Health Care Management Science 3 (2000) 77–88 77 Capitation funding in Australia: Imperatives and impediments Stuart Peacock and Leonie Segal Health Economics Unit, Centre for Health Program Evaluation, Monash University, PO Box 477, West Heidelberg, Victoria 3081, Australia E-mail: stuart.peacock@buseco.monash.edu.au Health service funding mechanisms are pivotal in the pursuit of health system objectives, as they provide strong financial incentives for actors in the system to achieve policy goals. Underpinning funding mechanisms is a set of key economic principles, or objectives, thatshould guide their design and use: efficiency, equity, and accountability. The Australian health system has historically performed relatively poorly in relation to these objectives, with evidence of inefficiencies, inequities, and poor accountability in many areas of health services. The primary cause of these shortcomings may lie in the complex set of funding and delivery arrangements at the S and Federal levels of government. Potentially significant improvements in the performance of the health system would be available from the integration of the funding and delivery of services within a single tier of government, coupled with the development of a national weighted capitation approach to funding. To develop a national capitation funding model a number of unique factors require consideration, including the current fragmentation of services, the role of the private sector, the needs of indigenous populations, and the effects of rurality. The data available to develop a capitation model is of a level of detail and quality not readily found elsewhere. If policy statements promoting efficiency, accountability, and particularly equity are to be actively pursued, a national capitation model based on robust methods should become a cornerstone of Australian health system reform. 1. Introduction Health system reform is the subject of ongoing debate worldwide. In a climate of limited health budgets, ageing populations and medical technology providing expanding options for health care, there is a pervasive concern with how to gethe bestoutof health system resources. The challenge is to define funding and delivery arrangements that will achieve health system objectives, through the use of appropriate incentives for key actors in the health system: individuals (as patients and citizens), funders, providers, health bureaucrats, and insurers. In broad terms, the ob- jectives ofthe health system are to promote health and wellbeing through the provision and consumption of health services.Central considerations within this are efficiency and equity.Thatis, concern is not justwith the overall health of the community, but also with the underlying dis- tribution of health. The focus of this paper is with funding models in health services. Specifically, we consider the arguments for fund- ing health services on the basis of a weighted – orisk adjusted – capitation formula, and methodological issues in developing formulae in the Australian context. Further, recognising that the success of capitation based funding depends not just on the integrity of the methods used, but also its context in the health system, other requirements are also explored. Australia does not fund the bulk of services through any sort of capitation formula (an exception being nursing homes), thus before considering issues in the desir- able capitation model, the question of whether a capitation formula is a good idea for Australia is addressed. The remainder of this section provides a brief introduc- tion to Australia’s health funding and delivery arrangements to provide a context for the ensuing discussion. Australia’s funding arrangements are then reviewed relative to the ec nomic principles and objectives of funding systems. This leads into a discussion of health system reform options, an consideration of whether capitation represents a logical an swer to the observed problems. Finally, the key challenges in developing a suitable weighted capitation formula for Australia are explored. 1.1. Overview of health funding arrangements in Australia In 1996–1997 the total expenditure on health services in Australia was US$ 27,219 m (A$ 1 = US$ 0.63), of which 94% is identified as recurrent expenditure [4]. This represents 8.5% of GDP, which is close to the average for all OECD countries [25]. Total health service expenditure per person was US$ 1,477 in 1996–1997 a growth of 4.3% pa since 1992–1993. Hospitals accounted for 37% of ex- penditure, medical services 20%, pharmaceuticals 11.6%, dental and other health professional 9.2%,nursing homes 7.5%, and community and public health 5%. Funding of health services is split between the Com- monwealth, State and municipal governments, and the pri vate sector. Government has financed between 62% and 73% of recurrent health expenditure since 1960–1961 [5], in recent years stabilising at around 68.5%. The Common- wealth funding of health is underpinned by the “Medicare levy”, a hypothecated income tax introduced in 1984. Un- der Medicare the Commonwealth has a responsibility to en sure universal access to public hospitals and medical care Of the one third non-government share, private health in- surance covered 35%, direct patient contributions 51% an workers compensation and transport accident insurers 14 Services are provided by both public and private providers  Baltzer Science Publishers BV