modelling options for the public funding of hospital ... hospital medicines... · funding of...

Modelling Options for the Public Funding of Hospital Medicines in Australia

THE CURRENT SYSTEM AND PROPOSALS FOR

REFORM

PREPARED BY

Laurie Brown, Alicia Payne, Binod Nepal, Cathy

Gong and Gabrielle Cooper

MARCH 2010


NATSEM March 2010

2

ABOUT NATSEM

The National Centre for Social and Economic Modelling was established on 1 January 1993, and supports

its activities through research grants, commissioned research and longer term contracts for model

maintenance and development.

NATSEM aims to be a key contributor to social and economic policy debate and analysis by developing

models of the highest quality, undertaking independent and impartial research, and supplying valued

consultancy services.

Policy changes often have to be made without sufficient information about either the current

environment or the consequences of change. NATSEM specialises in analysing data and producing models

so that decision makers have the best possible quantitative information on which to base their decisions.

NATSEM has an international reputation as a centre of excellence for analysing microdata and constructing

microsimulation models. Such data and models commence with the records of real (but unidentifiable)

Australians. Analysis typically begins by looking at either the characteristics or the impact of a policy change

on an individual household, building up to the bigger picture by looking at many individual cases through the

use of large datasets.

It must be emphasised that NATSEM does not have views on policy. All opinions are the authors’ own and

are not necessarily shared by NATSEM.

© NATSEM, University of Canberra 2010

All rights reserved. Apart from fair dealing for the purposes of research or private study, or criticism

or review, as permitted under the Copyright Act 1968, no part of this publication may be reproduced,

stored or transmitted in any form or by any means without the prior permission in writing of the

publisher.

National Centre for Social and Economic Modelling

University of Canberra ACT 2601 Australia

170 Haydon Drive Bruce ACT 2617

Phone + 61 2 6201 2780

Fax + 61 2 6201 2751

Email [email protected]

Website www.natsem.canberra.edu.au


NATSEM March 2010

3

AUTHOR NOTE

Laurie Brown is a Professor and Research Director (Health) at the National Centre for Social and

Economic Modelling, University of Canberra. At the time of undertaking this research, Alicia Payne,

Binod Nepal and Cathy Gong were Research Fellows at NATSEM. Gabrielle Cooper is a Professor and

Head of the Discipline of Pharmacy, Faculty of Health, at the University of Canberra.

ACKNOWLEDGEMENTS

The authors would like to thank the following for their professional contribution to this Report

through interviews conducted by Professor Gabrielle Cooper:

Professor Michael Dooley BPharm, Vic.Coll.Pharm., Grad.Dip.Hosp.Pharm., Vic.Coll.Pharm.,

Professor of Clinical Pharmacy (and Director of Pharmacy, Bayside Health), Monash

University, Melbourne Victoria,

Mr Andrew Petrie BPharm FSHP, Director Medicines and Pharmacy Services Unit, Queensland

Health,

Mr Neil Keens BPharm MBA, Director of Pharmacy, The Canberra Hospital and current President

Society of Hospital Pharmacists of Australia

and we acknowledge the assistance provided and the time given to answering our questions and

queries by other individuals from Government, AIHW, ABS, the Pharmaceutical Industry and Hospital

Pharmacy in Australia.

This project was supported through an untied research grant from Pfizer Australia.

GENERAL CAVEAT

NATSEM research findings are generally based on estimated characteristics of the population. Such

estimates are usually derived from the application of microsimulation modelling techniques to

microdata based on sample surveys.

These estimates may be different from the actual characteristics of the population because of

sampling and non-sampling errors in the microdata and because of the assumptions underlying the

modelling techniques.

The microdata do not contain any information that enables identification of the individuals or

families to which they refer.


NATSEM March 2010

4

ABBREVIATIONS

ABS Australian Bureau of Statistics

ACHS Australian Council on Health Care Standards

ACSQHC Australian Commission for Safety and Quality in Health Care

AHCA Australian Health Care Agreements

AIHW Australian Institute of Health and Welfare

ALOS Average length of stay

AR-DRG Australian Refined Diagnosis Related Groups

ATC Anatomical Therapeutic Chemical classification

COAG Council of Australian Governments

CURF Confidentialised unit record file

DoHA Department of Health and Ageing

ICD-10-AM International Statistical Classification of Diseases and Related Health Problems, 10th

Revision, Australian Modification

IPA Individual Patient Approval

JATAG Joint Australian Therapeutics Advisory Groups

MSAPs Medical Superintendant Signed Authority Protocols

NHCDC National Hospital Cost Data Collection

NHHRC National Health and Hospitals Reform Commission

NHMD National Hospital Morbidity Database

NPHE National Public Hospital Establishments

PBS Pharmaceutical Benefits Scheme

PBAC Pharmaceutical Benefits Advisory Committee

PHEC Private Hospital Establishment Collection

SDL Standard Drug List (for Queensland Hospitals)

SHPA Society of Hospital Pharmacists of Australia

TGA Therapeutic Goods Administration


NATSEM March 2010

5

CONTENTS

About NATSEM 2

Acknowledgements 3

General Caveat 3

Abbreviations 4

Executive Summary 7

Executive Summary 7

1 Introduction 13

1.1 Methods 14

2 Background 15

2.1 Public and Private Hospitals in Australia 15

2.1.1 Public hospitals 15

2.1.2 Private hospitals 16

2.2 Overview of Hospital Medicines in Australia 18

2.2.1 Structures of funding for the use of prescribed medicines in Australia 19

2.2.2 The Pharmaceutical Benefits Scheme and its use in hospitals 20

2.2.3 Hospital formularies 22

2.2.4 Drug Committees 24

2.2.5 The influence of PBS listing on the hospital formulary 25

2.2.6 Off Label- non-TGA approved therapies 26

2.2.7 Ability of Industry to influence formulary applications 26

2.3 Policy Context - National Health and Hospitals Reform Commission 27

3 Identified Issues with the Current System and Opportunities for Reform 30

3.1 Continuity of Care and Health Outcomes 30

3.2 Cost Shifting 30

3.3 Inequities of Access and Funding 31

3.4 Value for Money 31

3.5 Duplication of Work 31

4 Proposals for Reform 32

4.1 Society of Hospital Pharmacists of Australia (SHPA) 32

4.2 Joint Australian Therapeutics Advisory Groups (JATAG) 33

4.3 Pfizer Australia 34

5 Constructing a System Dynamics Model of the Hospital Medicines System 37

5.1 Modelling Approach 37

5.2 Data Sources 38

5.2.1 National Hospital Cost Data Collection 38

5.2.2 National Public Hospital Establishments Data Collection 40

5.2.3 National Hospital Morbidity Database 42


NATSEM March 2010

6

5.2.4 Private Hospital Establishment Collection 43

5.2.5 IMS Health Pharmaceutical Sales Data 44

5.2.6 Quality and Safety of Hospital Care – Adverse Drug Events 44

5.3 Causal Loop Diagram of the Hospital Medicines System 46

6 General Findings 50

6.1 Use of Medicines in Australia’s Hospitals 50

6.2 Hospital Medicines by Therapeutic Class 55

6.3 Adverse Drug Events 56

6.4 Possible Impacts of the Reform Options 57

7 Conclusions 61

References 63

APPENDIX 1 Terms of Reference for the National Health & Hospitals Reform Commission 66

APPENDIX 2 Decision Algorithms on the Evaluation of Medicines 67

APPENDIX 3 Public and Private Hospital Activity and Cost of Pharmacy by Selected DRG and by State 68

Boxes, figures and tables

Figure 1 Typology of Australian Hospitals 16

Figure 2 Causal Loop Diagram of the Hospital Medicines System 47

Figure 3 Share of separations by public hospital peer group, 2006-07 51

Figure 4 Average length of stay by public hospital peer group, 2006-07 51

Figure 5 Average cost of per separation by public hospital peer group, 2006-07 52

Figure 6 Average cost of pharmaceuticals per separation by public hospital peer group, 2006-07 53

Figure 7 Average cost of pharmaceuticals per separation as a proportion of total cost by public hospital peer group, 2006-07 54

Table 1 Australian public hospital peer groups 17

Table 2 Number of hospitals and hospital beds by broad public hospital peer group, 2007-08 17

Table 3 Number of public and private hospitals and number of beds per 1,000 weighted population by state and territory, 2007-08 18

Table 4 Selected recommendations by the NHHRC and their implications for hospital medicines. 29

Table 5 Percentage of total costs by component, and cost ratio by component, Public & Private Sector, Round 11 40

Table 6 Components of system dynamics model 48

Table 7 Cost of hospital medicines by therapeutic class, 2007-08 55

Table 8 Separations with adverse events 57

Table 9 Likely impact for public hospitals of select reform option in addressing key issues 58


NATSEM March 2010

7

EXECUTIVE SUMMARY

The National Health and Hospital Reform Commission (NHHRC) was charged with developing a long

term reform plan for the Australian health care system. One area where the funding and regulation is

complex and which gives rise to a number of medical and financial problems and concerns is hospital

pharmacy. Despite various proposals for change in the public funding of hospital medicines, this has

attracted little attention in the reform agenda. This Report seeks to:

• review hospital pharmacy in Australia and the current system for the public funding of

hospital medicines in Australia;

• identify the key issues and problems that exist with the current funding and bureaucratic

arrangements;

• develop a system dynamics model to estimate the clinical, economic and organisational

consequences of proposals for reform; and

• identify possible options for reform and evaluate the likely impact of a select few within the

policy context of NHHRC deliberations and recommendations.

In undertaking this research, we found that there were many challenges to building a system

dynamics model, especially related to the availability of detailed data on the use and cost of

medicines; on clinical pharmacy, distribution and management processes that take place within

hospitals; and patient outcomes, at the level of individual hospitals. Hence, this Report examines

only the nature of the modelling task, scopes the available data upon which the model could be

constructed, and details the structure of a system dynamics model through a causal loop diagram.

Hospital Pharmacy in Australia

Prescription medicines are funded and subsidised differently depending on whether they are sold in

the ‘community’ or administered in hospital, whether it is a private or public hospital, whether the

patient receiving the drugs in hospital is an ‘in’ or ‘out’ patient and the type of drug itself. As of 2007-

08, there were 762 public and 552 private hospitals in Australia. There is significant variation

between these hospitals, the services they provide, their size and the number of patients they treat.

In 2007-08, over $2bn of public funds were spent on covering the cost of medicines in Australian

hospitals – medicines in public hospitals costing $1.4bn and in private hospitals around $0.6bn,

noting that many medicines dispensed in private hospitals are funded via the PBS. The provision and

funding of pharmaceuticals in Australia, both in the community and hospital, is regulated by two

main policies: the National Medicines Policy - including its third pillar ‘Quality Use of Medicines’ -

which sets out the aims and principles for the supply and use of medicines in Australia; and the

Australian Health Care Agreements (AHCA), which are bilateral five year agreements between the

Commonwealth and each State/Territory Government.

Medications approved for use in a public hospital are listed in a formulary. Formularies identify to

prescribers what medications can be used in a public hospital and for what indications. Unlike the

PBS for which a list of subsidised drugs is agreed on at the national level, hospitals are generally

responsible for selecting their own individual formularies, with some exceptions such as in


NATSEM March 2010

8

Queensland and Western Australian where State-wide formularies operate. The complex area of cost

effectiveness evaluation requires skills that are often not available in each individual hospital. As a

result, there has been the development of specialised therapeutic advisory groups in most States to

provide State governments and hospital Drug Committees evidence and cost-effectiveness data with

which to make informed decisions on medications availability and indications. Public hospitals will

develop policies to refuse direct representation to Drug Committees from pharmaceutical company

‘reps’ to make sure that the decision of inclusion is made on clinical grounds and not as a marketing

exercise for industry. One particularly challenging area for public hospitals is the area of use of

medications for non-approved (not approved by TGA) uses of medications. Clinicians are keen to

provide the best care to patients particularly when few alternatives may be available or the patient

has limited time for treatment, and hence public hospitals will develop processes to enable patients

to be availed of ‘off-label’ treatment for which there is limited evidence.

Identified Issues with the Current System and Opportunities for Reform

The system of funding and regulation of hospital medicines is complex and fragmented. This has a

number of implications. The following were identified as major issues of concern:

• Lack of continuity of care and poor health outcomes - a substantial number of adverse drug

events and admissions to hospital are attributable to confusion surrounding the overlap of or

gaps between community and hospital care;

• System incentives for cost shifting e.g. between in- and out-patients, and between State and

Commonwealth Governments;

• Inequities of access to and funding of medicines - individual formularies in most hospitals

mean that the same drugs, or at least, the same brands of drugs are not available across all

public hospitals, and many patients in private hospitals are able to access the PBS to cover

drugs administered while they are in hospital;

• Value for money – the current emphasis is on evaluating the efficacy of drugs and drug

committees and TAGs do not necessarily have the expertise to undertake appropriate cost-

effectiveness evaluations to ensure ‘value for money’;

• Duplication of work and bureaucratic workloads required to maintain the system - the

management of a formulary for each individual public hospital represents duplication of

work, and State and Commonwealth administrative procedures and requirements impose an

unnecessary workload, duplication and waste of resources.

Proposals for Reform

A number of reform options have been proposed. The following three were investigated in this

Report:


NATSEM March 2010

9

1. The Australian government provides funding for all pharmacy services (clinical distribution

and management) including all medicines used in hospitals (this is the Society of Hospital

Pharmacists of Australia’s (SHPA) Option 5);

2. The extension of the PBS to cover all hospital medicines (this is SHPA’s Option on 2); and

3. A national hospital formulary is established with a national committee to administer it and

the Commonwealth Government funding the cost of all pharmaceuticals in hospitals (as

proposed by the Joint Australian Therapeutics Advisory Groups).

These reflect the broad interest by key stakeholders.

A System Dynamics Model of the Hospital Medicines System

Hospital medicines are funded, acquired, prescribed and consumed within a system driven by cause

and effect, and is characterised by complex ideas and information. The ‘hospital medicines system’ is

a complex system in that it is highly coupled with dynamic processes that play out over time, has

feedback effects and many outcomes resulting from the interactions that occur between its many

parts. System dynamics is a method to enhance the understanding of the functioning and to analyse

the behaviour of complex systems over time, with the help of computer simulation. This approach

involves system variables, the interactions between them through feedback loops, and the study of

the effects of these interactions over time. The utility or power of system dynamics modelling is its

simulation capabilities for testing what if scenarios.

There is a broad range of data that ideally is required to populate a system dynamics model of hospital

medicines. Most of the publicly available statistical collections do not routinely report data at the fine

level – e.g. at the level of an individual hospital - required for the modelling but review of the possible

data sources suggest that such information may be made available on request. A combination of

datasets would need be used to build the model equations and populate the different stages of the

model. Likely sources of data include:

• The Commonwealth Department of Health and Ageing National Hospital Cost Data

Collection (NHCDC);

• The Australian Institute of Health and Welfare (AIHW) National Public Hospital

Establishments (NPHE);

• AIHW’s National Hospital Morbidity Database (NHMD);

• Australian Bureau of Statistics Private Hospital Establishment Collection; and

• IMS Health Pharmaceutical Sales Data.

Information on adverse drug events can be obtained from AIHW’s NHMD using ICD-10-AM codes Y40-

Y59 which identify separations with an external cause coded as an adverse effect caused by ‘drugs,

medicaments or biological substances in therapeutic use’.

The causal loop diagram (CLD) (visual representation of the system dynamics model) developed for

the hospital medicines system is provided in the figure below. The model is based on four interacting

parts: the industry characteristics and business activities of pharmaceutical companies

manufacturing and supplying hospital based medicines; the characteristics of the hospital as an


NATSEM March 2010

10

organisational entity; features related to hospital pharmacy based around the purchasing,

acquisition, prescribing and dispensing of medicines in hospital; and patient-related characteristics

and behaviour. Some of the relationships shown in the CLD will be able to be quantified while others

will be of a more qualitative nature. The model primary outcome measures (system key performance

indicators) are: the cost of hospital medicines (drug expenditure by $ amount and proportion of a

hospital budget); expenditure by different funding sources; number of adverse drug events and

continuity in medication post-discharge as measures of quality and safety. The model is designed to

allow users to answer the basic question of:

How do changes in the characteristics and behaviour of pharmaceutical suppliers, hospitals,

hospital pharmacy and/or patients affect the expenditure on hospital medicines, adverse drug

events, continuity of care on discharge, and source of funding?

In modelling terms, if we change system parameters or re-define the processes and interactions

operating within the system then how will this impact on system outcomes?

The Hospital Medicines System in Australia

Cost of hospital

medicine ($, %)

Adverse drug

events

Continuity ofmedication ondischarge

Hospitalpharmacy

Formularytype

Case mix

Size ofpharmacy

Roles of

pharmacists

Drug price

Drugpreferences

Tendering

process

Patients

No. of seperations

Proportion

Inpatients

Proportion

OutpatientsProprotion

Day-only

Demographics

Hospital

Peer group

State

Public/private

sector

Remoteness

Hospital

budget

Dispensed drugs -

volume and type

Cost toCommonwealth(S100, PBS)

Cost to Hospital

(States/Commonwealth)

Average length

of stay

Drug supply,

New drug

Medication

complexity

Doctor prescribing

behaviourOff label use

Role of TAG

Pharmaceutical

Industry

Findings

There is substantial variation in the cost of pharmaceuticals between public sector hospital peer

groups, reflecting case mix and scale, and different pharmacy services. The pharmaceutical and

pharmacy component of the average total cost per separation increases with the size of the hospital.

Supplier


NATSEM March 2010

11

In 2007-08, the proportion of the total cost of a separation attributable to the costs of

pharmaceuticals and pharmacy services varies from 2.5 percent in small regional acute (D1) hospitals

to 5.1 per cent in major city and regional hospitals. Two ATC categories account for nearly half of all

pharmaceutical sales in public and private hospitals - cancer and immunosuppressant therapies (ATC

Category L) make up nearly 30 percent of all hospital expenditure on drugs and systemic anti-

infection drugs (ATC – J) contribute to a further 20 percent. The number of pharmaceutical

companies selling products in the different ATC classes varies considerably - in general, the more

companies selling products within a therapeutic class, the lower was the annual growth rate in the

cost of drug purchase. By 2007-08, the total number of separations to Australian public and private

hospitals had increased to 7.9 million, but a staggering 106,012 separations were reported as having

an adverse drug event in hospital i.e. over one in every 75 hospital stays had an adverse drug event

that was sufficiently severe that it was reported on the patient’s medical file and coded into official

hospital statistics.

The possible impacts of the three chosen reform options on key issues and outcomes were

investigated. Extending the PBS or establishing a national hospital medicines formulary funded by the

Commonwealth Government offers significant advantages. The first option ‘ Commonwealth

Government as single funder’ performs the least well as it does not directly impact on issues around

hospital formularies which are central to the public funding of hospital medicines and performance

of hospital pharmacy and which are addressed by the other two options. Each of the options:

• is universal in that it supports all patients;

• increases equity of access to hospital medicines with a focus on meeting the clinical needs of

individual patients;

• improves the supplies of medicines on discharge;

• removes incentives for cost shifting; and

• shifts funding to the Commonwealth Government as the single funder, and addresses State-

Commonwealth administration issues.

The reform options offer other benefits but these either vary between the options or are less clear,

for example: integration with community care (and PBS), including improving continuity of

medication on discharge; adherence to QUM principles and improved patient safety; reduction in

unnecessary bureaucratic processes, administrative workloads and duplication of work; robust

tendering processes and pricing mechanisms; and economic evaluation leading to value for money

(cost-effectiveness) and responsible spending. Like all policy reform options, ‘the devil is in the detail’

and these options need further scoping and assessment.

At present, expenditure on hospital medicines is capped through public hospital budgets but under

these reform options, expenditure is likely to become uncapped, with funding being ‘activity-based’.

Mechanisms need to be put into place to link medicine use to health outcomes, with funding

arrangements and formularies allowing for flexibility at the level of the individual hospital to

dispense medicines that best suit the clinical needs of the patients while encouraging responsible

and cost-effective spending. The introduction of an enhanced PBS-hospital formulary or a national

hospital medicines formulary will both positively impact on hospitals through streamlining, at the


NATSEM March 2010

12

level of the individual hospital, drug-listing, pricing, tendering and other acquisition processes.

However, while there is strong support for increasing the clinical role of pharmacists, how these

reform options will impact on clinical pharmacy services is uncertain. A possible limitation with both

formulary options is the restriction to approved uses only. The impact of these reform options on the

total cost of hospital pharmacy and more specifically on the cost of medicines is also uncertain

because of the possible incentives for hospitals to use more medicines under an uncapped funding

system versus the efficiencies and savings that the Commonwealth could achieve as monopsony

funder and purchaser dictating terms to the pharmaceutical companies supplying drugs and through

economies of scale. This change in funding arrangements would have major implications for the

pharmaceutical suppliers in Australia.

Conclusions

Although a number of submissions were made to the National Health and Hospitals Reform

Commission, no direct recommendations were made by the Commission concerning the public

funding of hospital medicines. The broader issues raised by the Commission are relevant to and

overlap the changes proposed in the three reform options examined.

