Basis for National Health Reform payments – New South Wales 2019-20

The basis for NHR payments to LHNs in New South Wales was advised by the NSW Ministry of Health to be as follows:

Basis used to determine NHR payments to LHNs – New South Wales

The process for determining 2019-20 NHR payments to LHNs encompassed three distinct elements of preparation for the individual LHN Service Agreements, including development of annual activity estimates, discussion/negotiation of activity levels with individual LHNs, and total State-wide activity across each activity type.

Consistent with last year’s methodology and pursuant with the National Health Reform Agreement (the Agreement), the Ministry of Health has adopted the National Weighted Activity Unit (NWAU) as the currency for Activity-Based Funding (ABF) with the applicable version being NWAU19, which is different from the previous year. 

The Independent Hospital Pricing Authority (IHPA) has issued the National Efficient Cost (NEC19) funding model that applies to small regional and remote hospitals.  However, NSW has introduced an alternative methodology to better account the significant challenges faced by small hospitals in rural settings and better integrate care between small regional and remote hospitals and ABF hospitals. This model uses a fixed and variable cost approach to funding and is expected that similar approaches will be considered moving forward under the national model. The mechanics of the NSW funding model is used to determine the aggregate funding allocation to LHNs for these small hospitals within the NSW funding model parameters.

Ensuring access to health services for local populations is a key objective of NSW health policy.  The Health Services Act 1997 stipulates that in determining LHN budgets, the Minister have regard to the size and health needs of the local population and provision of services to residents outside the local area.  Accordingly, targets are adjusted considering factors appropriate to each LHN and service type, rather than simple extrapolation from historical activity data.  The factors considered are reviewed on an annual basis.

In 2019-20, a series of elements will be applied to each in-scope service stream to ensure that activity targets are tailored to the requirements and patterns of each LHD/SHN. Activity targets are developed by the Ministry and LHDs/SHNs based on analysis of activity level drivers. This analysis was informed for 2019-20 by the following factors:

• Weighted population change: providing an indication of expected 'natural' growth;
• Recent trends in activity growth for each LHD/SHN;
• Relative Utilisation Rate adjusted for relevant demographic factors;
• Inter-district and cross-border flows (where relevant);
• Current year activity relative to targets (for adjustment of baseline volumes, where relevant);
• Known service changes and developments, including planned capacity increases.

Price weight adjustments which are being applied in 2019-20 include:

• Paediatric Adjustment
• Specialist Psychiatric Age Adjustment
• Patient Residential Remoteness Area Adjustment
• Indigenous Adjustment
• Radiotherapy Adjustment
• Dialysis Adjustment
• Patient Treatment Remoteness Area Adjustment
• Intensive Care Unit (ICU) Adjustment for eligible facilities
• Private Patient Service Adjustment
• Private Patient Accommodation Adjustment
• Multidisciplinary Clinic Adjustment
• Emergency Care Age Adjustment

Provisional activity estimates are created at a LHD level to provide the basis for discussion and negotiation with individual health services to determine agreed LHD level activity targets, with the activity volumes measured using the NWAU for each Service Category.  Additionally, where applicable, activity estimation is split by financial class to allow differential funding mechanisms to be applied to the respective service groups to reflect the variation in funding source. 

Provisional estimates and historical activity measures provide the basis for discussions with individual LHDs and subsequent negotiations for approval or adjustment.

The negotiation process allows for relevant local LHN service issues and activity impacts to be communicated with the NSW Ministry of Health (the Ministry) to assess the potential impact on future year activity volumes and the relevance of related service strategies to address these. 

It is important that negotiation processes recognise that funding and purchasing are undertaken in the environment of a capped State/Commonwealth funding pool for 2019-20 and recognition that NSW contributes the larger portion of these funds as well as being responsible for management of the system as a whole. When negotiations have concluded, the Ministry incorporates the final activity targets in each LHN’s annual Service Agreement.  Where an LHN achieves delivery of selected services through Affiliated Health Organisations or contracted services with a private provider these arrangements are to be specified in agreements between the LHN and the respective provider.  Both the funding (and subsidy) and associated activity pertaining to such providers are included in the budget and the activity estimates appearing in the LHN’s annual Service Agreement.

