Victorian Auditor-General’s report 
23 May 2012 
Payments to Visiting Medical Officers in Rural and Regional Hospitals
Audit summary
Independently contracted, fee-for-service visiting medical officers (VMO) are a common feature of medical service delivery in rural and regional health services. Metropolitan and larger regional hospitals have shifted mainly to salaried medical staff. However, the reliance of rural health services on local general practitioners to provide hospital-based services, and the tighter labour market and lower service volumes in these areas, mean contracted VMOs remain the predominant model in rural health services. 
The use of VMOs requires health services to establish and manage effective contractual arrangements, and to make accurate and appropriate payments. Past Ministerial and Parliamentary inquiries, and audits by this office, have repeatedly identified problems with the adequacy of payment systems and monitoring, and with information gaps that prevent proper checking and accuracy. This continues to cast doubt on VMO billing and payment practices, for an expenditure that totalled $108 million in rural and regional health services in 2010–11. 
This audit examined the appropriateness and transparency of payments to VMOs by rural and regional health services including whether:
·	contractual arrangements for VMOs are adequate
·	health services use robust systems and processes to manage VMO arrangements. 
The audit included four rural or regional health services and the Department of Health (the department). 
Conclusions
Payments to VMOs by rural and regional health services are appropriate and transparent. Rural and regional health services have improved their systems and processes for paying VMOs. The department is also assisting by reviewing systems at each health service, and by implementing an IT payment system for small rural hospitals. 
Increasingly, health services are adopting better practice approaches. All of the audited health services take advantage of the automated checks offered by IT payment systems, and two of the four health services provide VMOs with service sheets, used to generate invoices, to make sure they are accurate. Three of the four health services had adequate audit processes in place. 
While there are still gains to be made, particularly by VMOs clearly documenting the services they provide, our testing of a statistically significant sample of VMO payments at each health service found no material errors or evidence of inappropriate VMO billing. 
Health services now need to focus on achieving the best possible outcomes through contracted VMO arrangements. Effective contract management requires regular reviewing of whether the contract is properly met, and whether that model continues to best meet the purchaser's needs. None of the audited health services were assessing VMO performance against their contracts, and only one was strategically considering their use of VMOs compared to other employment options. Given the essential nature of medical services, these contracts should be closely managed.
Of greatest concern, however, is the lack of clarity rural and regional health services have about the legal implications of their VMO arrangements. Aspects of VMO arrangements, for example where lump sum payments to VMOs are processed through payroll, and VMOs are given access to salary packaging, imply that they are employees of the health services rather than independent contractors. Recent case law in other sectors, and examples of VMOs in Victoria achieving settlements through claims against health services for employee benefits, demonstrate that this matter does pose a financial risk to health services. Health services need clear advice about the employment status of VMOs and the arrangements needed to meet the definition of that status. 
Findings
Contracting visiting medical officers
VMO contracts are consistent; they set out VMO and hospital obligations and payment arrangements, and employ the standard contract template, jointly developed by the Victorian Hospitals Industrial Association and the Australian Medical Association. However, testing a sample of contracts at four health services still found examples of unsigned, out-of-date contracts. 
Rural and regional health services need to work more proactively and cooperatively to address their medical staffing needs. Across the four sites there was only limited evidence of analysis of the composition of medical staff, and whether the use of VMOs, rather than formalised salaried arrangements, best met the health services' needs. Competition between health services to secure VMOs also deters information sharing on rates paid, limiting the ability of health services to assure they are getting the best value for public funds.  
Whether a VMO's employment status is more akin to an independent contractor or an employee depends on the arrangements in place. For example, factors such as lump sum payments for teaching and training paid through payroll, and salary packaging for VMOs at one audited health service, indicate that the VMO is more likely to be an employee. Health services have no clear legal guidance on either the boundaries between contractor and employee arrangements, or on the employment status of VMOs. This poses a risk to health services if VMOs seek access to employee entitlements, like leave or redundancy, and may raise other legal compliance risks—for example, tax contributions. 
Health services do not actively manage their VMO contracts to assure the quality of services purchased with public funds. None of the audited health services include performance monitoring in their VMO contracts, or complete annual performance reviews. Yet, Department of Health policy requires health services to implement annual performance reviews for all senior medical staff, including contracted VMOs, by October 2012. The policy, however, treats contracted VMOs as salaried staff, with instructions, for example, to address professional development. As independent contractors, performance assessment should occur specifically against the contract. While departmental policy should be revised to reflect this, it will still be important for the department to assess health service compliance in undertaking VMO performance assessments.  
Paying visiting medical officers
Payments made to VMOs by rural and regional public hospitals are accurate. Health services have adequately responded to recommendations from the multiple reviews at Parliamentary and departmental levels, and Victorian Auditor-General's Office audits, over the past twenty years. 
Three of the four audited health services have instituted routine audit processes for VMO payments, and no significant errors were found at any of the four sites on testing of payments. No evidence was found of inappropriate billing by VMOs. VMOs can, however, continue to improve the clarity and comprehensiveness of their documentation of the services provided, to better support payment processes. 
Work by the department has, and continues to contribute to these improvements. Its review of VMO payment systems in all rural and regional health services assisted health services to identify and focus on their individual areas for improvement. In addition, a recent project to support small rural health services to access IT payment systems will further enhance payment accuracy in the sector.
Recommendations
Number	Recommendation	Page	
	That health services:		
1.	assure contracts are signed and current 	14	
2.	proactively review and plan their need for visiting medical officer services	14	
3.	include performance expectations in visiting medical officer contracts and conduct annual reviews	14	
4.	obtain advice on visiting medical officer contractor arrangements.	14	
	That the Department of Health:		
5.	facilitate the development of guidance on contracted visiting medical officer arrangements, by coordinating relevant stakeholders	14	
6.	revise the Partnering for Performance policy to clarify performance assessment processes for contracted visiting medical officers and monitor health service compliance.	14	
7.	That health services complete routine audits of visiting medical officer payments.	20	
Submissions and comments received
In addition to progressive engagement during the course of the audit, in accordance with section 16(3) of the Audit Act 1994 a copy of this report was provided to the Department of Health and the four audited health services with a request for submissions or comments.
Agency views have been considered in reaching our audit conclusions and are represented to the extent relevant and warranted in preparing this report. Their full section 16(3) submissions and comments however, are included in Appendix B.