The development of the system dynamics model through the causal loop diagram provided a means

to enhance our understanding of the systemic causes of hospital medicine use and costs in Australia.

Further work to quantify and operationalise the model will allow the policy levers and reform options

discussed, or alternative formulations, to be more thoroughly and rigorously tested on the simulation

and the results evaluated for their improvement to key outcomes. Models are a cost-efficient way of

testing ‘what-if’ policy scenarios that address real world issues.

It is timely given the release of the NHHRC’s final report on and the Commonwealth Government’s

interest in reforming Australia’s health care system that the reform of public funding of hospital

medicines is also addressed. The three proposals examined in this Report would all provide benefits.

These and other possible alternatives should be studied in much greater detail to provide the

Commonwealth Government with the necessary platform to introduce policy change to the publicly

funding of medicines in Australian hospitals.

Key words: Hospitals, pharmaceuticals, funding, reform options, system dynamics modelling


NATSEM March 2010

13

1 INTRODUCTION

Medications are the most common intervention a patient will experience in an Australian public

hospital, costing some $1.4 billion dollars annually1. The National Health and Hospital Reform

Commission (NHHRC) was charged with developing a long term reform plan for the Australian health

care system. One area where the funding and regulation is complex and which gives rise to a number

of medical and financial problems and concerns is hospital pharmacy. Despite various proposals for

change in the public funding of hospital medicines, this has attracted little attention in the reform

agenda.

This Report examines the current system for the public funding of hospital medicines in Australia and

investigates possible options for reform. A key aim of the Report is to provide an overview of

hospital pharmacy in Australia, and identify the key issues and problems that exist with the current

funding and organisational arrangements. Options for change are then canvassed. The development

of a system dynamics model to estimate the clinical, economic and organisational consequences of

selected funding models-policy options for government, the pharmaceutical industry, hospital

administrators, peak health professional bodies (especially hospital pharmacy) and patients is

investigated.

In undertaking this research, we found that there were many challenges to building such a model -

especially related to the availability of detailed data on the use and cost of medicines, the workings

of hospital pharmacies in terms of clinical pharmacy, distribution and management related processes

that take place within hospitals, and patient outcomes, at the level of individual hospitals. Hence,

this Report examines only the nature of the modelling task, scopes the available data upon which the

model could be constructed, and details the structure of a system dynamics model through a causal

loop diagram.

In developing the model structure, we identify the key agents, relationships and interactions that

occur within Australia’s ‘hospital medicines system’. While we have not as yet quantified the

processes nor ‘populated’ the model with data, we have been able to use the model structure to

hypothesize the likely impacts of each reform option in terms of both economic and patient

outcomes. The Report highlights the next steps needed to build a fully-functional model that can be

used to better inform future policy options for the funding, supply and use of medicines in Australia’s

public and private hospitals.

This research has been undertaken within the context of the NHHRC’s deliberations and

recommendations and with the view to contributing to the policy debate around the supply and use

of medicines in hospitals in Australia. A summary of the policy context is given in Section 2.3. Also

by way of background, we initially provide a brief overview of public and private hospitals in Australia

in Section 2.1 and medicines in Australian hospitals in Section 2.2.

We provide the results of the research in Sections 3–6. Firstly, the findings on the current issues and

problems with medicine use in hospitals and related costs are provided; secondly, three possible

1 http://d01.aihw.gov.au/cognos/cgi-bin/ppdscgi.exe?DC=Q&E=/ahs/phe0607_f


NATSEM March 2010

14

reform options are reviewed; thirdly, the modelling work is described in which system dynamics

modelling is introduced as a modelling approach, the data sources are discussed and the structure of

a system dynamics model for hospital medicines outlined. In Section 6, we provide the results of

some aggregate analyses and speculate on the likely impact of the different reform options. The

Report concludes with a brief discussion of these findings and recommendations for future work.

1.1 METHODS

This work is based on a detailed review of the literature on hospital pharmacy and the funding and

use of medicines in Australian hospitals. A number of interviews with key stakeholders from both the

pharmaceutical industry and hospital pharmacy were also conducted. These interviews provided

further information on and insight into the operation of the current system and its problems, as well

as on possible options for change.

Administrative statistical collections held by the Australian Institute of Health and Welfare (AIHW), by

the Commonwealth Department of Health and Ageing (DoHA), the Australian Bureau of Statistics

(ABS), were evaluated as possible data sources for the modelling as well as pharmaceutical sales data

collected by IMS Health Australia Pty Ltd in its hospital audit database. Reports and data on the

quality use of medicines and patient safety were also reviewed.

Process maps2 were constructed to assist in designing the system dynamics model which was then

developed using the software package ‘Vensim’. A number of different software packages are

available to construct system dynamics models. Vensim is readily available, is widely used and is well

supported.

2 A process map (flowchart) is basically a visual picture of a process (or system). A key element of process

mapping is establishing boundaries around processes i.e. identifying where each process starts and finishes,

and how each interacts with other processes.


NATSEM March 2010

15

2 BACKGROUND

2.1 PUBLIC AND PRIVATE HOSPITALS IN AUSTRALIA

In Australia, hospital services account for around one-third of national expenditure on health care

(Productivity Commission, 2009). Australian hospitals can be divided into the public and private

sectors and within these into further groups based on their patient throughput and the treatments

provided, as shown in Figure 1. As of 2007-08, there were 762 public hospitals in Australia to which

there were 4.7million admissions, and 552 private hospitals to which there were 3.1 million

admissions (DoHA 2009a). In 2009, the Productivity Commission undertook a review of the relative

performance of public and private hospitals in Australia. The Commission found that the efficiency of

public and private hospitals was, on average, similar and using their experimental cost estimates

that, at a national level, public and private hospitals have similar average costs (Productivity

Commission, 2009). However, there are significant variations between hospitals, the treatments they

provide, their size and the number of separations they treat, and in the composition of their costs.

2.1.1 Public hospitals

The majority of Australia’s hospitals are public, in which all Australians can access treatment free of

charge, funded by the government. As will be discussed further in Section 2.2 hospitals are the

responsibility of state and territory governments, although some of their funding comes from the

Commonwealth Government through the Australian Health Care Agreements. In 2006-07, $27 billion

was spent on public hospital services, of which 40 per cent was funded by the Commonwealth

Government ($10.8 billion), 53 per cent by state, territory and local governments and the remaining

seven per cent came from non-government sources, for example ‘out-of-pocket’ payments by

individuals (DoHA, 2009a).

Across all public hospitals there were 56,467 available beds, accounting to 2.5 public hospital beds

per 1,000 weighted population (DoHA, 2009a). Half of people admitted to public hospitals were

discharged on the same day. The majority of public patients (67 per cent) received acute medical

care, 18 per cent underwent surgery, six percent had medical procedures, a further six per cent were

admitted to maternity and three per cent to sub-acute services (DoHA, 2009a).

In order to compare hospitals of a similar size and case mix, the ‘peer group’ structure has been

developed to classify hospitals. As detailed in Table 1, public hospitals in Australia can be classified

into seven main categories, and ten sub-groups within those, based on their number of admissions in

a year and location. Specialist psychiatric hospitals form their own grouping. ‘Principal referral’ and

‘specialist’ hospitals are classified as those treating more than 20,000 patients if they are located in a

major city and more than 16,000 if they are in regional areas. These major hospitals account for more

than half of all available beds, and represent 11 per cent of all public hospitals. ‘Small acute’, ‘small

non-acute and multi-purpose services’, psychiatric and ‘other’ hospitals represent 71 per cent of all

Australia’s public hospitals, but only 22 per cent of hospital beds (DoHA 2009a). Table 2 shows the

number of hospitals and beds in each broad group. Peer group is a key structure for the comparison

of hospitals, and thus an ideal unit for modelling for this project. Section 5 presents analysis of data

comparing the costs and use of public hospitals by peer group.


NATSEM March 2010

16

Figure 1 Typology of Australian Hospitals

Australian Hospitals

Public

Private

Ownership

For Profit

Not for Profit

Peer Group

1. Private hospitals 2. Private day surgery

1. Principal referral and specialist women's and children's hospitals

2. Large hospitals 3. Medium hospitals 4. Small acute hospitals 5. Small non-acute hospitals and multi-purpose services

6. Psychiatric hospitals 7. Other hospitals

Individual Hospital

2.1.2 Private hospitals

While this project focuses on public hospitals, private hospitals and the systems used within them

provide a useful comparison with current and proposed systems for public hospitals, thus they are

also described. One way to broadly classify private hospitals is on the basis of whether the

establishment provides day only surgery – about half of all private hospital are day hospitals.

However, another important distinction can relate to the ownership of the hospital. This is generally

distinguished on the basis of whether the hospital is operated by a for-profit entity or a not-for-profit

organisation (denominational/charitable organisations or other not-for-profit entities).


NATSEM March 2010

17

Table 1 Australian public hospital peer groups

AIHW Peer Group Definition

Principal referral and

specialist women’s and

children’s

A1 Major city hospitals with >20,000 acute casemix-adjusted separations and

Regional hospitals with >16,000 acute casemix-adjusted separations per

annum

A2 Specialised acute women’s and children’s hospitals with >10,000 acute

casemix-adjusted separations per annum

Un-peered and other

hospitals

A9 Prison medical services, special circumstance hospitals, Major city

hospitals with <2000 acute casemix-adjusted separations, hospitals with

<200 separations etc

Large hospitals B1 Major city acute hospitals treating more than 10,000 acute casemix-

adjusted separations per annum

B2 Regional acute hospitals treating >8,000 acute casemix-adjusted

separations per annum, and remote hospitals with >5,000 casemix-

adjusted separations

Medium hospitals C1 Medium acute hospitals in Regional and Major city areas treating between

5,000 and 10,000 acute casemix-adjusted separations per annum

C2 Medium acute hospitals in Regional and Major city areas treating between

2,000 and 5,000 acute casemix-adjusted separations per annum, and

acute hospitals treating <2,000 casemix-adjusted separations per annum

but with >2,000 separations per annum

Small acute hospitals D1 Small Regional acute hospitals (mainly small country town hospitals),

acute hospitals treating <2,000 separations per annum, and with less than

40% non-acute and outlier patient days of total patient days

D3 Small remote hospitals (<5,000 acute casemixadjusted separations but not

'Multipurpose services' and not 'Small non-acute'. Most are <2,000

separations

Small sub-acute and non-

acute hospitals

G Small non-acute hospitals, treating <2,000 separations per annum, and

with more than 40% non-acute and outlier patient days of total patient days

(D2) plus Multi-purpose service (E2)

Hospices, Rehabilitation, Mothercraft, Other non-acute hospitals

Psychiatric Psychiatric

Source: DoHA (2008b)

Table 2 Number of hospitals and hospital beds by broad public hospital peer group, 2007-08

Hospital type Hospitals Beds

Principal referral and specialist

women’s and children’s hospitals (A)

83 31,850

Large hospitals (B) 45 6,405

Medium hospitals (C) 93 5,690

Small acute hospitals (D) 151 3,280

Small non-acute hospitals and multi-

purpose services (G)

185 4,428

Psychiatric hospitals 20 2,330

Other hospitals 185 2,485

Total 762 56,467

Source: DoHA 2009a, adapted from Table 1.3, pp14.


NATSEM March 2010

18

In 2007-08, private hospitals received $7.1 billion in government funding (DoHA 2009a). As will be

discussed further in Section 2.2, the way in which pharmaceuticals are paid for in private hospitals is

quite different to that in public hospitals, as drugs for the majority of patients are covered by the

Commonwealth Pharmaceutical Benefits Scheme (PBS) or patients’ private health insurance. There

were 1.3 private hospital beds per 1,000 weighted population, and 66 per cent of patients admitted

were discharged on the same day (DoHA, 2009a). The mix of treatments delivered in private

hospitals was somewhat different to that in public hospitals, with patients being less likely to receive

acute care and more likely to have surgery in private hospitals than in the public system. In private

hospitals 34 per cent of patients received acute medical care, 38 per cent had surgery, 20 per cent

had medical procedures, three per cent were in maternity and four per cent received sub-acute

services (DoHA, 2009a).

Table 3 shows the number of public and private hospitals in each State and Territory, showing that

the number of hospitals tends to roughly reflect the population of the state. The Table also shows

the number of hospital beds per 1,000 weighted population in each State and Territory. The average

across Australia for public hospitals was 2.5, with the Northern Territory having the highest ratio of

beds to population at 3.6.

Table 3 Number of public and private hospitals and number of beds per 1,000 weighted population by state and territory, 2007-08

Public hospitals Public beds

per 1,000

weighted

population

Private

hospitals

Private beds

per 1,000

weighted

population

Total number

of hospitals

New South Wales 228 2.7 172 0.9 400

Victoria 148 2.3 148 1.3 296

Queensland 177 2.5 106 1.5 283

Western Australia 94 2.5 52 1.7 146

South Australia 80 2.8 55 1.1 135

Tasmania 27 2.3 9 1.9 36

Australian Capital

Territory

3 2.6 9 1.2 12

Northern Territory 5 3.6 1 0.6 6

Australia 762 2.5 552 1.3 1,314

Source: DoHA 2009a, adapted from Tables 1.1 and 1.2, pp 11 and 12.

2.2 OVERVIEW OF HOSPITAL MEDICINES IN AUSTRALIA

The current regulation and funding systems for pharmaceuticals in Australia are complex and multi-

faceted. Prescription medicines are funded and subsidised differently depending on whether they

are sold in the ‘community’ (for example local pharmacies) or administered in hospital, whether it is

a private or public hospital, whether the patient receiving the drugs in hospital is an ‘in’ or ‘out’

patient (essentially whether they are staying overnight in hospital or a day patient, however the

definition differs between hospitals, procedures and admissions) and the type of drug itself. These


NATSEM March 2010

19

complexities, disparities between situations and areas of ‘loose’ regulation lead to the issues that

have been identified by various pharmacy groups, and constitute the reasons for this Report. This

section provides an overview of the structures, regulation and funding of hospital pharmaceuticals in

Australia and the processes by which medicines are selected for use in hospitals. While this Report

focuses on the issues facing public hospitals, it is important to explain the broader context of

pharmaceutical funding in Australia, including community pharmacy and private hospitals in order to

appreciate the broader policy context in which pharmaceutical use and funding operates. In

preparation of this section of the Report, several key authorities were interviewed to provide insight

into those issues that influence medications availability and utilisation within the hospital sector (See

the acknowledgements section for details of contributors).

2.2.1 Structures of funding for the use of prescribed medicines in Australia

First, all medications available for therapeutic use in Australia are required to be approved by the

Therapeutic Goods Administration as provided by the Therapeutic Goods Act 1989. This Act laid

down a framework for the regulation of therapeutic goods in Australia to ensure quality, safety and

efficacy of medicines and medical devices. The Therapeutic Goods Act 1989, Regulations and Orders

set out the requirements for inclusion of therapeutic goods in the Australian Register of Therapeutic

Goods, including advertising, labelling, product appearance and appeal guidelines. Some provisions

such as the scheduling of substances and the safe storage of therapeutic goods are covered by the

relevant State or Territory legislation. The Therapeutic Goods Administration (TGA) is a unit of the

Australian Government Department of Health and Ageing and is responsible for administering the

provisions of the legislation. Once a medication has been approved for use by the TGA that

medication may be used by a registered health professional for the indication for which it was

approved3.

Under this umbrella, the provision of prescribed medicines4 is divided into two main systems:

community, including all prescriptions presented to ‘local’ pharmacies, and hospital. The provision

and funding of pharmaceuticals in Australia, both in the community and hospital, is regulated by two

main policies: the National Medicines Policy including its third pillar ‘Quality Use of Medicines’ which

sets out the aims and principles for the supply and use of medicines in Australia; and the Australian

Health Care Agreements (AHCA), which are bilateral five year agreements between the

Commonwealth and each State and Territory Government. These govern the health funding given

from Commonwealth to State and Territory Governments. While the Medical Benefits Scheme

(covering the use of GP and specialist services provided outside of hospital) is funded by the

Commonwealth Government, hospitals are funded by State and Territory Governments (although a

substantial proportion of this funding comes to the states from the Commonwealth through the

AHCA).

3 http://www.tga.gov.au/docs/html/tga/tgaginfo.htm 4 Prescribed medicines include: a) prescription drugs listed on the PBS (including the Repatriation

Pharmaceutical Benefits Scheme). These are either ‘benefit paid pharmaceuticals’ or ‘below copayment medicines’; and b) ‘private medicines’ which are pharmaceuticals dispensed through private prescriptions but are not items listed in the PBS or RPBS, or which do not meet PBS criteria for dispensing through the PBS.


NATSEM March 2010

20

2.2.2 The Pharmaceutical Benefits Scheme and its use in hospitals

The majority of prescription drugs provided in the community (i.e. not in hospital) are subsidised by

the Commonwealth Government through the Pharmaceutical Benefits Scheme (PBS). The PBS

subsidises the cost of prescribed medicines that have been assessed by the Pharmaceutical Benefits

Advisory Committee (PBAC) and found to be cost-effective in the management of conditions

contributing to a significant disease burden in Australia. There is also a subcommittee of the PBAC

that addresses pharmacoeconomic issues known as the Economic Sub-committee of the PBAC. This

committee has expertise in evaluating the cost effectiveness data provide by industry to justify the

inclusion of their product on the PBS. The Scheme works by covering the additional costs of

medications above a set co-payment that is made by individuals. The annual co-payment amount

that can be made by an individual is also capped through the safety net arrangements to ensure that

people with complex and high pharmaceutical needs are not disadvantaged. PBS reimbursements

account for approximately 90 per cent of total prescription drug expenditure (Medicines Australia,

2005). Advantaged by the national scale, competitive prices are negotiated keeping the cost of

medicines relatively low. The PBS budget is uncapped. In addition to this scheme, the Repatriation

PBS (RPBS) is a Commonwealth Government (Department of Veterans’ Affairs) funded scheme

providing eligible veterans and their dependants a more comprehensive range of medications and

dressings than is available through the PBS (Australian Government Department of Health and

Ageing, 2009).

An important point to note here regarding the PBS is that each drug on the PBS is listed for the

treatment of a particular ‘indication’, that is, for the treatment of a specific condition or conditions.

The drug is only subsidised through the PBS when it is prescribed for that indication. However,

sometimes drugs can be useful in treating other conditions that may not be included in the drug’s

PBS listed indication. In this case a GP might prescribe the drug as a private prescription, meaning

that it is not covered by the PBS, and could be extremely expensive for the patient. Private

prescriptions are relatively rare in community pharmacy, however, in hospitals the use of medicines

outside their PBS indications is common practice (SHPA, 2008). This has implications for the

discussion of suggestions for the PBS to be instituted in public hospitals.

Within a public hospital all drugs are provided by the hospital (with the exception of some very small

hospitals and health centres that do not have their own pharmacies). This includes of course any

drugs that are prescribed during the patient’s time in hospital, but also any medications that the

patient may have been taking before their admission to hospital, for example, for a long-term

condition. Thus, when a patient is admitted to hospital, a doctor and pharmacist both take their

medication history and if there are any medications that they will need to continue taking during

their stay in hospital in addition to any new prescriptions, then these are also provided by the

hospital. These medications will be the same molecule but not always be the same brand as the

patient was receiving upon admission. On discharge from hospital, the hospital pharmacy will

generally provide the patient with a few days’ supply (the number of days differs with the hospital

and in some cases the particular patient) of medication to take home, including both any new

medications relating to the hospital stay and any existing medications that the patient is

recommended to continue taking. The patient then needs to see their GP before this supply runs out

in order to be given new scripts to collect from a community pharmacy. As will be explained in the

next section, several issues arise from this ‘hand-over’ between hospital and community – in


NATSEM March 2010

21

particular medication errors arising from the confusion in the substitution of medications between

admission and discharge, and the adequacy of the supply of medication post discharge (some States

are trialling the use of the PBS on discharge to allow for a months supply of medicines rather than a

few days).

While the PBS is primarily a community pharmacy initiative, there are exceptions under which it does

apply in hospitals. While drugs are funded ‘by the hospital’ while a patient is admitted, the source of

this funding depends on whether the hospital is public or private, whether the patient is an in or out

patient and the type of drug. First, the broad majority of medications in a private hospital are

covered by the PBS, and thus Commonwealth funded, or if not by the patient themselves or their

insurer. In a public hospital the majority of medications are funded by the hospital, and thus the

State. Within a public hospital, the funding of drugs then depends on whether the patient is an in or

out patient. Again this definition differs between hospitals, but generally ‘inpatient’ refers to patients

who stay overnight in the hospital, while outpatients are those that come in to see specialists or

receive treatment, for example chemotherapy, but do not stay overnight in the hospital. A reform

introduced in the 1998-2003 Australian Health Care Agreement (AHCA) led to patients being seen at

outpatients, admitted as day cases or being discharged from a public hospital in Victoria, Queensland

and Western Australia being covered by the PBS.

