In 2016–17, there were 695 public hospitals in Australia. Each state operates its own public hospital system. Under the 2011 National Health Reform Agreement (NHRA), the Australian Government contributes to the cost of operating these public hospitals. In 2017–18, the Australian Government provided $19.94 billion under the NHRA, with the states providing $26.57 billion. The Australian Government contribution is provided primarily on the basis of ‘activity based funding’ (ABF) — a structure where hospitals are funded for the number and mix of patients they treat.

The NHRA specified the establishment of two ‘national bodies’ plus a statutory position to administer the new public hospital funding arrangements; the Independent Hospital Pricing Authority (Pricing Authority), the National Health Funding Body (Funding Body), and the Administrator of the National Health Funding Pool (the Administrator).

Amongst other functions, the Pricing Authority determines the National Efficient Price (NEP), a key input into the calculation of the Australian Government’s National Health Reform (NHR) ABF contribution. The Funding Body assists the Administrator in undertaking their functions, including advising the Treasurer on both the total Australian Government NHR payment contribution for the upcoming year and whether any adjustments should be made to payments after the end of the year due to changes in number of hospital services provided or other reasons. The Administrator also publishes reports on Australian and state government NHR funding levels and numbers of public hospital services.

The Pricing Authority and Funding Body have important roles under NHRA arrangements through setting the efficient price of public hospital services and then calculating and administering Australian Government public hospital funding. The audit was selected as the integrity of key processes in both entities are highly reliant on the accuracy and completeness of state public hospital cost and service activity data.

The audit examines whether the NHR funding arrangements, including public reporting, provides transparency on the allocation of Australian Government funding. In a different context, the ANAO’s audit Monitoring the Impact of Australian Government School Funding highlighted a lack of sufficient assurance that relevant Australian Government funding had been distributed to schools on the basis of need as required by the relevant legislative framework. The current audit also assesses progress towards relevant policy objectives under the NHRA. The importance of monitoring the impact of Australian Government funding, and to provide greater accountability, was also a theme in the ANAO’s school funding audit.