Introduction health system that they aim to modify.



The national health systems in Australia and the United Kingdom (UK) share many similarities, not least is the challenge of escalating health expenditure.(1) Both nations continue to face significant increases in health spending relative to their gross domestic product (GDP); in Australia it increased from 7.6 to 9.4 per cent and in the UK from 6.6 to 8.4 per cent of GDP, between 1997 and 2009-10.(2) The increases have been in part to an aging population and advances in medical technologies.(3) To address the escalation in health expenditure, both countries have adopted national health reforms with the common strategy of cost containment. Despite the similarities between the Australian and UK health systems, their approaches to cost containment have differed.



This briefing report, which was commissioned by the Ministry of Health (MOH), aims to assess the relative efficacy of the cost containment methods between Australia and the UK, and to highlight the key lessons from both nations to better inform policy-makers. The scope of the report will be limited to cost containment measures relating to provider payments. The report comprises three sections: 1) understanding cost containment, 2) cost containment approaches in Australia and the UK, and 3) key lessons.



A non-systematic, narrative literature review was conducted using published literature. Searches were performed in Ovid MEDLINE and EMBASE using MeSH and keyword terms “health expenditure” OR “health spending” OR “cost containment”. Search results were limited to publications in the last 25 years, English-only publications and full-text articles. The reference lists of relevant articles were also inspected for additional publications. Based on the abstracts, only publications that were relevant to the objectives of the review were selected. Due to a limited number of published literature, relevant grey literature was also considered.


Understanding cost containment

Definition and framework

Cost containment has been defined as “the attainment of optimal operating efficiency within the constraints of providing a high standard of service to patients”.(4) In this report, it specifically relates to the use of public policy to influence economic factors i.e. macro-policy.


Cost containment for policy-makers is challenging given the complexity of the health system that they aim to modify.  To assist policy-makers, the ‘control knob’ framework developed by Roberts, Hsiao, Berman et al (5) recognises five main factors (known as ‘control knobs’) as important policy instruments in strengthening health systems. These factors or ‘control knobs’ comprise financing, payments, organisation, regulation and behaviours.(5) A range of cost containment measures, each with varying contributions from the individual ‘control knobs’, is available to policymakers.


Cost containment measures

Cost containment measures can be classified in a number of ways. Commonly, they are divided according to the two prevailing strategies – demand-side and supply-side cost sharing.(6) Demand-side cost sharing is where patients contribute to the healthcare costs through patient charges such as deductibles or co-payments. Supply-side cost sharing is where healthcare providers are incentivised to deliver cost-efficient and quality healthcare. Examples of supply-side cost sharing include activity based funding ABF and capitation.(7)  


Demand-side cost sharing has been shown to have limited efficacy and potential risks.(7) The precedent RAND experiment(8) and more recent research(9) have shown that modest patient charges can reduce demand for services with no adverse health effects on certain patients; however, in high-risk patients it has shown to reduce access to effective treatments, particularly among price-sensitive individuals. Further discussion of demand-side cost sharing methods is outside the scope of this study.


Supply-side cost sharing has been extensively used throughout developed countries, with most evidence from European nations.(1, 10) The majority of cost containment measures utilise ‘payments’ to healthcare providers as the key control knob. Provider payments have been shown to influence the behaviour of healthcare providers.(11) Depending on the provider payment model, it can provide financial incentives or disincentives to influence the provision of quality and cost-effective care by organisations (such as hospitals) and professionals (such as doctors). 


Quinn (12) described eight basic provider payment methods (i.e. per time period, beneficiary, recipient, episode, day, service, dollar of cost, or dollar of charges), which are analogous with the more common terms such as capitation, fee for service FFS, global payment, and cost reimbursement. Each provider payment method has its advantages and disadvantages. In general, countries use a combination of provider payment methods to suit their relevant health system context.


Cost containment approaches in Australia and the UK

Health systems

Both Australia and the UK have predominantly public health systems offering universal coverage, which are mainly government funded. In both nations, there are two streams of health services: 1) inpatient care (through hospitals) and 2) ambulatory care (through general practitioners and community health professionals). The coordination of payments for health services slightly differs between the two nations. In the UK, payments are through a centralised body (i.e. National Health Service), whereas in Australia, ambulatory care is paid through a central body (i.e. Medicare), while payments for inpatient care is decentralised to the individual states and territories.(13, 14)


Provider payment methods

In Australia, the major payment methods for public inpatient care are ABF and fixed budgets (i.e. a lump sum is paid for pre-defined services).(14, 15) Also known as casemix or diagnosis-related group funding, ABF refers to a fixed cost payment to hospitals to cover all services provided in the treatment of a patient with a given condition. In the provision of inpatient care, individual professionals are generally paid through salaries or wages.(14, 15) Ambulatory care is predominantly funded by FFS (i.e. payment for the number of services provided), although other payment methods such as incentive payments (i.e. payments for improved level of service), capitation (i.e. payments for the number of patients enrolled to receive care) and patient co-payments are also used to a limited degree, particularly within primary care.(14, 16)


In the UK, organisations providing inpatient care are paid by ABF and fixed budgets (known as block contracts), and health professionals are generally paid using salaries or wages.(13) Community ambulatory care is predominantly paid through capitation, whereas primary care additionally includes a hybrid method known as pay for performance.(13) Pay for performance are incentive payments tied to achieving quality and/or efficiency targets. The pay for performance scheme for general practice in the UK is known as the Quality and Outcomes Framework, which uses a points-based system to provide graduated payments upon achieving quality and efficiency targets.(17)  



