In reply: Gough has missed the central argument in my article,1 which is not against activity-based funding (ABF) per se, but against the federal government's use of it.
ABF facilitates hospital technical efficiency (cost per patient treated), as the Victorian public hospital experience will attest. However, it is arguably counterproductive to achieving allocative efficiency (optimal distribution of health services for greatest community benefit). It incentivises more hospital care.
ABF is a tool for purchasers of hospital services and, when used by private insurers, as Gough notes, it acts as a framework for negotiating prices that take into account different hospital cost structures and market positions. It is not formula funding.
I suggest the federal government fund state governments on a risk-adjusted population formula, facilitating allocative efficiency (with a focus on health outcomes) and reducing its own financial risk and administrative cost.
This would allow the states more service flexibility and would facilitate innovation in systems of care to deal with growing demand. States can still use ABF as a tool to drive technical efficiency when purchasing public hospital services.