An the exception to this is the Section 100 scheme through which the Commonwealth Government

supports the provision of a group of highly specialised and expensive medications in unique

environments. The scheme includes provision of medications for:

(a) Highly Specialised Drugs

These are medicines for the treatment of chronic conditions, which, because of their clinical use or

other special features, are restricted to supply through public and private hospitals having access to

appropriate specialist facilities. To prescribe these drugs as pharmaceutical benefit items, medical

practitioners are required to be affiliated with these specialist hospital units. A general practitioner

or non-specialist hospital doctor may only prescribe highly specialised drugs to provide maintenance

therapy under the guidance of the treating specialist. Benefits are available for the listed clinical

indications only. There is no facility for individual patient approval for indications outside those

listed. To gain access to a Commonwealth Pharmaceutical Benefits Scheme funded drug under this

program, a patient must attend a participating hospital and be a day admitted patient, a non-

admitted patient or a patient on discharge, be under appropriate specialist medical care, meet the

specific medical criteria and be an Australian resident in Australia (or other eligible person). A patient

will be required to pay a contribution for each supply of a highly specialised drug at a similar rate to

the PBS. A Commonwealth subsidy is not available for hospital in-patients (may be an outpatient)

(http://www.pbs.gov.au/html/healthpro/browseby/section100?subbook=HS).

(b) Opiate Dependence Treatment Program

The Australian Government funds the cost of buprenorphine hydrochloride, buprenorphine

hydrochloride with naloxone hydrochloride and methadone hydrochloride supplied as

pharmaceutical benefits through clinics and pharmacies approved by State and Territory

Governments.


NATSEM March 2010

22

(c) Botulinum Toxin Program

Used for spasticity and spasm with approved indications.

(d) Human Growth Hormone Program

Used for growth assistance due to inadequate hormone secretion.

(e) IVF/GIFT Program

Used for assisted reproduction.

(f) Special Authority Program

Used for provision of specialized treatments for specific types of breast cancer.

While this appears fairly straightforward, the division between in and outpatients is blurry, and it is

seemingly common practice for inpatients to be taken to a different part of the hospital to receive

certain treatments, for example chemotherapy, where possible so that they can be classified as

outpatients and the treatment will be covered by the PBS rather than the hospital’s own budget. A

key point to note here is that unlike the PBS, hospital pharmacy budgets are generally capped.

Hospitals generally allocate a fixed proportion of the hospital budget for pharmaceuticals, apparent

in the fact that expenditure by public hospitals on drug supplies has consistently been five per cent

over the past several years (AIHW 2003, 2004, 2005, 2006, 2007, 2008). A high level of financial

diligence is required by hospitals to maintain budgetary control over medication expenditure in a

climate of the development of high cost therapies with varying levels of evidence for their impact on

patient care.

2.2.3 Hospital formularies

Medications approved for use in a public hospital are listed in a formulary. Formularies identify to

prescribers what medications can be used in a public hospital and for what indications. Unlike the

PBS for which a list of subsidised drugs is agreed on at the national level, hospitals are generally

responsible for selecting their own individual formularies, with some exceptions such as in

Queensland, to be discussed further.

Public hospitals in conjunction with their state health departments will develop a tender document

for the supply of medications listed in the formulary. This tender document is used by public

hospitals to optimise their expenditure on medications. Individual hospitals or groups of hospitals

will purchase medications that they require from that tender but there is no obligation to do so. The

tender document identifies an agreed price for a medication provided by a company. The price

provides a starting point at which negotiations may start between the Director of Pharmacy and the

company for medications. The practice of “bundling” refers to the negotiations that occur between

the Director of Pharmacy and the supplier to find a mutually satisfactory price for a group of

medications that may or may not be part of the tender document. For example, a hospital may have

a high demand for item X and request a lower price than the tender price but as an added benefit it


NATSEM March 2010

23

also uses product Y which may not be on the tender document but the price may be negotiated

based on the volume required in a given period. In addition bonus stock may be provided by the

company if the quantity purchased is above a negotiated level. The other negotiations that may

occur are the time of billing of the stock may be deferred to reduce costs to the hospital in a high

usage period (i.e. winter) to smooth out financial strain on the organisation during peak periods.

Negotiated arrangements are left up to the individual Director of Pharmacy Services in the hospital

or group of hospitals. Products purchased by the hospital will be transported by the company to the

hospital at the company’s cost. A problem with the current tendering process is that it is frequently

delayed, such that prices can become out-of-date and manufacturing schedules and supply affected.

Within states, some hospitals group together to decide on and share a formulary, for example, in

Victoria this is quite common. Queensland and Western Australia have adopted state level

formularies, so that all drugs across all public hospitals and institutions are negotiated and selected

together (Queensland Health, 2009; Pfizer, 2008). The state-wide formulary originated from a

Standard Drug List for Queensland Hospitals (SDL) that was first developed in 1973 (Aldous & Petrie,

2008). Maintained by the Queensland Hospitals Drug Advisory Committee, the state-wide formulary

has been adopted in an attempt to reduce effort and resources required to ensure safe, rational and

cost-effective use of medications in keeping with the Quality Use of Medicines principles 2000, while

ensuring equity of access to necessary medications by all hospitals across a large state (Aldous &

Petrie, 2008). The “Standard Drug List” is a negotiated medication formulary that applies consistently

across the state. Instead of each hospital brokering a price for a medication directly with the supplier

this is done centrally. In consolidating this process, those involved (Queensland Health) believe that

they can have greater control of expenditure and negotiate better prices for the health system as a

whole.

Queensland medications are supplied to a central store in Brisbane and it is Queensland Health’s task

to transport medications across the entire state to all hospitals, health care and Aboriginal health

centers. The key to this system is a strong Drug Committee (Queensland Hospitals Drug Advisory

Committee) structure in approving medications for use in the state and an opportunity for Individual

Patient Approval (IPA) and Medical Superintendant Signed Authority Protocols (MSAPs). This process

is similar to the approval system within the PBS system where a set of criteria dictate approval or

exceptional drugs (usually expensive)5.The use of formularies on a large scale has the potential to

make pharmaceutical purchasing very competitive and therefore keep the cost low (Morgan, 2007;

Braae et al. 1999; Huskamp et al. 2003).

However, others see the Queensland formulary as being highly constrained as there are limited

ranges of brands within some drug categories. This has the potential to leave both the government

and suppliers exposed if circumstances were to change, for example, if there was a quality or safety

scare on one particular medicine. Other suppliers may not be able to readily deliver the necessary

stocks and there would be significant cost implications if large volumes of medicines had to be

imported. In addition, given the relatively small size of the hospital pharmaceutical industry in

Australia, if a manufacturer is unsuccessful in the tendering process then they may lose access to the

entire market.

5 Http://www.health.qld.gov.au/qhcss/mapsu/sdl.asp


NATSEM March 2010

24

In public hospitals where there is a devolved budget to specialty areas (e.g. oncology) the clinical

team will work with the Director of Pharmacy to develop a budget for medications. Given some

clinical areas like oncology are proportionally the highest consumers of high cost drugs, there is

significant advantage for them to work closely with their specialist pharmacists to rationalise choices

of therapy in an attempt to contain costs as much as possible to enable best use of scarce resources.

In most cases the developed formulary will accommodate the needs of most patients within the

hospital. When there is a rare occurrence of a need for a non-formulary medication the Director of

Pharmacy will decide on the urgency of the situation. If there is a similar medication already on the

formulary it may be recommended if clinically appropriate. In consultation with the clinician involved

with the patient the Director will seek clinical evidence for the indication and efficacy for the

treatment, the cost implications both short term and long term and liaise with the Chair of the Drug

Committee and if need be with the Hospital Chief Executive Office to make sure the implications of

the supply are recognised. Mostly these situations are “one offs” and can be accommodated by the

budget. There are some medications that need to be held by the hospital for rare occurrences. These

are often held in the major hospital and shared between a region in the event of rare poisonings or

other incidents. It is an accepted role that public hospitals take on for the service of the community

in general.

2.2.4 Drug Committees

This complex area of cost effectiveness evaluation requires skills that are often not available in each

individual hospital. As a result, there has been the development of specialised therapeutic advisory

groups in most states that provide for state governments and drug committees evidence and cost-

effectiveness data with which to make informed decisions on medications availability and

indications. As a group they are known as the Council of Australian Therapeutic Advisory Groups6.

Their role is to investigate and evaluate new initiatives in therapeutics and by doing so promote safe,

rational, high quality, cost-effective use of medicines in public hospitals and the wider community in

an unbiased and objective manner. These committees specifically support the Drug and Therapeutics

Committees in public hospitals across Australia in making informed and rational decisions on

applications made for listing medications on the hospital formulary.

Historically, public hospitals across the country have developed drug committees that are delegated

to make decisions concerning which medications will be available to patients via a formulary in their

hospital or group of hospitals. In general, these committees consist of senior clinicians, clinical

pharmacologists and the Director of Pharmacy with support from senior pharmacists who provide

clinical trial and data support. It would be unusual for such a committee to have any

pharmacoeconomic experience or input.

Drug committees usually meet monthly and the items on the agenda are requests for new

medications or indications for a medication directly from a clinician. Generally, drug companies are

not permitted to make application directly to these committees. The data presented to the

committees is usually presented in a pre-formatted way using application forms developed by the

committee. Each hospital tends to have its own forms and approaches to medicines decision-

6 http://www.ciap.health.nsw.gov.au/nswtag/


NATSEM March 2010

25

making. Frequently data included in the submissions is from drug companies that the clinician has

been provided to assist the application. Pharmacoeconomic data is sometimes presented although it

is generally based on less complex modeling evaluations than considered by PBAC. Those individuals

interviewed identified that access to PBS pharmacoeconomic data would assist hospital drug

committees to make more informed decision on the financial impact of a new therapy on their drug

budgets. Currently this data is not available to public hospital drug committees as it is “commercial-

in-confidence” data. In addition, for many hospital indications, there may be little clinical data

specifically relating to hospital uses upon which a full PBS-type decision could be made. This gap in

data and evaluation is one of the major hurdles that would need to be overcome if there were to be

a move towards a national or harmonized system for funding of medicines between community and

hospital sectors.

The governance of hospital drug committees rests with the appointed clinicians. Their role is to make

informed decisions on the clinical relevance and importance of a therapy taking into account current

evidence on safety and efficacy and other available therapies at a comparative cost. Costs may also

include factors such as reduced length of stay or staffing reductions due to the impact of the new

therapy.

Most hospitals will not accept a drug for use in the hospitals without approval by the drug

committee. This includes the recent practice of “familiarisation programs” where new medication is

supplied directly to patients on the approval of a clinician who is participating in such a program7.

These programs are offered by the pharmaceutical industry to facilitate deferred costs, cost free or

or subsidised access medications that are included on the Australian Register for Therapeutic Goods

by the TGA for public hospital patients prior to Pharmaceutical Benefits Scheme (PBS) listing or prior

to some other funding arrangement. This method of “product familiarisation” has produced

significant patient, clinician and hospital issues around continuance of supply if the medication does

not get PBS listing and as such has required the development of Guiding Principles for Product

Familiarisation for Public Hospitals from the Council of Australian Therapeutic Advisory Group to

make sure the pharmaceutical industry and clinicians are aware of their responsibilities to the patient

in such ventures.

The great challenge for many drug committees is to maintain some financial control over the costs of

therapeutic agents available in the hospital. Rationalisation of the number of brands and selection of

only a few medications from a class of agents is frequently done and this is based on evidence and

therapeutic guidelines prepared by the learned societies and prescribing services (e.g. National

Prescribing Service or Therapeutic Guidelines or the UK NICE Guidelines) or from the Council of

Australian Therapeutic Advisory Groups. Medications required outside those recommendations must

be supported by a clinician with significant clinical argument for such variance provided to the

committee.

2.2.5 The influence of PBS listing on the hospital formulary

Once a medicine is listed on the PBS there is pressure for that medicine to then be listed on a public

hospital formulary. This does not automatically occur. A submission must be made to the Drug

7 http://www.ciap.health.nsw.gov.au/nswtag/publications/guidelines/CATAGPFPGuidingPrinciples.pdf


NATSEM March 2010

26

Committee by the industry for inclusion by a clinician. Given the number of individual products listed

on the PBS it is not realistic for a hospital to stock all brands or individual products within a group of

medicines on the hospital formulary. Frequently a drug committee will decide to chose select items

to be listed on a formulary that address the majority of patient’s needs with clinicians input and trial

evidence to support that decision. Multiple brands of the same medication are not stocked. This

means patients will receive the same medication in hospital but often receive a different brand that

may be a different colour or shape that may cause confusion if they are not properly counselled. It is

the role of the clinical pharmacist to ensure patients and clinicians are educated in the variance in all

hospital prescribed medications, and that they recognise the potential consequences of changing

brands, especially in terms of medication adherence.

2.2.6 Off Label- non-TGA approved therapies

One particularly challenging area for public hospitals is the area of use of medications for non-

approved (not approved by TGA) uses of medications. Clinical practice evolves at a much faster rate

than legislative or bureaucratic processes or even commercial interest. The rates at which new

developments in clinical practice occur make it very difficult for organisations and industry to keep

up with the formal application processes to occur in healthcare provision. Clinicians are keen to

provide the best patient care to patients particularly when few alternatives may be available or the

patient has limited time for treatment (e.g. end of life issues). In this circumstance public hospitals

will develop processes to enable patients to be availed of treatment for which there is limited

evidence (i.e. recent published data from a reputable journal) but the patients or next of kin will

need to give consent.

Interestingly children are the group most often in the situation of needing medications for which

they are not approved by TGA. Given the scarcity of clinical trials undertaken in children there is

often no approved indication for the use of medications used in adults for this population. In addition

there is often no formulation developed for the paediatric population therefore the pharmacy will

have to develop an extemporaneous preparation for the very young to enable the medication to be

administered in a usable way. In these situations consent needs to be attained for each episode of

care and as much information as possible needs to be provided to the patient or carer. Missing will

be any long-term data on the treatment in specific clinical situations. When this occurs clinicians are

encouraged to submit the cases to the medical literature to build up some body of experience.

2.2.7 Ability of Industry to influence formulary applications

The pharmaceutical industry has recently adopted the 15th edition of the Medicines Australia Code of

Conduct8 that governs standards, support, professionalism and promotion of quality use of

medicines consistent with the National Medicines Policy9. The development of policies by public

hospitals to refuse direct representation to drug committees from industry is to make sure that the

decision of inclusion is made on clinical grounds and not as a marketing exercise for industry. When it

appears to a Drug Committee that the application has been provided for a clinician by industry

without evidence of the clinical need the application may not proceed.

8 http://www.medicinesaustralia.com.au/pages/images/Medicines_Australia_Code_of_Conduct

_Edition_15.pdf

9 http://www.health.gov.au/internet/main/publishing.nsf/Content/National+Medicines+Policy-2


NATSEM March 2010

27

In most public hospitals access to clinicians by the pharmaceutical industry representatives (reps) is

limited. Junior medical staff are usually not accessible to reps unless they are sponsoring a meeting

at the hospital. Senior staff may receive reps in their offices to keep them informed of new products

available.. Attendance at conferences or reviewing current publications in their area of practice is

more commonly used as the method of choice for prescribers. Adoption of best practice guidelines

developed by the specialist professional societies and other expert groups such as the NPS, Council of

Australian Therapetuic Advisory Groups and NICE have more influence on prescribing and clinical

practice. Many public hospitals will have policies and behaviours that must be adhered to by

pharmaceutical industry representatives while they are in a public hospital.

2.3 POLICY CONTEXT - NATIONAL HEALTH AND HOSPITALS REFORM COMMISSION

The National Health and Hospitals Reform Commission (NHHRC) was established by the

Commonwealth Government after the terms of reference were announced by the Council of

Australian Governments (COAG) in late 2007. The Commission was charged with the task of providing

advice on performance benchmarks and practical reforms to the Australian health system which

could be implemented to address problems with access to services, the growing burden of chronic

disease, population ageing, costs and inefficiencies generated by blame and cost shifting, and the

escalating costs of new health technologies. The NHHRC was required to develop a long term reform

plan for a modern Australia and which addressed eight specific issues (see Appendix 1). While all of

these can be related in someway to hospital pharmacy, four are of particular relevance, as identified

by SHPA (2008):

1. reduce inefficiencies generated by cost-shifting, blame-shifting and buck-passing;

2. better integrate and coordinate care across all aspects of the health sector, particularly

between primary care and hospital services around key measurable outputs for health;

3. better integrate acute services and aged care services, and improve the transition between

hospital and aged care; and

4. provide a well qualified and sustainable health workforce into the future.

In addition, a set of service design and governance principles were developed to underpin the

NHHRC’s thinking about health reform and the design of Australia’s future health system (NHHRC,

2008 & 2009). The Commission identified the service design principles as: people and family centred;

equity; shared responsibility; strengthening prevention and wellness; value for money; providing for

future generations; recognising broader environmental influences that shape our health; and

comprehensive. The governance principles included: taking the long term view; safety and quality;

transparency and accountability; public voice; a respectful and ethical system; responsible spending

on health, and a culture of reflective improvement and innovation. These principles apply to both the

public and private sector, and to both hospital and community based services.


NATSEM March 2010

28

The Commission recognised that Australia currently has ‘a fragmented health system with a complex

division of funding responsibilities and performance accountabilities between different levels of

government’ and that ‘it is ill-equipped to respond to these challenges’ (2009, p3). In developing ‘a

practical national plan for health reform that will benefit Australians, not just now but well into the

future’ (p3, 2009), the NHHRC identified a number of health and health care challenges and made

numerous recommendations. However, neither hospital pharmacy nor the funding and use of

medicines in hospital were discussed by the NHHRC in its final report. Nonetheless, various

priorities/policy levers and recommendations made by the Commission in it’s reform agenda target

major changes in the operation and funding of Australian public hospitals. As such they are very

relevant to and will impact on the public funding of hospital medicines, the way in which hospital-

based pharmacists undertake their work, and on patient outcomes in terms of adverse drug events

and continuity of medication use on discharge. These are summarised in Table 4.


NATSEM March 2010

29

Table 4 Selected recommendations by the NHHRC and their implications for hospital medicines.

Priority/Lever Recommendations Implications of Hospital Medicines

Timely access to quality care in public hospitals

Take action to improve timely access to quality care in public hospitals, particularly care in emergency departments and access to planned surgical and medical care

Reducing waiting times for specific hospital services may also reduce, or at least change, patients’ need for and reliance on drugs to manage their health problems.

Connect and integrate health and aged care services

Reshape hospitals by expanding specialty services in the community; separate the provision of elective and emergency services in public hospitals to provide better access to and efficient delivery of planned surgery and procedures; and review public hospital outpatient services to ensure that they are more closely designed around the needs of patients, including providing more of these services in community settings outside hospitals.

New arrangements for the dispensing and funding of pharmaceuticals may be required with increased emphasis on community settings e.g. increased use of the PBS. Integrating health and aged care services may improve the continuity of care and medication use post-discharge.

Modern, learning and supported workforce

Develop a new framework for the education and training of health professionals which moves towards a flexible, multi-disciplinary approach, and incorporates an agreed competency-based framework for all health professionals. The health workforce to be supported by effective communication across all parts of the health system; investing in management and leadership skills; and providing timely relevant data on comparative clinical performance and latest practice knowledge to support best practice and continuous quality improvement.

Hospital pharmacists may play an increasingly important role in a flexible multidisciplinary clinical team.

Improved communication and information on

clinical performance and best practice may

improve the quality use of medicines in

hospitals and reduce the likelihood of adverse

drug events.

Smart use of data, information and communication

Use an e-health agenda to drive improved quality, safety and efficiency of health care. Introduce a person-controlled electronic health record for each Australian.

A person-controlled electronic health record is seen as one of the most important systemic opportunities to improve the quality and safety of health care, reduce waste and inefficiency, and improve continuity of care and health outcomes for patients. Adverse drug events are expected to be reduced with a personal electronic health record as it will be easier to manage medicines and their interactions through having access to medical and medication histories.

Well-designed funding and strategic purchasing

To improve the efficiency of both public and private hospitals, introduce the use of efficient ‘activity-based funding’ for hospitals using casemix classifications.

Activity-based funding refers to making

payments on the basis of ‘outputs’ delivered

by health services. This funding model links

funding to the actual services provided such

as a separation, emergency department visit

or outpatient consultation. It allows funders to

compare costs across different health service

providers in providing the same health

service, and thus may lead to more efficient

use of pharmaceuticals in hospitals (noting

that implementation will require a measure of

efficiency).

Knowledge-led continuous improvement, innovation and research

Make the Australian Commission on Safety and Quality in Health Care a permanent national organisation.

The ACSQHC would promote a nationally consistent culture of safety and quality across the health system, analyse and report on safety and quality, and monitor and assist in its regulation.

Healthy Australia Accord

Change the funding arrangements for public hospitals and health care services, with the Commonwealth Government paying State/Territory Governments activity-based benefits for public hospital care and other public health care services.

Under this funding arrangement, the Commonwealth Government would pay 100 percent of the efficient cost of public hospital outpatient services with an agreed, capped activity-based budget; and 40 percent of the efficient cost of every public patient admission to a hospital, sub-acute or mental health care facility and every attendance at a public hospital emergency department (with the possibility of increasing this contribution over time). This would potentially change the balance of source of funding for hospital medicines.


