Cost Assessment for New Public Hospital Services

Australians value our public hospitals highly but, members of the Australian Institute of Quantity Surveyors will be surprised to know that, the valuation of the buildings and medical equipment, required to support hospitals, is poor.

Over many years national reports on public hospitals have lamented the quality of data on hospital assets (SCRGSP 2017; SCRGSP 2018, 2007, 2008, 2009) and the Productivity Commission, when directed to value public hospital capital, acknowledged that “nobody knows exactly how much capital is currently used by public hospitals” (Productivity Commission 2009) p. 303).

Consequently the value of public hospital capital assets required for patient diagnosis and treatment are estimated from asset depreciation plus the user cost of capital (Productivity Commission 2009; SCRGSP 2019). However, public hospitals in Australia are now costed and funded for the specific resources required for individual patient care. Impending clinical improvements including Personalised Medicine, Genomics and Precision Medicine require precision costing for public hospital capital costs.

This article outlines trends in capital funding for public hospitals in Australia, the key factors influencing investment and building and the opportunities and challenges facing public hospital infrastructure posed by technological change. It concludes with identification of the role Quantity Surveyors can take in developing the tools for activity-based capital funding for public hospitals.


Australians value access high quality public hospital services when they need them. Consequently between $2 billion and $2.3 billion has been invested annually in public hospital projects over the last three years, but this is down from peaks of $4.3 to $5.3 billion annually between 2010-11 and 2012-13.

Public hospitals are focussed on activity. Once beds were the measure of hospital size and technical capacity. But now beds are only a portion of hospital activity with 6.6 million patients of whom 53 % do not have an overnight stay (AIHW. 2018)page 15), 3 million procedures in outpatient clinics, 16 million allied health treatments and 12 million outpatient medical consultations. Hospital-in-the-home meant 1500 fewer beds were required in 2016-17 (AIHW 2018)Table 5.49) Across the nation, the number of patients increased by 4% per year each year (since 2012-13), although fewer than 15% of public hospitals have had building projects over the past three financial years (State and Territory Budget Papers 2015-16, 2016-17, 2017-18).

However, waiting lists for surgical care are increasing annually with 3% of Australians waiting for surgical treatments, some for over a year (Table 4.5 (AIHW 2017; Australian Medical Association 2019). Access to emergency departments is deteriorating with some waiting times defined as clinically dangerous (Whitson 2018; Australian Medical Association 2019). Emergency department waiting times are constrained by access to hospital beds (Australasian College for Emergency Medicine 2018; Australian Medical Association 2019). Mounting evidence suggests that current clinical requirements for patients are not being met by traditional approaches to capital funding (Kerr 2014; Kerr 2018).

Funding for hospitals

Contemporary public hospitals in Australia are focussed on the quality of care delivered at an efficient cost. Funding for most hospital costs is per patient based on their diagnosis group (DRG) and is called activity-based funding (ABF). Since ABF funding was introduced in 2012-13, the annual cost for operating public hospitals has only increased by an average of 1% per year (Biggs 2018).

However, capital funding for public hospitals is prioritised by state and territory governments (called ‘states’ in this paper) based on health service, budgetary and political priorities (Kerr 2018). At the beginning of this century, the value of capital required to support clinical care was estimated to be 8% of recurrent costs (Deeble 2002). By 2016-17, the Productivity Commission depreciation-based estimate for the capital cost per patient had risen to 19% of recurrent costs for public hospitals (SCRGSP 2018). However, state budget papers show over the three years (2015-16, 2016-17 and 2017-18) across all states, investment in hospitals only averaged 44%, 40% and 36% of the cost of capital consumed in providing care (Table 1).

Clinical change and technology pose risks and opportunities

The progression from funding hospitals per bed day to funding per patient by Diagnosis Related Group has changed the focus of clinical service costing. The capacity to cost the treatment of similar patients across all hospitals in Australia has increased transparency and efficiency, reducing waste and minimising risk. The success of this micro-economic costing approach has not been extended to capital valuation, yet.

Clinical change has resulted in improvements for patients and hospitals with implications for hospital buildings. Hospital-in-the-home, telemedicine, robotics, medical imaging advances are examples of improved clinical effectiveness resulting in efficiency dividends.

Further changes in clinical care are expected from new types of medicine and new diagnosis and delivery systems (Williamson 2018) from point-of-care testing for genome sequencing, gene editing, microbiomics and epigenetics to hybrid robotic surgery and imaging (Williamson 2018; CSIRO 2018). Platforms in hospitals will be required for information and clinical communications systems to supporting electronic medical records, Artificial Intelligence as a clinical aid (Sampler 2018; Dewey 2018), automatic dispensing, Big Data (Productivity Commission 2017a; CSIRO 2018), real-time patient monitoring equipment and apps (Productivity Commission 2017b; Phillips 2018; CSIRO 2018), and patient monitoring systems.

