salary and wages were the subject of particular attention. Year-end projection, based on year-to-date per­ formance, was also included in some reports. Reports on a cost centre basis were also in evidence, particularly from Victorian hospitals, and activity costs were shown.

Computerised payroll systems were used by all hospitals in this sample, and most also used computer-based or -assisted systems for billing, creditors, and general ledger. The relevant percentage figures for com­ puter use in these areas was:

Accounting Function

Billing Creditors General Ledger

Per Cent Relying on Computers

82 71 65

These computer facilities were provided in the following ways:

Computer Facilities

In-house equipment Bureau Combination of in·house and bureau

Per Cent of Hospitals

12 53 35

36

3.123

The software for these systems being provided as follows:

Software Source

Own development Purchased package Use package with third party

Per Cent of Hospitals

41 29 65

Note that these figures for software add to more than 100 per cent as all software for the various systems need not have been obtained from the same sources.

User satisfaction, from an accounting viewpoint, with these systems varied, but most were satisfied. Relative percentages were :

User Satisfaction

Satisfied Partly satisfied Unsatisfied

Per Cent of Hospitals

70 29

Where lack of satisfaction was reported, it was primarily related to lack of system flexibility.

Accounting Principles And Procedures

The questionnaire sought specific information on the use of written procedures for processing account transactions, use of accrual account­ ing, how education and research costs are treated, how purchased diagnostic services are treated, and whether stores and supplies are casted and the methodology used. Information was also sought on the use of statistics, cost centre accounting, reporting periods, ability to analyse labour costs, procedures for asset accounting, budgeting prac· tices, and changes proposed for the managerial control system. The findings are summarised below:

* Written Procedures

In almost 60 per cent of cases, written procedures existed for all accounting entries for the maintenance fund, and a similar percentage applied to entries for the special purpose, trust, and capital funds.

37

* Accrual Accounting

No hospital in the sample was using an accrual system of accounting, although one hospital did accrue salaries, another used accrual account­ ing for its laundry, whilst a third accrued salaries and wages, operating expenses, stocks, and revenue.

On the subject of whether accrual accounting should be introduced into their hospital, the responses were:

Do You Believe That Accrual Accounting Should Be Implemented?

Yes Yes, with qualifications No

Per Cent

59 23 18

Those who gave qualified support for accrual accounting included state­ ments in support of their stance such as the following:

* To be of any significant value accounting data would have to be matched against corresponding periods of activity. Resources are just not available to do this on a continuing basis with adequate indexa­ tion for cost escalation. * State/Commonwealth Cost Sharing Agreement requires cash account­

ing, and funding is on a cash basis. Ideal system would include accrual basis of accounting with ability to recognise forward commit­ ments for capital projects, research.

Those who did not support the introduction of accrual accounting also gave reasons for their answers, including:

* Accrual accounting has no relevance to Government accounting tech­ niques and funding procedures. Accrual accounting is not the panacea of cost management in hospitals. The control of costs can be effectively managed at input by those persons responsible for the purchase of goods and services at little or no cost to the hospital.

* Its only advantage would be a more realistic year-end balance sheet. It would provide no assistance month by month for management reporting purposes or cash flow control.

One hospital indicated that depreciation may be included m their accounts within the next five years.

D espite this guarded acceptance of accrual accounting by some hospi­ tals and rejection of the need for proper accounting procedures by about one hospital in five among this group, almost all2 indicated that their existing accounting system could be extended to embrace accrual accounting. Difficulties seen in the adaptation of accrual accounting again related primarily to staff resources and statutory cash reporting requirements. The staffing problems mentioned included both staff numbers and the need for an educational process. Time frames stated

for the introduction ranged up to one year. There was emphasis placed on the system being introduced at the start of a financial year.

2 Only one exception.

38:

* Education and Research Costs

As this group consisted primarily of teaching hospitals, a considerable amount of information relating to the recording of education costs was received. The level of recording of these costs varied.

Representative replies were:

* Not recorded or required by Health Commission. * Educational costs are not totally recorded. * They are not directly costed. On an annual basis an allocation of expenditure related to education is made on an assessment basis.

In general, the recording which was undertaken was for nursing training only, and then direct costs only, eg, nurse educators. Resident medical officers' wage costs could also be identified and charged.

Recording of research costs varied according to how the research was funded. Where specific funds or grants were involved, detailed recording took place. Indirect research costs are not separately recorded and, in one hospital, the research committee is currently attempting to quantify the costs involved in research activities.

* Purchased Diagnostic Services

Treatment of purchased diagnostic services in the hospital accounting systems also varied. The level of accounting ranged from

and

to

and

maintenance account ledger-visiting medical officers

charged to pathology requisites (not separately recorded)

on payment of invoice for individual service the relative diagnostic department is charged with the cost under an identifying expense cost

separate subjective cost code used to isolate this expense.

* Costing Supplies

Less that 30 per cent of hospitals in this sample costed all issues of stores or supplies, and another 41 per cent partly costed these issues. For those which did perform some costing of issues, manual methods were mainly employed. Both Last In, First Out (LIFO) and First In,

First Out (FIFO) were used as methods of valuation.

39

* Use of Statistics

The reporting systems used in less than half the hospitals ( 41 per cent) incorporated statistics which related dollar amounts to activity levels. Whilst these statistics were of the_ 'bed days' and 'outpatient attend­ ances' type, one hospital has extended these measures and use:

* Patient bed days, by ward, and specialty occasions of service, by department, divided into inpatients and non-inpatients-all diag­ nostic and paramedical services and outpatient clinics.

Use of statistics was supported by some hospitals which did not have such measures and, with one exception, the hospitals believed that standard units of measure should be used to identify the volume of services provided to patients and services provided by support

functions. The only hospital not to support these measures indicated that its lack of a reply related to the fact that it had not undertaken an investigation of the issue in order to allow an appropriate answer.

* Cost Centre Accounting

Fourteen out of the sixteen hospitals with a bed capacity in excess of four hundred operated cost centre accounting. Of these, eleven had the cost centres organised on a responsibility basis. All fourteen could organise their cost centres on an activity basis.

In total, only 35 per cent of the group could structure cost centres in their hospital in such a manner as to allow both labour and non-labour costs to be analysed into fixed and variable components. Labour costs could be analysed in 4 7 per cent of cases, and non-labour costs in 41 per cent of cases.

Only one hospital in the sample allocated inter-departmental services to patient care cost centres. These allocations were performed on the basis of actual and standard costs. In one other case, partial allocations were performed, and housekeeping, meals, and linen were charged to wards.

40

* Reporting Periods

All hospitals in the group used monthly financial reporting periods. In one case, weekly reports were issued, and in another, fortnightly reports. In both instances these reporting cycles were in conjunction with other cycles.

Quarterly reports were also issued in 53 per cent of cases. Time delays for the production of these reports showed the following lags:

Montly reports: 5 days to 4 weeks Quarterly reports: 2 to 3 weeks Annual reports: 2 to 8 weeks

The reports produced on these cycles were directed as follows:

Weekly Fortnightly

Monthly

Quarterly

* Analysis of Labour Costs

Senior m anagement Senior management and executive officers Usually senior management, Board,

and Board Committees, together with Statutory Health Authorities; in one case to 70 cost centres. Similar distribution t o monthly

reports.

* All hospitals in the group could analyse their payroll costs according to staff categories. * All but one hospital could analyse these staff costs on a cost centre basis.

* 58 per cent could determine productive and non-productive hours. * Slightly more than h alf could analyse payroll costs on the basis of service provided.

* Asset Accounting Procedures

Asset registers were maintained by 4 7 per ce nt of those in the group. Out of these, three out of four recorded all assets in these registers.

Methods used in the determination of whether an asset should be capitalised o n expenses showed some variation but basically the method was: 'New equipment capitalised, replacement equipment written off to expense.' Some variation was introduced where the decision was influ­ enced by the value of the equipment, eg, 'items over $500 capitalised' or 'materiality to the wh o le'.

In less than 25 per cent o f all cases, assets were subject to periodic accounting and reconciliation with financial records (which represents 50 per cent of those in the group who kept asset registers). In most cases, 'useful life' was the most common criterion used to determine whether an asset should be replaced. No hospital pursued a po lic y of asset depreciation, although two hospitals did indicate that they could allocate depreciation to financial cost centres if such charges were to be

made.

41

* Budgets

In 59 per cent of all cases, budgets were prepared and used for purposes other than the funding of hospital activities.

As with other sample groups, the major use of the budgets was as a departmental performance measure. There was only one instance where budgets were prepared on other than a subjective basis, or where responsibility-based figures were not available.

Most hospitals in the group prepared expense, capital, and cash budgets. Less than half of the hospitals, however, prepared budgets or forecasts for more than one year. The forward projections which were prepared included both capital and cash flow and were used by internal planning committees or senior staff. Only one hospital indicated that depart­ mental heads were not involved in budget preparation, and in 76 per cent of cases, departmental budgets were reported as being related to activity levels.

* Proposed Changes

With one exception, the hospitals in this group were planning to intro­ duce changes to their accounting systems, but the time frames for such changes varied ; only 35 per cent were planning immediate changes. In a number of cases (58 per cent of the total), these proposed changes were either influenced by, or were in response to Statutory Health Authority requirements. The changes which were planned included those for the introduction of cost centre accounting in Victoria, and increased com· puterisation.

The majority of hospitals were also planning changes to their manage­ ment information systems, with 58 per cent planning immediate change. However, these changes were almost all in response to internal demands.

No significant common element was present in these system changes.

Only one hospital said that its organisational structure was unsatisfac­ tory and planned changes to the structure. These changes were designed to improve the integration of medical staff into the management struc­ ture and to reorganise departments.

42

3.13 Other Significant Points

Major additional comments attached to replies were received in a number of instances. Significant points made were as follows:

* Any major changes in budgeting would have to be consistent with state and federal budgeting procedures.

* The effect of computerisation on the production of accounting infor­ mation has meant reports are available approximately 14 day s earlier than was the case with accounting machines. We b elieve our system would b e one of the best operating in the hospital field, and future development potential is very encouraging.

* This hospital has followed the policy of departmental budgeting for many years, as this concept provides the means of controlling expen­ diture at the level at which the expense is incurred, rather than re­ viewing total expenditure for the hospital. Departmental budge ting also invo lv e s the department head in the financial co mmitm ents of

his department and gives him the opportunity to be part of the decision-making process with regard to the allocation of funds.

* In order to implement fully the new systems in areas such as supply"/ stock control, som e costs m ay have to be incurred prior to recouping the benefits. Accordingly, the hospital is engage d in reveiwing all systems with the aim of identifying the most cost-effective m ethod. To this end, an internal auditor has recently been appo inted, and it is

expected that the results of his operati onal auditing will be most helpful.

* It is the management's plan to implement as soo n as possible a full departmental/respo nsibility reporting system.

Whether a more d etailed and sophisticated costing system can be introduced depends entirely upon the d evelopmen t of meanin gful statistical measuring units fo r both inputs and outputs, and

additional staff to be able to measure a nd record the various items of informatio n that will be required. It is th e hospital' s view that this is the only method in which bo th those who use the fin ancial resou rces of the hospital can be made aware of the cost of th e service o rdered and the efficiency of the operating centres may also be measu re d by

their use o f the resources.

To try to usc a departmental reporting system to measu re one hospi­ tal's performance against another is co nsidered a pointless exercise , as it is recognised that no two hospi tals arc the same, especially in equipment and staffing areas. The only mcaningf ul method o f com·

parison between hospitals would be the introduction of the co ncept o f 'disease costing' whereby each hospital can be measured by it s e fficien cy in how much it costs to trea t the unit s o f disease. This concept once again would requir e the resources tu enable the co llec·

tion of the in form ati o n rcq uired.

* New and innovative accounting systems an d reporting techniques will and do play a part in improving management of huspital s, but they will not substitute the most important co mp o nent of any well· manage d health care and \\Til-trained staff

dedicated to the tas k of providing the highest possible standard of patient care.

Ia 43

3.2 HOSPITALS WITH CAPACITY BETWEEN 200 AND 400 BEDS

3.21 General Characteristics

All of the thirteen hospitals gave evidence to the Commission of Inquiry. The number of beds in this hospital category totalled 3598. During the last financial year the number of inpatients treated totalled 159,661. During the same period, outpatient services were provided for 573,836 casualty, and 1,080,570 non-casualty patients.

The medical staff resources on hand were:

Type of Medical Staff

Full·time medical staff Visiting medical staff Staff specialists

Numbers

198 1191 91

Only 36, or 19 per cent, of the 191 staff engaged m accounting

functions had formal qualifications.

The organisational structure for the hospitals in this group were in accord with those in other groups, with a chief executive officer being responsible for medical, nursing, and administrative groups.

44

3.22

3.221

3.222

Accounting Functions

Staff Structures

Within the accounting/finance function common patterns of organisa­ tion also emerged. Major variances in the finance function were related to non-accounting areas, eg, computing, supply, or personnel functions reporting within the group. In some instances the finance areas were organised into separate revenue and expenditure sub-groups with more senior staff controlling each such group.

Reporting and Computer Processing

All of the hospitals prepared information and reports over and above the minimum requirements set by the relevant Statutory Health Authority. The type of information produced included:

* Supply, stock controls * Monthly departmental cost reports * Budget reports * Staff establishment reports * Debtors summary * Summary balance-wages, repairs, etc * Operating statements * Stores and pharmacy issues by unit * Cost summaries * Monthly clinic visit summaries.

The two main recipients of this information are the Finance Committee and the Management Committee.

Important statistics in relation to the use of computers in these hospi­ tals are as follows:

* All had a computerised payroll system. * 76 per cent had computerised creditor and ledger systems. * 50 per cent of hospitals had computerised billing. * 38 per cent used a bureau. * 23 per cent had an in-house system. * 39 per cent used a combination of bureau and in-house. * 15 per cent of hospitals that used computer facilities had developed

their own software. * 38 per cent used the software of a third party. * 15 per cent purchased a package. * 32 per cent used a combination of the above software options.

45

3.223

Satisfaction with software, from an accounting perspective, varied. 61 per cent said that they were satisfied. A further 29 per cent were partly satisfied. Reasons given for lack of complete satisfaction were as follows:

* Cumbersome for patient reporting. * Creditor/ledger system not adequate for management reporting. * Not enough scope for individual reporting. * Lack of trained staff.

Accounting Principles And Procedures

* Written Procedures

In 46 per cent of cases, written procedures existed for accounting entries in the maintenance fund. In 38 per cent of cases, written proce­ dures also existed fo r special purpose trust and capital funds. In all but one case, hospitals that had written procedures for the m aintenance fund also had written procedures for special purposes, trust, and capital funds.

* Accrual Accounting

One in five o f these hospitals used the accrual system of accounting. This sample included, of co u rse, community and proprietary hospitals. Two hospitals had partially implemented an accrual system of ing, notably in the area of salaries and wage s, and in a m anagement information system which en comp assed fiv e hospitals.

55 per cent of hospitals b elieved an accrual accounting system sh ould be introduced, 15 per cent sa id they were against it, and 15 per cent expressed reservations. A further 15 per cent did no t comment. The hospitals which qualified any introduction of an accrual system felt it was only useful for payroiJ and significantly variable expenses. The general attitude of the favourable respo nses was that the accrual

method

* Eliminates distortions * Gives a true measure of performance * Helps in compariso ns.

70 per cent of hospitals believed that their accounting system could be extended to embrace the ac crual system. Ho wever, they estimated th at a twelve mo nths time lag would be required before implementation could be completed.

Staff re training would be needed also, but as one hospital put it:

There will be problems but [they are] not in surmountable, as advantages of change far o utweigh any disadvantages.

46

* Cost Allocation

Of this sample, 7 6 per cent were either teaching hospitals or associated with teaching of medical and nursing staff. 61 per cent used an account specifically for teaching and allocated direct costs to it, eg, training­ labour, salary costs. The other hospitals allocated the costs to cost

centres, or areas of responsibility. Overheads such as lighting, heating, etc, were absorbed by the various hospitals in general expenses, and were not allocated.

* Purchased Diagnostic Services

One out of every two of these hospitals purchasing diagnostic services charged the costs to specific accounts, eg, 'Services provided by other hospitals' or 'Pathology Department'.

* Costing Supplies .

Issues of stores and supplies were casted in 3 7 per cent of the hospitals, while they were partly casted in 30 per cent of cases. Only one hospital stated its valuation method, which was Last In, First Out.

* Use of Statistics

In 52 per cent of cases, the hospitals reporting incorporat ed stat1st1cs which related dollar amounts to activity levels. One hospital prepared profit and loss reports for all inco me-producing departments and another attempted to relate number of inpatients and length of stay to support spending levels.

One hospital saw the purpose of standard measures and statistics only in terms of comparing the performance of different hospitals . Another saw these measures being useful only in terms of comparing actual to budgeted cost. 30 per cent o f the hospitals saw the purpose as combina­

tion of the above and/or as a means to inform interested bodies. One hospital advocated that standard units of measure should be used to record

* Services to patients * Services provided by support facilities.

* Cost Centre Accounting

All hospitals had organised their cost centres around a responsibility basis. All but one hospita l could cost centres around activity

areas. The hospital that could not felt that it would need mo re staff to justify such a change in a hospital of its size (250 beds) . Within the cost centres, 61 per cent of hospitals could differentiate between fixed and variable costs.

Costs relating to interdepartmental services were, in 15 per cent of cases, allocated to patient care cost centres. One hospital stated that th e allocations were based on a percentage sampling.

47

* Reporting Periods

All hospitals prepared monthly and annual reports. One out of two also prepared quarterly reports. There was a time delay in the formulation of these reports:

* Average delay for monthly reports- 2 weeks * Average delay for quarterly reports- 2 weeks * Average delay for annual reports- 4. 7 weeks.

The recipients of these reports were similar in all cases, namely Finance Committees, Department Heads, Management Committees, the Board, and the Statutory Health Authority.

* Analysis of Labour Costs

All hospitals could analyse payroll costs according to the types of staff employed. Of the sample 76 per cent could analyse labour costs in terms of cost centres, 61 per cent in terms of productive hours, and non-productive hours. 69 per cent of hospitals could allocate payroll costs in terms of services provided.

* Asset Accounting Procedures

Only five hospitals kept a fixed asset register and, of those, only two recorded all assets.

In determining whether assets should be capitalised or expenses, two hospitals made a judgment based on expected life and cost, two fol­ lowed the directives of the Victorian Health Commission (ie, purchases from capital funds-capitalise; purchase through cost sharing-expense), and one hospital expensed all assets and stated: 'All assets expensed­ no advantage in capitalising assets for internal control of costs.'

Only one in four of the hospitals periodically reviewed their assets. In determining when an asset should be replaced, hospital management used the following criteria:

* Useful life only- 23 per cent * Periodic review only - 7 per cent * Observation review only - 15 per cent * A combination of the above - 46 per cent.

Only two hospitals in the sample of thirteen depreciated assets. The following statement was made by one hospital in this group:

Depreciation of all assets (largely supplied to the private sector for taxation purposes) would pr9vide more meaningful financial data for inter-hospital comparisons, but it offers little assistance to internal management and control. Would the various Health Com­ missions replace all buildings and equipment with a depreciation value of zero? Use of depreciation would, however, act as a guide to organisations that plant and equipment had reached the end of its useful life-subject to other factors, eg, technological redund­ ance.

Two hospitals could allocate depreciation charges to functional cost centres, but no hospital in this sample did make such allocations.

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* Budgets

Budgets were used in 7 0 per cent of the h ospitals for purposes other than for funding. They were used for purposes such as cost control, management efficiency, and planning.

In all but o ne case a subjective code structure was used for preparation of budgets, and in 85 per cent of cases the budgets were prepared on a responsibility basis. Two hospitals used functions as a co ntro l point in budget fo rmulation. All but one hospital prepared expense budgets,

76 per cent of hospitals prepared a capital budget, and 84 per cent of hospitals prepared a cash budget.

In 38 per cent of cases, budgets were prepared for more than one year. In those cases, the time span varied between eighteen m o nths and five years. All hospitals claimed that departmental heads participated in budget preparation and, in 77 per cent of occasions, departmental

budgets were said to be related to activity levels in the department.

* Proposed Changes

48 per cent of hospitals planned immediate changes to their accounting system, 78 per cent planned short-term changes, and 25 per cent fo re­ saw long-term changes. In 46 per cent o f cases where change was to take place, the responsibility for the decision lay with the hosp ital. In

30 per cent of cases, the Stat e Health Authority was resp onsible for the decision. In 24 per cent o f cases, it was a co mbinatio n of b o th these factors.

The changes t hat were being pla nned centred o n :

* Accrual accounting- a re introductio n * Invento ry control impro vement * Asset control improvem ent * Introductio n of computers/automation * Cost centre accounting system

* Standardisatio n of report ing between hospitals.

The motivat io n behind these changes was to improve the overall efficiency and contro l within the hosp it als, and to monitor per­ formance.

In respect to time ho rizons for changes to the ho sp ital manage ment information systems

* 38 per cent planned fo r immediate changes * 61 per cent planned fo r short-term changes * 23 per cent planned fo r long-term changes * 7 per cent planned fo r no change.

63 per cent of answers submitted said that the body responsible for making the decision to change the manage ment informat io n system was the hospital. In 9 per cen t o f cases, it was the Statutory Health Autho­ rity and, for 28 per cent , a comb in ation of both.

49

Changes proposed included:

* Introduction of patient information system * Cost control statistics * Revision/consolidation of statistical and financial reports * More timely reports * Establishment of a nurse allocation/roster system.

The rationale behind the changes was to increase management effi­ ciency, provide easily comparable data, and to improve priority setting.

Of the hospitals that planned to institute a computer system, no hospi­ tal planned to use only its own programs or software package. One hospital did intend using an in-house computer. A similar situation existed for the use of a third party package and a bureau. The rest, ie,

79 per cent of the hospitals, planned to use a combination of the above.

Of the hospitals questioned, 70 per cent were happy with their existing organisational structure. The remainder, however, anticipated changes in some form to the present situation. In these cases, proposed changes had not been determined but, as one hospital put it, they have to 'maximise patient care with available dollars'.

50

3.23 Other Significant Points

In a number of cases, extra points were raised by hospitals. Significant statements included the following:

* There is considerable merit in providing a balance between in-house bureau facilities to optimise administrative costs on a state-wide basis.

* In the relatively short period concerned, the hospital has significantly reduced expenditure, secured an excellent payroll system, secured an in-house computer and software for patient reporting and billing, commenced organisational restructuring, commenced limited cost

centre reporting, and identified objectives for accounting systems and management information reports.

Achievement of existing objectives are planned over three years.

* The key issue highlighted in the questionnaire is how should hospi­ tals report and analyse their costs and performance. With respect to the reporting of costs, two different and distinct reporting methods are possible, and each serves a different purpose. Costs (and

revenues) in hospitals can be reported on either

1 A responsibility basis (ie, responsibility accounting)

or

2 A functional basis (ie, cost centre accounting).

Responsibility accounting allocates costs (and revenues) to organisa­ tional units within the total organisation; departmental heads are allocated a budget within which they are expected to operate their department. As organisational structures vary both within and be­

tween hospitals due to differences in the levels of skills and expertise of personnel, responsibility reporting is best suited to internal financial reporting, management, and control, and it does not permit

meaningful comparisons between hospitals except on a global basis.

Cost centre accounting allocates costs to defined areas of function/ activity and as such it becomes useful for external reporting and for cost comparisons between hospitals. However, as a tool for internal reporting and financial management, it has several significant limita­

tions which include:

It restricts responsibility accounting since some cost centres (ie, functional areas), such as Casualty, Pathology, Radiology, Out­ patients, etc, involve more than one line of responsibility.

2 Implementation of cost centre accounting would probably involve all hospitals adopting a uniform organisation structure; such a practice restricts organisational development and may lead to inefficiency and inappropriate lines of responsibility.

Each reporting method on its own has limitations with respect to satisfying both internal and external reporting requirements. The

51

obvious solution, therefore, is to combine both methods to enable meaningful financial reporting for internal management and control as well as inter-hospital comparisons by an external body. The American Hospital Association has followed such an approach in the development of its 1976 Chart of Accounts for Hospitals. A similar approach in Australia, whereby a uniform management information

and accounting system is developed based on such a chart of

accounts, would be sufficiently flexible to allow the allocation of all costs (and revenues) to both the appropriate responsibility areas and the functional areas. This would then permit two streams of report­ ing- one by responsibility for internal control, and one by function/ activity (ie, cost centre) for external analysis and control.

13 5: I

3.3 HOSPITALS WITH CAPACITY UNDER 200 BEDS

3.31 General Characteristics

Less than half of the fourteen hospitals in the group made submissions to the Commission of Inquiry, but a number did forward their views to the Victorian Hospitals Association Limited for inclusion, by that body, in a consolidated submission. In one case a personal submission was made by the chief executive officer of one of the hospitals.

Our sample of hospitals in this group currently has in excess of 1800 beds available and staffed, the majority of which are general beds. In the last financial year they treated more than 69,000 inpatients and provided almost 250,000 occasions of service to casualty outpatients and over 650,000 occasions of service to other outpatients.

In total, they employ 83 full-time medical staff, 30 staff specialists, and they have 538 visiting medical staff. Administrative staff engaged in accounting functions number 115, of which 15, or 13.04 per cent, had formal accounting qualifications.

Organisational structure in the hospitals showed marked similarities, with more than three quarters having the senior medical and nursing positions reporting to the Board through a chief executive officer or manager. In the other cases, the three senior staff, administration, nursing, and medical were all shown as reporting direct to the Hospital Board.

IHI 53

3.32

3.321

3.322

Accounting Functions

Staff Structures

The accounts/finance functions of the hospitals contained some varia­ tions in regard to non-accounting areas controlled within the functions.

Reporting and Computer Processing

With one exception, the hospitals produced information and reports, in excess of the statutory minimum, for internal management purposes. In general, these reports compared performance relative to budget and were circulated to the Finance Committee and Board. In approximately

25 per cent of cases, departmental heads were also provided with similar performance reports.

All hospitals in the group were using computerised payroll systems and 25 per cent of the group also used computerised billing, creditors, and general ledger systems. In general, around one out of two of each of these non-payroll systems were computerised. When non-computer­ based systems were used they were almost always manual. In the majority, 75 per cent, the computer services were provided on a bureau basis with some hospitals using in-house equipment .and one using a combination of a bureau and in-house facilities. The software for these systems was in most cases a package.

Only 60 per cent of the hospitals were satisfied with their computerised system from an accounting viewpoint. The reasons for lack of satisfac· tion included access difficulties, time lags, particularly in error correc· tion cycles, difficulties in obtaining program changes, and lack of

flexibility due to packaged systems.

54

3.323 Accounting Principles And Procedures

* Written Procedures

In some 65 per cent of the sample, written procedures existed for all accounting entries associated with the maintenance fund. This figure dropped to 50 per cent for special purposes, trust, and capital funds.

* Accrual Accounting

Only two hospitals in the group were using accrual accounting in total, with a further three using some accrual techniques. However, all fourteen supported the implementation of accrual accounting in their hospitals, although in four cases this support was qualified. These quali­

fications were as follows:

* If depreciation and long service leave are not included it seems point­ less.

* Any change in procedure would be subject to a change in funding procedures by Government, and also to adjustment to staff level.

* Accrual accounting should be implemented in conjunction with depreciation of assets.

* Only if it is required for both Government and Board of Management use; otherwise, preparing two sets of accounts would not be worth the effort.

Given these comments, it can be fairly stated that accrual accounting was supported by all in the sample group. All in the group who were not using accrual accounting indicated that they could extend their existing accounting systems to embrace accrual accounting. The imple­

mentation time for such a change was generally given as six months or less. As with other groups, a number of hospitals indicated that such a change should only be introduced to coincide with the start of a finan­ cial year, and in approximately 30 per cent of cases, staff levels and/or

training of staff was seen to be a restricting factor.

* Educational and Research Costs

Educational costs were not, in most cases, separately recorded. In about 25 per cent of cases, direct education costs were identifiable. For those hospitals with a research role, attempts were made to isolate research costs.

55

* Purchased Diagnostic Services

Purchased diagnostic services were recorded in a number of ways. Sample answers representative of the total were:

* Recorded as purchase of Pathology services. * Debited against purchases of special services pathology. * Recorded against the diagnostic unit requesting the service. * Expensed as 'special service payments'.

* Costing Supplies

In 50 per cent of the hospitals in the sample group, issues of stores or supplies were costed. This costing was based on requisitions and a monthly summary was used for accounting purposes.

* Use of Statistics

Only one hospital in this group included, in this reporting system, more than one statistic which related activity levels to dollar amounts. The particular statistics used were monthly in-patient bed days, meals served monthly, and outpatient attendances which were used in annual report­ ing. This hospital was in the process of determining outpatient measures for departments, for improved statistics. One hospital also reported that meal costs were checked on a monthly basis, and another checked linen costs on a unit basis each month.

With one exception, there was support for the use of standard units of measure to identify the volume of services provided to patients. Similarly, the majority of respondents believed that such measures should also be used for support functions.

* Cost Centre Accounting

In those hospitals which used cost centre accounting, the cost centres were, in almost all cases, organised on a responsibility basis, but could be organised on an activity basis, if required. Differentiation of costs into fixed and variable, labour and non-labour, could be performed by some 60 per cent of the sample hospitals, with a slightly higher per­ centage being able to carry out one of these analyses, ie, labour costs into fixed and variable. No hospital allocated all interdepartmental service costs to patient care cost centres, although one hospital directly costed laundry charges.

all ss I

* Reporting Periods

As with other groups, the preferred reporting cycles were monthly and annual, with two hospitals using four weekly reporting cycles. Approxi­ mately one third of the group produced reports on a quarterly basis. The time taken from the end of the period to produce these reports

showed significant variations. Monthly reports were produced from 5 days to 5 weeks after the end of the period, and annual reports from 4 to 10 weeks after period end.

* Analysis of Labour Costs

All hospitals in this sample could analyse payroll costs by staff type, but less than 25 per cent could analyse the payroll costs by all of the following: cost centre, productive hours, non-productive hours, and service provided. Slightly less than 25 per cent could not analyse these

costs into any of the above categories. The balance, over 5 per cent, could analyse payroll costs into some of the categories only, and there was no consistency in the replies.

* Asset Accounting Procedures

Asset registers were kept by 50 per cent of the hospitals in the sample, and slightly less than half of these recorded all assets in the register. In two other instances, hospitals were in the process of completing asset registers. Criteria used for determining whether assets should be capital­ ised or expensed varied between hospitals according to their status for

reimbursement purposes. However, in two instances an initial cost greater than $250 for the asset provided part of the criteria.

Of those hospitals which kept complete asset registers, most performed periodic reconciliations, as did another hospital whose register was incomplete. No significant conclusions could be drawn from the asset replacement criteria given.

In two hospitals, fixed assets were subject to depreciation charges, and in one of these cases the depreciation charges could be allocated to individual functional cost centres, but no such allocation actually took place. Another two hospitals could also perform these allocations if assets were required to be depreciated.

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* Budgets

In about 65 per cent of this sample, budgets were prepared and used for purposes other than the funding of hospital activities. The general thrust of the information given on these extra budgets and their pur­ pose was well summarised by one hospital: 'Cost awareness and en­

couragement of responsibility in departments.'

A subjective code structure was used for all except one of the budgets, and in most cases the budgets were prepared on a responsibility basis. No hospitals used functions as a control point for the preparation of budgets. All in the group prepared expense budgets, usually associated with cash and capital budgets. In one case, budgets for in-patient bed days and outpatient visits/attendances were also prepared. Two institu­ tions prepared forecasts or budgets three years ahead.

In all except one case, departmental heads were involved in the budget preparation and, in around 7 5 per cent of cases, departmental budgets were related to activity.

* Proposed Changes

Almost all hospitals in this sample have planned changes to their accounting systems. In the main, the initiative for such changes came from the relevant Statutory Health Authority. The changes planned varied as to time frame and content. In Victorian hospitals, the majority of changes related to the introduction of cost centre account­ ing. Elsewhere, computerised systems were to be implemented to improve the availability of management information.

The majority were also planning changes to their management informa­ tion syste .. ;s, mainly in response to internal requirements. Largely, these changes related to increased statistical information to improve decision-making. In almost all cases it was planned to increase compu­ terisation, through the use of in-house equipment.

Whilst four hospitals considered that their existing plan of organisation was not satisfactory, only two had changes to the structure planned. The changes proposed were to introduce 'Multi-disciplinary committees to involve all service areas', and 'The organisation must be based on result-producing activities derived from the organisational objectives'. A third hospital, whilst not planning changes, commented: 'The intro­ duction of a departmental budgeting system may lead to a change in the organisation structure based on financial accountability of depart­ ments rather than the existing accountability of functions.'

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3.33 Other Significant Points

The following general comments were also made;

* The present system of budgeting in this region is to use the actual figures for the previous year as a base, add a percentage for inflation, plus or minus known variations, to arrive at the budget for the ensu­ ing year. This figure is often reduced by the Health Commission. It is felt that there is no objectivity for good management.

* The present system of budgeting, whereby expenditure is isolated from income, could be improved upon by total global budgeting.

* This hospital fully supports the concept of accrual accounting. We also contend that the accounting year for hospitals should be from January to December. This would permit our grant allocation to become known in November prior to the commencement of the

accounting period, so enabling sensible budget levels to be set for our departments.

* With such a small hospital as this, full accrual/cost centre accounting would entail a lot of extra work for what I see as a relatively small gain.

* The lack of adequate computerisation at this hospital is of great con­ cern. Whilst the health computing services facilities are available and to some extent used by this hospital, transmission, delivery, and the availability of competent programs are problems experienced frequently.

Part of the accounting system is manual, part mechanical, and part computerised. An in-house computer with suitable packages could provide the hospital with prompt, accurate, and meaningful infor­ mation for accounting and management systems. The lack of any method of depreciation for equipment is also of con­ cern in that:

(i) There is no procedure to replace equipment as it becomes obso­ lete-no capital funds available to replace them. (ii) No schedule of equipment is maintained.

(iii) The true cost of provision of health care is not shown, in that the wearing down of equipment is not shown in the operating figures.

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3.4 REPATRIATION/VETERANS' AFFAIRS HOSPITALS

3.41 General Characteristics

Both Repatriation/Veterans' Affairs hospitals in the survey were teach­ ing hospitals, and they treated in excess of 33,000 in-patients in FY80. For the same period, total outpatient services were in the order of: casualty, 43,000; other than casualty, 390,000. In total, they employed

256 full-time medical staff and a similar number of visiting medical staff.

Full-time equivalent staff engaged in accounting functions were 52, of which only two, or 3.85 per cent, possessed formal accounting qualifi­ cations.

The overall organisation al structures of the hospitals were similar, as were the structures of the two accounting/finance functions.

3.42 Accounting Functions

Both hospitals produced reports and information from their accounting records other than those required by the Statutory Health Authority. Interestingly, both used four weeks as the reporting period. Although these extra reports were produced, they were aimed primarily at out· side us e.

Accounting functions were computerised in part, using the Common· wealth Department of Finance as a bureau, in one hospital. The use of this facility was not regarded as totally satisfactory, as the systems were not tailored to the specific needs of a health care organisation.

Neither hospital was using accrual accounting techniques in part or in •otal, although the adoption of such techniques was supported with differing emphasis. Both hospitals saw difficulties in introducing accrual accounting, including those relating to the requirements of finance directives and regulations.

Education costs incurred in t he h9spitals are in general incorporated into the accounts, although some salary figures and fees can be identi· fied specifically.

Ia 60

The level of recording of research cost s in the two hospitals, as

reported, showed variances, with one being able to identify uniquely most costs associated with approved research. Purchased diagnostic ser­ vices were recorded in the treatment appropriation, and o ther supplies were not uniformly casted to wards or departments, altho ugh one hos­

pital is moving to do so for medical consumerables. Neither hospital currently has a comprehensive system of relating dollar amounts to activity levels, but they b o th support the concept of standard units and costing. T o this end, the hospital could provide funct ional co st centre details b y co st type witho ut allo cated co sts being spread to patient care cost centres.

As mentio ned earlier, b oth use four-weekly reporting cycles for financial reports, with delay lags after period end varying from 10 to 15 working days for the four-weekly reports, t o 15 to 30 working days fo r quarterly reports.

Whilst bo th hospitals can analy se payroll costs according t o staff type, only o ne could split these co sts into productive and non-p roductive hours.

Asset reg ist ers were k ept by both hospitals, alt ho ugh neither p erformed periodic reconciliatio ns o f those record s. Asset replacement review criteria were similar in bo th hospitals. Depreciation charges were made in one case, fo r the ccntrallinen supply.

One hospital prepared a cash budget for purposes other than funding, and b oth prov id ed three-year forecast s to the relev ant authority. Departmental heads are involve d in budge t preparatio n .

Both hospitals have pla nned changes to their acco unting and manage­ ment informa tion systems, but the areas emphasised differ. In-house computer fac ilities will be associated with these systems changes, and o ne hospital also intends to rev ise its adm inistrative structure to intro­ duce great er m anagem ent co ntrol.

