The introduction of activity-based funding (ABF) means that Australian Refined Diagnosis Related Groups and their relative costs will become the basis for reimbursing public hospitals for admitted patient services. This study sought to investigate the variation in admitted patient costs for Indigenous people and people from remote areas that cannot be explained by variation in the clinical mix of cases, and to interpret this variation within an ABF framework. The study used a dataset of discharges from public hospitals of Northern Territory residents between July 2007 and June 2009. Multivariate regression analysis was used to estimate the variation in average costs, using the logarithm of patient cost as the dependent variable and Major Diagnostic Categories (MDCs), hospitals and population subgroups (Indigenous v. non-Indigenous; urban v. remote) as independent variables.
Although much of the additional cost of Indigenous and remote patients was found to be due to differences in severity and complexity between MDCs, there were extra costs for remote Indigenous patients that were not captured by the classification system. Hospitals servicing larger than average proportions of these patients could be systematically underfunded within an ABF framework unless a price adjustment is applied.