When the Kennett government introduced case mix funding to Victorian hospitals in 1993 there was a 17% improvement in productivity in eighteen months. It looked impressive and the government proclaimed its management superiority over its predecessors. Much of it however was achieved with smoke and mirrors.

In a celebrated circular entitled “Are you dead yet?” the then Secretary of the Human Services Department Dr John Paterson challenged hospital administrators to abandon their public sector ways and start acting as though they were running private corporations. There would be no more bailing out of the inefficient. They would stand or fall on their ability to trade at a profit.

Some of the improved productivity was from cutting costs. Hospitals outsourced hotel functions like linen supply, catering and cleaning and utilised every available bed for revenue generation. Why would you leave a bed vacant for a possible emergency admission when you could fill it with a patient who generated a payment? This led to reports of dirty wards and patients being kept in emergency departments on gurneys because no bed was available, and ultimately the removal of the Health Minister Marie Tehan.

The majority of the productivity increase was caused by additional activity. That year hospitals were able to access additional funds from a Commonwealth funded Medicare Additional Throughput Pool. Victoria got in early and gained a disproportionate share in the first year. The next year the other states caught up and the additional money disappeared. Along with it went much of the increased productivity.

But part of the improvement wasn’t new activity, it was just differently coded. In the one year the number of normal newborns admitted went from 13% to 53% and the number of emergency admissions that were discharged within four hours went through the roof. For some reason, suddenly half the children born from non-complicated deliveries were so ill that they had to be admitted to hospital and large numbers of people attending emergency departments were so ill that they had to be admitted, but not so ill that they had to stay in hospital for any length of time. The reason was that this generated a higher case payment.

Paterson railed against doctors and administrators who rorted the system. But, in fact, they were only doing what he had urged them to do. Hospital managers were optimising their revenue within the rules as they were. Every subsequent year’s funding guidelines for hospitals has seen a rewriting of the rules to plug the latest hole spotted by enterprising operators.

When the former Commonwealth Health Minister sought to introduce the Medicare Safety Net, he was advised that it would inevitably lead to increased costs, particularly for obstetrics. Clinicians are also businessmen. Why wouldn’t they restructure their bills so that items previously without charge were billed when there would be no additional charge to their patients.

The recent Victorian Ombudsman’s investigation found that a number of Victorian Hospitals had fabricated returns to the Department of Human Services in order to maximise performance incentive payments. But the context needs to be well understood. Hospital administrators who push the purchasing system to its limits have little to gain personally. They are merely trying to keep their hospitals afloat in circumstances where the money available to do so is diminishing in real terms.

The underlying strategy of the Howard Government’s health policy was to screw down the public system while subsidising private medicine. This saw the Commonwealth contribution to public health services decrease by 20% over the life of the last Australian Health Care Agreement. State governments increased their share but struggled to keep up with increasing demands and health inflation running at greater than 8%. The funds available for case payments in hospitals are, in their simplest form, the total pool of funds available divided by the amount of activity undertaken standardised for complexity. Limit the pool or increase the activity and you reduce the funds available for each payment.

In the 2009 Budget, the Rudd Government has moved to limit and control the application of the Medicare Safety Net, particularly when applied to obstetrics. There has been an implied criticism of doctors who have optimised their income to which both the outgoing and incoming AMA Presidents have taken exception. But again their actions are entirely rational given the pricing signals given by an ill thought out Safety Net policy.

Bad policy promotes distorting behaviours. If you provide inadequate funds to sustain the operations of public hospitals, responsible and well-intended administrators will stretch and bend the rules to keep essential public services viable. If you maintain an inefficient fee-for-service medical system with perverse rewards which encourage resource consumption, health professionals will respond accordingly. They are doing what you told them to do!

We would do well to focus on the system that generates the gaming rather than upon the individuals who play.