NATSEM March 2010

30

3 IDENTIFIED ISSUES WITH THE CURRENT SYSTEM AND OPPORTUNITIES

FOR REFORM

As described in the previous section, the funding and regulation of hospital medicines is complex and

fragmented. Several issues relating to the costs and funding of hospital medicines have been

identified as arising from this and will be discussed here. The system of regulation and funding of

hospital medicines has implications for the cost of medicines, equity of access and government

funding, the continuity of care and health outcomes and the work required to maintain the system.

3.1 CONTINUITY OF CARE AND HEALTH OUTCOMES

The division of funding and regulation of pharmaceuticals between the community and hospital

sectors in Australia has long been identified by pharmacists as an issue of concern in terms of health

outcomes (SHPA, 2008; Pfizer, 2008). Although data is somewhat limited, it suggests that a

substantial number of adverse drug events and admissions to hospital are attributable to confusion

surrounding the overlap of community and hospital care (SHPA 2008, Pfizer 2008). For example an

earlier study found that for 72 per cent of patients the list of medications prescribed by the hospital

at discharge differed from what the patient’s GP understood the patient to be taking before

admission (Mant et al 2000). The practice of patients’ ‘usual’ medications being provided by the

hospital while they are admitted along with enough for several days at discharge is a key source of

problems in this regard. Patients can become confused when taking home small amounts of

medications from the hospital, especially when they may look different or have different names to

what they are used to due to branding. Further, patients may be unable to get to the GP following

discharge before their supply runs out. Current ‘silo’ funding arrangements also prevent continuing

medication management being provided by hospital pharmacists on discharge, and it had been

suggested that such management would be useful in preventing adverse drug events following

discharge and smoothing the transition from hospital to home (SHPA, 2008).

3.2 COST SHIFTING

Cost shifting, especially between the Commonwealth and State governments, is commonly identified

as a problem with the current funding arrangements for medications in Australia (JATAG, 2009;

Pfizer, 2008; SHPA, 2008). It could be said to an extent that this is artificial as hospitals receive

around half their funding from the Commonwealth via the AHCA (Pfizer, 2008). However, it has been

suggested that there are in fact incentives to shift costs embodied in the system, leading to inequities

and inefficiencies (SHPA, 2008). First, there are incentives within public hospitals to shift inpatients to

outpatients in order to claim Commonwealth funding for medications. Second, the provision of

patients’ usual prescriptions while in hospital shifts this cost from the PBS to State funds, and then

back to the State at discharge.


NATSEM March 2010

31

3.3 INEQUITIES OF ACCESS AND FUNDING

Across the hospital system, there are inequities of access to, and funding of, medications between

patients in public and private hospitals. Many patients in private hospitals are able to access the PBS

to cover drugs administered while they are in hospital, with the remainder being paid by the patient

themselves or by their insurer. In public hospitals the majority of drugs are covered by the State or

Territory government through the hospital’s budget. While the PBS is not capped, drugs used in

public hospitals are part of the hospital budget which is capped and many hospitals may need to stop

buying medications especially towards the end of financial year. Individual formularies in most

hospitals mean that the same drugs, or at least, the same brands of drugs are not available across all

public hospitals. As discussed in the previous section, it is common for drugs to be used for purposes

outside of their PBS indications in hospital, and in this case the drug is covered by the hospital

budget. However, if the patient were to continue using the drug outside of hospital, it would not be

covered by the PBS for this indication. In a private hospital, it is likely such a prescription would be

covered by the patient’s insurance or by the patient themselves.

3.4 VALUE FOR MONEY

A key issue surrounding the largely individual formularies for each public hospital is whether this

generates the best value for money in drug expenditure when each hospital must negotiate its own

price and supply of drugs. Arguably if formularies were put together at a national or state level, drugs

would be able to be purchased more cost effectively. However, as identified by Pfizer (2008), drug

manufacturers could face difficulties in meeting such supply demands, and the change in market

balance would have broad implications for competition and pricing. While efficiency is important,

drug efficacy also has to be kept in mind and that formularies need to offer choice in therapy as

some patients may not tolerate or respond to certain key medications in a therapeutic class.

3.5 DUPLICATION OF WORK

Further, the management of a formulary for each individual public hospital represents the

duplication of work. Arguably greater cost effectiveness would also be achieved by a national or state

level committee/s to formulate a national / state level drug list.

State and Commonwealth administrative procedures and requirements are also seen to impose

additional administrative activities that are often viewed to be unnecessary, a duplication and a

waste of resources.


NATSEM March 2010

32

4 PROPOSALS FOR REFORM

Three key submissions were made to the NHHRC regarding the funding of hospital medicines and

their suggestions for reform are briefly outlined here. These suggestions provide examples of the

types of questions that would be desirable to ‘answer’ using a model such as that scoped in this

Report. Notably the SHPA (2008), the Joint Australian Therapeutic Advisory Group (2008) and Pfizer

(2008) submissions all include recommendations for collecting better data on pharmaceuticals used

in hospitals for enhanced analysis and planning. The submissions made to the Commission share

some similar broad aims including equitable access to medicines for all patients across the care

continuum and adherence to Quality Use of Medicines principles. However they differ in the reforms

they suggest to reach these aims, and also in some further aims and principles. Discussion with

interested stakeholders indicated that these options encompassed the majority of suggestions

regarding possible reform.

4.1 SOCIETY OF HOSPITAL PHARMACISTS OF AUSTRALIA (SHPA)

SHPA is the national professional organisation representing pharmacists, pharmacy technicians and

associates practicing in public and private hospitals and other health service facilities. SHPA has

compared five reform options, including the status quo, across a range of aims. The possible reform

directions analysed are as follows (SHPA, 2004 & 2008):

1. Continue the current implementation of Clause 35 of previous AHCA.

2. Expand the availability of medicines on the PBS to better suit the hospital environment e.g.

access to inpatients in public hospitals, revised pack sizes and access for inpatients.

3. Introduce a hospital specific PBS list i.e. additional medicines, indications, revised pack sizes

and access for inpatients.

4. The Australian government provides funding for all medicines used in hospitals (block

funding) and work towards systems to merge with the PBS.

5. The Australian government provides funding for all pharmacy services (clinical distribution

and management) including all medicines used in hospitals.

SHPA compare how each of these options with regard to an extensive range of objectives, including

(SHPA, 2008):

• Supports all patients: in public and private hospitals, non-admitted, inpatients and medicines

required on discharge

• Builds on local evaluation and monitoring systems used to promote the quality use of

medicines and manage the cost of medicines in hospitals

• Efficient distribution system for medicines


NATSEM March 2010

33

• Meets the clinical needs of individual patients, this includes access to investigational

medicines and medicines for non registered indications

• Clinical governance

• Corporate governance

• Data collection, evaluation and review

• Equity of access and remove incentives for cost shifting

• Integration with community based PBS and other services

• QUM and patient safety

• Seamless to prescribers and patients

• Staffing requirements

• Teaching and research

• Technology requirements

• Impact on medicines industry

Comparing the expected outcomes of each of the options against these objectives, SHPA suggests

that Option 4 or 5 would be most desirable: either the Commonwealth provides funding for all

medicines used in hospitals, with a view towards merging the system to the PBS; or, the

Commonwealth provide funding for all pharmacy services (clinical distribution and management)

including all medicines used in hospitals.

We have selected Options 2 and 5 for evaluation in this study. In Option 5, both the acquisition costs

of medicines and the costs of the professional pharmacy services that accompany their use in

hospitals are funded together with funds from the Commonwealth. However, SHPA points out that

there will still be some medicines that will be funded by the hospital or third parties (e.g. medicines

used in clinical trials, new medicines prior to PBS listing or medicines for patients ineligible for

services through Medicare).

4.2 JOINT AUSTRALIAN THERAPEUTICS ADVISORY GROUPS (JATAG)

This was formally an individual submission to the NHHRC submitted by Charles Denaro, Chair of

JATAG (Denaro, 2008). While the document was not vetted by all stakeholders in the Joint TAGs, it

did reflect many ideas canvassed by JATAG and thus we label these reform ideas as those of ‘JATAG’

rather than Assoc. Professor Denaro. In addition to a range of suggested administrative reforms, the

major reform suggested that is relevant to this Report is the move towards a national formulary and

establishment of a national committee to administer this.

The submission states that this proposal would:


NATSEM March 2010

34

‘in one single blow – eliminate the current inequity of access to high-cost pharmaceuticals that is occurring

across the country, stop cost-shifting and its inherent waste, allow patients to be discharged from hospital

with adequate supplies of medications, would allow health professionals moving from one institution to

another to work with the same set of medications, policies and procedures’ (Denaro, 2008, p2)

A key issue underlying JATAG’s call for reform is the need for improved and detailed pharmaco-

economic evaluation of pharmaceuticals to assist in the decision-making on their listing on hospitals’

(or State) drug formularies. This currently occurs with drugs submitted for listing on the PBS. JATAG

indicates that many high-cost pharmaceuticals are suited for in-hospital or public hospital use and

are unlikely to be considered by the Pharmaceuticals Benefits Advisory Committee (PBAC), or will

have been rejected for PBS-listing on cost-effectiveness grounds. Denaro states ‘the decision to list

such pharmaceuticals on hospital formularies is haphazard across the country and in many instances,

decisions are made at a local hospital level’ (Denaro, 2008, p1). As a result of this variable decision-

making process, access to medicines – especially high cost drugs – in hospitals is inequitable across

the country and cost-shifting between hospital services and between State and Commonwealth is

common. This results in wastage of resources in unnecessary bureaucratic processes and duplication

of work, and in many cases value for money in purchasing medications is not achieved.

In the ‘JATAG’ call for reform, it is also suggested that the lack of uniformity in hospital formularies

impacts on patient safety through the risk of adverse drug events. When doctors, nurses or

pharmacists move from one institution to another, or between the public and private sector, they

may face different formulary listings, different methods for prescribing, and different hospital

policies and procedures which may impact on the prescribing and safe dispensing of medicines.

A single national formulary for all public hospitals would require the Commonwealth to fund the cost

of all pharmaceuticals in hospitals. This proposal is equivalent to SHPA’s Option 3 ‘a hospital specific

PBS list’.

4.3 PFIZER AUSTRALIA

Pfizer’s submission summarises and analyses a range of current and past reform suggestions but with

a focus on two of NHHRC’s principles ‘value for money’ and ‘responsible spending on health’.

Pfizer defines eight principles relating to funding and five relating to the safe, appropriate and

effective use of medicines in hospitals that they feel should govern any reforms, and compare past

and current reform suggestions against these objectives. The principles for reform identified by Pfizer

are as follows (Pfizer 2008):

Funding principles

1. Ensuring access to medicines for all Australians in hospital

2. Creating harmony between the hospital and community funding systems

3. Maintaining the integrity of the PBS and RPBS


NATSEM March 2010

35

4. Preserving individual hospitals’ ability to select their own formularies to meet their local

needs

5. Selecting medicines should involve assessing their clinical benefits, not just their cost

6. Exploring better use of medicines data to establish hospital budgets

7. Reducing unnecessary administration

8. Formalising the funding of medicines by private health insurers

Quality principles

9. Enhancing the role of hospital pharmacists and specialist physicians

10. Linking funding of medicines to quality improvement

11. Funding research into medicines and their use

12. Providing the infrastructure necessary for safe and effective medicine use

13. Implementing APAC guidelines

Pfizer then discusses the merit of the following proposed reforms with regard to these principles

(Pfizer, 2008):

1. The Australian government should pay for all public hospital medicines (e.g. SHPA Option 5)

2. The extension of the PBS to cover all hospital medicines (e.g. SHPA Option 2)

3. All hospitals use an identical medicines lists [formulary], funded by the Commonwealth (e.g.

SHPA option 3 or JATAG proposal)

4. The Commonwealth reimburses all medical services via a voucher system (as general

practitioners are reimbursed in the community).

Pfizer highlights potential problems with each of these proposed reforms, and notably rejects the

idea of a national formulary, highlighting the issue that manufacturers, both big and small, would

have trouble meeting supply for the entire nation, and that companies that did not make the list

would likely collapse with broad implications for competition and pricing. Extending the PBS is

attractive although like SHPA and JATAG, Pfizer notes that a number of problems would need to be

overcome in this approach also. Pfizer identifies some advantages associated with the voucher

system, although they believe it would be difficult to administer. Its key advantage is it would

eliminate the funding difference between public and private hospitals. The Commonwealth would

provide equal baseline for both, but private hospitals would be free to charge additional fees for

extra services.

Of the four reform options reviewed by Pfizer, Options 1-3 are already covered in the two SHPA

proposals and that by JATAG. The voucher system essentially aims to extend ‘Medicare’ type funding

arrangements into hospitals. Given this focuses on broader issues of funding hospital costs – not just

those associated with the acquisition of medicines and associated hospital pharmacy costs - this will


NATSEM March 2010

36

option will not be examined here. However, it can be noted that this proposal calls for the

Commonwealth Government to become the primary funder of hospital services, medicines being one

component of total costs, and as such has some similarities to the SHPA Option 5 or Pfizer’s Option 1

– a key difference being the opportunity of ‘gap’ payments or above scheduled fees for extra

services, and the funding being activity-based i.e. funding is tied to the services provided as

advocated by the NHHRC.


NATSEM March 2010

37

5 CONSTRUCTING A SYSTEM DYNAMICS MODEL OF THE HOSPITAL

MEDICINES SYSTEM

5.1 MODELLING APPROACH

Hospital medicines are funded, acquired, prescribed and consumed within a system driven by cause

and effect, and is characterised by complex ideas and information. The ‘hospital medicines system’ is

a complex system in that it is highly coupled with dynamic processes that play out over time, has

feedback effects and many outcomes resulting from the interactions that occur between its many

parts.

System dynamics modelling was first developed in the 1950s as a method to enhance the

understanding of the functioning and to analyse the behaviour of complex systems over time, now

with the help of computer simulation (Homer and Hirsch, 2006; Lyell et al, 2008). This approach

involves key system variables, the interactions between them through feedback loops, and the study

of the effects of these interactions over time. Coyle (1996, p. 10) defines system dynamics as follows:

‘System dynamics deals with the time-dependent behaviour of a managed system with the aim of

describing the system and understanding, through qualitative and quantitative models, how information

feedback governs its behaviour, and designing robust information feedback structures and control policies

through simulation and optimization’.

Time delays, feedback loops, stocks and flows10, simulation and optimization are the central concepts

in a system dynamics approach (Kirkwood, 1998). Coyle (2000) describes 3 stages of system dynamics

modelling:

1. description of the system by some type of diagram (e.g. process maps, a feedback and causal

loop diagram that links the stocks and flows and sources of information as a graphical

notation for representing the system structure);

2. study of the diagram (checking its suitability for the problem, specification of system

boundaries, coverage, logic etc.); and

3. quantification (write equations that determine the flows and interactions, estimate

parameters and initial conditions, simulate the model and analyse results).

The changing value (behaviour) of one stock (variable) may cause another to change as described by

equations and algorithms. Model parameters are established by analysing real data on actual

linkages or cause and effect relationships existing at a particular point. Each stock becomes a variable

that identifies a quantifiable property of the system that changes over time. Each connecting line can

have equations or rules that formalise how one variable affects another. The aim is to establish a

predictive framework that allows you to assess changes in target variables and outcomes by changes

in specific explanatory variables and processes, for example, to be able to predict the cost of hospital

medicines and use of clinical pharmacy services from other system attributes.

10 A stock is any entity that accumulates or depletes over time. A flow is the rate of change in the stock.


NATSEM March 2010

38

Quantitative modelling is the common practice in system dynamics modelling but Coyle suggests

qualitative modelling can also be carried out using a system dynamics approach. An illustration of

qualitative or ‘soft’ variables can be found in the system dynamics sub-model of elective care in

England, owing to the lack of hard statistics (Royston et al. 1999). Coyle (2000), however, cautions

that quantification of essentially qualitative or soft variables, such as motivation, can increase

uncertainty in the results.

The utility or power of system dynamics modelling is its simulation capabilities for testing what if

scenarios. While initially developed to help corporate managers to improve their understanding of

industrial processes, system dynamics is now being used widely for policy analysis, including

application in the health field. There are now a number of applications of system dynamics to model

issues related to various health care sub-systems in Australia, including a model of hospital

medication errors by McDonnell and Heffernan (2005) and national medicines use (PBS

drugs)(Heffernan et al, 2004). In the first of these, the model represented the interactions among the

key determinants of medication errors, including the complex interactions of patients and staff,

information, medications, work practices (including the potential impacts of information and

communication technology on work behaviour) and the infrastructure and policies within a hospital

environment. This model included qualitative variables such as the quality of interaction. In the

second paper, Heffernan and colleagues replicated the demographic projections of first (2002) IGR

report and extended the model by incorporating additional detail on medicines use such as drivers of

new drug use, feedback of benefits of medicines use on macroeconomics, and structural changes in

over, under and misuse of medicines over the next four decades. A further example is that by Gray

et al. (2006) who used a system dynamics model enhanced by agent-based modelling techniques to

simulate interactions between the acute and aged case systems in Australia. As these researchers

comment ‘computer simulations offer an inexpensive, low risk method to test the impact of policy

options in health care’ (p450).

5.2 DATA SOURCES

There is a broad range of data that ideally is required to populate the system dynamics model. This

Section describes various available datasets providing information that could possibly be useful for the

modelling of the funding and use of hospital medicines. Most of these statistical collections do not

routinely provide data at the fine level required for the modelling. Customised data requests would

need to be made and it is questionable whether unit record data (e.g. at the level of individual

hospitals) would be made available. However, the data that is publicly available suggests that the level

of data may possibly exist if access to this could be granted.

A combination of datasets would need be used to build the model equations and populate the different

stages of the model.

5.2.1 National Hospital Cost Data Collection

The Department of Health and Ageing’s National Hospital Cost Data Collection (NHCDC) database has

been identified as perhaps the most useful dataset for this model, and a preliminary analysis is


NATSEM March 2010

39

provided in Section 6. This Section describes the characteristics of the publicly available dataset

which would be useful to the modelling. However, if a higher level of detail could be made available

then this would be even more useful to the model.

The NHCDC contains cost and activity data from both public and private acute care hospitals across

Australia (DoHA 2008a). The most recent round of published results (2006-07) were based on

responses from 47per cent of all public hospitals and 36per cent of all private hospitals, spanning

86per cent and 59 per cent of public and private acute separations respectively.

A range of hospital groupings are provided for the purposes of comparison across cost components,

including number of separations, average length of stay, total days stay, the average total cost per

separation and a detailed break down of the components of this cost (including pharmacy) and

within these their direct and overhead components, by 666 Diagnosis Related Groups (DRGs). DRG

cost weights (the average cost of respective DRGs relative to the average cost of all separations) are

produced using the NHCDC, for public and private hospitals, peer groups, teaching and non-teaching

hospitals, major urban and non-major urban hospitals, and the five biggest States (NSW, Victoria,

Queensland, South Australia and Western Australia). Public hospital funding is commonly allocated

using these weights, such that establishment funding is relative to the frequency of separations for

each DRG multiplied by associated cost weights. This funding allocation process motivates public

hospitals to maintain costs at levels similar to their peers, after accounting for differences in case

mix. Peer groups are also derived from the NHCDC for the purposes of cost per case mix-adjusted

separation analysis (comparing the costs and activities) across hospitals with similar levels of activity.

Cost data is included for private hospitals also, however, comparison of this data with that for public

hospitals is problematic as the range of costs incurred across the two sectors are inherently different.

For example, a large share of medical and pharmaceutical expenditure in private hospitals is billed

directly to patients, which are subsequently not included in the NHCDC.

The summary data provided in Table 5 quantifies the extent of these differences by comparing the

percentage of total costs allocated to each cost component (also referred to as cost buckets), and the

ratio of these costs, across the public and private sectors. As shown in the three final columns, cost

ratios for thirteen of the sixteen components differ by more than 1.5 times or 150 per cent between

the public and private sector, whether in terms of direct costs, overhead costs or both. Considerable

caution thus needs to be exercised when comparing average costs between the public and private

sectors.


