Direction to the Independent Hospital Pricing Authority on the performance of its functions under section 226 of the National Health Reform Act 2011 - No 1/2020

Nationally Funded Centres (NFC) Program. The program was endorsed by Australian health ministers in June 1990 for the public sector provision of certain high cost, highly specialised clinical practices and technologies with limited demand. The definition in clause 4 of the direction states that for a technology to be considered for NFC status it must require a national population base for efficient and effective service provision. This implies that the patient cohort for any given service is too small to sustain a service in each state or territory, so centralisation at one or a few sites funded nationally makes economic and clinical sense. The direction lists five services as NFC services: islet cell transplantation, paediatric heart transplantation, paediatric liver transplantation, paediatric lung and heart lung transplantation, and pancreas transplantation. Each is a procedure with high per patient cost, small annual volumes, and a need for specialised multidisciplinary teams and infrastructure.

Direct and indirect costs. The direction carefully distinguishes direct costs, defined as costs incurred at the NFC site(s) directly related to the NFC technology, including pre and post procedural care as captured in the National Health Cost Data Collection Cost Bucket Matrix. Indirect costs include travel and accommodation costs incurred by patients to access an NFC service, capital costs, and other overhead costs incidental to provision of the service as deemed by the Pricing Authority. This distinction is crucial because the funding question (ABF versus block) turns in part on whether the current cost structure is better captured by a per episode price (ABF) or a fixed grant (block). Indirect costs, especially patient travel, are not typically captured in ABF prices for mainstream hospital services, so their inclusion here may lead to a block funding recommendation if travel costs are large and variable.

Cost model and pricing model. The direction defines a cost model as including deriving cost profiles, adjustments, parameters and relative weights of classes within each service stream for a financial year, based on cost and activity data from ABF establishments only. A pricing model includes a National Efficient Price (NEP), price weights and adjustments, based on cost and activity data from three years prior. Reference cost means a standardised mean to ensure the measure of an NWAU (National Weighted Activity Unit) remains constant over time, used to convert the cost model into a cost weight model and pricing model. These definitions are standard ABF architecture, but the direction requires them to be applied to the NFC context, which may not fit neatly. The requirement that the cost model use only data from ABF establishments is a notable limitation: if some NFC services are provided at sites that are not ABF establishments or have incomplete cost data, the model may be biased or incomplete.

Specified sites. The table in clause 5 lists each NFC service and the hospital sites where it is provided. Only those sites are within scope for the costing study. The sites are all major public teaching hospitals: Royal Adelaide Hospital, St Vincent’s Hospital Melbourne, Westmead Hospital, Royal Children’s Hospital Melbourne, Queensland Children’s Hospital, The Sydney Children’s Hospitals Network (Westmead), Alfred Hospital, and Monash Medical Centre. No private hospitals are listed, which is consistent with the program’s public sector origin. The direction does not authorise the Pricing Authority to consider other sites or potential new sites unless the minister amends the direction.

Activity Based Funding versus block funding. The central policy question the direction forces the Pricing Authority to address is whether NFC services are more appropriately funded via ABF or block funding under the National Health Reform Agreement. ABF pays a fixed price per unit of activity (e.g., per admission or per procedure), which incentivises volume and efficiency but can penalise services with high fixed costs and small volumes. Block funding provides a lump sum, which suits services with unpredictable demand, high standby costs, or a need to maintain capacity for rare procedures. For NFC services, which by definition have limited demand and high per case expense, ABF might produce unstable revenue streams or inadequate funding for necessary infrastructure, while block funding could better match costs but may blunt efficiency incentives. The Pricing Authority’s recommendation is not binding on the Commonwealth or the states, but it will inform negotiations under the National Health Reform Agreement.

The direction directly affects only the Pricing Authority as the entity bound by its terms. However, the practical effects ripple outward to several groups. States and territories are indirectly affected because they hold the hospital contracts and bear residual funding risk. They are invited to supply cost and activity data and to make submissions, but they are not compelled to do so. If a state chooses not to provide data, the Pricing Authority might proceed with incomplete information, potentially skewing the study. The specified hospitals (Royal Adelaide, St Vincent’s, Westmead, Royal Children’s Melbourne, Queensland Children’s, Sydney Children’s Westmead, Alfred, Monash Medical Centre) will be the subjects of the costing inquiry. Their finance and clinical teams will need to provide cost data, potentially diverting administrative resources. For these hospitals, the outcome is important: if the Pricing Authority recommends moving to ABF, they may face different funding levels and reporting requirements. If block funding remains, their current arrangements continue but possibly with adjustments. Patients are the ultimate beneficiaries of the study, but only indirectly. If the study leads to more efficient funding, access and quality could improve. However, the direction does not guarantee any particular outcome. Taxpayers fund the NFC Program through Commonwealth and state contributions. The study is an administrative cost that, if it improves allocative efficiency, may produce savings. But the study itself consumes resources - the Pricing Authority’s time, staff, and the costs of data collection and analysis - without any immediate pay off.

