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Hospital funding tops $47 billion, largest health care cost

A version of this commentary appeared in the Vancouver Sun, Halifax Chronicle Herald and the Alberta Medical Association Bulletin

Revising the way hospitals are funded can create incentives for hospitals to reduce costs and reduce inefficient models of care. The provinces of British Columbia, Alberta and Ontario have each recently announced plans to tackle this problem by introducing what is referred to as activity-based funding (ABF), as a complement to current funding models.

Under this funding approach, the objective is to improve efficiencies and improve access to care, but these plans are drawing considerable criticism in some quarters.

At $47 billion, hospital spending comprises the single largest proportion of annual health care costs in Canada, making it a key target for provinces trying to contain health care cost increases.  Yet, with public pressure to reduce wait times and improve the quality of care, health care managers face the contradictory objectives of trying to reduce growth in hospital costs, increase access to high quality care and maintain the morale of hard working staff.

Other provinces are not yet moving in the direction of ABF, but should they?

There are important benefits to implementing activity-based funding for hospitals, but taxpayers and future patients will bear the risks if quality or financial viability of hospitals is threatened.  Proceeding cautiously, there are ways to maximize the potential benefits of funding reforms while limiting the down-side risks.

What it means to move to the ABF model

In Canada, hospitals have traditionally been funded from a “global budget”: a single sum of money to provide treatment and care of all patients within a given time period.  While providing budget certainty for governments, this approach has been criticized for its lack of transparency — promoting real and perceived politicking — and entrenching historical inequities between regions.

Global budgets also misplace financial incentives, rewarding those hospitals that keep costs below their budgets — regardless of the amount or quality of care provided — rather than those that address the needs of their population through patient-centred care.

But under ABF, each hospitalization would be funded by a pre-determined amount whose level is set according to the needs of the patients and the type of services provided by the hospital.

By allowing hospitals to retain the difference between the ABF payment and their costs of caring for a patient, financial incentives are created to improve the efficiency and amount of hospital care.  These efficiencies are gained by varying the intensity of nursing care and the amount of care is increased by shortening lengths of stay.

International experience with ABF has had mixed results

International experiences with ABF policies have been mixed. In health care systems most like our own, such as Norway, Sweden and Denmark, ABF policies have shortened lengths of stay, shifted care from hospitals to continuing care, and increased the number of patients treated.

If the objective of implementing ABF is to reduce wait times, shortening lengths of stays is a desirable outcome.  Plus ABF creates incentives for hospitals to take the initiative to discharge ‘bed blockers’ that cause emergency room waits and cancelled day surgeries.

However, ABF creates its own set of problems: incentives for hospitals to provide the most “profitable” types of care by treating the least ill, and to centralize services which may improve efficiency but reduces access for small and remote communities.

The biggest criticism of ABF is that while aiming for increased efficiency, hospitals may “skimp” on quality.  Careful monitoring of hospital quality has helped to avoid this.

Increasing the numbers of patients treated can also be expensive.  ABF, by increasing the numbers of patients treated, has resulted in an increase in overall spending on hospital and physician care costs.

ABF in Canada: Move forward with caution

A significant change in hospital funding policy in Canadian provinces is not without risks, both political and financial.  To date, ABF has been largely supported by Canadian physician groups, though they are not disinterested parties — physician payments are tied to the amount of care they provide.

Provincial governments are faced with balancing the health care needs of the people while keeping growth in costs in check.  ABF is one potential solution to this balancing act, but we can’t expect that this change in funding method will resolve financial pressures.

Evidence to date suggests that ABF may actually worsen spending pressures.  Since more care is not necessarily better for patients, creating incentives for additional hospital care using ABF should be approached with caution.

Jason Sutherland is Assistant Professor and Trafford Crump, post doctoral fellow at the Centre for Health Services and Policy Research, University of British Columbia.  Jason is also an expert advisor with EvidenceNetwork.ca.

February 2012

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