Cross-national comparisons

Similar to many high-income countries, it is not surprising that both Australia and the UK have adopted ABF as the major payment method for public inpatient care. It was originally developed by Yale University, USA in 1983 to improve efficiency and transparency in care.(18) In Australia, Victoria was the first state to adopt ABF in 1993 after facing severe cost pressures.(18) Most, but not all, other states and territories have progressively adopted it since.(18) In comparison, the UK was much later in its adoption of ABF after transitioning only in 2004 from a system largely based on block grants.(19)


The transition from fixed budgets to ABF by both nations was sensible within the context of maturing health systems. As demand for health services exceeded the capacity of health systems, the focus of governments shifted from simply financing health services to demanding greater efficiency. The method of fixed budgets had no inherent drivers to promote productivity. Monrad Aas (20) described common practices of undertreating patients, limiting services and patient selection for the cheapest casemix to operate within budgets. Therefore, the introduction of ABF was logical as its strengths were to promote greater productivity and increased transparency in the volume of care delivered. Specific published evidence on the effects of ABF in Australia and the UK are lacking; however, aggregated evidence from developed countries shows that it leads to improved efficiency, transparency and reduced length of stay.(18)


While ABF has been successful, it has not been the panacea. A major downside is the lack of financial incentives to deliver quality care. Rather, it creates an incentive towards earlier hospital discharges.(18) In addition, ABF presents an administrative burden that incurs substantial costs, which could otherwise be spent on healthcare delivery.(20) Importantly, ABF is not an effective method of constraining healthcare expenditure. Often it used within fixed (hard) budgets to prevent ballooning expenditure and/or used in combination with other cost containment methods such as salaries and capitation. Subsequently, ABF has not completely replaced all payment methods for public inpatient care in Australia and the UK.


Fixed budgets and salaries continue as payment methods for public inpatient care. A review of developed countries found that global budgets (i.e. inclusive of all health expenditure including salaries paid by the government) are a popular cost constraint method, particularly where there are close government-provider ties such as Australia and the UK.(21) It is cited as having the greatest potential for cost containment, especially when prospectively set.(1) In Australia and the UK, global budgets and health system capacity constraints are regarded as the main cost containment measures. However, these are not long-term solutions and additional sources of funding and/or payment methods will be required. Interestingly, in Australia, to balance the mismatch between funding and costs, cost-sharing through patient co-payments is common practice.(7) However, as previously mentioned, this method is prone to equity issues.(7)


Australia and the UK have taken different approaches to provider payments for ambulatory care. The UK predominantly utilises capitation, which has the main feature of dissociating provider reimbursement from patient encounters. Subsequently, capitation is an effective method for cost containment. This payment method also improves access to care for communities; however, transfers the pooling of financial risk to a practice level.(22) Practices get paid a set amount regardless of the complexity or true costs of care for a patient. As a result, there can be increased health risks for patients if practices chose to reduce services or deferred certain care to a future period.(22) The introduction of the Quality and Outcome framework within primary health in 2004 is seen as a forward step to couple quality care with capitation payment methods.(17) This voluntary system that provides additional funding based upon meeting quality and efficiency targets has since had 99% adoption and been described as ‘world-leading’.(17)


In contrast, the predominant model for ambulatory care in Australia is FFS, which is based on provider reimbursements for patient encounters. This model is highly criticised by health experts for incentivising over-servicing by providers and being ill-suited to the practise of health prevention.(23) A Cochrane Review, limited by a small sample size, found evidence that the number of patient encounters was greater with FFS than capitation or alternative payment methods.(24) In Australia, the government has little control over fee levels; therefore, it follows that FFS is not an effective method for constraining costs. Despite these limitations, it has been difficult for the government to move away from the FFS model due to the political power of the independent medical profession providing ambulatory care.(25) Subsequently, the government has tended to rely on other payment methods, namely patient co-payments, to constrain costs within this sector.



Evidence on the long-term effects of many of the cost containment measures was lacking. In addition, it was challenging to discern the effects of one measure from another, as they were seldom introduced singly and/or independent of other factors, such as international trends. Reference to quantitative evidence was avoided, as this would likely vary between countries due to differences in institutional and historical contexts. Despite these limitations, the general lessons for Australia and the UK are provided below. 


Key lessons

Cost containment measures in Australia and the UK have demonstrated that healthcare providers’ behaviours are responsive to payment methods. The ideal provider payment method would be simple to administer, provide transparency, promote productivity and quality of care, contain costs and have a clear evidence base. Unfortunately, no current provider payment method has all these features. Instead, a combination of methods best optimised to balance the advantages and disadvantages is required. The choice of methods is partly dependent on the institutional, historical and political factors of a country.


For Australia, the combination of ABF within fixed budgets for public inpatient care appears to be an effective cost containment measure. However, it is recommended that quality management is set as a priority (e.g. through regulatory requirements) to safeguard the community from the downsides of ABF. The pursuance of FFS for ambulatory care is inconsistent with international trends and its inability to contain costs. Therefore, it is recommended that policy-makers revisit this decision with the intention of transitioning to other methods with cost containment benefit. If political (i.e. lobbyists) pressures prevent the required change, then introducing a pay for performance scheme linked to quality and efficiency outcomes similar to Quality and Outcome Framework in the UK would be recommended. In addition, the ongoing use of patient co-payments should be considered in view of the available evidence.


This report has only considered monetary incentives to contain costs; however, non-monetary methods such as sustainable healthcare education to providers and patients should be evaluated separately and considered by policy-makers.