The Australian Health Ministers’ Advisory Council and the Standing Council on Health are the recipients of the interim and final reports respectively. They are policy bodies representing health ministers and officials; the direction empowers them to request updates at any time. This gives ministers oversight and the ability to influence the study’s direction mid course, which could introduce political considerations into what is ostensibly a technical costing exercise. Private hospitals and other health bodies are mentioned as potential submitters, but they are not directly affected because no NFC services are provided in the private sector for these procedures. Their submissions may advocate for including private providers, but the direction currently limits the scope to the specified sites. Competing programs or other high cost services not in the NFC Program are not within scope, but the study’s methodology could influence future determinations about what qualifies for NFC status.

The direction imposes a suite of duties on the Pricing Authority. It must undertake a costing and pricing study into the NFC Program. It must inquire into and make findings about the four matters listed in clause 2: direct and indirect cost per service per site, aggregate direct and indirect cost per service across all sites, projected cost of all NFC services at all sites, and existing direct and indirect cost per service per patient per site. It must recommend options on whether NFC services are more appropriately funded via ABF or block funding, on the development and operation of cost and pricing models for the NFC Program, and on other related matters it deems appropriate. It must have regard to the National Health Reform Agreement, NFC program cost and activity data supplied by a state or territory, submissions from the Commonwealth, states, territories, public hospitals, other health bodies, and other parties it deems relevant, and other related matters it deems appropriate. It must commence the study as soon as practicable. It must provide updates to the Australian Health Ministers’ Advisory Council and the Standing Council on Health as requested. It must provide an interim report by 1 August 2020 and a final report by 31 January 2021. These duties are mandatory, indicated by the word “must” in the direction. Failure to comply would constitute a breach of a lawful direction under the Act, potentially exposing the Pricing Authority to legal challenge or ministerial intervention.

The direction creates no rights for any private party. It is a government to government direction. No hospital, clinician, patient, or other stakeholder has a right to be heard or to receive a particular recommendation. The discretionary element appears in clause 3(c) and 4(c)(v) and (d), where the Pricing Authority “deems” other matters appropriate. This gives the Pricing Authority some procedural flexibility, but it is not a right held by outside parties. The direction does not create any right to judicial review for third parties, though a party with sufficient interest could theoretically seek judicial review of the Pricing Authority’s compliance with the direction if it failed to consider a mandatory matter or exceeded its powers. However, given the study is advisory only, any such challenge would likely be premature until the report is finalised and acted upon.

The direction itself does not prescribe any penalties for non compliance. It is a direction under section 226 of the National Health Reform Act 2011, but that Act does not impose a civil penalty provision for failing to follow a ministerial direction. Instead, enforcement mechanisms are indirect and political. The Pricing Authority is a statutory agency whose members are appointed by the minister. If it refused or failed to comply with the direction, the minister could potentially remove members (subject to the Act’s removal provisions) or revoke the direction and start afresh. The minister could also issue a new direction superseding this one, or vary the direction’s terms. More likely, the Pricing Authority would simply face negative attention from the minister and health department, reputational damage, and potential budgetary consequences. The direction’s deadlines have passed; the interim report was due 1 August 2020 and the final report 31 January 2021. As of the date of this analysis, it is reasonable to assume the Pricing Authority complied, as no public controversy surrounds this direction. If it had not, the minister could have taken action under section 226 to issue a further direction requiring compliance. There is no private right of enforcement; only the Commonwealth could seek an injunction or other remedy in the Federal Court for breach of statutory duty, but such a step would be extraordinary for a policy study.

The absence of monetary penalties or criminal sanctions is typical for directions to independent statutory bodies. The discipline comes from the relationship between the Pricing Authority and the minister, and from the fact that the Pricing Authority’s funding and existence depend on the government. In practice, the Pricing Authority treats such directions seriously because its credibility and future work program rely on ministerial confidence.