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3.5 GERIATRIC HOSPITALS

3.51 General Characteristics

Of the four geriatric hospitals included in the survey, two had made submissions to the Commission of Inquiry. The four hospitals had 2084 available and staffed beds, treated 6017 in-patients, and provided 42,837 occasions of service to outpatients. To provide these services,

19 full-time medical staff, 25 visiting medical staff, and 7 staff special­ ists were employed. There were 34 full-time equivalent members of staff engaged in accounting functions at these hospitals, of which 7, or 21 per cent, were qualified.

In all hospitals in this group, the organisational structures were similar. An administrator controlled all activities of the hospital, .with the medical, administrative, and nursing staff reporting to the position.

The accounts/finance functions in these hospitals were also organised in a similar fashion.

3.52 Accounting Functions

All hospitals in the group produced more than the statutory minimum from their accounting records. In two instances, the information pro­ duced went beyond statements of receipts and payments.

One hospital provided:

* Departmental expense analysis to all departmental heads. * Departmental payroll costs to all departmental heads. * Summary of all departmental activities to management. * Monthly payroll summary report, including sick leave details, to

management.

* Quarterly HosPower analysis to management.

The other hospital supplied:

* Monthly reports to department heads (major functional responsibi­ lity areas). Comparisons of actual with budget for month and year to date.

* Monthly reports to the Board: (a)

(b)

Financial report encompassing all funds of the institution.

Report on maintenance account operatio n by subjective classi­ fications, actual vs. budget, month and year to date.

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In all cases, the payroll systems used were computerised. Creditors and general ledger were also computerised in two cases. Manual billing, creditors, and general ledge r were used in another case, with

mechanised systems used by the other institutions.

The computerised systems were not regarded, in all cases, as totally satisfactory from an accounting point of view. Comments made in this regard were that there was a need to keep subsidiary ledger cards for payroll purposes, lack of detail in cash book, and cumbersome treat· ment, in general ledger, of associated hospitals.

In half the hospitals in this sample, written procedures existed for all accounting procedures. Whilst accrual accounting was not used by the hospitals in the sample, all believed that it should be introduced into their hospital. In one case, this support was qualified insofar as that

hospital thought that depreciation of assets would be of little value. Two hospitals indicated that their existing account systems could not be extended to embrace accrual accounting. In one case this was because of limitations of the existing facilities and staffing, which

would not permit both an accrual and a cash accounting system to operate. Implementation times were given in other cases for accrual accounting, with l July being regarded as a preferab le starting date for such a system.

Education costs in the institutions which incurred them showed some differences in treatment. In one case, a separate cost centre was main· tained and identifiable costs charged to that cost centre (which did not incur any overhead apportionment). In the one institution in this group

which had a research involvement, the costs of this research were sepa­ rately recorded.

Purchased diagnostic services were treated in a number of ways, ranging from as 'any creditor' to 'direct charge to the appropriate cost centre account'.

Costing of the issues of stores or supplies also showed variation, with only one institution charging user departments, in every case, for goods requisitions.

ll:one of the hospitals in the gr o up had a reporting system which linked activity levels with dollar amounts, but the concept was supported. All but one hospital indicated that their existing responsibility-based reporting systems could be modified to an activity-based system. How­ ever, only one of these hospitals could create such cost centres in a

manner which would allow for fixed and variable costs to be recorded separately. :\o hospital was allocating interdepartmental services to patient care co st centres.

All reported on a monthly basis, and in two cases quarterly reports were also produced. Significant delays after period end in producing these reports was evident, with annual reports taking up t o 6 weeks, quarterly up to 2 weeks, and monthly up to 3 weeks.

63

Payroll costs for all hospitals in this group could be analysed by type of staff. Breakdown of these payroll costs into further classifications, eg, cost centre, productive hours, non-productive hours, and service pro­ vided, could only be accomplished by one hospital. One could not pro­ vide any of these further analyses, whilst the others could in part.

Only one of these hospitals kept an asset register, and all assets were recorded in this register. No institution depreciated assets.

Budgets were prepared and used in the majority of this sample of geriatric hospitals only for funding purposes. In all cases, they were pre­ pared only on the basis of subjective codes. Expense and cash budgets were prepared by all respondents, and the majority indicated that department heads assisted in budget preparation, and that departmental budgets were related to activity levels. There were no forecasts or bud­ gets prepared for periods greater than one year.

In two cases, changes were planned to accounting systems. These changes had been generated within the hospitals, and both related to computer processing. Only one of these two hospitals was also · planning to modify the management information system. The initiation for this change came from the Statutory Health Authority, and involved further development and co-ordination of existing systems.

One hospital expressed some concern in regard to centralised computer­ ised systems and lack of flexibility, whilst another commented upon the difficulties associated with obtaining acceptable limits of measure­ ment for comparative purposes.

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I I

3.6 REHABILITATION HOSPITALS

3.61 General Characteristics

The three rehabilitation hospitals included in the survey had made sub­ missions to the Commission of Inquiry. The hospitals in this group pro­ vided treatment to some 3200 in-patients and 20,000 occasions of service for outpatients in FYSO. The combined, available, and staff beds for the group were 389. Seven full-time and 12 visiting medical staff

were employed.

Full-time equivalent staff engaged in accounting functions were 14, of which 2 were qualified. In the third hospital, the general manager was qualified.

In two cases, managers controlled all aspects of their hospitals' func­ tions, whilst in the third, the medical and nursing streams reported to the manager only on administrative matters, ie, a more traditional structure was used.

The differences which were evident in the finance/accounts structure of the hospitals was primarily a factor of size.

3.62 Accounting Functions

All the hospitals in the sample were producing reports and information in excess of statutory requirements, but based on cash accounting pro­ cedures and directed towards the statutory requirements.

There was considerable variation in the manner in which accounting functions were performed in these hospitals. One used all computer­ based systems (in-house and Health Computing Services) and was happy with the results. The second used a computer payroll package (provided hy Health Computing Services) with the balance of the systems being manual; this hospital was also satisfied with the computerised output and processing. Another used manual systems only.

With the exception of the maintenance fund in one hospital, written procedures for all accounting entries did not exist. o hospital was using accrual accounting techniques for hospital accounts. However, one institution did use accrual accounting for their sheltered industrial division. All in the group supported the introduction of accrual

accounting into their hospitals, and all indicated that their existing system of accounting could be extended to embrace accrual accounting.

Ia 65

Accrual accounting could be introduced and operating within a period of about a month. Tl"e preferred implementation date was given as 1 July, and one organ:sation saw difficulties because of lack of staff numbers and insufficient depth o f knowledge /experience of the staff.

For those hospitals with a teaching role, no separate recording of the training or education costs was made. Only one hospital performed any research and minor research costs were charged direct to operating costs with major projects charged to reserve fund.

The purchases of outside diagnostic services by tho se hospitals were recorded in the existing subjective co de structure with subsidiary recording.

All these hospitals costed 'stores' on a Last In, First Out b asis, but one did not cost all such issues.

No hospital in the group utilised an internal reporting system which linked d ollar amounts to activity levels through the use of statistics. However, all supported the use o f such reports and statistics for com­ parative purpose s across institutions, and one saw the system as a way t o improve budget control. With these statistics, two hospitals tho ught that standard units of measure should be used to id entify services pro­ vided to patients, including those by support functions. The use of standard measures was no t supported in one hospital, for its own institutio n, on the basis of size and existing staffing.

Only one hospital in the sample o perated cost centre accounting and was able to organise these cost centres o n an activity basis. The same institutio n could also structure these cost centres to differentiate costs by type.

All reported results o n a monthly and annual basis. However, the time taken, after p eriod end, to report the res ults varied significantly for thf' m o nthly reports; from 1 working day to 18 working days.

Payroll costs in all hospitals in this group could b e analysed by staff type and two hospitals could also analyse these payroll costs to cost centres and S?lit the hours into p roductive and non-p roductive. Only one could link the payro ll costs to a particular service.

No asset registers were kept. A variety of criteria were used to deter­ mine when an asset should be replaced . One indicated that these decisions were made b y a sp ecific committee.

Budgets were prepared and used for purpose s other than fund ing in two of the institutions. One response indicated that the current funding approval cy cl e crea ted management problems. All hospitals prepared their budge ts using the existing subjective codes, and o nly one split the budgets o n a res ponsibility basis. The number of budgets prepared varied between hospitals. All created expense budgets, two also pro­ duced cash budge ts, and o nl y o ne prepared a capital budget. That

131 66

institution also created a 'patient days' budget and was the only hos­ pital in this group which prepared a budget for a period of more than the corning year. All hospitals claimed to involve departmental heads in budget preparation and to relate the departmental budgets to depart­ ment activity.

Two hospitals in this group had changes to their accounting systems planned, in both cases, as a result of action by the relevant Statutory Health Authority. In one case, the hospital was planning to install a computerised payroll system.

While no hospital in the group was planning organisational changes, one hospital did comment that it felt administrative efficiency could be improved if greater staffing flexibility were allowed, together with for­ ward planning of physical resources.

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3. 7 BUDGETING, REPORTING, AND MANAGERIAL CONTROL

Central to many of the issues of managerial control discussed in this and the previous chapter is the topic of budgeting. As discussed pre­ viously, the structure and process of the budget can be organised subjectively, by responsibility, by function, or by some combination of each. In this section, we draw together our findings concerning the use of budget data for the purpose of giving reliable and valid cost infor­ mation on hospital performance. We concluded in Chapter Two that subjective data is not appropriate for this purpose.

3. 71 Responsibility Budgets Are Not Appropriate For Inter-Hospital Comparisons

As previously suggested, responsibility budgets are appropriate as a tool for managerial control but are not satisfactory as a primary source of data for cost information on hospital performance.

There is no 'standard' method of organising a hospital in the best interests of patients and the community. The structures which are in use are the product of a variety of factors including:

* Historical events * Size of hospital * Management practices * The abilities and motivations of Visiting Medical Officers and staff * The hospital's role in the community it serves.

Any attempt to create a uniform budget structure in Australia's hospi­ tals based on some ideal responsibility framework would therefore create a number of difficulties.

In the hospitals which did not fit the 'model', considerable extra effort would be required to produce results which met the hospital's internal management needs as distinct from the external reporting requirements. If these steps of creating an internal as well as an external reporting sys­

tem were not taken, then the budgeting process would not assist in focussing accountability and sharpening control. Rather it would become the somewhat ritualistic exercise that it is at present in most recognised hospitals. Any externally imposed attempt to have the hospital alter its structure to conform to the 'ideal', for responsibility budgeting purposes, would be likely to fail, alienate the hospital, and may be counter-productive to the delivery of patient services. Whilst the existing structures may not in all cases be either effective or efficient in the delivery of patient care services, change must be gene­ rated from within and recognise specific problems or issues which may exist.

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In any idealised structure, all reporting relationships would need to be included in the model for any responsibility level. Given the diversity of hospital services it is probable that no single hospital would have all the functions shown reporting to a position in the model. Rather, there would be many different combinations of functions dependent on hos­

pital activities_ With significant differences between the actual content of reports from different hospitals for the same responsibility position, inter-hospital comparison at a responsibility level would be severely limited_

3.72 Functional Budgets Can Give Reliable and Valid Cost Comparisons

It would be more appropriate and useful, therefore, to introduce budget reporting to a lower level than that normally associated with responsibility budgets. The Statutory Health Authority could 'roll up' these lower-level figures into any structures that are required by the major financial intermediaries and use the lower-level figures for inter­

hospital comparisons. The participating institutions, in tum, could 'roll up' the data in any way that they required to provide res ponsibility budgets to meet the requirements of their own organisational structure. Such action would ensure that each institution and interested party would have available to it information which could be used without

compromise.

Based on these findings, we recommend that the lowest practical level at which data should be collected and reported is the function

performed.

It is important that the 'function' be tightly defined so that reliable and valid comparability is obtained. For example, organ-imaging functions would be classified as 'x-ray', 'ultrasound', and 'CAT Scan', rather than grouped under the higher-level function of organ-im ag in g. Having infor­

mation available at this functional level would allow for procedures to be more clearly related to their cost, provided suitable measures are set for determining inputs and outputs.

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3.73 Creating the 'New Style'

Functional Budget

In the ex1stmg situation, 'budgets' as set are unalterable, within a subjective code, except for exogenous factors such as award changes in salaries and wages. Such a procedure is difficult to support, as it inherently assumes infinite capacity and zero variable costs.

We recommend that functional budgets should be set in the context of a planned level of activity and related to an achievable or prescribed treatment capacity.

Such an approach will allow for the calculation of cost variances caused by levels of activity other than those budgeted for and the re-establish­ ment of budgets at the end of a period in terms of activity achieved to isolate operating efficiencies. Given the existing absence of basic management information, it is not presently possible to set budgets in this fashion.

Therefore there will need to be a transitional period of about eighteen months following the change from subjective to functional budgets whilst base figures are established. This transitional period would follow the acceptance of the purpose of the system by financial intermediaries and providers, and agreement on definitions and statistics. Hospitals would then begin budgeting and recording costs on a functional basis and collecting statistics. At the end of the first financial year, cost and statistical data would be available for subsequent control use. With the existing budget timetables, the second year's budget would need to be created in the absence of significant data as the first year on the new basis would be only some six to seven months old when the second 'new style' budget was created. When the budget for year three was being established, the hospital and financial intermediaries would have some eighteen months' data available to them on costs, capacity and occasions of service from which to create activity-based budgets.

Each hospital will need to look at the volume of each service to be pro­ vided and budget from that point onwards in terms of input/output measures per function at a cost. The total number of occasions of ser­ vice can be predicted on various bases, including past trends in demand, characteristics of the catchment population, delineated role for the hospital, and admission criteria in relation to patients. The Statutory Health Authorities should also provide data for the budgetary process in terms of policy priorities and planning and forecasting data to ensure

the planned provision of appropriate services.

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3. 7 4 Disease-Costing:

3.741

An Option for Future Consideration

We do not support an attempt to produce disease-costing at an early stage as the system requirements would be beyond the skills and man­ power available in many hospitals. The complexities of such a disease­ costing system would also require a longer development and imple­ mentation phase than functional costing. We believe it is preferable to have a system installed, staff trained and experienced in operating the

system, with benefits and savings generated, before considering systems of greater complexity. Should the concept of disease-costing be shown to have significant advantages over the system installed, Statutory Health Authorities would then be better placed to implement disease­

costing procedures building on experience gained with functional budgets and reporting. We acknowledge that, until some form of disease-costing is available, medical staff, lacking access to comparative costs of different management regimens, will be handicapped in decid­ ing which course of treatment is likely to be more cost effective. This lack of information will handicap, to a degree, the recognition of aberrant costs.

Excessive Utilisation Can Be Identified

However, major measures are available to highlight cost of treatment anomalies. If inpatients are associated with a diagnosis or disease code based on the existing disease index, statistical controls can be used. Average stay periods per diagnosis can be calculated and these measures

compared to existing in-patient stays to highlight apparent anaomalies and excessive utilisation. Similarly, control reports can be produced on the use of pathological or other diagnostic services, costed if necessary, on a patient and treating physician basis to assist in identifying areas of possible excessive utilisation.

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4 GENERAL POLICY CONSIDERATIONS CONCERNING EFFICIENCY

Decisions on health policy should, in part, represent attempts to improve the performance and efficiency of Australia's hospitals and associated or related health systems and services. One or more of the following aspects of performance and efficiency could be involved:

* Satisfying various and changing needs for health services, both public and private, with minimum utilisation of resources.

* Distributing resources according to accomplishments in health out­ comes as well as equity considerations.

* Increasing total output relative to resource inputs while maintaining stability of costs.

In reality, however, few decisions of health policy have been concerned with performance or efficiency gains. Instead, decisions on health ser­ vices fr equently represent political and administrative responses to powerful interest groups. Examples of such political and administrative decisions include the over-expansion of teaching hospitals in the inner regions of our metropolitan cities, the maintenance of excess bed num· hers outside the metropolita n cities, and insistence by Treasuries on their own mechanisms of control for the management of expenditures by recognised hospitals. These decisions have resulted in the production of too much hospital output at too great a cost at the expense of few er inflationary pressures and mo re choice in relation to alternative medical services.

The cumulative effect of these political and administrative decisions bears heavil y on the health p o licy -mak ers of today. One burden is the growing element o f disenchantment among the public concerning the ability o f Governments to fund a hospital system (whether by taxpayer subsidy or health insurance) which satisfies community need while per­ forming efficiently.

In this chapter, we seek to find a solution to these difficulties. We address the followin g questions:

* Wh at are the options for strengthening manage rial control functions to im prove performance and efficiency in Australia's hospitals? * Wh at are the efficiency and cost containment objectives which need to be accomplished through managerial control mechanisms?

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4.1 OPTIONS FOR STRENGTHENING MANAGERIAL CONTROL FUNCTIONS

In previous chapters, we drew the conclusion that there is substantial scope for strengthening managerial control functions in Australia's hospitals. A reasonable overall objective for improved performance and efficiency would be to contain per capita expenditures on the provision of hospital services while increasing levels of health efficiency and satis­ faction throughout the health system. In a broader context, expendi­ tures on health services must not be allowed to weaken the capacity of Governments to pursue other, higher priority, social goals. We believe

that the strengthening of managerial control functions in hospitals to realise efficiency and cost containment gains represents the first neces· sary step towards the achievement of such objectives.

4.11 Greater Regulation or More Private Market Discipline?

The options for strengthening managerial control functions in Austra· lia's hospitals come down to a small number of major choices. These are:

* The impositiOn of increased public regulation as a disciplinary and motivating force for improving the efficiency of hospitals in fulfilling their designated social role.

* The introduction of more market discipline into the hospital system by restructuring the ways in which hospitals are reimbursed. * Some combination of public regulation and private market discipline. There is a spectrum of alternatives between the two extremes.

The benefits to doctors, health administrators, patients, and communi· ties from increased hospital expenditures have to be balanced against the costs. Policy development geared to raising levels of efficiency will seek to confront these parties with the true social benefits and costs

from hospital expenditures.

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4.111 Regulating for the Public Interest

There are two contrasting approaches to regulating the cost of hospital activities in the public interest:

* One approach weakens managerial control over costs and, in this respect, channels much hospital activity in a direction not consistent with the public interest.

* The other approach would strengthen managerial control. The regulatory approach can be centralised, piecemeal, linked to the funding of institutions, and independent from management control functions. Alternately, regulation could be decentralised,l redistri­ butive according to efficiency criteria, and directly linked with mana­ gerial control.

Cash limit controls over the activities of recognised hospitals can fairly be characterised as centralised, piecemeal regulation which weakens mangerial control over costs. Such broad-scope controls by Common­ wealth and State Governments over inputs into the provision of hospi­ tal services leave faulty processes in the delivery of services uncorrected. By failing to come to terms with how costs for the majority of inputs should be managed, cash limit regulatory control is largely irrelevant to health policy and management decision-making.

A more solid foundation for regulation in the public interest would be both process- and output-oriented. It would provide a framework for assigning accountability for service delivery without requiring financial intermediaries to abdicate responsibility for aggregate costs.

A decentralised, redistributive approach, directly linked with mana­ gerial control, could be achieved by allowing financial intermediaries to reimburse hospitals according to efficiency criteria and social policy guidelines. Properly structured incentives could be used to facilitate the achievement of health and social goals. Financial intermediaries could set a controllable limit on hospital expenditures. Doctors and health administrators could be responsive to patient needs and policy priorities while also remaining within their budgeted allocation.

To ensure that personal service delivery is responsive to local need, decision­ making in relation to the number and type of services should be decentra!aed, as far as possible, to where service delivery actually takes place.

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4.113

More Market Discipline

Beyond such regulatory approaches, it would appear to be in the best interests of the patient and the community if greater emphasis was given to the introduction of more market discipline in the reimburse­ ment of hospitals. Greater emphasis on the elements of incentives and

voluntary choice could make hospitals more self-regulating so that private interest better serves the public interest.2

Two major options can be identified:

* One emphasises the direct use of incentives for the providers of medical services. This approach places doctors, hospitals, and health administrators under strong incentives to concentrate on health efficiency considerations. The objective is to optimise health for

patients and the community while maintaining resource use and standards of amenity within prescribed levels. * The other approach emphasises patient choice and provides the patient and the community with an incentive to consume serv1ces

with a poor efficiency rating more conservatively)

A Combination of Public Regulation And Private Market Discipline

As previously mentioned, regulatory approaches and private market discipline can be combined to give a preferred mix of options.

It would be possible, for example, to combine a decentralised, redistri­ butive regulatory approach with some private market incentives. Hospitals could be given an efficiency rating. Areas served by efficient hospitals with a good rating (which could be States or Territories,

regions or districts) could be given higher level reimbursement for the provision of additional health and welfare services. Areas served by less efficient hospitals would receive lower order reimbursement.

Such a policy would reverse existing policy, which provides a clear incentive to areawide communities to increase services available, and expenditures incurred, 01; behalf of residents at the expense of non­ residents. Reimbursement of hospitals by deficit funding and com­

munity rated health insurance removes from patients and the areawide community the major responsibility of paying for the cost of the services. Since most taxes are collected nationally and many health insurance contributions come from more than one community, present

reimbursement mechanisms have long been manipulated to achieve political and administrative ends rather than health goals. These mani­ pulations are in conflict with the stated objectives of national policy and are regressive in terms of equity.

2 Matters of private and public interest are the subject of another report to the Commission of Inquiry by McHarg. 3 This approach is described in the report referred to above.

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4.2 SPECIFIC OBJECTIVES FOR EFFICIENCY AND COST CONTAINMENT

The options identified above encompass the major policy choices for improving performance and efficiency in Australia's hospitals. Within each option, however, a variety of different approaches could be adopted. Although the subject of this report is to identify managerial control mechanisms which will make the preferred approaches for improving efficiency administratively feasible, we recognise that the mechanism must meet political as well as administrative needs.

Where hospitals are concerned, the electorate and politicians have, in the past, adopted a rather narrow perception of where their self­ interest lies, and have voted accordingly.4 Policy-makers and health administrators seeking to achieve changes in the performance and efficiency of hospitals have often found themselves handicapped by low levels of general understanding about values and choices concerning health services.

However, the electorate and politicians can also have views about the public good where the benefits and costs of particular policy choices are much more general. The widely held b elief, in Australia, that the rate of inflation should be kept within prescribed limits, is one such example. In relation to hospitals and associated or related health systems and services, the electorate can have its concepts of public good modified or redirected. The perception of self-interest by the electorate and politicians can be widened. Political persuasion can be used to create new health issu es and alternative policies.5

In addressing ourselves to the question of specific objectives for effi­ ciency and cost containment we have been conscious of the general need for information concerning values and choices. Our key objectives have been formulated partly with this need in mind. They are as follows:

1 To make cost comparisons within and between hospitals as reliable and valid as possible.

2 To allow for a review of hospital costs relative to hospital capacity and utilisation.

3 To ensure efficient production of services taking into account hos­ pital capacity constraints.

4 To provide a focus and direction for hospital cost containment decisions. 5 To identify the reasonable requirements of a hospital con­

sistent with cost containment restraints and the efficient produc­ tion of services. 6 To allow for equity of reimbursement between types of service and classes of payor.

4 Voting out of self interest can be described as the politics of representation. 5 This persuasion can be described as the politics of leadership.

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It is anticipated that objectives such as these could feature in shaping developmental roles for recognised and private hospitals in the 1980s. The managerial control systems described in the final chapter of this report represent the first necessary technical step towards the accomp­

lishment of the above objectives. 6 The administrative and political needs to be satisfied by these objectives are described below.

4.21 Making Cost Comparisons Between and Within Hospitals As Reliable and Valid as Possible

A key question to be addressed is whether the services provided by hos­ pitals in the States of Australia are worth the price that the community is paying. To answer this question, we must be able to differentiate between two separate sources of hospital cost inflation:

* Inflation representing inefficient and wasteful expenditures. Such expenditures could result from the maintenance of excess bed and technical capacity, the creation of additional capacity, unsound management practices, organisation dysfunction in the hospital system, and inadequate information about hospital activities.

* Inflation caused when the resource or opportunity costs of hospital services exceed the benefits to the health of the patient and the public good.

A broad-based appreciation of the forces which make for inflation in hospital costs was shown by many of the major organisations making submissions to and giving evidence before the Commission of Inquiry. These organisations included most of the Statutory Health Authorities;

the Australian Hospital Association and the Victorian Hospital Associa­ tion; the Australian Association of Surgeons; the Australian College of Health Service Administrators; the Voluntary Health Insurance Associa­ tion of Australia; and the Australian Psychological Society.

Some organisations, for example, the Australian Hospital Association, were clearly ambivalent on the issue of whether today's hospital ser· vices are worth the price. Although the Association has previously argued publicly for a change in priorities in the delivery of medical and allied health services (AHA, 1979), it recently opposed any reduction in hospital funding which was not 'based on a realistic assessment of

demand and standards of service to patients' (Steele, 1980, p 7).

6 A necessary political step will be consultations between the Commonwealth Government and the other financial intermediaries, the Commonwealth and State and Territory Health Authorities, and financial intermediaries and the providers of health services.

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4.211

While a system of funding Australia's recognised hospitals based on realistic assessments of demand and standards of service sounds equitable and legitimate, this is not a goal which can be considered administratively feasible in the short term. What we cannot specify is

difficult to attain. Australian hospitals do not, at present, monitor standards of service to patients. D emand is largely a function of supply. A realistic assessment of demand for hospital services .in most parts of Australia would be substantially lower than present levels of demand.7

When we can specify what a hospital actually produces, what services we want it to produce, and what efficient production would cost to produce these services, then we have benchmarks against which we can evaluate the costs that hospital services incur and start making assess­ ments about what should be reimbursed.

An Ideal Set Of Benchmarks

An ideal set of benchmarks would identify and quantify hospital inputs and costs for specific intensities and quality of care delivered to a defined population (B auer, 1976). According to Bauer, comprehensive data are required in each of the following areas of importance:

* Scope of service offered by hospital(s), including service complexity and physician specialist mix.

* Burden of illness brought to the hospital( s) for care, for example, diagnostic case mix, case complexity, patient age, and income charac­ teristics.

* Nature, volume, and timeliness of services rendered. * Prices hospital(s) must pay for necessary labour and non-labour inputs.

* Efficiency of service delivery in terms of flexible staffing in relation to volume changes, internal manage ment controls, and th e like.

* Appropriateness of patient care rendered in relation to patient needs and population needs.

* Quality o f care rendered. * Duplications in facilities and services (especially high-technology ser­ vices) in hospital service areas or regions and gap s in access.

* Trends in per capi ta utilisation and per capita ex penditures for hospi­ tal services in the region, and their rel ationship to total health care utilisation and expend itures.

* Outcomes to patients and populations in term s of health and well­ being.

See, for example, the Commonwealth Government Discussion Paper, R eport on Rationalisation of Hospital Facilities at!{/ Services and on Proposed New Charges, and the submission from the Voluntary Health Insurance Association to the Commission of Inquiry, Scope for Better Usc of This Nativ11 's Hospitals.

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4.212

Until we have these comprehensive data, we are unable specifically to determine standards of services to patients and answer the question of whether the services are worth the price. As a starting point, however, reliable and valid comparisons of costs between services and institutions would provide normative criteria for identifying those areas of hospital activity which constitute excessive and unnecessary resource consump·

tion.

There will probably always be a lack of consensus on the extent to which medical services contribute to the health of individuals and the community. Reliable and valid cost comparisons, however, would be very useful in advancing our state of knowledge. Without such data, terms such as 'excessive' and 'unnecessary' can be disputed on the basis that they are qualitative value judgments rather than empirically deter­ mined benchmarks.

Reliable and valid costing data, within and between hospitals, will give all interested parties criteria for pinpointing excess capacity and excessive utilisation. C osting data can be used t o establish, with a greater or lesser degree of uncertainty, floors or minima of resource use which constitute the efficient production of services. R esource use

above the minimum can then be fairlv described as excessive and unnecessary. Evidence presented to the ' Commission of Inquiry con­ firms the findings of the Co mmonwealth of Australia in its discussion paper, Report on Rationalisation of Hospital Facilities and Services and O>' Proposed New Charges, that there is sub stantial resource use arising

from excess hospital capacity and unnecessary h ospitalisation.

Using Minimum Cost for Comparative Purposes

The minimum is the appropriate benchmark for quantifying the oppor­ tunity cost of excess hospital capacity and unnecessary hospital output. Minimum cost is the proper basis for making cost comparisons between and within hospitals. A hospita l or department may be internally

efficient but, if there is excess capacity and utilisatio n, then the cost of providing the service will be above the minimum .

Average cost, on th e other hand, is a most in appropriate benchmark for evaluating the effici ency of ho spital serv ices. Average cost reflects excess capacity and utilisation as well as relative efficiency ami, in Australia, wo uld be sit,rn ificantly hi gher than minimum cost. The use o f av erage cost benchm arks for deciding ho w much hospitals sh ould be

reimbursed for the provision of services could have pervers e effects for hospital cost containment. If the mean co st experience of a gro up of like hospitals b ecame the benchmark fo r funding, then lower-cost hos­ pitals would be given an in centive to increase their expenditures. The average cost would then mo ve further from th e minimum co st bench­

mark.

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4.213 Minimum Cost Criteria Provide A Solution to a Political Dilemma

The use of minimum cost criteria developed from reliable and valid costing data provides governments and the health insurance industry with a solution to a political dilemma.

Hospitals today are paid for the services they provide and the costs they incur. Doctors, health administrators, patients, and sometimes com­ munities have every reason, under this system of funding, to seek the provision of more services or more intense services as long as there is some potential benefit to someone. Under present reimbursement

arrangements, not one of those parties has the responsibility or incen­ tive to relate the potential positive benefit to either the additional direct cost or the broader social cost.

At the margin, therefore, the opportunity costs of hospital services exceed the potential realisable benefit. Public policy decisions on the reimbursement of hospital services, whether by taxpayer subsidy or community rated health insurance, should take this factor into account. Reliable and valid costing data, within and between hospitals, could provide part of the answer. They could be evaluated in terms of service efficiency and health efficiency criteria. For any health care function, service, or program, these criteria could be used to measure how well the activity satisfies the needs and wants of the community served, in terms of quality, quantity, and cost. Minimum cost criteria take these factors into account and represent target levels of efficiency.

Minimum cost criteria could work to improve efficiency by identifying where to concentrate the effort for health results and cost containment. Minimum cost criteria could also be applied to improve resource distri­ bution. In most communities, there will be regular changes in the distribution of health resources if they are being used efficiently. Changes which, on balance, bring gains for patients and the community will inevitably deprive some existing health care functions of resources. Minimum cost criteria could provide the signals for directing service development in socially desirable directions. We find that this would be a welcome change from present mechanisms for reimbursing hospitals.

Present mechanisms frequently give the wrong signals, and service deve­ lopment, accordingly, fails to adapt to changed circumstances. The over-development of teaching hospitals and the maintenance of under­ utilised hospital capacity are prominent examples of service develop­ ment in response to the wrong signals.

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Lacking minimum cost criteria, Governments and the health insurance industry have found it impracticable, except in the most obvious case of abuse, to challenge claims for the 'reasonableness' of costs incurred in providing hospital services. The Commonwealth Government experi­ ences this problem with the States under the Commonwealth/State Cost Sharing Agreement. No doubt the Commonwealth Government also experiences this problem with Veterans' Affairs hospitals and hospitals in the Australian Capital Territory. The States confront this problem with their own recognised hospitals. Health benefit organisa­ tions are experiencing this problem in relation to services provided to some of their contributors. F actors such as 'patient demand' and 'stan­ dards of service' are used by providers to justify less-than-satisfactory aspects of patient management and more-than-reasonable levels of reimbursement. Until financial intermediaries can come to terms with these claims, cost inflation in hospital expenditures is likely to continue.

The mere threat of a more restrictive approach to funding is sufficient to make the providers of hospital services claim that their capacity to maintain standards of care is being threatened. As lo ng as the financial intermediaries, governments, and health benefit orga nisations lack appropriate data and criteria to challenge these claims, providers have the upper hand, politically, in negotiating and barga ining over resource allocation and utilisation. With minimum cost criteria, financial inter­ mediaries will be better able to withstand provider claims for additional resources.

The development and implementation of a uniform set of accounting, reporting, and administrative procedures within Australia's hospitals is probably the best health investment that could be made at the com­ mencement of the 1980s. The managerial control system proposed in the next chapter of this report provides governments and the health insurance industry with a solution to present-day political dilemmas over reimbursement for hospital services. Reliable and valid costing data are at the core of the system.

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4.22 Allow for a Review of Hospital Costs Relative to Capacity and Utilisation

4.221

Theoretically, public policy on the funding of hospital services through taxation should reflect the value of these services as a public good. This value should be assessed relative to other publicly funded health and welfare services and publicly funded services generally. As noted above,

however, uncertainty in medical management and medical outcomes and present-day mechanisms for funding hospital services result in the community sacrificing more in other services than hospital services are worth. The end result is a gravitational effect whereby an increasing

proportion of public and quasi-public subsidies allocated to the provi­ sion of health are consumed providing hospital services. It is all too easy to fund excess capacity and the unnecessary provision of hospital ser­ vices. The previously stated argument from the President of the Austra­

lian Hospital Association that funding of hospitals by Governments should be based on a realistic assessment of patient demands and the maintenance of services to patients fails to take this reality into

account.

Competing Demands For Public Funds

Goals for the provision of health serv1ces funded by the taxpayer should include services for: * Acute and long-term care provided outside hospitals * Mental health

* Rehabilitation * Developmentally disabled * Primary prevention (public health, occupational health, health infor-mation, and health education).

Only by adopting a restrictive approach to hospital funding is it pos­ sible to contain expenditures by hospitals and provide adequately for the achievement of these broader health goals within the framework of the nation's economic and social goals.

It is not within the scope of this report to make recommendations con­ cerning such policy options and priorities. To satisfy claims for alterna­ tive forms of health care delivery, however, and to cope with other demands on public sector funding, both Commonwealth and State Governments may have to act quickly.8

8 For further details on this aspect see Dixon and Foster, Social Welfare Policy

for a Sustainable Society, 1980.

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4.222

4.223

Finding Causes for Hospital Cost Inflation

Changes in health expenditures can be disaggregated into:

* The volume of services provided * The intensity of services provided * The price paid for resources used to provide services.

Inflation in health expenditures is not just inflation in price. A study by the Hospitals and Health Services Commission for the period FY72 to FY76 disaggregated the factors responsible for increased expenditures as follows :

* Higher prices for the inputs, particularly labour, used to provide medical and hospital care-58 per cent.

* Increased usage of services, both the volume of services provided per capita and more intense services- 35 per cent.9

* Increased numbers of people, ie, an expanding population resulting in more services, and an aging population! 0 contributing to an increased per capita demand for services- 8 per cent.

Minimum cost criteria would permit a diagnosis of some of the funda­ mental structural and m anagement issues which burden both the State's recognised hospital systems and the private hospital system. Minimum cost criteria would allow for a review of hospital costs relative to hospi­ tal capacity and utilisation, and enable interested parties to identify the extent to which cost variations between institutions can reasonably be

attributed to differences in the intensity of care. Cost comparisons using minimum cost criteria would permit a cost containment diagnosis in terms of the gains from:

* Eliminating under-utilised hospital capacity. * Eliminating excessively utilised hospital capacity. * Improving efficiency.

Accounting for Capital Costs

In the United States, it is estimated that a capital investment of one dollar in hospitals will create, o n average, an operating cost of fifty cents in the first twelve-m onth period. Minimum cost criteria must therefore account no t only for operating expenditures! I but also for capital expenditures. A strategy for cost containment will contain both operating expenditures and capital expenditures in parallel.

9 A partial explanation of rising per capita hospital expenditures is that new technology is extending the role of hospitals. Hospitals are providing both new services and more intense services requiring greater amounts of labour and/or capital investment in equipment. 10 Utilisation of hospital services increases as a function of age over 14 years and

becomes particularly marked after age 65. 11 Recognised hospitals in Australia do not account for capital and do not, in an accounting sense, provide statements of operating expenditure. Statements of cash disbursements are described as maintenance or current expenditures.

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4.23 Ensure Efficient Production of Services Taking Into Account Capacity Constraints

4.231

4.232

Efficiency is concerned with producing more output per unit of input.

Obtaining Measures Of Output

The efficient production of services requires some measure of output. Only when we have a basis for assigning and allocating costs to the various factors which constitute hospital output do we have an objec· tive basis for defining the efficient production of services. Although

there are analytical difficulties in the development of a comprehensive set of output data for hospitals, the accounting, reporting, and admini­ strative framework proposed in the final chapter of this report would provide a solid foundation for coming to terms with these issues. This

framework would provide data which would give insight into the effi· cient production of services and which would lead ultimately to the systematic development of minimum cost criteria.

Differentiating Between Fixed and Variable Costs

The efficient production of services must take into account the dif­ ference between fixed cpacity costs, ie, those costs which remain con­ stant irrespective of the level of activity, and variable costs, ie, those costs which vary with the level of activity.

Broadly speaking, the economic structure of a hospital is 60 per cent fixed cost and 40 per cent variable cost (United State estimates). Differentiating between fixed and variable costs is another key step in the development of a cost containment strategy. Cost containment in

relation to the efficient production of services depends on the variabi­ lity and hence the controllability of costs. Accounting, reporting, and administrative procedures must therefore differentiate between fixed and variable costs.

all 84

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4.233 Developing Formal Management Policies On Efficiency

The Australian Council on Hospital Standards has reviewed the results of its accreditation work on Australian hospitals. In its submission to the Commission of Inquiry it concluded that the style of management to be found is often informal and, it may be inferred, not primarily

concerned with efficiency.

