Direction to the Independent Hospital Pricing Authority on the performance of its functions under section 226 of the National Health Reform Act 2011 - No. 1/2016

The direction introduces and defines several key concepts that are central to its purpose.

Sentinel event is defined as “one of a subset of adverse events that result in death or serious harm to a patient”. The definition does not itself list the events; it relies on the broader clinical understanding adopted by the Australian Commission on Safety and Quality in Health Care. Sentinel events are typically rare, catastrophic occurrences such as wrong site surgery, retained instruments, or medication errors leading to death. Because they are so severe, there is a strong policy rationale for eliminating them entirely, and funding models that stop payment for such events aim to create a powerful disincentive.

Hospital acquired condition is defined to mean a “hospital acquired patient complication, as defined by the Australian Commission on Safety and Quality in Health Care, for which clinical risk mitigation strategies may reduce (but not necessarily eliminate) the risk of that complication occurring”. This is a narrower category than all hospital complications. It captures conditions that are preventable to some degree, acknowledging that zero risk is not achievable. The definition leaves the precise list of conditions to be determined by the Commission and agreed by the Parties (the Commonwealth, states, and territories). This agreement clause introduces a political negotiation step before the model can be implemented.

Avoidable hospital readmission means readmission within 28 days of discharge, with a particular focus on readmission within five days. The direction specifies that the focus must be on readmissions “for a condition or conditions arising from complications of the management of the original condition”. This excludes readmissions for unrelated new illnesses or conditions that are part of the natural progression of the original disease. The five day window is short enough to suggest the readmission was likely caused by premature discharge or inadequate follow up care, though the direction acknowledges that some readmissions within five days may still be clinically necessary or unavoidable.

Risk adjustment is a key design principle. The model must account for different patient complexity levels and specialisation across jurisdictions and hospitals. Without risk adjustment, hospitals that treat sicker, older, or more complex populations would be unfairly penalised. The direction requires a “comprehensive and risk-adjusted” model, but does not specify the methodology. This leaves IHPA to design a statistical approach that isolates the effect of hospital care quality from patient mix.

Shadow year refers to a period during which the model runs in parallel with existing funding arrangements but without financial adjustments. The data collected in the shadow year is used to calibrate the model and give hospitals time to improve before funding consequences take effect. The direction allows a shadow year for the preventable hospital acquired conditions model, but not for the sentinel events model, reflecting the Parties’ intention to act more quickly on the most serious adverse events.

Signal at the health system level is a phrase used in the direction’s design principles. It means that the pricing and funding adjustments are intended to change behaviour across the whole system, not to punish individual hospitals or clinicians. The direction explicitly says the models should “not compromise state system financial sustainability and quality” and should be focused on “system level performance improvement”. This suggests the Commonwealth expects the financial adjustments to be modest enough to avoid destabilising state hospital budgets, which limits the potency of the incentive.

The primary addressee of the direction is the Independent Hospital Pricing Authority (IHPA), a statutory agency established under Part 3 of the National Health Reform Act 2011. IHPA’s core function is to determine the national efficient price for public hospital services under the activity based funding system. This direction expands the scope of IHPA’s advisory work to include safety and quality related pricing. IHPA’s staff and board are directly bound to comply with the direction under section 226(3) of the Act (though that provision is not quoted in the instrument, it is implicit from the authority to give directions).

The Commonwealth Department of Health, as the Minister’s department, is the sponsor of the direction and will receive IHPA’s advice. The Commonwealth stands to benefit financially if the models reduce its share of funding for avoidable poor quality care, because the National Health Reform Agreement generally sees the Commonwealth contribute a share of public hospital funding based on activity. Reducing payments for sentinel events and hospital acquired conditions directly lowers the Commonwealth’s expenditure.

The states and territories are directly affected as joint signatories to the Heads of Agreement and as partners in the COAG Health Council. They will ultimately be the entities responsible for implementing any funding adjustments in their public hospitals. The direction requires IHPA to have regard to submissions from states and territories, giving them a voice in the design of the models. State treasuries and health departments will need to assess the financial impact on their hospital systems. If the models reduce Commonwealth contributions, states will either need to absorb the costs or find ways to improve outcomes to avoid penalties.

Public hospitals are the ultimate target of the funding adjustments. Their budgets are determined by activity based funding, so any adjustment that reduces payment for a particular episode of care directly reduces revenue. Hospital executives and clinical directors will need to monitor sentinel events and avoidable readmissions more closely and invest in prevention strategies. This may require changes to discharge planning, medication reconciliation, infection control, and surgical safety protocols.

