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Cost-based funding This is also called historical funding or, more recently, negotiated budgets.

Cost-based funding
This is also called historical funding or, more recently, negotiated budgets. Under historical funding, the “provider” (i.e., the hospital or facility that provides the healthcare service) receives their funding according to what they have spent in the previous year, with a minor adjustment. This system was used in Australian states prior to the introduction of casemix funding (discussed below). A negotiated budget is a formal contractual agreement between the hospital and the state health authority; it includes goals and targets for the number and type of patients to be treated (Duckett, 2022). The cost-based funding model has several disadvantages, some of which include:

there is little or no incentive for the hospital to be more efficient and to spend less,
if a similar number of resources is given to the same hospitals each year, the areas of greatest need or of population growth, such as sectors with poor health services or newly developing housing estates, may not receive adequate funds; and
there is no incentive for hospitals to deliver their services more effectively, i.e., they are given the same amount of money regardless of whether their healthcare outcomes are good or poor. This means, for instance, that whilst there may be compelling clinical reasons for improving the quality of care, there is no real financial incentive to improve outcomes such as reducing morbidity (disease) related factors, e.g., post-operative complications or hospital-acquired infections which, in turn, tend to increase the patient’s length of stay and cost of treatment.