Towards a healthier state: the restructuring of Victoria's public health services

PREFACE

Project Victoria originated from a concern among business organisations in Victoria to address the major economic and budgetary issues facing the State, without increasing the burden of taxation.  Its signatory document, Victoria -- An Agenda for Change, was published in May 1991.  It recommended major changes in the role of government as a means of improving the competitiveness and role of business.

The project has now progressed to the second stage of detailing inefficiencies and bringing forward policy proposals for improving efficiency and productivity in key areas of Government activity.  These proposals would involve a significant increase in the role of the business sector in a competitive environment that would benefit the consumer.  The first two reports prepared dealt, respectively, with the Electric Supply Industry and Ports.  This report addresses Victoria's public health services.

The business organisations supporting Project Victoria are listed on the following page.

While commissioning this study, the supporting business organisations do not necessarily accept all its detailed recommendations, which remain my responsibility.

I particularly wish to acknowledge the research assistance of Cresap Management Consultants, which did much of the financial analysis in this study.  I am also most grateful to those members of the Project Victoria Committee, and to a number of independent experts, who provided valuable comments and suggestions.  Likewise, Mr John Stone made some very helpful substantive and editorial suggestions on various drafts.  I would also like to place on record the detailed and thoughtful analyses of Mr Richard Salmons.

Richard J. Wood

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FOREWARD

This report has been completed using publicly available information on health services in Victoria and throughout Australia.  The Health Department of Victoria was not prepared to provide us with access to internal Departmental records and our analysis has therefore focused on those activities of the Department where data could be obtained elsewhere.  (For a more detailed note on Sources of Data, see Appendix A.)  Nevertheless, our interpretation of the data has benefited from our being able to discuss our findings informally with departmental staff who have direct experience of the services we analysed.

Where the data permit, the analysis of trends in this report extends back to 1981-82.  However, consistent, detailed statistics dating back to this year were not always available.  1981-82 was selected as the base year for the analysis of trends both because of constraints on the availability of earlier data, and because this was the last year in which there was a Liberal Party Government in Victoria.  The Labor Party has been in office since the State election of 3 April 1982.

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GLOSSARY

Adjusted occupied bed day -- the number of occupied bed days adjusted by a factor to account for outpatient services (see Appendix C).

AIH -- Australian Institute of Health.

Approved bed -- the average number of hospital beds approved for utilisation by inpatients.

Average length of stay -- the true average length of stay would be obtained by dividing the total days stayed by all patients "separating" during the period by the number of such patients.  It is usually estimated by dividing the total bed days for the year by the number of patients separating during the year.  This estimate is reasonably accurate for acute care hospitals but may be rather poor in long stay institutions such as nursing homes and psychiatric hospitals.

Capital outlay -- refers to payments made for the acquisition of long-term assets such as land, building and equipment.  Includes expenditure on new and second-hand fixed assets and stocks, land and intangible assets, capital grants and other capital transfer payments and net advances paid.

Casemix -- this is the profile of patients treated in a hospital or group of institutions, and is based on the Diagnostic Related Group (DRG) classification of these patients.  Casemix based funding means that hospitals would be funded according to their performance as measured by their level of output and casemix.

CGC -- Commonwealth Grants Commission.

CSV -- Community Services Victoria.

Current outlay -- refers to expenditure which is made on the normal operating costs occurring in the provision of on-going services.  Includes final consumption expenditure (i.e., the net cost of the provision of goods and services), interest payments, subsidies, personal benefit payments and current grants.

Diagnostic Related Group (DRG) -- this is a system for classifying patients according to the treatment they receive.  DRGs are the basis for determining the casemix for an institution or a geographic area.

Full Time Equivalent (FTE) -- part time staff are converted to Full-Time Equivalent units by expressing the hours paid to a part time staff member as a proportion of the hours paid to an equivalent full time staff member.

Government purpose classification -- this is a system employed by the Australian Bureau of Statistics for uniformly allocating public expenditure to functions rather than to the Departments or agencies which manage the expenditure.  It allows for valid comparisons between States, where the same type of service may fall within the jurisdiction of different agencies, and of trends within the one State as services may be shifted from one agency to another over time.

HDV -- Health Department of Victoria.

Hospital and clinical health index -- this is an index which measures the degree to which price increases have affected costs for hospitals and other health institutions.

HUCS -- Hospital Utilisation and Costs Study.

Inpatient -- a patient who is formally admitted to hospital in order to receive health care.

Occupancy rates -- the average occupancy rate for an institution or group of institutions is calculated as follows.  If D is the number of days in the year, and B is the average number of available beds for the year then:
          Occupancy rate (%) = 100 x Total occupied bed days
                                                                      D x B

Occupied bed days -- the number of days for which inpatients occupy beds regardless of admission and separation dates.  This means that:  patient leave days are excluded;  a same day patient is counted as representing one occupied bed day;  and, a part of a day is counted as one day.

Separation -- a separation occurs when an inpatient leaves hospital to return home, transfers to another hospital or residential establishment, or dies at the hospital following admission.  Patient numbers are calculated by counting separations.

Staff per occupied bed -- staffing levels are described as FTEs per occupied bed.  The number of occupied beds was calculated by dividing the total number of occupied bed days by 365 or 366.

Standard expenditure -- this is calculated by the Commonwealth Grants Commission using the actual expenditure for each State/Territory, weighted by population.

Standardised expenditure -- this is calculated by the Commonwealth Grants Commission as the level of expenditure required by a State to provide the average level of services across all States.  The standardised expenditure takes account of those factors which affect the cost differentials between the States.

Total health index -- this provides a measure of the degree to which price rises as a result of inflation have had an impact on the cost of all health services.

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CHAPTER 1
OVERVIEW

Health "should not be put outside the normal criteria of effectiveness and value for money ... the suppliers of health care are humans not saints and so will respond to carrots and sticks just like anyone else". ⁽¹⁾

With estimated total outlays in 1991-92 of $2.88 billion (about one-fifth of all State Government Budget outlays), the Health Department of Victoria (HDV) is the second largest expenditure item in the State's Budget.  (Total expenditure on public health is actually significantly higher if spending from all sources is included -- see below).  The Department provides vitally important services to the State in terms of its overall development and monitoring of public health policy and programs, its administration of service provision through the State's hospitals, community health facilities and nursing homes, and its direct services to the community in terms of psychiatric services, alcohol and drug services, school dental programs, and family health services.  Some 70,000 Victorians are employed in the public sector of the health industry in this State, primarily in acute care public hospitals, psychiatric hospitals and nursing homes, and of this number, approximately 6000 to 7000 are direct employees of the Department.

With the State Government running substantial Budget deficits in recent years (in 1991-92 it is expected to be in excess of $1.5 billion in an overall Budget of $14.37 billion), there are pressures on all Government departments and agencies to rein in spending.  The demand is for Government and public sector managers to make service delivery more efficient and effective, and eliminate practices which have contributed to the growth of departmental budgets beyond prudent levels and in excess of the capacity of Government to pay.  This becomes even more critical in the area of health services as the cost of new medical technology increases and the demands for more sophisticated and expensive services grow.  As the recent high level Review of Victoria's health system (the Brand Review) concluded, "it will be necessary to make changes in the way health care services are funded, structured and delivered". ⁽²⁾

This report examines Government spending on health services in Victoria, and concludes that there are significant opportunities to achieve efficiencies and reduce spending without affecting the quality of services provided to the community.  This is neither a case of crudely hacking at important and generally high quality services, nor of pruning services in ways which would undermine their viability or limit their effectiveness.  It is rather a matter of managing resources more efficiently and effectively to achieve economies -- at a level evident in health systems elsewhere around the country.  The scope for improving efficiency has been acknowledged by the Brand Review -- the first major review of the system in some fifteen years, commissioned by the Minister for Health, Mrs Maureen Lyster, and released in May 1992 -- which concluded that "there has been too much emphasis on historical funding allocations to organisations within the system ... without sufficient regard to their relative efficiency." ⁽³⁾  That Review also acknowledged the existence of inefficiencies in the hospital system as indicated by the large differences in patient costs in similar types of hospitals. ⁽⁴⁾

The essence of the argument in this Report -- that there can be very substantial savings achieved from greater efficiencies in the delivery of health services, particularly in the high cost area of acute care public hospitals -- has also been acknowledged by the Deputy Prime Minister and Minister for Health, Housing & Community Services, Mr Howe, as recently as May 1992.  Speaking in response to a campaign by NSW and WA Health Ministers for an additional $1.2 billion in Commonwealth funding for public hospitals, Mr Howe (who is a Victorian) pointed to the high cost structures in the nation's public hospitals as driving the calls for increased funding by State Health Ministers.  Increased efficiencies in the public hospital system, Mr Howe said, could lead to savings of "tens of millions if not hundreds of millions of dollars". ⁽⁵⁾

Our analyses in this Report are necessarily imprecise.  Data inadequacies prevent any precise pinning down of the extent of inefficiencies.  Such a task must await more detailed review on the ground.  What we are presenting is an analysis which identifies prima facie evidence of "over-spending" and thus of the potential for substantial improvements in efficiency.  The analysis also provides compelling evidence of the major factors contributing to the over-spending.

The analysis draws in part on the authoritative assessments by the Commonwealth Grants Commission (CGC), which is the body responsible for recommending federal revenue grant allocations to each State for the provision of community services of one kind or another.  According to the detailed analysis by the CGC, in terms of what it should cost to provide services at the same level as in other States, Victoria's health system has been significantly over-resourced in recent years, and the extent of the "over-servicing" amounted to some $352 million in 1990-91.  This means that in that year Victorians were paying some $80 per head of population more than they needed to provide a level of service comparable with other States and Territories.  Our own analysis, however, goes beyond that by the CGC.  It suggests that if each main aspect of the various services were brought into line with the average for the other States, substantially higher levels of savings should be realisable -- possibly around $700 million per annum.  While it would probably not be practicable to achieve a saving of that magnitude within one year, our judgement is that much of it could be realised by the end of 1992-93 and the balance certainly over the following year or two.

The important point to make is that paying more than necessary for essential services does not mean that such services are automatically provided at a higher level than elsewhere or that they produce better outcomes.  Certainly, great expense and high resource levels do not necessarily mean a better community health status.  Health indicators for Victoria confirm that death and infant mortality rates of Victorians differ little from those of people in States with lower cost systems. ⁽⁶⁾

In respect of some parts of the system the evidence is striking that there is a poor standard of care.  This is particularly apparent in the State's psychiatric institutions where successive official reports indicate that there is very high cost but poor standards of care -- standards which the Minister for Health, Mrs Lyster, has agreed are "Dickensian". ⁽⁷⁾  A comprehensive clinical audit of 19 of the State's 21 psychiatric hospitals reported in March 1992 that there were poor nursing standards and inadequate facilities for patients. ⁽⁸⁾  The audit followed Task Force reports on two of the State's oldest psychiatric institutions, Lakeside and Aradale, which showed similar evidence of poor standards of care, combined with instances of mistreatment and abuse of patients by staff. ⁽⁹⁾  It appears that, in a number of Victoria's psychiatric institutions, facilities may be run for the benefit of staff rather than the care and treatment of patients.  (At Aradale Psychiatric Hospital, for example, there are 455 staff for 245 clients;  more than 40 per cent of the work-force do not have any direct care duties.  The Chief Administrators of both Community Services Victoria (CSV) and HDV have conceded that the culture in the institution "had led to services which focused more on the needs of the staff than the patients".) ⁽¹⁰⁾

The obvious questions that arise are:  why are Victorians paying so much for their health services?  What is driving the higher cost, and what can be done about it?  Following detailed analysis, the conclusions we have reached are that:

• the "overspending" in the health sector has occurred -- and has generally increased -- over the last ten years under a Government committed, as a matter of philosophy and policy, to higher levels of spending.  (At the beginning of the decade, Victoria's actual expenditure per head was below the level the CGC assessed as required to provide the same level of service as in other States);
• excessive staffing levels and inefficient work practices have become entrenched.  In the State's acute care public hospitals, the staffing levels are 15.0 per cent above those in the rest of Australia, and 25.4 per cent higher than those in Queensland, (i.e. the system has, in an industrial relations sense, been "captured" by strong health sector unions, in some cases unions having affiliations with the party in Government);
• productivity in key areas of Victoria's public hospitals has -- contrary to claims by the Department -- decreased (i.e. staffing levels per patient bed day have actually been increasing);
• private hospital capacity has been under-utilised in the health system at the same time as relatively high proportions of private patients are being treated in Victoria's public hospitals (e.g. the average private hospital occupancy rate of 58 per cent contrasts with the average occupancy rate of 80 per cent for public acute hospitals;  at the same time substantially more public acute hospital occupied bed days in Victoria relate to private patients than in other States);
• provision of general medical services in public hospitals has been over- utilised (e.g. free outpatient hospital services are provided at usage levels substantially in excess of those in other States);  and
• cost management performance has, generally, not been good (i.e. there has been a higher priority on process accountability rather than outcomes, and the basis of funding service providers still primarily reflects staffing levels rather than the achievement of specified service delivery targets).

In the context of Victoria's serious debt situation, therefore, it is imperative to tackle the over-spending on health services in ways that achieve real and sustainable savings while focusing on key health care outcomes and maintaining quality standards.  This Report argues that simply by achieving the average for the other States the Victorian Government could not merely realise savings of several hundred million dollars, but produce a health system which operates more efficiently and effectively in delivering important community services.

* * * *

The funding of public hospital, psychiatric, nursing home and a number of other public health services comes predominantly from State sources and it is thus the State Government which determines the level (i.e. additional dollars) of spending on such public health services, as well as the quality of those services.  However, the financial basis on which public hospital services are provided is determined largely by the Commonwealth under Medicare arrangements.  Thus, while the hospital funding grants by the Commonwealth finance about 50 percent of total State current outlays for hospital services, ⁽¹¹⁾ they are provided on the condition that no charge is made for treatment in public wards of public hospitals or in outpatient clinics of such hospitals, and that there is no means testing of those seeking to use such services.

On the basis of assessments by the CGC, the State's current outlays on health amounted to $3,226 million or about 29 per cent of total current budget expenditure in 1990-91. ⁽¹²⁾  Public hospital and other institutional health services account for about 90 per cent of such outlays.  Hospital services are a State operated monopoly:  although they have competition from private hospital services (which treat about one quarter the number of patients treated by public hospitals), only public hospitals are able financially to provide treatment without charge.  State operated nursing homes also compete with privately operated nursing homes, although both are heavily subsidised by the Commonwealth.  There are also some privately operated psychiatric hospitals as well as a considerable number of voluntary/charitable institutions which provide health services of one kind or another.

Given the availability of services without charge under the Medicare system, it is not surprising that an increasing proportion of the Victorian population has been relying on public hospital services.  This is reflected in, inter alia, the declining proportion of Victorian families covered by private health insurance (from 63.3 per cent in 1980 to 49.7 per cent in 1990).  Accordingly, in order to contain public health expenditure within reasonable hounds, elective treatment in public hospitals has been rationed through the establishment of waiting lists.

Until the Commonwealth Government changes the Medicare arrangements either to limit the access of middle and upper income groups to free public hospital services and/or to provide an incentive to use private health insurance to a greater extent, there is only limited scope available to the State Government to economise on health expenditure by reducing the demand for public hospital and other institutional services.  However, some free or heavily subsidised services appear to be more readily available in Victoria than in other States and policy changes in the administration of such services have the potential to eliminate unnecessary use and, hence, reduce their cost to the tax payer.  For example, if average occupancy were increased to 80 per cent in private hospitals, that would potentially allow up to 1,300 public hospital beds (which represents 10 per cent of the total) to be closed, realising an estimated saving of approximately $165 million.  (Of course, any such shift of private patients to private hospitals would tend to increase the cost of treatment and would therefore need to be accompanied by increased private insurance cover).  Similarly, if the Victorian Government were to privatise approximately 3,130 of the 5,360 State operated nursing home beds, Victoria would have a proportion of its total beds operated by the State similar to the average for the rest of Australia.  At a funding level of $99 per bed day this would reduce public expenditure on nursing homes by $108.5 million. ⁽¹³⁾  Of this $108.5 million, approximately $55 million is State funds and the remainder is Commonwealth funding.

As noted, there is also considerable scope available to reduce health expenditure by improving the efficiency of supply of such services, but without reducing their quality or availability to those who have a real need to use them.  This report is concerned, therefore, with identifying at the macro level, inefficiencies in the operation of Victorian public health services, with identifying areas of unnecessary use, and with proposals for changing the structure of the existing system so as to sustain the consequential reduction in the burden on the tax payer. ⁽¹⁴⁾

The analysis is largely based on comparisons of the level and composition of spending by Victorian and other State Governments on public health services.  A variety of data sources is used:  Australian Bureau of Statistics, Australian Institute of Health, Commonwealth Department of Health, Housing and Community Services and Commonwealth Grants Commission data as well as State Budget Papers.  Some comparisons with the private hospital system are also included.

It needs to be said that the quality of published data in the health field leaves a good deal to be desired -- data are neither timely nor consistent.  In particular, data allowing detailed assessments of performance tend to lag by three to four years.  Accordingly, some of the estimates of savings in expenditure are based on the assumption that staffing and use of public health services in Victoria continue to be about as high, relative to levels in other States, as they were three or four years ago.  Comparisons of overall trends in spending suggest that this assumption is a reasonable one.  Indeed, CGC assessments show that the extent of "over-spending" on health by Victoria, relative to other States, has actually increased in recent years.