Clinicians - doctors, nurses, and allied health staff - are indirectly affected. The direction encourages the use of evidence based practice and data quality improvement. If funding is adjusted, hospitals will likely impose clinical governance requirements to reduce complications. Clinicians may face pressure to adhere more strictly to checklists, protocols, and documentation standards. The direction does not impose personal liability, but it creates financial incentives for institutions that cascade to clinical behaviour.

Patients are the intended beneficiaries, but they also bear risks. If the models lead to hospitals avoiding high risk patients or complex cases to maintain their funding, access to care for the sickest patients could be compromised. The risk adjustment requirement is meant to mitigate this, but imperfect risk adjustment can still create perverse incentives. Patients discharged earlier to avoid a readmission count may be sent home too soon, or readmitted to a different hospital to game the metrics.

The Australian Commission on Safety and Quality in Health Care is directly referenced. It defines the list of hospital acquired conditions and sentinel events, and its goals and data reporting systems are to be complemented by the pricing models. The Commission’s work on clinical standards and accreditation directly informs the models.

The National Health Funding Body is invited to make submissions, but its role is largely administrative - it manages the flow of Commonwealth and state funds to public hospitals.

Taxpayers ultimately bear the cost of the system. If the models successfully reduce harm, everyone benefits from lower costs and better outcomes. But the design and implementation phase consumes resources, and if the models create complex data collection and reporting requirements, administrative costs could offset some savings.

The direction imposes a binding duty on IHPA to provide advice to the Commonwealth, states, and territories on the specified options by 30 November 2016. This is a mandatory obligation under statutory power. IHPA does not have discretion to refuse to provide the advice or to substitute a different task. It must address both items in the Schedule: (a) a model for sentinel events and hospital acquired conditions, and (b) a strategy and model to reduce avoidable readmissions.

IHPA also has a duty to have regard to a number of specified matters. The term “have regard to” is a standard statutory formulation meaning IHPA must genuinely consider these matters as part of its decision making, but they are not binding constraints in the same way as the duty to provide the advice. Had regard to is a weaker duty than “must give effect to” or “must comply with”. The matters include:

• The matters set out in subsection 131(3) of the National Health Reform Act 2011 (which likely include efficiency, quality, and financial sustainability criteria, though the exact text is not reproduced in the direction).
• The Heads of Agreement on Public Hospital Funding signed on 1 April 2016. This is a political agreement, not a statute, but IHPA must consider its terms.
• The five design principles listed in Part 2(iii) of the Schedule. These principles are substantive: prioritise patient outcomes and be evidence based; be consistent with whole of system efforts; be transparent and comparable; use risk adjustment; and avoid compromising state system financial sustainability.
• Submissions from the Australian Commission on Safety and Quality in Health Care, the National Health Funding Body, the Commonwealth, states and territories, and other parties IHPA deems relevant.

IHPA must also “give consideration to any probable known costs and expected benefits” when performing the activities. This is a cost benefit analysis requirement, though the direction does not specify the level of detail or methodology. It is a notable imposition on an advisory body that usually focuses on price efficiency rather than cost benefit analysis.

The direction does not grant IHPA any new rights or powers. It merely directs IHPA to use its existing functions under paragraphs 131(1)(a) and (h) in a particular way. IHPA retains the right to determine the content of its advice within the framework. It can propose multiple options, as the direction says “an option or options”. It can choose the analytical methods and data sources, subject to the design principles.

The Parties (Commonwealth, states, and territories) have a right to receive the advice and to have IHPA consider their submissions. The direction does not create any obligation for the Parties to adopt the models. The COAG Health Council is the recipient of the advice, but its members are not bound to implement anything. The direction thus creates a right to be informed and consulted, but no right to demand implementation.

Hospitals and clinicians have no direct rights under this direction. They may be indirectly affected by future policy changes, but the direction itself does not affect their legal position.

Importantly, there is no duty on IHPA to implement the models, only to advise. The implementation is a matter for the Parties to decide through subsequent agreements and legislative changes. This means the direction’s real impact depends entirely on political will after the advice is delivered.

The direction itself does not prescribe any penalties for non compliance. It is a formal statutory instrument, but its enforcement mechanism lies outside its text. Under the National Health Reform Act 2011, a direction given under section 226 is legally binding on IHPA. If IHPA fails to comply - for example, by not providing the advice by the deadline or by ignoring the requirement to have regard to the listed matters - the Minister could take enforcement action.