This direction is made under the National Health Reform Act 2011 (Cth), specifically section 226, which empowers the minister to give directions to the Pricing Authority about the performance of its functions and exercise of its powers. The direction relates to the Pricing Authority’s functions under paragraphs 131(1)(h), (i) and (n) of that Act. Those functions include undertaking costing and pricing studies, providing advice on funding models, and other related matters. The direction therefore operates within the existing statutory framework; it does not override or modify any other provision of the Act. The Act also establishes other bodies such as the Administrator of the National Health Funding Pool and the National Health Funding Body, which administer payments under the National Health Reform Agreement. This direction does not affect those functions directly.

The direction explicitly references the National Health Reform Agreement, an intergovernmental agreement between the Commonwealth and the states and territories. The Pricing Authority must have regard to that Agreement in carrying out the study. The Agreement sets out the general principles for ABF and block funding, and it will constrain the options the Pricing Authority can recommend. Any recommendation must be consistent with the Agreement’s terms, unless the Agreement is amended. The direction also references the Standing Council on Health and the Australian Health Ministers’ Advisory Council, recognising their role in health policy coordination.

The direction does not interact with state or territory legislation directly. However, the sites specified in the schedule are governed by their respective state health Acts, such as the Health Services Act 1988 (Vic) and the Health Administration Act 1982 (NSW). The Pricing Authority’s study may rely on data that is subject to state privacy laws or health records legislation. The direction does not override those laws; the Pricing Authority must obtain data in a lawful manner. The Privacy Act 1988 (Cth) may apply if the Pricing Authority receives personal health information, though the data required (costs, activity) is likely aggregated or de identified.

Finally, the direction does not purport to affect competition law, contract law, or other commercial laws. It is a purely administrative direction within the public health funding sphere.

No amendment history is available from the instrument itself. The direction is numbered No 1/2020, suggesting it is the first direction issued under section 226 in the 2020 calendar year. It was registered on the Federal Register of Legislation and commenced the day after registration. As a delegated legislative instrument, it can be amended or revoked by the minister at any time under section 226 of the Act. Amendments would be published as a new legislative instrument, likely titled "Direction to the Independent Hospital Pricing Authority … No 2/2020" or similar. There is no evidence that this direction has been amended. Given its specific deadlines (interim report 1 August 2020, final report 31 January 2021), it is likely that the direction has expired in practical terms once the reports were submitted. However, it remains in force as a legal instrument unless explicitly revoked. The minister may choose to leave it on the register as a record. For readers, this means the direction is a historical document governing a study that should have already been completed. Any current compliance obligations for the Pricing Authority would be fulfilled, unless the direction continues to impose ongoing duties such as providing updates (which are only “as requested”). If no further updates are requested, there is no ongoing burden.

There is no reported litigation concerning this direction. The instrument is a narrow administrative direction with a limited shelf life, making it an unlikely subject of judicial review. In general, directions under section 226 of the National Health Reform Act 2011 have not generated litigation. The Pricing Authority itself has been involved in some Federal Court proceedings, such as judicial review challenges to its pricing determinations (e.g., Private Health Insurance Ombudsman v Independent Hospital Pricing Authority (2018) 360 ALR 115, though that concerned a different function). However, this direction merely requires a study, not a final determination that affects rights. Any legal challenge would need to show that the Pricing Authority failed to comply with a mandatory requirement (e.g., failing to have regard to a specified matter). But even if a stakeholder proved such a failure, the court would likely decline to grant relief because the direction is preparatory and advisory; the study itself does not change anyone’s legal position. A court would be reluctant to intervene in the internal processes of a statutory body unless a clear jurisdictional error or ultra vires act occurred. No such case has been reported.

For practitioners advising clients who are concerned that the Pricing Authority’s study will lead to adverse funding changes, the better avenue is to engage through the submission process (clause 4(c)). The direction explicitly invites submissions from a wide range of parties, including public hospitals, other health bodies, and “other parties deemed relevant by the Pricing Authority”. A failure to make a submission cannot later be used as a basis to challenge the study’s outcomes, because the study is advisory. Judicial review of the final pricing decisions made by the Commonwealth or states would need to focus on the actual funding determination, not the preparatory study.

The first and most important grip is that this direction is time limited with deadlines that have already passed. The interim report was due over two years ago, and the final report over a year ago. Anyone relying on this direction to understand current Pricing Authority obligations must check whether the minister has revoked or replaced it. If the reports were submitted and accepted, the direction’s operative provisions may be spent. The direction remains on the Federal Register of Legislation, but compliance with its ongoing reporting duties (clause 6(b): “provide updates … as requested”) is likely dormant unless a specific request has been made. Practitioners should not assume that the Pricing Authority is still actively working on this study in 2025.