The general picture which emerges is of a system that is providing broadly similar services to those in other States but with considerably more staff and with policies that allow greater use of some of the services.  The amount of over $350 million which Victoria could have saved in 1990-91 -- by reducing spending per head to the level assessed by the CGC as necessary for providing the average level of service across Australia -- would constitute a reduction of about nine per cent on total current spending on public health services.  Analysis of 1987-88 Australian Institute of Health (AIH) data suggests, however, that the potential for saving in that year was $360 million in respect of public hospital inpatient services and psychiatric services alone, i.e. without taking account of the potential savings in other areas.  Complete analysis of the AIM and other data suggests that, if staffing and utilisation of Victorian public health services -- projected to 1990-91 -- were to be reduced to the average for the other States, savings substantially greater than $350 million should be realisable.  The areas of projected savings are summarised as follows:

POSSIBLE AREAS FOR SAVING IN HEALTH SPENDING
$ million

	1990-91 (projections)
Acute Care Hospitals Average Salaries * (reduce to average for other States from seven per cent above) Staffing per occupied bed * (reduce to average for other States from 14.9 per cent above) Outpatient Services * (reduce utilisation to average for other States from 34 per cent above) Private Hospital capacity (make better use of private hospital capacity and close 1300 public hospital beds)	104 203 118 165
Psychiatric Hospitals Beds per 1,000 population * (reduce to average for other States from 40 per cent above) Staffing per occupied bed * (reduce to average for other States from 64 per cent above)	58 83
Nursing Homes Funding * (reduce to $10 per day more than Commonwealth funding of private homes) Nursing home beds (privatise 3130 nursing home beds)	104 55
Department Administration staff * (reduce to 1987-88 levels)	4

Note:  The savings asterisked above have been calculated on an additive basis.  However, no allowance has been made for the effects of any reduction in public hospital and nursing home beds on the other estimates of savings.  Note also that no allowance is made for savings in respect of over-spending on Community Health services identified by the CGC.

This figuring implies that there is potential for substantially reducing Victoria's current spending on public health services without reducing the quality of services.  In weighing this against the Commonwealth Grants Commission's assessment, it needs to be kept in mind that the Commission's assessments also show that, if Victoria were to reduce its per capita spending on health to the same level as Queensland, there would be a saving of almost $1,000 million. ⁽¹⁵⁾  Further, it is the provision of fewer public hospital beds per head that keeps Victoria's hospital operating costs per head lower than in all States except Queensland.  While under the Commission's methodology, this provides an offset to Victoria for its significantly higher staffing costs per occupied hospital bed, such costs could be reduced without affecting the quality of services.

The areas for potential savings indicate that there is a serious problem with the structure of the system and, in particular, that management may have insufficient autonomy and incentive to operate the services efficiently.  Although the Brand Review recommended a bureaucratic solution to the problem, it found that the "existing structure is top heavy, too centralised and involves too much role confusion among its various elements". ⁽¹⁶⁾

Australia has one of the highest ratios of staffing per occupied bed amongst OECD countries, if not the highest, and Victoria "leads" the way in Australia.  The extent of overstaffing, particularly non-medical support staff, indicates that union "capture" of the system is considerable.  The majority of the difference between Victoria and the rest of Australia is evident in the higher levels in Victoria of domestic and other staff (44.1 per cent above the average for the rest of Australia), administrative and clerical staff (29.3 per cent above the average for the rest of Australia), and nursing staff (11.3 per cent above the average for the rest of Australia).

This is true for salary levels, as well.  Salaries are the most significant component of operating expenditure for hospitals, and make up 75 per cent of the operating costs in Victoria's hospitals.  The salaries in Victoria were 6.7 per cent above the average salaries for the rest of Australia in 1987-88, although the differences varied between categories of staff, and some were lower than elsewhere.  Salaries in Victoria's hospitals have increased more rapidly than the Australian average;  in 1985-86 they were only 2.6 per cent higher than the average for the rest of Australia.

Over time, inefficient work practices, including excess staffing ratios, have been conceded by management in the knowledge that successive governments have had neither the capacity nor the will to stand up to industrial disruption of health services by strong unions.  The union capture is borne out by the fact that CGC data show that high levels of over-expenditure in Victoria have only developed in the 1980s under the Labor Government.  As noted, at the beginning of the decade, Victoria's actual expenditure per head was below the level the CGC assessed as required to provide the same level of services as in other States.  By the mid 1980s, the situation was reversed and in 1990-91 Victoria's actual expenditure per head was twelve per cent above the level assessed by the CGC as necessary.  (It is worth noting that, when it came into power, the Labor Government immediately centralised industrial relations within Government, effectively taking over the role of employer which had previously been undertaken by the Victorian Hospital Association.  This action was taken at the request of the health unions).

The overstaffing, and the over-use of certain services, also demonstrate the inherent tendency of public sector administrators to expand the services which their institutions provide and to resist reductions in their "empires".  This means that, while savings should be sought as a matter of urgency by instituting immediate policy changes, working within the existing system to achieve such savings is likely in practice to be difficult.

The report therefore proposes changes to the existing structure that would make easier the task of both achieving a more efficient service and easing the burden on the tax payer, but without reducing the quality of service.  Indeed, the likelihood is that the quality of service would increase as a result of an improvement in workplace culture and through improved workforce flexibility.

The basic approach proposed is to move progressively to a situation in which government ceases to involve itself in the operation of the majority of existing public health services but focuses instead on providing the finance and regulating/supervising the operation of services by contractors and/or by the private sector.  Under such a purchaser/provider split, instead of having one monopoly provider of public hospital and other similar services (including State psychiatric and nursing home services), such services would be supplied by individual operators on the basis of contracts with the Government that would stipulate the minimum standard of services required to be provided.  Arrangements along these lines already exist in the U.K. and New Zealand and even the Victorian Government has started to recognise the potential to contract out some services;  recent reports indicate moves by the Health Department to allow the privatisation of outpatient services by public hospitals. ⁽¹⁷⁾

The existing system has, in fact, already gone some way towards a purchaser/provider split by the conclusion of health service agreements with all funded health agencies, under which an agreed level of services must be delivered in return for the allocation of an agreed global budget.  The missing links in those arrangements, however, are the absence of competition between suppliers and of effective operator autonomy, particularly as regards industrial relations.  This Report proposes, therefore, that the system should move quickly to one where contracts for the supply of public institutional health services are opened to competitive bidding;  such contracts would run for a stated minimum period, at the end of which they would again be put to tender.  It would be open to the managers of the existing institutions to compete.  Existing institutions would be leased to the successful contractor (assuming that was required to supply the services).

Such an arrangement would maintain the Government's responsibility for ensuring the availability of adequate public hospital services but would create a competitive market for the supply of services.  It would thereby provide an incentive for operators to bid for contracts on a basis that makes allowance for the potential to effect economies by changing work practices and/or reducing staff, while still conforming to standards laid down by the State.  While contractors would need to bid on a basis that included a component for profit, this should be more than met from the savings from greater efficiency/higher productivity, resulting in lower State budget outlays. ⁽¹⁸⁾

Most importantly, this approach would give maximum operational autonomy to contractors and would thus reduce the capacity of unions and other pressure groups to make the operation of health services a directly political issue.  It would specifically make industrial relations the sole responsibility of the operator and would be consistent with an industrial relations system based either on enterprise bargaining or on the negotiation of individual contracts with employees.  A move to such a structure would likely take some time to implement.  As a first step, therefore, it is proposed that the majority of Victorian public health institutions should be properly "corporatised".  Legislation should be introduced to establish each institution as a company, with a management and Board of Directors which would have maximum autonomy to determine the way in which the institution is run, subject only to written (and published) policy directions by the Minister.  Funding would continue to be provided primarily on the basis of annual budgets negotiated with the Department.  Once the enhanced corporatisation process has been completed, however, contracts for the operation of the institutions would be progressively put to tender by the Department on the basis already outlined.  Contracts would need to be made renegotiable in the event of changes in the Medicare arrangements designed to reduce the use of free public hospital services.

It will take time to bring the efficiency of Victoria's health services into line with the average of other States, let alone take it ahead.  However, the state of those services, and the Government's finances more generally, suggests the need for strong and determined action at an early date.  Accordingly, it is proposed that:

• The State Government immediately announce that the 1992-93 budgets for public health institutions will be drawn up on the following basis:
• There is to be no planned increase in average salary levels in acute care hospitals.  Any union claims will be denied on grounds of incapacity to pay.  Should Industrial Tribunals increase awards, the cost will have to be offset by other cost savings;
• Non-medical staffing per occupied bed in acute care hospitals will be reduced to the average for the other States by the end of 1992-93 through a combination of attrition, dismissals and redundancy agreements;
• Non-medical staffing per occupied bed in psychiatric hospitals will be cut by 30 per cent and psychiatric beds will be reduced by 20 per cent by end 1992-93;
• Acute care hospitals will institute administrative changes to reduce use of outpatient services by 30 per cent by the end of 1992-93;
• Total funding for State nursing homes will be limited to an average of $10 per day more than Commonwealth funding of private nursing homes;
• State-run nursing homes will be reduced by 10 per cent by end 1992-93;  and
• Administrative staff in HDV will be reduced to 1987-88 levels by ihe end of 1992-93.
• The Government also announce that legislation will be introduced in the Budget session to enhance the corporatisation of Victorian public health institutions so as to provide maximum management autonomy, and that, prior to such introduction, a "Green Paper" will be issued setting out the basis of such enhanced corporatisation and discussing the subsequent introduction of a system of contracting for the supply of public health services.

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CHAPTER 2
FEATURES OF THE PRESENT SYSTEM

2.1 BACKGROUND

The availability of quality health care services is an important element in creating a high standard of living in the community.  However, it is erroneous to conclude that the quality of the health care system is simply and directly related to the level of government expenditure on health services and that increasing resources will inevitably lead to improvements in service quality.  In evaluating a public health system one must also take into account:  whether it provides value for money by ensuring that services are delivered most efficiently;  and whether services would be more efficiently and effectively provided through the private sector.

A trend of increasing expenditure on health services has been evident in the 1980s and there is concern that the ageing of the Australian population and the development of new, high cost medical technology will place even greater demands on our health system and the health budget.  Total Australian health expenditure by governments and individuals increased in real terms by 29.2 per cent from 1982-83 to 1988-89, and the average annual rate of growth per capita in real terms was 2.9 per cent. ⁽¹⁹⁾  Health expenditure as a percentage of Gross Domestic Product ranged between 7.7 per cent and 8.1 per cent in this period. ⁽²⁰⁾

With the introduction of Medicare in February 1984 the public sector has assumed increased responsibility for the cost of our health services.  The proportion of total health expenditure funded by the public sector increased from 60.8 per cent in 1982-83 to 70.6 per cent in 1987-88. ⁽²¹⁾  This increased responsibility fell entirely on the Commonwealth Government, as both State and Local Governments maintained their percentage of the health budget during this period.  The provision under Medicare of free treatment in public hospitals and by doctors, generally, has been reflected in a marked decrease in private health insurance cover.  Coverage rates have dropped from 65.8 per cent in 1982 to 47.2 per cent in 1990. ⁽²²⁾  This change in government policy has added to pressures on public health services.

These pressures are evident in Victoria's spending on public health.  Per capita current spending by the State Government on health services more than tripled between 1981-82 and 1990-91, the average annual growth rate being 14.1 per cent. ⁽²³⁾  This implies a real increase in spending per head of no less than seven per cent per annum, as the average annual increase in the health price index (which measures the effect of inflation on the price of health services) over this period was 7.2 per cent.  The increase in Victoria in per capita expenditure was easily the highest among the States (see Table 2.1).

Table 2.1
Average Percentage Increase in State Government
Current Expenditure Per Capita ^(a)

	1981-82 to 1990-91
Vic	14.1
Rest of Australia	11.3
NSW	12.4
Qld	9.2
WA	11.0
SA	12.2
Tas	11.1
NT	8.5
Total Health Index (b)	7.2

Source:
^(a) CGC
^(b) AIH, Australian Health Expenditure to 1988-89 and unpublished data

Health services are a major element of the Victorian Government's services and expenditure.  Health is the second largest item of Victoria's budget, ⁽²⁴⁾ after education, accounting for almost 15.5 per cent of total outlays. ⁽²⁵⁾

The majority (95.4 per cent) of the Government's expenditure on health services is administered by the Health Department, with most of the other services coming under the jurisdiction of Community Services Victoria (CSV).

Acute care hospitals are by far the largest program within the health budget, with 71.2 per cent of the Department's budget for 1991-92.  When nursing homes, geriatric hospitals and hospital-based psychiatric services are included, institutional services make up approximately 85 per cent of the total outlays.  Community health and home services are only a relatively small section of the budget (5.0 per cent).  Wages, salaries and superannuation are the main component of the health budget, making up almost 70 per cent of gross current outlays. ⁽²⁶⁾

The Department of Health operates and finances a range of services to the residents of Victoria and its visitors.  There are eight programs in the Department which are involved in direct service delivery.  They are:

• Acute Care Hospitals -- The services operated under this program include emergency and critical care services, elective medical and surgical procedures and associated outpatient services.
• Nursing Home and Geriatric Hospitals -- The program covers health and nursing care for older people, involving a range of acute medical, assessment, rehabilitation, allied health and residential care services.
• Community Health and Home Services — This program covers a range of services delivered through community health centres, community dental services, palliative care services and public hospitals.
• Psychiatric Services -- This program covers services for people with serious mental illness, including the treatment, care and rehabilitation of people who require continuous support.
• Alcohol and Drug Services -- The program covers a range of advisory education and health promotion, specialist treatment and rehabilitation services to reduce the incidence of, and consequences of, tobacco smoking, and the misuse of alcohol and other drugs.
• Public Health Protection and Promotion -- The services in this program are designed to prevent illness through improving the social, economic and physical environment, and through the development and enforcement of standards in relation to food and other environmental health measures.  The services include screening of high-risk groups and programs to encourage healthier lifestyles and better nutrition.
• Patient Transport and Blood Transfusion Services -- The program ensures that emergency transport is provided for patients and that blood products are accessible for medical emergencies.
• Health Agency Services -- Under this program the Department monitors the services provided by other health agencies and provides specialised professional advice to agencies.

In addition, there are three further programs within the Department which provide a support service.  They are:

• Health Education, Research and Service Quality -- A number of health and medical research centres, institutes, foundations and units are funded through this program.
• Executive Services -- This program comprehends the overall strategic direction and performance of the Denartment.
• Hospitals and Charities Fund -- This program covers management of the Fund.

2.2 ASSESSING VICTORIAN GOVERNMENT SPENDING

In assessing the efficiency of Victorian Government spending on health, a number of data sources have been used (see Appendix A).  The basic method of assessment has been by way of comparison with other State Governments.  For this purpose considerable emphasis has been given to the analysis of States' health expenditures by the CGC for the purpose of framing its recommendations on the distribution of general purpose revenue assistance among the States.  This analysis (which includes 1990-91 figures) has been supplemented by information compiled by the Australian Institute of Health, the Australian Bureau of Statistics and various Victorian Government publications.  (See Appendix B for an explanation of the difference between the CGC figures for health expenditure in Victoria and the State's Budget Papers data).

CGC data are compiled on two bases.  First, actual expenditure on health by the various States is compiled on a consistent basis as between States for each major component of expenditure.  Second, the Commission calculates a standardised expenditure for each State which reflects the amount of spending per head required by a State to provide a level of services not appreciably different from the standards provided by other States.  The standardised expenditure includes adjustments to take account of cost differences between States in providing services of the same standard (such differences arise because of differences in economies of scale, dispersion of population, social composition of the population, etc.).  The CGC also calculates the standard expenditure, or the Australian average actual expenditure, by weighting each State's actual expenditure by the State's population.

It should be noted that the CGC's assessments indicate that Victoria should be able to spend the least amount per head in order to provide health services at the average level for the States.  This indicates that, relative to the other States, Victoria has a natural comparative cost advantage over the other States in the provision of such services, which the Commission assesses as being of the order of eight per cent.

Comparisons between the standardised and actual expenditures per head on any particular service provide an indication of whether a State is spending more or less than is required to provide an average level of service.  However, above-standardised expenditure does not necessarily mean the State is providing a better than average quality service;  this "policy" difference may simply reflect inefficiency in service delivery.  Equally, lower expenditure per head than the standardised amount does not necessarily mean that a lower than average quality service is being provided.  While it is not possible to quantify how much these "policy" differences reflect differences in the quality of services and how much they are a function of differences in efficiency, examination of various factors contributing to the differences provides a basis for reaching a broad judgement.

The conclusion reached in this report is that the considerable above-standardised spending by Victoria does not appear to result in the provision of higher quality public health services, and is therefore chiefly a function of less efficient provision of such services.

The CGC data show that current expenditure on health in Victoria was $3,226 million, or $732 per capita in 1990-91, which compares with per capita expenditure in NSW and Queensland of $684 and $516 respectively. ⁽²⁷⁾  However, when actual expenditures are compared with standardised expenditures, it becomes evident that Victoria is "overspending" significantly more than most other States (see Table 2.2 ).  By bringing actual expenditure in line with the standardised expenditure in 1990-91, the Government could have reduced its expenditure on health by $352.5 million out of a total expenditure of $3,226 million, a reduction of 10.9 per cent.  Had Victoria reduced its spending to actual levels in Queensland, the saving would have been of the order of $950 million, or about 30 per cent of the current budget.

Table 2.2
Per Capita Current Expenditure On Health, 1990-91

	Actual $	Standardised $	% Difference	Excess Spending $m
Vic	732	652	+12.3	352
Rest of Australia	680	698	-2.6
NSW	684	669	+2.2	87
Qld	516	721	-28.4	-602
WA	812	742	+9.4	116
SA	759	758	+0.1	0
Tas	728	744	-2.2	-8
NT	1296	1158	+11.9	22

Source:  Commonwealth Grants Commission

The data in Table 2.2 cannot be broken down into useful detailed categories.  However, data available for 1989-90 indicates that, of the net "over-expenditure" on health services in Victoria of $356.9 million in that year, the majority ($354.9 million or 99.4 per cent) was in the General Medical Services category, which includes a broad range of services (e.g., hospitals, nursing homes, psychiatric services).  The CGC has formulated estimates of expenditure using more specifically defined categories for 1989-90 only and these provide a starting point for identifying inefficiencies in the Victorian health system.  The differences between actual per capita expenditure in Victoria and actual average per capita expenditure in the rest of Australia in these estimates suggest that Victoria is over-spending above the average as follows:

• Hospitals = -$317.8 million
• Nursing Homes = +$145.7 million
• Mental Health Services = +$132.4 million
• Community Health Services = +$294.4 million

That is, the net "over-expenditure" compared with the average for the rest of Australia is $254.7 million in these areas.

The main difference between our analysis and this CGC data is in the area of public acute hospital services, where Victoria appears to be "under-spending".  (Note, however, that these figures are of actual spending and therefore make no allowance for any cost advantage which Victoria may have in this area).  This would be explained by the fact that Victoria provides fewer public acute care hospital beds per 1,000 population than any other State, and the hospital operating costs per 1,000 population are, therefore, lower than in all States except Queensland;  in other words, it reflects factors other than those going to matters of efficiency.  In our analysis we have focused on the efficiency of Victoria's hospital services, and we have argued that, given the current level of services, improvements in staffing efficiency (i.e., staff per occupied bed but excluding reductions in average salaries) would have realised savings of $180 million in 1989-90.