Possible consequences include:

• The Minister could issue a further direction requiring compliance, potentially with more specific requirements.
• The Minister could remove or suspend members of IHPA’s board under the Act’s provisions for unsatisfactory performance.
• The Commonwealth could reduce funding to IHPA or withhold appropriations, though this would be politically and legally complex.
• A court could issue an injunction or declaration requiring IHPA to perform its duty, but judicial review of a direction to an advisory body on an internal process is unlikely, especially given the short timeframe (advice due within three months). The direction is probably not justiciable because it does not affect any private rights or impose obligations on external parties.

There are no criminal or civil penalties specified. The direction is a management tool, not a penal statute. The real “penalty” for IHPA if it fails is reputational damage and loss of credibility with the Minister and states, which could affect its ongoing role in the health funding system.

For hospitals and states, the direction imposes no direct penalties. However, if the models are implemented in future years, hospitals that exceed the predetermined avoidable readmission rate or experience sentinel events will face reduced funding. That reduction is the functional penalty, but it is not a fine - it is an adjustment to the price paid for that episode of care. The effect is that the hospital bears the cost of its own adverse outcomes, rather than passing them to the Commonwealth.

The direction’s design principles attempt to prevent penalties from being too severe. They require that any adjustments be “commensurate with the additional care required as a result of the complication”. This implies the adjustment should not exceed the cost of caring for the complication, so the hospital is not worse off than if the complication had not occurred. This significantly limits the deterrent effect. A hospital that causes a sentinel event will receive no payment for that event (since there is a “reduction in the amount the Commonwealth pays”), but the hospital still incurs the costs of treating the event. Whether this creates a net penalty depends on the baseline funding arrangement.

The direction also requires that IHPA consider “probable known costs and expected benefits”. If the costs of implementation (data collection, validation, risk adjustment modelling, appeals processes) exceed the benefits of reduced adverse events, the models could be economically inefficient. The direction does not state what happens if the cost benefit analysis is negative - presumably IHPA would advise against implementation, but the Minister could still proceed.

This direction operates under the National Health Reform Act 2011 (Cth), specifically section 226 which gives the Minister power to direct IHPA on the performance of its functions. The direction does not amend or override any provisions of that Act; it simply directs IHPA to exercise existing functions in a particular manner. The Act’s provisions on IHPA’s objectives (section 131(3)) remain in force and are expressly referenced as matters IHPA must have regard to.

The direction is not self executing. Any actual funding model that adjusts payments for sentinel events or avoidable readmissions would need to be incorporated into the National Health Reform Agreement between the Commonwealth and states, and likely into the National Funding Determination issued under the Act. The funding determination is a legislative instrument that sets the actual prices and adjustments for activity based funding. The direction is a precursor to that process.

The direction references the Heads of Agreement on Public Hospital Funding signed on 1 April 2016. That agreement is not a statute but a political compact. It sets out the Parties’ intentions for public hospital funding from 2017-18 to 2019-20. The direction requires IHPA to have regard to it, meaning the advice should be consistent with the Heads of Agreement’s broader funding parameters. The Heads of Agreement likely includes commitments on funding growth rates and indexation, which constrain how much funding can be withheld for poor outcomes.

The direction interacts with the work of the Australian Commission on Safety and Quality in Health Care (ACSQHC). The Commission defines the conditions and sentinel events, develops clinical standards, and runs accreditation programs. The direction explicitly says the funding models should complement the Commission’s goals, national benchmarking, data reporting, and accreditation. This means the models should not duplicate or contradict existing safety and quality initiatives. The Commission sets the clinical definitions, and IHPA must use those definitions in its model. Any change to the list of hospital acquired conditions requires agreement by the Parties, suggesting a formal governance mechanism.

State health legislation is indirectly affected. Public hospitals are operated by state health departments under state law. If the models reduce funding for certain episodes, states may need to amend their own funding allocations to hospitals. No state law is overridden by this direction, but the financial incentives created by the models may push states to regulate hospital behaviour more tightly.

The Health Insurance Act 1973 (Cth) and the Private Health Insurance Act 2007 (Cth) govern funding for private hospitals. This direction only applies to public hospitals. However, if the models successfully reduce readmissions in public hospitals, there may be spillover effects on private hospital demand. The direction does not address private hospitals.

The National Health Reform Act 2011 also establishes the National Health Funding Body (NHFB). The NHFB administers the flow of funds. The direction invites submissions from the NHFB, but its role in implementation would be limited to adjusting payment amounts in accordance with the funding determination. The NHFB’s functions are not altered by this direction.

There is no interaction with criminal law, privacy law, or tort law directly. However, if the models incentivise hospitals to better document complications and readmissions, this could interact with medicolegal duties and reporting obligations. No specific intersections are mentioned.

