Direction to the Independent Hospital Pricing Authority on the performance of its functions under section 226 of the National Health Reform Act 2011 - No. 1/2017

Several key concepts defined in the direction are essential to understanding its operation. Activity based funding has the meaning given in Appendix A of the National Health Reform Agreement as in force on the commencement of the direction. It is the funding model under which hospitals are paid a national efficient price for each unit of activity (such as an admitted episode or a non‑admitted service event). The national efficient price is also defined by reference to the Agreement. Block funding is the alternative model, defined by the Agreement, under which hospitals receive a lump sum for an agreed level of service rather than being paid per activity. The direction addresses the transition of certain non‑admitted care clinics from block funding to activity based funding.

Efficient growth is defined by reference to clause A3 of Schedule A to the Agreement. It is the benchmark rate of growth in activity that is considered efficient and therefore fundable. Changes in classification systems or costing methodologies can artificially inflate or deflate the measured growth rate if historical data are not recalculated on the new basis. The direction requires back‑casting to prevent this.

Non‑admitted care clinic and 10.19 Ventilation - home delivered are defined by reference to the Independent Hospital Pricing Authority’s Tier 2 Non‑Admitted Services Definitions Manual 2016‑17 - version 4.1 as in force on the commencement day. The ventilation clinic code is a specific Tier 2 category for home‑delivered ventilation services that are self‑administered by the patient or the patient’s carer. The direction notes that its scope was expanded to include patients who are ventilation‑dependent at night and at risk of imminent hospitalisation without support. That expansion occurred during the relevant financial years and needed to be accounted for in efficient growth calculations.

Non‑admitted service event is defined as an interaction between one or more health care providers with one non‑admitted patient that must contain therapeutic or clinical content and result in a dated entry in the patient’s medical record. Previously, each such event was counted individually for funding purposes. The direction describes a change to temporal bundling, which means counting non‑admitted service events as monthly aggregates rather than individual events. This methodological change can alter the apparent volume of activity and, if not back‑cast, can distort efficient growth calculations.

Activity based funding service categories are the five categories reported by the Administrator of the National Health Funding Pool: acute admitted, admitted mental health, sub‑acute, emergency department, and non‑admitted. The direction applies back‑casting requirements across all five categories but gives special attention to the non‑admitted category because of the specific changes that occurred in 2014‑15 and 2015‑16.

The primary addressee of the direction is the Independent Hospital Pricing Authority (IHPA). The Minister directs IHPA to undertake specific actions and exercise its functions under paragraphs 131(1)(c), (e), (h) and (n) of the Act. Those functions relate to developing and maintaining classification systems and costing methodologies for activity based funding, and providing advice on matters referred by the Minister. IHPA is a statutory authority whose decisions directly affect the quantum of Commonwealth funding payments to states and territories for public hospital services.

The direction also affects the Administrator of the National Health Funding Pool. Item 1(ii)(b) authorises IHPA to consider developing a methodology for the Administrator to use in calculating the final funding entitlement for the 2015‑16 financial year. The Administrator relies on IHPA’s classifications and pricing determinations to calculate the amounts payable to each state and territory. Any changes to the efficient growth calculation will flow through to final funding entitlements.

States and territories are affected as recipients of hospital funding. The direction requires IHPA to advise the Commonwealth, states and territories on the outcomes of its reviews and actions by 13 October 2017. The advice will inform whether adjustments to funding are required for the 2015‑16 year, particularly for non‑admitted services. Western Australia is specifically named because its data reporting practices for non‑admitted services are under review. The direction requires IHPA to examine whether Western Australia’s use of a mix of patient‑level and aggregate‑level data creates a risk of duplicate payments. If duplicate payments are found, funding adjustments may follow.

Hospitals in all jurisdictions are indirectly affected because changes to classification systems and back‑casting can alter their funding levels over time. The direction does not impose duties on hospitals directly, but the outcome of IHPA’s reviews may affect how activity is reported and funded in the non‑admitted category.

Patients receiving ventilation services are affected by the expanded scope of clinic code 10.19. The direction acknowledges that the scope change included patients who are dependent on ventilation at night and at risk of imminent hospitalisation. That expansion, if properly accounted for, may ensure that activity based funding appropriately captures the costs of caring for those patients.

Finally, the direction affects anyone involved in the administration of the National Health Reform Agreement. The concepts of efficient growth, back‑casting and methodology changes are technical but consequential for the overall funding architecture.

The direction imposes specific duties on the Independent Hospital Pricing Authority. Under Item 1(i), IHPA must take steps to ensure that changes to classification systems or costing methodologies across all activity based funding service categories are effectively back‑cast for the purposes of clause A40 of Schedule A to the National Health Reform Agreement. The purpose is to negate any unintended impact on the calculation of efficient growth for funding purposes. This is a continuing duty in respect of any such changes.