A further factor which should be noted from the above CGC estimates is the apparently high level of "over-expenditure" in Community Health Services.  We have not been able to undertake a detailed analysis of these services in this Report due to a lack of available data;  nevertheless, the CGC data suggest that this is another area in which the policies adopted in Victoria have led to a high cost service.

Some of the factors which have contributed to the over-expenditure in Victoria are evident from interstate comparisons based on the Hospital Utilisation and Costs Studies (HUCS) compiled by the Australian Institute of Health up to 1987-88.  These studies show that in that year Victoria had:

• above average salaries for public hospital staff (6.7 per cent above the average for the other States and Territories);
• above average staffing levels in public hospitals (with 14.9 per cent more staff per occupied bed in the acute hospitals, 64.0 per cent more in the psychiatric hospitals and 2.3 per cent more in the repatriation hospitals compared with the average for the rest of Australia);
• higher levels of hospitalisation for psychiatric conditions (with 200.5 occupied bed days per 1,000 population in Victoria compared with an average of 132.9 for the rest of Australia);
• higher costs per bed day in the public psychiatric hospitals (48.5 per cent above the average for the rest of Australia);
• greater provision of outpatient services at public hospitals (utilisation per capita in Victoria is estimated to be 33.8 per cent above the average for the rest of Australia);  and
• higher costs per bed day in State Government nursing homes (in 1985-86) compared with nursing homes funded by the Commonwealth Government and managed by the private and voluntary sectors.  One factor contributing to the higher cost is greater levels of staff providing what are called "hotel services" (i.e. primarily catering, laundry and cleaning) per bed in the high cost homes. ⁽²⁸⁾

In addition, the increase in private patients in public hospitals was significantly greater in Victoria than in the rest of Australia in the 1980s.  As a result, Victoria has an above average proportion of public hospital bed days dedicated to private patients.  This occurred despite there being a higher rate of private health insurance cover in Victoria.

Overall, our analysis confirms that Victoria's health system requires major restructure -- that is, changing funding approaches, or shifting patients or changing organisational structures -- to improve efficiency while delivering quality services.  We identified a number of programs where there appears to be substantial potential for reductions in the Health Department's budget.  The main areas where policy changes and efficiency measures would achieve significant savings are: ⁽²⁹⁾

Acute Care Hospitals

If the average salaries in Victorian hospitals were brought in line with those in the rest of Australia a saving of $93.4 million in 1989-90 would have been realised. ⁽³⁰⁾  (Such a change would not be immediately realisable, of course;  salary levels are -- to a significant extent -- the subject of industrial awards that reflect generally higher salary standards in Victoria, and have the force of law.  However, under different wage-fixing arrangements, and with a different policy by the State Government, it should be possible over time to bring Victoria's health sector salaries more into line with other States.)  Of greater significance are the staffing levels applying in the health sector.  If staffing levels in the acute care hospitals were brought in line with the average for the rest of Australia, the hospital budget would have been reduced by a further $180.8 million in 1989-90.

By cutting back outpatient services to the average level across the rest of Australia, the hospital budget in 1989-90 could have been reduced by a further $105.2 million.

In 1989-90, the total operating expenditure for inpatient and outpatient services in public hospitals was $2,197 million so that the estimated savings (excluding the salary adjustments) represent a 13.0 per cent cut in this budget.

There is also potential for reducing public hospital beds, either by decreasing the use of public hospitals by private patients (and as a consequence putting increased reliance on private hospitals), or by closing public beds so as to make progress towards achieving publicly announced target for lowering beds per 1,000 population.

Psychiatric Hospitals

If the cost per bed day in Victoria's psychiatric hospitals was brought back to the average cost for the other States a saving of $68.8 million could have been achieved in 1987-88.  If the number of psychiatric hospital bed days per 1,000 population was also brought in line with the average level in the rest of Australia, a further saving of $48.1 million would have been achieved.  That is, expenditure on psychiatric hospitals in 1987-88 could have been reduced by a total of $116.9 million (or 44.6 per cent of the actual total cost).  Based on the total increase in the budget for the Psychiatric Services Program between 1987-88 and 1989-90, the estimated saving for 1989-90 is $125.7 million.

Assuming a similar distribution of savings as in 1987-88, $74.0 million of the $125.7 million would be attributed to reducing bed day costs and $51.7 million to cutting utilisation rates.

Nursing Homes

If the State's funding of nursing homes and geriatric centres was reduced to $99 per bed day, which is still $10 per bed day more than the Commonwealth funding of private and voluntary nursing home beds, a total saving of $93.0 million could have been achieved in the 1989-90 budget.

If Victoria had reduced the proportion of Nursing Home beds in State homes to the average for other States, a saving of $108.5 million could have been achieved in 1989-90.  Of this $108.5 million, approximately $55 million would have been State funding.

Administrative Staffing

If the number of public service staff in the administrative support Divisions of the Department ⁽³¹⁾ was reduced to the levels in 1987 and 1988, this would reduce staff by approximately 110 (from 689), with an estimated saving of $3.5 million in salaries and on-costs.

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CHAPTER 3
HEALTH IN VICTORIA

3.1 HEALTH EXPENDITURE

Commonwealth Grants Commission (CGC) data shows that current expenditure on health services in Victoria in 1990-91 was $3,226 million or $732 per capita, more than triple the per capita expenditure in 1981-82 of $230. ⁽³²⁾  Prior to 1984-85, Victoria's per capita expenditure was lower than the average for the rest of Australia, but since that year it has been consistently higher (see Figure 3.1).  The real increase in expenditure since 1980-81 is equivalent to about $300 per head.

Figure 3.1
Actual Current Expenditure on Health Services, Per Capita

The average increase in health expenditure per capita between 1981-82 and 1990-91 was greater in Victoria than in other States (see Figure 3.2).  Moreover, even after the much larger increases in Victoria in the period to the mid-1980s, increases in this State since then have generally continued at a higher rate.

Figure 3.2
Percentage increase in Current Expenditure on Health Services, Per Capita

The rate of increase in Victoria's health expenditure varied considerably between the different types of services.  Between 1985-86 and 1990-91 Family and Children's Health Services showed the greatest increase (14.0 per cent) and Children's Dental Services the least (8.2 per cent).  General Medical Services, which includes, inter alia, all expenditure on public hospitals and allied services, nursing homes and psychiatric institutions, showed an average annual increase of 9.2 per cent.  For the purposes of their calculations, the CGC adopts the following composition of the General Medical Services Category:  acute non-psychiatric care (i.e. public hospitals excluding nursing home and psychiatric patient bed days and outpatients) -- 55 per cent;  non-clinical services -- 24 per cent;  psychiatric patient care (in both acute care and psychiatric hospitals) -- 12 per cent;  and, chronic non-psychiatric patient care (i.e. nursing home type patients in public hospitals and nursing homes) -- 9 per cent.

The higher rate of increase in Victoria's per capita health spending than the average for other States has meant that, while in 1981-82 actual expenditure was just below the standardised expenditure for the State (as calculated by the CGC), by 1990-91 it was "over-spending" against the standardised amount by 12.3 per cent (see Figure 3.3).  The extent of Victoria's "over-spending" has increased progressively throughout most of the period, although there was a slight reduction between 1989-90 and 1990-91.  The NT is the only other State/Territory which showed a similar significant upwards trend in "over-spending" in this period, although NSW also exhibited a slight shift towards "over-spending".  The reverse trend is evident in all the other States as they either decreased their level of "over-spending" or increased the extent of "under-spending".

Figure 3.3
Percentage "Over Spending"

The largest increase in health expenditure in Victoria, (excepting when Medicare was introduced in 1984) occurred immediately following the change of Government in 1982.  Victoria's per capita expenditure rose by 20.9 per cent in 1982-83, whereas the average increase for all other States in this year was only 8.1 percent.

The largest component of the State Government's expenditure on health services is the cost of hospitals and other institutions.  Between 1981-82 and 1989-90, expenditure on institutional health care rose from $880 million to $2,222 million.  This represents an increase in real terms of $620 million. ⁽³³⁾  During this period, the activity levels in hospitals as measured by occupied bed days increased by an estimated 13 per cent. ⁽³⁴⁾

The other main areas of expenditure for the Department are Psychiatric Services, Nursing Homes and Geriatric Hospitals and Coommunity Health and Home Services (see Table 3.1).

Table 3.1
Total Outlays by Program, 1991-92 ($ million)

	OUTLAYS		PERCENTAGE OF TOTAL BUDGET
Program	Current	Capital	1987-88	1991-92
Executive Services	1.6	-	0.1	0.1
Acute Care Hospitals	1,943.4	150.2	68.8	71.2
Nursing Homes and Geriatric Hospitals	161.7	12.0	9.7	5.9
Community Health and Home Services	138.3	9.2	3.6	5.0
Psychiatric Services	277.2	13.5	9.4	9.9
Alcohol and Drug Services	28.4	1.0	0.9	1.0
Public Health Protection and Promotion	86.4	1.2	1.7	3.0
Patient Transport and Blood Transfusion	60.3	2.9	3.8	2.2
Health Agency Services	37.4	2.7	1.6	1.4
Health Education, Research and Service Quality	12.9	1.0	0.5	0.5
Total (a)	2,747.6	193.6	100.0	100.0

^(a) Numbers may not add precisely due to rounding

Source:  Budget Papers

The most significant cost for the Department is wages and salaries.  In 1990-91, 68 per cent of the total gross current outlays went towards wages and salaries.  There are no precise figures for the number of people employed directly or indirectly by the Department including administrative staff and personnel in the hospitals and other health services, but there appear to be approximately 70,000. ⁽³⁵⁾

Expenditure on Works and Services has taken an increasingly greater share of the budget in recent years, up from 3.4 per cent of the budget in 1983-84 to 6.6 per cent in 1991-92.  The 1990-91 expenditure was $218.6 million which was a real increase of $113.3 million on the 1983-84 budget.  However, a cut back of $23 million in capital expenditure was budgeted for 1991-92.

3.2 PROVISION OF HEALTH SERVICES

Victoria has the lowest ratio of acute care hospital beds per 1,000 population of all States/Territories except the ACT.  There were a total of 4.5 acute care beds per 1,000 population in 1990, including public, private and repatriation hospitals, compared with an average for the rest of Australia of 5.2.  However, Victoria has more private hospital beds per 1,000 population than all other States except Queensland and South Australia. ⁽³⁶⁾

The ratio of public and private aged nursing home beds in Victoria is well below that in other States (3.7 per 1,000 population in 1987-88 compared with 4.7 for the rest of Australia);  however, Victoria has the highest ratio of psychiatric beds (0.8 per 1,000 compared with an average for the rest of Australia of 0.5). ⁽³⁷⁾

In addition to the public hospital facilities, there are 112 community health centres in Victoria which are funded by the State Government and operated by other agencies.  There are also many community-based organisations which provide specific services and which receive public funding.  For example, there are 51 drug and alcohol agencies and 23 AIDS/STD agencies.

In total, there are over 2,000 services and agencies which do not come under the Department's operation but are funded by, and/or regulated by, the Victorian State Government. ⁽³⁸⁾

3.3 HEALTH OF THE POPULATION

Key health indicators show that Victorians utilise hospital inpatient services less than do other Australians, and that there is not a compensatory greater utilisation of other medical services.  This does not appear to have had a negative impact on their health.  Indeed, the annual death rate in Victoria per 1,000 population, standardised to take account of the age structure of the population, is slightly below the average for the rest of Australia (6.6 per 1,000 population compared with 6.7). ⁽³⁹⁾

Hospital patients are counted when they leave or "separate" from a hospital and the number of separations from public hospitals per 1,000 population in Victoria is 10.3 per cent below the average for the rest of Australia (see Table 3,2).  The number of patient bed days per 1,000 is also less than the Australian average, although the margin is reduced because of the slightly longer average length of stay in Victoria.

Table 3.2
Utilisation Rates of Institutional Care, 1987-88

	PUBLIC AND PRIVATE ACUTE CARE AND PSYCHIATRIC HOSPITALS		NURSING HOMES
	Separations bed per 1,000 population	Occupied bed days per 1,000 population	Separations bed per 1,000 population	Occupied bed days per 1,000 population
Vic	199.0	1,426.0	2.2	1,309.8
Rest of Australia	213.7	1,458.0	2.3	1,637.5
NSW (a)	212.1	1,471.2	2.6	1,737.2
Qld	221.9	1,457.7	1.7	1,549.5
WA	224.5	1,406.1	1.7	1,422.4
SA (b)	256.4	1,620.1	2.7	1,638.8
Tas	201.1	1,621.0	2.7	1,577.8

^(a) Data for the ACT are included in the NSW figure

^(b) Data for the NT are included in the SA figure

Source:  HUCS 1987-88

Although there is greater than average utilisation of private acute care hospitals and public psychiatric hospitals in Victoria, overall the rate of total institutional care (including acute, psychiatric and repatriation hospitals and nursing homes) remains the lowest in Australia with the exception of Western Australia.  The lower utilisation rates in Victoria's acute care hospitals and nursing homes are consistent with, and are partly explained by, the lower ratio of beds available in this State.  In general, increased bed availability results in higher usage levels, although this does not necessarily mean better patient care and improved health outcomes.

Victorians have a lower utilisation of Medicare services than the average for the rest of Australia (see Table 3.3).  However, much of the difference may be explained by the significantly greater utilisation of outpatient services in Victoria (2.1 occasions of service per capita per year in Victoria compared with an average of 1.57 for the rest of Australia).

Table 3.3
Utilisation of Medicare per Capita, 1990-91

Vic	7.98
Rest of Australia	8.71
NSW	9.61
Qld	8.45
WA	7.28
SA	8.19
Tas	7.71
NT	5.31
ACT	7.06

Source:  Commonwealth Department of Health, Housing
and Community Services Annual Report 1990-91

Regardless of changes to the public health system, since 1981 Victorians have maintained higher levels of private health insurance cover than the average across the rest of Australia (see Table 3.4 overleaf).  This may be a function of history and/or higher average income levels, but may also indicate a greater degree of disenchantment with the public health system in Victoria.  It would also partly explain the somewhat greater use of private hospital facilities in this State.

Table 3.4
Per cent of Contributor Units with Private Insurance

	1981	1990
Vic	63.3	49.7
Rest of Australia	55.0	46.3
NSW	58.5	48.0
Qld	41.9	36.5
WA	56.4	48.1
SA	61.8	55.4
Tas	61.5	50.2
NT	41.5	43.0
ACT	58.3	49.2

In conclusion, Victorians have consistently lower utilisation of acute hospital inpatient services and this does not appear to have had an adverse effect on the mortality rate, or resulted in greater demand for other medical services.  We can therefore conclude that there is a legitimate lower demand for these services in Victoria.  While it may not be possible to conclude that Victorians are more healthy than other Australians, there is clearly no justification for spending more per head on health services in this State.  In fact, one could even argue that the per capita expenditure in Victoria should be lower than in other States and there is no reason to increase the level of hospital inpatient services in this State.  Our findings for Victoria are supported by international research which shows that, in OECD countries, there is little correlation between total health expenditure per head and health measures such as life expectancy or infant mortality.

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CHAPTER 4
ANALYSIS OF EXPENDITURE ON PUBLIC HEALTH SERVICES

4.1 ACUTE CARE HOSPITALS

4.1.1 Background

The CGC does not provide the data required for a detailed analysis of efficiency in hospitals.  However, the Commission is currently reviewing its breakdown of expenditure for health services and is considering the introduction of a category which will separately identify hospital expenditure. ⁽⁴¹⁾  Nevertheless, even if this proposal is implemented, the CGC will not be able to provide a detailed breakdown of the total costs, nor data on the staffing and activity levels in the hospitals.

We have therefore referred to other data sources for the analysis in this section.  The only source of comprehensive, national data on costs and activity levels in hospitals are the Hospital Utilisation and Costs Studies (HUCS) published by the Australian Institute of Health (AIH).  The latest available HUCS study covers the reference year 1987-88.

Detailed data on the costs and utilisation of Victoria's hospitals is also compiled by the Health Department and published as the Hospital Comparative Data (HCD).  This series includes data for 1987-88 and 1990-91 for the major hospitals and for 1988-89 to 1990-91 for the smaller hospitals.  These data have been used in this Section for more recent analyses of trends and activity levels in Victoria's hospitals.

The funding and operation of acute care hospital services is the major activity undertaken by the Department.  The budget for these services in 1991-92 was $2,094 million, which was approximately 70 per cent of the Department's budget.  In 1987-88, there were 158 public acute care hospitals in Victoria with a total of 13,233 available beds.  There were a further 110 private acute care hospitals with 5,837 beds.

In 1989-90, Victoria had the lowest public acute hospital bed/population ratio of all States/Territories except the ACT (see Table 4.1).  However, the guideline which the Department in Victoria has set of 4.1 acute beds per thousand of all sectors is below the current level of services (4.5 beds per 1,000) and can only be achieved by bed closures. ⁽⁴²⁾  Furthermore, this guideline significantly exceeds the target national standard of 3.3 beds per 1,000 population by the year 2001 as proposed by the Commonwealth's National Health Strategy.

Victoria had the lowest utilisation rate of public acute hospital beds in 1987-88, with less occupied bed days per 1,000 population than any other State/Territory (see Table 4.1.1).  Victoria also had the lowest utilisation rate for all sectors.  This is consistent with the lower bed ratios per 1,000 population, and the tendency to increase utilisation as bed numbers increase.