For efficiency gains to be realised, therefore, it is mandatory that the accounting, reporting, and administrative procedures proposed in the next chapter be linked with a set of managerial control procedures in each of the following areas:

* Labour utilisation * Material utilisation * Utilisation of general support services * Control of fixed resource capacity * Financial control * Standards of patient care.

For Australia's recognised hospitals to become more efficient in the production of services to patients, changes will be required in the atti­ tudes of some Statutory Health Authorities and the practices that they

impose upon hospitals. The Victorian Hospital Association was one of many bodies which advised the Commission of Inquiry that outmoded and excessively restrictive public service controls give rise to totally unacceptable and irrational management practices.

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4.24 Provide a Focus and Direction for Cost Containment Decisions

Having identified the extent to which efficiency can be improved and hospital costs can be constrained, the next step is to identify how hospital systems and individual hospitals could live with budgetary con­ straints.

As noted previously, the areas of opportunity for improved functioning are:

* Reduction of under-utilised hospital capacity. * Reduction of excessively utilised hospital capacity. * Improved efficiency.

All the financial intermediaries show an appreciation of what is re­ quired in these opportunity areas. The Commonwealth Department of Health and the Voluntary Health Insurance Association, bodies with a primary concern in the funding of hospital services, are strong advo­ cates for cost containment and more value per dollar of expenditure.

The State Health Authorities choose t o see their role more in terms of providing hospital services than funding hospital services.! 2 Although the Statutory Health Authorities for the most part know what should be done, in their evidence to the Commission of Inquiry they demon­ strated little enthusiasm for the task of hospital cost containment.

Professional hospital associations chose to volunteer little to the Com­ mission of Inquiry on the development of strategies for cost contain­ ment. Their general attitude seems to be that little remains to be accomplished in this regard.! 3

Professional medical associations clearl y see the need for more manage­ ment and better management in hospitals and some associations want doctors to have mo re say in the management decision-making process.

12 This is true even in the most populo tis States of New South Wales and Victoria, where the principal role of the respective Health Commissions is that of fund­ ing recognised hospitals. These Health Commissions are only marginally in­ volved in the direct provision of hospital services. 13 For example, it is difficult to reconcile what the Australian Hospital Associa­

tion said on the need for structural and fiscal change in the provision of hos­ pital services in its monograph, Health Policies for Australia - 1979 and On­ wards, and its evidence to the Commission of Inquiry.

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4.241 R eduction of

Under-Utilised Hospital Capacity

It is well known that Australia h as a significant amount of under­ utilised hospital capacity .l4 T h e mo st common forms of under-utilised h o spit al capacity are t o b e found in an excess of hospital beds and an excess of intensity capacity (medical technology and associat ed per­ sonnel).

T he Australian Association of Surgeons, in its evidence to the Commis­ sion of Inquiry, was critical of the expansion of teaching hospit als into m egahospitals, with more emphasis on 'high-style' medical technologies con suming 3.5 to 4 times the reso urces required for general medi cal and surgical care. The Association believed that these developmen ts drained resources from areas of greater need and had prevented the develop­ ment of more appropriately sized, m o re accessible district hospitals in the metropolitan areas.

The Commonwealth Departme nt of Health stated in its submission that: 'Co ncern about the inefficient use of resources starts with hospital beds . . . t here is growing recognitio n that Australia is using too m any hospital beds.' The H ealth Co mmiss ion of New S o uth Wales said that :

'The supply of beds is a m aj or determinant of the leve l and pattern of b ed use.' The Health Commiss ion o f Victoria said that: 'Cost minim is a­ t ion in a public system d epends heavil y on the limitatio n of hospital capacity.' The South Australian Health Commission stated: 'The basic co st structure of the hospital sy stem in South Australia is now so high that a strategy of cost reductio n must start with an examinatio n of the need for and the appropriateness of current levels of actual b ed utilisa­

tion.'

The cost co ntainment strategy proposed by the Health Co mm issio n of New South Wales includes the rationalisation of high -technology services. This action was supported b y the NSW Branch o f the Austra­ lian College o f Health Service Administrators.

Levels of hospital capacity are controll ed jointly b y individual hospitals and the State Health Authority. The power of the State Health

Authority for controlling intensity capacity is more marked for recog· nised hospitals than for privat e hospitals. The accounting and costing system proposed in the final chapt er would be capable o f producing marginal cost data for all basic hospital activities, ie, each and eve ry important function. Such data would enable an eco nomi c solution to be determined for cost co ntainmen t proposals involving ratio nal isation,

amalgamation , and me rge r to reduce under-utilised capacity. These econo mic solutions could then be as sessed in terms of th eir administra­ tive and political feasibility.

14 The issue of hospital capacity in Austra lia w as addressed first b y Derek Shaw in 'What's Draining Our Hospital Dollars? ... And How Can We Plug the Drain'', Health Action, 3, 3/4, 1978. This w as followed b y funher evidence o n the sub­ j ect in the Commonwealth Government Discussion Paper, R eport on R ationali­

satio n of Ho spital Facilities an d Services and o n Propose d 1 \'ew Cha rges, 1979, and the submission fr om the Commonwealth Dep artmen t o f Healt h t o t he Commissio n of In quiry.

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4.242 Reduction of

Excessively Utilised Hospital Capacity

The Voluntary Health Insurance Association stated to the Commission of Inquiry: 'The Australian combination of a generous supply of medi­ cal manpower, plenty of technological capacity, and excessive bed

capacity, with zero pricing of hospital services, results in many examples of excessively utilised resources.'

Excessively utilised hospital capacity includes inappropriate admissions, treatment and discharge delays, unnecessary diagnostic investigations. Excessively utilised capacity reduces efficiency and adds to aggregate costs. The power to achieve a reduction of excessively utilised capacity is directly under the control of the hospital and its Visiting Medical Officers.

Take diagnostic testing in hospitals as a common example of excessive utilisation. The Commonwealth Department of Health, the Australian Association of Surgeons, and health benefit organisations all argued before the Commission of Inquiry that patients and the public good would be better served by lower levels of diagnostic testing. ·

The Commonwealth Department of Health said: 'There has been con­ siderable over-servicing in patholot,'Y testing. . . . Considerable over­ servicing has led to a rapid increase in pathology costs, which has con­ tributed significantly to health service budgets.' The Australian Association of Surgeons said: 'There are cases of patients tested to the

point of exhaustion for reasons entirely unknown to their principal medical attendant. There is little doubt that many of these diagnostic testing procedures represent an unwarranted invasion of privacy inflicted on the patient and many of them cause unnecessary suffering and hardship.'

Managerial control over patient admission and scheduling, linked with minimum cost criteria, would provide the information needed to reduce systematically excessive hospital utilisation in its various forms.

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4.243 Improved Efficiency

Management techniques for increasing efficiency range from admission scheduling and control as noted above, flexible staffing, improved pur­ chasing practices for supplies, and better energy use, to more focussed accountability of those responsible for the expenditure decisions.

Generally, the evidence before the Commission of Inquiry indicates that the management state of the art, at most levels in the Australian health system, offers considerable scope for improvement. The Austra­ lian Council of Hospital Standards, in its submission, documented the informal, rather laissez-faire attitude to management responsibilities in

many Australian hospitals.

One key cost area requiring the application of expenditure ceilings developed from minimum cost criteria is staffing. The Commonwealth Department of Health expressed its concern, stating that: 'Staffing levels and mixes need examination. Indeed, disparities in staffing ratios

are a matter of concern ... there is clearly a need for developing more definitive approaches to hospital staffing ... more attention should be given to maximising manpower productivity.' The Australian Associa· tion of Surgeons recommended that guidelines be produced for staffing relative to prescribed levels of intensity of care and numbers of patient days.

The power to improve efficiency is directly under the control of the hospital and its doctors. In the case of the recognised hospitals, how­ ever, collaboration with the State Health Authority in the development and implementation of those accounting and reporting procedures which would establish minimum cost floors for various hospital activi­ ties will be required. The linking of accounting, reporting, and admini­ strative procedures with a number of managerial control techniques would enable individual hospitals to identify where and to what extent efficiency can be improved and cost savings made. Any expenditure above floor level would reflect, from a public point of view, added amenity rather than added health value. It would be at the discretion of

the financial intermediaries to decide the extent to which expenditures above the minimum cost floor would be reimbursed.

As the Health Commission of Victoria stated: 'Cost minimisation in the public sector depends heavily on limitation of hospital capacity [as noted above] and tight budgetary controls' [our emphasis]. The key to containing hospital expenditures is tough, disciplined management at the State level as well as hospital by hospital. The evidence before the Commission of Inquiry demonstrates that, in the absence of minimum

cost benchmarks, there will be more rhetoric than action in working to achieve efficiency goals.

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4.244 Would Standards of Care Suffer?

Financial intermediaries, when consulting with providers on the subject of how to get more per dollar of expenditure, are likely to be told that standards of patient care will suffer. Typical of this type of unsubstan­ tiated statement is one made to the Commission of Inquiry by the Royal Australasian College of Surgeons. The College said: 'Standards of hospital care will suffer if cost containment is to be the predominant objective.'

The major terms of reference for the Commission of Inquiry are con­ cerned with issues of effectiveness and efficiency in hospitals and ways in which cost increases can be constrained. The managerial control mechanisms which are the subject of this report relate specifically to these issues of effectiveness, efficiency, and cost containment. The predominant objectives of the managerial control mechanisms are to improve standards of patient care generally and to increase outputs from health expenditures. Neither of these objectives is attainable without a restrictive approach to the funding of hospital services (as previously discussed). Cost containment is a primary objective of these managerial control mechanisms but is not a predominant objective.

There is ample scope for cost containment in Australia's hospitals, particularly the teaching hospitals. More importantly, a restrictive approach to funding hospital activities can maintain standards of patient care for inpatients15 and improve standards of care elsewhere. Current inflation in the cost of funding hospital services is frustrating

the ability of Government and health benefit organisations to provide for the medical and associated health needs of the non-inpatients in our communities.16

The plannir::: of services and the funding of services need to be inte· grated to achieve higher levels of health efficiency. Standards of health care in Australia should increase following public policy decisions to adopt a more restrictive approach to the reimbursement of hospital activities.

15 The Australian situation is reviewed' by Derek Shaw in the article, 'Would Australians Benefit From Fewer Hospital Services? ', Health Action, 4, 1/2, 1979. A good United States case study is that by Patrick O'Donoghue, Control· ling Hospital Costs: The Revealing Case of Indiana, 1978. 16 Two examples are discussed in section 3.261 of this report.

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4.25 Identify the Reasonable Financial Requirements Consistent with Efficient Production of Services

As long as the efficient production of services provided by the hospital remains as difficult to define as it is in today's hospital system, it is equally difficult to attain.

The present system of funding recognised hospitals is a combination of prospective payment (determining Commonwealth and State obliga­ tions under deficit funding in advance) and retrospective reimburse­ ment (payment for services by private payors normally through health insurance and after the service has been rendered). Under present re­ imbursement mechanisms for both recognised and private hospitals, the Commonwealth Government and community-rated health insurance

organisations find that they are locked into a system of

* Funding hospitals in terms of their actual cost experience. * Accepting present-day structures and processes within the hospital system, including under-utilised capacity, excessively utilised capa­ city, and management inefficiency.

* Questioning only the more extreme decisions by hospitals and doctors.

Furthermore, with separate and different payment arrangements for private patients in recognised hospitals, the Commonwealth Depart­ ment of Health and health insurance organisations find themselves in a situation where costs can be shifted from one class of payor to another

to the benefit of the provider. One such example is where salaried medical staff and the hospital can bill insured patients. It is not within the scope of this report to argue either for or against private practice rights other than in the context of efficiency considerations. The Medi­

cal Benefits Division of the Department of Health, however, is unequivocal in stating its view:

It would appear undesirable that medical decisions taken by staff specialists in recognised hospitals are taken against the background of possible financial gain. The hospital has no incentive to exercise control over the rendering of medical services because it, too, stands to gain from the rendering of medical services .... One solution would be for payments of Commonwealth medical bene­

fits in respect of all services rendered by salaried medical practi­ tioners to be terminated.

The accounting, reporting, and managerial control system proposed in the next chapter would provide technical answers to policy questions such as: 'Should private practice rights be allowed and to what extent?' A primary goal for the proposEd managerial control system is to identify the reasonable financial requirements of the hospital consistent with its delineated role and efficient production of services.

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What is Reasonable?

Several of the major policy decisions to be made during the 1980s con­ cerning reimbursement of hospitals require exactly the information that the accounting, reporting, and managerial control system will provide. Typical of these decisions are the following examples: 1 7

* How restrictive will reimbursement be? Unless it is consistently restrictive, using a mechanism such as minimum cost criteria to establish a ceiling for mandatory levels of reimbursement, a policy of cost containment in hospitals is unlikely to be operationally feasible.

* What will be allowable for reimbursement purposes? All outgoings? Outgoings in relation to services provided to patients? Current (main­ tenance) expenses? Current and capital expenses? Patient service costs? Basic research expenditures? Education expenditures? Patient costs, research costs, and education costs?

* Will reimbursement be adjusted for inflation and, if so, how? Once payors determine acceptable or allowable costs at a parti­ cular time, they must decide whether and how to adjust for inflation in a hospital's purchases between the moment of decision and the time expenses are incurred. The percentage or index chosen can range from flexible to restrictive. Inflation in services can be defined specifically for the goods and services hospitals purchase (their unique 'market bracket'), related to the consumer price index, or set at a level chosen as 'reasonable' by policy-makers .... The more closely the index is tied to hos­ pital experience, the less it serves to bring hospital increases in line with the rest of the economy. In the most absurd instance, an index based on hospital inflation serves only to support unabated rates of increases in hospital expenditures.

(Feder and Spitz, p 328, our emphasis)

* Should sources of hospital income other than reimbursement funds be used to offset the level of reimbursement? Should endowments or private practice trust funds be used for capital expenditures creating additional capacity?

* Will there be units of payment? What will they be? Will reimburse­ ment funds be determined by line item budgets, departmental bud­ gets, or global budgets? Will units of payment be established per service, per day, per episode of illness, or per capita?

17 After Feder and Spitz, 'The Politics of Hospital Payment', in National Health Insurance, ed. Mannor, Feder, and Holahan, 1980.

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In the final analysis, choices between reimbursement mechanismsl8 in t erms of their potential to accomplish cost containment objectives are political decisions about how much to spend rather than technical decisions about funding reasonable financial requirements. The ac­

counting and managerial control system allows interested parties to focus on the issues and options. Alternative policies can then be evaluated in terms of their potential to satisfy a number of goals such as h ealth efficiency, administrative simplicity, control of inflation, and

political cost/benefits.

Once the reasonable financial requirements of a hospital consistent with efficient production of services have been identified, then prospective and retrospective reimbursement can be different policy approaches for funding hospital services rather than, as presently practised, different mechanisms of funding.

18 The major approaches are either prospective or retrospective, but within each approach there are a number of choices and the approaches can be combined.

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4.26 Allow for

4.261

Equity of Reimbursement

Beyond the very important consideration of reimbursing hospitals fairly, there are some equally important considerations of equity. There are questions of even-handedness between alternative forms of medical and allied health service (which sometimes cannot be resolved simply on the grounds of health efficiency) and there are questions of fairness in relation to those who are paying for the services.l9 Our system of reimbursing hospitals should not only fund the reasonable financial requirements of the hospital but should also allow for equity of reim­ bursement between types of service and classes of payor. Choosing the best system for Australia will require compromises and trade-offs between a number of choices.

Equity in Relation to Services

There is a lack of equity in the provision of services, for example, when funding mechanisms for hospitals discriminate against more cost­ effective methods of delivering services.

The Australian Association of Surgeons recognises that, for a wide range o f common surgical and obstetrical procedures, many patients are better treated on a walk-in, walk·out basis, without any requirement to admit them to hospital as an inpatient ....

Public patients do not pay directly for the costs of their hospitali­ sation. Almost all other patients in hospitals, either public or private, are insured and incur few direct costs. Moreover in public hospitals charges levied are entirely arbitrary and generally bear little relationship to the real resources being consumed.

Financing methods combining zero pricing with per diem bed reimbursement and/or deficit financing present procedural special­ ists with a dilemma. Patients are rewarded by zero prices if they take advantage of high-cost, resource-intensive facilities. This incentive discriminates against new types of organisation specifi­ cally geared to the needs of patients requiring day-only facilities. Although such facilities are less resource intensive and much more efficient, they contain no beds to be reimbursed and receive no deficit finance to underwrite operating expenditures. With current financing methods, the patient has to pay more to use a less costly and more appropriate form of care.

(Australian Association of Surgeons, 1979, p 29, our emphasis}

This evaluation was supported by· the Commonwealth Department of Health in its submission to the Commission of Inquiry. The Department

19 As Alice Rivlin has said in Systematic Thinking for Social Action (19 71, p 16): 'Knowing what the problems are is just the beginning. The next question is what to do about them. Intelligent choice among public programs depends in part on knowing who would benefit from a policy and who would pay its costs.'

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4.262

of Health acknowledged the need 'for fees and benefits to be modified to accommodate the day hospital situation'.

Another example of discrimination in funding concerns hospice and palliative care services20 for terminally ill people. While these services can be provided through hospitals, the most cost-effective form of care has a primary emphasis on domiciliary care but linked to one or more hospitals. 2 1

The principle of equity of r eimbursement is that services of equal co st effectiveness and/or convenience should be giv en eq ual preference under reimbursement arrangements. The principle of equit y o f service reimbursement gives service providers an incentive for improving health efficiency and increasing levels of patient satisfaction. I t does not

follow, as postulated by the Australian Hospital Association in its sub­ mission to the Commission of Inquiry, that policies designed to redistri­ bute hospital resources ' will increase rather than decrease costs'.

Equity in Relation to Payors

There is a lack of equity o f reimbursement in relation to payors when hospital costs can be shifted from one class of payor to another or when there is cross subsidisation between services to create pricing differentials in relation to charges to patients.

Evidence placed before the Commission of Inquiry concerning issues of equity of reimbursement in relation to payors included the fo ll owing:

* The shifting of costs by hospitals to health bene fit organisations for financial gain. Recognised hospitals charging public patients who happen t o be insured is one example of discrimination in relation to payors. Co untry hospitals arranging for payment of contributions to

community rated health insurance for their long-term patients is another example o f shifting costs from one class of payor to another. * The cross subsidisatio n o f private patients in re cognised hospitals under deficit funding arrange ments is also used to the financial bene­

fit of State Health Authorities. This cro ss subsidisation acts to the competitive disadvantage of community and proprietary hospitals and is used to ensure that demand relative to supply is skewed in favour of the State's recognised hospital systems. Although the mechanisms are different, the subsidisation of private patients in this way results in more Comm onwealth m o ne y and more health in sur­ ance m oney flowing into the State hospital system.

20 A hospice is defined as a co-ordinated program of home or inpatient care which manages the problems o f the terminally ill person and the famil y as a unit. The program provides palliative and supportive care to meet the special needs arising out of physical, psychological, spiritual, social, and economic stress experienced during the final stages of illness and during dying and bereave· ment. The program employs an interdisciplinary t eam under the direction of an autonomous hospice administration. 21 See the submission t o the Commission of In quiry from Dr David Frey, Hospice

Co-ordinator, Cancer Council of Western Australia.

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4.263

The principle of equity of reimbursement in relation to payors is that claims for reimbursement will accord with policy decisions on allowable costs and that equal allowable costs will be reimbursed equally. The accounting and managerial control system proposed in the next chapter enables cost manipulation and cross subsidisation to be identified and quantified. The extent to which manipulation and subsidisation would be allowed then becomes a policy decision for the financial inter­ mediaries.

Equity Goals, Reimbursement, And Management Control

The accounting, reporting, and manage rial control systems described in the final chapter of this report provide essential mechanisms which would allow the financia l intermediaries funding hospital services to move towards equity of reimbursement goals. The control systems pro­ vide data on performance and trends in relation to services, costs, and efficiency. These systems make it practicable for govern'ments and the health insurance industry to:

* Exercise control in relation to policy objectives for reimbursing hos­ pital, medical, and allied health services.

* Provide for fl exibility in resource allocation according to changes in need and policy priorities.

* Minimise the administrative costs of reimbursement mechanisms m relation to results sought and achieved.

The reimbursement of hospitals is important not only in relation to equity issues but also, as previously discussed, to control hospital cost inflatio n by reimbursing efficient performance. What amounts should be reimbursed above the minimum cost ceiling are then at the discre­ tion of the finan cial intermediaries.

The manage rial control m echanisms describ ed in this report make it possible to reimburse hospitals using some combination o f the follow· ing systems:

* Funding for the year ahead using a target budge t or formula which takes into account data on perform ance in relation to goals and delineated role.2 2

* Funding based on budget review (functional and responsibility bud­ ge t.s) and nego tiation. The financial intermediaries review and vigor­ ously negotiate proposed budge t s in relation to costs, j) erformance, and go als.2 3

22 Although deficit funding as, for example, under the Commonwealth/State Hos· pita! Cost Sharing Agreement may appear to be consistent with this approach, deficit funding o f health services in Australia has never been concerned with costs, performance, and goals. 23 It co uld be said that Standing Committee Negotiations under the Common·

wealth/State Hospital Cost Sharing Agreement are consistent with this approach but, once again, there is no proper foundation for tying negotiations to costs, performance , and goals.

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Through a combination of the above systems, formulae can be used to quantify the total funds available and, within this amount, allocate resources to areas and programs. Within these allocations, the budget review system is the basis for negotiating individual

provider budgets. Although the managerial control system will great­ ly facilitate equity in reimbursement between providers, services, and payors, it should be recognised that no reimbursement mechanism will eliminate the need for political choices by financial inter-

mediaries.

* * *

The accomplishment of the six specific objectives for efficiency and cost containment depends upon reliable, valid, and comparable data from an accounting and managerial control system. An accounting and managerial control system which builds on the strongest existing

system in Australia and which could be administratively operational in the short to medium t erm is the subject of the final chapter of this report.

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5 PROPOSALS FOR STRENGTHENING MANAGERIAL CONTROL FUNCTIONS

The challenge of this assignment has been to identify how managerial control mechanisms in Australia's hospitals can be strengthened to improve efficiency and control rising hospital costs.

In this final chapter, we bring together our recommendations for improving efficiency and administration in hospitals and achieving cost containment objectives. We are recommending that a number of modifications b e made to presently operating managerial control sys-

tems.

We are recommending that all hospitals adopt an accounting and reporting system based on accrual accounting with unity of approach and consistency of presentation. To produce reliable and valid cost data of the type required, the accounting system would be standardised with

respect to the chart of accounts, functio nal structures, cost finding, and management reporting. We describe how this accounting system would link with the budget process and the reimbursement of hospitals. We are recommending that the system should be detailed and documented

for all to follow in a Reporting and Management Information Manual.

We also examine some of the key technical aspects of implementing the proposed system.

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. 5.1 ACCOUNTING AND REPORTING SYSTEMS: OVERVIEW

This chapter commences with an overview of the major components of the accounting, reporting, and managerial control system which we believe best satisfies the specific objectives previously described. Later in this chapter, we bring t ogether the various elements in m ore detail and outline the systems in operation.

5.11 Accountability:

Preferably All Hospitals

For managerial control information to m ee t the needs of tho se provid­ ing services, those funding services, and o ther interested parties, the guidelines set down in this report should b e mandated fo r all instit!-1-tions reimbursed by taxpayer subsidy and/o r community rated health msurance.

We recognise that a process of consultation is required before there can be a specific policy commitment. Our recommendation, however, is that the accounting and reporting system should be developed and implemented in all recognised, community, and proprietary hospitals.

Elsewhere in the world, different levels of reporting requirements have been considered, based on factors associated with hospital si ze. How­ ever, in those places where this multi-level reporting requirement exists, the nominal size of hospitals is more uniform than th e Australian pattern.

In the Australian context and with the guidelines described , the com­ plexity of accounting and reporting will b e a function of the size of the hospital. This variability will make accounting and reporting demands proportional to size and still allow for t he es tablishment o f a compre­ hensive base of data. Variability will be a result o f the fun cti onal base and will decrease in conjunctio n with hospital si ze.

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5.12 Accounting Philosophy:

5.121

Accrual Accounting

We believe that the accounting systems required in Australia's hospitals should be based on those concepts commonly described as accrual accounting. In line with the adoption of this accounting approach, we recommend that all hospitals should establish and maintain asset registers. These registers should be integrated into the accounts of the institution and should be depreciated.

Comparability Cannot Be Obtained Without Accrual Accounting

There are a number of reasons for making these recommendations. Some of these reasons have been previously discussed. In the context of the above recommendation we believe that hospitals can be complex enterprises, expensive to operate and difficult to manage. Therefore the systems in use to achieve management control should be in accord with their funding and capital commitments. We find it difficult to compre­ hend why hospitals are not required to account for their activities on the same basis as a commercial organisation or a trading statutory authority. Cash limit accounting by Governments is no excuse for not adopting an appropriate accounting philosophy within hospitals.

Throughout the course of the public proceedings of the Commission of Inquiry, we have heard of the ways in which hospital management may manipulate the 'leads and lags' of a cash accounting system to achieve the mystical balanced budget. The result of these manipulative efforts, and indeed a mqjor fault of reliance on cash accounting, is that the end­ of-year (or end-of-period) accounts provide no valid information for measuring the cost of providing a service during that period. The end­ of-year accounts are neither reliable enough to establish comparable measures between institutions nor within an institution.

For example, wages and salaries account for more than 70 per cent of hospital maintenance expenditures. Yet in the absence of any concept of accrual, a significant variance in expenditure can occur due to the 'luck of the calendar' in the number of 'pay days' in the year. A further deficiency in this area is that, with no concept of accrual, provisions for sick leave, long service leave, and superannuation will not be presented in the published accounts.

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5.122 Comparability Requires Unity of Approach and Consistency of Presentation

Whilst the above accounting problems can be overcome by the use of subsidiary records or reports, we contend that there has to be unity of approach and consistency of presentation to satisfy external reporting and reimbursement requirements.

One of the features of the development of services provided by hospi­ tals over the last two decades has been a marked increase in the

intensity capacity of some particular services. Diagnostic services, such as laboratory tests and X-rays, have become substantially more capital intensive. Specialised treatments, such as intensive care and coronary care units, oncology techniques, open heart surgery, microsurgery, hip

replacements, and heart pacemakers, require higher levels of capital investment as well as higher levels of staffing. The 'results' produced by cash accounting give no useful indication of the resources required to provide these forms of treatment (or, for that matter, any other form

of patient management). There is no information which would indicate what particular resources are required to achieve a particular end result and no basis for comparisons.

To account fully for resource use requires that asset acqulSitJOns be capitalised, not expensed in a single period, and that depreciation charges be made. The inclusion of the depreciation charges, together with the other steps outlined, will provide a uniform base from which to begin to extract comparable management information.

The acceptance and implementation of depreciation is an essential ele­ ment in providing for comparability and the measurement of relative efficiency in the provision of hospital services. The charging of depreci­ ation against a function will allow differences in capacity intensity

resulting from capital intensity and the age of assets to be reflected in the total cost of the service provided. As a by·product of the recording of asset values, hospital staff will become more fully aware of the actual monetary level of public custodianship for which they are responsible.

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5.123 Required in Implementing

Accrual Accounting

In implementing accrual accounting in all hospitals, difficulties will be experienced in the following areas:

* The creation of asset registers and values. * The derivation of standard depreciation rates for all asset types. * The setting of rules for the capitalisation decisions.

These may be problem areas in implementing accrual accounting in our hospitals, but they are problems which can be resolved.

Assets can be identified and recorded if the task is approached methodi­ cally; remaining service life can be estimated and items are capable of valuation. The capitalisation decision requires the acceptance of two parameters against which the asset should be measured, namely cost and service life. In some American literature on hospitals, the decision

to capitalise is based on the asset having a cost greater than $300 and an anticipated life extending beyond one year.

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Of Accounts

To enable the universal implementation of a common system of accounting, reporting, and administration requires standardisation and uniformity. We therefore recommend a common chart of accounts for all Australian hospitals which are in receipt of taxpayer subsidies and for

community rated health insurance. Standardisation and uniformity commences with a common chart of accounts.

The standard chart of accounts would co ntain:

* D etails of the coding structure * How the structure is to b e used * Definitions and descriptions o f all accounts.

These definitions and descriptio ns would:

* Detail the accounting treatmen t required for each account. * Set down all policy m atters and methods to be used , for ex ample, treatment of provisions, treatment of assets. * Outline standard j o urnals and the u se o f a uniform stationery

package.

Whilst some m ay argue that a number of the above m atters do no t belo ng in a ch art of accounts or that detail a t such a le ve l is unneces­ sary , particularly in a computerised enviro nment, we consider it essential that all fin ancial m anagement issu es and requirem ents be docu­

mented. Without such levels o f documentatio n avail able to all hospitals, consistency of approach and uniformity o f meaning to give comparab i­ lity of results will never occur or will erode over time and with staff change s.

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5.14 Standard Functional Structures

5. 141

Just as there is a r equirement to define and detail the standard chart of accounts, so is there a similar need to define and detail each function or activity area in the hospital. As cost centres are b eing based on func· tions, there is a need to define all functions which are to be considered as cost centre s.

We further recommend that standard functional structures be estab­ lished. For each cost centre, the costs which could/should be recorded against it and the classification of these costs into fixed costs and vari­ able costs must be established. Recording systems, methods, and

measures of input and output of each such centre must also be de­ scribed, together with the manner in which theoretical and attainable capacity for each cost centre is to be established.

A Reporting and Management Information Manual

Manuals showing the necessary informatio n on accounting and financial structures are provided in all countries where systems similar to the one proposed are used.

State Health Commissions in the United States publish definitional material for the systems under their control. This d efinitio nal material includes identificatio n of the function, its description, a standard unit o f measure, and the data source fo r the standard measure.

In a similar manner, the T ask Force on Hospital Ma nagement Informa­ tio n Systems , Health Commissio n o f Victoria, is developing detailed descriptions of functional cost centres for implementation in that State. Else where in Australia, manuals have also been produced showing the same type of in fo rmatio n.

T o illus trate the style and content o f a standard functional stru, ture, the following example is taken from the California Hospital Commis­ sio n Accounting and Reporting Manual :

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Clinics

Function

Clinics provide organised diagnostic, preventive , curative, rehabilitative, and educa­ tional services on a scheduled basi s to ambulatory patients. Additional activities may include, but are not limited to, the following :

Participating in community activities designed to promote health education; assisting in administration of physical examinations and diagnosing and treating ambulatory patients having illnesses which respond quickly to treat­ ment; referring patients who require prolonged or specialised care to appropriate other se rvices; assigning patients to doctors in accordance with

clinic rules; assisting and guiding volunteers in t heir duties; making patients' appointments through required professional service functions.

Description

These cost centres contain the direct expenses incurred in providing clinic services to ambulatory patients. Separate cost should be maintained for each

organised clinic. For example, a separate cost centre should be maintained for each of the following clinics when such services are provided patients: Dental Clinic, ENT Clinic, Allergy Clinic, Psychiatric Clinic, etc. Included as di rect expenses are : salaries and wages, employee benefits, professional fees, supplies, purchased services, other direct expenses, and transfers.

Standard Unit of Measure : Number of Visits

Enter all visits to medical clinics. Each visit is counted as one. For example, when a patient visits Dental, ENT, and Allergy, the count is three . Visits made by patients to departments such as Laboratory and Radiology are not included here.

Data Source

The number of visits shall be the actual count maintained by the Cl inics.

Further examples of standard functional structures fro m this Manual appear as annexure 1.

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An ex

COST CENTRE

Clinical Units & Services

These Cost Centres are the individual elements of the hospital's medical staff structure considered responsible for the provision of medical care to inpatients and outpatients. Such medical care may be provided by RMOs, Senior Medical Officers, and Senior Medical Officers organised into clinical services/units, or by Visiting

Medical Staff on a fee-for-service basis.

Due to the numerous alternative ways of organ1s1ng medical services, several different options are available for encoding such services. A comprehensive standard code register will be maintained for specialty units and services.

All Medical Services

* Services provided by Visiting Medical Officers. * Services provided by whole-time Senior Medica l Officers. * Specialty Clinical Units of formally organised VMOs providing inpatient, outpatient, and/or operating theatre service. (See list of specialties.) * Specialty Clinical Services-formally structured and having a designated area set

aside for the provision of such service and employing at least some full-time staff (eg, Senior Medical Officers or technical staff)-(See list of specialties.)

NOTE: Each of the above codes may be used as desired where it is not possible or required to specifically isolate each medical officer or unit.

Where formally structured units or services are in existence, the following specific standard code register should be used: Where required, a new code should be requested for new or unique units or services. Multiple codes will be made available where there are multiple units within a given specialty.

* General Medicine -General Medicine No. 1 -General Medicine No.2 - General Medicine No . 3 -General Medicine No.4 - General Medicine No. 5 -General Medicine No . 6 * Genera I Surgery

- Ge11eral Surgery No. 1 -General Surgery No.2 - General Surgery No. 3 -General Surgery No. 4 - General Surgery No. 5 - General Surgery No. 6 * Special Medicine * Special Surgery * Acupuncture * Alcohol & Drug Dependency • Anaesthesiology • Asthma & Allergy • Breatt Cancer • Burna

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• Burns

• Cardiology - ECG

* Cardio-thoracic Surgery * Clinical Pharmacology * Clinical Research

* Community Medicine (Including FMP) * Dentistry (Oral Surgery) • Dermatology * Endocrinology/Metabolic/Diabetic

* Facio-Maxillary Surgery * Gastroenterology * General Practice * Geriatrics * Hypertension Service • Infection Diseases * Intensive Care * Medical Death Audit

* Nephrology/Renal Dialysis * Neurology * Neurosurgery

* Occupational Health • Occupational Health & Safety * Obstetrics and Gynaecology -Obstetrics and Gynaecology No. 1

- Obstetrics and Gynaecology No. 2 - Obstetrics and Gynaecology No. 3 - Obstetrics and Gynaecology No.4 - Obstetrics - Gynaecology • Oncology * Ophthalmology • Orthopaedic Surgery * Otolaryngology/Otorhinolaryngology

- ENT

* Paediatric Medicine * Paediatric Surgery * Pharmacology (Clinical) • Plastic and Reconstructive Surgery * Psychiatry

-Psychiatry-Adult -Psychiatry-Child * Radiotherapy * Respiratory Physiology & Pulmonary Function * Rehabilitation • Rheumatology • Social & Preventive Medicine * Spinal

* Urology • Vascular Medicine * Vascular Surgery * Venereal D isease

In this Victorian example, act1v1 ty measures have, as yet, no t been determined. Co nsultations co ncerning activity measures are in progress and documentation should be available early in 1981.

It can be seen from the above example that the approach being deve­ loped in Vict oria to the adoptio n of standard functional structures follows closely the model which operates in the United States. Further details from the Victorian Manual on Hospital Information Systems

appears as annexure 2.

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5.15 Accounting and Reporting Period: Annually and Monthly

We recommend that the accounting period should remain one year with reporting periods each month within the year.

Consideration has been given to whether the number of reporting periods should be altered to thirteen, with reports produced on a four­ week cycle. Such a thirteen-period cycle provides for greater compara­ bility of costs through time. The use of thirteen-period reporting is common in those industries or organisations with continuous processes or operations. As the majority of the weekly cycle costs in hospitals are not seasonal or greatly influenced by public holidays, thirteen-period reporting could be advantageous.

However, the introduction of reports every four weeks would probably bring increased pressures and complexities into a hospital accounting environment which will already be facing significant pressures for change.

Further, as the majority of both public and private sector activities are not attuned to thirteen-period reporting, external difficulties could arise. The above difficulties are believed to outweigh the advantages of thirteen-period accounting.

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l6 Cost Finding and

Management Reporting

The establishment of total operating costs for any one functio n requires that charges associated with service functions be distributed or allo­ cated across to other departments. For consistency in application, these service functions need to be determined and defined in a formal

fashion. Further, the sequence in which such costs are to be allocated across to other functions needs to be set down for all to follow. This sequence of allocation must also be supported by a means of allocating each of the cost centres to other functions.

This formalisation of the allocation methodology must be followed consistently t o maintain the reliability of the data. Changes in methods of allocation or the adoption of arbitrary measures could create signifi­ cant variations to the level of 'overhead' to be absorbed by any one function. Whilst no proscrib ed allocation method can be perfect, accuracy of allocation will allow for consistency of measurement.

We recommend that a description of accounting principles and con­ cepts, the standard chart of accounts, standard financial structures, and methods for assigning and allocating costs should be set dmvn for all to follow in the Reporting and Management Information Manual. This manual should also contain the prime elements of how results are to be reported, in terms of contents, layout, and timing.

It may be argued that, if the recording and reporting system is to be computerised, much of the detail in this and the previous two elements need not be provided to the hospitals. However, the material will be required to be distributed to allow the hospitals to comment on the system prior to its introductio n and to enable staff to develop an under­

standing of the system. Staff must also be ab le to answer questions when the accounting, reporting, and administrative system IS

operational.

For those organisations too small to justify computer processing at all recording levels, the manual will provide the basis for the clerical recording of the information.