Under Item 1(ii), IHPA must take steps to ensure that changes in the non‑admitted service category that occurred in the 2014‑15 and 2015‑16 financial years do not have an unintended impact on the calculation of efficient growth for the 2015‑16 financial year. The direction specifies three sources of possible anomaly: the transfer of non‑admitted care clinics from block funding to activity based funding; the change from counting every non‑admitted service event to temporal bundling; and scope changes for non‑admitted care clinics, including the expanded scope of 10.19 Ventilation - home delivered. IHPA must review and take any necessary steps to address anomalies from these sources.

Under Item 1(ii)(b), IHPA has a discretion (not a duty) to consider developing a methodology for the Administrator of the National Health Funding Pool to consider in calculating the final funding entitlement for the 2015‑16 financial year. This is a permissive power: IHPA may develop such a methodology, but is not required to do so.

Under Item 1(iii), IHPA must undertake a review of the data reporting practices used in Western Australia for the non‑admitted service category. The review must examine the practice of using a mix of patient and aggregate level data at a hospital for funding purposes, including whether there is potential for duplicate payments. This duty is linked to IHPA’s functions under paragraphs 131(1)(e) and (h) of the Act, which concern providing advice on matters referred by the Minister and performing any functions conferred by the regulations or the Minister.

Under Item 1(iv), IHPA must advise the Commonwealth, states and territories on its reviews and any actions taken to resolve the issues referred to in Items 1(i), (ii) and (iii) by 13 October 2017. This advice cannot be delayed beyond that date.

The direction does not confer any rights on IHPA beyond those already contained in the Act. It does not create rights for private parties. States and territories have no right to compel IHPA to act beyond the direction, but they are entitled to receive the advice by the specified date. The Administrator of the National Health Funding Pool may receive a methodology from IHPA but is not bound to adopt it.

The direction itself does not prescribe any penalties for non‑compliance. It is an administrative instrument issued under subsection 226(1) of the National Health Reform Act 2011. The Act does contain enforcement mechanisms for directions generally, but the text of this direction does not refer to them. Under the Act, failure by IHPA to comply with a ministerial direction could potentially give rise to political consequences, such as a report to Parliament or dismissal of board members, but these are not mentioned in the instrument.

The direction does not create civil penalty provisions, criminal offences or infringement notices. It operates as a binding instruction to a statutory authority. If IHPA fails to take the steps required, the Minister might exercise further powers under the Act, such as amending IHPA’s functions or issuing a subsequent direction. The source does not specify the consequences of non‑compliance, so the analyst must note that the enforcement framework is external to the direction.

For the Administrator of the National Health Funding Pool, the direction states only that IHPA may consider developing a methodology for the Administrator to consider. There is no duty on the Administrator to use any such methodology, and no penalty for disregarding it. The advice to be provided to the Commonwealth, states and territories by 13 October 2017 is a reporting obligation, but the instrument does not say what happens if the advice is late or inadequate.

The practical enforcement lies in the funding arrangements themselves. If IHPA does not back‑cast properly, the calculation of efficient growth will be distorted, and states or territories may receive either under‑payments or over‑payments. Disputes about funding entitlements are typically resolved through the dispute‑resolution mechanisms in the National Health Reform Agreement, which are not detailed in the direction. The direction is best understood as a technical corrective measure rather than a penal instrument.

The direction is made under subsection 226(1) of the National Health Reform Act 2011. That subsection empowers the Minister, after consulting the Standing Council on Health, to direct IHPA in relation to the performance of its functions. The direction therefore sits as a subordinate instrument under the Act. It does not amend the Act or the regulations, but it imposes a binding requirement on IHPA as to how it must exercise its existing functions under section 131 of the Act.

The functions specifically referenced are paragraphs 131(1)(c) and (n) (for classification and costing changes) and paragraphs 131(1)(e), (h) and (n) (for the Western Australian data review). The direction channels IHPA’s discretionary powers into particular actions. Any inconsistency between the direction and a later Act or regulation would be resolved by ordinary principles of statutory interpretation: a later Act would prevail, but the direction would likely be revoked or amended if Parliament intended a different approach.

The direction incorporates by reference the National Health Reform Agreement, particularly Appendix A (for definitions of activity based funding, block funding, national efficient price), clause A3 of Schedule A (for efficient growth) and clause A40 of Schedule A (for the back‑casting requirement). The Agreement is a intergovernmental agreement between the Commonwealth, states and territories. It is not a statute, but the Act gives it legal effect through references in provisions like section 226. The direction locks the definitions to the versions in force on the commencement day, meaning future amendments to the Agreement are not automatically incorporated.