Table 4.1.1
Acute Hospital Beds

	AVERAGE BEDS PER 1,000 POPULATION:  30 JUNE 1990 (a)		OCCUPIED BED DAYS PER 1,000 POPULATION:  1987-88 (b)
	Public acute hospitals	All sectors (c)	Public acute hospitals	All sectors (c)
Vic	3.0	4.5	879.0	1225.5
Rest of Australia	3.7	5.2	1040.4	1345.3
NSW	3.5	4.8	1092.4	1339.9
Qld	4.1	5.8	934.3	1310.8
WA	3.8	5.2	990.4	1316.0
SA	3.8	5.6	1091.6	1455.6
Tas	4.1	5.7	1044.5	1379.6
NT	3.7	4.7	1222.9	N/A
ACT	3.2	3.7	926.9	N/A

^(a) Department of Community Services & Health, Annual Report 1989-90

^(b) HUCS 1987-88

^(c) Includes public acute, private acute and repatriation hospitals, excludes psychiatric hospitals

The average length of stay in Victoria's acute public and repatriation hospitals is above the national average. ⁽⁴³⁾  When the raw data are adjusted to take account of interstate differences in the age distribution of the population and in casemix, the length of stay in Victoria was higher than that in all other States except the NT. ⁽⁴⁴⁾  However, the average length of stay has been decreasing in the past decade, and the decrease in Victoria between 1985-86 and 1987-88 was greater than the average decrease across the rest of Australia.

There have been significant changes in the demand for acute hospital facilities in the past decade, mainly as a result of changes in medical technology and the treatment of illness, and changes in the age structure of the population.  New developments in medical procedures and treatments have made a major contribution to shortening the period of hospitalisation for most conditions.  The average length of stay in public acute care and repatriation hospitals in Victoria has decreased from 6.9 days in 1983 to 6.0 days in 1989-90. ⁽⁴⁵⁾  During the 1980s the age distribution of the population changed, with lower birth rates and fewer young people, and an increasing proportion in the older age groups which increases the demand on hospitals.  In 1981, 25.0 per cent of the Australian population were aged 0-14 and 9.7 per cent were aged 65 and over.  By 1989, the population distribution had changed to only 22.1 per cent being aged 0-14 and 11.0 per cent aged 65 and over.

The changes in medical technology and treatment strategies, and the ageing of the population, have given rise to an increase in the number of hospital separations per 1,000 population.  However, the rate of increase in the number of occupied bed days per 1,000 population has shown a much smaller increase (2.9 per cent from 1983 to 1989-90, compared with an increase in separations per 1,000 population of 19.5 per cent over this period).  The relatively small increase in the total number of occupied bed days per 1,000 population is a result of the significant reduction in the average length of stay in hospitals due to improvements in treatments and medical procedures (see Table 4.1.2 overleaf).

These trends are forecast to continue over the next decade, but will result in an overall decrease in bed day numbers.  Research undertaken for the National Health Strategy projected that there would be a 22.4 per cent decline in bed days in Victoria between 1986 and 2001. ⁽⁴⁶⁾

The components of this trend and their effects are as follows:

• Population change = +20.0 per cent
• Age effect = +10.6 per cent
• Changing admission rates = +1.4 per cent
• Changing average length of stay = -39.2 per cent
• Interaction effects = -15.2 per cent

This projected decrease in demand for hospital beds indicates that the Government's strategy over the next decade should be to reduce the total number of available hospital beds.  However, in the past three years the Government has undertaken a number of projects which will increase bed numbers.  These include new facilities with additional beds at Frankston (100 beds), Maroondah (101 beds), Western Sunshine Campus (136 beds), Fairfield (15 beds), and Alfred Hospitals.

Table 4.1.2
Public Acute and Repatriation Hospitals -- Activity Level Trends

	Separations	Separations per 1,000 population	OBDs (a)	OBDs per 1,000 population	Average length of stay (days)
1983	494,372	122.5	3,421,828	847.9	6.9
1984	518,172	127.1	3,687,694	904.6	7.1
1985	535,173	129.9	3,799,728	922.3	7.1
1986	518,466	124.6	3,577,415	859.8	6.9
1987	586,284	139.3	3,810,846	905.4	6.5
1988	622,977	146.2	3,800,160	891.7	6.1
1989-90	635,643	146.1	3,813,858	876.8	(b) 6.0

^(a) OBDs are estimated from separations and average length of stay.

^(b) The method of calculation was changed in 1989-90.  Same day procedures which had been counted as zero length of stay are now counted as one day.  Hence this figure is higher than if it had been calculated on a comparable basis.

Source:  ABS Catalogue No.4301.2

In some of these cases the expansions have been part of the Government's program to relocate services closer to the communities which use the service, and it is planned to redirect resources accordingly.  For example, resources and services have been transferred from Prince Henry's Hospital to new facilities.  However, in future, unless existing hospital beds are closed as new ones are opened, bed numbers will increase and the costs of acute care hospital services will rise.  If the Department is to meet the National Health Strategy's proposed guideline of 3.3 beds per 1,000 population by the year 2001 then it will be necessary to reduce hospital bed numbers by approximately 3600.  The Department should be instituting a strategy for achieving this target in a rational, staged fashion.

4.1.2 Productivity

The Department has claimed that productivity has increased in public acute hospitals in recent years.  Thus, the Budget Papers for 1990-91 claimed that an increase in the number of patients treated was partly a result of increases in productivity, ⁽⁴⁷⁾ and that "major economies and productivity savings have been achieved". ⁽⁴⁸⁾

To measure productivity the Department has focused on the number of patients treated, and concluded that increasing patient numbers represents increasing productivity.  An alternative and -- we would argue -- more valid measure of productivity levels is staffing levels per occupied bed day.  The actual demands on staff are a function of the number of patient bed days they are required to support, and there is not necessarily a direct relationship between trends in patient numbers and in total bed days.  In fact, because of decreasing rates in the average length of stay of patients, total patient numbers have increased more rapidly than patient bed days.  Hence, staffing per occupied bed day is a more accurate measure of the demand on resources.

A comparison of the staffing levels per occupied bed day in 1985-86 and 1987-88 shows that productivity levels fell over that period.  The Full Time Equivalent staff (FTEs) per occupied bed ⁽⁴⁹⁾ rose from 4.16 to 4.30, and productivity decreased for salaried medical officers, diagnostic, professional and technical staff and administration and clerical staff. ⁽⁵⁰⁾

There is also no evidence that staff productivity has improved in more recent years.  Between 1987-88 and 1990-91 the number of inpatient days per acute inpatient staff in the major hospitals ⁽⁵¹⁾ (which cover 83.8 per cent of all public hospital inpatient bed days) fell from 124.8 to 114.7.  And inpatient days per staff in the smaller hospitals fell from 181.7 to 149.2 between 1988-89 and 1990-91.  The staffing categories where productivity decreased were medical support staff and HMOs in all hospitals, and also the administration and clerical staff in the major hospitals. ⁽⁵²⁾  In addition to the increases in staff/bed ratios, increases in overtime have contributed to the decline in productivity.  Between 1987-88 and 1989-90, overtime costs for staff in the major hospitals rose from 3.2 per cent of basic salary to 3.9 per cent.

The Department's claims of increased productivity are therefore not substantiated;  staffing levels per patient bed day have actually been increasing.

A measure of efficiency may also be obtained by evaluating what proportion of the total staff actually provide direct medical care, compared with the proportion providing support services.  The administration and clerical, and "hotel" and allied/domestic staff may be classified as support staff in hospitals.  In 1987-88, over 40 per cent of staff in Victoria's hospitals were support staff, compared with 34.7 per cent in the rest of Australia.  Thus, although there has been gradual decline in the proportion of support staff in recent years, there remains a substantially higher percentage of hospital staff in Victoria who are not directly involved in the delivery of medical services.  The nature of the functions performed by these staff means that it cannot be argued that lower paid support staff are being used more in Victoria to replace higher paid medical and nursing staff.

One factor which affects productivity levels is the amount of sick leave taken by staff.  In 1990-91, paid sick leave for hotel and allied staff in the major hospitals amounted to 3.3 per cent of the basic salary.  That is, these staff took an average of 8.6 sick days per year which is significantly more than for other categories of staff (e.g., nurses -- 6.8 days, administration and clerical staff -- 5.7 days, and medical staff -- 2.6 days). ⁽⁵³⁾

Average sick leave for all staff in the major hospitals decreased from 8.3 days in 1987-88 to 6.5 days in 1990-91.  Similar trends are evident in the smaller hospitals although overall leave levels are lower.  "Hotel" and allied staff in these hospitals have the highest leave levels, followed by nurses.  The average number of leave days taken decreased from 6.0 days per year to 5.5 between 1988-89 and 1990-91. ⁽⁵⁴⁾

The utilisation of sick leave is influenced by the culture and accepted practices in an individual's work places.  This is evident in the hospital sector by the differences in leave levels for different categories of staff, and between the same types of staff in the larger and smaller hospitals.  While we would not propose reducing sick leave entitlements, there is clearly scope for tightening administration and changing the accepted practices to increase productivity.

4.1.3 Costs

Public Hospitals

Up until 1986-87, the recurrent budget for each hospital was based on the previous year's expenditure adjusted for inflation.  However, in recent years the Department has become increasingly concerned about the cost of providing acute care hospital services.  In 1987-88, following a pilot program introduced into four public hospitals the year before, the Department commenced a program of Service Agreements whereby hospital funding was linked to output and global limits to annual funding were applied.  The practice of funding budget overruns was discontinued by the Department, although a number of hospitals have been unable to remain within their budgets.  There have been continuing deficits and it is estimated that there is over $30 million in accumulated operating deficits within public hospitals. ⁽⁵⁵⁾  The 1991-92 program of Service Agreements covers 342 health providers, including 142 public hospitals which have combined budgeted recurrent outlays in excess of $2 billion. ⁽⁵⁶⁾

In 1989-90, the budgets for individual hospitals were negotiated on the basis of achieving increased productivity.  The budgets of most hospitals were then to be reduced in 1990-91 to reflect the expected savings to be achieved by improved productivity and reductions in outpatient services.  The Department expected that savings could be achieved by employing more efficient clinical practices, and in non-direct care areas such as administration and support services.  The Department again identified the need to improve the efficiency and productivity of the acute care hospitals in Victoria as a key issue in 1991-92.

However, audit of public hospitals has shown that, while the move to Service Agreements has been a positive one, their use by public hospitals has not been consistent with their purpose.  The Auditor-General found that "while service agreements commit hospitals to achieving specified service delivery targets for an agreed annual cash grant from the Department, in reality the provision of grants totalling in excess of $2 billion are still based predominantly on staffing levels". ⁽⁵⁷⁾  In fact, the Health Department maintains a list of EFT staff for each hospital.

This is consistent with the Hospital Comparative Data statistics for 1987-88 to 1990-91 which do not support the Department's claims of budget cuts and cost savings through increased efficiency.  The trends in productivity have been addressed above, the costs and budgets are analysed below.

The gross operating expenditure for acute care services in the major hospitals increased by $507.7 million over the three-year period -- an average of 10.2 per cent per annum. ⁽⁵⁸⁾  This increase substantially exceeded the hospital and clinical price index, and was further enhanced by the fall in activity levels over the corresponding period.  The costs per inpatient bed day and outpatient attendance have therefore shown even larger real increases (see Table 4.1.3).

The continued real increase since 1990-91 in budget allocations to acute care hospitals, while the trend is for little change in the occupied bed days and decreasing levels of outpatient services, suggests that there may not have been improvements in efficiency since 1990-91.

Table 4.1.3
Public Hospitals -- Changes in Expenditure and Activity Levels

	Major hospitals and geriatric agencies: 1987-88 to 1990-91.
Gross operating fund expenditure	33.7%
Inpatient bed days	-2.1%
Cost per inpatient bed day	30.7%
Outpatient occasions of service	-4.3%
Cost per outpatient occasions of service	42.1%
Hospital and clinical price index	18.6%

Source:  Hospital Comparative Data 1989-90 and 1990-91.

HUCS data for 1987-88 shows that Victorian acute care and repatriation hospitals at that time had the highest operating costs per approved bed of all other States/Territories (excluding the NT and ACT);  they were 24.8 per cent higher than the average cost per bed for the rest of Australia (see Figure 4.1.1). ⁽⁵⁹⁾  The difference between the Victorian cost per bed and the average for the rest of Australia was significantly greater for the non-metropolitan hospitals.  The only types of hospitals which did not have above average costs were the district hospitals in metropolitan areas (i.e., metropolitan hospitals which have less than 200 beds and which treat only a restricted range of cases).  These hospitals represent only 12.0 per cent of the operating expenditure for acute care and repatriation hospitals.

Figure 4.1.1
Acute Care Hospitals -- Operating Costs per Approved Bed, 1987-88

However, when Victoria's cost per occupied bed day, adjusted to include a measure for non-inpatient services, is compared with the average for the rest of Australia, Victoria's costs are 5.8 per cent below this average.  The apparent contradiction between this result and the higher cost per approved bed in Victoria is a result of the adjustment for non-inpatient services which has different effects on each State's data because of the different levels of outpatient services provided in each State.  As noted, the utilisation of public hospital outpatient services in Victoria is estimated to be the highest in Australia. ⁽⁶⁰⁾  If the relative cost of an outpatient attendance compared with an inpatient bed day is overestimated, then this will result in fewer outpatient visits being equated to an inpatient bed day.  Hence, the total number of bed days, adjusted to account for outpatient services, will be greater and there will be a subsequent underestimate of the cost per adjusted bed day.  Because any adjustment for outpatient services will have a far greater impact on the Victorian data, the underestimate of the adjusted bed day cost will be greater in Victoria.

A discussion of the purpose and appropriate level of the outpatient adjustment is contained in Appendix C.  It is argued there that the factor of just under two employed by the Australian Institute of Health in the HUCS study (where 1.917 outpatient visits is equated to one inpatient bed day) is too low.

If the HUCS data are re-analysed applying an adjustment factor of four (for a justification of this factor see Appendix C), then the Victorian cost per adjusted bed day would increase from $278 to $354, and the comparable average cost for the rest of Australia would increase from $295 to $345.  That is, the Victorian cost changes from being 5.8 per cent below the average to 2.6 per cent above average.  And, on the basis of this adjustment, if the Victorian cost was brought down to the average for the rest of Australia a saving of $44.7 million could have been realised.  Clearly, if a larger adjustment factor for non-inpatient services is applied then even greater savings could be realised (see Table 4.1.4).

Table 4.1.4
Acute Care Hospitals -- Outpatient Adjustment Factors and
Costs per Adjusted Bed Day, 1987-88

	Cost		Saving
Adjustment Factor	Victoria $m	Rest of Australia $m	$m
1.917	278	295	-107.4
4.0	354	345	+44.7
5.0	373	356	+84.4

These comparisons also do not take account of external factors which have an impact on the operating costs of hospitals, such as remoteness and transportation costs.  An indication of the relativities in costs, adjusted for differences in circumstances, may be ascertained by comparing the standardised costs for General Medical Services which are calculated by the Commonwealth Grants Commission (CGC).  According to the CGC, a per capita cost in Victoria 8.2 per cent below the cost for the rest of Australia should allow services to be provided at the same level.

The existence of inefficiencies in the hospital system are also indicated by the large differences in patient costs in similar types of hospitals.  The Hospital Comparative Data has calculated the cost per inpatient, weighted using the Diagnostic Related Group (DRG) index to control for differences in patient conditions and treatments which affect costs.  The results showed that the adjusted cost per inpatient in the teaching hospitals ranged between $2,892 and $5,328 in 1990-91.  Inpatient costs in the large regional base and suburban hospitals varied between $2,348 and $3,798. ⁽⁶¹⁾

Similarly, there were large variations in the cost of outpatient services.  The average cost per outpatient occasion of service in the teaching hospitals varied between $38 and $206, and between $18 and $103 in the large regional base and suburban hospitals. ⁽⁶²⁾  The fact that there are such wide discrepancies in the per patient costs in similar types of hospitals providing similar services suggests that there is scope for many hospitals to increase efficiency and reduce costs.

The Department identified this potential and made the reduction in cost differentials to improve productivity a key issue for 1991-92. ⁽⁶³⁾  This will become imperative for hospitals if the current trend towards casemix funding continues and hospitals will no longer be able to rely on previous funding levels where these are supporting relative inefficiencies.  (Casemix refers to the profile of patients and conditions treated in a hospital).  In that event the funding of hospitals will be based on an average cost per type of patient treated, and each hospital will receive funding according to the number and types of patients treated per year.  Hospitals whose costs are above the average for each service will therefore be under financial pressure to reduce their costs.

The above analysis of costs for acute care hospitals across Australia, and of the variation in costs between similar hospitals in Victoria, indicates that there is scope for reducing the operational costs of these hospitals.  The apparently lower bed day costs in Victoria in the HUCS study are a result of an inappropriate adjustment for outpatient services.  If a more realistic adjustment is made, based on the Department's own cost data, then Victoria's costs are above those in the rest of Australia.  In Section 4.4 below we identify the main factors contributing to these higher costs and estimate the savings which can be achieved by improving the efficiency of acute care hospitals.

Comparison of Public and Private Hospitals

Analysis of the hospital costs in the public and private sectors indicates that private hospitals are, on average, more efficient than public hospitals. ⁽⁶⁴⁾ Direct comparisons between the two sectors are difficult due to the limited data available, and differences between the accounting practices used in each sector.  Nevertheless, after adjusting for such differences J.F. Taylor & Co. estimated the cost per bed day in public sector hospitals to be $236.80 and the comparative cost in private sector hospitals to be $232.90. ⁽⁶⁵⁾  These figures do not include any adjustment for casemix differences between public and private hospitals, and the absence of management and head office charges in the public sector.  Traditionally, it has been assumed that variations in casemix between the two sectors give rise to higher costs in the public sector.  However, J.F. Taylor & Co. argue that, while the public sector treats the "sickest" patients, this does not necessarily mean that they are the costliest in terms of cost per occupied bed day.  Thus, the above discrepancy in costs between the two sectors may be more extreme than the given figures indicate.

J.F. Taylor & Co. also undertook some further analysis on selected South Australian hospitals to compare the costs per separation in public and private hospitals.  The cost per separation provides a better measure of relative efficiency since the generally lower occupancy rates in private hospitals mean that the fixed costs are distributed over fewer bed days.  (The AHMAC Private Hospital Study estimated that increasing occupancy from 70 to 80 per cent reduced occupied bed day costs by up to $10.)  J.F. Taylor & Co.'s research found that the average cost per separation in private hospitals was $1,451 compared with an average cost of $1,564 in public hospitals.

If the difference between these figures is applied to the estimated number of public hospital separations in Victoria in 1990-91 (645,000), then the cost of public hospitals could have been reduced by $73 million.