NATSEM March 2010

40

Table 5 Percentage of total costs by component, and cost ratio by component, Public & Private Sector, Round 11

Public (AR-DRG 5.1) Private (AR-DRG 4.2)

Direct

Costs

Over-

head

Costs Total

Direct

Costs

Over-

head

Costs Total

Direct

Costs

Over-

head

Costs Total

(%) (%) (%) (%) (%) (%) Cost ratio

Ward Medical 14.31 10.91 12.61 1.31 0.41 1.04 10.92 26.61 12.13

Ward Nursing 25.67 22.65 24.16 24.72 3.67 18.48 1.04 6.17 1.31

Non-Clinical Salaries 2.54 6.84 4.69 1.99 8.14 3.81 1.28 1.19 1.23

Pathology 3.79 3.17 3.48 0.15 0.19 0.17 25.27 16.68 20.47

Imaging 3.32 2.9 3.11 0.39 0.34 0.37 8.51 8.53 8.41

Allied Health 2.35 2.43 2.39 1.36 0.79 1.19 1.73 3.08 2.01

Pharmacy 5.54 3.82 4.68 2.66 0.47 2.01 2.08 8.13 2.33

Critical Care 8.21 7.37 7.79 6.75 5.18 6.28 1.22 1.42 1.24

Operating Room 13.34 12.48 12.91 22.31 21.5 22.07 1.67 1.72 1.71

Emergency Department 5.07 4.73 4.9 0.88 0.62 0.8 5.76 7.63 6.13

Ward Supplies 3.16 6.06 4.61 2.79 16.41 6.83 1.13 2.71 1.48

Specialised Procedure Suits 1.19 1.15 1.17 3.28 2.75 3.12 2.76 2.39 2.67

Prosthetics 3.79 2.37 3.08 24.11 2.54 17.71 6.36 1.07 5.75

Staff On-costs 4.51 5.45 4.98 3.85 3.82 3.84 1.17 1.43 1.30

Hotel Overheads 1.96 4.3 3.13 2.12 23.95 8.59 1.08 5.57 2.74

Depreciation 1.25 3.33 2.29 1.34 9.22 3.68 1.07 2.77 1.61

Total 100.00 100.00 100.00 100.00 100.00 100.00 1 1 1

Cost Ratio – Public hospital costs higher

Cost Ratio – Private hospital costs higher

Source: National Hospital Cost Data Collection (2008a).

Although data are retained by DoHA at the hospital establishment level and in many cases the

patient level, all publicly available data are de-identified and presented in aggregate format. Written

permission from the organisation from which the data originated is necessary to procure

disaggregated data at the establishment or other level. This level of data is required in order to make

valid cost component comparisons between private and public hospitals with similar functionality or

departments.

5.2.2 National Public Hospital Establishments Data Collection

The AIHW’s National Public Hospital Establishments (NPHE) data collection is a census of public

hospitals collecting details on capacity, staffing and limited financial information compiled by the

Australian Institute of Health and Welfare (AIHW). It is collated from the routine administrative

collections of public acute hospitals, psychiatric hospitals, drug and alcohol hospitals and dental

hospitals in all States and Territories. Analysis by peer group is possible, meaning that it is feasible to

compare operationally similar establishments. Data on recurrent expenditure is available for

categories such as salaried medical officers, visiting medical officers, drug supplies and repairs and


NATSEM March 2010

41

maintenance. However, with both the public data cubes and AIHW standard reports, expenditure

data is only available by State and Territory (not type of hospital).

Some data is publicly available in data cubes and requests can be made to access extracts of the data

at a unit (hospital) record level. The available data cubes contain data on capacity measures including

number of hospitals, number of beds, separations, bed days and occasions of service and financial

and staffing measures. The data is also largely published in the annually updated publication

Australian Hospital Statistics (see AIHW 2008 for 2006-07 data) which also includes summary tables

on public hospital recurrent expenditure and revenues.

The data also includes:

Types of services:

• Specialised service indicators (a broad range of indicators relating to sections of the

hospital for example including obstetric/maternity service, specialist paediatric service,

psychiatric unit/ward, intensive care unit etc).

• Type of non-admitted patient occasions of service (for example accident and emergency,

dialysis, pathology, radiology and organ imaging)

• Type of admitted patient episode (for example mental health, alcohol and drug, nursing

home type, rehabilitation etc).

Administrative data:

• Full time equivalent staff: Salaried medical officers, registered nurses, enrolled nurses,

student nurses, trainee/pupil nurses, other personal care staff, diagnostic and health

professionals, administrative and clerical staff, domestic and other staff

• Number of hospitals

• Number of available beds for admitted patients

Establishment data:

• State or territory of the hospital

• Sector (public hospitals only)

• Charging status (public patients, private patients, DVA patients, compensable and ineligible

patients)

Financial data:

• Total revenue

• Patient revenues

• Recoveries

• Other revenues

• Total expenditure

• Total salaries and wages expenditure by staffing categories

• Total non-salary expenditure (payments to visiting medical officers, drug supplies,

superannuation payments, medical and surgical supplies, food supplies, domestic services,

repairs and maintenance, patient transport, administrative expenses, interest payments,

depreciation, other recurrent expenditure)

• Average admitted patient cost proportion

Quality of care (relative stay index):

• Number of Separations from public hospitals for admitted patients

• Number of Patient days for admitted patients

Demographic data:

• Sex

• Age group (in 5-year groups)

• Indigenous status


NATSEM March 2010

42

As data is collected by each hospital, the actual definitions used by the data providers may vary from

year to year and between jurisdictions and sectors. Comparisons between the States and Territories,

reporting years and hospital sectors should be therefore made with caution.

5.2.3 National Hospital Morbidity Database

The AIHW’s National Hospital Morbidity Database (NHMD) is a comprehensive census of hospital

separations across both the public and private sectors. This database is compiled by the AIHW from

data supplied by the State and Territory health authorities and is a collection of records for admitted

patients separated from public and private hospitals in Australia. Cost data is not available restricting

analysis to epidemiological and administrative metrics. Cross-tabs are publicly reported for a range

of variables, including comparisons between the public and private sector for some variables and

metrics. However, the data cubes do not permit any more detailed comparisons to be made

between the public and private sectors. While requests can be made for either custom data extracts

or access to the unit records upon which the collection has been built, this is likely to involve the

need to obtain clearance from individual State and Territory authorities which may impose their own

restrictions on the use of their data.

This dataset includes information on:

Clinical data

• Urgency of admission

• Principal diagnosis (the diagnosis established after study to be chiefly responsible for

occasioning the patient's episode of care in hospital)

• Additional diagnoses (include co-existing conditions and/or complications)

• Procedures (surgical and non-surgical)

• Major Diagnostic Category (MDC) and Australian Refined Diagnosis Related Group (AR-DRG)

• Care type (for example acute, rehabilitation, palliative, newborn) (from 1995-96 for some

jurisdictions; the newborn category was introduced in 1998-99)

• Admission mode (source from which the person was transferred/referred)

• Separation mode (status at separation: discharge/transfer/death and place to which person

is released)

• Intended length of stay (same day or overnight)

• External causes of injury or poisoning

• Places of occurrence of external cause

• Activity when injured (from 1998-99)

Establishment data

• State or territory of the hospital (NSW, VIC, QLD, WA, SA, TAS, ACT, NT)

• Sector (public/private hospital)

• RRMA (Rural, Remote and Metropolitan Areas) and other characteristics of the hospital (for

public hospitals only) (from 1995-96)

• ARIA (Accessibility/Remoteness Index of Australia) of the hospital (from 1998-99, and only

for some jurisdictions)

• Remoteness Area of the hospital (from 2000-01).

Financial data

• Estimated average cost for the AR-DRG (for the public and private sectors)


NATSEM March 2010

43

Quality of care-Length of stay data

• Admission and separation dates

• Leave days

• Same day flag (to indicate separation/discharge on the same day as admission)

Patients: Demographic data

• Sex

• Date of birth

• Age, age group (in 5-year groups)

• Country of birth (from 1996-97)

• Indigenous status

• State and local area of residence (Statistical Local Area, Statistical Subdivision, Statistical

Division; from 1997-98)

• RRMA Rural (Remote and Metropolitan Areas) of patient's residence (from 1995-96)

• Remoteness Area of patient's residence (from 2000-01).

Details on Source of funding

• Funding source data elements including Admitted patient election status, Funding source

for hospital patient, Department of Veterans' Affairs patient and Medicare eligibility status

5.2.4 Private Hospital Establishment Collection

Information on private hospitals is compiled by the ABS (not AIHW as for public hospitals). The ABS’s

Private Hospital Establishment Collection contains statistical information for 1992-93 to 2006-07

financial years, obtained from an annual census of all licensed private hospitals in Australia. It

contains details about the facilities, activities, staffing and finances of all private hospitals, including

both private acute and/or psychiatric hospitals and free-standing day hospital facilities.

The dataset includes information on:

Clinical data:

• Number of separations

• Number of patient days for admitted patients

• Average length of stay for admitted patients

• The average number of sessions per operating theatre per week

• The total number of procedures

• Principle diagnosis

• Mode of Separation

• Occasions of service in non-admitted patients services (value)

• Major diagnostic category

• Procedure

• External causes of principle diagnose

• Specialized units: Neonatal Intensive Care unit (level II, level III), Separate Intensive Care

Unit and/or separate Coronary Care Unit, Combined Intensive/coronary care units, High

dependency unit, Rehabilitation unit, Hospice care unit.

Administrative data:

• Number of hospitals

• Number of hospitals with operating theatres, number of operating theatres

• Number of hospitals with dedicated day surgery units, number of dedicated day surgery

units

• Number of available beds for admitted patients


NATSEM March 2010

44

• Full time equivalent staff : Salaried medical officers, Registered nurses, Enrolled nurses,

Student nurses, Trainee/pupil nurses, Other personal care staff, Diagnostic and health

professionals, Administrative and clerical staff, Domestic and other staff.

Establishment data:

• State or territory of the hospital (NSW, VIC, QLD, WA, SA, TAS, ACT, NT)

• Sector (Acute hospitals and Psychiatric hospitals; Free-standing day hospital facilities)

Financial data:

• Patient revenues

• Recoveries

• Total expenditure

• Total salaries and wages expenditure by staffing categories

• Total non-salary expenditure (Payments to visiting medical officers, Superannuation

payments, Drug supplies, Medical and surgical supplies, Food supplies, Domestic services,

Repairs and maintenance, Patient transport, Administrative expenses, Interest payments,

Depreciation, Other recurrent expenditure)

Average admitted patient cost proportion:

• The proportion of patient separations reported as being covered by hospital insurance

Demographic data:

• Sex

• Age group (in 5-year groups)

• Election status (public and private patients, self-paying patients)

Details on source of funding:

• Election status (public and private patients, self-paying patients)

5.2.5 IMS Health Pharmaceutical Sales Data

IMS Health Australia Pty Ltd collects confidential data on ‘warehouse’ sales of pharmaceuticals to

community (retail) and hospital pharmacies in Australia. These data can be purchased by interested

clients (or accessed through third party access agreements). Their National Hospital Audit database

contains information at the national level on pharmaceutical sales available by manufacturer,

products, packs, molecule, and therapeutic class. IMS Health records both the volume (number of

units sold) and the dollar value of the sales. The data are available by month, and although it is

collected for both public and private hospitals, it is not broken down by sector in the national

hospital audit. While it may be possible to aggregate sales by State/Territory, it is not routinely

collated by jurisdiction.

Given the aggregated nature of this dataset, it is unlikely that it could contribute significantly in the

model development. However, one advantage is that it can provide information on the use and cost

of pharmaceuticals by hospitals by therapeutic class. The cost of pharmaceuticals vary significantly

among the different therapeutic classes, hence a hospital’s casemix will impact on its overall

pharmaceutical budget.

5.2.6 Quality and Safety of Hospital Care – Adverse Drug Events

Adverse drug events are one performance indicator for monitoring and assessing the quality and

safety of hospital care. Adverse drug events can include inappropriate dosages, inappropriate

combinations of drugs and use of drugs not recommended for a particular age group (Burgess et al,

2005; Roughead and Semple, 2009). Under the National Health Performance Framework, ‘safety’ has


NATSEM March 2010

45

been defined in terms of the avoidance or reduction to acceptable limits of actual or potential harm

from health care management or the environment in which health care is delivered (AIHW 2009).

Similar definitions are commonly used (Runciman, 2006) - the former Australian Council for Safety

and Quality in Health Care, now succeeded by the Australian Commission for Safety and Quality in

Health Care (ACSQHC) defined safety as the degree to which potential risk and unintended results

are avoided or minimised (www.aihw.gov.au/safequalityhealth/definitions.cfm). From this

perspective, an adverse event is an incident in which harm results to a person receiving health care

(Runciman, 2006; AIHW 2009). Thus, an adverse drug event is any incident involving a medicine that

causes harm to the patient. They include harm that results from known adverse drug reactions,

medication errors or system failures associated with the manufacture, distribution or use of

medicines (NPS, 2009; Roughead and Semple, 2009). At an aggregate level, ‘quality’ is assessed in

terms of the extent to which a health care service or product produces a desired outcome. At a more

detailed level, as described in the National Health Performance Framework, quality is seen as a

guiding principle in assessing how well the health system is performing in its mission to improve the

health of Australians (www.aihw.gov.au/safequalityhealth /definitions.cfm).

The Australian Commission for Safety and Quality in Health Care (ACSQHC) was established 1 January

2006 to provide national leadership in health care safety and quality (www.aihw.gov.au/

safequalityhealth/aust_stats.cfm). The ACSQHC publishes a number of reports which provide a

general picture of adverse drug events in Australia but has limited data which could be used in

quantifying the system dynamics model.

The Australian Council on Healthcare Standards (ACHS) is an independent private sector not-for-

profit organisation which aims to improve the quality of health care in Australia through the ongoing

review of performance, assessment and accreditation (www.aihw.gov.au/safequalityhealth/aust_

stats.cfm). The ACHS publishes a clinical indicator report based on its Clinical Indicator Program (CIP)

(ACHS, 2008). The CIP is a service offered to public and private hospitals in Australia and New

Zealand. The CIP has a large number of clinical indicators, ranging across 23 different areas and

includes information on selected adverse events, adverse drug reactions being one of these. In 2006,

some 159 hospitals provided data on eight clinical indictors for adverse drug events but only two

related to non-specific adverse drug reactions, the other six relating to the drug Warfarin. In

addition, the Productivity Commission has highlighted a number of weaknesses with this source of

data:

• participation in the CIP is voluntary, and so the sample may not be representative;

• the number of reporting hospitals is often small, and so sample sizes may not be sufficient

to reach robust conclusions about the relative performance of the public and private

hospital systems; and

• the ACSQHC review raised concerns about data collection and validation methods used for

the CIP (Productivity Commission, 2009a).

The ACHS is not prescriptive about how participating organisations collect their data and there is no

requirement that an organisation monitors a specific number of indicators. However, they must

ensure that the data they do collect are in strict accordance with the specified definitions in order to

provide consistency in the data submitted to ACHS.

The best source of data to examine adverse drug events as a system outcome measure appears to be

AIHW’s National Hospital Morbidity Database (as described above). Using specific ICD-10-AM codes,


NATSEM March 2010

46

it is possible to extract adverse event data for both public and private hospitals from the NHMD. The

NHMD separations data include ICD-10-AM diagnoses, places of occurrence, and external causes of

injury and poisoning which indicate that an adverse event was treated and may have occurred during

the hospital admission (AIHW, 2009). However, other ICD-10-AM codes may also indicate that an

adverse event occurred or was treated, and some adverse events are not identifiable using these

codes i.e. it is likely that the data will be an underestimate as adverse events that are not explicitly

described or recorded in hospital medical records will not be ascribed to the ICD-10-AM codes. The

data contained in the NHMD collection should therefore be interpreted as representing selected

adverse events that have resulted in, or have affected, hospital admissions, rather than all adverse

events that occurred in hospitals (AIHW, 2009).

ICD-10-AM codes Y40-Y59 (within Chapter XIX Injury, poisoning and certain other consequences of

external causes) identify separations with an external cause coded as an adverse effect caused by

‘drugs, medicaments or biological substances in therapeutic use’. These hospital stays represent

those caused by an adverse drug event as a complication of medical and surgical care. However, the

AIHW states in its 2009 publication ‘Australian Hospital Statistics 2007-08’ that ‘the data [on adverse

events] for public hospitals are not comparable with the data for private hospitals because their case

mixes differ and recording practices may be different’ (pg 53).

Unfortunately, the AIHW does not routinely report on this specific category of hospital separations,

favouring the broader category of ‘complications of medical and surgical care’ (ICD-10-AM codes

Y40-Y84) and data on adverse drug event separations are suppressed on the NHMD online data cube.

However, customised requests can be made to the AIHW to get Y40-Y59 separations broken down by

a range of variables e.g. age and gender, hospital peer group, or State and Territory (conditional on

sample size).

In addition, the ABS also uses the ICD-10-AM codes Y40-Y59 to report the annual number of deaths

in Australia caused by adverse drug events in hospitals. Again only aggregate numbers are readily

accessible and the small numbers limit the extent of disaggregation by other variables.

5.3 CAUSAL LOOP DIAGRAM OF THE HOSPITAL MEDICINES SYSTEM

In this Section we describe the causal loop diagram (CLD) (visual representation of the system

dynamics model) of the current system of hospital medicines. As discussed in Section 5.1, the CLD

identifies the key agents/elements in the system, the interactions and feedbacks that link them, and

the system outcomes that are of interest.

47


Fig

ure

2

Causal lo

op d

iagra

m o

f th

e h

ospital m

edic

ines s

yste

m in A

ustr

alia

Cost of hospital

medicine ($, %)

Adverse drug

events

Continuity of

medication on

discharge

Hospital

pharmacy

Formulary

type

Case mixSize of

pharmacy

Roles of

pharmacists

Drug price

Drug

preferences

Tendering

process

Patients

No. of seperations

Proportion

Inpatients

Proportion

Outpatients

Proprotion

Day-only

Demographics

Hospital

Peer group

StatePublic/private

sector

Remoteness

Hospital

budget

Dispensed drugs -

volume and type

Cost to

Commonwealth

(S100, PBS)

Cost to Hospital


Average length

of stay

Drug supply,

New drug

Medication

complexity

Doctor prescribing

behaviour

Off label use

Role of TAG

Pharmaceutical

Industry

supplier

Cost of hospital

medicine ($, %)

Adverse drug

events

Continuity of

medication on

discharge

Hospital

pharmacy

Formulary

type

Case mixSize of

pharmacy

Roles of

pharmacists

Drug price

Drug

preferences

Tendering

process

Patients

No. of seperations

Proportion

Inpatients

Proportion

Outpatients

Proprotion

Day-only

Demographics

Hospital

Peer group

StatePublic/private

sector

Remoteness

Hospital

budget

Dispensed drugs -

volume and type

Cost to

Commonwealth

(S100, PBS)

Cost to Hospital


Average length

of stay

Drug supply,

New drug

Medication

complexity

Doctor prescribing

behaviour

Off label use

Role of TAG

Pharmaceutical

Industry

supplier


NATSEM March 2010

48

Following our investigations, points of concern identified with the existing system and proposed

changes identified in the three reform options, we have designed the model around four interacting

partial models. As shown in Figure 2, these model the industry characteristics and business activities

of pharmaceutical companies manufacturing and supplying hospital based medicines; the

characteristics of the hospital as an organisational entity; features related to hospital pharmacy

based around the purchasing, acquisition, prescribing and dispensing of medicines in hospital; and

patient-related characteristics and behaviour. Some of the relationships shown in the CLD will be

able to be quantified while others will be of a more qualitative nature, for example, changing the role

of the pharmacist to become an integral member of the clinical team and have a more active role in

actual medication management and decision-making.

Far more detailed decision algorithms have been developed by other researchers and health

professionals for some specific aspects represented in the model. As indicated earlier, the hospital

medicines system is very complex and individuals and health organisations have studied particular

components and processes. For example, the NSW Therapeutic Advisory Group has developed

decision algorithms for both the evaluation of medicines for formulary listing in public hospitals and

for individual patient use (IPU) approval. These are provided in Appendix 2.

Ideally, the model would draw on information on the following:

Table 6 Components of system dynamics model

Pharmaceutical Supplier

Hospital Establishment Hospital Pharmacy Patients

Products manufactured/supplied (including new drugs, generics etc)

Public / private sector Size of pharmacy Breakdown of inpatients, outpatients and day only patients

Therapeutic area(s) Hospital peer group (for public hospitals)

Role of pharmacists Number of separations

Sales volumes, share of market

State/Territory Formulary type (i.e. state-wide / campus / individual)

Average length of stay

Tendering processes Remoteness Role of TAG Patient demographics

Business practices Hospital budget Drug preferences Case mix (DRGs)

Industry competition Doctor prescribing behaviour

Medication complexity

Off-label use

New drugs

Drug prices

Tendering processes

Data on drugs and costs is central to the model, and ideally it should be informed by data broken

down by drug class and other system variables.

The model primary outcome measures (akin to system key performance indicators) are:

• The cost of hospital medicines (drug expenditure by $ amount and proportion of a

hospital budget)


NATSEM March 2010

49

• Expenditure by different funding sources

• Number of adverse drug events (as a complication of surgical and medical care) as a

measure of quality and safety

• Continuity in medication post-discharge (e.g. measured by having a medication action

plan, supply of medicines information to patient or sufficient supply of drugs is

provided on discharge).

The model contains a number of stocks and allows for a wide range of comparative analyses. If the

model can be appropriately populated with data then it is theoretically possible to extract

information, for example, on the range, volume and cost of drugs dispensed by different hospital

peer groups by State/Territory by DRG. The model should be able to illustrate the effect of having a

centralised State-wide formulary versus an individual hospital based formulary, or indicate - at least

qualitatively - the effect of having multi-disciplinary and flexible clinical teams involved in medication

management and decision-making.

