Key messages

  • Casemix funding promotes the policy objectives of equity, efficiency and consumer choice.
  • Casemix funding bundles patient care episodes into clinically coherent groups.
  • Casemix funding allocates funds according to type and number of patients treated.

Casemix funding promotes Victoria’s health funding policy objectives of equity, technical and allocative efficiency, and consumer choice. It refers to the use of classifications that bundle patient care episodes into clinically coherent groups that require similar resources.

Casemix is the basis for the introduction of Activity Based Funding (ABF) as a nationally consistent funding model.

In Victoria, the casemix model is used to monitor, manage and administer the funding of healthcare provided by public hospitals.

What is casemix funding?

Casemix funding is a method of allocating funds based on the activities hospitals perform, and on the types and number of patients treated. Funding is allocated on the basis of relative cost of patients treated and to reward improved performance and efficiency.

There are three basic requirements to the casemix model:

  • classifying patients treated
  • counting the number of patients treated
  • costing of patients treated.


Patients treated are classified into Diagnosis Related Groups (DRGs). DRGs are a method of classifying patients who have similar conditions and require similar levels of resource use.


A condition of funding is that Victorian public hospitals collect and report records for every inpatient treated. Counting is required for administrative health data collections maintained by the Department of Health & Human Services across the range of healthcare settings.


Victorian public hospitals are required to report costs for all state-funded activity, and are expected to maintain activity and costing systems as part of good hospital management practice. Costing is required for hospital cost data collections maintained by the department for both admitted and non-admitted activity that span a range of healthcare settings.

Basic cost weights of casemix funding

Cost weights reflect the costs incurred by hospitals in treating patients. Each DRG has a single cost weight that is applied to each patient episode grouped to the DRG. Every eligible patient episode is funded at a flat rate based upon the DRG cost weight and price paid per cost weight.

Hospital funding also depends on the number of patients treated but up to an agreed funding limit.


One cost weight is used to fund each and every patient in a DRG. But not every patient in a DRG needs exactly the same level of care.

A flat rate of funding does not adequately track cost variation with time and across levels of severity within a DRG:

  • Some groups of patients require additional care, even within the same DRG.
  • Some hospitals treat more complex patients because of their role.

This approach creates financial risk to providers and purchasers of healthcare.

Changes to casemix funding

Victoria has made significant refinements to the casemix model to better promote funding policy objectives, moderate financial risk, address funding inequities, and to more closely align funding with changes in clinical practice and the adoption of new technologies.

WIES (Weighted Inlier Equivalent Separation)

The basic casemix model has been refined to include different cost weights for funding different types of stay, thereby moderating financial risk. The different types of stay are:

  • extended hospital stay (high outlier cost weight)
  • typical hospital stay (inlier cost weight)
  • short hospital stay (low outlier cost weight)
  • same-day and overnight stay (same-day and overnight cost weights).

WIES represents a cost weighted (W, weight) separation, where the DRG cost weight is adjusted for time spent in hospital (IES, inlier equivalent separation).

Victoria currently uses six different cost weights to fund a patient in a DRG:

  • multi-day inlier cost weight
  • multi-day high outlier cost weight
  • multi-day high outlier cost weight for hospital-in-the-home days
  • multi-day low outlier cost weight
  • same-day cost weight
  • overnight cost weight.

A patient’s DRG and stay type determines which cost weights are used for funding. Cost weights are based upon the recurrent costs of treating patients as reported to the department.

DRG boundary policy

Victorian DRG boundary policy closely aligns funding with the actual costs of treating patients.

A boundary policy categorises a patient’s length of stay (LOS) for each DRG as:

  • inlier (LOS equal to or within the DRG stay boundaries)
  • low outlier (LOS less than the DRG low stay boundary)
  • high outlier (LOS more than the DRG high stay boundary).

Co-payment WIES

Victoria includes additional cost weight co-payments to moderate financial risk for hospitals that provide special types of care. These co-payments are in addition to base WIES allocation determined by the patient’s DRG and length of stay.