Make money follow hospital patients

With hospital waiting times continuing to make headlines, several provinces are experimenting with a new way to fund hospitals as a way to solve this problem.

Up to now, nearly all Canadian hospitals received their funding in the form of global budgets based essentially on amounts spent in the past. Most other developed countries, however, use at least some form of activity-based funding – also called patient-based funding – whereby hospitals are reimbursed according to services provided. In essence, the money follows the patients, with the more patients treated, the higher the reimbursement.

The B.C. government set up a program that applies the new approach to about 17% of hospital funding. Early results seem very encouraging.

Last March, the Ontario government announced that the province will begin reimbursing 91 hospitals (excluding 55 other, smaller hospitals) on the same basis.

Although the health-care establishment often seems to resist changes, in this case the model appears to have broad support. At the beginning of the year, the director general of the McGill University Health Center and the Quebec Association of Health and Social Services Institutions each in turn proposed that hospitals should from now on be financed according to services provided.

The Quebec government has reacted by convening a panel of experts whose mandate is to evaluate the feasibility of a pilot project on activity-based funding for the hospital network.

Decision-makers have always regarded the old funding model as easy to administer and useful for reining in rising costs. However, this cost control – which has not in fact prevented expenditures from rising – has historically come at the price of service rationing: Given continually increasing demand, hospitals have had no choice but to limit admissions in order to stay within budget. The chronic problem of waiting lists in Canada is therefore rooted in part in hospitals' funding models.

Furthermore, global funding offers no incentives for hospital managers to innovate in order to reduce expenses and improve access and wait times. Under the current model, a manager who devoted time and resources to developing innovative measures to improve care quality and reduce wait times in his or her hospital would not be rewarded for such initiative. On the contrary, an innovation that led to spending reductions would translate into an equivalent decrease in the hospital's next budget. Similarly, an innovation that led to wait times being reduced and more patients being treated would produce increased pressure on the hospital's fixed budget.

In England before 2003, hospitals were funded mainly with global budgets and, mirroring the current situation in Canada, the population seemed resigned to long wait times before receiving treatments. Since then, just about all hospital care has been reimbursed through an activity-based funding system, including ambulatory care and emergency services.

It did not take long for results. The average length of stay fell rapidly after the reform was implemented, while better use of resources by hospitals led to more patients being treated, with no reduction in care quality.

Reforming hospitals' funding model also paved the way for other changes to the English health-care system that have produced beneficial results. Patients can now choose the hospital in which they will be treated, and hospitals compete to attract them. This increased competition, which stems directly from the funding reform, has played a key role in the improvement of hospital management and in the quality of care provided for patients.

The median wait time for elective surgery in England has fallen significantly over the last decade, so much so that in 2010, it is only a third of what it was in the year 2000. In addition, according to a recent study examining changes in wait times for hip and knee replacements, as well as cataract removals, the reduction has been even more pronounced for patients from less well-off areas. Therefore, contrary to widespread worries at the time, the reforms did not lead to less equitable access to care.

Thanks to activity-based funding and to the other incentives provided to hospitals, the speed with which patients are admitted in emergency rooms has also improved substantially, without causing other aspects of care to suffer. The most recent data compiled indicate that 97% of patients who show up in emergency rooms receive a doctor's diagnosis within four hours, the targeted time frame.

Moreover, concerns that activity-based funding might encourage hospitals, especially those in the private sector, to select less complex cases have proven to be largely baseless. Like most countries that have adopted this type of funding, mechanisms were developed in England to identify atypical cases and to take into account the additional costs involved in treating such patients when determining hospital payments.

This funding mechanism is not the miracle cure that will solve all the problems of our public health-care monopolies. But bringing about better incentives within the system is without a doubt a step in the right direction.

Yanick Labrie is an Economist at the Montreal Economic Institute. The views reflected in this op-ed are his own.

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