The provision o f detailed standards to all hospitals is in accord with the practice in co untries with similar recording and reporting requirements.

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5.17 Budget Process

If hospital costs are to be co ntained in a manner consistent with equity of reimbursement and reimbursement according to reasonable financial requirements, then Governments have a responsibility to produce state· ments of objectives, policy priorities, and distributional goals. Once established, this information should b e communicated to hospitals to allow realistic budgeting to commence.

We recommend that the budget process for hospitals should be based on the integrated provision of services for the community and the pre­ scription of levels of bed capacity and intensity capacity by location.

These steps will not be achieved in the short term, as many of the necessary inputs to the process cannot be provided witho ut consulta­ tion between the various parties involved. Hopefully, these consulta­ tions would lead to a statement o f objectives and policy priorities and comprehensive planning and management control d ata from Statutory Health Authorities. The achievement of such o bjectives, however, can proceed no more quickly than the strengthening of the m anagerial con­ tro l system will allow. As a result, the initial budget processes will be less than ideal and initial levels of reliability will be lower than desired for clear identificatio n of policy choices in relation to the containment of costs.

We recommend that the budget process should start with the establish­ ment of practical capacity levels for each function and the estimation of fixed charges associated with those fun ctions.

Each activity would then be reviewed to de termine the level of practical capacity at which the function sho uld operate in the coming period. This activity level would provide the budget base and enable the esti­ mation o f variable costs. As the initial iteratio ns of this process will be

performed in the absence of a solid statistical base or delegated objec­ tives, it is inev itable that estim atio n erro rs will exist. Incrementalism cannot be replaced b y critical evaluation overnight. Although estima­ tio n errors canno t b e eliminated, they will reduce as the proces s is refined and skill levels improve.

We recommend that the establishment of capacity and utilisation levels be performed by the staff members responsible for the functions.

Commitment to the achievement of the cost factors determined in rela­ tion to capacity and utilisatio n canno t be o btained without this involve­ ment. Further, daily co ntrol will no t be achieved until st aff come to understand how the costs fo r whit h they a re responsible are influenced by administrative and patient management decisions.

11011

Whilst the above has dealt broadly with the creation of the functional and cost elements, we recommend that two further steps should be taken:

* The budget costs associated with interdepartmental service groups should he spread back in accord with the standard methodology, and total unit and operating costs established for the function. * These functional cost centres should then be 'rolled up' in accord

with the responsibility structure existing in the hospital to arrive at departmental, institutional, and areawide budgets.

Alterations to the bid made on the basis of this budget will require that the organisation go back, re-calculate against minimum cost ceilings, and then consolidate until such time as the operating budgets are con· sistent with reimbursement policies of financial intermediaries. We con· sider it essential that final budgets be agreed through a pro cess of vigorous negotiation, and that these budgets then provide benchmarks against which performance can be monitored and controlled.!

Performance evaluation could relate to a functio n , a unit , a department, a division, an institution , o r a number of institutio ns. Performance evaluation could be undertaken in relation to functio ns or respo nsibility .

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5.18 Major Components of the

5.181

Accounting, Reporting, and Budgeting System

Before drawing together the major components for the accounting, reporting, and budgeting system, we would like to emphasise th.at what we are proposing is simply an imaginative development of operating systems found in a number of hospital systems.

An Imaginative Development To Meet the Needs of Various Parties

Accounting and reporting systems such as the one outlined in this report exist already elsewhere in the world. These systems have proved practical to operate. They have enabled health administrators and financial intermediaries to increase their control over the incidence of hospital costs and their levels. In many instances, the use of these sys­ tems is mandatory for reimbursement purposes.

The Health Commission of Victoria is planning to introduce a system similar in most respects to the one recommended in this report. It is intended that the Health Commission's system will be operational as from 1 July, 1981.

Our proposed system, like those others, is predicated on the adoption of full accrual accounting in all hospitals. This accounting would be based around a standard chart of accounts which would be applied nationally. We believe that the use of this standard coding structure, account nomenclature, and reporting and disclosure provisions will meet the needs of the various parties involved in the delivery of hospital services. In our opinion, it should be a condition of reimbursement of hospitals by way of taxpayer funding or community-rated health insurance that they use this standard system of accounting, reporting, and budgeting.

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5.182 System Overview

In summary, the standard unit for budget purposes is a function, which is the lowest level at which costs can be associated with the per­

formance of an activity. Functions may therefore be sub-sets of the department concept. No two functions will carry out the same activity or set of activities.2

Whilst the standard budget unit is the function, these functions shall be rolled up for internal use in a hospital to represent responsibility levels within that hospital. In each successive such roll up, the level of detail provided shall decrease with only the one level below being shown in detail. The use of this responsibility structure assumes that persons holding positions at each responsibility point are also accountable for the costs associated with that level or position.

This means that they are:

* Involved in the creation of the budget * Committed to the achievement of the budget * In receipt of progress reporting to monitor performance * Required to satisfy any failure to achieve budget performance.

For purposes external to the hospital and in relation to the needs of financial intermediaries and other interested partie s, the function shall be the reporting unit.

All progress reporting will be on the basis of calendar months and take all accruals, prepayments, and a period depreciation charge into account. These entries, and their reversal, can be accomplished as an automatic product of computerisation.

The reports for each such period and function will show:

* Achievable activity level (having regard to all fixed factors, including staffing).

* Budget service levels. * Activity levels achieved in the period under review. * Cost incurred. These would be under the major headings of variable costs, fixed costs directly incurred in the function, and costs allo­

cated from other areas. Within each such heading, the costs shall be broken into their subjective component parts, cg, allocated costs could include such items as salaries and wages (medical), salaries and wages (non-medical), payments to Visiting :\ledical Officers, food supplies, and so on.

The costs shown in this fashion will then be compared against budget in terms both of the original budget established and in terms of that budget adjusted to reflect the activity levels achieved.

2 See annexure 1.

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Provision shall also be made for the removal of the labour rate variance, either in terms of budget figures or to adjust to a base year. Removal of this 'labour rate variance' in terms of budgeted rates will improve com­ parability to budget. Removal of this variance to hold rates to those for the start of the current year, or any other year, will allow for compara­ bility of labour content cost over time. Movements in labour cost can then be related to efficiency and intensity of care factors.

For internal use these reports would be rolled up as outlined earlier. For the financial intermediaries and Statutory Health Authorities, these reports would be presented, in the condensed format, showing total Jines only and including explanations for any significant events.

The activity measures above will be set on the basis of a single item for each function. Typical measures include: square metres cleaned, for cleaning staff; meals prepared, for catering staff; number of operating minutes, for theatres and recovery areas; number of line items issued, for pharmacy. In the case of these measures, equivalency factors must be used to arrive at an appropriate figure. To measure cleaning activity on the basis of square metres assumes that the cleaning loads are

identical, regardless of the finish to be cleaned- an obvious fallacy. Similarly, 'meals served', if used in an unadjusted fashion, equates all three meals and makes no allowance for the morning/afternoon tea or tray situation. For diagnostic services, a number of relative value measures are available, the best known of which would be the CAP system used in pathology.

Therefore loading factors and tables of equivalency need to be created to balance the measurement unit with the work load required to produce a unit. Such measures and the need for these adjustments can be easily seen for service functions. In many instances the measures used for describing the activity level of one department would be used in the derivation of the amount of costs to be allocated to other areas. Typical allocations would be cleaning costs on the basis of area, medical social work on the basis of numbers of patients, and medical records on the basis of admissions, adjusted outpatient, and casualty attendances. With other allocated costs, similar methods can be used.

With the increased emphasis which will be placed on statistical and cost recording, the accuracy of these statistics and the coding of sums becomes of paramount importance. Errors in either area can have signi­ ficant effect on the overall results for any function. Therefore we con­ sider that special attention will need to be required to ensure that the necessary manual systems are functioning correctly.

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To this end we believe that the hospital audit function, by third party auditors, should include certain regulatory requirements in relation to the statistical system. Professional competence of these auditors is not impugned if minimum audit levels for such statistics are set. This step of independent verification will bring greater consistency to systems functions and enhance the validity (and perhaps the reliability) of the

data.

It must be appreciated that the audit role in a hospital will change sig­ nificantly in the light of the above requirement and the adoption of accrual accounting. These changes will require that hospital audits become more extensive and intensive. As a result hospital audit costs

can be expected to rise, in major hospitals, by significant amounts. Such costs have to be assessed in terms of the value of having reliable and valid data which permit the accomplishment of the specific objec­ tives listed previously.

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5.2 ACCOUNTING, REPORTING, AND MANAGERIAL CONTROL

The foregoing provides a foundation for strengthening the managerial control process at all levels within the health system, from service pro­ vider through to health administrator. Various managerial controls can be implemented through the use of such a system to focus on the health efficiency and service efficiency implications of different patterns of resource use.

The availability of management information and its circulation is of itself a control measure. By becoming aware of health efficiency and service efficiency considerations, medical staff and health administra­ tors, if capab le and conscientious, can act to provide patients and the community with more value per dollar of expenditure.

5.21 The Development of

Minimum Cost Criteria

In more direct terms it will be possible and practical to examine the factors which contribute most to service efficiency by tracking costs to the individual functions which constitute the service.3 Where unit variable costs move between periods, the magnitude of the movement will be apparent and action can be undertaken to determine the cause of the movements. With the provision of base data on service efficiency, the cost effects of organisation, physical, and operational changes, either within the hospital or a network of hospitals, can b e monitored and controlled. Taken over time, combinations of factors which make for minimum cost criteria can be isolated.

When activity levels increase or decrease , the fact will be reported upo n and its significance costed. In the case where activity levels are in excess of the practical capacity, staffing pressures will be identified. Should activity levels fall significantly, staff excess will be shown by the increased percentage of fixed cost. Within an individual institution th e absolute cost levels for each function will be seen.

3 Given that appropriate methods for assigning and allocating costs are used.

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Health administrators, financial intermediaries, and policy-makers will have access to total costs:

* For each function, and for each grouping of functions, within and between hospitals and associated or related institutions and services. * By area; district, region, territory, or State (for each grouping of functions).

* By client group (for each grouping of functions). * By health program; acute care, long term care, primary prevention (for each grouping of functions). * By source of reimbursement; Commonwealth Government, State

Government, health benefit organisations, direct patient/client pay­ ments, local government (for each grouping of functions).

Within each function and grouping of functions, cost analyses can be undertaken using consistently derived and soundly based figures. Such analyses and comparisons can be made on the basis of:

* Total unit cost * Variable unit cost * Minimum cost ceilings.

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5.22 Minimum Cost Ceilings: Benchmarks for Reimbursement

As stated in the previous chapter, we do not believe that 'normal' costs are an appropriate basis for efficiency evaluations and the reasonable reimbursement of providers. There is a tendency to regard 'normal' costs as best endeavour levels, and costs away from the norm, whether high or low, as deviant. Figures higher than the norm may not represent inefficiency if the quality of the service is higher, that is, health effi­ ciency could be higher in some instances. Likewise, figures lower than the norm may on occasions represent greater efficiency of service but lower health efficiency.

Minimum cost criteria, which represent an amalgam of what is known about service efficiency and health efficiency, are the appropriate criteria for the distribution of available resources across health pro­ grams4 and the level of reimbursement for any particular activity. As previously noted, the use of 'normal' costs as a basis for reimbursement creates an incentive for lower cost, more efficient providers to become less efficient. The most likely outcome of this approach to reimburse­ ment would be an intensification of care not reflected in higher levels of health efficiency and an upward movement of the norm.

Minimum cost criteria provide policy-makers with benchmarks for assessing efficiency and identifying how costs can be contained in the provision of hospital services. Minimum cost criteria would be accept­ able to most of the parties vitally concerned with the provision of hospital services.

4 It should be noted that medical activities are often fungible (substitutable) and this factor should be taken into account by the policy-maker in deciding on the distribution of available resources.

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5.23 Good Payroll Systems Are Essential

In most' hospitals payroll costs account for 70 to 80 per cent of recur­ ring expenditure. Therefore the correct dissection and allocation o f these sums is of prime importance in any cost-recording or allo cation system. The payroll systems currently in use do not in general provide all the requisite information.

We recommend that payroll systems be installed in Australia's hospitals (and perhaps associated or related institutions) which will identify and segregate staff costs by function, allowing for multiple dissections of a single staff member's time.

This multiple dissection is required to enable the accounting system to account properly for staff costs for tho se persons who are rostered, within any period, to work in several locations. The payroll system would also record and report for functional centre labour costs b y

category, that is, ordinary rate, overtime rate, and penalty or other allowances. Paid unworked hours would also be identified and recorded uniquely. Similarly, workers' compensation payments would be identi­ fiable, together with hospital superannuation payments and similar associated payroll costs. Time not available for productive purposes would also be recorded by category for subsequent allocation.

Correct allocation of wages and salaries and associated costs will require considerable effort if valid cost measures are to be created for

functions.

Whilst surrogate methods, other than direct analysis and allocation, are available to spread these costs, they often require arbitrary judgments. Arbitrary judgments can lead to severe anomalies in allocation and have differing consequences in each organisation. The cost savings from any

form of averaging or approximation used in the allocation of staff costs must be weighed against the implications of cost comparisons within and between hospitals being less valid.

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5.2.4 Control over

Reimbursement

Regardless of the mechanism adopted for reimbursing hospitals for the services they provide, it is important that the mechanism of actually transferring funds does not, of itself, create control problems.

In the United Kingdom, for example, funds are released to hospitals on a daily basis at what could be a large bureaucratic cost. Other transfer periods apply elsewhere.

Under the reimbursement mechanism of the Hospital Cost Sharing Agreement it is possible for astute hospital managers who tightly con­ trol their cash flows to earn significant interest sums on funds trans­ ferred from the central authority. Interest earned in this fashion be­ comes part of a hospital's discretionary income and may be used in ways inimical to the plans of the Statutory Health Authority by being invested in a way which could give rise to additional maintenance expenditures. Whilst managers and their staff who achieve such incomes show commendable enterprise, the situation may need to be carefully monitored.

We would prefer that the central authority controlled the provision of funds to the individual organisations in a manner which centralises such income. On a monthly cycle, this could be achieved by the simple expedient of funds transfer at the end of a period in response to the provision of details of total cheques raised. Control over the accounts to which these funds are transferred could be effected by making them exclusive use, prohibiting transfers to other accounts, and by mid­ period checks.

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5.25 Consultations Leading to A Program for Implementation

It is expected that there will be opposition to the proposed budgetary system from those who enjoy the present lack of accountability and who believe that institutionalised incrementalism (perhaps with some adaptions, such as global allocations) is the preferred funding arrange­ ment for recognised hospitals. There will be those who argue against the proposals on the basis of lack of knowledge, insufficient data, and the need for more experience.

Such arguments cannot be allowed to subvert the benefits to patients, financial intermediaries, and the health care system generally accruing from more comprehensive information and improved management control in hospitals.

The proposed developments in accounting and managerial control would require a restructuring rather than an expansion of the costs of managing the health system. Once the system was operational, most of the accounting and reporting data would be processed by computer and easily managed. Hospital activities would then be streamed according to

the benefits they produce while the aggregate costs of the hospital sys­ tem could be significantly reduced. The results of a survey undertaken as part of this study reveal quite widespread support among hospitals for improved standards of accounting and managerial controLS

A series of consultations between the Commonwealth Government and other involved parties would raise the level of understanding amongst those who might otherwise not support the proposals as. to why such changes are needed and what benefits will accrue. Arising from these consultations could come a firm but flexible program for implemen­ tation.

5 See Chapter Three.

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5.3 ASPECTS OF

IMPLEMENTATION

Some of the key technical aspects of the implementation process include building up the capabilities of staff within the finance function in hospital administration, getting agreed policies on the use of compu­ ters for accounting and reporting purposes, and setting a time frame for implementing the system.

5.31 Staff Capabilities in

The Finance Function

The expertise within and the performance of the finance functions in Australia's recognised hospitals show variances which are not always in relation to the size of the hospital.

In general terms there is a tendency for staff to have little experience outside the hospital field. Formal accounting qualifications are not common except at the most senior leveJ.6 In the smaller or more remote hospitals, formal accounting skills may not be available except at manager or chief executive level.

To a degree recognised hospitals appear handicapped in attracting quali­ fied staff due to the existing low levels of regard for hospital accounting requirements in the public sector and possibly a feeling that career opportunities are not as good in hospitals as an industry.

In Victoria, for example, the existing salary award structures for the senior finance positions are :

Office Within Finance Function

Administrative Office Finance • Highest award * Group 6 hospitals 7

Accountant • Highest award • Group 6 hospitals7

Assistant Accountant * Highest award * Group 6 hospital7

6 The evidence is summarised in Chapter Three.

Salary Per Annum

$25,818 $18,470

$21,247 $15,356

$15,756 $12,782

7 In Victoria, level of remuneration for executive and administrative staff is based on the groupings of institutions in terms of relative dollar maintenance expenditures. A Group 6 hospital has maintenance expenditure within the range S2 .6 million to S3 .3 million.

Payments in excess of these determinations are believed to be common, however, as are over-award payments in general in Victoria. For com­ parative purposes, in industry and commerce in the same State a quali­ fied accountant with five years' post-qualification experience could

reasonably be expected to receive in the range $18,000-$20,000 per annum if employed in a large, stable organisation.

In the large metropolitan and teaching hospitals the level of profes­ sional support available in the finance function is normally adequate. Further, these hospitals have often actively sought finance staff with outside experience.

However, there has been little external pressure on hospitals or their staff from Statutory Health Authorities for innovative management reporting and/or accounting. Therefore the performance of the finance function is determined by the professional standards and motivations of

local administrators. At present, these are the people who decide whether the function should perform anything more than the routine statutory minimum. Some health administrators demand more and attract more skilled staff and get higher levels of performance.

In most hospitals payroll is the largest area of the finance function. With computerised packages, however, payroll offers little scope for initiative. At present, accounting requirements in other areas are not demanding. Private patient accounting is routine and simple, the

accounting associated with medical staff who have the right to private practice is not demanding, and the accounting required for statutory purposes presents no challenge. The finance function in a hospital with an associated private facility, however, is usually under more pressure

to ensure that information to allow for proper and cost-effective management is available.

Professional accounting and associated bodies recognise the particular and specific problems of accountants in hospitals. Special interest groups have been formed to allow the interchange of ideas and to improve the knowledge of their members. Whilst these special interest

groups are advantageous, they can do little for their members in loca­ tions remote from the capitals. Non-members, of course, are probably largely unaffected by these professional developments.

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5.311 Building Up Staff Capabilities

The more intensive reporting that we are recommending is simply con­ sistent with sound management practice. In terms of the management climate to be found in most recognised hospitals, however, it does pre­ sent some short-term difficulties in implementation.

We recommend a systematic program of building up staff capabilities within the finance function of hospital administration.

The further development and implementation of the proposed system will therefore require staff training as well as the provision of an extended period for the managerial control system to become opera­ tional. Staff could be instructed in what to do and how to do relatively easily and quickly. However, such an approach to training would not be sufficient. Staff must also be trained to understand why they are taking these actions if a system is to be effective and provide consis­ tency of output. It should also be accepted that some staffing changes may be required in order that the system can operate efficiently. These changes could involve extra staff, a more qualified staff, or both.8 These steps may need to be taken recognising that there are variances in staff calibre and that in the past little has been asked of the finance function in many hospitals.

The use of computers could reduce the need for increased staff num­ bers but it must be recognised that effective systems will require changes to staff knowledge levels.

8 The cost of these staff would be offset by improved levels of performance and cost containment within the hospital system.

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Getting Agreed Policies on

The Use of Computers

The major system concepts proposed and the large data volumes to be processed mean that physical resources to support the system must also be examined.

This examination may, in some States, require the resolution of policy issues regarding the placement and use of computers. Other issues will also arise.

What type of equipment should be used? To a degree the answer to this question will depend on the computing approach adopted by Statutory Health Authorities in relation to computing services, ie, the extent to which they are centralised, regionalised, or use in-house equipment within the hospitals.

The other significant factor will be the software decision. Should the Commonwealth Government be responsible for providing a software package for the accounting, reporting, and administrative system, or should each State and Territory be allowed to pursue its own course to meet information and reporting requirements? The decision to purchase a package solution may of itself force some equipment decisions. Crea­ tion of specific specialised software may also prove costly if attempts are made to create software capable of operating on divergent equip­ ment types and cost penalties will arise.

A political issue rather than a technical issue is who will pay for these expenditure decisions involving computers. We propose that the con­ sultative process between the Commonwealth and other involved parties be used to address this question.

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5.321 Computing Methods

Whilst recommending that the accounting and budget process be com­ puterised, we do not believe that we should set down the finite means by which the computing should be undertaken.

However, we do suggest that Commonwealth and other involved parties collectively seek to agree on the best ways to achieve the required out­ puts so that implementation and cost savings can be made available to all.

We recommend that any computerised system which is installed for accounting, reporting, and administrative purposes should assist the individual hospitals in the creation of their budgets at the functional and responsibility levels.

Such a facility should be easily provided. This budget sub-system should also allow the hospitals to modify various budget parameters:

* To determine the overall effect of wage and salary increases. * To determine changes in activity levels or supply costs. * To apply percentage movements to all budget elements in one process.

* To simulate the impact of policy decisions on cost containment.

Similarly, the accounting/general ledger system should allow for automatic end-of-month or -year adjustments and simplified handling of journal entries direct from various automated sub-systems.

Additional reporting should be available to all users of the system with­ out the need for intensive programming effort so that individual local control needs can be satisfied and user involvement encouraged.

5.33 Setting a Time Frame

For Implementation

5.331

5.332

Full and complete documentation of the accounting, reporting, and administrative system, including specification of input and output measures and agreement to all definitions, is a significant task. Commonwealth Government initiatives involve consultations with the

various parties as well as political choices. Agreement concerning the purpose of the system and its implementation should be reached be­ tween financial intermediaries-the Commonwealth Government, State Governments, the community-rated health insurance organisations-and

the providers- the Statutory Health Authorities, and private hospitals and nursing homes.

An Important and Urgent Task

Implementation of systems which provide a mechanism for the accomp­ lishment of the specific objectives previously identified will require an extended time frame. It is worthwhile restating these objectives to emphasise the importance and urgency of the task. They are as follows:

1 To make cost comparisons within and between hospitals as reliable and valid as possible. 2 To allow for a review of hospital costs relative to hospital capacity and utilisation.

3 To ensure efficient production of services, taking into account hos­ pital capacity constraints. 4 To provide a focus and direction for hospital cost containment decisions. 5 To identify the reasonable financial requirements of a hospital con­

sistent with cost containment restraints and the efficient produc­ tion of services. 6 To allow for equity of reimbursement between types of service and classes of payor.

Achieving National Objectives Without Losing Momentum

Initiatives have been taken in a number of States with some of these objectives in mind. In Victoria, for example, a pilot cost centre report­ ing program is underway at a number of major hospitals. These initia­ tives by the States do not provide a sufficient basis for reliable and valid

cost comparisons. Therefore these preliminary steps need to be re­ directed towards national objectives without the loss of momentum. Achievement of this directional shift would require consultation be­ tween the Commonwealth, State, and Territories and co-ordination of

effort.

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5.333 A Schedule for

Implementation

The absolute time frames fo r a total implementatio n involve a number of uncertainties. We envisage that consultations b etween the Common­ wealth Government and other involved parties will lead to a policy commitment to implement the proposed system.

It is likely that differential rates of progress will be achieved by the various States and Territories and between recognised and private hospitals. RealisticaJly, a three- t o five-y ear time frame would appear necessary before the accounting, reporting, and administrative systems will be sufficiently developed to accomplish all the objectives outlined above. However, the achievement of each of these objectives should be pre-scheduled.

We suggest that the following schedule could be ad opted fo r initiating the implementation cycle:

* Within six months of the release of the Final Report of the Commis­ sion of Inquiry into the Efficiency and Administration of Hospitals, all financial intermediaries, Statutory Health Authorities, and private hospital provider associations sho uld forward to a national body or group a statement, in broad terms, of their intended approach.

* Within nine months, the necessary agreem ent with each participating party should have been made and the necessary adjustments to pre­ existing systems determined.

* Within one year, system o utput formats, that is , statutory reporting requirements, should have been agreed upo n.

* Within two years, a standard chart o f acco unts, as described, sh ould be agreed upon and then progressively implemented.

Time frames for other aspects of implementation would nee d evalu a­ tion following the resolutio n of the first two points mentioned ab ove. Concurrent with the creation o f the standard chart of accounts, activity to provide the balance of the definitional material would be required so that individual hospitals could begin to implement recording systems and gather statistical material.

In any hospital, the major tasks required to be undertake n wo uld be:

* Organise for payroll costs to be available at the requisite level o f detail.

* Beg in the identification, recording, and val uation o f asse ts prepara­ tory to the move to the new chart of accounts.

* Undertake the recording of provisio ns o f service in terms of the agreed measures.

* Establish practical capacity levels for each functio n in the hospital. * Implement accrual accounting and the stand ard chart of accounts.

Activities following these steps wo uld relate to the establishment o f new budget structures, budge ts, and internal and external reporting. These steps are likely to require resolutio n of computer issues and relative sequences could therefo re alter.

IJI 128

5.34 In Summary

The proposed system of accounting, reporting, and budgeting which is the subject of this report is simply an imaginative development from systems which are already operating in some Australian hospitals.

Once operational on a national basis, it would give substantial leverage to national and State policies for increasing effectiveness, improving efficiency, and containing costs in the provision of hospital services. These gains can be achieved by structuring rather than adding to the

costs of administering Australia's hospitals.

129

6 REFERENCES AND

SOURCES OF INFORMATION

Advisory Council for Inter-Governmental R elations, Relations Between Federal and State Governments in Australia, Information Paper No.6, AGPS, Canberra, 19 79 American Hospital Association, Hospital Administrative Services

Division, Monitrend for Hospitals, AHA, Chicago , 1980. Australian Association of Surgeons, Submission to Commission of Inquiry into the Efficiency and Administration of Hospitals, Novem­ ber, 1979 Australian Hospital Association, Health Policies for Australia: 1979 and

Onwards, AHA Health Services Monograph 12/79, 1979 Australian Hospital Association, Submission to Commission of Inquiry into the Efficiency and Administration of Hospitals, November, 1979 Alford, Robert, Health Care Politics: Ideological and Interest Group

Barriers to Reform, University of Chicago Press , Chicago, 1975

Bauer, Katherine, Improving the Information for Hospital Rate Setting, Harvard Centre for Community Health and Medical Care, Report Series R-45-15, September, 1976

California Hospital Commission, Accounting and R eporting Manual for California Hospitals, Sacramento, 19 7 4 Cancer Council of Western Australia, Submission to Commission of Inquiry into the Efficiency and Administration of Hospitals, Novem­

ber 1980 Commissio n o f Inquiry in to the Efficiency and Administration of Hos­ pitals, Interim Report, AGPS, Canberra, 1980 Commission o f Inquiry into the Efficiency and Administration of Hos­

pitals, Publicly Released Submissions and Transcripts of Proceedings at Public Hearings, Sydney, 1980 Commonwealth Department of Health, Submission to Commission of Inquiry into the Efficiency and Administration of Hospitals, Decem­

ber, 1979 Commonwealth of Australia, Report on Rationalisation of Hospital Facilities and Services and on Proposed New Charges: A Discussion Paper, AGPS, Canberra, 1979 Congressional Budge t Office, Director Rivlin, Alic, Controlling Rising

Hospital Costs, Co ngress of the United States, Wash ingto n , 1979

Deeble, J ohn, 'Health Expenditures in Australia, 1966-67 to 1977-78', Paper delivered at Australia n Society of Acco untants, Health Services Seminar, Melb o urne, 1980 Dillon, Ray, Zero-Base Budgeting for Health Care Institutions, Aspen

Systems Corporation, Germantown, 1979 Dixon, Daryl, 'Hospitals and the National Eco no my ', Paper delivered at AHA National Congress, Canberra, 1980 Dixon, Daryl and Fo st er, Chris, 'Social Welfare Poli cy fo r a Sustainable

Society', Paper delivered at ANZAAS Congress, Adelai de, 1980

130

I

[' li I

Feder, Holahan, and Marmor (eds.), National Health Insurance, Urban Institute, Washington, 1980 Feder, Judith and Spitz, Bruce, 'The Politics of Hospital Payment', chapter 6, National Health Insurance, Urban Institute, Washington,

1980

Griffiths, John et al ( ed.), Cost Control in Hospitals, Health Admini­ stration Press, Ann Arbor, 1976

Health Commission of New South Wales, Formula for Regional Alloca­ tion of Maintenance Funds, Sydney, 1979 Health Commission of New South Wales, Operating Manual for Manage­ ment Information Review System, Sydney Health Commission of New South Wales, Output Budgeting: A Discus­

sion Paper, Sydney, 1979 Health Commission of Victoria, Manual on Hospital Information Sys­ tems, Melbourne, 1980 Hospitals and Health Services Commission, A Discussion Paper on Pay­

ing for Health Care: A Review of the Financing of Health Services in Australia and a Discussion of Possible Alternative Arrangements, AGPS, Canberra, 1978

Lindblom, Charles, 'The Science of "Muddling Through" ', Public Administration Review, 19, 1959, pp 79-88

McClure, Walter, Reducing Excess Hospital Capacity, Report No. HRP-0015199, (United States) Bureau of Health Planning and Resources Development, Rockville, 1976 McHarg, Malcolm, Public and Private in the Provision of Medical Ser­

vices, Report to the Commission of Inquiry into the Efficiency and Administration of Hospitals, Sydney, 1980 Mechanic, David, Future Issues in Health Care: Social Policy and the Rationing of Medical Services, Free Press, New York, 1979

O'Donoghue, Patrick, Controlling Hospital Costs: The Revealing Case of Indiana, Policy Centre, Denver, 1978 Owen, A. J., Health Authority Capital Budgeting: the State of the Art in Theory and Practice, A Technical Paper Prepared for the Royal

Commission ori the National Health Service, University of Warwick, 1978

Persin, Marcia, MIRC: Management Improvement to Reduce (Hospital) Costs, Kellogg Foundation, Bat tie Creek, 19 7 8

Review of New South Wales Government Administration, Interim Report: Directions for Change, Government Printer, Sydney, 1977 Rivlin, Alice, Systematic Thinking for Social Action, Brookings Institu­ tion, Washington, 1971 Royal Commission on the National Health Service, Management of

Financial Resources in the National Health Service, Research Paper No. 2, Her Majesty's Stationery Office, London, 1978 Royal Commission on the National Health Service, Allocating Health Resources: A Commentary on the Report of the Resource Allocation

Working Party, Research Paper No. 3, Her Majesty's Stationery Office, London, 1978

131

Sax, Sidney, 'Medicine in the Eighties-Can We Afford It?: The Austra­ lian Perspective', Paper delivered at Joint Canadian Medical Associa­ tion Australian Medical Association Meeting, Vancouver, 1980 Scott, Ian, 'Health Expenditure and the CPI', Working Paper Prepared

for Commission of Inquiry into the Efficiency and Administration of Hospitals, August, 1980 Shaw, Derek, 'What's Draining Our Hospital Dollars? ... And How Can We Plug the Drain?', Health Action, 3, 3/4, 1978 Shaw, Derek, 'Would Australians Benefit from Fewer Hospital Ser­

vices?', Health Action, 4, 1/2, 1979, pp 2-8 Shaw, Derek, 'Ambulatory Surgery: How Less Can Be Better', Health Action, 4, 1/2, 1979, pp 18-23 Steele, Selby, 'Presidential Address', Delivered at AHA National Con-

gress, Canberra, 1980

United States Department of Health, Education, and Welfare, Health Care Financing Administration, Office of Policy, Planning, and Research, System for Uniform Hospital Reporting, DHEW, Washing­ ton, September, 1978 Voluntary Health Insurance Association of Australia, Scope for Better

Use of this Nation's Hospitals: Submission to Commission of Inquiry into the Efficiency and Administration of Hospitals, November, 1979 Washington State Hospital Commission, Accounting and Reporting

Manual for Hospitals, State of Washington, 1974

Zubicoff, Raskin, and Hanft (eds.), Hospital Cost Containment: Selected Notes for Future Policy, Prodist, New York, 1978

132

ANNEXURES

1 STANDARD FUNCTIONAL STRUCTURES FROM THE CALIFORNIA HOSPITAL COMMISSION ACCOUNTING AND REPORTING MANUAL

2 MATERIAL FROM MANUAL ON HOSPITAL MANAGEMENT INFORMATION SYSTEMS (VERSION 11) HEALTH COMMISSION OF VICTORIA

:3 ACCOUNTING, COSTING, AND MANAGEMENT REPORTING PRACTICES QUESTIONNAIRE

ANNEXURE!

STANDARD FUNCTIONAL STRUCTURES FROM THE CALIFORNIA HOSPITAL COMMISSION ACCOUNTING AND REPORTING MANUAL

SYSTEMS OF ACCOUNTS

MEDICAL/SURGICAL ACUTE

Function

Medical/Surgical Care Units provide nursing care to patients on the basis of physi­ cians' orders and approved nursing care plans. Additional activities may include, but are not limited to, the following :

Serving and feeding of patients; collecting sputum, urine, and feces samples; monitoring of vital life signs; operating of specialised equipment related to this function; preparing of equipment and assisting of physicians during patient examination and treatment; changing of dressings and cleansing of wounds and

incisions; observing and recording emotional stability of patients; assisting in bathing patients and helping into and out of bed ; observing patients for reaction to drugs; administering specified medication; answering of patients' call signals; keeping patients' rooms (personal effects) in order.

Description

This cost centre contains the direct expenses incurred in providing daily bedside nursing care to Medical/Surgical patients. Included as direct expenses are: salaries and wages (non-physician only), employee benefits, professional fees, supplies, purchased services, other direct expenses, and transfers.

Standard Unit of Measure: Number of Patient Days

Report patient days of care for all patients admitted to this unit. Include the day of admission, but not the day of discharge or death. If both admission and discharge or death occur on the same day, the day is considered a day of admission and counts as one pat ient day.

Data Source

The number of patient days shall be taken from daily census counts.

Source: System of Accounts California Hospital Commission Accounting and Reporting Manual

SKILLED NURSING

Function

Skilled Nursing care is provided to patients on the basis of physicians' orders and approved nursing care plans and consists of care in which the patients require con· valescent and/or restorative services at a level less intensive than the Medical, Surgical, and Paediatric acute care requirements. This centre is sometimes referred to as Extended Care. Additional activities may include, but are not limited to, the following:

Serving and feeding of patients; collecting of sputum, urine, and feces samples; monitoring of vital life signs; operating of specialised equipment related to this function; preparing of equipment and assisting of physicians during patients' examination and treatment; changing of dressings and cleansing of wounds and incisions; observing and recording emotional stability of patients; assisting in bathing patients and helping into and out of bed; observing patients for reaction to drugs; administering specified medication; answering of patients' call signals; keeping patients' rooms (personal effects) in order.

Description

This cost centre contains the direct expenses incurred in providing daily bedside nursing care to patients requiring extended skilled nursing care usually lasting 30 days or more. Included as direct expenses are: salaries and wages (non-physician only), employee benefits, professional fees, supplies, purchased services, other direct expenses, and transfers.

Standard Unit of Measure: Number of Patient Days

Report patient days of care for all patients admitted to this unit. Include the day of admission, but not the day of discharge or death. If both admission and discharge or death occur on the same day, the day is considered a day of admission and counts as one patient day.

Data Source

The number of patient days shall be taken from daily census counts.

Source: System of Accounts California Hospital Commission Accounting and Reporting Manual

I I

I

INTERMEDIATE CARE

Function

Intermediate Care is the provision of supportive, restorative, and preventive health services in conjunction with a socially oriented program for patients, and the main· tenance and operation of 24-hour services including board, room, personal care, and continuous nursing service under the direction of a professional nurse.

Description

This cost centre contains the direct expenses incurred in providing daily services to patients requiring intermediate nursing care. Included as d irect expneses are: salaries and wages (non-physician only). employee benefits, professional fees, supplies, purchased services, other direct expenses, and transfers.

Standard Unit of Measure: Number of Patient Days

Report patient days of care for all patients admitted to this unit. Include the day of admission, but not the day of discharge or death. If both admission and discharge or death occur on the same day , the day is considered a day of admission and counts as one patient day .

Data Source

The number of patient days shall be taken from daily census counts.

Source: System of Accounts Californ ia Hospital Commission Accounting and Reporting Manual

RESIDENTIAL CARE

Function

Residential Care is the provision of safe, hygienic, sheltered living for residents not capable of fully independent living. Regular and frequent, but not continuous, medical and nursing services are provided.

Description

This cost centre contains the direct expenses incurred in providing residential care to patients. Included as direct expenses are: salaries and wages (non-physician only), employee benefits, professional fees, supplies, purchased services, other direct expenses, and transfers.

Standard Unit of Measure: Number of Patient Days

Report patient days of care for all patients admitted to this unit. Include the day of admission, but not the day of discharge or death. If both admission and discharge or death occur on the same day, the day is considered a day of admission and counts as one patient day .

Data Source

The number of patient days shall be taken from daily census counts.