4.1.4 Staffing and Salary Costs

The staffing of Victoria's acute care hospitals is the major area where efficiencies can be introduced and substantial savings achieved in the operating costs of the public hospitals.

Salaries are the most significant component of operating expenditure for hospitals, and make up 75 per cent of the operating costs in Victoria's hospitals.  The total staffing costs are affected by two factors:  salary levels and staffing levels.  The salaries in Victoria were 6.7 per cent above the average salaries for the rest of Australia in 1987-88, although the extent of the higher level of payment varied between the different categories of staff (see Table 4.1.5).  Salaries in Victoria's hospitals have increased more rapidly than the Australian average;  in 1985-86 they were only 2.6 per cent higher than the average for the rest of Australia.

The staffing levels in Victoria were also above the average levels for the rest of Australia, with an average of 14.9 per cent more staff per occupied bed in 1987-88. ⁽⁶⁶⁾  However, the differences were much higher for some staffing categories, in particular domestic and other staff, administrative and clerical staff, and salaried medical officers (see Table 4.1.5).  There were also differences between the various types of hospitals in the level of staffing.  The non-metropolitan district hospitals with less than 50 beds had the highest staffing levels and the teaching hospitals and rural base hospitals also had significantly above average staffing levels.  The overall staffing levels in other types of hospitals were close to average.  There were also wide variations in the staffing levels of different hospitals, even when they were approximately the same size and provide similar services.  For example, the number of inpatients treated (DRG adjusted) ⁽⁶⁷⁾ per acute inpatient staff unit in the major general hospitals in 1989-90 ranged from 13.1 at Dandenong Hospital to 20.0 at Geelong Hospital, so that staffing at Geelong is over 50 per cent more efficient. ⁽⁶⁸⁾

The staffing levels in Victoria are 15.0 per cent above those in the rest of Australia, and 25.4 per cent higher than those in Queensland (4.3 staff per occupied bed in Victoria compared with 3.4 in Queensland).  The majority of the difference between Victoria and the rest of Australia can be attributed to higher levels in Victoria of domestic and other staff (44.1 per cent above the average for the rest of Australia), administrative and clerical staff (29.3 per cent above the average for the rest of Australia), and nursing staff (11.3 per cent above the average for the rest of Australia).

Staff mix, particularly the balance between more highly trained medical staff and technical staff, and the number of administrative staff, appears to be a key factor in explaining interstate variation in hospital costs.  There is no reason to believe that there are differences between the States in the profile of hospital patients which would explain these differences.  They must therefore be attributed to differences in staffing policy.

Table 4.1.5
Public Acute Hospitals -- Salaries and Staffing Levels, 1987-88

	Average salary in Victoria as a percentage of average for the rest of Australia	FTE staff per occupied bed in Victoria as a percentage of staffing levels for the rest of Australia
Salaried medical officers	119.0	118.4
Nursing staff	105.7	111.4
Diagnostic, professional and technical (1)	128.9	72.5
Administration and clerical	108.7	128.4
Domestic and other (2) staff	99.0	144.1
Total	106.7	114.9

⁽¹⁾ Includes all allied health professionals, ambulance officers and dental nurses

⁽²⁾ Includes maintenance and gardening staff, and assistants such as orderlies, wardsmen and porters

Source:  HUCS 1987-88

As noted, HUCS also calculated the salary costs per adjusted occupied bed day and found that Victoria's costs were below the Australian average despite the higher average salaries and higher staffing levels per occupied bed.  This anomaly occurs as a result of the low adjustment factor applied for non-inpatient services.  If the HUCS data are re-analysed using an adjustment factor of four (see above), the salary cost per adjusted bed day in Victoria is 2.6 per cent above the average for the rest of Australia.

More recent data indicates that the high salaries and staffing levels in Victorian hospitals as indicated by the HUCS data for 1987-88 have been maintained.  Between 1987-88 and 1989-90, the average salary across all staffing categories rose more than the CPI.  In addition, the staffing levels per inpatient bed day increased slightly.

Clearly, if the average salary and staffing levels in Victoria's acute care hospitals were brought in line with the average for the rest of Australia, substantial savings could be achieved in the hospital budget.  Analysis of the HUCS data indicates that the budget for acute care hospitals in 1987-88 would have been reduced by $217 million, or 16.5 per cent of the salaries, wages and related payments component of the operating costs, if salaries and staff levels were reduced to the average for the rest of Australia.  The Hospital Comparative Data for the period 1987-88 to 1990-91 indicates that staff productivity levels have not improved since 1987-88 but rather have reduced slightly.  We may therefore assume that the relativity between Victoria and the rest of Australia with respect to salaries and staffing levels has not changed, and hence a saving of $277 million could have been realised in the 1991-92 budget.

4.1.5 Non-Salary Costs

Non-salary items such as food and medical supplies, pharmaceuticals, utilities and repairs and maintenance make up approximately one quarter of the total operating costs for hospitals.

The non-salary costs per adjusted occupied bed day in Victoria were below the average for the rest of Australia according to the HUCS analysis.  However, when a factor of four is applied (see above) to convert outpatient visits to occupied bed days the Victorian costs are 2.6 per cent above the average.  The two main areas of higher costs are patient transport and workers compensation premiums.

Since 1987-88, the non-salary costs per inpatient bed day have continued to rise more rapidly than the hospital and clinical price index.  In the major hospitals, the non-salary cost per inpatient bed day increased at a rate which was more than twice the increase in this index (i.e., 30.5 per cent from 1987-88 to 1989-90 compared with an increase in the index of only 12.1 per cent).  The main items where cost increases occurred were WorkCare, superannuation, administration expenses, payments to Visiting Medical Officers and pharmaceutical, medical and surgical supplies.  (With WorkCare, for example, the Auditor-General has reported that in 1991-92 Victoria's public hospitals will pay levy premiums in the order of $58 million, but that the full cost of workplace injuries, which the Health Department had not quantified, would be several times this figure. ⁽⁶⁹⁾  The Auditor-General found that over the five years to 1992, WorkCare levies in public hospitals had increased by 260 per cent;  he criticised the Department and the majority of public hospitals for their failure to maintain adequate management information systems to enable the full cost of workplace injuries to be determined and monitored.)

4.1.6 Outpatient Services

The acute care hospitals also provide a range of outpatient services including accident and emergency services and consultations.  In 1989-90, the cost of outpatient services in Victoria's public hospitals was $540.9 million or 24.6 per cent of the acute hospital operating costs.

The per capita utilisation of outpatient services in Victoria is significantly greater than in other States.  The Australian Institute of Health (AIH) estimated that the rate in Victoria was 33.8 per cent above the average for the rest of Australia (2.1 occasions of service per capita in Victoria in 1987-88 compared with 1.57 across the rest of Australia). ⁽⁷⁰⁾  Figures from the Hospital Comparative Data base support the AIH estimate for Victoria.  These data show that the number of occasions of service per capita in 1988-89 was 2.1, and decreased to 2.0 in 1990-91.

The difference between Victoria and the other States in the usage rate of outpatient services suggests that a significant proportion of the services provided in Victoria could be undertaken by the private health sector.  This is supported by the findings of the Auditor-General's investigation of the Alfred Hospital.  The audit review concluded that between 10 and 20 patients per day who attended the outpatient clinic were suffering from minor ailments and did not have sufficient medical need to justify treatment at the clinic.  That is, 2.3 per cent to 4.6 per cent of outpatient attendances could have been attended to by a private GP. ⁽⁷¹⁾

There is other evidence which suggests that the higher utilisation of outpatient services is not reflected in lower use of other public health services, i.e. inpatient services.  What appears to be the case is that outpatient services are used instead of private GP services, and this is reflected in the lower number of Medicare claims per capita in Victoria.  As alluded to elsewhere in this Report, if the figures for outpatient occasions of service in Victoria are added to the figures for Medicare occasions of service per capita, then the Victorian rate is close to the average for the rest of Australia.

A further factor which identifies the need, and opportunity, to reduce costs in this area is the significant increase in the cost of outpatient services in recent years.  The cost of outpatient attendances between 1987-88 and 1989-90 in the major hospitals (which provide 77.7 per cent of outpatient services and a similar proportion of the total expenditure on outpatient services) rose by significantly more than the hospital and clinical price index.  The index increased by 18.6 per cent and the cost per outpatient occasion of service by 42.1 per cent.

If the level of outpatient services in Victoria was cut back to the average level of service for the rest of Australia (as at 1987-88), then an estimated saving of $105 million could have been achieved in the 1989-90 expenditure. ⁽⁷²⁾

In the 1990-91 budget, the Government identified outpatient services as an area where expenditure and services should be reduced.  The hospitals were expected to target outpatient services and reduce the degree of duplication with other medical services in the community. ⁽⁷³⁾  Data are not yet available which would allow an assessment of whether this objective has been realised, but moves by the Health Department to allow the privatisation of outpatient services by public hospitals wishing to pursue this course have recently been reported. ⁽⁷⁴⁾

The differences to date between the States in the utilisation of outpatient services have been a result of historical differences in policy.  Victorian hospitals have traditionally referred their inpatients to the outpatient service for follow-up medical treatment, a policy which has not been adopted to the same extent in other States.  Because the Medicare Agreement does not allow hospitals to charge for outpatient services, fees cannot be employed to influence utilisation rates.  Such policy differences are thus the key reason why these rates vary.  As such, they indicate the potential for cost savings.  If utilisation of outpatient services were reduced, the patients would not suffer as they would be eligible for free treatment from their doctors.  However, the State Government would save considerable amounts as the Commonwealth would then fund the cost of patient treatment.

4.1.7 Private Patients

Almost one quarter of public hospital bed days in Australia are filled by private patients.  There are a number of reasons why those with private health insurance use the public, rather than private, hospital system.  For example, certain procedures or doctors may only be available in the public system, or there may be no conveniently located private hospital.  However, the wide variation between the States in the proportion of private patients in public hospitals suggests that there is an important element of discretion, that is, government policies can affect the extent to which public hospitals are used by private patients.  For example, long waiting lists in public hospitals would encourage greater utilisation of private hospitals.

Historically, Victoria has had a stronger private hospital sector than in other States, higher rates of private health insurance cover, and a greater proportion of private patients in public hospitals.  Under the Medicare Agreement, a penalty is applied to a State if the number of inpatient bed days for public patients is less than 56 per cent of all patient bed days in both the public and private sectors.  Victoria is the only State against which such a penalty has been invoked.  In 1987-88, only 53.5 per cent of all patient bed days were for public patients. ⁽⁷⁵⁾  Nevertheless, there are direct benefits to the hospitals from higher private patient numbers because of the revenue received from the health insurance funds, although this does not generally cover the full operating costs for these patients.

Table 4.1.6
Acute Care Hospitals -- Private Patients, 1987-88

	PERCENTAGE OF TOTAL OCCUPIED BED DAYS		PERCENTAGE OF PUBLIC HOSPITAL OCCUPIED BED DAYS
	Private patients in public hospitals	Private patients in private hospitals	Private patients in public hospitals
Vic	21.4	25.1	28.5
Rest of Australia	18.5	20.2	22.9
NSW	24.8	17.1	29.9
Qld	10.0	24.9	13.3
WA	16.5	20.0	20.7
SA	13.5	23.6	17.6
Tas	11.8	20.5	14.8
NT	7.3	-	7.3
ACT	40.8	-	40.8

Source:  HUCS 1987-88

In Victoria, the proportion of private patients in public hospitals was higher than in most other States in 1987-88, despite the fact that Victoria has a greater proportion of all acute hospital beds in the private sector (29.8 per cent compared with the average for the rest of Australia of 21.9 per cent).  Across Australia, 22.9 per cent of public acute hospital occupied bed days were filled by private patients in 1987-88 whereas the equivalent figure in Victoria was 28.5 per cent (see Table 4.1.6).

However, the Department's hospital data suggests that the figure is even higher.  In 1990-91, 37.2 per cent of the total bed days for all Victorian hospitals were taken by private patients. ⁽⁷⁶⁾

Between 1985-86 and 1987-88, the proportion of private patient days in public hospitals rose, with the increase in Victoria being significantly greater than the average increase across the rest of Australia (up by 18.0 per cent in Victoria compared with 0.5 per cent across the rest of Australia). ⁽⁷⁷⁾  This increase was not associated with a similar change in the level of private health insurance coverage and hence cannot be explained by changes in insurance levels.  The proportion of people with hospital insurance in Victoria increased by only half a percentage point (from 51.1 per cent to 51.6 per cent), and overall there was no change in insurance levels across Australia.

In 1988-89, the Victorian Government stated that it would encourage private patients on public hospital waiting-lists to use private hospitals. ⁽⁷⁸⁾  Then again in 1989-90, the Government noted that it was considering a program to make greater use of private hospitals and thereby reduce the pressure on the public hospitals. ⁽⁷⁹⁾  The most recent data available, which covers the period up to 1989-90, does not provide any significant evidence of decreased utilisation of public hospitals by private patients.  The percentage of private patient days fell by only 0.3 per cent from 36.5 per cent to 36.2 per cent between 1988-89 and 1989-90.

If the Government's policy was effective, the demand on the public system could be reduced, as well as achieving a reduction in the cost to the Government in providing hospital services.  There is currently considerable unutilised capacity in the private hospital sector.  The occupancy rate for private acute and psychiatric hospitals in Victoria is 58 per cent (compared with 57 per cent in the rest of Australia).  If private hospitals were to operate at an occupancy rate of 80 per cent (which is close to the occupancy rate of public acute hospitals) then the estimated number of unused private acute hospital beds is 1,300.  That is, if some of the demand for services can be shifted from the public to private hospital sectors, the private facilities currently available would potentially allow up to 1,300 (or 10 per cent) public hospital beds to be closed.  (This could realise an estimated saving of approximately $165 million based on the operating costs of public hospitals in 1989-90.)  It should be noted that the savings from shifting demand to the private sector will only be realised if public hospital beds and facilities (e.g., operating theatres) are closed, and staff numbers reduced accordingly.

4.2 PSYCHIATRIC SERVICES

4.2.1 Introduction

The Department, through the Office of Psychiatric Services, provides institutional and community care for the mentally ill, and services directed towards the prevention of psychiatric illness in the community.  The Department's programs cover children, adolescents, adults and the elderly and include acute hospital and long-term care, clinics, day hospitals, community accommodation and support services, and assessment centres.  Funding is also provided to non-government agencies for the provision of community-based services and in 1989-90 the Department spent 2.6 per cent of the Psychiatric Services recurrent budget on subsidies to non-government agencies. ⁽⁸⁰⁾  The psychiatric hospitals consume the majority of the Department's expenditure on Psychiatric Services.  In 1987-88 total operating costs of the psychiatric hospitals were $210.8 million, ⁽⁸¹⁾ or 86 per cent of the Psychiatric Services budget. ⁽⁸²⁾  In 1987-88, there were 22 public psychiatric hospitals with 3,038 available beds, and a further nine privately funded and operated psychiatric hospitals, with 361 beds.

4.2.2 Psychiatric Hospitals

The situation with respect to the nation's psychiatric hospitals has attracted considerable public comment in recent years, as treatment regimes have undergone reform, particularly in respect to bringing mental health into the mainstream of hospital and medical practice.  The process of de-institutionalisation and the provision of more community based facilities has begun in Victoria, as well, and new capital funds have been found to raise the standard of psychiatric facilities. ⁽⁸³⁾  However, these reforms are still largely to occur.  Official clinical audits of the State's psychiatric institutions were carried out only in 1991 and published in March 1992;  the situations they describe were current less than twelve months ago. ⁽⁸⁴⁾  The conclusions they reach are that while these processes and programs have been talked about by the State government, standards of patient care in many of the State's psychiatric hospitals have changed little and, in many cases, have become distinctly worse than was the case fifty years ago. ⁽⁸⁵⁾  As well, in relation to the cost structures in psychiatric hospitals, while patient numbers in these institutions have dropped significantly, staff numbers have largely remained the same.

Victoria provides more psychiatric hospital beds per 1,000 population than all other States, and Victorians make significantly greater use of these services (see Table 4.2.1).  As there are no obvious medical reasons why Victorians should require more psychiatric hospital beds, the differences would appear to be a result of State Government policy with respect to the provision of these services and access to them.

In 1987-88, Victoria had 0.7 public hospital psychiatric beds per 1,000 population compared with the average for the rest of Australia of 0.5.  Victoria had proportionally more psychiatric beds than all other States except Tasmania, which also had 0.7 beds per 1,000 (see Table 4.2.1).  With respect to private psychiatric hospital beds, NSW, Victoria, Queensland and South Australia all have 0.1 beds per 1,000 population and the other States have none.  Despite the higher provision of psychiatric beds, there are still problems of access to acute beds in Victoria, as recent reports have made clear. ⁽⁸⁶⁾

Table 4.2.1
Public Psychiatric Hospitals -- Beds and Utilisation, 1987-88

	Average beds per 1,000 popn	Separations per 1,000 popn	Occupied bed days per 1,000 popn
Vic	0.7	2.7	200.5
Rest of Australia	0.5	1.6	132.9
NSW	0.5	1.9	131.3
Qld	0.5	0.5	146.9
WA	0.3	1.5	90.1
SA	0.6	3.1	164.5
Tas	0.7	0.7	241.4

Source:  HUCS 1987-88

Not surprisingly, perhaps, given the greater availability of psychiatric hospital beds, Victorians also have a greater rate of utilisation of such beds.  In 1987-88, there were 200.5 occupied bed days per 1,000 population in Victoria, compared with the average for the rest of Australia of 132.9.  Tasmania was the only State which had a higher number of occupied bed days than Victoria (241.4 per 1,000 population).

The Victorian Government has also clearly maintained a different policy to other States in relation to the type and size of its public psychiatric hospitals.  It has stated that it aimed to establish a range of "small, local, easily-accessible inpatient units" to support the community-based services, ⁽⁸⁷⁾ which is consistent with the profile of inpatient facilities in the State.  Compared with the other States, Victoria has significantly more hospitals, the average number of beds per hospital is mostly smaller, and a lower proportion of these beds is in the metropolitan area (see Table 4.2.2).