In summary, the model has been designed to allow users to answer the basic question of:

How do changes in the pharmaceutical industry, characteristics and behaviour of

hospitals, hospital pharmacy and/or patients affect the expenditure on hospital

medicines, adverse drug events, continuity of care on discharge, and source of funding?

In modelling terms, if we change system parameters or re-define the processes and interactions

operating within the system then how will this impact on system outcomes?

At present, the model has been constructed with the view that the basic unit of analysis is an

individual hospital establishment. However, if unit record data cannot be obtained then the model

could be operationalised using public hospital peer groups and private hospitals as the unit of

analysis.


NATSEM March 2010

50

6 GENERAL FINDINGS

6.1 USE OF MEDICINES IN AUSTRALIA’S HOSPITALS

This Section presents analysis of selected data from the Department of Health and Ageing’s National

Hospital Cost Data Collection, 2006-07. This section focuses on comparisons of the number of

separations, average length of stay (ALOS), average total cost, average cost of the pharmacy

component of a separation, and the pharmacy component as a percentage of average total cost per

separation by public hospital peer group and state and territory, in order to present a snapshot of

some of the variation in hospital ‘use’ and cost by peer group and state with a view towards

informing the modelling of pharmaceutical funding in hospitals.

Data presented in this Section largely refers to the overall average per separation, in order to present

an overview. However, the case mix and number of admissions in hospitals of different peer groups

of course has major impacts on this. Data in the collection is available at the level of 666 Diagnostic

Related Groups (DRGs), between which there is extreme variation. All DRGs do not apply to all

hospitals, and between DRGs there is a great deal of variation in terms of separations, ALOS, cost and

the pharmaceutical component of treatment. In order to compare hospitals using this data, AIHW

have identified a list of 20 DRGs that are useful for the comparison of hospitals on the basis of:

• Homogeneity where variation can be attributed to the performance of the hospital;

• Representativeness across clinical groups;

• Differences between jurisdiction or sectors; and

• Policy interest (AIHW, 2009).

Tables comparing hospital indicators for these selected DRGs by peer group and State and Territory

are provided in Appendix 3, and are referred to throughout this Section.

In 2006-07, the total cost of medicines (including the cost of containers but not pharmacy service

costs) dispensed in Australian public acute and psychiatric hospitals was $1.4bn (AIHW, 2009).

Unfortunately, recurrent expenditure on drug supplies by private hospitals is reported as part of the

broader category of ‘drug, medical and surgical supplies’. In 2006-07, this amounted to $1.7bn. In the

public sector drug costs represent about 36 percent of the expenditure on drug, medical and surgical

supplies. If this is similar in the private sector then private hospitals would have purchased around

$630m worth of drugs (ABS, 2008). Furthermore, about a third of medicines used in private

hospitals are reimbursed directly from the PBS and these costs are not counted in the $630m (Pfizer,

2008). IMS Health in their hospital audit for 2006-07 recorded an almost identical level of total

expenditure on pharmaceuticals by Australian hospitals at $2.03bn.

In 2007-08, there were 4.7 million separations to public hospitals and 3.1 million to private hospitals.

Half of patients admitted to public hospitals and two-thirds of patients in private hospitals were ‘day-

only’ (same day) patients. There were over 16 million outpatient clinical services provided and over

7.1 million presentations to emergency departments in public hospitals – one in three individuals

attending an emergency department were admitted to hospital or referred for treatment


NATSEM March 2010

51

Figure 3 Share of separations by public hospital peer group, 2006-07

A1

67%

B1

10%

B2

5%

C1

7%

C2

4%

D1

0%G

0%

A2

6%

D3

1%

Peer group A1 – principal referral and specialist women’s and children’s hospitals – accounts for

around two thirds of separations in 2006-07 (Figure 3). This is unsurprising as, as shown earlier in

Table 2, group A1 and A2 hospitals account for 56 per cent of public hospital beds nationally. As

shown in the Appendix 3, A1 hospitals have the most separations of the peer groups and represent

the greatest proportion of separations for each of the selected DRGs. The most frequent DRG of the

selected group for each of the public hospital peer groups except G, and in fact the private sector, is

the vaginal delivery of babies without Cscc. In hospitals in peer group G the most common DRG of

those selected is Chronic Obstructive Airway Disease Cscc, however the number of separations for

this group across DRGs are significantly lower than the order of separations in larger hospitals. As

shown in Appendix 3 some DRGs, even within the selected ‘representative’ group are not included in

the case mix of some of the smaller hospital peer groups, for example hip and knee replacements.

Figure 4 Average length of stay by public hospital peer group, 2006-07

3.22.9

2.7 2.6 2.5 2.6

3.8

2.4

3.4

0

0.5

1

1.5

2

2.5

3

3.5

4

A1 A2 B1 B2 C1 C2 D1 D3 G

Peer group

Avera

ge L

ength

of Sta

y (D

ays)


NATSEM March 2010

52

Figure 4 compares the ALOS across all DRGS by public hospital peer group, and shows that at the

aggregate level there is variation between peer groups. The longest overall ALOS is in peer group D1

hospitals – small acute regional hospitals – of 3.8 days, and the shortest of 2.4 in D3 remote acute

hospitals. When ALOS is compared for the selected DRGs by peer group in Appendix 3 the variation

between DRGs can be seen. The longest ALOS for most of the peer groups is for Major Affective

Disorders A<70 (without Cscc). The average stay is longest in the private sector, of 19.8 days,

compared to 13.7 in an A1 public hospital. The length of stay for this DRG generally decreases with

hospital size, suggesting that the most serious cases are perhaps referred to the major hospitals. This

long-stay DRG is most common in the private sector with an estimated 12,163 separations and A1

public hospitals with 6,435 separations; however each hospital peer group has separations within

this DRG, including small sub-acute and non-acute hospitals.

Figure 5 compares the overall average cost per separation. The greatest cost per separation is in A2

public hospitals which include specialised acute women’s and children’s hospitals with more than

10,000 acute case mix adjusted separations per year. The most common DRGs in these hospitals

include births and bronchitis and asthma A<50 without Cscc. While the costs for these most common

treatment groups at A2 hospitals are roughly on par with A1 hospitals, the average cost per

separation for some other DRGs are significantly higher in these hospitals that A1 hospitals, as shown

in Appendix 3, perhaps due to the hospitals’ specialisation. For example in an A2 hospital the average

cost per separation for Major Affective Disorders A<70-Cscc is $18,617 compared to $10,055 for an

A1 hospital. For heart failure and shock without Cscc the average cost per separation is $12,770 in an

A2 hospital compared to $4,377 in an A1 hospital.

Figure 5 Average cost of per separation by public hospital peer group, 2006-07

4,079

4,871

3,106 2,986 2,8722,571

2,9353,305

2,727

0

1,000

2,000

3,000

4,000

5,000

A1 A2 B1 B2 C1 C2 D1 D3 G

Peer group

Avera

ge tota

l c

ost per separa

tion

($)


NATSEM March 2010

53

Overall A1 hospitals have the second highest average total cost per separation, and then there is less

variation in the average cost per separation between the smaller peer groups, which range from

$2,571 to $3,305. The estimated overall average total cost per separation in private hospitals is

$2,754 roughly about average in comparison to the public hospital peer groups, although the

calculation of costs for the public and private sectors includes different components and thus

comparison is problematic. Across the private sector and public sector peer groups (excluding, A2,

D1, D3 and G which do not have separations under these DRGs) the DRGs with the greatest average

total cost per separation are Hip Replacements without Cscc and Knee Replacement and

Reattachment. For Hip Replacements without Cscc the average cost ranges from $14,366 in a C1

public hospital to $17,719 in a private hospital. For Knee Replacement and Reattachment the

average cost ranges from $15,382 in a private hospital to $19,726 in a C2 hospital. Notably most

separations under both these DRGs are in the private sector, although as noted comparisons

between the private and public sectors with this data should be treated with caution.

As shown in Figure 6 there is substantial variation in the cost of pharmaceuticals between public

sector peer groups, most likely related to case mix and scale, and pharmacy services. Similar to total

cost, the greatest average pharmaceutical costs per separation are in A2 specialist women’s and

children’s hospitals, at $219 per separation on average. A1 hospitals have a similar pharmaceutical

cost per separation at $209, and then costs generally fall with hospital size, with the exception of D3

hospitals which have relatively higher pharmaceutical costs than other smaller hospitals, which is

also similar to the pattern of average total costs shown in Figure 5.

Looking at the costs of pharmaceuticals by DRG in Appendix 3 it is clear there is substantial variation

in the costs of pharmaceuticals per separation by DRG. The highest pharmaceutical costs per

Figure 6 Average cost of pharmaceuticals per separation by public hospital peer group, 2006-07

209219

140122

82 77 72

106

72

0

50

100

150

200

250

A1 A2 B1 B2 C1 C2 D1 D3 G

Peer group

Avera

ge tota

l pharm

acy c

ost per

separa

tion ($)

:


NATSEM March 2010

54

separation among the selected DRGs are for Lymphoma and Non-Acute Leukaemia- Ccc, ranging

from $282 in a D3 hospital to groups, although the range of costs varies greatly across the peer

groups. For example while $282 is the highest pharmaceutical cost for a DRG among those selected

in a D3 hospital, there are several other DRGs with similar pharmaceutical costs, while in an A1

hospital the second highest cost after that associated with a Lymphoma and Non-Acute Leukaemia-

Ccc separation of $1,947 is that of $330 for Major Affective Disorders A<70 without Cscc. This

disparity could reflect the seriousness of cases in major hospitals, or scale issues.

Figure 7 Average cost of pharmaceuticals per separation as a proportion of total cost by public hospital peer group, 2006-07

5.1

4.5 4.54.1

2.9 3.02.5

3.22.6

0

1

2

3

4

5

6

A1 A2 B1 B2 C1 C2 D1 D3 G

Peer group

Avera

ge p

harm

acy c

ost as %

of to

tal

avera

ge c

ost per separa

tion (%

)

:

The proportion of the total cost of a separation made up of the pharmaceutical component varies

from 2.5 per cent in a D1 hospital to 5.1 per cent in an A1 hospital (Figure 7). Notably the

pharmaceutical component of average total cost per separation increases with the size of the

hospital. This could be related to the cost of staffing in larger hospitals, as some smaller hospitals

may not have pharmacy departments in the same sense as larger hospitals do. This also relates to the

hospital case mix. Similarly, for the costs of pharmaceuticals in dollar terms, there is substantial

variation in the cost of pharmaceuticals as a proportion of the total cost of separations by DRG. Again

the costs of pharmaceuticals for separations within the Lymphoma and Non-Acute Leukaemia- Ccc

DRG is an outlier, especially in larger hospitals, for example forming 27.5 per cent of the total costs of

a separation in an A1 hospital.

State is also a useful unit for comparing hospitals as it gives some reflection of the systems by which

pharmaceuticals are funded and purchased within the hospitals. Data from the DoHA Cost Collection

gives is publicly available by DRG for New South Wales, Queensland, South Australia, Victoria and

Western Australia, but not for the smaller jurisdictions of Tasmania and the territories. Comparison

of the share of separations between the five states covered showed that just under a third all public

hospital separations are in each of NSW and Victoria, 18 per cent in Queensland, ten per cent in WA

and nine in South Australia. Comparison of ALOS, total cost, pharmaceutical cost and pharmaceutical

cost as a proportion of total costs showed that at this aggregate level there was little variation

between the states, and these charts have been included in Appendix 3.


NATSEM March 2010

55

6.2 HOSPITAL MEDICINES BY THERAPEUTIC CLASS

The tables and figures above show that hospitals will spend differently on pharmaceuticals according

to their hospital type. Hospitals have different case mixes and their formularies need to span

therapeutic classes in accordance with their patient case loads. It is well known that some types of

medicines are far more expensive than others – cancer drugs for example – and there will be

different costs and risks associated with different drugs between and within therapeutic classes.

Table 7 provides a broad picture of pharmaceutical sales to Australian hospitals in 2007-08 by

therapeutic category (top level ATC classes) using IMS Health’s National Hospital Audit data.

IMS Health recorded total sales of $2bn. in 2007-08, with expenditure growing by over 8 percent per

year over the two previous financial years. Two ATC categories accounted for nearly half of all sales -

cancer and immunosuppressant therapies (ATC Category L) accounting for nearly 30 percent of all

hospital expenditure on drugs and systemic anti-infection drugs (ATC – J) contributing to a further 20

percent.

Table 7 Cost of hospital medicines by therapeutic class, 2007-08

Sales ATC Category Number of companies

selling products in ATC Category

$ million % Total

Annual growth in expenditure

2005-06 to 2007-08 (%)

A - Alimentary tract and metabolism 56 79.52 3.9 3.6

B - Blood and blood forming organs 29 227.06 11.2 -0.9

C - Cardiovascular System 38 67.56 3.3 3.3

D - Dermatologicals 41 8.80 0.4 0.1

G – Genito-urinary system and Sex Hormones

31 23.02 1.1 10.0

H - Systemic hormonal preparations, excl. sex hormones and insulins

18 42.73 2.1 14.4

J - Anti-infectives for systemic use 41 414.77 20.4 10.7

K - Hospital Solutions 16 120.30 5.9 4.8

L – Anti-neoplastic and immunomodulating agents

38 584.00 28.7 12.8

M - Musculo-skeletal System 33 64.35 3.2 6.0

N - Nervous System 52 269.06 13.2 5.3

P - Antiparasitic products, insecticides and repellents

9 1.15 0.1 15.3

R - Respiratory System 27 34.67 1.7 9.4

S - Sensory Organs 19 26.91 1.3 29.6

T - Diagnostic Agents 24 26.96 1.3 19.3

V - Various 28 41.99 2.1 18.6

All 2,032.85 100.0 8.3

IMS Health Confidential and Propriety: Source IMS Health Australia Pty Ltd, and National Hospital Audit – topline therapeutic class

information


NATSEM March 2010

56

Also provided in Table 7 are the number of pharmaceutical companies selling products in the

different ATC classes. In 2007-08, hospitals accessed ‘alimentary tract and metabolism’ or ‘nervous

system’ products from over 50 suppliers, but in contrast, only 9 companies sold ‘anti-parasitic

products, insecticides and repellents’. In general, the more companies selling products within a

therapeutic class, the lower was the annual growth rate in the cost of drug purchase (a simple linear

regression analysis indicates that the number of companies selling products within an ATC category

explained over 25 percent of the variation in the growth in annual drug expenditure per category –

suggesting competition does influence cost).

6.3 ADVERSE DRUG EVENTS

Some 2-4 percent of all hospital separations are medication related with as many as 30 percent of

unplanned admissions in older Australians (who typically have complex health problems and are on

multiple medications) being due to adverse drug events (Runciman et al, 2003; National Medicines

Safety and Quality Scoping Study Steering Committee, 2009; Roughead and Semple, 2009). The

majority of adverse drug events occur within the community, leading to hospital admission or re-

admission (Roughead and Bedford, 2008). The risk of medication error is particularly high

immediately after a patient is discharged from hospital when discontinuities and a lack of co-

ordination may occur in their care (Mant et al, 2001; Roughead and Semple, 2008). In a survey of GPs

in Sydney, Mant and colleagues found that consultation with the GP about the patient’s medication

during the hospital stay occurred in only 11 per cent of patients recently discharged from hospital

and that medication management was documented in the discharge plan of only 13 per cent of

patients (Mant et al, 2001).

Of the approximate 7 million separations in 2004-05 to Australian public and private hospitals, there

were around 320,000 separations recorded as having complications of surgical and medical care

(ICD-10-AM Codes Y40-Y84). This means that an adverse surgical or medical event occurred in nearly

5 in every 100 separations. Nearly 30 percent of these separations or over 90,000 separations were

due to adverse drug events occurring in hospital (Y40-Y59). Thus, adverse drug events occur in over

one in every 100 separations. As shown in Table 8 by 2007-08, the total number of separations to

Australian public and private hospitals had increased to 7.9 million, but a staggering 358,117

separations were now coded as having a complication of medical and surgical care (AIHW, 2009).

Seventy percent of these separations occurred within public hospitals. Of concern is that the number

of separations recorded as having an adverse drug event increased at a higher rate (around 4.3

percent per annum) than the growth in all hospital separations or those due to complications of

surgical and medical care (Y40-Y84) (both having an annual increase of 3.0 percent per year over the

period 2004-05 to 2007-08).

Poor communication of medical information at key transition points appears to be responsible for up

to 50 percent of all medication errors in hospital and 20 percent of adverse drug events (Victorian

Department of Human Services, 2005). Omission or overdose of medication is the most frequent

type of medication incident reported in hospitals (Roughead and Semple, 2009).


NATSEM March 2010

57

In 2007, Y40-Y59 ‘drugs, medicaments and biological substances causing adverse effects in

therapeutic use’ was recorded as the underlying cause of death for 59 Australians (ABS, 2009).

Table 8 Separations with adverse events

Year Total separations

Complications of surgical and medical care (Y40-Y84)

Adverse drug events (Y40-Y59)

Y40-Y59 as proportion of

Y40-Y84 separations

separations with adverse

events


events per 100 separations


events


events per 100 separations

%

2004-05 7,019,000 319,637 4.55 90,371 1.29 28.27

2005-06 7,312,000 331,711 4.54 96,436 1.32 29.07

2006-07 7,603,000 348,145 4.58 101,003 1.33 29.01

2007-08 7,874,000 358,117 4.55 106,012 1.35 29.60

Source: AIHW, Australian Hospital Statistics, 2004-05 to 2007-08.

6.4 POSSIBLE IMPACTS OF THE REFORM OPTIONS

The possible impacts of the three chosen reform options on key issues are summarised in Table 9.

These relate to public hospitals only, and in terms of the system dynamics model primarily reflect

changes in hospital pharmacy interactions (see Figure 2) and system outcomes.

Each of the options:

• is universal in that it supports all patients;

• increases equity of access to hospital medicines with a focus on meeting the clinical needs of

individual patients;

• improves the supplies of medicines on discharge;

• removes incentives for cost shifting; and

• shifts funding to the Commonwealth Government as the single funder, and addresses State-

Commonwealth administration issues.

The first option ‘ Commonwealth Government as single funder’ performs the least well as it does not

directly impact on issues around hospital formularies which are central to the public funding of

hospital medicines and performance of hospital pharmacy and which are addressed by the other two

options.

While the proponents of the reform options may claim other benefits, these are less clear and vary

between the options, for example,


NATSEM March 2010

58

Table 9 Likely impact for public hospitals of select reform option in addressing key issues

Issue Option For Reform

‘Comm. Govt. Single Funder’

(SHPA Option 5)

‘Extension of the PBS’

(SHPA Option 2)

‘National Formulary’ (JATAG)

Patient coverage:

- all public hospitals √ √ √

- non-admitted and inpatients √ √ √

QUM & Patient safety

- judicious, appropriate, effective use ? ? ?

- adverse drug events ? ?(√) √

Continuity of care

- adequate supplies of medicines on discharge

√ √ √

- continuity of medication use on discharge

? √ ?(√)

Integration with community PBS - √ ?(√)

Pharmacy services

- clinical pharmacy ? ? ?

- drug distribution services ? √ √

- management services ? ? ?

Formulary – Drug Listing & Acquisition

- access (adequacy of formulary – range of drugs - to meet clinical needs of individual patients)

?(√)

√

√

- off-label use - X ?(X)

- hospital management of formulary - √ √

- hospital purchasing & acquisition administrative workload

?

√

√

- duplication of work ? √ √

- cost-effectiveness evaluation (value for money)

- √ √

- transparency in decision-making ? ? ?

Costs

- total cost of hospital pharmacy (level of individual hospital)

? ?(√) ?(√)

- cost of medicines (level of individual hospital)

? ?(√) ?(√)

- cost-shifting √ √ √

- ability to manage costs in hospital ? √ √

- change in funding source (shift to Commonwealth Govt.)

√ √ √

Note: √ improvement/positive impact; - no change; X deterioration/negative impact; ? not known; ?( √) potentially an improvement; ?(X) potentially a deterioration


NATSEM March 2010

59

• integration with community care (and PBS), including improving continuity of medication on

discharge;

• adherence to QUM principles and improved patient safety;

• reduction in unnecessary bureaucratic processes, administrative workloads and duplication

of work;

• robust tendering processes and pricing mechanisms; and

• economic evaluation leading to value for money (cost-effectiveness)and responsible

spending.

Like all policy reform options, ‘the devil is in the detail’ and these options need further scoping. It is

not clear the degree to which individual hospitals will implement cost-control mechanisms and

incentives when funding is provided by the Commonwealth. At present, expenditure on hospital

medicines is capped through public hospital budgets but under these reform options, expenditure is

likely to become uncapped, with funding being ‘activity-based’ (similar to the PBS). Mechanisms need

to be put into place to link medicine use to health outcomes, with funding arrangements and

formularies allowing for flexibility at the level of the individual hospital to dispense medicines that

best suit the clinical needs of the patients while encouraging responsible and cost-effective spending.

