In Australia, governments give hospitals a set amount of funding for each service they provide to a patient, regardless of that patient's outcomes. 

Government funding influences the capacity and incentives of hospitals and clinicians to deliver high-quality healthcare to Australian consumers. Australian governments largely fund public hospitals through activity-based funding (ABF), which reflects the number of people treated in hospitals and the complexity of their conditions. While ABF has incentivised higher volumes of care using limited resources, it does not provide direct financial incentives for better outcomes in care. 

This paper asks whether reducing payments to a hospital when a patient develops certain complications can lower the risk of those complications occurring. The initial findings suggest financial mechanisms could be effective in lifting the quality of care. However, these findings should be interpreted with caution and further work is needed before expanding the use of such mechanisms in Australia.

Key points

• Hospitals are funded primarily through activity-based funding, which incentivises higher volumes of care and cost controls, but does not directly promote the safety or quality of care. 
• In 2017, the Australian Government introduced funding adjustments intended to reduce the rate of hospital acquired complications (HACs). The PC used data on admissions to public hospitals to establish whether this adjustment affected the rate of HACs. 
• The HAC funding adjustment had a sizeable effect, and was associated with about a 25% reduction in the likelihood of a complication occurring in those states and territories where the financial penalties were passed on to the relevant local hospital networks.