Source: System of Accounts California Hospital Commission Accounting and Reporting Manual

111111111

Ancillary Service Expense:

LABOUR AND DELIVERY

Function

This includes the services provided by specifically trained nursing personnel to patients in Labour and Delivery , including prenatal care in labour, assistance in delivery, postnatal care in recovery, and minor gynaecologic procedures, if per­ formed in the Delivery suite. Additional activities may include, but are not limited

to, the following:

Comforting patients in the labour, delivery, and recovery rooms; maintaining aseptic techniques; preparing for deliveries; cleaning up after deliveries to the extent of preparation for pickup and disposal of used linen, gloves, instruments, utensils, equipment, and waste; arranging sterile setup for d eliveries; preparing

patient for transportation to delivery room and recovery room; enforcing of safety rules and standards; monitoring of patients while in recovery.

Description

This cost centre contains the direct expenses incurred in providing care to maternity patients in labour, delivery, and recovery rooms. Included as direct expenses are : salaries and wages, employee benefits, supplies, purchased service s, other direct expenses, and transfers.

Standard Unit of Measure: Number of Deliveries

Report multiple births as one delivery. Include Caesarean sections only when they are performed in delivery room. Caesarean sections performed in the Surgical suite shall be included in the operating room statistics. Stillbirths and infants born out· side the hospital building are not to be classified as delive ries.

Data Source

The number of deliveries shall be an actual count obtained from medical records.

Source: System of Accounts California Hospital Commissio n Accounting and Reporting Manual

SURGERY AND RECOVERY

Function

Surgery and Recovery services are provided to inpatients by specifically trained nursing personnel who assist physicians in the performance of surgical and related procedures during and immediately following surgery. Additional activities may include, but are not limited to, the following:

Comforting patients in the operating room; maintaining aseptic techniques; scheduling operations in conjunction with surgeons; assisting surgeon during operations; preparing for operations; cleaning up after operations to the extent of preparation for pickup and disposal of used linen, gloves, instruments,

utensils, equipment, and waste; assisting in preparing patients for surgery; inspecting, testing, and maintaining special equipment related to this function; preparing patient for transportation to recovery room; counting of sponges, needles, and instruments used during operation; enforcing of safety rules and standards; monitoring of patient while recovering from anaesthesia.

Description

This cost centre contains the direct expenses incurred in providing surgery and recovery room services to patients. Included as direct expenses are: salaries and wages, employee benefits, supplies, purchased services, other direct expenses, and transfers.

Standard Unit of Measure: Number of Operating Minutes

Operating minutes is the difference between starting time and ending time defined as follows:

Starting time is the beginning of anaesthesia (or surgery if anaesthesia is not administered).

Ending time is the end of anaesthesia (or surgery if anaesthesia is not admini· stered) .

Data Source

The number of operating minutes shall be an actual count obtained from the surgical suite operating log.

Source: System of A=unts California Hospital Commission A=unting and Reporting Manual

SURGICAL DAY CARE

Function

Surgical Day Care services are provided to outpatients by specifically trained nurs· ing personnel who assist physicians in the performance of surgical and related procedures both during and immediately following surgery. Additional activities may include, but are not limited to, the following:

Comforting patients in the operating room; maintaining aseptic t echniques; scheduling operations in conjunction with surgeons; assisting surgeon during operations; preparing for operations; cleaning up after operations to the extent

of preparation for pickup and disposal of used linen, gloves, instruments, utensils, equipment, and waste; arranging sterile setup for operation; assisting in preparing patients for surgery; inspecting, testing, and maintaining special eq up· ment related to this function; preparing patient for transportation to recovery room; counting of sponges, needles, and instruments used during operation; enforcing of safety rules and standards; monitoring of patient while recovering from anaesthesia.

Description

This cost centre contains the direct expenses associated with a separately identifi· able outpatient surgery room. When a common operating room is used for both inpatients and outpatients, the direct costs for both should be accumulated in the 'Surgery and Recovery' cost centre. Included as direct expenses of the 'Surgical Day

Care' cost centre are: salaries and wages, employee benefits, professional fees, supplies, purchased services, other direct expenses, and transfers.

Standard Unit of Measure: Number of Operating Minutes

Operating minutes is the difference between starting time and ending time defined as follows :

Starting time is the beginning of anaesthes ia (or surgery if anaesthesia is not administered) .

Ending time is the end of anaesthesia (or surgery if anaesthesia is not admini · stered).

Data Source

The number of operating minutes shall be an actual count obtained from the surgery room operating log.

Source : System of Accounts California Hospital Commission Accounting and Reporting Manual

RADIOLOGY- DIAGNOSTIC

Function

This department provides diagnostic radiology services as required fo r the examina­ tion and care of patients under the direction of a qualified radiologist. Diagnostic radiology services include the taking, processing, examining, and interpreting of radiographs and fluorographs. Additional activities may include, but are not limited

to, the following : Consultation with patients and attending physician ; radioactive waste disposal ;

storage of radioactive materials.

Description

This cost centre contains the direct expenses incurred in providing diagnostic radio· logy services. Included as direct expenses are: salaries and wages, employee benefits, professional fees, supplies, purchased services, other direct expenses, and transfers.

Standard Unit of Measure: Relative Value Units

Rad iology Relative Values as determined by the California Medical Association, 1974 California Relative Value Studies. Relative Value Units for unlisted and 'BR' (By Report) procedures should be reasonably estimated on the basis of other comparable procedures or estimated by qualified personnel.

Data Source

The number of Relative Value Units shall be the actual count maintained by the Radiology Department.

Source: System of Accounts California Hospital Commission Accounting and Reporting Manual

PHARMACY

Function

This department procures, preserves, stores, compounds, manufactures, packages, controls, assays, dispenses, and distributes medications (including IV solutions) for in· and outpatients under the jurisdiction of a licensed pharmacist. Pharmacy services include the maintaining of separate stocks of commonly used items in designated areas. Additional activities may include, but are not limited to, the

following:

Development and maintenance of formulary(s) established by the medical staff; consultation and advice to medical staff and nursing staff on drug therapy; add· ing drugs to IV solutions; determining incompatibility of drug combinations; stocking of floor drugs and dispensing machines.

Description

This cost centre contains the direct expenses incurred in maintaining a pharmacy under the jurisdiction of a licensed pharmacist. Included as direct expenses are: salaries and wages, employee benefits, professional fees, supplies, purchased ser· vices, other direct expneses, and transfers. The cost of non-chargeable supplies and equipment issued to other cost centres shall be transferred to the using cost centres,

preferrably on a monthly basis.

Standard Unit of Measure: Number of Line Items Sold

An item description on a prescription or requisition form is reported as one line item regardless of the quantity the item description represents. Items returned for credit shall not be counted. Non-chargeable items issued to other departments (or returned therefrom) shall not be included in the count. Only items billed to

patients shall be counted.

Data Source

The number of line items sold may be obtained from an actual count maintained by the pharmacy or from acceptable statistical sampling techniques.

Source: System of Accounts California Hospital Commissinn Accounting and Reporting Manual

DIALYSIS

Function

Dialysis is the process of cleaning the blood by the use of an artificial kidney machine. Additional activities may include, but are not limited to, the following:

Wheeling portable equipment to patient's bedside; explaining procedures to patient; operating dialysis equipment; inspecting, testing, and maintaining special

equipment.

Description

This cost centre contains the direct expenses incurred in the Dialysis department. Included as direct expenses are : salaries and wages, employee benefits, professional fees, supplies, purchased services, other d irect expenses, and transfers.

Standard Unit of Measure: Number of Hours of Treatment

The number of hours of treatment shall be the difference between the starting time and the ending time (rounded to the nearest half hour) defined as follows:

Starting time is the time when the physician or paramedic assumes control of the

dialysis treatment. Ending time is the time when the physician or paramedic relinquishes control of

the dialysis treatment.

Data Source

The number of hours of treatment shall be the actual count maintained by the

Dialysis department.

Source : System of Accounts California Hospital Comm ission Accounting and Reporting Manual

I

lal

PHYSICAL THERAPY

Function

The Physical Therapy Department provides physical or corrective treatment of bodily or mental conditions by the use of physical, chemical, and other properties of heat, light, water, electricity, sound, massage, therapeutic exercise under the direction of a physician and/or registered physical therapist. The physical therapist

provides evaluation, treatment planning, instruction and consultation. Activities may include, but are not limited to, the following:

Application of manual and electrical muscle tests and other evaluative proce· dures; formulation and provision of therapeutic exercise and other treatment programs; organising and conducting physical therapy programs upon physician referral or prescription; instructing and counselling patients, relatives, or other

personnel; consultation with other health workers concerning a patient's total treatment program; assistance by aides to patients in preparing for treatment and performance of routine housekeeping activities of the physical therapy service.

Description

This cost centre contains the direct expenses incurred in maintaining a physical therapy program. Included as direct expenses are : salaries and wages, employee benefits, professional fees, supplies, purchased services, other direct expenses, and transfers.

Standard Unit of Measure: Number of Treatments

Count each modality or procedure provided to a patient as one treatment. When a combination of modalities and procedures are provided, the count shall include the total of the individual modality(ies) and procedure(s). For example: If a comb ina · tion of 3 modalities and 1 procedure are provided, the count (number of treat·

ments) would be 4 .

Data Source

The number of treatments shall be obtained from an actual count maintained by the Physical Therapy department.

Source: System of Accounts California Hospital Commission Accounting and Reporting Manual

EMERGENCY

Function

The Emergency Room provides emergency treatment to the ill and injured who require immediate medical or surgical care on an unscheduled basis. Additional acti­ vities may include, but are not limited to, the following:

Comforting patients; maintaining aseptic conditions; assisting physicians in per­ formance of emergency care; monitoring of vital life signs; applying or assisting physician in applying bandages; co-ordinating the scheduling of patient through required professional service functions.

Description

This cost centre contains the direct expenses incurred in providing emergency treat­ ment to the ill and injured. Included as direct expenses are: salaries and wages, employee benefits, professional fees, supplies, purchased services, other direct expenses, and transfers.

Standard Unit of Measure: Number of Visits

An emergency room visit is defined as medical attention given an emergency patient, whether the patient is admitted to the hospital or is treated and released. Visits made by emergency patients to departments such as Laboratory and X-ray are not included here, but are included in that department's standard unit of

measure.

Data Source

The number of visits shall be the actual count maintained by the Emergency Room.

Source: System of Accounts California Hospital Commission Accounting and Reporting Manual

IHI

AMBULANCE

Function

This department provides ambulance service to the ill and injured who require immediate medical attention on an unscheduled basis. Additional activities may include, but are not limited to, the following:

Lifting and placing patient into and out of an ambulance; transporting patients to and from the hospital; first aid treatment administered by a physician or para· medic prior to arrival at the hospital.

Description

This cost centre contains the direct expenses incurred in providing ambulance ser­ vice to the ill and injured. Included as direct expenses are: salaries and wages, employee benefits, professional fees, supplies, purchased services, other direct expenses, and transfers.

Standard Unit of Measure: Number of Occasions of Service

Ambulance service provided a patient is counted as one occasion of service. For example, the administration of oxygen and first aid and the pick-up and delivery of the patient would count as one occasion of service.

Data Source

The number of occasions of service shall be the actual count maintained by the Emergency Medical Services.

Source: System of Accounts California Hospital Commission Accounting and Reporting Manual

CLINICS

Function

Clinics provide organised diagnostic, preventive, curative, rehabilitative, and educa­ tional services on a scheduled basis to ambulatory patients. Additional activities may include, but are not limited to, the follow ing :

Participating in oommunity activities designed to promote health education; assisting in administration of physical examinations and diagnosing and treating ambulatory patients having illnesses wh ich respond quickly to treatment; refer­ ring patients who require prolonged or specialised care to appropriate other ser­ vices; assigning patients to doctors in acoordance with clinic rules; assisting and guiding volunteers in their duties; making patients' appointments through

required professional service functions.

Description

These oost centres oontain the direct expenses incurred in providing clinic services to ambulatory patients. Separate oost centres should be maintained for each orga­ nised clinic. For example, a separate oost centre should be maintained for each of the following clinics when such services are provided patients: Dental Clinic, ENT Clinic, Allergy Clinic, Psychiatric Clinic, etc. Included as direct expenses are: salaries and wages, employee benefits, professional fees, supplies, purchased ser­ vices, other direct expenses, and transfers.

Standard Unit of Measure: Number of Visits

Enter all visits to medical cl inics . Each visit is oounted as one. For example, when a patient visits Dental, ENT, and Allergy, the count is three. Visits made by patients to departments such as Laboratory and Radiology are not included here.

Data Source

The number of visits shall be the actual count maintained by the Clinics.

Source : System of Accounts California Hospital Commission Accounting and Reporting Manual

HOME HEALTH SERVICES

Function

Home Health Services is the provision of nursing care to patients at their place of residence. Activities of each of the following functions may be performed for patients outside the hospital: nursing care, intravenous therapy, inhalation therapy, electrocardiology, physical therapy, occupational and recreational therapy, social service, dietary, and housekeeping.

Description

This cost centre contains the direct expenses incurred in providing nursing care to patients at their place of residence. Included as direct expenses are: salaries and wages, employee benefits, professional fees, supplies, purchased services, other direct expenses, travel to and from the patient's residence, and transfers.

Standard Unit of Measure: Number of Home Health Patient Contacts

The number of home health patients contacts shall be the number of home health patients visited at their place of residence by representatives of the home health program.

Data Source

The number of home health patient contacts shall be the actual count obtained from Home Health Services.

Source: System of Accounts California Hospital Commission Accounting and Reporting Manual

SCHOOL OF NURSING

Function

The School of Nursing is a school for educating Registered Nurses. Additional acti­ vities may include, but are not limited to, the following:

Selecting qualified nursing students; providing education in theory and practice conforming to approved standards; maintaining student personnel · records; counselling of students regarding professional, personal, and educational prob· lems; selecting faculty personnel; assigning and supervising students in giving nursing care to selected patients; and administering aptitude and other tests for counselling and selection purposes.

Description

This cost centre shall be used to record the direct expenses incurred in operating a school of nursing for Registered Nurses. Included as direct expenses are: salaries and wages, employee benefits, professional fees, supplies, purchased services, other direct expenses, and transfers.

Standard Unit of Measure: Weighted Number of Participants

The weighted number of participants in the School of Nursing is defined as the sum of the percentage of time each student is enrolled in the school during the year divided by 100.

Data Source

The number of participants in the School of Nursing shall be the actual count main· ta ined by the School of Nursing.

Source : System of Accounts California Hospital Commission Accounting and Reporting Manual

CAFETERIA

Function

Cafeteria includes the procurement, storage, processing, and delivery of food to employees and other non-patients in compliance with Public Health regulations.

Description

This cost centre contains all directly identifiable expenses incurred in preparing and delivering food to employees and other non-patients. Included in these direct expenses are : salaries and wages, employee benefits, professional fees, supplies, pur­ chased services, other direct expenses, and transfers. Also included is the Cafeteria's share of common costs of the Cafeteria and Dietary Centres, which are accumulated

in the Kitchen cost centre and distributed, preferably on a monthly basis.

Standard Unit of Measure: Equivalent Number of Meals Served

To obtain an equivalent meal in a pay cafeteria, divide total cafeteria revenue by the average selling price of a full meal. The average full meal should include meat, potato, vegetable, salad , beverage, and dessert. When there is a selection of entrees, desserts, and so forth, that are available at different prices, use an average in calcu­

lating the selling price of a full meal. Count a free meal served to a non-patient as a full meal.

Data Source

Cafeteria revenue should be taken from the general ledger.

Source: System of Accounts California Hospital Commission Accounting and Reporting Manual

DIETARY

Function

Dietary includes the procurement, storage, processing, and delivery of food and nourishments to patients in compliance with Public Health regulations and physi· cians' orders. Additional activities may include, but are not limited to, the fol­ lowing :

Teaching patients and their families nutrition and modified diet requirements; determining patient food preferences as to type and method of preparation; pre­ paring selective menus for various specific diet requirements; preparing or recom­ mending a diet manual, approved by the medical staff, for use by physicians and nurses; and delivering and collecting food trays for meals and nourishments.

Description

This cost centre contains the direct expenses incurred in preparing and delivering food to patients (including formula for infants). Included as expenses would be salaries and wages, employee benefits, professional fees, supplies, purchased ser­ vices, other direct expenses, and transfers. Also included is Dietary's share of com· mon costs of the Cafetaria and Dietary Centres, which are accumulated in the Kitchen cost centre and distributed, preferably on a monthly basis.

Standard Unit of Measure: Number of Patient Meals

Count only regularly scheduled meals and exclude snacks and fruit juices served be· tween regularly scheduled meals.

Data Source

The number of patient meals should be the actual count of patient meals main­ tained by the Dietary Department.

Source: System of Accounts California Hospital Commission Accounting and Reporting Manual

Fiscal Services

GENERAL ACCOUNTING

Function

This department performs general accounting (ie, non-patient billing and account­ ing) activities of the hospital, such as the preparation of ledgers, budgets and financial reports, payroll accounting, accounts payable accounting, plant and equip­ ment accounting, inventory accounting, non-patient accounts receivable accounting

(tuition, sales to other institutions). etc.

Description

This cost Centre shall include the direct expenses incurred in providing the general accounting requirements of the hospital. Included as direct expenses are: salaries and wages, employee benefits, professional fees, supplies, purchased services, other direct expenses, and transfers.

Standard Unit of Measure: Average Number of Hospital Employees

This includes part-time as well as full-time employees, but does not include non­ paid workers, volunteers, or others who do not receive a cheque.

Data Source

The average number of employees shall be computed using number of employees at the beginning and end of the reporting period per the payroll accounting records.

Source: System of Accounts California Hospital Commission Accounting and Reporting Manual

MEDICAL RECORDS

Function

Medical Records includes the maintenance of a records system for the use, tran­ scription, retrieval, storage, and disposal of patient medical records; and the produc­ tion of indexes, abstracts, and statistics for hospital management and medical staff uses.

Description

This cost centre contains the direct expenses incurred in maintaining the medical records function. Also, costs associated with microfilming of medical records shall be included in this account. Included as direct expenses are: salaries and wages, employee benefits, professional fees, supplies, purchased services, other direct expenses, and transfers.

Standard Unit of Measure: Number of Inpatient Admissions Plus One Eighth of Total Emergency Room and Clinic Visits

Data Source

The number of admissions shall be the actual count maintained by the admitting office. The number of Emergency Room and Clinic visits shall be the actual count maintained by the Emergency Room and Clinics, respectively.

Source: System of Accounts California Hospital Commission Accounting and Reporting Manual

MEDICAL STAFF

Function

This centre is used to record certain general expenses associated with the medical staff, such as the salary of the Chief of the Medical Staff, as well as the salary, and other costs associated with a house medical staff which serves in the daily hospital services departments.

Description

This cost centre contains the direct expenses associated with the medical staff (as described above) . Interns', externs', and residents' salaries (or stipends) should not be included here, but rather in the applicable education cost centre. Compensation paid to Chief(s) of Service(s) as well as other physicians working in ancillary depart·

ments should not be included here, but rather in the applicable ancillary cost centre. Included as direct expenses are: salaries and wages, employee benefits, supplies, purchased services, other direct expenses, and transfers.

Note: Expenses for physicians assigned to the daily hospital services cost centres have to be charged to this cost centre, 'Medical Staff'.

Standard Unit of Measure: Number of Physicians on Active Staff

Data Source

The number of active physicians on the staff shall be the actual count obtained from the Medical Staff Office.

Source: System of Accounts California Hospital Commission Accounting and Reporting Manual

STATISTICS

Cost Centre Standard Unit of Measure Account Number

Daily Hospital Services

Medical/Surgical Intensive Care Number of Patient Days 6010

Coronary Care Number of Patient Days 6020

Definitive Observation Number of Patient Days 6030

Paediatric Intensive Care Number of Patient Days 6040

Psychiatric Isolation Number of Patient 6050

Medical/Surgical Acute Number of Patient Days 6080

Paediatric Acute Number of Patient Days 6120

Psychiatric Acute Number of Patient Days 6140

Obstetrics Acute Number of Patient Days 6160

Nursery Acute Number of Newborn Patient Days 6170

Skilled Nursing Number of Patient Days 6200

Psychiatric-Long-Term Number of Patient Days 6240

Intermediate Number of Patient Days 6280

Residential Number of Patient Days 6320

Ancillary Service

Labour and Delivery Number of Deliveries 7010

Surgery and Recovery Number of Operating Minutes 7020

Surgical Day Care Number of Operating Minutes 7030

Anaesthesiology Number of Operating Minutes 7040

Central Services and Supplies Number of Line Items Sold 7050

Laboratories-Clinical Workload Measurement Units 7060

II

Laboratories-Pathological Workload Measurement Units 7070

Laboratories-Pulmonary Function Workload Measurement Units 7080 Blood Bank Units of Blood Issued 7100

I

Electrocardiology Number of Procedures 7110

Electromyography Number of Procedures 7120

E Jectroencepha Jogra phy Number of Procedures 7130

Radiology-Diagnostic Relative Value Units 7140

Radiology-Therapeutic Relative Value Units 7150

Nuclear Medicine Relative Value Units 7160

Pharmacy Number of Line Items Sold

7170

Inhalation Therapy Number of Treatments 7180

Dialysis Number of Hours of Treatment 7190

Physical Therapy Number of Treatments 7200

Occupational Therapy Number of Treatments 7210

Emergency Number of Visits 7230

Ambulance Number of Occasions of Service 7240

Psychiatric Emergency Room Number of Visits 7250

Clinics Number of Visits

7260

Home Health Services Number of Home Health Patient Contacts

7400

Cost Centre

Research Costs

Research Administrative Office Research Projects

Education Costs

Education Administrative Office

School of Nursing Licensed Vocational Nurse Program Medical Postgraduate Education Paramedical Educational Student Housing Other Education Activities

General Services

Printing and Duplicating Cafeteria Dietary Laundry and Linen

Social Services Employee Housing Physicians' Offices and Other Office Rentals Other Retail Operations

Purchasing

Grounds

Security Parking Housekeeping Plant Operations Plant Maintenance

Fiscal Services

General Accounting

Communications

Patient Accounting Data Processing Credit and Collection Admitting

Standard Unit of Measure Account Number

$1000 of Gross Patient Revenue $1000 of Gross Patient Revenue

Weighted Number of Participants in Educational Programs Weighted Number of Participants Weighted Number of Participants Weighted Number of Participants Weighted Number of Participants

Number of Square Feet Weighted Number of Participants

Number of Reams of Paper Used Equivalent Number of Meals Served Number of Patient Meals Number of Dry and Clean Pounds Processed Number of Persona I Contacts Number of Square Feet Occupied Number of Square Feet Occupied

8010 8020

8210 8220 8230 8240 8250 8260 8270

8310 8330 8340

8350 8360 8380 8390

Number of Occasions of Service 8400

$1000 of Gross Non-Capitalised Purchases 8420

Number of Square Feet of Ground Space 8430

Number of FTE Employees 8440

Number of Square Feet of Parking Area8450 Number of Square Feet Serviced 8460 Number of Gross Square Feet 8470

Number of Gross Square Feet 8480

Average Number of Hospital Employees Average Number of Hospita I Employees $1000 of Gross Patient Revenue $1000 of Gross Patient Revenue $1000 of Gross Patient Revenue

Number of Admissions

8510

8520 8530 8540 8550 8560

Cost Centre Standard Unit of Measure Account Number

Administrative Services

Hospital Administration Number of FTE Employees

Governing Board Expense $1000 of Total Revenue Public Relations $1000 of Total Revenue

Management Engineering Number of FTE Employees Personnel Number of FTE Employees

Employee Medical Services Number of FTE Employees Administration Auxiliary Groups Number of Volunteer Hours

Cha pia incy Services Number of Patient Days

Medical Library Number of Physicians on Actil•e Staff

Medical Records Number of Inpatient Admissions Plus

One Eighth of Emergency Room and Clinic Visits

Medical Staff Number of Physicians on Active Staff

Nursing Administration Average Number of

Nursing Service Personnel

lnservice Education-Nursing Number of Hours of Nursing lnservice Education

Unassigned Costs

Depreciation and Amortisation Number of Gross Square Feet Leases and Rentals Number of Gross Square Feet

Insurance-Professional Liability $1000 of Gross Patient Revenue Insurance-Other Number of Gross Square Feet

Licences and Taxes (Other than Number of Gross Square Feet on income) Interest-Working Capital Gross Patient Revenue Interest-Other Number of Gross Square Feet

Employee Benefits (Non-Payroll) Number of FTE Employees

Source: California Hospital Comm ission Accounting and Reporting Manual

8610 8620 8630 8640 8650 8660

8670 8680 8690

8700 8710

8720

8740

8810 8820 8830 8840 8850

8860 8870 8880

ANNEXURE 2

MATERIAL FROM MANUAL ON HOSPITAL MANAGEMENT INFORMATION SYSTEMS (VERSION 11) HEALTH COMMISSION OF VICTORIA

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all

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arrl

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hospital

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performance

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disposal

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(REPORT :-:o. 1, DRAFT No. -~ · · UNIFORM REPORTING M!D Bv'DGE:'ING sYSn~: Acci"tr~:,···l.T.u. QT.R wi::so xxx i9x:< COST CEN.RE - · NO. ----- (AGGRr.GATION OF CODES XXX TO XXX)

I I EXPESSES C/\TEGORYj ORDIN.".RY I OVERTil".S l PE'.IALTY I ALLOl~NCB 1 )":'ER.''1INATION f L. - SERI.'. L TC:fA"i, J H03r-I.?1-.L ! S '"_ ,_

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ADMIN & CLERICAL

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85.6 I 5.5 3.3 2.7, 1.6 1.3 100. 1· I

17.9 17.9 19.0 l.lj

15,160 I

16,500 I 820 / I 400 II I $17,720 16,000 !'*ll.0%!

93.l 4. 6 j 2.3 I 100. 0% I

s. 4 . I I I 4' ~3 i . 5. 0 I * 0. 4 %

S, 300 52. 0 l. 5

86, 800 83, 7 24. 8

2,200 21.6

7,120 6. 9

l, 300 12. 7

3, sea 3. 7

1,000 ·). 8

3,400 3 .3

I I · I I I

I I I

I I I I ' I I I I I I I I I I I I i ' I I II ! i I I I I I I - I I ' I I 30 0 I 10 0 $ l O, 20 0 I 8, OG O I *2 i. SI I 2. 9 I l. 0 l GO. 0% I I I l, 500 1.4

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24 ·to\ 25.0 l C.2

1 '

21, ss6 J I

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COST CENTRE

GENERAL ADMINISTRATION $

PROD HRS

ADJ BED DAY UNIT CT EFT

ACCOUNTING AND FINANCE $

I

PROD HRS

ADJ BED DAY UNIT CT I EFT

PB~SONNEL AND PAYROLL $

PROD HRS

ADJ BED DAY UNIT CT EFT

SUPPLY

$

PROD HRS

ADJ BED DAY UNIT CT EFT

NURSING ADMINISTRATION $

PROD HRS

ADJ BED DAY uNIT CT EFT

[EXTRA 26 COST CENTRES BY 5 LINES EACH I I

TOTAL

$

PROD HRS

ADJ BED DAY UNIT CT EFT

UNIFORM REPORT!NG ANO BUDGETING SYS':'EM ACCRUED Y. T.D, QTR ENDED XXXXX 19XX SUKMARY COST CENTRF REPO?.T

HOSPITAL---~~~~~ ACTUAL ! H.C.V. II $%

1BUDGET ALLOC VAR

I

a1,468 I 78,500 * 4.o

19,830 8 . 60 8.00 * 0.60

9.6 9.0 * 0.4

121,216 123,000 I 1 .. 0

24,321 I

12.40 13.00 0.60)

13.3 14.0 0.7

42,604

1

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10,030 6.20 6.00 * 0.20

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31,64( 30,000- * s.o

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3.6 3.0 * 0.6

43,408 45,000 4.0

12,216 6 .02 6 .so 0.48

5.1 5.5 0.4

I

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... , I 7,a14,162 J l,961,368 I 161.63 155.00 * 6.63 963 . 6 950.0 1*13.6

- I __

(REPORl' ~=o. 2, DR,'\FT No. 1)

LAST YR

77,316 19,220 7.80 9.0

119,300 24,416 12.50 13 .o

39,116 9,860 6.00 5 . 0

30,116 8,632 4.80 4 . 0

42,608 12,180 5.90 5.0

7,264,316

151.16 949.0

I

I

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ACTuAL I H.C.V. I $% I LAS':' YR

ACTUAL I BUDGET AI..LOC I VAR I

-1 ,-1 -1

I

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--1 l-1--1 ____ I_, __

i

t0SPITAL : · x.xxxxxxxxx:..:xxxxxxxxxxxxx (RE2C:t1.i: No. 3, DR)~.., T ~,a. 1 i

i.JlH!:'0::Z)l RE?ORT:i:XG AND BUDGE'I'-rING SYSTEM REPOR·J." C0:•1PILED lllTER QUARTER X YY.Y/YY.Y X.XXZXX

~!AJ OR COST CENTRE

I.CM IN STRA·C:I ON GZ'.iER.;L AD~ENISTRA?ION ,\CCOUKTING A:rn FINANCE PERSO~:NEL A..1'

GROUP TOTAL

St.E-:Yi/-,RY OF M~.JOR COS'l' CEN'l'RES EXPENDITURE Yc:A.R TO DATE

.ACTUAL Y.T.D--:-----TiiOSPI·rAL BUDGE'l .' YTD rft:c:-v:---Bu15GE'r YTD .

1

'VA.«IA'I'ION ADV[r,!SJ:-BEDD.:..YUNIT COST~,

-----%-1 $ % f I AC'i'UAL/ECV *" ACTUAL HCSP.B HCV.B!

I I i

xxx,xxx,xxx xx.x 1xx>.xxx,xxx xxx.x lxxx,xXx,xxx xxx.x Jx,xxx,xxx !xxx.xx xxx.xx xxx.x.,

SERVIC!:S I ! I I I I

I

;~;~:~~:sti:~;T t~.ll-~;~iNANCE I i I 1' 1

F:)0D SEF.VIES I I

I

DOMES'l'IC SERVICES •1

RESID£NC:SS

I

LINEN, LAU~DRY .a.ND SEWING jl l

GROUP TOTAL I

I

MF.DIC,r,.L A~CILLARY I I'

, ~~,~~-:;;: j , '1 I

I ~!ED~C..'\L ~ECORDS ! I !

I DIAG .~CJSTIC LA30RATORY SRVCS I I I j

I

O!\GAK Il·:Ps.G:·:~ .:G SERVICES I

TECHNI2/\S S\JPPORT I

1

I

TEE~~py SERVICES I I

SOC IP.L WOR:< A!m WSLF ARE -,

l DIREC:n::L:;:T::r~~ . I [ I :,·

1 OPE,tt, ·r·ING T2 2A?RE SUITE l I 1

I 1{AI'0S 21,444,324 20.0 ) 20,980,620 19.8 19,764,000 19.9 1,680,324 ** I ·12.89 42.39 40.0lJ

i CtS:JALTY/ACCIDENT/E,·!ERGENCYI I I I

I ~~i·~~·g_~~~N~;;·,~~;\ERVICES .30,000,000 28.0 I 29,000,000 27.4 30,400,000 30.6 i 400,00 160.00 58.59 61.54!L

I GROUP TOTAL I I

l CO'.~VA:.ESCEi,T I REHA.BILITA'l'ION l · II I

;1 · ;~~~ ;!~~~ ~~ltl,RY SE RV ICES I I · 11 j

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, I l I

I GR"''' P "'~,,• :- r . I I ' ' .vv. _..., __ ,..., I I ___________ !

I P.osPr-rAL TOTAL 1101,221,620 100.0 !1os,S62,,20 100.0 j 99,316,600 100.0 ! 1,sos,020 ** 1214.44 214.07 201.os!i . I . . l , l l-.D:rnsnc BED !l.~.Ys - No.I soo,oao l 1,-;5,ooc l 494,000 i 6,000 j i I ~

HEP.L':'H cc:,,:.nssION OF VICTORIA - UNU'OP.~I ~?O:C:TEG ,\}:t) rrGDGETTING SYSTEM (REPORT N0. 4. D~T ~:o. 1)

H:TER EOS?I?AL CO)t,?ARISON OF RESOURCE USE BY /'.DJUS',~ED BED DJI.YS FOR YEAR ':'0 DATE ENDED DDM:WY (GROUP lA) (A)

i R:..SGU?.C:r: CO!-:?CNE:~? ~~~~~~~~~~~~~-i R.M.~. l~A_L_F_R_E_D_j ST. VIN i~_j_.2_._·~ ; Z,~XirXX~liX ,XXX,XXXIX,XXX,XXXIX,X~X,XXX x,xxx.~i~-~-r_~_i:_f_~_:~-~

. I I I . I ' PAR·:c 1 - ;-:onsy I $ I $ $ $ ! $ $ / $ s $ / s i\, ... ,\~THTS'PD""flTr"'" I 1 0 -,n 1 0 46 I 'O 16 I 10 ~7 I 11 56 · 10 ; 9 ; 9 "'5 I 10 60 8 27 \ C, t, .... 1.v, ••• , • • ,,,. ___ ..,_, •• ~o - • i .l.. ..) I . I ·- I ., . . . I ~- ··' s:::Rvrc2s I 2s . .;9 j , I , I I ! :.:>oJ:i ••-.· 1-- -~-.,. : ••T.-T""T -i,-.""7') / / r ! ! I...,..,. ~f~f:~,~-\~~~~;~E SUITE I f ~~ I ! I : I ! ! ,· f H c:-:;;:· ' L".'Y 10:;·::'?A.'::':E::T/E:V:ERGi 20 . • co 1. / ,1. ! i '! I 2,:,. J.5 :JU :2:?A~IE~J':' SER-JIC:ES I 20. 00 / I C:L'''"C'r UNT'•"S - :::~R'rC"'S 13 47 I I , i , L,. -~ - -- " ~~· .1. ~ ! • ( / I i ' ! 2G .Ci 5 13. 60 i~:,:~~';'.~:"::,,~~~,~ DOMIC c::~ i----1 i I 1 ____ 1 =--=1----- -~~~:~-l"'"S-.1A.., .o .... L i h,.8., i J I I i 1 · i .:.0_.~2 i,c, ~ -~ ··,r:-- • /--.;::--: 1 II - i -~ II •, I . . 1--,-,-- ,·-. -- .. --- ' _A, -., 2 - , .·..OD. !3.S I );-,. I NO. . NO. I t·,•..;. I NO. / NO. I ;,;o. c,O. ..TI0N I 1.93 ( I I I I i I l. 75. ~~;·i~~i\:,cm,ARY i ; :1~ I I j1 ·, J i I ~ :it O?'C: c':\".C-ING T:-!EATRE SUITE / 2.00 \ I , I j I 1.c.; :J :A~-;'.:.~ -,•m ~~-,m ~ ~ I 2.QQ I I I l I I i '.:.00 vi'.,w •w.Y/vf..,,'?.'\1J..,.ls/~~!.:.RGI 2.0C I I i J 1 , I ~;_i!~;;:;Y\~:::~vrcz~,.,. c:I ~-O? i I I i / i ?- ··· - . vL•-<-vr-< U., _1.:, & S,:, .. vICE- _.c.L I ! I i I l , ~.v , 11HOS?ITAL SU3 ':'0'.'.'AL ! 22.7~. 1-----1 I I II ~-:r:-::--.r--COllVAL, REI:A3, & om-:rc I 1.s1 i J I , j 1.::s IIHOSPITAL TOTAL 24.26-- I 1,----1' I . ~3.SG- . i I : \ _____ \ ------,(B) ~"TJoG A3D 9./A'JJ 'COO M 2 . t...i u. f( ~,~TCE j DO'.·ES 'l'IC/ ! FC.")2i/l\DJ ~~.rt\~S l ~~tr:1~:1f;~~t:ABD I :iv,cmsrs;nsn NO. $ $ $ $ $ $ ! g;~~~~:-X:;:~~~g,~~;i~~;RE $ $ 1i;~1s~1~tJ~;;~cgtYS : !cr.rnc·-- T",lI'"-/'.i.BD $ l~~-r-.L -'·· -'°, r.r :s-s 1.12 2. 69 3 .. ~3 3. 56 1. 59 3.56 4. 6 3 SUNDRY MEASURES OF RESOURCE USE l I i i I -2 I I \ j ,. I ! I 1.5. 7 I l I '1 14--:-is---l. 65 4.,.:... 3 .3 8 3.S2 3 .3 2 2.. 6 C 4 .53 7.25 l 'i. ::.~. · S 7.:: 7.58 96 .1 I I I 3>~ . !. I , .o I I I , 83. 7 i I I r i ------ j ___ ....,:...,_,=-,----1--~L----~-1 __ ____ _ s 4. oe Gil-

I

ANNEXURE3

ACCOUNTING, COSTING, AND MANAGEMENT REPORTING PRACTICES QUESTIONNAIRE

COMMISSION OF INQUIRY INTO THE

EFFICIENCY AND ADMINISTRATION OF HOSPITALS

ACCOUNTING, COSTING AND MANAGEMENT REPORTING PRACTICES

The assistance of your hospital is sought in providing information on accounting, costing and management reporting practices. The assistance requires completing the enclosed questionnaire on present practices and proposed changes.

The completed questionnaire should be returned to the Commission of Inquiry using the enclosed envelope. It would be appreciated if it could be returned by 7 November, 1980.