A recent hospital pharmacy workforce study has shown that 47 percent of pharmacists’ time is spent

on clinical pharmacy services for individual patients, providing drug information to doctors and

nurses, and training and education; 38 percent on drug distribution services in terms of acquiring,

manufacturing and dispensing medicines; and 15 percent on management services involving

managing the medicine and personnel resources of the pharmacy service and hospital-wide

activities, such as institutional drug policy management (O’Leary and Allinson, 2009). The

introduction of an enhanced PBS-hospital formulary or a national hospital medicines formulary will

both positively impact on hospitals through streamlining at the level of the individual hospital drug-

listing, pricing, tendering and other acquisition processes. However, while there is strong support for

increasing the clinical role of pharmacists, how these reform options will impact on clinical pharmacy

services is uncertain. None of the options specifically target clinical pharmacy services which have a

major impact on the use of medicines, and consequently pharmaceutical expenditure, as well as

adverse drug events. JATAG believe that a national formulary will reduce adverse drug events

because health professionals will be able to move between hospitals but still work from the same

drug list, using the same prescribing, dispensing and evaluation procedures and policies.

An extended PBS ‘formulary’ should operate in a similar way but because of essential differences

between medicines used in the community and hospital-based medicines, this may not be the case.

The range of drugs differs and in hospital settings, there are different patterns of use including off-

label use and trialling medications for short periods of time. A possible problem with both formulary

options is the limitation in off-label use (e.g. non-PBS indications or non-registered indications), and

use of ‘investigational’ medicines. Applying a PBS type funding mechanism to hospital medicines

further raises the question as to whether or not patient copayments would apply to current PBS-

listed medicines prescribed in hospital and to maintain consistency would copayments be introduced

for ‘hospital-only’ medicines.


NATSEM March 2010

60

The impact of these reform options on the total cost of hospital pharmacy and more specifically on

the cost of medicines is uncertain because of the possible incentives for hospitals to use more

medicines under uncapped funding systems versus the efficiencies and savings that the

Commonwealth could achieve as sole funder. With the Commonwealth Government becoming the

single funder of hospital medicines and especially if it became the sole ‘purchaser’ through the

operation of an extended PBS or national hospital formulary, it is likely that it would exert

monopsony purchasing power. It could bring economies of scale and dictate terms to the

pharmaceutical companies supplying drugs. This would have major implications for the

pharmaceutical industry in Australia. Companies would have to enter robust tendering processes

with the Commonwealth and not States or individual hospitals as is the current system, and provide

cost-effective evaluations for formulary listing of their medicines – noting that direct transference of

PBS listing and pricing processes into the hospital sector is likely to be problematic given the nature

of hospital medicines e.g. for the funding of high-cost medicines where the cost per individual unit

dose is very high. Currently, the evaluation of drugs for use in hospitals focuses mainly on efficacy

and not value for money. JATAG (2008) suggest that for a national hospital formulary not all

members of a drug class need to be listed, a strategy of selecting only some members of a class of

drugs where there is not much difference between the members (me-too drugs) will improve price

competitiveness in the tendering process.

As suggested it is uncertain how such a system might play out – if hospitals introduce cost control

mechanisms and efficiency gains accrue at the Commonwealth level then there will be overall

improvements in expenditure. However, in their submission to the NHHRC, Pfizer paints an

alternative picture with higher prices and jeopardised drug supply being the outcomes:

‘To take a hypothetical example: if three manufacturers currently supply Medicine X in Australia, and if the

Commonwealth placed only one of these brands on a national medicines formulary, the other two

companies would quickly cease to supply Medicine X in Australia. Without competition, there would no

longer be any reason for the sole supplying manufacturer to keep its prices low—and the Commonwealth

would no longer have a mechanism to contain aggressive cost increases. And the Commonwealth would

have no alternative sources of supply’ (Pfizer, 2008, p8).

With a fully functional system dynamics model it would be possible to evaluate the impact of

different Industry behaviours in response to other system changes on costs and drug supply.

The possible outcomes for the three reform options have been modelled for public hospitals. The

extension of the PBS (SHPA Option 2) would offer public patients a similar level of access as private

patients (recalling that about one third of their medicines use in private hospitals is already being

funded through the PBS). Also JATAG suggest that there is no reason why private hospitals could not

base their drug acquisition decisions on a national hospital formulary, although it by no means mean

that the Commonwealth Government would assume the extra cost burden of funding all private

hospital medicine use.


NATSEM March 2010

61

7 CONCLUSIONS

This Report addresses the issues that influence the development of public hospital formularies in

Australia. Clinical need drives most inclusions with representation of new items primarily coming

from the clinicians themselves, as Industry mostly is not able to directly influence the inclusion of

their products. Tender processes enable Directors of Pharmacy in collaboration with their Health

Departments to select items that have been listed through a competitive process. There is no

obligation in most cases to only purchase from the tender with the exception of Queensland Health.

Directors of Pharmacy can directly negotiate with Industry to achieve an outcome that addresses

their hospital’s needs. Bundling of products (i.e. purchasing a range of products at a negotiated

reduced price) and creative payment options can be an attractive option for some hospitals to spread

payments across financial periods particularly during high throughput periods.

The PBS can influence the items listed on a formulary but in general restrictions apply to the range of

items listed by selection of key items within therapeutic groups based on evidence-based

recommendations. Organisations such as the National Prescribing Service and the Council of

Australian Therapeutic Advisory Groups assist Drug Committees in all public hospitals to rationalise

the size of their formularies but address therapeutic need in the most cost effective way. The

challenge the Drug Committees face in rationalisation of therapies is limited access to usable

pharmacoeconomic data such as that provided to the PBAC for product listing on the PBS. In

addition, there is little access to qualified pharmacoeconomists to interpret data at a hospital level.

Currently most Directors of Pharmacies in Australian public hospitals feel they have systems that

work adequately for them to address patient need. They do identify the increase in high cost drugs

and the possibility of across the board use of the PBS for hospital discharges as a challenge for the

future both in cost, continuity of care, infrastructure requirements and junior prescriber education.

Various reform options have been put forward in the public domain by stakeholders to improve key

outcomes in Australia’s hospital medicines system. Although a number of submissions were made to

the National Health and Hospitals Reform Commission, no direct recommendations were made by

the Commission concerning the public funding of hospital medicines. However, as shown, the

broader issues raised by the Commission have relevance and overlap changes proposed or identified

by the Society of Hospital Pharmacists of Australia, the Joint Australian Therapeutics Advisory Groups

and Pfizer. The NHHRC, SHPA, JATAG and Pfizer all call for improvements in quality and safety,

improved access and continuity of care, appropriate economic evaluation and funding models,

removing incentives for cost-shifting, transparency and accountability in decision-making, and

enhancing the role of health professionals (hospital pharmacists) through shared responsibilities,

flexibility and multi-disciplinary clinical teams.

It was not be possible to develop a fully functional system dynamics model within the timeframe and

budget of the current project, largely because of the significant limitations in the publicly available

data. However, understanding how the hospital medicines system works – whether this be the

current system or one of the alternative funding options – and the way in which key outcomes might

change at an aggregate or descriptive level because of changes to the system elements and

processes is a good first step in advocating and evaluating policy change.


NATSEM March 2010

62

The initial development of the model through the causal loop diagram provided a means to enhance

our understanding of the systemic causes of hospital medicine use and costs in Australia. It could be

used in a qualitative manner to hypothesize the likely impacts of the three reform options studied.

Further work to quantify and operationalise the model will allow the policy levers and reform options

identified in the reform proposals discussed, or alternative formulations, to be more thoroughly and

rigorously tested on the simulation and the results evaluated for their improvement to the system

outcomes. The usefulness of the model ultimately will depend on how well it represents the real

world. This in turn depends on the underlying assumptions, the construction of the causal

relationships and feedback loops, whether the appropriate concepts, processes, relationships and

interactions are captured and the quality of the input data.

However, in undertaking this review of the issues and challenges in hospital pharmacy and the

funding of hospital medicines in Australia, and in scoping the development of the system dynamics

model, it has become clear that action needs to be taken by Government sooner than later. Models

are a cost-efficient way of testing ‘what-if’ policy scenarios that address real world issues.

Expenditure on pharmaceuticals vary greatly between hospitals and patients have different access to

medicines depending on where and what type of hospital they are admitted to. One in every 100

separations from Australian public and private hospitals involves an adverse drug event that was

sufficiently severe that it was reported on the patient’s medical file and coded into official hospital

statistics. It is timely given the release of the NHHRC’s final report on reforming Australia’s health

care system that the reform of public funding of hospital medicines is also addressed. The three

proposals examined in this Report would all provide benefits. These and other possible alternatives

should be studied in much greater detail to provide the Commonwealth Government with the

necessary platform to introduce policy change to the public funding of medicines in Australian

hospitals.


NATSEM March 2010

63

REFERENCES

Aldous, D. and Petrie, A. (2008). State-wide drug availability. WATAG meeting 2008. Slides available

from: http://www.watag.org.au/watag/docs/Formulary_Petrie.pdf Accessed on 09 February 2009.

Australian Council on Health Care Standards (2008). Australasian Clinical Indicator Report 2001–

2007: Determining the Potential to Improve Quality of Care, 9th Ed., Sydney.

Australian Bureau of Statistics (2009). Causes of Death, Australia, 2007. Cat No. 3303.0, ABS,

Canberra.

Australian Bureau of Statistics (2008). Private Hospitals, 2006-07. Cat No. 4390.0, ABS, Canberra.

Australian Government Department of Health and Ageing (2009). website

http://www.health.gov.au/ accessed June 2009.

Australian Government Department of Health and Ageing (2009a). The State of our Public Hospitals,

June 2009 Report, Commonwealth of Australia, Canberra.

Australian Institute of Health and Welfare (2009). Australian Hospital Statistics 2007-08, Health

Services Series no. 33, Cat. no. HSE 71, Canberra.

Bonabeau, E., (2002). Agent-based modeling: Methods and techniques for simulating human

systems, PNAS vol. 99 suppl 3 pp. 7280–7287.

Bradley, C. and Harrison, J. (2008). Hospital separations due to injury and poisoning, Australia 2004–

05. Injury Research and Statistics Series Number 47. (Cat. no. INJCAT 117) Adelaide: AIHW

Braae, R., McNee, W. and Moore, D. (1999). Managing Pharmaceutical Expenditure While Increasing

Access. The Pharmaceutical Management Agency (PHARMAC) Experience. PharmacoEconomics

16(6), 649-60.

Burgess, C.L., Holman, C.D’A. J. and Satti, A.G. (2005). Adverse drug reactions in older Australians,

1981-2002. MJA, 182(6), 267-270.

Coyle, G. (2000). ‘Qualitative and quantitative modelling in system dynamics: some research

questions’, System Dynamics Review vol. 16, no. 3 pp. 225-244.

Coyle, G. (1996). System Dynamics Modelling: A Practical Approach, Chapman and Hall, London.

Denaro, C. (2008). Joint Australian Therapeutics Advisory Groups Submission to the NHHRC,

Submission No. 44, August 2008.

Gray, L., Broe, G. Duckett, S., Gibson, D., Travers, C. and McDonnell, G. (2006). Developing a policy

simulator at the acute–aged care interface, Australian Health Review vol. 30 no. 4, pp. 450-457

Heffernan, M., Martin, P., and McDonnell, G. (2004). National Medicines Use Dynamics: Influencing

Health Policy with System Dynamics, www.anysim.com, Accessed 13 June 2009.


NATSEM March 2010

64

Homer, J.B. and Hirsch, G.B. (2006). System dynamics modelling for public health: Background and

opportunities. American Journal of Public Health, 96 (3), 452-458.

Huskamp, H.A., Epstein, A.M. and Blumenthal, D. (2003). The Impact of a National Prescription Drug

Formulary on Prices, Market Share, and Spending: Lessons for Medicare? Health Affairs (Millwood),

22(3), 149-58.

Kirkwood, C.W. (1998). System Dynamics Methods : A Quick Introduction. College of Business,

Arizona State University.

Lyell, D., Sadsad, R. and Georgiou, A. (2008). Health systems simulation. In Wickramasinghe, N, and

Geisler, E. (Eds). Encyclopedia of Healthcare Information Systems, Vol II, 646-654.

McDonnell, G. and Heffernan, M. (2005). The dynamics of hospital medication errors: a systems

simulator testbed for patient safety interventions, www.anysim.com, Accessed 13 June 2009.

Mant, A., Rotem, W. and Kejoe, L. (2000). Continuity of Care in Therapeutics from Hospital to

Community. Final report to the Pharmaceutical Health and Rational Use of medicines Committee,

Sydney, South East Health.

Mant, A., Rotem, W., Kehoe, L. and Kaye, K/ (2001). Compliance with guidelines for continuity of care

in therapeutics from hospital to community. MJA, 174(6), 277-80.

Morgan, S., Hanley, G., McMahon, M., Barer, M. (2007). Influencing drug prices through formulary-

based policies: Lessons from New Zealand. Healthcare policy, 3(1), 1-20.

National Health and Hospitals Reform Commission (2008). Beyond the blame game: Accountability

and performance benchmarks for the next Australian Health Care Agreements. A Report from the

National Health and Hospitals Reform Commission, April 2008

National Health and Hospitals Reform Commission (2009). A Healthier Future For All Australians –

Final Report of the National Health and Hospitals Reform Commission – June 2009. ISBN: 1-74186-

940-4, Publications Number: P3 -5499, Commonwealth of Australia, Canberra.

National Medicines Safety and Quality Scoping Study Steering Committee (2009). National Medicines

Safety and Quality Scoping Study Report. Report to the Australian Commission on Safety and Quality

in Health Care.

National Prescribing Service (2009). Review finds errors occurring at all stages of medication process.

Media Release, 4 June 2009.

Pfizer Australia, 2008, ‘A Submission to the National Healthcare and Hospitals Reform Commission:

Funding for Hospital Medicines’, June 2008.

O’Leary, K., and Allinson, Y.M. (2009). Snapshot of the Australian Public Hospital Pharmacy

Workforce in 2007. Journal of Pharmacy Practice and Research, 39(1), 28-33.

Productivity Commission (2009). Public and Private Hospitals, Research Report, Canberra.


NATSEM March 2010

65

Productivity Commission (2009a). Performance of Public and Private Hospital Systems, Productivity

Commission Issues Paper, Productivity Commission, Canberra.

Roughead, E.E and Bedford, G. (2008). Medication Safety – will adverse drug events be reduced? 27-

36. Australian Commission on Safety and Quality in Health Care

Roughead, E.E and Semple, S. (2009). Medication safety in acute care in Australia: where are we

now? Part 1: a review of the extent and causes of medication problems 2002-2008. Australia and

New Zealand Health Policy, 6(1), 18.

Roughead, E.E and Semple, S. (2008). Literature Review: Medication Safety in Acute Care in Australia.

Report to Australian Commission on Safety and Quality in Healthcare.

Runciman, W.B. (2006). Shared meanings: preferred terms and definitions for safety and quality

concepts. MJA, 184 (10), S41-S43.

Runciman, W.B., Roughead, E.E., Semple, S.J. and Adams, R.J. (2003). Adverse drug events and

medication errors in Australia. International Journal for Quality in Health Care,15, 149-159.

Society of Hospital Pharmacists of Australia (2008). ‘Submission to the National Health and Hospitals

Reform Commission’, May 2008.

Society of Hospital Pharmacists of Australia (2004). Moving Forward – the Fundingof Medicines in

Australia’s Hospitals. Discussion Paper, SHPA, Melbourne, Vic.

Victorian Department of Human Services (2005). Preventing Adverse Drug Events – Toolkit. Victorian

Department of Human Services, Melbourne.

Queensland Health (2009).‘Standard Drug List for Queensland Hospitals (1 February 2009)’, available

at http://www.health.qld.gov.au/qhcss/mapsu/, accessed June 2009.


NATSEM March 2010

66

APPENDIX 1 TERMS OF REFERENCE FOR THE NATIONAL HEALTH & HOSPITALS

REFORM COMMISSION

The Commission will report on a long-term health reform plan to provide sustainable improvements

in the performance of the health system addressing the need to:

a. reduce inefficiencies generated by cost-shifting, blame-shifting and buck-passing;

b. better integrate and coordinate care across all aspects of the health sector, particularly

between primary care and hospital services around key measurable outputs for health;

c. bring a greater focus on prevention to the health system;

d. better integrate acute services and aged care services, and improve the transition

between hospital and aged care;

e. improve frontline care to better promote healthy lifestyles and prevent and intervene

early in chronic illness;

f. improve the provision of health services in rural areas;

g. improve Indigenous health outcomes; and

h. provide a well qualified and sustainable health workforce into the future (NHHRC, 2008).


NATSEM March 2010

67

APPENDIX 2 DECISION ALGORITHMS ON THE EVALUATION OF MEDICINES

NSW Therapeutic Advisory Group (February 2008)

a) Decision Algorithm for evaluation of medicines for formulary listing in public hospitals

b) Decision Algorithm for evaluation of medicines for individual patient use (IPU) approval.