Table 4.2.2
Public Psychiatric Hospitals -- Size and Distribution, 1987-88

	No. of Hospitals	Average No. of beds	No. of hospitals with less than 10 beds	Percentage of beds in the metropolitan area
Vic	22	138	10	59
NSW	6	456	0	79
Qld	3	410	0	54
WA	5	100	4	100
SA	2	393	0	100
Tas	1	333	0	100

Source:  HUCS 1987-88

The occupancy rate for Victoria's hospitals is close to the average for the rest of Australia, and only Queensland and Tasmania have significantly higher occupancy rates (see Figure 4.2.1).  Differences in occupancy levels are therefore not an explanation for the differences in the staffing levels and costs for Victoria's hospitals compared with other States.

Figure 4.2.1
Public Psychiatric Hospitals -- Occupancy Rates, 1987-88

Given that there are significant economies of scale in hospitals, the strategy adopted in Victoria of moving to smaller scale facilities will further increase the cost of providing psychiatric hospital services.  It is, therefore, not surprising that the average cost per bed in Victoria's psychiatric hospitals is significantly greater than the cost in most other States.  The average annual cost per approved bed in Victoria in 1987-88 was $70,000 compared with an average for the rest of Australia of $49,500.  (See Table 4.2.3).  It is also evident that there is considerable scope for reducing the cost of these services by rationalising the distribution of psychiatric hospital beds to bring Victoria into line with other States.

The operating cost per bed day in Victoria was $248 in 1987-88 which was 48.5 per cent more than the average cost across the rest of Australia (see Figure 4.2.2).  The major factor contributing to the higher costs in Victoria's psychiatric hospitals was salary costs, which were 75 per cent of the total operating costs.  These costs are greater as a result of the higher staffing levels in Victoria's hospitals, and not because of higher salaries.  Victoria had 64.0 per cent more staff per occupied bed than the average staffing level in the rest of Australia.

Table 4.2.3
Public Psychiatric Hospitals, 1987-88

	Average annual cost per approved bed ($'000)
Vic	70.3
Rest of Australia	49.5
NSW	47.9
Qld	39.5
WA	61.3
SA	70.1
Tas	33.0

Source:  HUCS 1987-88

Nurses make up almost half the staffing numbers per bed day, and the nursing staff ratio per occupied bed in Victoria was 26.0 per cent above the average for the rest of Australia, accounting for 21.9 per cent of the higher level of staffing in this State.  High staff/bed ratios for domestic and other support staff, and administration and clerical staff must therefore account for the majority of the higher than average staffing in Victoria.

Figure 4.2.2
Public Psychiatric Hospitals -- Operating Costs, 1987-88

It would appear to be difficult to justify these higher staffing levels in areas not directly related to the patients' care.

The ratio of average salaries in Victoria's psychiatric hospitals to average salaries across the rest of Australia shows that, over all staffing groups, Victoria's salaries are close to this average (see Figure 4.2.3).  The exceptions are administrative and clerical staff, who have salaries 42.6 per cent above the average in the rest of Australia, and diagnostic, professional and technical staff, who have salaries 14.5 percent above the average.

Investigations by the Auditor-General since 1990 have identified several sources of inefficiency in the psychiatric hospitals.  For example, an audit review of cleaning services in six of the major hospitals found that inefficient work practices were being followed in five of these hospitals and that savings of at least $1.4 million could be achieved. ⁽⁸⁸⁾  In 1989-90, the Government had stated that it intended to improve productivity and efficiency in psychiatric services by removing inefficient work practices and pursuing structural efficiency. ⁽⁸⁹⁾  Nevertheless, the results of the audit review indicate that this intention had not been realised, at least with respect to cleaning services.

Figure 4.2.3
Public Psychiatric Hospitals -- Average Salaries, 1987-88

Another factor which contributes to the bed day cost of inpatients, and hence could notionally be an explanation for the cost differences between the States, is turnover.  With a higher turnover, and hence shorter average length of stay, both the administrative and medical costs are higher as more resources are required to process patients and for assessment in the early stages of a hospital stay.

However, in Victoria's case the average length of stay in psychiatric hospitals in 1987-88 was seven to 37 per cent longer than in NSW, WA and SA.  Thus, Victoria's costs should be lower on this account.  Queensland and Tasmania have exceptionally long average lengths of stay and thus, not surprisingly, the lowest costs per bed day (see Figure 4.2.4).

Figure 4.2.4
Public Psychiatric Hospitals -- Average Length of Stay, 1985-86 and 1987-88

Certainly, significant savings could be achieved in the budget for psychiatric hospitals.  If the cost per bed day was cut back to the average for the rest of Australia, expenditure in 1987-88 would have decreased by $68.8 million.  If in addition the bed day rate per 1,000 population in Victoria was brought in line with the Australian rate a further saving of $48.1 million would have been realised.  Thus, a total saving of $116.9 million would have been realised, which is a reduction of 44.6 per cent in the actual expenditure in that year.  Clearly, a reduction of this magnitude relies upon a major change in the Government's policy on both work practices and the level of provision of inpatient services.

More recently, the Auditor-General has reported upon other practices within the psychiatric hospital system giving rise to higher costs, in particular, that WorkCare practices in the State's psychiatric hospitals are poor and are not being managed efficiently.  The Auditor-General has reported that WorkCare levy premiums for the 5600-plus staff in the State's 20 psychiatric hospitals (at June 30, 1991) had increased over the previous five years by 345 per cent and were in 1991-92 totalling $15 million;  moreover, he observed that the full cost of workplace injuries in these hospitals would be several times this figure. ⁽⁹⁰⁾  According to the Occupational Health and Safety Commission in 1991-92, in a rating of WorkCare performance in Victorian industries, Victoria's psychiatric hospitals scored among the poorest performers with the fourteenth worst ranking of 271 industries.  By comparison, the State's public hospitals ranked 86. ⁽⁹¹⁾  The Auditor-General also reported that in 1991-92:

• Victorian psychiatric hospitals had the highest net levy premium rate as a proportion of payroll than psychiatric hospitals in other states;  and
• State psychiatric hospital employees were, on average, between two and three times more likely to submit WorkCare claims than their private sector counterparts. ⁽⁹²⁾

The attention of the Auditor-General was directed to other management practices in the State's psychiatric hospitals.  For example, audit found that the level of subsidy going to the provision of staff meals in psychiatric hospitals -- determined by the Health Department to be $1.6 million a year -- had been substantially understated, and that the strategies formulated to phase-out the subsidy had not been implemented.  In addition, the review also disclosed that the adoption of cafeteria staffing levels similar to those operating in the metropolitan public hospitals would achieve substantial savings in labour costs. ⁽⁹³⁾

While changes to work practices to improve efficiency can produce immediate savings, it would take longer to realise the full benefits from changes to the policy on the provision of services (i.e., the number of facilities and total number of beds).  Nevertheless, an immediate change in policy should be implemented so that the excessive use of psychiatric inpatient facilities is reduced.  This would be consistent with the Departments' existing policy of focusing on community-based psychiatric services.  Changed policies would also have an impact on the reported shortage of acute care psychiatric beds;  this appears largely to be a function of treatment practices in the State's psychiatric hospitals where lengths of stay in 1987-88 were seven to 37 per cent longer than in NSW, WA and SA. ⁽⁹⁴⁾

4.3 NURSING HOMES

4.3.1 Background

The Health Department funds and operates 73 State Government nursing homes with approximately 1900 beds, and a further 2,700 nursing home beds in State geriatric centres and other agencies. ⁽⁹⁵⁾  In the rural areas, many of the nursing homes are attached to public hospitals.  In addition, the Department funds nursing home type patients in acute public hospitals for approximately 160,000 bed days per annum, the equivalent of nearly 440 full-time patients. ⁽⁹⁶⁾

The Commonwealth Government funds a further 11,000 nursing home beds which are managed by the private sector and voluntary non-government organisations (e.g., churches). ⁽⁹⁷⁾  These private sector institutions include both for profit and non-profit homes.  The Commonwealth does not directly manage or operate any nursing home facilities.

Of the 16,430 approved nursing home beds in Victoria, 32.7 per cent are "public" beds under State Government management.  This compares with only 9.2 per cent in NSW and an average for the rest of Australia of 13.6 per cent. ⁽⁹⁸⁾  This high proportion of State Government nursing homes in Victoria has developed because of the policies adopted by this State.

The Department's budget for the Nursing Homes and Geriatric Hospitals Program is $174 million for 1991-92 which is slightly below the 1990-91 expenditure of $177 million.

Victoria has fewer nursing home beds (public and private) per thousand of the aged population (aged 70 and over) than all other States/Territories except the ACT.  As a result, the number of occupied bed days per thousand population is also lower (see Table 4.3.1).  The rate of nursing home beds in Victoria, as throughout Australia, is above the Commonwealth target of 40 beds per 1,000 aged population.  However, all States fall below the Commonwealth target of 55 hostel beds per 1,000 aged population.

Table 4.3.1
Nursing Home Beds and Occupancy, 1987-88

	No. of beds (1) per 1,000 aged popn (2)	Occupied bed days per 1,000 aged popn ('000)
Vic	50.8	17.9
Rest of Australia	65.5	23.0
NSW	68.2	24.2
Qld	61.9	22.0
WA	65.0	22.7
SA	63.6	22.0
Tas	65.5	20.9
NT	68.5	19.8
ACT	48.1	12.2

⁽¹⁾ Includes all beds in private and public nursing homes for the aged.

⁽²⁾ Population aged 70 and over.

Source:  HUCS 1987-88, ABS Cat. No.3101 0

Residents of State Government nursing homes in general require a lower level of nursing and personal care services than do those in the non-government homes, which is in line with the Commonwealth policy for nursing homes.  All nursing home residents are classified as to the level of care they require using the Resident Classification Instrument (RCI).  Category 1 residents have the highest service needs, and Category 5 the lowest and are hence the least dependent.  While almost half (49 per cent) of the State Government residents were classified as Category 4 or 5 in 1989, only about 25 per cent of residents in non-government homes were in these lower categories.

Furthermore, the percentage of Category 4 and 5 residents in the non-government homes has fallen significantly in recent years, down to 15 per cent in 1991. ⁽⁹⁹⁾ The shift of Category 1 to 3 residents into the private/voluntary sector was a major objective of the nursing home funding system which the Commonwealth introduced in 1987.

These data raise the question as to why the public sector should retain responsibility for the low dependent nursing home residents.  If the private/voluntary sector can provide a satisfactory service for the most dependent nursing home patients, it is clearly able to also serve the needs of the less dependent patients.

The profile of relative service needs for non-government nursing home residents in Victoria differs significantly from that in other States.  In Victoria, only 15.3 per cent of residents are in the low dependency Categories 4 and 5, while in NSW 35.7 per cent of residents are classified as Category 4 or 5, and the average for all States except Victoria is 31.1 per cent. ⁽¹⁰⁰⁾  That is, the private nursing homes in Victoria have fewer low dependency residents and thus the public sector homes in this State take more of these residents than do in other States.  As a result, the bed day costs in the State Government nursing homes should generally be lower than the costs for the non-government homes.

The bed day costs for Victorian nursing homes in 1985-86 were in fact higher than in all other States, being 27.2 per cent above the average for the rest of Australia. ⁽¹⁰¹⁾  The State financed nursing homes had significantly greater costs than the other types of nursing homes, except those which received deficit funding.  The recurrent expenditure per bed day for Victoria's State Government nursing homes was 34.6 per cent higher than the private sector non-profit homes, and 19.6 per cent higher than the private for profit homes (see Table 4.3.2 overleaf).  That is, private nursing homes which do not even operate to realise profits were caring for elderly residents for three-quarters the cost of State Government homes.

It has been argued that the higher cost of care in State Government nursing homes is a result of the extent of the rehabilitation activities provided in these homes compared with the private and voluntary sectors.  However, there are private and voluntary sector nursing homes which also provide extensive rehabilitation facilities.  We must therefore conclude that there are considerable inefficiencies in the operation of the State Government nursing homes.

In 1987, the Commonwealth Government introduced a new funding system for non-government nursing homes known as CAM/SAM.  The Care Aggregated Model (CAM) component of the funding is for nursing and personal services, and the Standard Aggregated Model (SAM) component provides funding for other services such as the hotel services (e.g., laundry, catering).  The CAM funding is based on the level of dependency of residents (using the RCI) and the SAM funding is based on a fixed daily amount irrespective of dependency levels. ⁽¹⁰²⁾

Table 4.3.2
Nursing Home Costs, 1985-86

Type of Home	Vic	Rest of Australia	NSW (a)	Qld	SA (b)	WA	Tas
Participating non-profit	56.6	46.3	46.5	40.4	54.8	47.3	44.6
Participating for profit	44.6	48.6	47.6	44.4	57.6	46.9	45.6
Deficit financed	76.7	62.6	57.6	54.4	79.5	69.6	51.3
State financed	76.2	60.1	60.4	53.9	67.8	61.6	55.7
Total	69.6	54.7	51.0	48.6	67.2	54.7	50.8

^(a) Includes ACT

^(b) Includes NT

Source:  HUCS 1985-86

Commonwealth funding of the State Government nursing homes is based on a single rate per occupied bed day, which has been frozen at the 1985 level of $48.50 per bed day.  There is an additional supplement of $6 per bed day for residents classified as requiring extensive care.

The residents' contribution to the costs in both public and private nursing homes is controlled by the Commonwealth and was set at 87.5 per cent of the single rate pension plus the rent assistance allowance in July 1991.

The current level of this contribution is $23 per bed day.  While some nursing homes may obtain exemption from this control, only one per cent of homes currently have an exemption.  The Commonwealth funding of non-government nursing homes in Victoria is currently $78 per day. ⁽¹⁰³⁾  This is the average Commonwealth funding under the CAM/SAM formula and incorporates an amount to reflect the return on investment.  When the resident's contribution is included, the total revenue from residents and the Commonwealth for private nursing homes is set at $101 per bed day.

The CAM/SAM funding level (including the Commonwealth subsidy and resident's contribution) in Victoria in 1989/90 was $89 per bed day for Category 3 residents.  Clearly, the bed day costs in the State Government nursing homes were significantly greater than this (see Table 4.3.3).  The cost differential is even greater when one takes into account the higher proportion of low dependency of residents in the State Government homes.  As a result, if the CAM/SAM funding formula was applied to the State homes the subsidy for these homes would be even lower than $89.

Furthermore, the bed day costs vary considerably between homes, which indicates that substantial savings could be achieved by introducing efficiencies in many of the nursing homes.  For example, the minimum cost per nursing home bed day in Geriatric and Rehabilitation Hospitals in 1989 was $116 at Lyndoch Hospital and the maximum was $219 at Victoria Parade Geriatric Hospital. ⁽¹⁰⁴⁾

Table 4.3.3
Bed Day Costs in State Government Nursing Homes, 1989-90

Type of Nursing Home	No. of homes	No. of beds	Weighted cost per bed day
Geriatric centres	8	2325	$ 165
Other nursing homes	73	1929	127
Other geriatric agencies	5	383	197
Total/Average	86	4637	152

Source:  Economic and Budget Review Committee,
Thirty-First Report to the Parliament, November 1991.

The costs in the State Government nursing homes also vary considerably.  In 25 per cent of the State homes the cost per bed day was less than $100, while 19 per cent had costs above $160. ⁽¹⁰⁵⁾  Some of this variation may be a result of differences in the services provided and the dependency levels of residents.  Certainly, there are large differences in the average length of stay in the geriatric centres and other geriatric agencies, and higher costs are associated with shorter average lengths of stay.  (Shorter lengths of stay tend to result in higher average costs as there are greater costs associated with assessments in the early days, and higher administrative costs due to the increased turnover.)  However, there must be some doubt as to whether such factors can fully explain the cost differences.

Analysis undertaken by the Economic and Budget Review Committee found that the variation in the bed day costs of the State Government nursing homes can be attributed to differences in the number of cleaning and catering staff per bed rather than the number of nursing staff, and in occupancy rates and length of stay, rather than the number of beds available. ⁽¹⁰⁶⁾

There are 4.5 equivalent full-time hotel staff to cater and clean for ten residents in the geriatric centres according to the data supplied to the committee.  This would appear to be excessive, and the fact that some centres operated with substantially lower staffing levels suggests that there are efficiencies to be realised.  Similarly, the geriatric centres have on average one administrative staff member for 9.8 residents -- although the ratio varies considerably.  The staffing levels in nursing homes are lower than in the centres, but also vary substantially.  On average, there is one administrative staff member for every 16 beds, and one "hotel" staff member for every 3.7 beds. ⁽¹⁰⁷⁾

The Department plans to apply the CAM/SAM funding formula to calculating the funding for its nursing homes, but has set its objective at $10 above the average CAM/SAM level (which also includes a component for a return on investment). ⁽¹⁰⁸⁾  In addition, this objective does not take into account the lower average RCI for State Government homes, which would produce a lower CAM/SAM funding level.

If State funding of its nursing homes was reduced to $99 per bed day the Government could have cut the 1989-90 expenditure on these homes by approximately $18 million out of a total budget of $81 million.  Even greater savings could be realised by reducing the costs of geriatric centres to $99 per bed day.  In 1989-90, expenditure on nursing home beds in the geriatric centres was $176 million.  This could be cut to $101 million, realising a saving of $75 million in these centres, and a total saving to the Government in its expenditure on nursing home beds of $93 million.

Another area for potential improvement in the efficient management of nursing home services is in the distribution of nursing home beds and the utilisation of acute care hospitals to provide care for nursing home type patients.  Of the 243,000 identified nursing home bed days in 1989-90, only 48 per cent were in the geriatric centres.  More than half (55 per cent) of public acute care hospitals provided nursing home services.  In many rural areas, acute hospitals include nursing home services and a significant proportion of the hospital bed days are taken by nursing home type patients.  Furthermore, there are a number of acute hospitals without affiliated nursing homes which also provide for nursing home type patients (see Table 4.3.4).

These statistics lead to the question of whether acute hospitals are the most appropriate and efficient facilities for the care of nursing home patients.  The Auditor-General's 1989-90 Report compares the cost of nursing home type patients in acute care hospitals with the cost of nursing home care.  This study examined three acute hospitals with affiliated nursing homes.  It found that the average bed day cost for treating nursing home type patients was approximately $120 greater than the cost for similar patients in the nursing homes affiliated with the selected hospitals.

