The annual variation in activity and funding for acute public hospitals in NSW,1988?89 to 1992?93

Abstract

Casemix-based funding was introduced into the Victorian health system withoutan assessment of the annual variation in inpatient activity. Before undertaking sucha funding reform, it would be appropriate to determine the level of annual variationin inpatient activity for individual hospitals that could be attributable to chance orrandom variation. If the annual random variation is not accounted for, then casemix-basedfunding may actually lead to inefficiencies. For this study, hospital inpatientactivity and funding data for 120 acute public hospitals from New South Walesfor the years 1988?89 to 1992?93 were used to estimate the standard deviationof the annual random variation in activity and gross operating payment. Throughlinear regression, estimates of the standard deviation of random variation about theunderlying trend were obtained for each hospital. The results showed that, dependingon the size of the hospital, total diagnosis related group cost weights have a standarddeviation in the range of 2 to 16- per cent of total activity, whilst gross operatingpayment has an equivalent standard deviation that ranges from 1 to 10- per centannually. The magnitude of the variation would suggest that funding of hospitalsshould either be based on average activity over several years or based on bands ofactivity in order to reduce the potential random variation in funding levels.