Modellin

g O

ptions for

the P

ublic F

undin

g o

f H

ospital M

edic

ines in A

ustr

alia

NATSEM March 2010

68

AP

PE

ND

IX 3

P

UB

LIC

AN

D P

RIV

ATE

HO

SP

ITA

L A

CTIV

ITY

AN

D C

OS

T O

F P

HA

RM

AC

Y B

Y S

ELE

CTE

D D

RG

AN

D B

Y S

TA

TE

Num

ber

of separa

tions for

sele

cte

d D

RG

s b

y s

ecto

r and p

ublic h

ospital peer

gro

up, 2006-0

7

Public P

eer

Gro

ups

DR

GD

RG

Descri

ption

Pri

vate

Secto

r -

Estim

ate

d

Public

Secto

rA

1A

2B

1B

2C

1C

2D

1D

3G

E62C

Respiratory Infectn/Inflamm-Cc

4,635

21,942

10,310

1,251

2,241

1,048

1,657

878

198

350

86

E65B

Chrnic Obstrct Airway Dis-Cscc

5,052

21,937

10,766

214

2,357

1,043

1,815

1,622

265

231

142

E69C

Bronchitis & Asthma A<50 -Cc

1,484

26,050

11,307

5,293

2,371

1,181

1,715

1,170

128

134

78

F62B

Heart Failure & Shock - Ccc

6,660

22,672

12,169

19

2,140

1,142

1,471

1,430

251

219

117

F71B

N-Mjr Arythm&Condctn Dsrd-Cscc

11,131

28,819

16,312

101

2,732

1,881

1,729

1,655

225

178

122

G07B

Appendicectomy - Cscc

5,640

17,983

10,471

1,338

1,792

1,283

906

303

12

141

******

G08B

Abdom & Oth Hrn Pr 0<A<60-Cscc

7,114

7,294

3,212

359

858

479

800

435

22

49

16

G09Z

Inguinal&Femoral Hernia Pr A>0

22,803

17,614

7,135

635

2,291

1,119

2,182

1,114

78

83

46

H08B

Lap Cholecystectmy-Cde-Cscc

16,605

19,080

9,879

45

2,624

1,371

2,182

867

26

88

0

I03C

Hip Replacement - Cscc

11,561

7,250

4,552

******

919

421

669

107

------

00

I04Z

Knee Replacemt & Reattach

20,861

11,476

6,652

******

1,756

730

1,327

135

******

00

I16Z

Other Shoulder Procedures

24,499

5,841

3,166

18

649

334

704

201

27

******

******

L63B

Kdny & Unry Trct Inf A>69/+Scc

4,184

15,804

9,021

93

2,039

606

1,071

787

102

73

76

M02B

Transurethral Prostectomy-Cscc

12,011

6,527

3,283

0984

489

498

294

41

14

------

N04Z

Hysterectomy For Non-Malignanc

12,655

12,201

5,342

1,005

1,491

1,004

1,151

579

67

64

33

N06Z

Fem Repr Sys Reconstructive Pr

9,707

6,712

2,923

496

908

540

567

331

38

31

39

O01C

Caesarean Delivery -Cscc

30,159

42,901

21,678

4,776

4,339

2,544

2,112

1,709

137

263

30

O60B

Vaginal Delivery -Cscc

37,273

105,050

52,886

11,772

11,949

5,943

4,807

3,788

342

685

84

R61B

Lymphma &N-Acute Leukaemia-Ccc

6,574

8,095

5,221

254

904

274

207

322

50

35

16

U63B

Major Affective Dsrd A<70-Cscc

12,163

10,311

6,435

93

649

370

903

395

60

88

35

Modellin

g O

ptions for

the P

ublic F

undin

g o

f H

ospital M

edic

ines in A

ustr

alia

NATSEM March 2010

69

Avera

ge length

of sta

y (days) fo

r sele

cte

d D

RG

s b

y s

ecto

r and p

ublic h

ospital peer

gro

up, 2006-0

7

Public P

eer

Gro

ups

DR

GD

RG

Descri

ption

Private

Secto

r -

Estim

ate

d

Public

Secto

rA

1A

2B

1B

2C

1C

2D

1D

3G

E62C


5.1

3.4

3.4

2.5

3.1

3.2

3.0

6.0

5.0

3.7

4.2

E65B


7.1

4.7

4.6

3.7

4.6

4.7

4.5

4.9

6.2

5.3

6.8

E69C


2.1

1.6

1.7

1.4

1.5

1.6

1.6

1.7

1.6

2.1

1.8

F62B


7.8

5.1

4.8

7.2

5.2

4.8

5.3

5.9

6.0

4.2

8.7

F71B


2.2

2.3

2.2

2.8

2.3

2.5

2.3

2.5

2.7

2.0

2.3

G07B


2.5

2.8

2.7

3.4

2.6

2.8

2.6

2.7

2.7

2.5

******

G08B


1.4

1.6

1.8

1.0

1.4

1.6

1.4

1.3

1.6

1.8

1.3

G09Z


1.4

1.4

1.5

1.1

1.2

1.6

1.3

1.2

1.5

1.3

1.3

H08B


1.8

1.9

2.1

2.4

1.6

2.0

1.5

1.6

1.5

2.9

0.0

I03C


7.2

7.0

7.2

******

6.7

6.2

6.1

6.9

------

0.0

0.0

I04Z


7.4

7.4

7.8

******

6.8

6.7

6.6

6.9

******

0.0

0.0

I16Z


1.6

1.6

1.7

1.6

1.5

1.5

1.5

1.5

2.2

******

******

L63B


7.1

5.1

4.9

5.2

5.0

5.1

5.4

5.7

7.2

5.2

6.2

M02B


3.1

2.9

3.1

0.0

2.7

3.0

2.5

2.8

2.6

3.1

------

N04Z


4.1

3.8

3.9

3.9

3.6

3.6

3.8

3.5

3.8

3.7

3.3

N06Z


3.0

2.7

2.7

3.0

2.6

2.6

2.7

2.7

3.6

2.1

1.9

O01C


5.1

4.3

4.1

4.5

4.1

4.3

4.3

4.4

5.7

4.6

4.6

O60B


4.2

2.9

2.8

2.9

2.7

3.0

3.0

3.2

4.6

3.4

3.3

R61B


4.4

4.7

5.2

3.9

4.5

4.0

3.6

2.9

5.6

2.1

2.7

U63B


19.8

12.3

13.7

10.0

13.3

11.3

11.7

4.6

6.6

3.9

6.1

Modellin

g O

ptions for

the P

ublic F

undin

g o

f H

ospital M

edic

ines in A

ustr

alia

NATSEM March 2010

70

Avera

ge tota

l cost per

separa

tion for

sele

cte

d D

RG

s b

y s

ecto

r and p

ublic h

ospital peer

gro

up, 2006-0

7

Public P

eer G

roups

DR

GD

RG

Descri

ption

Pri

vate

Secto

r -

Estim

ate

d

Public

Secto

rA

1A

2B

1B

2C

1C

2D

1D

3G

E62C


2,563

3,084

3,270

3,374

2,576

2,670

2,677

5,063

3,546

4,982

2,820

E65B


3,022

3,862

4,141

4,905

3,268

3,086

3,309

3,509

3,907

6,706

3,990

E69C


1,334

1,876

1,882

2,078

1,656

1,899

1,816

1,693

1,446

2,846

1,582

F62B


3,533

4,206

4,377

12,770

4,030

3,386

4,263

3,892

3,972

4,875

5,518

F71B


1,688

1,976

2,105

4,618

2,056

1,892

1,828

1,510

1,482

3,015

1,441

G07B


2,976

5,075

5,129

5,866

4,759

4,459

5,495

4,206

3,674

6,401

******

G08B


2,185

3,570

3,932

1,676

3,394

3,607

3,423

3,211

2,739

3,794

3,469

G09Z


2,356

3,514

3,810

1,625

3,288

3,567

3,263

3,270

2,929

3,623

3,489

H08B


3,197

5,118

5,475

5,674

4,571

4,701

4,438

4,775

4,354

6,348

0

I03C


17,719

15,587

15,500

******

17,044

15,093

14,366

16,995

------

00

I04Z


15,382

17,351

17,238

******

17,718

17,045

16,939

19,726

******

00

I16Z


3,449

5,213

5,477

4,869

5,246

4,980

4,631

4,456

4,590

******

******

L63B


3,481

4,156

4,286

5,563

3,663

3,658

4,076

3,881

5,002

6,274

4,295

M02B


3,081

4,957

5,100

04,773

4,730

4,411

4,954

4,714

6,248

------

N04Z


4,929

7,199

7,497

7,996

6,644

6,411

6,988

5,981

6,526

8,885

7,361

N06Z


4,327

5,518

5,467

7,837

5,194

4,940

5,221

4,786

5,697

6,601

5,465

O01C


5,097

7,085

6,883

6,181

6,803

7,121

8,962

8,242

7,349

10,696

5,982

O60B


4,090

4,205

3,947

4,049

4,078

4,264

5,371

5,885

4,931

7,129

3,382

R61B


3,168

6,617

7,073

9,231

7,107

4,529

4,071

4,219

5,147

4,022

3,241

U63B


7,915

9,719

10,055

18,617

9,598

11,273

9,528

5,310

6,823

6,463

5,463

Modellin

g O

ptions for

the P

ublic F

undin

g o

f H

ospital M

edic

ines in A

ustr

alia

NATSEM March 2010

71

Avera

ge tota

l pharm

acy c

ost per

separa

tion for

sele

cte

d D

RG

s b

y s

ecto

r and p

ublic h

ospital peer

gro

up, 2006-0

7

Public P

eer

Gro

ups

DR

GD

RG

Description

Pri

vate

Secto

r -

Estim

ate

d

Public

Secto

rA

1A

2B

1B

2C

1C

2D

1D

3G

E62C


52

112

140

116

75

90

79

208

78

136

79

E65B


71

192

250

228

140

127

132

133

101

278

118

E69C


35

58

68

63

33

47

44

46

43

82

50

F62B


59

151

181

349

118

113

124

121

92

138

108

F71B


18

63

76

126

42

46

47

49

41

94

51

G07B


57

96

94

131

80

93

107

117

63

116

0

G08B


26

56

63

30

44

74

47

49

38

79

64

G09Z


28

56

60

28

45

89

48

58

50

45

40

H08B


42

83

90

107

66

94

70

83

70

87

0

I03C


128

204

221

0158

222

147

113

00

0

I04Z


115

222

248

0153

241

159

122

00

0

I16Z


51

74

77

57

47

99

61

115

82

00

L63B


73

164

192

330

116

145

128

131

104

219

121

M02B


65

110

111

097

133

77

119

150

112

0

N04Z


77

129

143

203

81

120

96

131

98

129

53

N06Z


54

99

108

191

60

86

78

86

80

85

37

O01C


93

121

120

145

93

115

110

141

79

178

150

O60B


51

68

74

70

51

71

57

63

36

170

77

R61B


426

1,716

1,947

2,065

1,964

1,001

502

756

527

282

793

U63B


98

285

330

185

159

253

224

175

131

189

205

Modellin

g O

ptions for

the P

ublic F

undin

g o

f H

ospital M

edic

ines in A

ustr

alia

NATSEM March 2010

72

Avera

ge p

harm

acy c

ost as a

perc

enta

ge o

f avera

ge tota

l cost per

separa

tion for

sele

cte

d D

RG

s b

y s

ecto

r and p

ublic h

ospital peer

gro

up, 2006-0

7

Public P

eer G

roups

DR

GD

RG

Description

Private

Secto

r -

Estim

ate

d

Public

Secto

rA

1A

2B

1B

2C

1C

2D

1D

3G

E62C


2.0

3.6

4.3

3.4

2.9

3.4

3.0

4.1

2.2

2.7

2.8

E65B


2.3

5.0

6.0

4.6

4.3

4.1

4.0

3.8

2.6

4.1

3.0

E69C


2.6

3.1

3.6

3.0

2.0

2.5

2.4

2.7

3.0

2.9

3.2

F62B


1.7

3.6

4.1

2.7

2.9

3.3

2.9

3.1

2.3

2.8

2.0

F71B


1.1

3.2

3.6

2.7

2.0

2.4

2.6

3.2

2.8

3.1

3.5

G07B


1.9

1.9

1.8

2.2

1.7

2.1

1.9

2.8

1.7

1.8

*

G08B


1.2

1.6

1.6

1.8

1.3

2.1

1.4

1.5

1.4

2.1

1.8

G09Z


1.2

1.6

1.6

1.7

1.4

2.5

1.5

1.8

1.7

1.2

1.1

H08B


1.3

1.6

1.6

1.9

1.4

2.0

1.6

1.7

1.6

1.4

*

I03C


0.7

1.3

1.4

*0.9

1.5

1.0

0.7

**

*

I04Z


0.7

1.3

1.4

*0.9

1.4

0.9

0.6

**

*

I16Z


1.5

1.4

1.4

1.2

0.9

2.0

1.3

2.6

1.8

**

L63B


2.1

3.9

4.5

5.9

3.2

4.0

3.1

3.4

2.1

3.5

2.8

M02B


2.1

2.2

2.2

*2.0

2.8

1.7

2.4

3.2

1.8

*

N04Z


1.6

1.8

1.9

2.5

1.2

1.9

1.4

2.2

1.5

1.5

0.7

N06Z


1.2

1.8

2.0

2.4

1.2

1.7

1.5

1.8

1.4

1.3

0.7

O01C


1.8

1.7

1.7

2.3

1.4

1.6

1.2

1.7

1.1

1.7

2.5

O60B


1.2

1.6

1.9

1.7

1.3

1.7

1.1

1.1

0.7

2.4

2.3

R61B


13.4

25.9

27.5

22.4

27.6

22.1

12.3

17.9

10.2

7.0

24.5

U63B


1.2

2.9

3.3

1.0

1.7

2.2

2.4

3.3

1.9

2.9

3.8


NATSEM March 2010

73

Number of separations for selected DRGs by state, 2006-07

DRG DRG Description NSW QLD SA Victoria WA

E62C Respiratory Infectn/Inflamm-Cc 8,303 3,493 1,530 5,700 1,577

E65B Chrnic Obstrct Airway Dis-Cscc 8,289 3,860 1,825 5,001 1,699

E69C Bronchitis & Asthma A<50 -Cc 10,188 3,580 2,564 6,805 1,857

F62B Heart Failure & Shock - Ccc 8,525 3,512 1,874 5,962 1,764

F71B N-Mjr Arythm&Condctn Dsrd-Cscc 10,363 4,742 2,348 7,758 2,109

G07B Appendicectomy - Cscc 6,203 3,127 1,223 4,336 2,084

G08B Abdom & Oth Hrn Pr 0<A<60-Cscc 2,379 1,481 585 1,761 788

G09Z Inguinal&Femoral Hernia Pr A>0 5,981 3,210 1,382 4,565 1,773

H08B Lap Cholecystectmy-Cde-Cscc 6,780 3,334 1,568 4,877 1,805

I03C Hip Replacement - Cscc 2,446 1,121 630 1,731 885

I04Z Knee Replacemt & Reattach 4,354 1,867 888 2,513 1,405

I16Z Other Shoulder Procedures 1,738 1,029 513 1,263 1,012

L63B Kdny & Unry Trct Inf A>69/+Scc 6,216 2,480 1,236 4,032 1,218

M02B Transurethral Prostectomy-Cscc 2,035 801 728 2,223 537

N04Z Hysterectomy For Non-Malignanc 3,727 2,095 1,104 3,404 1,324

N06Z Fem Repr Sys Reconstructive Pr 2,070 1,233 596 1,806 758

O01C Caesarean Delivery -Cscc 14,463 9,287 2,819 10,450 3,838

O60B Vaginal Delivery -Cscc 36,204 19,733 6,807 27,698 9,620

R61B Lymphma &N-Acute Leukaemia-Ccc 2,792 969 706 2,533 644

U63B Major Affective Dsrd A<70-Cscc 1,728 2,589 1,790 1,863 1,579

Average length of stay for selected DRGs by state, 2006-07


E62C Respiratory Infectn/Inflamm-Cc 3.6 3.2 3.5 3.1 3.3

E65B Chrnic Obstrct Airway Dis-Cscc 5.0 4.6 4.7 4.1 4.8

E69C Bronchitis & Asthma A<50 -Cc 1.6 1.6 1.8 1.5 1.7

F62B Heart Failure & Shock - Ccc 5.7 4.7 5.5 4.4 4.8

F71B N-Mjr Arythm&Condctn Dsrd-Cscc 2.5 2.1 2.4 2.3 1.8

G07B Appendicectomy - Cscc 3.0 2.5 2.9 2.6 2.6

G08B Abdom & Oth Hrn Pr 0<A<60-Cscc 1.6 1.4 1.9 1.5 1.7

G09Z Inguinal&Femoral Hernia Pr A>0 1.4 1.3 1.5 1.5 1.3

H08B Lap Cholecystectmy-Cde-Cscc 1.9 1.7 1.9 2.0 2.0

I03C Hip Replacement - Cscc 7.1 7.2 6.9 7.1 6.0

I04Z Knee Replacemt & Reattach 7.2 7.2 6.4 8.0 7.7

I16Z Other Shoulder Procedures 1.6 1.5 1.7 1.7 1.4

L63B Kdny & Unry Trct Inf A>69/+Scc 5.5 5.0 5.6 4.3 5.4

M02B Transurethral Prostectomy-Cscc 3.2 2.8 3.0 2.8 2.6

N04Z Hysterectomy For Non-Malignanc 3.9 3.5 3.7 3.9 3.9

N06Z Fem Repr Sys Reconstructive Pr 2.9 2.3 2.9 2.6 2.8

O01C Caesarean Delivery -Cscc 4.3 3.7 4.6 4.6 4.3

O60B Vaginal Delivery -Cscc 3.0 2.6 2.9 2.9 2.9

R61B Lymphma &N-Acute Leukaemia-Ccc 5.0 4.9 4.8 4.1 4.8

U63B Major Affective Dsrd A<70-Cscc 10.7 13.3 11.3 11.9 13.8


NATSEM March 2010

74

Average total cost per separation for selected DRGs by state, 2006-07


E62C Respiratory Infectn/Inflamm-Cc 3,012 3,005 3,317 2,770 3,742

E65B Chrnic Obstrct Airway Dis-Cscc 3,613 4,052 3,694 3,522 4,981

E69C Bronchitis & Asthma A<50 -Cc 1,828 1,786 2,078 1,654 2,609

F62B Heart Failure & Shock - Ccc 4,148 4,331 4,329 3,649 5,377

F71B N-Mjr Arythm&Condctn Dsrd-Cscc 1,836 2,300 1,892 1,805 2,258

G07B Appendicectomy - Cscc 4,908 5,435 5,206 4,644 5,287

G08B Abdom & Oth Hrn Pr 0<A<60-Cscc 3,512 3,710 3,334 3,186 4,194

G09Z Inguinal&Femoral Hernia Pr A>0 3,315 3,827 3,408 3,322 3,885

H08B Lap Cholecystectmy-Cde-Cscc 4,711 5,566 5,022 4,883 5,986

I03C Hip Replacement - Cscc 14,428 16,968 16,635 15,593 14,552

I04Z Knee Replacemt & Reattach 16,438 17,948 17,813 17,430 17,572

I16Z Other Shoulder Procedures 4,585 5,170 4,786 5,271 6,156

L63B Kdny & Unry Trct Inf A>69/+Scc 4,020 4,383 4,623 3,548 5,509

M02B Transurethral Prostectomy-Cscc 4,626 5,103 5,232 4,776 5,407

N04Z Hysterectomy For Non-Malignanc 5,920 8,065 7,413 7,112 8,831

N06Z Fem Repr Sys Reconstructive Pr 4,739 5,652 6,323 5,454 6,748

O01C Caesarean Delivery -Cscc 6,593 6,738 6,775 7,139 8,596

O60B Vaginal Delivery -Cscc 4,804 3,547 3,449 3,705 4,809

R61B Lymphma &N-Acute Leukaemia-Ccc 6,653 7,596 5,569 6,163 7,115

U63B Major Affective Dsrd A<70-Cscc 2,962 12,023 9,050 9,248 14,599 :

Average total pharmacy cost per separation for selected DRGs by state, 2006-07


E62C Respiratory Infectn/Inflamm-Cc 108 123 114 106 110

E65B Chrnic Obstrct Airway Dis-Cscc 182 218 213 187 171

E69C Bronchitis & Asthma A<50 -Cc 50 74 72 47 57

F62B Heart Failure & Shock - Ccc 143 187 153 139 156

F71B N-Mjr Arythm&Condctn Dsrd-Cscc 58 84 59 60 60

G07B Appendicectomy - Cscc 106 94 78 86 113

G08B Abdom & Oth Hrn Pr 0<A<60-Cscc 61 50 49 55 66

G09Z Inguinal&Femoral Hernia Pr A>0 65 40 46 65 51

H08B Lap Cholecystectmy-Cde-Cscc 95 70 64 89 66

I03C Hip Replacement - Cscc 182 227 193 220 218

I04Z Knee Replacemt & Reattach 173 235 209 281 272

I16Z Other Shoulder Procedures 84 69 83 82 53

L63B Kdny & Unry Trct Inf A>69/+Scc 160 190 183 135 196

M02B Transurethral Prostectomy-Cscc 109 105 94 122 87

N04Z Hysterectomy For Non-Malignanc 149 99 87 138 146

N06Z Fem Repr Sys Reconstructive Pr 113 70 87 107 102

O01C Caesarean Delivery -Cscc 147 86 93 120 124

O60B Vaginal Delivery -Cscc 81 63 52 53 77

R61B Lymphma &N-Acute Leukaemia-Ccc 1,763 1,871 1,270 1,987 835

U63B Major Affective Dsrd A<70-Cscc 125 404 235 290 304


NATSEM March 2010

75

Average pharmacy cost as a percentage of average total cost per separation for selected DRGs by sector and

public hospital peer group, 2006-07


E62C Respiratory Infectn/Inflamm-Cc 3.6 4.1 3.4 3.8 2.9

E65B Chrnic Obstrct Airway Dis-Cscc 5.0 5.4 5.8 5.3 3.4

E69C Bronchitis & Asthma A<50 -Cc 2.7 4.1 3.5 2.8 2.2

F62B Heart Failure & Shock - Ccc 3.4 4.3 3.5 3.8 2.9

F71B N-Mjr Arythm&Condctn Dsrd-Cscc 3.2 3.7 3.1 3.3 2.7

G07B Appendicectomy - Cscc 2.2 1.7 1.5 1.9 2.1

G08B Abdom & Oth Hrn Pr 0<A<60-Cscc 1.7 1.3 1.5 1.7 1.6

G09Z Inguinal&Femoral Hernia Pr A>0 2.0 1.0 1.3 2.0 1.3

H08B Lap Cholecystectmy-Cde-Cscc 2.0 1.3 1.3 1.8 1.1

I03C Hip Replacement - Cscc 1.3 1.3 1.2 1.4 1.5

I04Z Knee Replacemt & Reattach 1.1 1.3 1.2 1.6 1.5

I16Z Other Shoulder Procedures 1.8 1.3 1.7 1.6 0.9

L63B Kdny & Unry Trct Inf A>69/+Scc 4.0 4.3 4.0 3.8 3.6

M02B Transurethral Prostectomy-Cscc 2.4 2.1 1.8 2.6 1.6

N04Z Hysterectomy For Non-Malignanc 2.5 1.2 1.2 1.9 1.7

N06Z Fem Repr Sys Reconstructive Pr 2.4 1.2 1.4 2.0 1.5

O01C Caesarean Delivery -Cscc 2.2 1.3 1.4 1.7 1.4

O60B Vaginal Delivery -Cscc 1.7 1.8 1.5 1.4 1.6

R61B Lymphma &N-Acute Leukaemia-Ccc 26.5 24.6 22.8 32.2 11.7

U63B Major Affective Dsrd A<70-Cscc 4.2 3.4 2.6 3.1 2.1

Share of separations by state separation by public hospital peer group, 2006-07

NSW

32%

SA

9%

VIC

31%

WA

10%

QLD

18%


NATSEM March 2010

76

Average length of stay by state, 2006-07

3.3

2.9

3.1

2.7

2.9

2.4

2.5

2.6

2.7

2.8

2.9

3

3.1

3.2

3.3

NSW QLD SA VIC WA

State

Avera

ge L

ength

of Sta

y (D

ays)

Average total cost per separation by state, 2006-07

3,924 3,763 3,6073,255

4,297

0

1,000

2,000

3,000

4,000

5,000

NSW QLD SA VIC WA

State

Avera

ge tota

l c

ost per separa

tion ($)


NATSEM March 2010

77

Average cost of pharmaceuticals per separation by state, 2006-07

174158

140

201181

0

50

100

150

200

250

NSW QLD SA VIC WA

State

Avera

ge tota

l pharm

acy cost per

separa

tion ($)

Average cost of pharmaceuticals per separation as a proportion of total cost by state, 2006-07

4.4 4.23.9

6.2

4.2

0

1

2

3

4

5

6

7

NSW QLD SA VIC WA

State

Avera

ge p

harm

acy c

ost as %

of to

tal

cost per separa

tion


NATSEM March 2010

78

modelling options for the public funding of hospital ... hospital medicines... · funding of...

Documents