Table 4.3.4
Acute Hospitals with a High Proportion of Nursing Home Type (NHT) Patients

Hospital	Percentage of NHT patients
Alexandra	38
Beeac	91
Creswick	62
Eildon	65
Manangatang	47
Omeo	76
Ovens District	49
Port Fairy	62
Tallangatta	62

Source:  Economic and Budget Review Committee,
Thirty-First Report to the Parliament, November 1991

The Economic and Budget Review Committee replicated this study in a further two hospitals and found the difference in costs was substantially less, about $13-$ 14 per average bed day.  However, these studies are of limited value as the appropriate comparison is between the costs for nursing home patients only in the acute hospitals and in the affiliated nursing home.  The average hospital bed day cost is affected by the percentage and casemix of the acute patients, and generally this group will be more costly to care for.  Nevertheless, the Committee suggests that there is potential for reducing costs in this area which warrants further investigation.

A further issue is the current trend towards casemix funding of acute hospitals.  If casemix funding was introduced, the budgets for rural hospitals with a large percentage of nursing home type patients would undoubtedly be substantially reduced.  This may then force the rationalisation of rural health services and the development of multi-purpose health centres.  In a State the size of Victoria, one must seriously question the need for so many small facilities, each of which is very costly to operate.

The State Government could achieve substantial savings in its expenditure on nursing homes and geriatric centres if funding was reduced to the level of funding received by the private sector for nursing homes beds.  By cutting expenditure to $99 per bed day in 1989-90, which was approximately 10 per cent higher than the funding of private beds, the State would have saved $93 million ($18 million in nursing homes and $75 million in geriatric centres).

The Auditor-General's 1989-90 Report also estimated that the introduction of CAM/SAM funding for State nursing homes would reduce operating costs by $93 million.  It concluded that, by addressing the issues of resource utilisation and inefficient practices, millions of dollars could be saved without impacting on standards of care.

In addition to reducing the bed day costs in the State Government nursing homes, significant savings in Government expenditure could be achieved by cutting back the number of State operated nursing home beds to bring Victoria in line with other States.  By privatising approximately 3,130 of the 5,360 State operated nursing home beds, Victoria would have a similar proportion of its total beds operated by the State as the average for the rest of Australia.  At a funding level of $99 per bed day this would reduce public expenditure on nursing homes by $108.5 million.  Of this $108.5 million, approximately $55 million is State funds and the remainder is Commonwealth funding.

The Auditor-General's 1989-90 Report noted that the Department did not have overall planning strategies and policies for the future direction of State-wide residential care services for the aged.  The Victorian Government has to date adopted policies which created a situation whereby Victoria has more, and more expensive, State funded nursing home beds than the other States.  If this trend were reversed -- by privatising many of the public nursing homes and improving the efficiency of the remaining public sector homes -- substantial savings can be realised by the State without reducing the availability and quality of care for the aged.

4.4 ADMINISTRATIVE STAFF

The Public Service Board produces a List of Officers which includes all officers employed under the Public Service Act.  According to this list, there were 6,838 Officers in HDV as at 31 December 1990.  The staffing numbers for each Division are included in Table 4.4.1.  The Divisions which perform a purely administrative support function for the Department are:  Central Administration;  Planning and Research;  Finance;  Personnel;  and Building Services.

Table 4.4.1
Administrative Staff, 1990

Division	Public Service Officers
Central Administration	373
Planning & Research	31
Finance	77
Personnel	69
Building & Services	56
Public Health	179
Tuberculosis	55
Maternal & Child Welfare	235
Dental	377
Hospitals	38
Office of Psychiatric Services   - Central Administration   - Other	83 5,265
Total	6,838

Source:  Public Service Board List of Officers 1990 & PSB Annual Report 1990.

The number of Officers in these Divisions rose from 295 in 1980 to 606 in 1990.  The majority of these staff were employed in the Central Administration Division (or Secretariat and Management Services according to the 1980 classifications), and this Division showed the greatest expansion in staff numbers over the decade (from 62 to 373).  This Division also experienced significant growth in the proportion in the Senior Executive Service.  While there was only one Division 1 officer in 1980, there were 11 SES Officers in 1984 (or 12 per cent of the Division), and 45 in 1990 (or 12 per cent of the Division).

The Planning and Research Division more than tripled in size between 1980 and 1984, but subsequently decreased slightly to 2.6 times the 1980 level.  The Finance and Building Services Division also increased significantly between 1980 and 1984, but then gradually reduced so that the number of staff in 1990 was below the 1980 level.

Over all the support services areas, the number of Officers in the Senior Executive Service increased from six in 1980 (in Division 1) to 53 in 1990.  As a proportion of all Officers in these Divisions they rose from 2.0 per cent to 8.8 per cent.

The growth in public service staff in recent years suggests that there is potential for substantially lower staffing levels.  For example, if staff numbers in the support services Divisions were reduced to 1988 levels a saving of approximately $3.5 million with 111 fewer public service staff would have been achieved.

---

CHAPTER 5
RESTRUCTURING THE SYSTEM

5.1 PROBLEMS OF THE EXISTING SYSTEM

Public health institutions are a State operated monopoly that know they cannot go out of existence or be taken over;  most of their services are provided free or on a heavily subsidised basis.  This enhances demand pressures and provides no market test of the value of the services and no price constraint on their use.  It also creates a situation in which the only limit on expenditure is the amount which can be extracted by institutions from the State Budget.  Essentially public health is perceived as being an activity not subject to any test of commercial efficiency.

Another feature of the public health system is the constraints on the autonomy of those managing the institutions.  In part this derives from the fact that, being publicly funded, they have to be accountable, through the Department, to the Minister for Health and the Government.  As a corollary, however, it is also perceived as necessary to subject public health institutions to political direction and control in various matters.  In particular, industrial relations for public health services are essentially determined on an industry-wide basis by the Department of Health, which acts in accordance with Government industrial relations policy and within the constraints of the industrial relations system.  At the same time, public health services are regarded as "essential" and, as such, any serious interruption or disturbance is seen as being essential to avoid from a political perspective.

Public health institutions are, therefore, particularly susceptible to "capture" by groups that have a vested interest in expanding the spending on, and staffing of, public health services.  The most notorious of the pressure groups is the trade unions, whose membership is concentrated amongst public sector employees.  In public health institutions a high proportion of non-medical staff are members of these unions, which have been able to establish high staffing ratios and working practices which reduce efficiency.  They have achieved this through the industrial relations system and because politicians are reluctant to take the sort of action to reduce costs and deal with disputes which the private sector has to deal with because, in the end, it has to pay its own bills, rather than have them paid by taxpayers.  The capacity to make the operation of public health services a directly political issue is a powerful political weapon when governments are not prepared in the last resort to terminate employment and/or use legal sanctions to deal with disputes.

Equally, given the government's ultimate responsibility for providing public health services, conflicts inevitably arise when regulating and auditing such services.  Particularly as political embarrassment (at the least) is the likely outcome when mismanagement of health services is revealed, governments are reluctant to publicly identify the real extent of problems and to take all the action needed to correct them.  That has recently been most evident in the case of psychiatric services.

Unions are, however, not the only pressure group seeking an expansion in health spending and staffing.  Administrators of public health services also tend to want to see an expansion and/or improvement of the services that come within their domain.  Since they are not footing the bills, and their own remuneration is in no way "profit-related", they have no incentive to contain spending other than the constraint imposed by the annual budget process.  Professional medical staff have similar inclinations and also tend naturally to be more concerned with the technology and quality of services than with their cost.  This limited incentive to contain, let alone reduce, costs is reflected in the fact that, at least until recently, the health system "was largely financed with agency budgets being incrementally adjusted within 'red tape' controls". ⁽¹¹⁰⁾  In short, the argument was largely about how much last year's budget would be increased to allow for cost increases.

Even though the move to Service Agreements in the health sector constitutes an improvement in administrative practice, the same lack of incentive to reduce costs continues to exist.  Indeed, while these Agreements are giving a more output and performance-oriented approach to health services, whether they are cost effective can only really be tested in a competitive environment.  In addition, although autonomy is improved under the Service Agreements, management remains constrained by political policy, especially as regards the all important area of staff management and numbers.  As indicated in an earlier chapter, the Auditor General's report on Ministerial Portfolios for May 1992 noted that Service Agreements continue to be determined primarily on the basis of staffing levels, and a senior official of the Health Department recently expressed concern at the "failure of many agencies to involve program managers in prioritising and resource decision making". ⁽¹¹¹⁾

In one sense the key problem in running the public health services on a cost-efficient basis can be viewed as an industrial relations problem.  In another sense, however, it is a problem of management autonomy, of which industrial relations is only a part, albeit an important part.  Management autonomy is becoming even more important as the emphasis on industrial relations shifts more towards enterprise bargaining and away from the determination of wages and conditions at a national and/or industry level.  As noted in a recent paper by a senior official of the Victorian Department of Health, the delivery of client oriented services

"is best achieved by allowing agencies the autonomy and freedom to establish objectives and plans based on clearly announced and well formulated Government policy and to deliver an agreed level of outputs at proper service and quality levels.  In return they must be accountable for the achievement of output which in effect represents greater autonomy/freedom in exchange for enhanced accountability." ⁽¹¹²⁾

The difficulty is how to create an environment in which:

• the providers of public health services have an incentive, inspired by competitive pressures, to reduce costs in order to maintain or increase their share of the market for health services;  and
• managers of public health institutions are also able to make decisions which allow them to reduce costs while still supplying services at a standard that complies with Government requirements.

The problem in creating such an environment derives from two main sources.  First, the requirement under the Commonwealth Government's Medicare scheme that services in State operated health institutions have to be provided free or on a heavily subsidised basis.  This virtually rules out competition on the demand side, and there is little that the State Government can do about that.  (It can, however, make policy changes to shift more of the responsibility onto the Commonwealth for financing the cost of the Medicare and associated arrangements by encouraging less use of some State funded services, such as hospital outpatient services and State run nursing homes, and more use of Commonwealth funded services).

Second, the fact that public health services are provided through State owned institutions, and are largely financed from State budgets, has hitherto prevented the establishment of a sufficient degree of autonomy to allow cost effective management.  This is, however, an area that is well within the capacity of the State Government to make substantial changes.

We propose that changes be implemented in two stages.

First, by establishing as much management autonomy as is consistent with the need for the State Government to be able to determine policy on the general level and range of public health services, and the amount of funds to be allocated to such services.  Such policy responsibilities would naturally need to remain with the Government in view of its ultimate responsibility to account for the efficient use of funds raised and expended on behalf of the taxpayer.

Second, by creating as quickly as practicable a market for the supply of public health services in which contractors would compete to supply services of a given range and standard determined by the Government.  In this second stage the Government would continue to decide the general level and range of services, but the final amount allocated to such services would be determined by the outcome of the contractual process.

5.2 ENHANCED CORPORATISATION

The enhanced corporatisation program proposed as the first stage aims to devolve management and financial responsibilities to the service provider level to a much greater extent than now exists.  While the Government, through the Minister, would retain the responsibility to determine policy on the level and range of services, the program would maximise management autonomy through legislation establishing the great majority of public health institutions as statutory corporations, while specifically limiting the powers of direction of the Minister.

A new form of corporatisation would be constituted by statute, to be named the "Victorian Health Corporation" (VHC).  The relevant legislation would provide authority to create separate VHCs to take control of each of the various public health institutions.  The legislation would specifically stipulate that each VHC would be responsible for the employment of staff, and (subject to such award conditions as may apply) for the wages and other conditions on which they are employed.

The Victorian Government would remain the owner of each VHC.  The VHC system would, however, give institutions a free hand to manage their own assets, including their single most important asset (their staff), subject only to budget constraints.  While health institutions would be allowed to add to, develop and dispose of assets, the State Government would retain a power of veto over the sale of assets above a certain sum.  The borrowing powers of VHCs would be subject to a specified limit per institution determined by the Minister.  In the event of a VHC being wound up, its resources would pass back to the State of Victoria.

As with existing public health institutions, VHCs would be funded on the basis of annual budgets negotiated with the Department.  However, VHC budgets would be negotiated on the basis that the management of each VHC would have operative autonomy, subject only to any written (and published) policy directions by the Minister.  Each VHC would be expected to maximise cost efficiency by reference to accepted national or international bench-marks for the type of institution concerned, and by utilising the management autonomy available to it.

The operating policy of each VHC would be determined by a Board of Directors appointed by the Minister.  The Board would appoint the executive director of the institution.  To avoid conflicts of interest, employees of a public health institution or of a major contractor or supplier would not be eligible for appointment to the Board.

Most public health institutions already have been "corporatised" by the Health Services Act 1988 and their conversion to VHCs would involve little formal change organisationally.  However, this has been corporatisation in name only, as the Health Department retains almost total managerial control. ⁽¹¹³⁾  The main change would be in the extent of autonomy.

Apart from providing scope for greatly improving staff management, enhanced corporatisation would increase the scope for improving efficiency through "contracting out" for the supply of services to public health institutions.  Such contracting out could range from the care of patients in cheaper private hospitals following an operation to the cleaning of institutions.

There is no reason to suppose that standards of services would decline.  An institution that allowed standards to fall would risk the loss of funds to another institution in the annual budget negotiations.  In fact, the improvement in work place culture and in flexibility of staff management would likely result in an improvement in the quality of services.  This would be reinforced by the enhanced separation of responsibilities for the funding and the operation of services under such a system, which should make the Government more diligent in its regulation and supervision of government funded services.

This framework would provide the basis for a major "down-sizing" in the Victorian Health Department.  It is beyond the scope of this study to propose detailed plans for restructuring;  however, the increased autonomy of VHCs, particularly as regards to industrial relations, would significantly reduce the role of the Department.  The Department would remain responsible for the regulation, monitoring and auditing of operations of the health service providers.  As noted, it would also continue to negotiate annual budgets through Service Agreements with each public health institution on the basis outlined.

Creating A Competitive Market In Health Services

The second stage of restructuring of the public health system would involve a more radical change than the establishment of a fully corporatised framework.  The objective of the second stage would be to utilise the enhanced management autonomy to establish a competitive market in the supply of public health services.  While it would be desirable to accumulate some experience or enhanced autonomy, a move to a competitive market situation should occur as soon as practicable.

It is beyond the scope of this report to detail the changes needed to establish such a situation.  The basic framework would involve the invitation of tenders for the supply of a stipulated level and range of services at each public health institution (VHC) judged to be ready to move to a competitive market situation.  Tenders would be open to groups formed by the Boards and management of existing VHCs and to private sector enterprises.  Contracts would initially run for a minimum stipulated period, say (3) years, and would be subject to review and cancellation in the event of non-performance of the stipulated level and range of services.  The winning tenderer would lease the major assets of an institution (assuming that to be required in order to deliver the services).

Such an approach could be extended to the building and operation of new hospitals, as has recently been proposed in New South Wales, where the Greiner Government is proposing to contract with a private hospital operating consortium, Health Care of Australia, to build and operate a new district public hospital at Port Macquarie.  Part of the $80 million deal involves the NSW Government agreeing in advance to purchase 70 per cent of the beds for public patients in the hospital, above which the consortium can use beds for private patients.  While the per-patient costs are believed to be slightly higher than average for public hospitals, the quality of the services provided are claimed to be considerably higher, almost at the level of a public teaching hospital.  Ten per cent savings in recurrent costs are expected each year compared with the average for other similar public hospitals in NSW.

The private consortium will aim to make a profit on private patients and other services.  The contract is renegotiable after twenty years.

The Port Macquarie proposal cannot be described as ideal as it creates an effective private sector monopoly in the area (Health Care also owns a private hospital in the Port Macquarie area).  It may have been preferable to have called for tenders to supply public hospital services to a wider range of institutions at the same time.  Nonetheless, the Port Macquarie model provides a precedent that the Victorian Government could usefully study.

Conclusions

The restructuring of public health services proposed in this chapter would entail major changes in the role of Government.  Parallels can be seen in other major areas of government activity.  For example, defence is an essential government-provided service.  In the past, much defence equipment and materiel was produced by inefficient, outdated government plants and factories.  Today, dramatic savings have been instituted by corporatisation of defence industries and competitive tendering from the private sector for most contracts.  None of this, however, has been taken as an abrogation by the Government of its responsibility for the nation's security.  Similarly, the Victorian Government is now committed to the corporatisation of four major State enterprises with the objective of improving the efficiency of provision of the public services they provide.  Our proposal to create an enhanced corporatisation framework for the supply of public health services is consistent with that approach.  Our proposal has the added advantage of making health service provision more competitive and hence less burdensome on taxpayers.  Most importantly, it is likely to improve the quality of services provided to the consumer.

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ENDNOTES

1.  The Economist, March 21-27 1992, p.14.

2.  Victorian Health System Review February 1992.  Executive Summary p.2.  For a short discussion of the Brand Review see Appendix D.

3.  Ibid, p.3.

4.  The Brand Report refers to the "great disparities in costs among hospitals providing comparable services".  Victorian Health System Review February 1992.  Executive Summary p.3.

5.  "Howe attacks States' request for extra funds," Sydney Morning Herald 8 May 1992.

6.  This is true more generally.  The Head of the Health Services Division of the Australian Institute of Health recently reported that "in OECD countries there appears to be little correlation between total health expenditure per person and measures such as life expectancy or infant mortality".  Roy Harvey "First Measure Output -- Then Manage the System."  Paper presented at a Conference on Managing State Finances, April 1992.

7.  Interview with Ranald Macdonald ABC Radio 4 May 1992.

8.  See the Report to the Victorian Government, "Audit Standards of Treatment and Care in Psychiatric Hospitals in the State of Victoria" March 1992.

9.  See the "Report of the Board of Investigation into Lakeside Hospital" April 1991 and "The Investigative Task Force's Findings on the Aradale Psychiatric Hospital & Residential Institution" November 1991.

10.  See Simon Haskell, Victorians in Mental Hospitals:  Victims of Union Power, Review, Vol.45, No.2, 1992.

11.  Commonwealth Department of Health, Housing and Community Service Annual Report and State Budget Papers.

12.  This is about $450 million more than the amount included in the State Budget Papers for both capital and current expenditure and $524 million more than the amount shown by the ABS as current expenditure.  See Appendix B for an explanation of the difference between the CGC and Budget Papers figures.

13.  Assuming the average occupancy rate for Government nursing homes of 96 per cent in 1991 is maintained.

14.  Of course, what is done with any savings as a result of improvements in the health system is a separate issue.  They could be used to improve the quality of services.  In present circumstances, however, the top priority would be to reduce the budget deficit, and hence the growth of Victoria's debt.

