Hospital Funding Policy and Activity-Based Funding

The Provinces of British Columbia, Alberta and Ontario have each recently announced plans regarding changes in the way hospitals their provincial hospitals will be funded. The hospital funding changes represent a departure from the status quo and have the potential to significantly alter the landscape of hospital funding in Canada.

Introduction

At $45 billion annually, hospital spending comprises the largest proportion of health care spending dollars, and is consequently a key target for provinces trying to reduce their health care costs. At the same time, provinces face pressures to reduce surgical wait times, and maintain high quality, safe care for the public. Thus, policymakers are left with the seemingly paradoxical objective of trying to reduce hospital costs to meet budget targets while increasing surgical volume to reduce wait times.(1)

In Canada, hospitals have traditionally been funded with a ‘lump sum’ to provide treatment and care of all patients within a given period. As a hospital funding policy, this approach is known as ‘global budgeting,’ and while not the sole technique for funding hospitals, this is the norm in Canadian provinces.(2) While global budgets provide flexibility to hospital managers to allocate funds to respond to changes in demand or patient characteristics, this policy largely bases hospital payments on historical payments, politicking, and perceived need of the local population; because of this, global budgets are criticized for their lack of transparency, perpetuating cultural spending norms and their impediments to innovation.

To address these limitations, the provinces are interested in exploring different mechanisms to fund hospitals. One policy that has garnered significant interest is activity-based funding (ABF). ABF remunerates hospitals based on two factors: 1) the type of services they provide to their patients; and 2) the volume of services.

The principle of ABF provides that each patient’s hospitalization is funded by a pre-determined amount whose level is set according to the characteristics of the patients and the type of services provided by the hospital. For example, a hospital receives more funding for a kidney transplant than it does for a normal delivery of a baby. This policy leverages hospitals economic interests by allowing hospitals to retain the difference between the funding level and actual cost. In theory, cost efficiencies are sought by shortening the length of stay and changing the mix of labor and non-labor inputs to hospital care. The biggest criticism of ABF is that by minimizing cost, hospital quality may suffer by ‘skimping’ on costs or quality.

The Evidence

Whether increasing the amount of hospital care is desirable, or can even be realized in Canada, remains to be determined. However, there is breadth of international experience with ABF upon which we can draw insights. Originating from the United States (US), ABF was found to be associated with shorter length of stays and greater use of post-acute care.(3-5) More closely mirroring Canadian health care, many European countries and Australia have also adopted ABF and have also reported shorter lengths of stay and shifting of activity to post acute care.(6-14) However, some literature notes ABF is correlated to increases in the number of patients treated and increasing spending. (6, 11, 14-20)

We turn to these international experiences to anticipate potential outcomes of ABF in Canada. Three important aspects of hospital care that are relevant to Canadians include volume of hospital care, access to care, and quality.

With regard to volume of hospital care, Australia, Norway, and Sweden have all reported an increase in patients treated after implementing ABF policies, (8, 11, 14). Greater patient throughput results in the generally desireable effect of reducing wait times for surgical procedures. Increase in volume, however, is not without its drawbacks; research from some countries suggests that ABF may lead to an over-provision of hospital care, particularly for care that tends to be the most profitable. (11, 21-24) Under the US Medicare program, for example, the treatment of heart bypass is more profitable than the treatment of pneumonia; consequently, MedPAC (the agency responsible for paying Medicare) has observed an increase in treatment capacity of the former relative to the latter. (25)

While access may be improved by shortening waiting times, the US has observed reduced access for more costly patients when hospitals are paid for the ‘average’ patient (25), and those with chronic illness or disability, because they are more expensive to treat, may find reduced access to care. (26) Moreover, efforts to ‘centralize’ some hospital services to capture economies of scale may lead to reductions in geographic access.(27)

The effect of changing funding policy on quality of hospital care has also been studied. Mortality was been unchanged in the US (28, 29), England (9) and Italy (30) after ABF implementation; while an evaluation of 28 other countries detected a weak association between ABF policies and lower mortality.(6) Based on patient surveys, Norway has found an increase in patient satisfaction as a result of lower wait times attributed to ABF.(31)

ABF in Canada

While ABF has not been widely implemented in Canada, some Canadian provinces (notably BC, Alberta and Ontario) are experimenting with ABF policies aimed at increasing volumes for certain surgical procedures. For example, hip and knee replacement, cataract surgery, selected cardiac and diagnostic imaging procedures have all been the targeted with ABF policies (i.e., “incremental funding”), as provinces try to utilize perceived excess capacity in hospitals.

A significant change in hospital funding policy in Canada is not without risks; ABF relies very heavily on standardized, timely and accurate hospital data.(32) Moreover, the provinces and hospitals have to agree on hospital output definitions and set realistic, achievable funding levels. (33, 34) While the story of ABF’s implementation in Canada has yet to be written, it will only be through careful study that we can begin to understand the consequences of these policies on hospitals and patients.

Jason Sutherland, Assistant Professor
Trafford Crump, post doctoral fellow
Centre for Health Services and Policy Research
University of British Columbia

References

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