The direction is issued as “No. 1/2016”. There is no amendment history provided in the source text. It is a single instrument, not an amending instrument. No subsequent directions are referenced, and no notation suggests that this direction has been varied or revoked. It is likely that this direction was either implemented as issued or superseded by later directions in subsequent years (e.g., No. 2/2016 or later instruments relating to IHPA’s functions). However, the source only contains this one direction. We cannot assume any amendments.

The direction itself does not amend any other legislation. It is a standalone exercise of power. The only “amendment” that could occur is if the Minister issues another direction under section 226 that varies or replaces this one. No such instrument is included in the source.

The direction’s timeline (advice due 30 November 2016) suggests it was intended to be a one time directive. Once the advice is provided, the direction’s operational life ends. It does not create ongoing duties beyond the 30 November deadline. Therefore, amendment history is largely irrelevant to the direction’s effect.

No litigation is recorded or referenced in the source text. There is no evidence that this direction has been challenged in court. It is an administrative direction to a statutory body, not a legislative rule that affects private rights. The direction does not impose obligations on hospitals, clinicians, or patients, and it does not directly alter funding. It is therefore unlikely to be justiciable for lack of standing by any external party. A state government could potentially challenge the direction if it believed the Minister exceeded the power under section 226, but no such challenge is documented in the source.

Judicial review would be limited to jurisdictional error, such as if the Minister failed to consult the Standing Council on Health as required by section 226(1). The direction states that the Minister “having consulted with the Standing Council on Health”, so that procedural step appears satisfied. If the consultation were flawed, a state could potentially seek review, but the short timeframe and political nature of health funding disputes usually resolve through negotiation rather than litigation.

No case names appear in the direction. We cannot infer any litigation history from the source.

Several aspects of this direction could catch out those who treat it as a routine procedural instrument.

The definition of “avoidable hospital readmission” is circular. It is defined as readmission within 28 days “with a particular focus on avoidable readmission within 5 days”. The term “avoidable” itself is not defined. The direction then says the focus should be on readmissions “for a condition or conditions arising from complications of the management of the original condition”. This is a proxy for avoidability, but it still relies on causal linkage. Proving that a readmission is due to complications of management rather than the natural course of disease is clinically contentious and often ambiguous. The model will need a robust adjudication mechanism to avoid penalising hospitals for unavoidable readmissions.

The sentinel events model is to be implemented from 1 July 2017, only ten months after the direction’s issue - and the advice was due 30 November 2016. That leaves just over a year from the advice deadline to implementation. This timeframe was extremely ambitious, particularly given the design principles require a “comprehensive and risk-adjusted model”. Risk adjustment for rare events like sentinel events is statistically challenging because the small numbers make reliable hospital level comparisons difficult. A hospital might go years without a sentinel event and then have two in a year without any change in quality. The model would need to account for random variation, and the direction does not specify how to handle this.

The direction requires IHPA to “have regard to” the Parties’ intention to implement models, but the Parties are not bound to implement anything. This means IHPA must design models that the Parties said they intend to adopt, but the advice could be ignored. IHPA’s effort could be wasted if political priorities shift. The direction does not guarantee implementation even if IHPA produces excellent work.

The requirement to “give consideration to any probable known costs and expected benefits” is sandwiched between aspirational language. The direction does not say what happens if costs exceed benefits. It does not make implementation conditional on a positive cost benefit analysis. It simply requires IHPA to consider them, leaving the final decision to the Minister and COAG.

The definition of “hospital acquired condition” includes the phrase “for which clinical risk mitigation strategies may reduce (but not necessarily eliminate) the risk.” This is vague. It could cover almost any complication. The Australian Commission on Safety and Quality in Health Care will define the specific conditions, but the direction does not limit the list to conditions that are highly preventable. If the list includes conditions with small attributable fractions, hospitals may be penalised for outcomes they can barely influence, creating perverse incentives to avoid admitting high risk patients.

The design principle (c)(i) says “the financial levers are designed to ensure there is transparency between the approach and the intended outcome.” This is unclear. It might mean that the funding adjustments should be clearly linked to the adverse event (i.e., the amount deducted should be transparent and understandable). Alternatively, it could mean the methodology for calculating adjustments should be transparent. In either case, achieving transparency when using complex risk adjustment models is difficult. The models may become black boxes, undermining trust.

The direction does not specify an appeals or review process for hospitals, states, or clinicians. If a hospital believes it was incorrectly penalised for a sentinel event or readmission, there is no mechanism set out in this direction. That would need to be designed as part of the model. The lack of such detail in the direction means the IHPA advice must include a robust governance framework, or else implementation will face resistance.