15.  We do not advocate such a reduction, however;  whether or not the general standard of Queensland's public health services is lower than Victoria's is not clear.  The point to be made is that there is a very substantial range between States in expenditure on health services:  Victoria is at the very highest point, Queensland is at the lowest point, and the per capita difference amounts to some $1000 million.  Queensland's low level of spending may be primarily due to the tight control over staffing levels exercised by Queensland Treasury.

16.  Victorian Health System Review February 1992.  Executive Summary p.3 and Final Report, Vol. 1, p.25.  (See also Appendix D to this Report.)

17.  See The Age 11 May 1992.

18.  In any event, State institutions should already be operating on budgets that include components for a return on assets employed and for taxes.  Unless this done, it will be impossible for the private sector to compete.

19.  AIH, Australian Health Expenditure to 1988-89.

20.  ibid.

21.  ibid.

22.  ABS, Catalogue No. 4335.0.

23.  CGC.

24.  ABS:  Government Finance Statistics, Catalogue No. 5512.0.

25.  Australian Bureau of Statistics, Catalogue No. 5512.0.

26.  Budget Papers.

27.  CGC 1992 Update.

28.  Economic and Budget Review Committee, Thirty-First Report to the Parliament, November 1991.

29.  These savings are calculated for 1989-90 as this is the most recent year for which the required data were available.

30.  Note that this figure -- as indeed the figures following in this section -- is for 1989-90 and in some cases for earlier years.  The figures in the Table "Possible Savings in Health Spending" in the Overview Chapter are projections for 1990-91.

31.  The Divisions which purely provide administrative support services are:  Central Administration;  Planning and Research;  Finance;  Personnel;  and Building and Services

32.  CGC.

33.  ABS, Catalogue No. 5512.0

34.  ibid.

35.  This estimate was given by the Chief General Manager of the Health Department Victoria, Mr Tim Daly, in evidence before the Select Committee on Government Appointments, 4 May 1992.  (See Transcript, p.1243.)  The only previously documented number for total employees in health services was given as approximately 90,000 in the Budget Papers 1985-86.

36.  HUCS 1987-88.

37.  ibid.

38.  Victorian Health System Review, Interim Report.

39.  ABS Catalogue No. 3302.0 "Deaths, Australia".

40.  Harvey, Roy (Australian Institute Of Health), "First Measure Output -- Then Manage the System," Paper presented at a Conference on Managing State Finances, April 1992

41.  In the previous chapter, reference to such data for 1989-90 was based upon estimates which the CGC has formulated -- and made available -- as part of this consideration.

42.  National Health Strategy, Hospital Services in Australia:  Access and Financing, August, 1991.

43.  HUCS 1985-86 and 1987-88.

44.  ibid.

45.  ABS Catalogue No. 4301.2.

46.  National Health Strategy, Hospital Services in Australia:  Access and Financing, August, 1991

47.  Budget Papers 1990-91.

48.  Budget Papers 1990-91.

49.  Occupied beds were calculated by dividing the total number of occupied bed days by 366.

50.  HUCS, 1985-86 and 1987-88.

51.  These include the metropolitan teaching hospitals, large specialist hospitals, major general hospitals, other hospitals with more than 4,000 inpatients per year and the geriatric agencies.

52.  Hospital Comparative Data 1989-90 and 1990-91.

53.  Hospital Comparative Data 1990-91.

54.  ibid.

55.  Victorian Health System Review, Interim Report, August 1991.

56.  Auditor General Report on Ministerial Portfolios May 1992.  p.188.

57.  ibid. p.189.

58.  Hospital Comparative Data 1989-90 and 1990-91.

59.  HUCS 1987-88.  It should be borne in mind that this is the average cost per authorised bed, not the cost per patient bed day, and hence does not take into account the effects of different occupancy rates.

60.  National Health Strategy, The Australian Health Jigsaw.

61.  Hospital Comparative Data 1990-91.

62.  ibid.

63.  Budget Papers 1991-92.

64.  J.F. Taylor & Co. Pty. Ltd.  "Inter-Sector Hospital Cost Analysis" reproduced in National Health Strategy Issues Paper No 2 Hospital Services in Australia:  Access and Financing, August 1991.

65.  Sources used for this analysis were HUCS 1987-88 and the AHMAC Private Hospital Study, 1990.

66.  The number of occupied beds was calculated by dividing the number of inpatient bed days by 366.  No adjustment was made for non-inpatient services.

67.  That is, the number of inpatients treated is adjusted to take account of differences in the profile of the types of treatment provided (i.e. the Diagnostic Related Group for patients).

68.  Hospital Comparative Data 1989-90.

69.  Auditor-General Report on Ministerial Portfolios May 1992, p. 172-173.

70.  National Health Strategy, The Australian Health Jigsaw.

71.  Auditor-General Report on Ministerial Portfolios May 1991

72.  Hospital Comparative Data and relevant population figures.

73.  Budget Papers, 1990-91.

74.  See The Age 11 May 1992.

75.  HUCS 1987-88.

76.  Hospital Comparative Data 1990-91.

77.  HUCS 1987-88 and 1985-86.

78.  Budget Papers, 1988-89.

79.  ibid.

80.  Annual Report, 1989.

81.  HUCS 1987-88.

82.  Based on the HUCS data and the Budget Papers.

83.  See "Mental Health:  $52m boost" The Age 4 May 1992.

84.  Audit of Standards of Treatment and care in Psychiatric Hospitals in the State of Victoria.  March 1992.

85.  See Simon Haskell Victorians in Mental Hospitals:  Victims of Union Power, Review, Vol.45, No.2, 1992.

86.  The issue is how the existing beds are used.  The problem is not the number of psychiatric beds, but the type and throughput.  For example, the Aradale report cited earlier shows an average occupancy at the hospital of 23 years.  With some beds having virtually nil throughput, pressure will be put on acute beds, generally.

87.  Budget Papers, 1987-88.

88.  Auditor-General of Victoria, Report on Ministerial Portfolios, May 1990.

89.  1989-90 Budget Paper No.5, Program Budget Outlays.

90.  Auditor-General of Victoria, Report on Ministerial Portfolios, May 1992. p.173.

91.  ibid. p.175.

92.  ibid. pp.175-6.

93.  ibid. pp.200-203.

94.  HUCS -- 1985-86, 1987-88

95.  Economic and Budget Review Committee, Thirty-First Report to the Parliament, November 1991.

96.  ibid.

97.  ibid.

98.  Annual Report, Commonwealth Department of Health, Housing and Community Services 1990-91.

99.  Economic Planning and Budget Review Committee, Thirty-First Report to the Parliament, November, 1991.

100.  Department of Health, Housing and Community Services, 1990-91

101.  HUCS 1985-86 -- Details of nursing home costs were not included in the 1987-88 HUCS report

102.  Economic Planning and Budget Review Committee, Thirty-First Report to the Parliament, November, 1991.

103.  Commonwealth Department of Health, Housing and Community Services.

104.  Hospital Comparative Data 1990-91.

105.  Economic Planning and Budget Review Committee, Thirty-First Report to the Parliament, November, 1991.

106.  ibid.

107.  ibid.

108.  ibid.

109.  Assuming the average occupancy rate for Government nursing homes of 96 per cent in 1991 is maintained.

110.  Joyce, Brian (Deputy Chief General Manager, Health Department Victoria) paper presented to conference on "Managing State Finances", April 1992.

111.  op. cit.  Mr Joyce also noted the "very strong tendency for budget negotiations to be confined to finance divisions of departments".  This confirms the lack of incentive to become cost efficient.

112.  op. cit.

113.  See Health Services Act 1988, especially Section 42, "Hospital must comply with directions of Chief General Manager".

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APPENDIX A

SOURCES OF DATA

The major sources of data on which this report is based are listed below.

Commonwealth Grants Commission (CGC)

The Commonwealth Grants Commission (CGC) publishes data on expenditure on health services which they use for formulating recommendations on the distribution of general purpose revenue assistance among the States.  A detailed explanation of the CGC data is included in Section 2.2 of the Report.  The CGC data includes:

• Actual current expenditure on health services
• Expenditure per capita
• Standardised expenditure per capita

The health services category has included the following four sub-categories since 1985-86:

• General Medical Services
• Family and Children's Health Services
• Children's Dental Services
• Public Health -- Other

Health Department Victoria Annual Reports

Selected information on budgets and activity levels was obtained from the Annual Reports.

Victorian Government Budget Papers

The Budget Papers were the primary source of data on the Department's budgets and included the following details:

• total appropriations and total outlays by Program;
• estimated budget and actual expenditure;
• current outlays by Program and function;  and
• capital outlays by Program and functions.

In addition, the Budget Papers include selected information on the major achievements of the previous year, key objectives for the forthcoming year and descriptions of the Programs.

Hospital Utilisation and Costs Study (HUCS)

The Australian Institute of Health (AIH) collects data on public acute, psychiatric and rehabilitation hospitals throughout Australia, and publishes it in the Hospital Utilisation and Costs Study (HUCS).  The survey is conducted biennially and to date data for 1985-86 and 1987-88 have been published.  The 1989 survey results will not be released until mid 1992.  This is the only source of detailed data on expenditure and activity levels which is comparable between States.

Each State/Territory health department is responsible for providing and checking the data for their own State.  However, not all States collect the data in the same form, or apply the same definitions, so that there has been some criticism of the consistency and quality of the HUCS data.  Furthermore, the lengthy delays in publication mean that the data are dated by the time they are available.  Nevertheless, the HUCS studies provide the only source of detailed hospital data on costs, staffing and activity levels from which detailed interstate comparisons can be derived.

The information presented in HUCS includes:

• number and type of hospitals and number of beds;
• utilisation -- separations, occupied bed days, occupancy levels, length of stay, non-inpatient services;
• patient characteristics:  age and sex, principal diagnosis, public/private status;
• hospital costs and revenue:  bed day costs, salaries/wages, non-salary recurrent expenditure;  and
• hospital staffing levels and salaries.

Hospital Comparative Data, Victoria

The Health Department Victoria publishes the Hospital Comparative Data statistics which include detailed data on all hospitals in Victoria except the psychiatric hospitals.  This series includes data for the four years 1987-88 to 1990-91 for the major hospitals, and for the three years 1988-89 to 1990-91 for the other hospitals.  The data are collected from the hospitals and from their annual reports.  However, problems are also evident as regards the quality of these data.

The information which is published for each hospital includes:

• staffing:  levels, levels adjusted by Diagnostic Related Group (DRG), costs, awards, sick leave;
• utilisation:  separations, occupied bed days, occupancy levels, length of stay non-inpatient services, inpatient/nursing home/hostel bed days;
• patient characteristics:  casemix, public/private status;  and
• hospital costs and revenue:  bed day costs, salaries, non-salary costs, overheads, costs adjusted for DRG units of care, cost by type of service (inpatient, outpatient, nursing home, hostel).

Australian Bureau of Statistics (ABS)

A range of data from the Australian Bureau of Statistics (ABS) were utilised in this Report.  For statistics on State Government expenditure by government purpose classification, we referred to Government Finance Statistics, Australia (Catalogue No. 5512.0) and unpublished data produced for us by the ABS.  Further sources of ABS statistics utilised were the Household Expenditure Survey, National Accounts and various demographic data.

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APPENDIX B

RECONCILIATION OF COMMONWEALTH GRANTS
COMMISSION AND BUDGET PAPERS EXPENDITURE DATA

According to the CGC the net expenditure on health services in 1990-91 was $3,226.059 million.  The Budget Papers show a figure of $2,764.1 million for the government purpose classification of "health" for the same period.  There is therefore an apparent discrepancy of $461.959 million.

Discussions with the CGC indicate that the major differences between the two sources are a result of definitional differences, both with respect to what is defined as an expenditure item, and what is defined as health expenditure.  The main areas of difference we were able to identify were as follows:

• the CGC starts with the figures for the Consolidated Revenue Fund and then adds in those trusts and other funds which provide services included in the standard budget.  All of the funds included in the Budget Paper figures may not be included in the CGC figures.  The outlays on Health as identified in the Victorian Government Purpose classification include expenditure and revenue which are not included in the CGC figures.  Due to the differing sources of data it is not possible to reconcile the figures completely;
• the CGC only includes recurrent expenditure.  Capital outlays for the Health Department in 1990-91 were $216.288 million, which would increase the discrepancy between the two sources;
• the CGC includes superannuation payments for hospitals in its Health category.  In 1990-91 their figure was $59.1 million compared with a budget figure for superannuation of $71.266 million, which was included in the General Public Services category;
• the CGC figure includes a negative adjustment to expenditure of $22.326 million in backcast payments to create consistency for inter-year comparisons when new programs are introduced;
• the CGC includes as an expenditure item a figure of $243.522 million for "patient fees and facility charges" which would not be included in the budget figures;
• the CGC would as a rule include all expenditure by the Health Department under the health function.  Thus, the expenditure by the Department of $170.4 million, which is classified in the budget papers under the government purpose classification of "General Public Services", would be included in the CGC figure;
• the CGC data shows that expenditure by the Department of Community Services of $211.767 million is included in the health category whereas the budget papers indicate that this Department only spent $102.0 million on health services;  and
• the CGC includes expenditure by the Department of Education and Training of $37.696 million which is not included under the health function in the budget papers.

If the CGC and budget figures are adjusted on the basis of the above assumed differences then the remaining difference between the two sources is reduced to $42 million.  Further differences in definitions and counting procedures for smaller budget items would account for this difference.

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APPENDIX C

OUTPATIENT ADJUSTMENT FACTOR

In order to account for interstate differences in the utilisation of outpatient services, and provide uniformity in the costings of hospital services so that valid interstate comparisons can be made, an adjustment factor is employed.  This adjustment attempts to equate a certain number of outpatient services with an inpatient bed day, and is based on assumptions about the relative cost of outpatient services vis-a-vis inpatient bed days.  Such an adjustment is necessary because the hospitals have been unable to provide separate details on costs and staffing for inpatient and outpatient services.

For the HUCS study, the Australian Institute of Health (AIH) has estimated that:

• 1.917 outpatient visits is equivalent to one inpatient bed day;  and
• 5.753 outpatient treatments is equivalent to one inpatient bed day (i.e., a ratio of an average three treatments per visit is assumed).

Adjustment factors for both visits and treatments are required because of differences between the States as to how they count outpatient services.

The AIH uses these factors to convert outpatient services to an equivalent number of inpatient bed days so that comparisons of the costs and staffing levels per adjusted occupied bed day are based on equivalent measures of the level of services provided.  The proposed adjustment implies that the cost of servicing two outpatient visits is almost the same as the average cost of caring for an inpatient for one day.

There has been considerable debate as to whether the adjustment factor used in HUCS, is appropriate.  It may be argued that this factor is far too low.  On the basis of Victoria's Hospital Comparative Data 1990-91, which includes data on the cost per inpatient bed day and the cost per outpatient attendance for each hospital in Victoria, a significantly greater adjustment factor would indeed be more accurate.  Based on these data, the average ratio of the cost per inpatient bed day to the cost per outpatient attendance is 4.6 for the teaching hospitals and 9.8 for the large regional base and suburban hospitals.  The average ratio for the various categories of smaller hospitals ranges between 6.1 and 9.6.

If we assume a conservative estimate of four for the adjustment factor then the cost relativity between Victoria and the rest of Australia is reversed.  An estimate of four would be justified as the adjustment factor given that the ratio of the cost per inpatient bed day to the cost per outpatient attendance is on average at least 4.6 in the teaching hospitals, and the average for all larger hospitals (which account for 83.8 per cent of all inpatient bed days) is 7.6.

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APPENDIX D

VICTORIAN HEALTH SYSTEM REVIEW

The final report of the Victorian Health System Review (dated February 1992, but not published until 20 May) identified the need to "make changes in the way health care services are funded, structured and delivered" and found that "the existing structure is top heavy, too centralised and involves too much role confusion among its various elements".  The Review also found that "there has been too much emphasis on historical funding allocations to organisations within the system" and that there were "great disparities in costs among hospitals providing comparable services".  The Review further concluded that there are "serious gaps in the basic framework of health care in Victoria" in regard to continuity of care.  Overall, however, the Review concluded that ''Australian's health care system is among the best in the world and Victoria's is as good as any in Australia".

The Review's recommended reforms included the following:

• A devolution of virtually all of the service delivery functions of the central health department to regional and local agencies and the strengthening of the health department's regional administrative structure.  This would include the creation of Local Health and Regional Capital Planning Boards (the latter to overcome problems with agencies competing for capital funding) and the further extension of Community Health Centres to all large population centres;
• A financing system in which recurrent funding is linked to efficiency through the concept of casemix funding.  There would be a phasing in arrangement by which, progressively, hospitals would be reimbursed on the basis of average state-wide costs of like treatments in comparable institutions.  Recurrent funding for all other services would be negotiated on the basis of annual Health Service Agreements;
• The continued integration of psychiatric services into general hospitals and the phasing out of the Health Department's role in direct service delivery;  and
• While a centralised industrial relations capacity would be retained by the Health Department ("to provide advice and assistance to both the department and its agencies"), regional offices and agencies would develop their expertise on industrial relations to enable resolution of disputes at the lowest possible level, and a working party would develop agreements for the application of enterprise bargaining.

The general approach adopted in this Review, which was largely endorsed by the Government, was essentially one of trying to solve the inherent structural problems of the present health system by introducing more levels of bureaucracy and applying more bureaucratic methods of assessing the financial requirements of hospitals.  While the Review recognised the need for greater decentralisation of decision making, the basic problem of inadequate management autonomy at the operational level would remain.  The rejection of the separation of the functions of funding and operation of services, while recognising the move to such an arrangement in Britain and New Zealand, would leave a system continually suffering from a lack of competitive incentive to maximise cost efficiency.  The continuation of centralised control over industrial relations would constitute a particular handicap. ⁽¹⁾

Notes

⁽¹⁾ Just how much of a handicap is indicated by the Review's reference to the increased level of communication between the Health Unions and the HDV in recent years, including:

• Monthly meetings between the Health Minister and the health unions on particular issues which cannot be resolved through the normal process of discussion;
• Weekly meetings between the Minister and the Trades Hall health sector union liaison;  and
• Monthly meetings between the HDV senior staff (Chief General Manager, Manager Industrial Relations Division, and Regional Directors as required) and the health unions.