In one NSW public hospital, removing a gall bladder – a common treatment for gallstones – costs $3500. In another, it costs $7300.
The story is similar for hip replacements, which cost $15,000 in one hospital and more than $20,000 in another. Such big differences are not inevitable. States could easily reduce them, saving taxpayers nearly $1 billion a year.
A new Grattan Institute report, Controlling Costly Care, shows such gaps don’t come from treating patients with more severe problems. They can’t be explained by the cost of running different types of hospitals, or hospitals in different kinds of places – both the hospitals mentioned above are in Sydney.
Cost differences might not sound so bad. In public hospitals patients don’t have to pay. If it’s your gall bladder, you might think, ‘'Great, I’ll go to the expensive, five-star hospital.’‘ But hospitals aren’t like hotels. There’s no evidence that the expensive option is any better.
In fact, the hospital where costs are out of control might be one to avoid. If costs aren’t managed well, the quality of care might not be managed well either.
The problem isn’t just with gall bladder operations. It has a big impact throughout the hospital system and a big impact on the budget. If high-cost NSW hospitals performed at the average level in the state, it would save $250 million a year. That money could make a big difference if it was spent where it’s really needed.
High-cost hospitals have different problems. In some cases patients might be kept in hospital longer than necessary. Other hospitals might have high prices for supplies. Because hospitals vary, there isn’t one simple fix. But we can make managing costs a higher priority, and make the task easier for hospitals.
Like all states, NSW is adopting activity-based funding, whereby the state sets a price for each kind of hospital treatment. This price is then adjusted for different kinds of care, and for patients with different kinds of health problems.
So far, so good. But the price is currently set at roughly the average cost of care. Costs at extremely expensive hospitals are simply included in the average, even if these costs are unjustified. To tackle cost variation, the price should exclude these unjustified costs. Only when prices reflect what care should cost – not what it does cost – will expensive hospitals have a good reason to rein in spending.
Yet this reform won’t work on its own. Hospitals, managers and doctors all need detailed information about how their costs compare with other hospitals. Otherwise, they won’t know where they’re doing well and where they need to improve. NSW has already developed a system to give hospitals better comparative information on their performance. Now the system needs to go further and to highlight where avoidable costs are high.
The government should get serious about dealing with hospitals that aren’t managing finances well. In 2011-12, all but one hospital network spent more than it earned and got bailed out by the government. If hospital networks aren’t managing their costs well, the government should help them to improve. If they don’t improve, the hospital network board should be held to account.
High costs have real consequences. When more money is spent on fewer services, the result is longer waiting times, more people missing out on care, or hospitals being forced to cut corners. Getting costs under control doesn’t require reinventing the hospital system, just sensible improvements to systems that are already there.
Improving efficiency should be a priority, well ahead of more drastic ways to deal with growing healthcare costs, such as cutting services, or charging patients more.
A more efficient hospital system will mean more and better care for patients who need it.