Any questions concerning the completion of the 1

questionnaire should be directed to the project consultants: * Malcolm McHarg, * Ian Clarke, (02) 231 6800

(03) 616 1109

The Study Report will preserve the anonymity of partici­ pating hospitals, but the following details are requested: I

Telephone Names and titles of individuals involved in completion of

Q2.

Q3.

- l -

Identify the type of hospital where you work. Associated teaching

Non-teaching

(A teaching hospital is one providing a range of clinical experience for medical students, with comprehensive teaching facilities, and conducting medical research. A teaching hospital is usually a large referral hospital. An associated teaching hospital is one which

provides clinical experience to students seconded from a teaching hospital but which does not have full teaching facilities).

What is the number of beds in your hospital? Approved Available and staffed

(Approved beds are beds approved by the Common-wealth Government for cost sharing and insurance benefits purposes. Available and staffed beds are staffed and available for occupancy regard-

less of approved bed numbers).

What percent of total approved beds belong to the following categories? Paediatric Obstetric

General

(General includes all categories of beds other than paediatric or obstetric) .

Q4. What was the number of inpatients treated, including one day stay patients, during the 1979-80 financial y ear?

(Inpatients treated includes patients in hospital at the beginning of the year and those admitted during the year. Day only patients whose day of discharge was also the day of

admission should be included among inpatients treated) . QS. What was the number of outpatients o c casions of service during the 1979- 80 financial year?

Casualty

Other than c asualty ____

Q6. What were the numbers of staff employed at the end of the 1979-80 financial year? Full time medical staff * Resident medical officers

* Registrars

* Staff specialists Visiting medical staff Administra tive staff Total staff L------'

- 2 -

Q7. What are the numbers of full time equivalent staff engaged in accounting functions?

Q8. What are the numbers of administrative staff engaged in accounting functions with accountancy qualifications?

Q9. Please attach a copy of the existing organisa­ tion chart for your hospital. If a chart is

not available, please sketch a plan of organisation in the space below.

QlO. Please attach a copy of the existing organisation chart of the Accounts/Finance function in your hospital. If a chart is not available, please sketch a plan of organisation in the space below.

Qll. Are accounting records in your hospital used to produce information and reports other than that required by the statutory health authority? Yes

No

If Yes, briefly identify the information and reports produced, the form in which they are produced (you may attach a sample) and to whom the informa­ tion goes (for example, the Board or Finance Committee).

Ql2.

Ql3.

Ql4.

- 3 -

How are the following accounting functions undertaken in your hospital?

llayroll,Billinq,Creditors

Mechanised _ _

If any accounting functions in Question 12 are computerised please provide the following details: (a) In-house system

Describe make and model of equipment

(b) Bureau

Give details of service

(c) Combination of in-house system and bureau Give details of arrangements:

If any accounting functions in Question 12 are computerised, (a) Please indicate how programs were developed:

(b)

Own development Purchased package

Use package with third party

Are results satisfactory from an accounting point of view? Yes No

Partly

(c) If No or Partly ticked in (b) above,

please give reasons.

[?:=J General

QlS. Do written procedures exist for all accounting entries?

Ql6.

Maintenance Fund

Special Purpose, Trust and Capital Funds

Is your hospital using an accrual basis of accounting (ie., the matching of revenue and expenses over a period in accordance with prescribed accounting principles)?

If answer to Question 16 is Yes, go to

Question 20.

Yes No

Yes No

Partly

Ql7.

Ql8.

Ql9.

- 4 -

If your hospital uses accrual techniques only partly, please list below these items treated on an accrual basis:

Do you believe that accrual accounting should be implemented in your hospital? Yes No

With qualifications

Please outline the reasons for your answer:

Can the system of accounting in your hospital be extended to embrace accrual accounting?

Please give the reasons for your answer. Highlight the difficulties to be overcome. If your answer was Yes, give possible time frames for implementation.

Yes No

Q20. If you hospital has an education role, how are equcational costs recorded? To what level of detail is this performed?

B

- 5 -

Q21. If you hospital has a research role, how are research costs recorded? To what level of detail is this performed?

Q22. If you hospital purchases diagnostic services, how are these costs recorded?

Q23. Are issues of stores or supplies within your hospital casted? Yes No

Partly

Q24. If Yes or Partly ticked in Question 23, how

is costing of stores or supplies performed?

Q25. Does the reporting system in your hospital incorporate statistics which relate dollar amounts to activity levels?

If Yes ticked, please attach details.

Yes No a

- 6 -

Q26. If Yes ticked in Question 25, do y ou see the

purpose of these reports and statistics as providing: (a) A means of comparing performance with other hospitals?

(b) A way of comparing actual costs with budgeted costs? (c) Information to a number of attentive publics? (d) Other? (Give details)

(All four options may be ticked)

Q27. Do you believe · that standard units of measure should be used to identify the volume of:

Q28.

Q29.

(a)

(b)

Services provided to patients?

Services provided b y support functions (for example, operating theatres, pharmacy, dietary) to patient care departments?

If your hospital operates cost centre accounting, are these cost centres organised on a responsibility basis (ie, by department, for example, pathology )?

If your hospital operates cost centre accounting, can these cost centres be organised according to activity (for example, biochemistry, microbiology and haematology) or can they be modified to achieve this end?

Yes No

Yes No

Yes No

Yes No

[ __ _,

§

.l I

a .l I §

a

- 7 -

Q30. Can cost centres in your hospital be structured to differentiate between those costs which vary directly with activity levels in the cost centre (ie, variable costs) and costs which remain

constant irrespective of the level of activity (ie, fixed costs)? (a) Labour costs - variable and fixed.

Yes No

(b) Non-labour costs - variable and fixed. Yes

No._ __ __.

Q3l.

Q32.

Q33.

Are interdepartmental services (for example, pharmacy, pathology, radiology, dietary, housekeeping, laundry) allocated to patient care cost centres?

Yes No

Partly

If Yes or Partly ticked in Question 31 please outline the basis of the allocations.

How often are financial results reported in your hospital? (More than one box may be

ticked)

Weekly

Fortnightly Four weekly Monthly Quarterly

Annually

v

Q34.

- 8 -

In relation to the boxes ticked in Question 33, what is the average time lag between the close of the reporting period and when the financial reports are issued?

Number of

Weekly

Fortnightly Four weekly Monthly Quarterly

Annually

Days Weeks

Q35. In relation to the boxes ticked in Question 33, to whom are these reports directed? (a) Weekly

{b) Fortnightly

{c) Four weekly

{d) Monthly

(e) Quarterly

{f) Annually

Q36. Can payroll costs for your hospital be analysed according to the type of staff? Yes No

Nursing Medical

Paramedical, allied health Clerical and administrative Hotel and allied

Q37. Can payroll costs for your hospital be analysed according to the following classifications?

Cost centre Productive hours Non-Productive hours

Yes No

Service provided

Q38. Describe the recording of fixed assets (ie, equipment, plant, buildings, land) for your hospital: {a) Is an asset register kept?

{b) Are all assets recorded therein?

(c)

Yes No

Yes No

B

- 9 -

Q39. Describe controls over physical assets at your hospital: (a) Are these assets subject to periodic accounting and reconciliation with

financial records?

(b) Which of the following criteria does management use to determine when an asset should be replaced?

Yes No

Yes No

Useful life

Periodic review of operational status Observation Other

If Other ticked, please specify criteria:

Q40. Describe your hospital's policy concerning the depreciation of fixed assets (ie, the method of identifying a cost for invest­ ments in equipment and plant) .

(al Are fixed assets depreciated?

(b) What basis is used to determine the

amount of depreciation:

Useful life Asset usage Replacement cost Other

If other ticked, please specify criteria:

No t===j

Yes No

(c) Can depreciation be allocated to functional cost centres (for example, biochemistry, microbiology, haematology)?

(d) Is depreciation allocated to functional cost centres?

Q41. Are budgets prepared and used in your hospital for purposes other than the funding of hospital activities?

If Yes ticked, please specify:

Yes 1-------1

No L__ __ --J

Yes No 1--------1

§ Yes No

Q42.

- 10 -

If budgets are used in your hospital, on what bases are they prepared: (a) On a subjective basis, ie, by funding or

expense categories (for example, salaries)?

(b) On a responsibility basis, ie, b y

departments or units (for example, pathology )?

(c) On a functional basis, ie, by activities

(for example, biochemistry, microbiology and haematology)?

prepared?

Yes No

Yes No

Yes No

v

Q43. What types of budgets are Yes No

Q44.

Expense Capital Cash Other

If Other ticked, please specify:

Are budgets or forecasts prepared for a period of more than one year?

If Yes ticked, please state for whom the reports are prepared and the period covered:

Q45. Do departmental heads assist in budget preparation?

Q46. Are the departmental budgets related to activities in the department?

B Yes No

No t===j

B Yes No

- ll -

Q47. Did your hospital make a submission to the Commission of Inquiry into the Efficiency and Administration of Hospitals?

If No ticked, was there any reason why not?

Q48. Are changes being planned for your hospital's accounting system? Immediate Short term

Long term No change

If No Change is planned, go to Question 51. Q49. If changes are planned for your hospital's accounting system, which body is responsible for initiating the changes?

Hospital

State Health Authority Other

If Other ticked, please provide details:

Q50. If changes are planned for your hospital's accounting system, what changes are being planned and why are they being made?

Q5l. Are changes being planned to your hospital's management information system? Immediate Short term

Long term No change

If No Change is planned, go to Question 54.

§ Yes No

v

Yes No

.;::::o-s.,

Yes No

v-'

Yes No

::::>-=::::::

- 12 -

Q52. If changes are planned for your hospital's management information system, which body is responsible for initiating the changes?

Hospital

State Health Authority Other

Yes No

'-----.1.-------<

If Other ticked, please provide details:

Q53. If changes are planned for your hospital's management information system, what changes are being planned and why are they being made?

Q54. If the changes planned for your hospitals accounting and/or mangement information system involve computer processing, which of the following options are involved?

In-house computer * own programs * purchased package * third party software

Bureau processing

QSS. Do you consider the existing plan of organisation for your hospital is satisfactory?

If No ticked, are changes planned?

If Yes ticked in the box above, what

changes are planned and why?

Yes No

No l=:==j

Yes No

I

- 13 -

Q56. Please use the space below to add or elaborate on

any aspect of the issues raised by this questionnaire.

Thank you for your co-operation. Malcolm McHarg and Ian Clarke Project Consultants

Paper c.

ISSUES OF PUBLIC AND PRIVATE IN THE HEALTH DOMAIN

Malcolm McHarg

This paper was prepared by Mr Malcolm McHarg, of CHS Consulting Pty Ltd, Melbourne.

To:

Mr J. H. Jamison, OBE Chairman Commission of Inquiry into the Efficiency and Administration of Hospitals

ISSUES OF PUBLIC AND PRIVATE IN THE HEALTH DOMAIN: How can incentives be changed to increase effectiveness, improve efficiency, and contain costs in health services delivery?

From:

Malcolm McHarg, Managing Consultant CHS Consulting Pty .Ltd

8 December, 1980

Consu ltants fo r Health Services

• Consulting Pty Ud

Mr J H Jamison, OBE Chairman

58 Gatehouse Street PO Box 125 Parkville Victoria 3052 Telephone 34 7 9844

19 December, 1980

Commission of Inquiry into the Efficiency and Administration 9th Floor, St James Centre of Hospitals 111 El izabeth Street Sydney NSW 2000

Dear Mr Jamison

re: ISSUES OF PUBLIC AND PRIVATE IN THE HEALTH DOMAIN: How can incentives be changed to ',I

increase effectiveness, improve efficiency and contain costs in health service delivery:

In accordance with the brief from the Commission of Inquiry into the Efficiency and Administration of Hospitals, I have pleasure in presenting to you this report on Issues of Public and Private in the Health Domain.

Yours faithfully

Malcolm McHarg Managing Consultant

Con su ltan ts for Health Services

1

2

2.1 2.11 2.12

2.13 2.2 2.21 2.22 2.3

3

3.1 3.2 3.21

3.22 3.23 3.24

3.3

3.31 3.32 3.33

3.4 3.41

3.42 3.5

CONTENTS

EXECUTIVE SUMMARY

GLOSSARY

INTRODUCTION

DISTINGUISHING BETWEEN PUBLIC AND PRIVATE

Different Meanings for Public and Private The Proper Limits of Government Activity Organisational Arrangements and Approach to Management Agency Versus Enterprise Some Issues of Public and Private The Recognised Hospital

'Private' Medical Practice: Enterprise Medicine Summarising on Public and Private

PUBLIC AND PRIVATE AND HEALTH INSURANCE

What Are We Trying to Achieve with Health Financing? Health Benefit Organisations: Public or Private? Governments Took Their Lead from Health Benefit Organisations Government Involvement in Health Insurance

The Dilemma of High Levels of Public Subsidy Other Dilemmas with High Levels Of Government Involvement The Dilemma is Reconciling Community-Rating and Rules of Membership Community-Rating

Rules of Membership Adverse Selection under Rules of Membership Time to Evaluate the Effectiveness of Present Policies What Are the Aims of the Commonwealth

In Health Care Financing? Towards More Effective Policies Summarising on Health Insurance Policy

Page

1

2

3

3

5

6

8

8

11 13

14

15 18

19 20 21

22

23 25 26 27 28

29 30 31

cond/

4

4.1 4.2 4.3 4 . 4

4.41 4.42 4.5

5

CONTENTS (continued)

DIAGNOSING PARTICULARIST INTERESTS

Service Identification Structuring the Health Domain Political Analysis Corporate and Economic Analysis Corporate Analysis Economic Analysis Policy Prescriptions for Effectiveness, Efficiency, and Cost Containment

REFERENCES AND SOURCES OF INFORMATION

EXHIBITS

1 Terms of Reference for Commission of Inquiry

2 Sources of Reimbursement for Hospital Activities 3 Reimbursement of 'Private' Doctors

4 UWASIS System of Services Identification: Health Domain 5 The Health Domain and its Basic Policy Subsystems

Page

34 35 35 36 38 39

40

41

After Page

1

5

5

34 35

EXECUTIVE SUMMARY

In this report, the term 'private' refers to that belonging to or the property of an individual. The term 'public', on the other hand, refers to activities which are undertaken on behalf of the community, shared by all members of the

community, or are directed to the promotion of general welfare. Although there would appear to be a clear dichotomy between these definitions of public and private, the dichotomy does little to increase our understanding of

what is happening in the health domain. Pragmatic policy prescriptions for increasing effectiveness, improving efficiency and containing costs in the provision of health services can seldom be written in terms of more public or private involvement.

By its very nature, the delivery of medical services whether in a doctor's office or in a hospital, is a very

decentralised activity. Doctors rather than patients make most of the decisions. The work of doctors and hospitals does not fit well with the public/private dichotomy. Rather doctors and hospitals pursue their own particularist

interests - goals and values which are consensually determined and competitively promoted. Whether publicly owned or privately owned, not-for-profit or for-profit, the range of interests and institutions providing medical and hospital services all pursue particularist objectives.

The whole structure of providing medical and hospital services in Australia would appear to be based on the assumption of almost total subsidisation by Governments and health insurance organisations. Through these financial

intermediaries, the community is directly reimbursing ninety-five per cent of the costs of recognised hospitals, eighty-five per cent of the costs of community and proprietary hospitals and eighty-seven per cent of the fee

income of fee-for-service doctors. The community also bears these costs indirectly when high and rising medical expenditures contribute to general inflation.

With such a heavy dependence on public funding mechanisms, there are very few medical and hospital services provided which can be considered private transactions. The twilight zone between public and private embraces most transactions

and reveals a dazzling array of degrees of publicness and privateness. The very existence of this array gives lie to the partisan political view that there are separate and discrete sectors involved.

i

Executive Summary ii

Independently from partisan debate about public and private, policy options for ir1proving effectiveness, increasing efficiency and containing costs in the provision of health services can be diagnosed. Choices can be

identified from an analysis of the key characteristics of the major interests and institutions.

The most difficult question remains unanswered. Are doctors, hospitals and health administrators prepared to relinquish a modest degree of control over their particularist interests to allow more scope for market

forces to promote efficiency and public welfare?

GLOSSARY

Private

Public

Interest

Institution

Policy System

Domain

Particularist Interest

Enterprise

Agency

After Power:

Belonging to or the property of the individual.

Pertaining to the people as a whole, done on behalf of the community as a whole, may be shared by all members of the community, directed to the

promotion of general welfare.

A grouping of individuals with similar goals and a similar competitive position with regard to achieving them politically.

An organisational arrangement g1v1ng rise to a stable set of expectations from individuals, interests and other institutions.

Set of organisational and interpersonal arrangements which has evolved to deal with an identifiable class of decision problems.

Action space generally recognised as belonging to an institution and/or policy system.

Organisational collaboration which may embrace more than one interest group or institution to promote largely consensual goals, values and norms with

a predetermined competitive position within the policy system to satisfying them politically.

An interest or institution which is more responsive to market forces than political constraints.

An interest or institution which is more responsive to political forces than market constraints.

1 INTRODUCTION

In analysing any area of public policy, it is important to have an understanding of the scope, structures, and processes of the domain under study.

In the health domain, we are required to address policy questions such as:

*

*

*

*

What are we trying to achieve?

Who will be helped by specific services? To what extent will they be helped? Who benefits from providing these services? Who will be paying the costs?

What mix of services will do the most good? How do the benefits of alternative approaches to the providing services compare? ... in terms of health results? .. . in terms of equity? How can health services be more efficiently produced?

Questions such as these are at the heart of the terms of reference for the Commission of Inquiry into the Efficiency and Administration of Hospitals. The major terms of reference are concerned with costs, effectiveness, efficiency, and how cost increases can be constrained. 1

This study addresses the particular question:

How do public and private activities in the provision of health services link with issues of effectiveness, efficiency, and cost containment?

The sections which follow look at issues of public and private interests in the provision of hospital and medical services, health insurance, and the development of competitive stances for jurisdiction and function.

l The complete terms of reference appear in exhibit l.

l

•h;b;< 1' TERMS OF REFERENCE FOR COMMISSION OF I NOUI RY

COMMISSION OF INQUIRY INTO THE EFFICIENCY AND ADMINISTRATION OF HOSPITALS The Commonwealth Government, in conjunction with the States and the Northern Territory, has established a Commission to inquire into the Efficiency and Admin­

istration of Hospitals and associated Institutions, and Services. The members of the Commission are Mr. J. H. Jamison, O.B.E. (Chairman), Dr. J. S. Yeatman and Mr. C. W. L. De Boos. The full Terms of Reference of the Commission are set out below. Persons, organisations or bodies wishing to place evi­ dence before the Commission are invited to make de­ tailed written submissions as soon as possible. The Commission requires to be advised of the intention of any person, organisation or body to make a submission and, where practicable, of the particu lar aspects of the Terms of Reference the submission will cover. Sub­ missions should contain a one (1) page summary cover­ ing the main points of the submission. The Commission requests that submissions be in the form of an aHidavit and be duly sworn. Format for affidavits will be for­ warded upon notice o f intention to su bmit. Submissions and enquiries should be addressed to:

The Secretary, Commission of inquiry into the EHiclencr and Administration of Hospitals, G.P.O. Box 4284, SYDNEY, N.S.W. 2001 . Telephone: (02) 231 6800. Only persons who have lodged a sworn written sub­ mission wi II be entitled to be heard at a hearing. Oral evidence will be heard in public and private hearings which the Commission intends to hold in all capital cities and such other locations as se em de.s irable. Dates and venues for the se hearings wil l be advertised from time to time. The Commission inten ds to make public as much of the evidence as possible. It· does. however, recognise that

certain evidence or submissions may need to be treated on a confidential basis. Persons who fee l all or any part of their evidence or submission should be so treated should notify the Commission at the time that the evidence or submission is given. The Commission reserves its right under Section 60 of the Royal Com­ missions' Act 1902 (Commonwea lth) to determine what part or parts of evidence or submissions should be

classified as confidential. TERMS OF REFERENCE To inquire Into and report upon :

1. Factors behind th e costs and escalation of costs of

hospitals a nd associated or related insti tutions and services; 2. Effectiveness of machin ery for determinin g objectives, policy and resource allocatio n in hospitals and asso­

ciated or related i nstitutions and services; 3. Weys in wh ich the efficiency of the hospital and asso­ ciated or rel ated health system s and services m ight be improved; and 4. Ways in which cost increases in hospital and asso-

ciated or r e lated services can be constrai ned ; and to make reco mmendations ar ising out of the inquiries into the above matters. Without restricting the scope of the Inquiry, the Comm ission

is to give particular attention to th e following matters : {a) The budgetary process for, and cost accountability of, hospi tals; (b) The effectiveness o f exi sting orga nisational structures,

and the relationships between central health author­ ities (Commonwea l th , Sta te and Te rritory) . hospita l boards and managements. and medical and othe;r staff, including any c on stra in ts adversely affecting efficiency i n hospilal management ; (c) Staff utilisation and policy, man­

agement methods and advisory serv1c es: (d) Metho ds of payment and cond itio ns o f servi ce l or

medical and oth e r prac titione rs us ing hospital fac ili­ ties an d other associated or related serv 1ces,

including charg ing practitioners for use of hosp ital facili ties and re sources and the effect of these mailers on th e level of services provided ; (e) The effect of c urrent financing methods (incl uding

health insurance) o n hospital utilisation including the pro>Jis ion of medi c al services !n hospital s : (f) The r elationship between commun ity based hea lth and related services and hospitals: (g) The va lue of accre dita tion of hospitals : (h ) Existi ng and possib le Commonwealth / State arrange­

ments for meetin g operati ng costs of hospitals and associ ated or relate d services: and (i) Any other ma ilers of signific ant importance to (1) to

(4} above.

The Com m issio n , in ma king 1IS re commen dations, i s to regard to the sc ope tor ra tion ali sat io n of se rv •c es

and resources of all !ypes (includ1ng th ose p rov1ded by .the Department o f Ve tera ns' Afla 1r s. private hospi tals , med:ca l practitioners and oth er health-care prac and to any

barriers to the ach ievement of su ch ratlonal1sat1on

2 DISTINGUISHING BETWEEN PUBLIC AND PRIVATE

The Shorter Oxford Dictionary defines private as that which belongs to or is the property of a particular individual. Public is defined as pertaining to the people as a whole, done on behalf of the community as a whole, that which is open to or may be shared by all members of the community, devoted or directed to the promotion of general welfare.

The distinction between the interests of individuals singly, on the one hand, and the interests of the community, 1 on the other, would appear to create a clear dichotomy. In analysing major medical activities, however, many of them appear to fit in a twilight zone which has varying mixes of public and private components. Medical services may produce both private benefits which go to individuals and public benefits which are diffused to the community. The very high level of taxpayer subsidy for reimbursement of hospital and medical services is justified, in part, because it is presumed that there is a high level of

public benefit.

A considerable amount of the evidence before the Commission of Inquiry concerned issues of public and private in the provision of hospital and medical services. The dichotomy of public and private served to create an acceptable

ideological reference point for partisan points of view. Various witnesses and interest groups were able to argue that issues of effectiveness, efficiency, and cost containment could be resolved by either more public involvement or less public involvement. The public/ private dichotomy also fitted nicely with partisan political values about what is good and what is bad with hospital and medical services in Australia.

Interesting as these policy positions may be, they represented an overly simplistic approach to complex issues. As this study will show, there are few easy answers. In health policy analysis, it is therefore important to free ourselves

from the conceptual limitations of the partisan use of the terms public and private. The first step is to understand the different meanings given to these terms.

1 The community can be either an aggregate of individuals or an organised wh ole.

2.1 Different Meanings

2.11

For Public and Private

The public/private dichotomy can be applied in a number of ways in the health domain. This terminology is often used:

*

*

*

To suggest proper limits for Government activity.

To describe an organisational arrangement and approach to management. To explain the economic structure and process of an interest or institution.

The Proper Limits of Government Activity

Political parties differ in their philosophy as to the proper limits to Government activity. The National Health Act, 1953, for example, reflected Liberal-Country Party philosophy that health arrangements should be primarily a matter of individual responsibility and initiative.

The basic principles underlying the Act were that:

* Medical services were the 'private' concern of patients and doctors.

* Hospital services were the primary concern of State governments and 'private' interests (whether charitable, religious, or profit-motivated).

Liberal philosophy consistently seeks to define the area where the Commonwealth Government could intervene legitimately and areas where it should not intervene. The National Health Act, 1953 committed the Government to subsidising

individuals who chose to belong to a registered health benefit organisation in a manner consistent with the above principles. This was a policy which met with a substantial degree of community support at the time, support which lasted for about fifteen years.

On the assumption that health and the costs of illness were issues of importance to every Australian, the Labor Party set about countering the LCP philosophy of either individual or State initiative and responsibility for health.

The Labor Party's view was that considerations of equity

3

and community benefit made health care part of social welfare. By definition, the social welfare of Australians must be a Commonwealth as well as a State responsibility.

The Labor Party, with the support of some academics and State health administrators, argued that: * The Commonwealth Government should assume increased responsibility for the financing of health services. * Health insurance should be universal and publicly funded

instead of being voluntary and 'privately' funded.

Policies developed in accordance with this political philosophy included the Medibank insurance scheme and the Commonwealth/State Hospital Cost Sharing Agreement.

These opposing political philosophies of the sixties and early seventies could be characterised as follows: * Liberals: laissez-faire but not market forces. * Labor: social we lfare plus e xtended bureaucratic

influence. Both policy approache s involved substantial elements of political patronage .

Much of the evidence placed before the Commission of Inquiry on the issue of more or less public involvement in the delivery and funding of medical and hospital services fits neatly within this political categorisation. The terms

'public' and 'private' were often used in evidence to suggest boundaries for the proper limits of government activity. Differ ent boundaries were associated with different political philosophies.

2.12 Organisational Arrangements and Approach to Management

A ministerial department, such as the Commonwealth Department of Health, is obviously a public organisation. It is accountable to the Public Service Board, the Department of Finance, and the Auditor-General's Office. The Commonwealth Department of Health is clearly owned by the Commonwealth Government and is managed in a manner distinctive to the

Public Service.

Organisations which are publicly owned are fundamentally different from privately owned organisations. They are different in the way in which they obtain their legitimacy, the way in which their purpose is determined,, their manner of organisation, and their approach to management.

But the term 'public' in relation to organisations can also be applied to institutions which are much more peripheral than a ministerial department. Recognised hospitals, for example, are often called public hospitals.

From an ownership point of view, Australia's recognised hospitals are clearly owned either by the State or Territory Government or on behalf of the community . Recognised hospitals, as public institutions, claim to represent the interests of all hospital patients without discrimination. Organisationally, the recognised hospital

has substantial elements in common with a public organisation. However, as shown in another report to the Commission of Inquiry, 2 to manage these peripheral institutions as if they were an arm of government is

contrary to the best interests of the hospitals, the community being served, and those arms of Government which are obliged to reimburse hosp itals for their services.

2 See Accounting, Reporting, and Budgeting , by McHarg and Clarke.

5

2.13 Agency Versus Enterprise

The traditional economic concepts of entrepreneurs, capital investment, and profit clearly belong to the private sector. But in the health domain, where almost all reimbursement comes in the form of public or quasi-public subsidy, these traditional economic concepts have little relevance.

An analysis of patterns of reimbursement for hospitals in Australia shows that direct out-of-pocket payments account for only 2 per cent of total reimbursement (see exhibit 2). The balance comes either by way of public subsidy (76 per cent) or quasi-public subsidy (22 per cent). A similar analysis of reimbursement for 'private' medical practitioners shows

that direct out-of-pocket payments account for only 8 per cent of doctors' income. The balance is in the form of either quasi-public subsidy (58 per cent) or public subsidy (34 per cent) (see exhibit 3).

Reimbursement to service providers by way of community-rated health insurance represents a form of quasi-public subsidy. With community-rated health insurance, contributors pay the same rates for the same amount of benefit irrespective of health status, health risk, age, or sex. Considerations of equity and the welfare of contributors prevents contribution rates from being tailored to the risk status of individual contributors. This principle sets health

insurance aside from other forms of insurance. The only differential within the community-rating principle is that single contributors pay half the rates applicable to married contributors. Third party insurance is also community-rated and there are elements of community-rating

in workers' compensation. It would be misleading, therefore, to construe these insurance payments to hospitals and doctors as 'private' payments.

With a very high degree of subsidy in the reimbursement of hospitals and doctors, and few out-of-pocket costs to the consumer, there is very little medicine which takes place in an entrepreneurial market context. The most private segments of the market, in an entrepreneurial sense, are community and proprietary hospitals, which receive about l8 'per cent of revenue directly from patients. 3 General practitioners, compared with their specialist medical

colleagues, also experience a degree of market discipline. The patient's out-of-pocket payment for general practitioner services can be significant as a proportion of the total fee.

3 Exhibit 3 shows how vulnerable community and proprietary hospitals are to marginal differences in the pricing of services. Pricing policies which would have the P-ffect of expanding the share of the 'private' hospital market served by recognised hospitals at the expense of community and proprietary hospitals could readily undermine the financial viability of this latter group of hospitals.

Exhibit 2:

Source of Funds

SOURCES OF REIMBURSEMENT FOR HOSPITAL ACTIVITIES CURRENT EXPENDITURE FY78 Per Cent of Total Current Expenditure

Financial Intermediaries Hospitals

Private ----- 2 ----------------------,

I 17-Heal t h Benefit Orga n tsa ttons : 5 1 36 Enterprise - 22 : 33 I Ill i 6=1 i Wo rk ers' Co mpensa t io n ill- 3 j :_5 .. -Third Party In surance 'I' l43 I r 43 - Co mmo nwealth jl J Go vernment - - -1 I I Public- -761 I L 33 --Stat e & Local : Go vernment ----Health Benefit Orga nisa tio ns Di rect Private Pa yments Ot her Commo nwealth Government State & Loca l Government Recognised-a

Hospita ls

Co mmun ity & Proprietary -2 Hospi t als

Repatriation-a Hospi tal s

Exhibit 3:

Source of Funds

REIMBURSEMENT OF 'PRIVATE' DOCTORS CURRENT EXPENDITURES FY78 Per Cent of Total Current Expenditures

Financial Intermediaries

'Private' Medical Providers

Private----- 8 ---------------------.

J

53- Health Benefit l Organ isations

Enterprise-58 I

I

53 'Private'

,- 5 Medical -8

L

Workers' Compensation j- 34 Programs 5 · -Third Party Insurance :I r Other- · ·-··- ·· JII

100 1,

1

I I

I r 34 -Commonwealth Ill

I I Government --...J

I I I

Public--341 I

I_ 0- State & Local I

Government - - - J

- Health Benefit Organisations Direct Private Payments Other Commonwealth Government State & Local Government

7

Although there is really very little in the provision of hospital and medical services which is clearly in the private sector, a distinction which does have some relevance in analysing the health domain is that between an 'agency' and an 'enterprise'.

An agency is defined as an institution which more responsive to political constraints than it is to market forces. A recognised hospital is an example of an agency. For political reasons, it is very difficult to close a recognised

hospital. Recognised hospitals do not become illiquid and go out of business. With an agency, such as a recognised hospital, the community tends to pay for the services whether or not there is a demand for them. Action by

patients and the community to substitute certain hospital outputs with alternative services tends to be general rather than specific. The pricing mechanism does not work to effect change.

An enterprise is an institution (or organisational arrangement) which is more responsive to market forces than to political constraints. Community and proprietary hospitals are examples of enterprises. With an enterprise, if there is

no demand for a particular service, then it is unlikely to be supplied. In contrast to the recognised hospital, community and private hospitals can become illiquid and cease functioning.

2.2 Some Issues of

Public and Private

2.21

Organisational arrangements, approaches to management, and the agency-versus-enterprise concept are useful tools for differentiating degrees of publicness or privatness in the provision of hospital and medical services.

The major features which differentiate between different mixes of public and private in the health domain are to be found in basic differences in the way in which institutions and interests:

*

*

Are owned, organised, and managed Are reimbursed for their services.

In transactions with enterprises there is a price-utility relationship between the cost to the institution or interest in providing the service and the consumer's appreciation of the value of the service. If the value

is too low relative to the price, the consumer will spend his or her dollars elsewhere. In transactions with agencies, however, the price of the service is underwritten by public and quasi-public subsidies. The higher the degree of subsidy, the less relevant is a price-utility relationship. In the extreme case, with no out-of-pocket charge to the consumer, there is no price-utility relationship.

The Recognised Hospital

The recognised hospital is clearly an agency. These hospitals are perceived as being publicly owned by the State and its citizens. At a high cost to efficiency, they are organised and managed as if they were an arm of Government. Out of a total of $2441 million of re,imbursement for recognised hospitals in fiscal year

(FY) 78, no amount was identified representing out-of-pocket private transactions. There can be no disputing the agency characteristics of recognised hospitals.

But does this high degree of publicness cause recognised hospitals to act in the public interest? Do they serve the residents of a

community as a whole?4 Are they directed to the promotion of general welfare? Or do they fulfil a particular function which does not include the interests of the areawide community or the promotion of general welfare?

Evidence before the Commission of Inquiry demonstrates that recognised hospitals can compete as actively as any enterprise for jurisdiction and function. There was ample evidence submitted to the Inquiry on the competitive position of teaching hospitals in advancing their interests and values. The Statutory Health Authorities in the States and Territories,

the major financial intermediaries, and some professional medical and hospital associations all stated their belief that there had been undesirable, particularist behaviours by teaching hospitals. Those parties did not see the developments

arising from these behaviours as serving either the welfare of citizens or the interests of Governrnents. 5 One legacy from these particularist behaviours has been the over-development of teaching hospitals on the fringe of the inner region in most of Australia's metropo litan cities.

Particularist interests and institutions can compete amongst themselves or against other particularist interests and institutions. Recognised hospitals, particularly teaching hospitals, can be very competitive among themselves. But the recognised hospital systems as a whole are currently engaged in sharp competitive behaviour for jurisdiction

and function with enterprise hospitals. The enterprise hospitals comprise community and proprietary hospitals. In FY78, about 85 per cent of the $324 million reimbursement for the enterprise hospitals was by way of

subsidy. Community-rated health insurance provided two thirds of the subsidy and the Commonwealth Government one third. Community and proprietary hospitals are therefore enterprises more in respect to the way in which they are organised and managed (and owned with respect to proprietary hospitals)

than the way they generate their revenue. Where funding is concerned, community and proprietary hospitals have strong agency characteristics.

4 The areawide community could be the residents of a

district, a region, or a State or Territory. 5 Governments, of course, have been known to link with these institutions on occasions in pursuit of competitive advantage in particular electorates.

9

Recognising that the rationalisation of Australia's recognised hospital system is in prospect, 6 the interests and institutions representing the recognised hospital system have insisted on a dual pricing policy for patients, which is designed to maximise

their share of the potential market for hospital patients.

Part of the pricing policy is to hold prices for insured patients in recognised hospitals at artificially low levels to ensure a deflection of insured patients into the recognised hospital system. Since community and proprietary hospitals account for only 20 per cent of hospital output in Australia, given the economic characteristics of hospitals, a small deflection within the total market will have a substantial

impact on the economics of these hospitals. This policy has had effect at a time when capacity among enterprise hospitals is being expanded. The other part of the pricing policy is to insist that every non-insured Australian has the right of free access to a recognised hospital irrespective of income or net worth.

It is generally recognised (although not generally acknowledged byeitheragency or enterprise hospital interests) that present mechanisms of reimbursing hospitals maximise the demand for this nation's extravagant levels of hospital capacity. The Commonwealth Department of Health, in its submission to the Commission of Inquiry, described the mechanism for reimbursing recognised hospitals as being: 'Conducive to high utilisation of hospital facilities and services by patients as, subject to their admittance as required by a medical practitioner, there is no financial restriction (to the patient) on the use of the facilities and services because they can be obtained free of charge. ,7

In their drive to maintain and gain as much as they can of the market for hospital inpatients, agency hospitals are opposed to any form of consumer cost sharing of the types which apply to the enterprise hospitals. The policy benefits of discouraging needless utilisation of hospital services and deflecting some potential demand to more appropriate forms of care, whether institutional, ambulatory, or domiciliary, are conveniently ignored. In this respect, recognised hospitals competitively pursue self interest not only in relation to other hospitals but also in relation to alternative forms of medical care delivery. The agency characteristics of recognised hospitals provide no guarantee that they will act on behalf of the community as a whole and that their effort will be directed to the promotion of general welfare.

6 See the Commonwealth Government's Discussion Paper, Report on Rationalisation of Hospital Facilities and Services and on Proposed New Charges, 1979, and the Terms of Reference for the Commission of Inquiry. 7 The public policy implications of this and alternative policies

on hospital reimbursement are discussed in Chapter Three of Accounting, Reporting, and Budgeting by McHarg and Clarke.

. 22 'Private' Medical Practice: Enterprise Medicine

The organisational aspects of 'private' medical practitioners are unambiguous. Private medical practitioners are either sole proprietors, partners, associates, or the employees of same. The bill to patients is always rendered in the name of the

principal or partnership. The professional responsibility and accountability of the principal or partners is at all times clearly identified. From an organisational perspective, the 'private' medical practitioner is clearly private.

