Incentives matter in health care

Imagine a business where the more productive it is, the more money it loses.

It sounds weird, but given the way Alberta’s hospitals get their funding, that’s the situation they’re in. The Manning Report, tabled last week, recommends Alberta change how these facilities are funded in order to reduce wait times.

Currently, the province’s hospitals receive a certain amount of money at the start of the year, based on the number of procedures it is expected to provide in the upcoming year. These estimations largely rely on how many procedures were performed in the previous year. This approach is known as global budgeting.

Imagine, for purposes of illustration, Calgary’s Peter Lougheed Hospital performed 50 hip replacement surgeries last year at a cost of $20,000 each. When allocating resources, Alberta Health Services would therefore give it enough money to perform another 50 or so such surgeries this year, with little to no regard for the actual needs expressed by long wait-lists. While this is admittedly an oversimplification, one can see how this kind of arrangement would be problematic.

Alberta Health Services has justified this practice by claiming it makes it easier to have a consistent approach to budgeting. The problem is this consistency comes at the expense of productivity improvements and innovation, which thus leaves patients waiting longer for the treatment they need.

Think about it this way: If a surgeon at that same Peter Lougheed Hospital has come up with a new technique that allows him to perform hip replacement surgery 20% faster, that sounds like great news for patients, as 60 of them can now be treated in the time it previously took to treat 50. This means that 10 more patients should be able to be treated in a year, and so waiting lists can start coming down, right?

But from the perspective of the hospital’s administration, this creates a huge budgetary headache.

It had money to cover the costs associated with providing 50 surgeries, not 60. At the assumed $20,000 per procedure, an extra 10 surgeries represent a $200,000 cost, for which the administrator has no associated funding. Sure, there might be a funding bump next year if they do it, but it still has a problem with its finances today.

That’s how global budgeting can stifle innovation and productivity.

What the Manning Report proposes, is to switch to a model known as activity-based funding in order to enhance the capacity and performance of the health care system.

With activity-based funding, a hospital gets money every time it treats a patient. This means the more patients get the treatment they’ve been waiting for, the better-funded the hospital is.

Whenever a doctor finds a cheaper, faster or better way of doing things, they’re no longer digging a hole in their administrators’ budgets. The incentive structure is thus geared towards treating more patients.

It is such a clear-cut case for improving health care that most other countries with universal taxpayer-funded health systems have adopted it in some respect and the effect has been overwhelmingly positive.

When Sweden shifted to activity-based funding in the 1990s, a 50% increase in day surgeries was observed. In Denmark, average waiting times decreased by 17%. Closer to home, in Quebec, its gradual implementation had been credited with increasing the number of MRIs by 22%, while helping lower their unit-cost by four per cent.

Alberta has some of the longest median wait times in Canada for elective surgeries. Just 38% of hip replacements, for instance, were performed within the recommended maximum wait time last year.

It’s quite clear the status quo is not working for Albertans and something has to be done. And while other key proposals, such as training more nurses and doctors, remain a necessary part of the solution, these are things that will take time and are small comfort for those currently suffering on a waiting list.

The government needs to take inspiration from the Manning Report and recognize incentives matter in health care. By making sure hospital administrators see a benefit in treating more patients, activity-based funding is the change Alberta needs.

Krystle Wittevrongel est analyste senior en politiques publiques et leader du Projet Alberta à l’IEDM. Elle signe ce texte à titre personnel.