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Fiscal Rules & Funding Leakage

The NHRA funding mechanism is defined by the interaction between the National Efficient Price (NEP), Weighted Activity Units (NWAU), and the 6.5% growth cap.

1. Effective Funding Share

While the nominal target (\(\alpha_{nom}\)) might be 45%, the effective share (\(\alpha_{eff}\)) often drifts lower due to efficiency gaps:

\[ \alpha_{eff} = \frac{\alpha_{nom}}{1 + \text{Efficiency Gap}} \]

Where:

  • Efficiency Gap: The divergence between hospital input costs and the indexation of the NEP.

2. The 6.5% Cap

The Commonwealth's contribution is capped at a 6.5% annual increase. This is modeled as:

\[ Payment_{Cth} = \min(Payment_{ABF}, Payment_{last} \times 1.065) \]

3. Boundary Shifting

To bypass caps, agents may shift activity to 'Block' funding streams. This is modeled as a choice between ABF and Block revenue based on relative shadow prices.

4. Evidence Grounding

  • NEP: IHACPA Annual Determinations (2011-2025).
  • Cap: NHRA Addendum 2020-25, Clause 42.