The direction also incorporates the IHPA’s Tier 2 Non‑Admitted Services Definitions Manual 2016‑17 - version 4.1 as in force on the commencement day. This is a document published by IHPA itself. The direction uses it to define non‑admitted care clinics and the specific ventilation clinic code 10.19. Again, later versions of the manual are not captured by these definitions unless the direction is amended.

The direction interacts with the financial framework established by the National Health Reform Act and the National Health Funding Pool. The Administrator of the National Health Funding Pool is responsible for calculating and making payments under the Act. The direction authorises IHPA to develop a methodology for the Administrator to consider in calculating the final funding entitlement for 2015‑16. That methodology, if adopted, would affect the application of the funding provisions.

There is no explicit interaction with state legislation, but the direction acknowledges that Western Australia’s data reporting practices operate under its own hospital funding arrangements. The review of those practices may reveal inconsistencies with the national framework, which might need to be resolved through negotiation or amendment of the Agreement.

The instrument is dated 24 August 2017 and signed by the Minister for Health, Greg Hunt. It commences on the day after it is registered on the Federal Register of Legislation. The source text does not contain any amendment history. There are no notations indicating that this direction has been amended, revoked, or superseded by a later direction. It appears to be a standalone direction on its face.

The instrument is designated as Direction No. 1/2017. The numbering suggests it is the first direction issued under subsection 226(1) in the 2017 calendar year. It is possible that subsequent directions have been issued concerning different matters or updating the requirements, but the source does not provide that information.

Because the definitions are tied to specific versions of the National Health Reform Agreement and the IHPA’s Non‑Admitted Services Definitions Manual as in force on the commencement day, any later amendments to those documents would not automatically affect this direction. To keep the direction current, the Minister would need to issue a new direction or amend this one. Amendment of a direction under section 226 would require a new instrument, presumably with the same consultation requirement (consultation with the Standing Council on Health). The source does not indicate that any such amendment has occurred.

The direction includes a requirement to advise on reviews by 13 October 2017. That deadline has long passed. The instrument itself remains on the Federal Register of Legislation as a historical legal instrument. It is not time‑limited on its face, but its practical effect may have been spent once IHPA complied with the duties and the 2015‑16 funding adjustments were resolved. However, the duty under Item 1(i) to ensure back‑casting for future changes is ongoing, so the direction has continuing effect.

The source text does not mention any litigation. There are no references to court cases, tribunal proceedings, or dispute resolution outcomes. Based solely on the text of the direction, there is no indication that it has been challenged in judicial review proceedings or that its validity has been tested.

It is theoretically possible that a direction under subsection 226(1) could be challenged on grounds such as ultra vires (if the Minister exceeded the power), procedural defect (if consultation with the Standing Council on Health was inadequate), or irrationality. However, the direction appears to be within the scope of the Minister’s power: it relates to IHPA’s functions under section 131 and was made after consultation (as recited in the preamble). No litigation is recorded in the instrument itself.

The direction’s requirements are technical and administrative in nature. Disputes about the calculation of efficient growth or funding entitlements are more likely to be resolved through the intergovernmental mechanisms of the National Health Reform Agreement rather than through litigation. The direction explicitly contemplates that IHPA may develop a methodology for the Administrator to consider - that is a soft coordination mechanism, not a binding legal determination that would invite immediate judicial challenge.

Western Australia’s data reporting practices, which are the subject of a specific review, could potentially give rise to a dispute if the review concludes that duplicate payments have occurred and funding adjustments are proposed. Any adjustment would be made under the Agreement, and the dispute resolution clause of the Agreement (not reproduced here) might be invoked. Again, the direction itself does not mention litigation.

In summary, based on the source, there is no litigation history directly associated with this direction.

Several features of the direction could trap unwary practitioners. First, all key definitions are fixed as at the commencement day of the direction. The definitions of activity based funding, block funding, national efficient price, efficient growth, non‑admitted care clinic, and 10.19 Ventilation - home delivered all refer to documents in force on that day. If the National Health Reform Agreement or the IHPA’s Tier 2 Manual are subsequently amended, the direction does not automatically update. Anyone relying on the direction must check that the correct versions are being applied, particularly for historical funding calculations.

