The annual variation in activity and funding for acute public hospitals in NSW, 1988-89 to 1992-93.

Casemix-based funding was introduced into the Victorian health system without an assessment of the annual variation in inpatient activity. Before undertaking such a funding reform, it would be appropriate to determine the level of annual variation in inpatient activity for individual hospitals that could be attributable to chance or random variation. If the annual random variation is not accounted for, then casemix-based funding may actually lead to inefficiencies. For this study, hospital inpatient activity and funding data for 120 acute public hospitals from New South Wales for the years 1988-89 to 1992-93 were used to estimate the standard deviation of the annual random variation in activity and gross operating payment. Through linear regression, estimates of the standard deviation of random variation about the underlying trend were obtained for each hospital. The results showed that, depending on the size of the hospital, total diagnosis related group cost weights have a standard deviation in the range of 2 to 16 per cent of total activity, whilst gross operating payment has an equivalent standard deviation that ranges from 1 to 10 per cent annually. The magnitude of the variation would suggest that funding of hospitals should either be based on average activity over several years or based on bands of activity in order to reduce the potential random variation in funding levels.