When we look at the funding of 'private' medical services, however, this clarity suddenly blurs into the diffuse forms of the twilight zone between the dichotomy of public and private. Of the $1176 million dollars expended on 'private' medical practitioners in FY78, 53 per cent was a quasi-public

subsidy from community-rated health insurance, 34 per cent was public subsidy reimbursement from the Commonwealth Government, while only 8 per cent represented direct payments from individuals. Other insurance payments amounted to 5 per

cent of total reimbursements.

The practice of 'private' medicine in Australia combines both enterprise and agency characteristics. General practitioners are more towards the enterprise end of the scale, while procedural medical specialists have more agency components

in their reimbursement.

There may be good social reasons why services provided by medical practitioners are in receipt of heavy public subsidies. Obviously private medical services produce private medical benefits, but it may be held that these benefits become

diffused throughout the community and therefore produce public benefits which warrant public funding. There could be other explanations, however. It could be said that Commonwealth Governments went through a period, during the seventies, when

they were eager to find vehicles for extending their political patronage to the electorate. Services provided by medical practitioners were a convenient vehicle by which to advance these goals, and therefore attracted higher levels of subsidy.

It could also be said that this drive by Governments was reinforced by health administrators who were eager to have more influence over the behaviour of the more autonomous parts of the medical profession.

11

It is not within the scope of this study to analyse the specific reasons why private medicine has allowed itself to become progressively less enterprise-oriented and progressively more agency-oriented over the last fifteen

years. One can conclude from the above figures, however, that there is very little medicine practised in Australia which is exclusively private.

Whatever the rhetoric of enterprise medicine about being 'private', enterprise medicine shows no sign of wanting to reduce the degree to which patient reimbursement relies on public and quasi-public subsidies.

12

.3 Summarising on

Public and Private

The very existence of degrees of publicness and privateness in the provision of medical and hospital services gives lie to the concept that there are separate and discrete sectors involved. The most significant interests and institutions in the health domain, namely doctors and hospitals, do not fit well into either category. For-profit and not-for-profit interests and institutions, enterprises and agencies, all seem to pursue particularist interests.

The twilight zone between the public/private dichotomy starts to show a dazzling array of degrees of publicness and privateness. Whereas the public/private dichotomy failed to disclose the variety of the values, structures, and processes involved, a richness in colours is now being displayed.

The whole structure of the system of providing medical and hospital services in Australia today is based on the assumption of almost total Government and health insurance funding. While this may be in the patients' interest and is generally presented as being of community interest, it is also very much to the benefit of hospitals and doctors. However, what patients and the providers of particular

services see as being in their best interests does not equate with the best interests of the community.

To increase our appreciation of how agency and enterprise activities link with issues of effectiveness , efficiency, and cost containment, it is necessary to understand the interrelationships between reimbursement incentives and particularist interests . The next section looks at issues

of public and private in relation to health ins urance . The final section outlines an analytic approach to identifying particularist interests and then assessing the effect of patterns of incentives on effectiveness, efficiency, and cost containment.

13

3 PUBLIC AND PRIVATE

AND HEALTH INSURANCE

Public action to subsidise health programs to produce both private and public benefits can fall into one of two categories.

On the one hand, Goverrunent subsidies can go directly to the providers of services. The Commonwealth Government, for example, deficit funds recognised hospitals in association with State and Territory Governments with Section 96 Special Purpose Grants made directly to these Governments. These payments go directly to the providers of hospital services. Such payments could represent the outreach of political and administrative influence over these hospitals. Or they could be made in this manner in the belief that the hospitals themselves are the best judges of how taxpayer subsidies should be expended in providing services.

On the other hand, Government subsidies could go directly to the consumers of medical and hospital services. This alternative approach to subsidising health programs could represent the outreach of political and administrative influence over a different group of constituents. But it could also be made in the belief that the consumers of medical and hospital services are the best judges of where

to go for best value for money. Subsidising consumers would obviously make providers more responsive to consumer needs.

This section of the report examines the issue of whether the Commonwealth Government's aims in subsidising health programs are more likely to be met by less emphasis on directly subsidising providers and more emphasis on subsidising consumers. The section addresses the following matters in relation to the Australian health insurance system: * The goals of the Commonwealth Gove rnment in subsidising

personal health expenditures. * The dilemmas for Government in subsidising health insurance. * The need for community-rated health insurance to be linked with rules of membership for it to achieve its

equity and welfare objectives .

14

* The timeliness of examining health insurance policies once aga

* Some options which could constitute more effective policy from the Commonwealth Gove rnment's point of view.

3.1 What are We Trying to Achieve

With Health Financing?

The Hospitals and Health Services Commission, in its Discussion Paper on Paying for Health Care, adopted and extended the criteria proposed by the United States health policy analyst, Karen Davis, for assessing the

adequacy of health financing systems.

According to the Hospitals and Health Services Commission:

A satisfactory system of health care financing should:

(i) Ensure that the overall level of appropriate health care is maintained. (ii) Ensure that benefits are adequate and distributed fairly so that they help all p eople in need to obtain

necessary care. (iii) Reduce the financial hardship of meeting bills for care, notably for the poor and for those with particularly large hospital and medical expenses.

(iv) Encourage the patient, the doctor, the institutional care provider to select the level of care that is most appropriate to medical need. (v) Be equitably financed, easy to understand and administer, and be acceptable both to the public and

the providers of services. (vi) Be economical in its administration , and include a record system that generates statistics and analyses of the use of services.

(vii) Be able to respond quickly t o changed conditions (eg, income, fees, usage).

(viii) Contain health care costs by measures that include: * restraint on price rises

* reduction of inappropriate or unnecessary care * incentives for the efficien t management of hosp itals. (ix) Reduce or abolish opportunities for fraud and abuse.

(x) Have some portion of the costs borne b y patients and these should be related to their use of health care services, but there should be income-related ceilings on the amount of cost s hari ng by patients.

(Hospitals and Health Services Commission, 1978 , p 54)

15

3 PUBLIC AND PRIVATE

AND HEALTH INSURANCE

Public action to subsidise health programs to produce both private and public benefits can fall into one of two categories.

On the one hand, Goverruoent subsidies can go directly to the providers of services. The Commonwealth Government , for example, deficit funds recognised hospitals in association with State and Territory Governments with Section 96 Special Purpose Grants made directly to these Governments. These payments go directly to the providers of hospital services. Such payments could represent the outreach of political and administrative influence over these hospitals. Or they could be made in this manner in the

belief that the hospitals themselves are the best judges

14

of how taxpayer subsidies should be expended in providing 1 1

services.

On the other hand, Government subsidies could go directly to the consumers of medical and hospital services. This alternative approach to subsidising health programs could represent the outreach of political and administrative influence over a different group of constituents. But it could also be made in the belief that the consumers of medical and hospital services are the best judges of where

to go for best value for money. Subsidising consumers would obviously make providers more r espon s ive to consumer needs.

This section o f the report examines the i ssue of whether the Commonwealth Government's aims in subsidi sing health programs are more likely to be me t by l ess emphasis on directly subsidising providers and more emphasis on

subsidising consumers. The section addresses the following matters in relation to the Australian health insurance system: ,,

* The goals of the Commonwealth Government in subsidising personal health expenditures. * The dilemmas for Government in subsidising health insurance . * The need for community-rated health insurance to be

linked with rules of membership f or it to achieve its equity and welfare objectives. * The timeliness of examining health insurance policies once agai * some options which could constitute more effective policy

from the Commonwealth Government ' s point of view.

3.1 What are We Trying to Achieve

With Health Financing?

The Hospitals and Health Services Commission, in its Discussion Paper on Paying for Health Care, adopted and extended the criteria proposed by the United States health policy analyst, Karen Davis, for assessing the

adequacy of health financing systems.

According to the Hospitals and Health Services Commission:

A satisfactory system of health care financing should:

(i) Ensure that the overall level of appropriate health care is maintained. (ii) Ensure that benefits are adequate and distributed fairly so that they help all people in need to obtain necessary care.

(iii) Reduce the financial hardship of meeting bills for care, notably for the poor and for those with particularly large hospital and medical expenses. (iv) Encourage the patient, the doctor, the institutional

care provider to select the level of care that is most appropriate to medical need. (v) Be equitably financed, easy to understand and administer, and be acceptable both to the public and

the providers of services. (vi) Be economical in its administration, and include a record system that generates statistics and analyses of the use of services.

(vii) Be able to respond quickly to changed conditions (eg, income, fees, usage). (viii) Contain health care costs by measures that include: * restraint on price rises

* reduction of inappropriate or unnecessary care * incentives for the efficient management of hospitals. (ix) Reduce or abolish opportunities for fraud and abuse.

(x) Have some portion of the costs borne by patients and these should be related to their use of health care services, but there should be income-related ceilings on the amount of cost sharing by patients.

(Hospitals and Health Services Commission, 1978, p 54)

15

16

The Australian system of financing personal medical and hospital expenses is very generous in meeting the bills. Non-insured Australians receive treatment from recognised hospitals free of charge and have their medical expenses outside hospitals heavily subsidised. Insured Australians also have their medical and hospital expenses heavily subsidised.

The following figures outline the scope of Commonwealth subsidies for personal medical and hospital expenses in FY7 8:

Recognised Hospitals Dollar Millions

Total Commonwealth subsidies Major components:

1039

- Commonwealth/State Cost Sharing 977

- ACT 'State' Costs 19

- Northern Territory 'State ' Costs 12

- Reinsurance Trust Fund 23

Community and Proprietary Hospitals Dollar Millions

Total Commonwealth subsidies Major components: - $16 a day bed subsidy

- Reinsurance Trust Fund

87

69 13

Medical Services Dollar Millions

Total Commonwealth subsidies Major components: - Health Insurance Act payments - Veterans ' Affairs payments

395

359 30

Commonwealth policies on health financing, at this time, clearly favoured direct subsidisation of one class of provider , the recognised hospital systems of the States and Territories. The ratio of subsidisation of providers to subsidisation of consumers was of the order of two to one . Although the overall degree of subsidisation for medical and hospital services has been generous, the Commonwealth's reimbursement policies have been deficientl in relation to:

* Avoiding discrimination between alternative forms of medical service delivery.

*

*

*

1

Providing incentives for more appropriate service utilisation and more efficient service delivery .

Containing aggregate costs .

Avoiding discrimination between different classes of payor.

See Chapter 4 in Accounting, Reporting, and Budgeting, by McHarg and Clarke , for an analysis of these issues.

Because of these weaknesses, present Commonwealth Government policies on health insurance are unlikely to be sustainable. In the sections which follow, the option of giving greater emphasis to payments to consumers rather than providers is

explored. The analysis shows that there is scope to increase effectiveness, improve efficiency, and contain costs.

17

3.2 Health Benefit Organisations: Public or Private?

In the rhetoric of the public/private dichotomy, health benefit organisations in Australia are often labelled 'private'. OVer the seventies, these organisations provided a convenient focus for ideological differences between competing political interests on health care financing.

Health benefit organisations can fairly be categorised as enterprises. These organisations can become illiquid and cease functioning. Enterprise characteristics are perhaps most clearly seen in the marketing and management styles of some of the larger organisations.

But health benefit organisations also have many agency characteristics. They are tightly regulated2 under the auspice of Commonwealth and, in some cases, State Government legislation. Each organisation serves a community of contributors which has certain rights and expectations in relation to the organisation. The particularist interests of health benefit organisations include community welfare.

In this respect, health benefit organisations have more agency characteristics than community hospitals and are very different to commercial insurers which offer risk-rated health insurance,

2 The more enterprising health benefit organisations consider that they are over-regulated. They believe that policies of over-regulation are more concerned with bureaucratic influence and political power than with a satisfactory system of health care financing.

18

I

fl I

:II I

t/1

I

3.21 Governments Took Their Lead From Health Benefit Organisations

Health benefit organisations predate the involvement of Governments in funding and delivering a wide range of medical and social welfare services. Australians have long joined health benefit organisations to reduce the financial risk of illness and to provide ready access to medical care when

it was required. By joining a health benefit fund, the contributor not only satisfied his own medical and security needs but, in so doing, also advanced the welfare of the community.

A contributor to a health benefit organisation pays the same rates for the same level of benefits, irrespective of health status or health risk. A contributor automatically reduces his risk exposure. At the same time, he also facilitates equity in relation to the provision and cost of medical

services and advances the external benefits of good health to the community generally.

The first health benefit organisations were the friendly societies: Mutual aid or 'friendly societies' were developed in the years following the formation of the first one in Sydney

in 1831. They provided members with weekly sickness or unemployment benefits, funeral benefits, and medical attention from their own doctors. Members paid regular contributions towards the doctors' salaries which were

based on the capitation fee system. Families of members also received some benefits, and by 1905 more than a quarter of Australia's population were covered by friendly society schemes. In some industries, employers and employees contributed jointly.

(Hospitals and Health Services Commission, 1978, pp 113 to 114)

During the depression of the 1930s, hospital funds were formed in most States as co-operative, self-help, community service organisations providing hospital benefits.

A further significant event was the formation of Medical Benefits Fund of Australia Limited in 1947. One thousand doctors in New South Wales each donated 10 pounds to establish this fund in the hope of forestalling a national scheme for paying doctors by salary or capitation. MBF was opened to public subscription. The fund reimbursed the medical expenses

of contributors on a fee-for-service basis.

19

3.22 Government Involvement In Health Insurance

Part V of the Australian Constitution, dealing with the legislative powers of Parliament, gives the Commonwealth the power to make laws with respect to 'pharmaceutical, sickness and hospital benefits' (section xxiiiA, inserted in 1946). The activities of community health benefit organisations in Australia are today r egulated under Parts VI and VIA of the National Health Act, 1953, and an associated bill, the Health Insurance Act, 1973

The strengths and traditional values of health benefits organisations were recognised by the Menzies Government in 1953 when it introduced a range of public subsidies for the provision of personal medical services. Receipt of some

subsidies was conditional on prior membership of a voluntary health benefit organisation. In introducing the National Health Act, 1953, Sir Earle Page, Minister for Health and himself a surgeon, said :

The aim of the scheme is to bring into being the National Health Scheme that would remove from people worry and anxiety caused by the costs of sickness and give confidence in the permanence and solvency of the scheme. Costs for medical and hospital care have grown enormously through advances in medical science. Immediate action must be taken to combat them before the community is overwhelmed. The Government's scheme aims at reducing costs to the patient, lessening sickness, and creating confidence in the community.

The National Health Act, 1953 made Government a partner with health benefit organisations in reducing risk exposure , promoting equity i n the sharing of costs, and advancing the external benefits of good health. The policy adopted by

the Menzies Government worked successfully for about a fifteen-year period and took into account a major dilemma associated with high levels of public s ubs idy for personal medical expenditures.

20

3.23 The Dilemma of High Levels

Of Public Subsidy

When introducing the National Health Act, 1953, Sir Earle Page observed:

The great danger in any Government-aided health scheme is the tendency to develop a psychology of dependence and diminished personal and community responsibility ... Any such scheme should contain elements that encourage

self-reliance and a sense of personal responsibility.

From a public policy perspective it is true, as Sir Earle Page suggests, that the health of any community depends, to a substantial degree, on individual members of the community assuming a measure of personal responsibility for their own health and well being. Although the impact of the physical and social environment on health is largely outside the control of any individual, several aspects of health status are directly under personal control.

Most Australians born since the Second World War were born to health. Many of these Australians, however, will experience premature illness, disability, and death because of their own behaviour, If these Australians were prepared to exercise personal responsibility for adopting a number of relatively

simple behaviours, then these Australians could increase health and defer the age of death. There are many who believe that those who are born to health have a public duty to maintain their health. A good proportion of contributors to health benefit organisations would belong to this constituency.

Commonwealth Government policy on health care financing has yet to resolve the dilemma of providing the required degree of support while creating incentives that would encourage self-reliance and a sense of personal responsibili ty.

In relation to this issue, the direct subsidisation of services provided by recognised hospitals would appe ar to be a weaker policy than the subsidisation of consumers.

21

3 .24 Other Dilemmas With High Levels Of Government Involvement

The Commonwealth has difficulty in reconciling thip dilemma in health care financing because of conflict between financing goals, on the one hand, and political, economic, and administrative goals3 on the other. An objective analysis of the policy decisions taken over the last decade would suggest that political, economic, and administrative considerations have been as salient, if not more salient, than the interests of contributors.

It is therefore misleading to suggest, as the Commonwealth Department of Health did in its submission to the Commission of Inquiry, that: The thrust of the Commonwealth's involvement in health

insurance is towards the protection of the interests of persons who elect to contribute to registered hospital and medical benefit organisations. (Commonwealth Department of Health,

1980, part 2, p 98)

Conflicting policy choices cannot be reconciled so simply.

3 A review of policy choices is contained in the report,

Accounting, Reporting, and Budgeting, by McHarg and Clarke.

22

3.3 The Dilemma is Reconciling

Community-Rating and Rules of Membership

The dilemma of the Commonwealth in reconciling conflicting policy choices is demonstrated by Government policies involving the welfare objectives of community-rating and the equity objectives of rules of membership in health benefit organisations. Health benefit organisations have

always sought to link welfare and equity objectives. These linkages were reflected in the way the organisations operated, long before the Commonwealth Government became involved in health insurance.

The thrust of the Commonwealth Government's policy and regulatory decisions on health insurance over the last decade has been to hold out-of-pocket prices for consumers to low levels. Low prices stimulate demand. The leverage

favours more resource-intensive forms of medical care and is greatest for inpatient medical services provided by recognised hospitals.

As the Hospitals and Health Services Commission has stated, the provision of a wide range of medical services at no direct cost to the consumer not only increases the quantity of services demanded but also the quantity supplied:

It makes consumers less sensitive to costs and often less aware of them. It diminishes the concern of providers, especially doctors and hospital personnel, for prices and efficiency, and tends to increase the

range, complexity, and amenity of the services demanded and supplied. (Hospitals and Health Services Commission, 1978, p 61)

The problem has been acknowledged by the Commonwealth Department of Health. In its evidence to the Commission of Inquiry, it implied that these policies have been conducive to much excessive and unnecessary hospital utilisation.

This type of problem experienced by Government in health care financing could be diminished by: * Giving back to health benefit organisations the scope to act responsibly as enterprises which could be responsive

to contributor need and would be obliged to operate efficiently. * Using the agency characteristics of health benefit organisations to achieve some of Government's welfare

and equity objectives in reimbursing for medical and hospital services.

23

Two key principles of health insurance are:

* Community-rating which ensures that medical and hospital costs are distributed in accordance with welfare objectives. * Rules of membership which ensure that welfare objectives

are achieved with equity and that the values and interests of the community of contributors are protected.

The Commonwealth Government, in its search to develop policies on health insurance, could find that

the combined enterprise and agency characteristics of health benefit organisations have many comparative advantages. These advantages cannot be found in organisations which are agencies without enterprise characteristics. Therefore Government substitutes for health benefit organisations offer no long-term solution. This can be seen from the legacy of po.litical and administrative decisions taken during the seventies. Political and administrative decisions which led to the breaking of the linkage between community-rating and rules of membership demonstrate this point.

24

3.31 Community-Rating

Community-rating for a health benefit organisation simply means that every contributor pays the same rates for the same level of benefit regardless of age , sex, employment status, class of employment, or health risk. The only differential within the community-rating principle is that

sinble contributors pay half the rates applicable to married contributors.

The Hospitals and Health Services Commission described the application of the community-rating principl e to the operations of health benefit organisations in the following terms:

Pooling woul d not be needed if costs we re trivial, or if

needs were evenly distributed, as, for instance , the need for food. General income support would be sufficient. The case for pooling is strongest for the most expensive and unpredictable services, weaker for those that are cheap and relatively regular, and does not exist at all for services which could be regarded as amenities, eg, luxury accommodation in hospital, some forms of cosmetic surgery, and fitness testing for health of athletes.

(Hospitals and Health Services Commission, 1978, p 56)

In application, the community-rating p rincip le for health insurance in Australia has been applied on a fund basis rather than a geographical basis. The value of a community­ rated health insurance in providing a social return as well as meeting a personal need was clearly understood by the Senate Select Committee on Medical and Hospital Costs :

The basis of community r ating in the construction of (health) insurance tables is the desirability of the better risks supporting poorer risks, and the social security concepts inherent therein. The committee believes this to be sound, and r ecommends that

community-rating should continue to be the basis of contribution rates for health insurance. Insofar as it reflects a community awareness of responsibility, it is to be hoped that this extends to community activity in other areas of need in health and

social welfare.

(Senate Select Committee on Medical and Hospital Costs, 1970, p 49)

The Hospitals and Health Services Commission observed that it is essential under a system of community-rated health insurance to have machinery for the control of fraud and abuse. Health benefit organisations have traditionally used the rules of membership principle to protect the community of contributors from exploitation by providers, whether doctors or hospitals, who could be working in

collaboration with individual contributors .

25

3.32 Rules of Membership

Rules of membership are also a distinctive characteristic of health benefit organisations, The value of membership of a health fund where the benefits are concentrated but the costs are spread diffusely over a community of contributors depends,

in part, on all contributors assuming a measure of personal responsibility. Its purpose is to protect the values and interests of all contributors from individuals who may seek to take advantage of the concentrated benefits available under the community-rating principle. In the context of health insurance, the rules of membership principle is applied to ensure the attainment of equity and welfare objectives, by containing adverse selection within defined

limits.

Rules of membership typically included varying waiting periods between joining the fund and the time that benefits were payable, exclusion rules for a pre-existing condition subject to a time limit, limits on the maximum benefits payable for a particular episode in a twelve-month period, and exclusions in relation to some long-term needs.

Nevertheless, under the community-rating principle, health benefit organisations have traditionally underwritten a certain proportion of risks that would either be selected out or subjected to higher contribution rates if insured on an individual basis according to the principles of commercial insurance.

Careful balance and compromise between community-rating and the avoidance of unacceptable adverse selection through rules of membership is the basis by which health benefit

organisations achieve equity and welfare objectives. Without this trade-off, neither equity nor welfare goals are realisable.

26

27

3. 33 Adverse Selection Under Rules of Membership

Adverse selection occurs when health insurance is taken out or the extent of insurance coverage is increased in anticipation of medical and hospital expenditures. The net effect of regressive trends in adverse selection is a decline in the actuarial performance of the fund and higher contribution

rates for all contributors.

In the several changes to Australia's health insurance legislation since 1 October, 1976, health benefit organisations have experienced a moderate degree of regressive adverse selection. In the area of inpatient services, for example, Government legislated to prohibit health benefit organisations

from refusing contributions from inpatients who wished to become fund members. Consecutively, it dispensed with the Special Accounts arrangements and introduced the Hospital Benefits Reinsurance Trust Fund, while extending the domain of hospital benefits to include nursing home benefits.

The opportunity for severely regressive adverse selection was imposed on community health funds without prior consultation.4

According to the Department of Health, in its submission to the Commission of Inquiry, the purpose of the above changes were to achieve 'the objectives of the community-rating principle by spreading the burden of the chronically ill

and assisting the financial viability of some organisations' (Commonwealth Department of Health, 1980, part 2, p 102).

The Commission of Inquiry received evidence from a number of sources on adverse selection and 'free-riders' arising from these policy decisions on health care financing.5 From a public policy perspective, it is difficult to comprehend how such a regressive trend in adverse experience, in either medical or hospital tables, meets the objectives of the

community-rating principle. Under the present system of health care financing in Australia, some may see these policies as an incentive not to assume as much personal responsibility for medical and hospital expenditures.

Clearly these policies are not sustainable if rising contribution rates become a disincentive to insure.

4 At that time, it was compulsory for income-earning Australians to pay either a tax surcharge for me dical and allied health services or be a member of a community-rated health benefit organisation. The levy was 2.5 per cent of taxable income for a family unit with a ceiling for annual payments of $3 00. On l November 1978 compulsory

insurance and the levy on taxable income was abolished but the Hospital Be nefits Rein surance Trust Fund arrangements continued. 5 See, for example, Transcript of Proceedings, pp 1529-31

3,4 Time to Evaluate

The Effectiveness of Present Policies

It could be timely for the Commonwealth Government to evaluate the effectiveness of present policies on health insurance which are a legacy from the seventies.

The eighties will probably be a decade of restraint in the growth of Government revenues and outlays. Rates of economic growth will be lower and less certain than they were during the sixties and the seventies. The Commonwealth Government will be obliged to allocate health and welfare outlays according to priorities determined by political and community consensus.

Continuing failures of policy in relation to health insurance herald difficulties for both contributors to health benefit organisations and taxpayers. Contributors will be less able to satisfy their security needs and particularist welfare objectives. Without prompt action by the Commonwealth,

there could be increased reliance on even higher levels of public subsidies for personal medical and hospital expenditures.

One question which should be addressed during this evaluation is whether more emphasis on subsidising the consumer of the service rather than the provider of the service would enhance effectiveness, efficiency, and cost containment in the provision of medical and hospital services.

28

3.41 What Are the Aims of the Commonwealth In Health Care Financing?

Criteria for a satisfactory system of health care financing have been already outlined (section 3.1, above). Within this context, the basic political, economic, and administrative aims for the Commonwealth Government would appear to be the f o llowing:

* The control of costs. The Commonwealth seeks to

influence the total amount of national resources consumed on health services and, most specifically, the cost to the Commonwealth.

*

*

The promotion of equity in the provision of personal health services. Equity issues include access to services, the relevance of the ser vices , choice i n relation to doctor and health values, and the extent

to which a consumer directly bears a proportion of the cost. The achievement of political benefits. The Commonwealth probably seeks to generate political benefits for health expenditures in proportion to the costs incurred. 6 If the political benefit/cost ratio can be made better than this, then so much the better. * The control of inflation. The Commonwealth has a vested

interest in ensuring that State and Territory Governments strive to make better use of health resources as an integral part of its broadly based economic management strategy to control inflation. It follows, therefore, that the Commonwealth has a vested interest in processes which will result in consolidation within State and Territory recognised hospital systems and the total hospital system.

The Commonwealth Department of Health, in evidence before the Commission of Inquiry, said : 'There is a need for greater rationality and restraint in the provision and use of funding of hospitals and related services. ' As the Department admits:

'There is no difference in health status if you look across the States.' Against this background, and in terms of the above criteria, there is a clear lack of rationality i n present patterns of Commonwealth subsidisation of health

expenditures . The Commonwealth is performing poorly in relation to its basic aims.

6 The States and Territories a ppear to be the political

winners from the Commonwealth's share of deficit funding under the Commonwealth/State Hospital Cost Sharing Agreement.

29

3.42 Towards More Effective Policies

From an effectiveness, efficiency, and cost containment perspective, it would appear to be fiscally counterproductive for the Commonwealth to be involved heavily in deficit funding of hospitals when the nation has an unhealthy surplus of hospital capacity. With surplus capacity, the direct funding of providers stimulates the provision of many excessive and unnecessary services and fuels inflation in per capita expenditures on health.

Health benefit organisations registered under the National Health Act, 1953 could provide the Commonwealth with a solution to its current dilemma of reconciling responsible economic management with the promotion of public good in health expenditures. In the climate of the eighties, the Government's aims could be achieved by redistributing some Commonwealth transfers for personal health expenditures away from the providers of services to the consumers of these services, Health benefit organisations could be the legitimate and appropriate vehicle for accomplishing this redistribution,

More reliance on transfers to consumers through health benefit organisations under section 51 of the Constitution and less reliance on section 96 transfers would enable the Commonwealth Government:

*

*

*

*

To distribute Commonwealth monies for personal health services more in accordance with need. To give the consumer more choice in relation to competing medical and allied health services, thereby increasing

consumer satisfaction and funding services according to their relevance. To reduce present patterns of price discrimination which Statutory Health Authorities use to stimulate utilisation of excess capacity in their respective recognised hospital systems. 7

To encourage more Australians to assume a greater measure 'of personal responsibility for their medical expenditures as contributors to health benefit organisations. * To give social welfare beneficiaries the same choice in

relation to competing medical and allied health services as other members of the community, 8

7 Price discrimination is used by agency hospitals, the recognised hospitals, to compete unfairly with enterprise hospitals, the community and proprietary hospitals. Excessive utilisation also has a high opportunity cost for the community in terms of other publicly funded services foregone. 8 As one in five Australians is a beneficiary of Commonwealth

funded social welfare services, this group constitutes a significant market segment in shaping demand for competing services.

30 ,

3.5 Summarising on

Health Insurance Policy

In summary, more reliance on section 51 transfers for the provision of benefits to health fund contributors, and the provision of direct subsidies to social welfare beneficiaries so that they can elect to be contributors, could bring the

Commonwealth Government much closer to realising its basic aims. These aims are the control of costs, promotion of equity, achievement of political benefits, and control of inflation.

With careful attention to the design and implementation of the proposed changes, the health insurance system could give more choice but simple choices in terms of values and costs. Community dissatisfaction with the inability of Governments to develop a sustainable insurance system would be contained. The health system would also be

stronger, with more Australians assuming personal responsibility for a proportion of their medical and hospital expenditures. In the eighties, a strong health insurance system could be vital to the accomplishment of the nation's health, welfare, and economic objectives.

Sound policy for a sustainable health insurance system along the lines outlined above would provide the Commonwealth Government with an opportunity to generate political benefits in proportion to the expenditures it will be incurring. In realigning its health expenditures,

the Commonwealth Government would also be bringing its future financial commitments more under its own control.

31

4 DIAGNOSING

PARTICULARIST INTERESTS

Generally, Governments in Australia are happy to rely on public and quasi-public subsidies for reimbursing relatively autonomous medical interests and institutions. Were it not for these interests and institutions, Governments could be directly responsible for providing these services. Recognised hospitals, community and proprietary hospitals, private medical practitioners, and health benefit organisations

all have their role to play. In turn, each of these

institutions and interests welcome, rely upon, and actively seek out public subsidies to fulfil their role.

Collectively, the arena for medical and hospital services becomes a commitment between these institutions and interests. They are linked by way of consultative structures to Governments, particularly the Commonwealth in the case of enterprises and State and Territory Governments in

the case of agencies, they have some say in the policy-making process, and they create a commitment from Governments to their maintenance. They are not without their policy differences, of course. For the most part, however, these policy differences are over the size of taxpayer and health insurance subsidies, who will get what proportion of the available funds, and what controls will be attached

to funding. Policy issues which involve the particularist interest, such as rationalisation of hospital capacity or policy choices for reimbursement, are seldom raised.

As previously noted, financial intermediaries will be less generous in the eighties than they were during the seventies. Most likely, the eighties will be characterised by political and community demands for restraint in Governments' commitment. Slower growth in Government revenues and continued heavy demand on the Commonwealth Government for social welfare services and income support programs will automatically lead to a decline in the proportion of personal meiical expenditures which can be subsidised by the taxpayer. Both consumers and providers are becoming aware that there

is an opportunity cost attached to excessive and unnecessary utilisation of health resources.

Changed incentives are required to increase effectiveness, improve efficiency, and contain costs. In the economic and political climate of the eighties, it will be to the advantage of Governments to eliminate those agency

characteristics which act as barriers to good performance. Two steps are involved. First, particularist interests of service providers must be defined. Secondly, the effects of a changed role and/or pattern of incentives must be assessed.

3i

Our approach to the diagnosis of particularist interests in the provision of health services commences with a delineation of the scope and structure of the action space known as the health domain. To increase our appreciation

of how particularist interests link with issues of effectiveness, efficiency, and cost containment, we must further develop our knowledge of the boundaries, structures, and processes of the health domain.

33

4.1 Service Identification

Probably the best-known system of service identification for human service delivery is that of UWASIS II.l UWASIS describes programs within the framework of fundamental goals, such as health, within the field of human services.

UWASIS outlines: the basic social goals; the services systems which promote such goals; the specific services in such systems; the programs that perform such services; some elements of such programs and suggested program products - in terms of types of persons served and efforts expended on their behalf .... Included in UWASIS are most of the organised, identifiable, and currently operative endeavours ... which are addressed to preventing, ameliorating, or solving human problems and to enhancing the human condition.

(UWASIS II, p 3)

The UWASIS system identifies a minimum of 587 building blocks for human service delivery. These building blocks are described as programs. An example of a program would be the provision of inpatient medical care in an acute care hospital. Within the UWASIS system of service identification, the 587 programs are structured into 231 services, 33 service systems, and 8 goals. Activities which are specifically oriented towards health comprise 79 programs structured into 23 services, 4 service systems, and 1 goal (see exhibit 4) .

Although the UWASIS system of service ,;_dentificatio n for health gives a c omprehensive perspective of the range of services, by itself it is an insufficient basis for diagnosing particularist interests. Our understanding can be facilitated by ordering the basic building blocks

to give: * A structure for the health domain which differentiates retween the major policy subsystems and provides a basis for analysing the political p rocess within and

between subsystems.

* A model for corpo rate and economic analysis of the

interests and institutions in the health domain from which we can develop answers t o questions concerning goals, effectiveness, and efficiency.

These two steps can substantially increase our understanding of what is taking place and why, and what constitutes good performance.

1 UWASIS stands for United Way of America Services Identification System. The standard r e ference is UWASIS II: A Taxonomy of Social Goals and Human Service Programs, United Way of America, Alexandria, VA, USA, 1976.

34

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C

4,2 Structuring the

Health Domain

There would appear to be five basic policy subsystems in the health domain. They centre around:

*

*

*

*

*

Providers of programs and services Governments Financial intermediaries Consumers Professional or union associations.

These policy subsystems can structure (see exhibit 5). particular policy subsystem of analysis.

4.3 Political Analysis

be organised into a quinary Within this structure, any could be the primary focus

The components of political analysis would be the relationships between the interests and institutions in the health domain with the bodies and processes of po}.icy decision-making.

Political analysis would also analyse the behaviour of interests and institutions in relation to: * The formation of factions and alliances. * Competition for the right to provide particular

programs, serve certain consumer groups, or undertake certain functions.

* ' Use of specialist and public media t o promote policy goals.

It is not within the scope of this study to provide

a political analysis of the key interests and institutions in the health domain. Such an understanding is vital, however, for the c orrect diagnosis of particularist interest.

35

4.4 Corporate and

Economic Analysis

The purpose of corporate and economic analysis is to increase further our understanding of the performance and particularist behaviours of interests and institutions in the health domain. From improved understanding comes the ability to make better assessments of policy choices concerned with

increasing effectiveness and efficiency and achieving cost containment.

Concern with issues of effectiveness, efficiency, and cost containment reflects the growing apprehension of the major financial intermediaries with high and rising hospital and medical expenditures. The magnitude of

the increased resources being consumed is one area of concern. Whether patients and the community are getting benefits which warrant the increased cost is another concern. Community benefit is as important as patient benefit because it is the community which is bearing almost all of the cost.

The community, through its financial intermediaries, Governments and health benefit organisations, is directly reimbursing 95 per cent of the costs of recognised hospitals, 85 per cent of the costs of community and proprietary hospitals, and 87 per cent of the costs of private medical practitioners (FY78 figures). The

community also bears the cost indirectly, when high and rising medical expenditures contribute to general inflation.2

The community delegates to doctors and hospitals a high degree of autonomy so that they can be responsive to patient need and flexible in clinical judgment. The community recognises that the primary concern of these providers should be patient care. The community also

expects, however, that these providers should be responsive to community need and prudent in their use of community resources.

2 McHarg and Clarke, op. cit., p 4.

36

The financial intermediaries recognise that the cost to the community of providing patient care can be inflated by:

*

*

*

*

The provision of services with little or no value.

Institutions of the wrong size, whether too big or too small. Institutions in the wrong place which impose unnecessary time costs on consumers.

Laissez-faire approaches to planning and management.

The problem avoidable inflation in medical expenditures, however, not only comes from the way in which health services are provided. It also comes from the way in which health service providers are reimbursed. In some high cost areas, such as inpatient medical programs, pricing policies under community reimbursement have been shifting the auspice of care from that which was or should be community based

to that which is hospital based. Consequently, in Australia, we have too much hospital output at the expense of alternative medical programs and services.

Corporate and economic analysis of the interests and institutions providing programs provides us with a basis for identifying policy options in relation to these issues. Policy choices will, of course, be influenced by political judgments about how to intervene and when.

37

Exhibit 5: THE HEALTH DOMAIN

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4.41 Corporate Analysis

The components of corporate analysis for interests and institutions in the health domain are: * Historical outline: date started; legal entity; agency or enterprise; norms and values; development

of major functions; part of a network or autonomous; if part of a network, centralised or decentralised; corporate, personal, community, or client control;

geographic operating areas; associations and affiliations with other interests and institutions; membership of health allied associations and agencies. * Market characteristics of programs and services:

clients - who are they, what are they, what health needs do they have, what programs do they receive?; channels of distribution of programs, location of offices and staff. * Method of setting objectives, goals, and targets.

* Management style: planning and performance oriented vs. bureaucratic or laissez-faire. * Approach to personnel management. * Method of delegating authority/responsibility and

identifying accountability. * Use of managerial controls in accounting, reporting, budgeting, pricing, and reimbursement. * Use of performance and efficiency evaluation in

planning and management.

38

4,42 Economic Analysis

The components of economic analysis for health-related institutions and interests are: *

*

*

*

*

*

Physical resources: size of institution or interest (number of people); investment in facilities; investment in technology; number and location of offices or service outlets. Source of funds: public and private; paid through which financial intermediaries; into what programs,

services, and service systems. Investment, cost, and price characteristics: capital intensive, labour intensive, or both; ratio of fixed cost to total cost; the relative

significance of the cost of investment within public and private sectors to the cost of particular programs; the effect of pricing on program volume, unit costs, and return on investment; sources of profits, financial surpluses, or discretionary

expenditure, Input characteristics: the mix of labour, technology, and supplies. Output characteristics: type and volume of programs provided.

