Mental health "The architect of a new system of activity-based hospital funding to be introduced in NSW this year says it can't be applied to mental health care". Photo: Tamara Voninski

MENTAL health patients would be seriously disadvantaged under hospital funding arrangements to be introduced in July, health authorities have warned.

The architect of a system of hospital funding to be introduced in NSW this year says it can't be applied to mental health care.

Leading psychiatrists have also raised serious concerns the new system of ''casemix'' funding will dismantle mental health services and encourage patients to use hospital emergency departments instead of community care.

NSW hospitals receive block grants each year under the existing funding system. Under the new casemix system to be introduced in July, hospitals will be funded on the basis of a fixed cost for each medical procedure, such as hip replacement or a birth.

While the cost of a prosthesis can be easily predicted, the cost of treating a mental health patient is much harder to forecast because the length of hospital stay can vary from days to months.

Professor Kathy Eagar, the executive director of the national casemix and classification centre at the University of Wollongong, is in charge of developing the clinical codes for the new casemix classification system.

In a submission to the Independent Hospital Pricing Authority on the national pricing framework, she says the casemix classification system must allocate a fixed cost to be fair and transparent. However she says mental health costs cannot be predicted.

Professor Eagar, who is developing clinical coding to be introduced in 2013, says the mental health category is the ''worst performer'' of the whole classification system.

She recommends mental health be recognised as a distinct form of care to separate it from the care given to other patients treated in the same hospital ward.

Professor Alan Rosen, a psychiatrist from the universities of Sydney and Wollongong, said mental health should continue to be funded under block hospital grants and not on a casemix basis, until it was fixed, because the existing system would fragment care and make it hospital-centred..

Tony Sherbon, the chief executive of the Independent Hospital Pricing Authority, said he recognised the existing system was inadequate when applied to mental health care. But he said the ''sky won't fall in'' when it is introduced, despite calls from psychiatrists for mental health to be exempted for a year until the problems with casemix can be fixed.

''The casemix [funding arrangement] for 2012-13 will involve mental health inpatient emergency department attendances and outpatient services, which is an enhanced version of what has been operating in Victoria and South Australia,'' he said.

''It needs significant improvement and we will need a new system on July 1, 2013 which will take into account the issues that Professor Rosen has been raising.''

Professor Rosen said he was concerned that casemix may not be updated once introduced.

''They shouldn't even consider starting it that way,'' he said. ''It will encourage people to come into the emergency department to get short-term crisis work because that will be squarely funded by activity-based funding.''