Public hospital spending is the fastest-growing area of government expenditure, but its growth can be slowed. Every year public hospitals spend one billion dollars with little or no benefit. The money is not used to provide better care. It is simply being spent inefficiently and could be better spent.
The problem is the huge variation in costs among hospitals. In NSW hospitals, the average cost of a gall bladder removal ranges from $3500 to $8000. In WA it ranges from $4200 to $8000. Even after accounting for differences between hospitals and patients, a vast gulf between high and low-cost hospitals remains.
To give the same kind of care to the same kind of patient, some hospitals cost two or three times more than others in the same state. In many states, the gap between the most and least expensive hospital is more than $1500 for each admission. Avoidable costs can be due to anything from over-priced supplies to keeping people in hospital too long. These costs will remain until states do more to tackle them.
Two big changes make this possible. First, hospital funding is improving. Soon all states will use activity-based funding, which pays hospitals based on an established price for each treatment. It replaces other forms of funding that rewarded inefficiency.
Second, data about costs has improved a lot. The data can now reveal how much cost is legitimate and how much is avoidable. Activity-based funding is a good pricing system, but cost data can help us improve it. Higher quality data makes it clearer than ever where costs are too high.
Today, the price paid for care is based on the average cost of treatment. Therefore, it includes costs that can and should be avoided. The price can create a strong incentive to be more efficient, but not while it rewards inefficiency. Using cost data, states should adopt a new efficient price for hospital care: one set at the average cost, but only after avoidable costs are removed.
Setting the right price is crucial, but it won’t work on its own. Hospitals need to know a lot more about where they stand. They need detailed information about where their avoidable costs are and how they compare to their peers.
None of this tells individual hospitals exactly what to do. The causes of high costs vary and so will the solutions. States need to put the right incentives in place and let hospital leaders, managers and clinicians find the best ways to improve.
The way that hospitals are funded and managed must work with the new efficient price. Grants and bailouts shouldn’t prop up inefficient hospitals. Hospital leaders should be held to account if they do not manage costs well.
The current system rewards average performance even though it includes wasteful spending. Linking funding to efficiency, and giving hospitals the tools and motivation to improve, can free up a billion dollars each year. This money can be spent where it will make a difference: providing more and better hospital care for patients who need it.