Service efficiency evaluations,

39

4,5 Policy Prescriptions for Effectiveness, Efficiency, and Cost Containment

By its nature, the delivery of medical services, whether in the doctor's office or in hospital, is a very decentralised activity. Doctors rather than patients make most of the decisions. The way in which we, as a society, have elected

to reimburse doctors and hospitals for their services means that the community will assume responsibility for nearly all of the cost.

The providers of medical and hospital services in Australia demonstrate some limited concern for issues of effectiveness and efficiency but little genuine concern for cost containment. The mechanism for reimbursing doctors and hospitals rewards them for doing more, but at no time confronts them with the benefits and costs of their actions.

Diagnosing the particularist interests of doctors and hospitals in corporate, economic, and political terms provides the basis for identifying administrative choices

which would increase effectiveness, improve efficiency, and contain costs. Preferred choices can then be assessed politically in terms of equity issues and political cost/benefits. Simple advocacy of more or less public or private involvement is unlikely to be relevant. The answer is most likely to be found in changed incentives to exploit the enterprise potential of hospitals and private medical practice in the public good.

40 \

I'

i

II II

5 REFERENCES AND SOURCES OF INFORMATION

Blanpain, Delesie and Nys, National Health Insurance and Health Resources: The European Experience, Harvard University Press, Cambridge, 1978

Colebatch, Hal, 'Public and Private in the Governmen·tal Process', Paper presented at Conference on the Public/ Private Dichotomy, Australian National University, September, 1979

Colebatch, Hal, 'On Shaking Hands with an Octopus: Organisational Linkage and Corporalist Explanations', Unpublished Paper Commonwealth Department of Health, Australian Health

Expenditure 1974-75 to 1977-78: An Analysis, AGPS, 1980 Commonwealth Department of Health, Submission to Commission of Inquiry into the Efficiency and Administration of Hospitals, December, 1979 Commonwealth of Australia, Final Report of the Senate

Select Committee on Medical and Hospital Costs, Government Printing Office, Canberra, 1980 Commonwealth of Australia, Report on Rationalisation of Hospital Facilities and on Proposed New Charges - A

Discussion Paper, AGPS, Canberra, 1979 Davis, Karen, National Health Insurance: Benefits, Costs and Consequences, Brookings Institution, Washington, 1975

Feder, Holahan, and Marmor (eds.), National Health Insurance, Urban Institute, Washington, 1980

Hospitals and Health Services Commission, A Discussion Paper on Paying for Health Care: A Review of the Financing of Health Services in Australia and a Discussion of Possible Alternative Arrangements, AGPS, Canberra, 1978

Lindblom, Charles and Cohen, David, Useable Knowledge: Social Science and Social Problem Solving, Yale University Press, New Haven, 1979 McHarg, Malcolm and Clarke, Ian, Accounting, Reporting

and Budgeting: A system which gives leverage to policies for increasing effectiveness, improving efficiency and containing costs in hospitals, Report to the Commission of Inquiry into the Efficiency and Administration of Hospitals, Sydney, 1980 Rivlin, Alice, Systematic Thinking for Social Action,

Brookings Institution, Washington, 1971

Schultze, Charles, The Public Use of Private Interest, Brookings Institution, Washington, 1977

UWASIS II: A Taxonomy of Social Goals and Human Service Programs, United Way of America, Alexandria, 1976

Wamsley, Gary and Zald, Mayer, The Political Economy of Public Organisations: A Critique and Approach to the Study of Public Administration, Heath, Lexington, 1973

Paper D.

SURVEY OF A SAMPLE OF RECOGNISED HOSPITALS

Commission of Inquiry into the Efficiency and Administration of Hospitals.

HOSPITAL SURVEY

In April - May 1980 the Commission undertook a survey of a sample of recognised, public, acute hospitals to gauge the availability and comparability of hospital expenditure and performance data. The survey was a test to assess the feasibility of undertaking a national survey. Time considerations precluded a national survey from being undertaken and the data

from the sample survey is described below.

This survey is published not as a scientifically-based project, only as a valuable indication of the different costs and usage over the small range of hospitals surveyed.

A stratified random sample was drawn from within a classification containing 630 hospitals organised by size and State or Territory. All specialist and/or non acute hospitals, all hospitals with five or fewer beds, and all hospitals known to have opened later than 1968-69 were excluded.

Five hospitals in the two Territories were included in the sample giving a total of 65 hospitals containing 13 060 beds.

This was not a randomly selected sample of all Australian hospitals care should be taken to interpret the results accordingly. Similarly the sample is too small to be representative even of acute care recognised hospitals.

The questionnaire was designed to collect basic information on hospital

performance, staffing, receipts and payments for both 1968-69 and 1978-79. Sixty completed questionnaires were returned and 58 were finally analysed by group according to size. The groups were Group 1 (6-50 beds), Group 2 (51-200 beds), Group 3 (201 500 beds) Group 4 (more than 500 beds). The

1

Commission thus analysed information for about 9 per cent of general

acute care public hospitals , and about 19 per cent of the beds in such institutions.

Findings

The information collected by the survey was of great interest to the

Commission in that it supported some of the impressions gained during hospital visits. Since the sample used is clearly an inadequate basis for precise statements about expenditure and performance trends in different groups of hospitals in Australia , the results presented should be interpreted as indicative, rather than conclusive.

While the questionnaire was designed to collect what was considered to be reasonably basic data the standard of information provided by a number of

hospitals was generally disappointing, even allowing for time constraints. The irregular availability of 1968-69 data is perhaps understandable but the

incompleteness of the data available for 1978 79 in hospitals i_s 3 matter of concern .

The findings are discussed by hospital Group (1, 2 3 and 4) and some

general findings are presented at the end.

Hospitals of 6 50 beds (Group 1)

Tile 16 hospitals surveyed in this Group could be said to be of three

basic types:

small country hospitals with predominantly geriatric patients. little pressure on beds, long length of stay and low occupancy rates

small suburban short -stay surgical hospitals with a predominance of private patients and medium occupancy, and

small isolated hospitals in remote areas of, in particular, Queensland and Western Australia.

2

There was wide variation in the performance of hospitals in the size range. The major trend to emerge was that while patient numbers declined between 1968-69 and 1978-79, length of stay tended to increase. Eight out of the 14 hospitals experienced positive increases in length of stay, the largest increase being from 13 to 35 days. These changes could be the result of reduced pressure on beds, changes in patient load and mix (geriatric) , or a combinatim of both.

Bed numbers remained static overall, the largest increase . wh i ch

occurred in one institution, being from 12 to 22 beds. This also explained the large percentage change in operating expenditure for this particular hospital.

The number of inpatients treated for 1978-79 varied from a high of

1992 (33 beds) to a low of 137 (10 beds). Most hospitals treated between 300 to 500 inpatients. Country hospitals tended to treat fewer patients than city hospitals.

The percentage of privately :_nsu r ed patients var i erl from 16 per cent

to 82 per cent of total inpatients treated. With the exceptions of Queensland and Tasmania, most patients in hospitals in the other States and Territories were privately insured.

Where outpatient figures were supplied, the tendency was for a l arge

percentage increase in the ten year period. The largest outpatient load was at a hospital in central Australia , with 22 700 attendances (1978 -79 ) - a 100 per cent increase over the 10 years. This was atypical. For the other hospitals the actual numbers involved were small - an average of 800

registered outpatients per hospital each year - but there was a tendenc y f or people to attend more frequently and for more occasions of service to be recorded than was the case in 1968-69.

Occupancy varied from a high of 86 per cent to a l ow of 29 per cent. Half the hospitals had occupancies below 65 per cent, but these figures do not accurately reflect activity because of the variable lengths of stay in many.

3

In 1978-79, expenditure levels for these hospitals ranged from $150 000 to $1.4 million. There was no consistent pattern between changes in the level of expenditure and changes in activity for the two time periods. There were also large variations in cost data for 1978 -79 Cost per patient treated varied from $386 to $2279 and cost per bed-day from $82 to $275 . These figures reflect wide variation in average length of stay for this group of hospitals (from 4 to 35 days) and the number of patients treated .

Table 1 Hospitals (6- 50 beds) Cost Indices , 1978 79

Hospital

1

2

3

4

5

6

7

8

9

10 11 12 l3

14 15 16

Notes: (a)

Cost per Bed-Day

$

81 111 89 86

74 275 142 55

65 64 n a .

62 51 177 82 213

Cost per Patient Treated (a)

$

746 438 386 1274 1962 1291 1285

519 830 2279 n.a

916 1163 658 2061 1145

Inpatients cnly (i.e. not adjusted for outpatient attendance)

These variations persist for the components of hospital costs elsewhere . Table 2 presents staffing information for this group of hospitals.

4

Table 2 Hospitals (6-50 beds) Staff-to-Patient Ratio

Ratio of Staff to Daily Average of Occupied Beds

Hospital 1968-69 1978-79

1 1.65 1.61

2 n.a. l.67(a)

3 1.55 l. 70

4 n.a. 1.64

5 1.23 l. 72

6 3. 92 4 43

7 3.21 2.84

8 n.a. 1.29(a)

9 1.38 1.46

10 1.25 1.57

11 n.a. n.a .

12 n.a. 1.38

13 n.a. 1.26

14 n . a . 4 22

15 2.32 2.14

16 n .a 3 7l(a)

Note : (a) Estimated

Where the information was available, the ratio of staff to daily average has

not altered substantially.

A number of hospitals had marked changes in activity over the period. Seven out of 14 that supplied information experienced a reduction in inpatient numbers but no reduction in staff or bed numbers occurred (except one marginal decrease).

The high ratio for hospital 16 is partly explained by the large

outpatient component which is not reflected in the daily average. Hospitals 6 and 14 appear to be short stay surgical although hospital 2 has similar characteristics but has a lower ratio. With this group of hospitals the daily average may not be the most useful indicator of activity because it is sensitive to the high length of stay of some of the hospitals.

5

This information poses questions about the role of the small hospital in country and metropolitan areas, how efficiency is being monitored, and about decisions which should be taken in those hospitals where there has been a reduction in activity.

Table 3 Bed Size (Group 1 - 6--50 beds)

(Figures are for 1978-79 and percentage change is since 1968-69)

Occupancy Gross

Available Inpatients Available Operating

Hospital Beds Olange Treated Olange Beds Payments Change

% % % $m %

1 26 30 571 53 55 .426 405

2 22 83 1521 n.a. 72 566 948

3 33 0 1993 44 69 .768 392

4 10 0 137 -56 56 .175 334

5 32 - 3 296 -44 68 581 424

6 16 0 365 -16 29 .471 317

7 36 0 516 18 35 .663 346

8 36 33 962 61 69 .499 637

9 21 24 444 41 74 368 821

10 30 20 198 -39 64 .451 761

11 6 n.a. 142 n.a. n.a. .150 n .a

12 28 0 355 - 9 52 .325 363

13 34 0 469 -18 86 .546 465

14 15 - 6 527 42 36 .347 442

15 48 0 413 -47 59 .851 508

16 26 -30 1236 54 74 1.416 624

Notes: (a) Private and Compensable (b) Equivalent Full Time Staff (c) Plus 4 part time

6

I i

I

Private Average

Patients Length

as % of Operations Total Stay. All

Inpatients(a) Performed Olange Staff( b) Dlange Patients Hospital

% % %

43 223 n.a. 23 0 7 9 2 l

n.a. 250 n.a. 25.0(c) 108 3.8 2

65 1752 67 38.5 11 12 3 3

77 0 -100 9.2 n.a. 14.9 4

60 150 - 39 37.2 56 26 . 6 5

16 310 107 20.8 0 4.7 6

21 107 32 36 . 2 5 9 0 7

76 147 - 55 32.2 n.a. 9.4 8

84 45 81 22.7 108 12.8 9

63 34 - 70 30.1 99 35.5 10

0 0 0 n .a . n .a. 2 3 ll

46 173 119 20.0 n .a. 14 9 12

l 165 27 36 6 n a . 22 6 n

n.a. 0 0 22.8 n.a. 3. 7 14

n.a. 0 0 60 7 7 25 l 15

n.a. 230 - 2 73 n.a. 5.4 16

Hospitals of 51-200 beds (Group 2)

Eighteen hospitals were surveyed in this category, ranging in size fran

51 to 147 beds. Ten had increases in bed numbers, from a minimum of two or

three to a maximum of 87 , three had no change and five had reductions.

The only uniform trend in this group of hospitals was an increasing

involvement in community services. In 1978 -79. 11 of the 18 hospitals provided or supported domicilary care , rehabilitation, day centre/hospital meals on wheels or health centres. This changing role is not adequately reflected in the traditional performance indicators of adjusted daily average

and length of stay.

7

Five of the 18 hospitals experienced a decline in the number of inpatients treated, varying from a marginal 0.7 per cent to a maximum 38 per cent. Twelve showed some increase, varying from 2 per cent to 65 per cent. In absolute terms, inpatients treated varied from a minimum of 884 to a maximum of 6567.

Length of stay declined in all but two hospitals. It varied from a high of 18.6 to a low or 5.6 for 1978-79. The proportion of day-only patients ranged from a high of 34 per cent to a low of 4.2 per cent. Five hospitals did not supply information on this category of patient.

The only clear pattern to emerge from the generally poor information

provided on outpatient services was the provision of more services per registration.

Occupancy varied from a high of 83 per cent to a low of 44 per cent.

For 1978-79, expenditure ranged from $0. 6 million to $7 .6 miUion the percentage growth in the period from 382 per cent (for a hospital with a 55 per cent reduction in beds) to 1347 per cent (for a hospital in which bed numbers increased by 360 per cent).

Cost per patient treated varied from $582 to $2212 . cost per bed day from $47 to $239. Except for the hospital providing a large number of community health staff the variations could not be accounted for by variations in activity.

8

Table 4 Hospitals (51-200 beds) Cost Indices, 1978-79

Hospital Cost per Bed-Day

$

1 85 .

2 75

3 142

4 239 (b)

5 96

6 80

7 102

8 103

9 47

10 70

11 95

12 88

13 ll8

14 81

15 93

16 114

17 201

18 157

Cost per Patient Treated (a)

$

669 1046 838 2212 (b)

582 864 678 1067

637 678 1585 776

844 1085 805 1345

1242

Notes: (a) Inpatients only (b) This hospital provided approximately 40 community health staff, and services a number of other hospitals with food, drugs etc.

These variations persist for the components of hospital costs itemised in Table 5.

9

Table 5

Hospitals

(51-200

beds)

Expenditure

Breakdown

for

Non-Labour

Costs,

Year Ended June 1979

MEDI

C AL

& SURGICAL

ADMINISTRATION

EXPENSES

FOOD

SUPPLIES

DOMESTIC

CHARGES

Cost

per

Cost

per

Cost

per

Cost

oer

Cost

p e r

Pati

e nt

Cost

per

Patient

Cost

per

Pati

e nt

Cost

per

Patient

1-DSPITAL

Treated

Treated

Bed-Da:t

Tr a t d

Bed-Day

Treated

$ $ $

$ $ $ $ $

1

3.89

30.78

4.81

38 .

06

2.

71

21.42

3 64

28.811

2 3 .

24

31.48

4.52

6 3 09

2

53

35 . 3 5

2

93

40 . 83

3 7

25

42 . 77

7.03

41.12

2.38

11.04

4 . 51

2.<;.61

4 22.36

207

Ol

6.2 2

57

54

22.4

9

200

18 8 15 75

47

5

5.26

31.83

2.13

12

88

') 49

15.06

2.96

l7

90

6

3.18

34.38

2 . 51

27 . 10

3 1 2

33 . 67

1.10

11.89

7

8.05

53.26

3.03

20.03

3.26

21.58

2.43

16.06

8

5.36

52.48

2.50

24.47

3.01

29.46

.90

8 . 81

9

2.47

33.54

2.40

32.60

1.81

24.66

.8fi

ll

7?

10

2.17

21.04

3.04

29.51 2

35

22.85

2 . 95

?8.fi 2

11

1.06

17.68

2.80

26.66

2.88

47.96

79

l3

2?

12

3.94

34.86

2

90

25.65

2.53

'22.42

1.51

1"3.3

'2

13

6.24

44.36

4.48

31.84

3.86

27.45

2.07

14.71

14

4.80

50.32

2

99

31.33

292

30.56

l.

72

18 Ol

15

1.55

18.09

3.40

39.74

3.51

41.01

3.17

37.10

16 4 .

29

30.33

2 78

19 .61

2 . 84

20 . 05

1.40

9 . 90

17

8.25

55.15

8.36

55 . 87

7.19

48.05

?.

71

18.1'>

18 8 . 95

70 .

81

8

66 68

.54

5 . 95

47

05

l 85 14

fi3

MEAN

6.33

47.78

4 . 14 36 .

99

4.32

39.49

2

53

2 '2

'>4

Table 6 indicates that, except for hospital 9, all hospitals had a higher ratio of staff to daily average in 1978-79 than they had in 1968--69 Sane increases were only marginal, others relatively large.

For the hospitals that recorded large increases in bed numbers, higher staff ratios may be partly explained by this growth in capacity and the expansion of community services.

Table 6 Hospitals (51-200) beds Staff to Patient Ratios

Ratio of Staff to Daily Average of Occupied Beds

Hospital 1968-69 1978--79

1 l. 70 2.02

2 1.22 l. 37

3 2 05 3 16

4 n. a> 4 30(a)

5 1 64 2 19

6 1.31 l. 70

7 1.59 2 43

8 l. 75 2.28

9 1.46 1 27

10 1.50 1.72

11 1 50 2 16

12 n.a. 1.90

13 2 19 2. 72

14 n.a. n.a.

15 2.26 2 41

16 1.90 3.04

17 l. 75 4 98

18 n.a. 2.65

Note: (a) Approximately 40 Community Health Staff

11

Table 7 Bed Size (Group 2 - 51-200 beds) (Figures are for 1978-79 and percentage change is since 1968 69)

Available Inpatients

Hospital Beds Change Treated

1 105 + 6.0 4281

2 70 - 12.5 1805

3 147 5.8 6041

4 111 +362 0 3453

5 136 + 56.0 6573

6 98 o.o 2551

7 98 0.0 2246

8 130 1.6 2117

9 55 31.0 1062

10 75 36 .0 1714

11 70 - 11.0 884

12 63 5.0 1917

13 127 - 9.0 4703

14 72 38 . 0 2071

15 48 - 14.0 1094

16 64 0.0 1842

17 29 _; 55.0 1018

18 68 5.0 1963

Notes : (a) Private and Compensable (b) Equivalent Full Time Staff

12

Occupancy Gross Available Operating Change Beds Payments Change

%

36.0 81.0 2.9 487

- 0 7 73.0 1.1 386

32.4 66.0 5.0 564

n.a. 79 0 7 6 1347

65.0 77.0 3.8 769

38 0 770 2 2 560

- 6.3 45.0 1.6 467

4 2 44 .0 2 1 564

18.0 720 0.6 608

53 . 0 61_ .0 1.2 9 ·.6

- 3.1 58.0 1.4 48 i

9.0 74.0 1.5 440

2.0 72.0 3.9 548

7.0 83 0 1.7 747

4.0 73.0 1.2 482

2.0 56 0 1.5 423

-38.0 64.0 1.4 382

-18.0 64 5 2. 4 535

Day only Private Average

Patients Patients Length

as % of as % of Operations Total Stay, All

Inpatients Inpatients(a) Performed Olange Staff(b) Olange Patients Hospital

% % % %

n.a. n.a. 2881 n.a. 186 47 0 7.9 l

n.a. 59 376 n.a. 70 1.5 17.1 2

9.0 58 2894 126.0 308 47 0 5 9 3

15.0 53 1493 n.a. 385 243.0 9.4 4

20.0 7l 4205 95.0 230 106 0 5 8 5

15.0 39 991 24.0 128 42.0 10.8 6

n.a. 62 1017 n.a. 104 15.5 6 6 7

5.0 43 424 -10.0 128 24.0 9 .8 8

34.0 61 193 36.5 50 47.0 13 6 9

n.a. 52 822 35.0 78 86.0 9.5 10

12.0 36 278 8.0 87 22 5 16.6 11

8.0 30 767 30.0 90 n.a. 8 .8 p

6.0 48 1340 54 0 248 18 0 7 l 13

14.0 53 398 -37.0 n.a. n.a. 10 . 5 14

24.0 2 174 n.a. 85 33 . 0 ll. 7 15

4.2 n.a. 186 n.a. 109 21.0 5.9 16

6.5 n.a. 483 -21.0 93 28 0 6 7 17

n.a. n.a. 554 95.0 113 64.0 7.9 18

Hospitals 201-500 Beds (Group 3)

Seventeen hospitals were surveyed, including some teaching hospitals

The sample was based on the approved number of beds but three hospitals had

fewer than 200 available and staffed beds in 1978-79 The lowest had 180 while the highest had 468.

Expenditure for 1978-79 ranged from $4.3 million to $30 8 million.

Variations in the cost per bed-day and cost per patient treated can be seen in Table 8 below.

l3

Table 8 Hospitals (201 500 beds) Cost Indices, 1978-79

Hospital

1

2

3

4

5

6

7

8

9

10 11 12 13 14 15 16 17

Cost per Bed-Day

$

129 225 161 139 100 226

96 126 106 131

90 275 138 153 163 167 180

Cost per Patient Treated

$

887 1544 1205 979

750 2323 700 824 1097 1042

626 1128 1425 1391 1279 1276 1339

(a)

Similar variations exist for the four components of hospital costs set out in Table 9. It will be seen from this table that medical and surgical costs per bed day varied from $1.24 to $27.54, while administration costs bed day varied from $0 .94 to $12.54

14

Table 9 Hospitals

(201-500

beds) Expenditure

Breakdown

for

Non-Labour

Costs,

Year

Ended

June

1979

MEDICAL

& SURGICAL

ADMINISTRATION

EXPENSES

FOOD

SUPPLIES

DOMESTIC

CHARGES

Cost per Cost per Cost per Cost per

Cost per

Patient

Cost per

Patient

Cost per

Patient

Cost per

Patient

}-()SPITAL

Bed-Day

Treated

Bed-Day

Treated

Bed-Day

Treated

Bed-Day

Treated

$ $ $ $ $ $ $

$

1

12.13

83.47

5.97

41.06

3.61 24.81

4.43

30.44

2

24.55

168.61

12.45

85.47

3.98

27.32

6.91

47.44

3

16.10

120.14

8.89

66.35

5.09

37.95

4.77

35.57

4

12.67

89.51

3.80

26.82

3.47

24.52

3 . 96

27.99

5

3.35

25.21

3.18

23.90

4.37

32.82

4.33

32 . 56

6

27.54

283.22

6.53

67.20

4.87

50.09

5.94

61.07

7

8.31

60.54

1.81

13.19

2

27

16.51

1.03

7.49

8

7.68

50.21

4.80

31.36

2.53

16.50

1.03

6.7 6

9

1.24

12.76

4.

77

49.23

2.68

27.59

.97

10.04

10

6.90

55.01

3.59

28.59

5.48

43.69

2.78

22.18

ll

5.65

36.94

.94

6,12

2.69

17.60

4.68

30.58

1 2

19.89

81.54

9.78

40.09

7.10

29.11

9.72

39.84

l3

10.89

11 2

.78

5.44

56.34

4.26

44.08

2 .17

22.44

14

6.82

61.81

5.68

51.53

5.27

47.81

7.65

69.34

15

9.25

72.43

6.82

53.44

49

35.17

5.65

44.26

16

13.54

103.64

9.77

74.78

3.15

24.12

2.21

16.90

l7

14.17

105.50

5. 72

42.59 5

99

44.63

1.43

10.67

MEAN

11.80

89.60

5.87

44.59

4.19

32.01

4.09

30.52

Marked variations and inconsistencies became obvious when considering expenditure and activity levels in the light of bed numbers, inpatients and outpatients treated and length of stay.

Tne ratio of staff to daily average for all hospitals in Group 3

increased for the 10 year period covered by the survey. (See Table 10.) This applied not only to hospitals which had an increase in the number of available beds during the period but also to those hospitals which had a decrease in the number of available beds. There appears to be no simple explanation for the differences within the group except to note that the three highest ratios in 1978-79 are for teaching hospitals.

Table 10 Ratio of Staff to Daily Average of Occupied Beds

Hospital 1968 -69 1978-79

l :Z.39 2 98

2 n.a. 4 70

3 2.40 3. 25

4 2.41 3.28

5 2.13 2.47

6 3.41 4.85

7 1.41 2.42

8 2.54 3.44

9 2 28 2 57

10 1.84 3.39

11 n.a. 1. 24

12 4.00 6.55

13 2.41 3.48

14 n.a. 3.54

15 n.a. 4.09

16 n.a. 3. 23

17 3.72(e) 4 05(e)

Note: (e) Est,j.mated

These hospitals could probably be described as a transitional group some beginning to demonstrate the complexities of teaching hospitals. On average, staff ratios are higher than for the smaller hospitals but are not as high on average as for the group of teaching hospitals surveyed.

16

I I

Table 11 Bed Size (Group 3 - 201-500 beds) (Figures are for 1978-79 and percentage change is since 1968-69)

Available Inpatients

Hospital Beds 01ange Treated

1 374 28.1 15 986

2 458 - 0. 2 19 194

3 266 8.1 8901

4 n .a. n.a. 19 534

5 280 7.7 12 394

6 466 n.a. l3 276

7 461 4.1 12 091

8 191 13.0 7 251

9 180 15.4 3 885

10 208 10 .3 6 482

11 207 120.2 8 865

12 277 7.7 17 302

13 447 8.5 10 876

14 251 36.4 6 395

15 252 - 4.9 8 165

16 198 34.7 7 009

17 324 2.5 12 434

Notes: (a) Private and Compensable (b) Equivalent Full Time Staff

Occupancy Gross Available Operating Change Beds Payments Change

40.3 80.80 14.2 528.0

65 .3 78 90 29 6 451 .9

29.9 68.40 10.7 422.1

58.5 82.37 19 l 554 8

84.3 91.17 9.3 602 6

n.a. 80 .30 30 8 n .a.

27.7 52.35 8.5 465.7

34 .6 67 .96 6 0 624 6

28.7 62.00 4 3 487.0

13 .8 68 10 6 8 688 0

120 .2 76.71 5.5 1147 6

55.0 69 40 19 5 661.1

22.4 69.04 15.5 481.1

46.5 70.36 8 9 511 ' 5

34.7 69.52 10.4 560.7

79 4 74 23 8 9 7139

38.7 80.42 16.6 n.a.

17

Day only Private Average

Patients Patients Length

as % of as % of Operations Total Stay, All

Inpatients Inpatients(a) Performed Dlange Staff(b) Dlange Patients Hospital

% % % %

12.2 78 7 556 35.1 882.4 49.3 6.9 1

28.6 59 9 623 n.a. 1697 .0 n .a. 6 8 2

20.5 71 4 368 -13.6 590.0 10.3 7.5 3

6.0 72 10 054 n.a. 1238.7 51.0 7 1 4

24.9 51 7 252 114.9 628.3 50.3 7.5 5

6.4 40 6 324 22 0 1812.2 76 .1 10 6 6

6.1 35 9 167 62.1 n.a. n.a. 6.4 7

4.9 59 4601 29 7 446 .3 50 . 2 6 5 8

7.8 57 2 631 -14.9 282.1 3.3 10.0 9

24.4 48 2 043 2 8 479 7 67 5 7 8 10

11.9 60 6 075 127.4 292.3 n.a. 6 6 ll

11 .8 65 10 004 55 .8 1271 8 68 2 4 1 1?.

n.a. 5 3 288 8.1 1071.4 41.7 10.4 13

3.7 1 2 333 28 3 584.6 17 . 2 9 1 14

6.4 4 3 236 -17.4 716.4 n.a. 7.8 15

n.a. n. a. 2 505 105 0 474.0 n.a. 7.6 l!J

n.a. n.a. 5 697 49.9 1027.0 5.3 7.4 17

of 500 beds or more 4)

Seven hospitals were surveyed in this grrup, one fran each State and one fran the Australian Capital Territory. In the main, they consisted of large metropolitan teaching hospitals.

A number of changes were consistent for all the hospitals. The average length of stay declined for all between the two periods, the shortest being 6 days and the longest, 8 8 days for 1978-79. The largest decline was 11 days. Inpatient numbers increased for all, substantially for some, without a parallel increase in beds. One hospital drubled in size another had a bed decrease of 25 per cent, the remainder had bed increases of between 0 .3 and 35 per cent. Occupancy rates in this group remained reasonably stable and the

increase in the number of inpatients treated has been managed by shortening

18

I

!I'

I

the average length of stay. It appears that there is a strong relationship between length of stay and bed availability - as pressure is exerted on beds , length of stay declines which may increase costs overall.

Information was supplied for six hospitals on the number of operations performed. For the two periods, there were increases in all six hospitals but the magnitude of the increase varied considerably. Table 12 looks at the changing numbers of operations performed , taking into account variations in

t he numbers of patients treated.

Table 12 Ratio of Operations to Patients Treated

Hospital Ratio 1968-69 Ratio 1978-79

1 1:1.7 1:2.5

2 n .a. 1·2 1

3 1:1.4 1: 3.1

4 1:1.8 l 3 2

5 1:2.1 1:3.5

6 2 - 3 1 2 . 4

7 1:1.5 1:1. 2

The results suggest that surgical work has dropped as a proportion of

total patients in 1978-79 compared to 1968-69. Proportionately less su rgica l work is being performed in 1978-79 than it was in 1968-69, although it has

increased in absolute terms.

In those hospitals where complete information was available outpatient registrations declined but attendances and occasions of service increased. Fewer individuals presented but once an outpatient they attended more frequently and had more services by way of tests and other procedures

Concurrently, the number of diagnostic services increased considerably in some areas.

All seven hospitals showed absolute increases in the number of X rays performed, the range of increase varying from 7 per cent to 65 per cent. Three hospitals were not able to indicate 1968-69 figures for pathology and pharmacy. However, there were marked increases in the number of pathology

tests in those hospitals providing figures and an increase in pharmacy issues similar to that for radiology services. It is not possible to draw

19

conclusions from these figures because of the difficulty in providing standardised output measures in diagnostic areas and also the differences in recording policies between hospitals.

Expenditure varied from a low of $23.5 million · to a high of $44 4 million. In four hospitals bed numbers remained constant between the years but expenditure rose by between 500 per cent and 2000 per cent.

In 1978-79 cost indices in Table 13 show a variation in cost per patient treated from less than $1000 to more than $2000 . Bed day costs ranged from $155.08 to $244.49.

Table 13 Hospitals (6-50 beds) Cost Indices, 1978-79

Hospital

1

2

3

4

5

6

7

Cost per Bed-Day

$

187 244 127 213 232 191 155

Cost per Patient Treated

$

1642 2160 1028 1285 2054 1690

966

(a)

Expenditure breakdowns for non-salary and wage items are shown in Table 16. As before, there is evidence of considerable variations in the cost of providing what would appear to be similar services in hospitals of broadly similar size, type and location.

The inter-hospital variations were most marked in this group of

hospitals, particularly for staff levels.

20

It is not surprising to find that hospitals with high costs per bed-day and per patient treated have the highest staff to daily average ratios (see Table 15). Although all seven hospitals had a higher ratio in 1978-79 than 1968-69 , the size of this growth varied from 0. 3 staff per patient

(hospital 1) to 2.0 (hospital 5). Furthermore, there were significant variations between hospitals in the ratios existing in both 1968 ·69 and 1978-79.

21

Table

14

Hospitals

(500+

beds) Expenditure

Breakdown

for

Non-Labour Costs, Year

Ended

June 1979

MEDICAL

& SURGICAL

ADMINISTRATION

EXPENSES

FOOD

SUPPLIES

DOMESTIC

CHARGES

Cost

per

Cost

per

Cost

per

Cost

per.

Cost

per

Patient

Cost

per

Patient

Cost

per

Patient

Cost

per

Patient

HOSPITAL

Bed-Day

Treated

Bed-Day

Treated

Bed-Day

Treated

Bed-Day

Treated

$ $ $ $ $ $ $ $

l 24.62 215.91 7.75 67.92 4.17 36.57

5.25

46.04

2 32.47 286.82 5 .

48

48.39 4.85 42.81

8.44

74 .

53

3 16.94 136.89 3.47

28.02

2.96 23.96

2.39

19.32

4

13.60

82.13 9 .

84

59.39

4.09 24.70

1.51

9.12

5 28.85 255.63 7.81 69.17

3.00

26.63

6.95

61.57

6 16.49

146.05

6.55 58.00 4.17 36.91

4.40

38.96

7 9.83* 61.22* 4.57 28.45 3.71 23.13 1.61*

10.00*

MEAN

20.40

169.23 6.49 51.33 4.33 34.99

4.36

37.07

*

Undernumerated

Table 15 Ratio of Staff to Daily Average of Occupied Beds

1 Hospital

1

2

3

4

5

6

7

1968-·69

3 . 2

3.8 1.7 3.3 2.6 3.1 2.6

1978-79

3 5

5.0 2.9 4.9 4.6 4.3 3.3

It would appear that the impact of technology , as reflected in rising staff-to-patient ratios, has had a greater impact on the teaching hospitals. If the application of technology is greatest in the large teaching hospitals , then it is possible to see the link between technology, staff and increasing expenditure.

T.:ible 16 Bed Size (Group 4 501+ (Figures are for 1978-79 and percentage change is since 1968 -69)

Available Inpatients

Hospital Beds Doange Treated

%

1 590 24.0 21 481

2 591 11.0 20 593

3 1128 - 0.3 40 003

4 728 35.0 31 119

5 553 102.0 18 951

6 589 4 8 24 405

7 458 -25.0 16 604

Notes: (a) Private and Compensable (b) Equivalent Full Time Staff

Occupancy Gross Available Operating Doange Beds Payments Doange

% % %

81 87.0 35 2 538

17 84 0 44 4 522

35 83.5 41.1 632

75 71.0 39 9 630

271 83.0 38.9 131 6

35 68 4 28 0 ?67

22 80.6 23.5 408

23

Day only Private Average

Patients Patients Length

as% of as % of Operations Total Stay, All

Inpatients Inpatients(a) Performed Change Staff(b) Change Patients Hospital

%

28 50 8 591 25.5 1797 31 7.1 1

14 46 9 727 n.a. 2517 41 8 8 2

14 17 22 594 5.5 2564 55 6.9 3

n.a. 21 9 872 36 .4 2518 73 6. 0 4

17 49 5 770 138.7 2115 218 8.9 5

n.a. 5 6. 924 33.1 1716 38 8 8 6

17 72 16 511 1.2 1241 - 8 6.2 7

General Findings

Some trends emerged from the data despite the limitations of the sample

size.

On average as the size of the hospitals increased the staff to patient

ratios rose and the change in the ratio between the two points in time was greater the larger the hospital. It could be hypothesised that the rising ratios, both over time and within hospital size, is a reflection of the impact of technology.

The impact of technology has no doubt been more strongly felt in the

larger hospitals. This impact eventually diffuses from the larger to the smaller hospitals. whether this process will eventually encompass all hospitals or whether there is a minimal si-e (say, 100-200 beds) at which technological development can be accommodated without undue increases in costs is unclear.

The proportion of privately insured patients was very high for some of

these public hospitals. In the 6-50 bed hospitals, the proportion of private patients ranged from 0 per cent to 84 per cent. For the 51 200 bed group from 1 per cent to 78 per cent and for the more than 500 bed hospitals it was between 5 per cent and 72 per cent. As expected, the low proportions referred

24

to hospitals in either Queensland or Tasmania, where the provision of hospital facilities to private patients in public hospitals differs from that in the other States .

The level of hospital payments to Visiting medical officers was obtained

from many of the hospitals surveyed. In 1978-79, total payments to visiting

m edical officers i n Australia amounted to morethan $85 7 million, representing 3.2 per cent of total current expenditure by public hospitals. Ta ble 17 gives the proportion of visiting medical officer payments to the

total salaries and wages bill for the four groups of hospitals.

Table 17

V.M.O. V.M.O. Payments to

Payments Total Salaries Total Salaries

$ $ %

6-50 beds 334 497 5 952 335 5 6

51-200 beds 1 901 292 28 908 683 6.6

201-500 beds 5 530 089 222 995 090 2.5

501 + beds 6 196 965 184 047 973 3 4

TOTAL 13 962 843 441 904 081 3 1

Many of these variations in hospital expenditure and performance may be

explained by taking into consideration such items as casemix, which was not covered in this survey. However, one matter of concern for the Comm ission was t he absence of non-comparability of basic management i nformation. This raises i mportant questions about what data should be available nationally. who should

be collecting it and how it could be used most effectively .

The information provided by the surve y raised a number of questions

about the future role of the hospitals in the present system:

25

24002 (8 1- l

Will there be a slowing in the rate of growth of teaching hospitals or will they continue to consume an increasing proportion of the total health bill?

Is the community receiving value for money from small hospitals or could more efficient use be made of the resources involved?

What should be done about hospitals where there has been a

significant reduction in activity over a period such as the last 10 years?

Who should monitor the performance of hospitals to ensure the

greatest efficiency consistent with the highest quality care?

26