Second, the direction uses the phrase “must have regard to” for the matters in clause 4. This is a well known standard in administrative law: it requires the decision maker to consider the matter, but does not dictate the weight to be given or the outcome. The Pricing Authority could theoretically consider the National Health Reform Agreement and then decide to recommend an approach that contradicts it, as long as it can show it turned its mind to the Agreement. This interpretive flexibility reduces the binding force of the direction in practice.

Third, the definition of “cost model” explicitly states it is “based on cost and activity data for each of the historical years with only those costs and activity from Activity Based Funding (ABF) establishments being used.” This is a significant limitation. NFC services may be provided at sites that are not classified as ABF establishments or may have cost structures that are not captured by standard ABF data collections. If the data is incomplete or distorted, the cost model may produce inaccurate results, leading to flawed funding recommendations. The direction does not allow the Pricing Authority to use non ABF data for the cost model; it only says the cost model is based on ABF establishment data. The Pricing Authority could potentially supplement with other data under its general study powers, but the direction’s language is prescriptive for the cost model itself.

Fourth, the table in clause 5 defines sites at the time of the direction. If a site changes (e.g., a service moves from one hospital to another), the direction would not automatically update. The Pricing Authority would need a new direction or variation to include new sites. This rigidity could render the study outdated if service locations change during the study period.

Fifth, the direction does not specify the form or content of the interim and final reports beyond “results of the study and options”. The Pricing Authority has wide discretion on how to present findings. It could bury unfavourable options or present scenarios that favour a particular funding model without transparent weighting.

Compliance with this direction is primarily the responsibility of the Pricing Authority as the addressee. For the Pricing Authority, compliance means taking the following steps: (1) Commence the study as soon as practicable after the direction commences. (2) Inquire into and make findings on the four cost matters listed in clause 2. This requires collecting cost data from each specified site for each NFC service, disaggregating direct and indirect costs, aggregating across sites, projecting future costs, and calculating per patient costs. (3) Develop at least one recommendation for each of the matters in clause 3: whether ABF or block funding is more appropriate for NFC services, and how cost and pricing models should be developed for the NFC Program. The Pricing Authority may also recommend on other related matters it deems appropriate. (4) Have regard to the National Health Reform Agreement, any cost and activity data supplied by states or territories, any submissions received from the listed parties, and any other matters it deems relevant. This “have regard” obligation is procedural: the Pricing Authority must actively consider these materials, but it does not have to follow them. (5) Provide updates to the Australian Health Ministers’ Advisory Council and the Standing Council on Health as requested. (6) Submit an interim report by 1 August 2020 and a final report by 31 January 2021. These deadlines are strict; missing them would be non compliance.

The Pricing Authority should document its compliance. For example, internal records should show that the data requests were sent to the specified sites, that cost models were constructed using ABF establishment data only, that the National Health Reform Agreement was consulted, and that submissions were received and reviewed. The reports should clearly outline the findings, the options considered, and the rationale for the preferred recommendations. Because the direction is made under a public Act, the reports are likely to be publicly released or at least accessible under freedom of information laws.

For states, territories, hospitals and other stakeholders, compliance is voluntary but strategically important. The direction expressly invites submissions and data. If a state or hospital wants to influence the funding outcome, it should provide accurate, comprehensive cost and activity data to the Pricing Authority. Submissions should address the matters in clause 2 and the options in clause 3. Stakeholders should be aware that the Pricing Authority may proceed without their data if they do not supply it, but the study may then be based on unrepresentative information. For private health bodies or other parties not described in the direction but deemed relevant by the Pricing Authority, the best approach is to proactively contact the Pricing Authority to seek being deemed relevant and then submit.

The Pricing Authority must also ensure it complies with confidentiality obligations under the Act and other laws when handling sensitive data. The direction does not override those obligations. Practical compliance therefore includes data protection protocols.

In summary, the direction creates a straightforward analytical task for the Pricing Authority with clear deadlines. The main risk is that the limited scope (only ABF establishment data, only specified sites) produces a study that does not fully capture the complexities of the NFC Program, potentially leading to suboptimal funding recommendations. For stakeholders, the compliance imperative is to engage early and thoroughly through the submission process.