Cash payments processed within the National Health Funding Pool (NHFP) Payments System and included within the Administrator’s monthly reports are based on the accrued budget for both ABF and in-scope Block Funding derived from the LHN Service Agreements after deducting an allowance to recognise own sourced revenue earned, and liabilities for superannuation and long service leave which are accepted by the Crown. 

Based on the fact that not all cash related funding for in-scope services is flowed through the State Pool Account (ABF) or the State Managed Fund (in-scope block) and that those funds are retained by the LHD to contribute to the cost of service delivery, the Administrator’s reported level of Commonwealth vs State cash paid through the pool does not truly reflect the full cash component funded by the State.

Further, although a consistent methodology has been applied, variations in cash prices between LHNs will also reflect the differing mix of the above components (own sourced revenue and Crown accepted liabilities) of each Local Hospital Network’s accrued cost.

In addition to receiving weekly cash payments from the State Pool Account and the State Managed Fund, LHNs also receive direct State Government funding for 2019-20 for all “out of scope” services not subject to the National Health Reform Agreement arrangements as required under their 2019-20 Service Agreements.   

Monthly reports– Basis on which payments were made

For NSW, all dollar values included in the tables issued by the Administrator are cash payments from either the NSW State Pool Account to LHNs and or cash payments from the State Managed Fund to LHNs. This includes cash payment to the Victorian Department of Health for Albury-Wodonga inter-jurisdictional agreement.

The tables provided do not include the level of additional State funding derived from own source revenues and retained by LHN’s and acceptance of crown liabilities (eg LSL & Superannuation) that are also available to LHN’s monthly to meet the cost of services.

The weekly cash payment to an LHN reflects the estimated cost of patient related services anticipated to be delivered during the monthly cash payment period. The estimated monthly activity and the weekly cash payments are determined based on the annual LHN Service Agreements.

Cash payments from the NSW State Pool Account and from the State Managed Fund to LHNs are processed each Tuesday. Reporting by the Administrator is based on cash payments made during a given month and is therefore dependent on the number of Tuesdays in a particular month.

During 2019-20, July 2019, October 2019, December 2019 and March 2020 each have five Tuesdays. If accrual accounting principles were being applied within the NHFA Payments System, the value of the reported cash payments would recognise only the number of calendar days in a particular month, not the 35 days (five weeks paid) or 28 days (four weeks paid), as reported by the Administrator.

In 2019-20 cash payments to LHNs from the NSW State Pool Account are calculated based on LHN cash flow requirements and will fluctuate depending on their commitments.

State Managed Fund cash payments occur on a monthly pro rata basis.

In respect to Albury Wodonga, the Victorian Department of Health has direct budget responsible for provision of services at Albury/Wodonga Health and the current and proposed IGA for Albury Wodonga, requires NSW to Pay the Victorian Department of Health.

The payment that NSW makes to Victoria Health includes ABF, Block and a share of Public/Population Health funds received under NHR plus the NSW funded component.

On this basis NSW makes a single total payment to Victorian Department of Health each month however for transparency of Commonwealth monies under the Agreement, NSW established an ABF virtual entity for the Albury component of the Commonwealth. 

Other payments may occur in 2019-20 that are outside the regular weekly (Tuesday) payment cycle for payments to other States/Territories for NSW residents treated in their public hospitals. Payments to LHNs may also vary where their cash entitlement alters during the financial year. 

Monthly comparison of cash payments from the NSW State pool and State Managed Fund can vary month to month predominately due to these planned payments and cash requirements of an LHN.

The cash payments from the NSW State Pool Account or State Managed Fund do not reflect the full budgeted funding available to health services in NSW. Other sources of funds available to LHNs include separate payments from the Crown (for example, defined superannuation scheme and long service leave cash recovery) as well as own sourced revenues earned and retained by each LHN.

For more information on budget allocations, see the 2019-20 LHN Service Agreements which are available on each NSW LHN website as the Chief Executive and Board of the LHN’s provide sign off.