The direction refers to “the Parties’ intention to send a signal at the health system level” but also says models should “not compromise state system financial sustainability”. Sending a strong signal requires meaningful financial consequences. If the adjustments are small enough to preserve state financial sustainability, the signal may be too weak to change behaviour. This tension pervades the direction.

The advice deadline of 30 November 2016 fell after the 2016 federal election (July 2016) and before the 2017-18 budget cycle. It is a tight deadline for what is essentially a major policy development requiring data analysis, consultation, and consensus building among states. IHPA would have had to reprioritise its staffing and resources, potentially at the expense of its core pricing work.

The direction requires IHPA to “have regard to” submissions from “other parties deemed relevant”. This gives IHPA discretion to invite or ignore submissions from interest groups like the Australian Medical Association, private hospitals, or patient advocacy organisations. The advice could be skewed if IHPA chooses not to consult broadly. The direction does not mandate public consultation.

Compliance with this direction falls primarily on the Independent Hospital Pricing Authority. The direction is a one time advisory task, not an ongoing obligation. To comply, IHPA must take the following steps.

1. Provide the required advice by 30 November 2016. This is the core deadline. The advice must cover both items in the Schedule: option(s) for a risk adjusted funding model for sentinel events and hospital acquired conditions, and a strategy and funding model to reduce avoidable readmissions. The advice must be provided to the COAG Health Council (now the Health Ministers’ Meeting).

2. Develop comprehensive and risk adjusted models. The models must be based on evidence, with risk adjustment to account for different patient complexity and specialisation. IHPA must use the definitions provided (sentinel events as defined by the ACSQHC, hospital acquired conditions as defined by the ACSQHC and agreed by the Parties, and avoidable readmissions within 28 days with focus on five days). The model must include a mechanism to reduce Commonwealth payments for sentinel events and hospital acquired conditions, and an adjustment for hospitals exceeding a predetermined avoidable readmission rate for an agreed set of conditions.

3. Have regard to the specified matters. This means demonstrating in the advice that each matter was considered. IHPA should document its consideration of:

• The matters in subsection 131(3) of the Act (likely including efficiency, quality, financial sustainability, and other criteria from the Act).
• The Heads of Agreement on Public Hospital Funding signed 1 April 2016.
• The design principles in Part 2(iii): (a) patient outcomes and evidence based, (b) consistency with whole of system efforts, (c) transparency and comparability including risk adjustment.
• Submissions received from the ACSQHC, NHFB, Commonwealth, states, territories, and any other deemed relevant parties.

4. Perform a cost benefit analysis. The direction requires IHPA to “give consideration to any probable known costs and expected benefits”. IHPA should identify, quantify where possible, and weigh the costs of data collection, model administration, compliance, and potential gaming against the benefits of reduced adverse events, improved patient outcomes, and reduced Commonwealth expenditure. The analysis should be included in or appended to the advice.

5. Consult with stakeholders. While only required to “have regard to” submissions, effective compliance implies IHPA should actively seek input from the listed bodies and others. IAHA should request written submissions and may hold workshops or roundtables. The advice should reflect that consultations occurred.

6. Respect the timeline for implementation intentions. The advice must be designed so that:

• The sentinel events model can be implemented from 1 July 2017.
• The hospital acquired conditions model can be implemented not before 1 July 2018, with a preceding shadow year.
• The avoidable readmissions model should focus on five day readmissions arising from complications of the original condition’s management.

7. Ensure the advice does not commit the Parties to anything. IAHA’s role is advisory. The advice should present options and be clear that implementation requires further agreement. IAHA should avoid drafting the advice as if it were an enforceable determination.

8. Maintain documentation of compliance. IHPA should keep records of its decision making, including minutes of board meetings, evidence of submissions considered, and cost benefit analysis worksheets. This is prudent in case the Minister or a state questions whether IHPA properly complied with the direction.

For hospitals, states, and other stakeholders, compliance with this direction itself is not required. But they should be aware of the direction’s existence and engage with IHPA during the consultation period. States should make submissions and participate in the shadow year if one is implemented. Hospitals should begin improving data quality on complications and readmissions to prepare for potential funding adjustments in future years. The direction signals that the era of unconditional activity based funding for public hospitals may be ending, and hospitals that perform poorly on safety and quality metrics may face financial consequences. Proactive investment in clinical governance, discharge planning, and adverse event reporting will position hospitals better for whatever model IHPA recommends.