Traditionally, adoption of new technologies has been seen as a cost. By analysing costs in terms of the patient and treatment efficiency, cost-benefit relationships can be established to determine cost-effectiveness. Critical to this process is effective and accurate capital cost estimation.

Valuing capital for patient care: The tools required for future valuation

European research has provided some frameworks to enhance capital cost estimation in hospitals to the patient and diagnosis level. The Dutch ‘Layers Approach’ to hospital building, costs hospital functional areas in four areas - hotel, ‘hot floor ’, office and industry. They use a property approach to determine the lifespan, technical specificity, flexibility and ultimate marketability or disposal value of hospital components (Netherlands Board for Healthcare Institutions 2007a). Based on depreciation of assets, Germany subsequently developed a diagnosis-based estimation for capital costs linked to facilities management systems (Vogl 2014; Lennarts 2009). The adoption of diagnosis-based capital funding in Germany improved the cost effectiveness of hospitals. Detailed hospital information on capital costs have enabled thorough evaluations of individual hospitals, technological progress and regional efficiency (Karmann 2017).

Green costing for sustainability is becoming more significant in the UK, Europe, Australia and America to manage to costs associated with climate change encouraging hospitals to reduce their carbon footprints, water and energy consumption and optimise waste management (OECD Health Ministerial Meeting 2017; WHO Regional Office for Europe 2017; Watts N 2017; Zhang 2018; CSIRO 2018; Hanna 2018; UK National Audit Office 2015). Australian healthcare is estimated to generate 7% of national carbon emission with 34% of that from public hospitals. Expenditure on health buildings has been estimated to generate an additional 8% of total health emissions (Malik 2018).

These dynamics suggest faster rates of redundancy and replacement of hospital assets with greater emphasis on life-cycle costing.


In Australia, the pursuit of hospital efficiency at the patient level has overlooked the value of effective capital costing. The traditional prioritised, project-based system of funding hospital projects is not delivering clinically-appropriate access to hospital beds, emergency departments or surgical care for all Australian patients. More patients require care each year but only a small percentage of hospitals are funded through existing processes. Emerging technologies are changing hospitals and the types of services they offer. Technological innovations in healthcare require effective capital valuations to determine both the costs and the benefits accurately. Costing capital to the patient level permits appropriate and sustainable capital funding for the expanding range of clinical services in hospitals. Evidence suggests that public hospitals require larger and more frequent investment to meet clinical and technological developments. Maintaining Australian standards for quality hospital care will require the development of accurate valuations for the capital required to deliver effective patient care, and a more patient-focussed funding mechanism. If the system of capital allocation is linked to the patient diagnosis through activity-based funding, and the Commonwealth cost-shares, a significant number of hospitals will require professional QS services to improve facilities and assets.

Hospitals are changing from measuring the number of beds to measuring the resources required by patient diagnosis. Rather than hospitals being defined by the number of beds, they will be defined by the number of inpatients, outpatients and day-patients seen. Quantity Surveyors can expect to be instrumental in delivering detailed costings for hospital services as they adapt to frequent clinical and technological change.

Assessments of capital costs in a technologically dynamic time would benefit from data collection specific to the different costs for functional areas of a hospital (operating theatres, ICU, procedure rooms, delivery suites, wards, day-only areas, hotel spaces, outpatient functional areas, imaging etc.) expanding on the Dutch Layers Approach (Netherlands Board for Healthcare Institutions 2007b) and the German Facilities Management costings (Lennarts 2010). Appropriate costing for buildings and systems responding to energy, water and waste costs increases and the impacts of climate change will also be valuable (UK National Audit Office 2015).

Quantity Surveyors will be instrumental in bringing the next generation of clinical care to Australians through progressively improved hospitals across Australia. Developing detailed costing data that can be linked to the various elements of patient care is the key. The challenge for Quantity Surveyors is to develop databanks of sufficient integrity to support the inclusion of capital costs in activity-based funding.

This article was first published in the July edition of The Building Economist the flagship publication of the Australian Institute of Quantity Surveyors

Rhonda Kerr is Principal Health Planner at Hames Sharley. The research outlined in this article has been undertaken over the past four years as part of her thesis for her PhD in Health Economics at Curtin University in Western Australia

Did you enjoy this article?