Second, the direction focuses on the 2014‑15 and 2015‑16 financial years and the calculation of efficient growth for 2015‑16. It does not address similar anomalies that may have arisen in later years. Practitioners dealing with funding for 2016‑17 and beyond cannot assume that the back‑casting requirement in Item 1(i) covers all changes; Item 1(i) is a general duty but Item 1(ii) is specifically limited to those two years. The direction does not say that IHPA must back‑cast changes for every year automatically; it only requires steps to ensure back‑casting for the purpose of clause A40. The practical scope may be narrower than it appears.

Third, the direction gives IHPA a discretion to develop a methodology for the Administrator, but does not require the Administrator to adopt it. If IHPA produces a methodology that the Administrator considers unsuitable, the final funding entitlement for 2015‑16 may be calculated on a different basis. The direction does not provide a mechanism for resolving disagreement between IHPA and the Administrator on this point.

Fourth, the review of Western Australia’s data reporting practices is confined to the non‑admitted service category. It does not extend to other service categories. A similar practice in another state or territory is not covered by this direction.

Fifth, the expanded scope of 10.19 Ventilation - home delivered is described in the direction, but the exact clinical criteria for “dependent on ventilation at night” and “risk of imminent hospitalisation” are not defined in the instrument. Those criteria are presumably set out in the IHPA manual, but the direction does not quote them. This could lead to definitional disputes when applying the back‑cast.

Sixth, the deadline of 13 October 2017 for providing advice to the Commonwealth, states and territories is a firm date. If IHPA missed that deadline, the direction does not specify any consequence. The practical effect is that the advice may have been provided late, potentially delaying funding adjustments.

Seventh, the direction uses the term “must take steps to ensure” rather than “must achieve a particular result”. This creates some wiggle room for IHPA: it must act, but the outcome is not guaranteed. A court reviewing compliance would assess whether IHPA took reasonable steps.

Eighth, the direction does not impose any obligations on states or territories to cooperate with IHPA’s reviews. If Western Australia, for example, does not provide data for the review of its reporting practices, IHPA may be hindered but is not excused from its obligation.

For the Independent Hospital Pricing Authority, compliance requires a systematic approach. First, IHPA must identify all changes to classification systems or costing methodologies that have been introduced across the five activity based funding service categories (acute admitted, admitted mental health, sub‑acute, emergency department, and non‑admitted). For each change, IHPA must ensure that historical data are back‑cast according to clause A40 of Schedule A to the National Health Reform Agreement. This means recalculating past activity and cost data under the new rules so that the trend in efficient growth is not artificially shifted by the change itself. IHPA should document the methodology used for each back‑cast and confirm that the effect on efficient growth is neutral.

Second, for the non‑admitted service category specifically, IHPA must review the changes that occurred in 2014‑15 and 2015‑16 and assess their impact on efficient growth for the 2015‑16 year. The three identified sources of anomaly must each be addressed: (a) the transfer of clinics from block funding to activity based funding; (b) the change from counting every non‑admitted service event to temporal bundling (monthly aggregates); and (c) the scope expansion of clinic 10.19 Ventilation - home delivered. For each source, IHPA must identify whether the change artificially increased or decreased measured efficient growth. If so, IHPA must take corrective steps, which may include recalculating base year activity levels, adjusting the price weights, or developing a special methodology for the Administrator to use.

Third, IHPA may consider developing a specific methodology for the Administrator to apply when calculating the final funding entitlement for 2015‑16. This could involve a transitional adjustment factor or a reconciliation process. IHPA is not obliged to produce a methodology, but if it does, it should be technically sound and clearly communicated to the Administrator and to states and territories.

Fourth, IHPA must undertake a review of Western Australia’s data reporting practices for non‑admitted services. This review must focus on the practice of using a mix of patient‑level and aggregate‑level data at a hospital level and assess whether this creates a risk of duplicate payments. IHPA should request data from Western Australia, analyse the reporting systems, and compare the counts under the mixed approach with what would be reported under a purely patient‑level or purely aggregate‑level system. Any finding of potential duplication should be documented and included in the advice provided.

Fifth, IHPA must compile its findings and actions into a report and advise the Commonwealth, states and territories by 13 October 2017. The advice should cover Items 1(i), (ii) and (iii) comprehensively. It should state what steps have been taken, what methodologies have been developed, and what anomalies were addressed. The advice should be sufficiently detailed to allow jurisdictions to assess whether any further funding adjustments are needed.

For states and territories, compliance means cooperating with IHPA by providing data and information as requested, particularly Western Australia for the data reporting review. They should also monitor the advice from IHPA and be prepared to implement any funding adjustments that result.

For the Administrator of the National Health Funding Pool, compliance involves considering any methodology developed by IHPA under Item 1(ii)(b) and applying it if appropriate. The Administrator should maintain communication with IHPA to ensure the methodology aligns with the statutory framework for calculating funding entitlements.