A Better Way to Fund Hospitals

Commentary, Healthcare & Welfare, Wayne Anderson

Hospitals in Canada consume about 30 per cent of health care spending, and are funded using a model known as block or global funding. This model results in a fixed or global amount of funding being distributed to the hospital. In return, the hospital is expected to provide services for a fixed period of time (usually one year). The amount of the global budget is based on a combination of factors, including historical budgets, rates of inflation, negotiation and politics.

Notice there is no reference to outcomes such as volume of activity, complexity of activity or quality.

Global budgeting creates budgetary predictability and a simple means of limiting growth in hospital expenditures through the lever of capped budgets. Predictably, the reaction of hospitals has been to restrict admissions in order to stay within budget, thus creating longer wait lists. Other disadvantages of global budgets are significant: the opaqueness of the process of governments allocating funding between hospitals based on previous historical budgets is open to claims of unfairness, rigidity, inequity and meddling.

Global funding also creates disincentives for hospitals to improve their performance in a number of ways. Global funding discourages hospitals from increasing expenditures or making investments to reduce wait lists, to improve day-to-day operations or improve quality. Such investments, with long-term positive results, create near-term budget deficits, which are very difficult to recover from the WRHA or Manitoba Health.

The near-universal system of hospital funding used in all advanced industrialized nations is referred to as activity-based funding (ABF), or case-based funding. ABF is based on the type, volume and quality of the service provided. The advantages of ABF flow from the incentives it creates for hospitals to improve patient care and operate more efficiently. Work smarter, not harder.

Experience in other jurisdictions indicates ABF can stimulate productivity, dramatically reduce or eliminate wait times, reduce excess capacity, improve patient choice and improve transparency. Consequently, since the early 1990s, virtually all advanced industrial countries (OECD) utilize some form of ABF. Implementation of ABF has also produced increased efforts to improve the quality of hospital care by reducing costly complications and re-admissions, and implementing quality assurance plans such as LEAN, which is a process of continuous improvement first used with great success in the auto industry. It focuses on creating a culture that empowers employees to eliminate waste through problem solving.

In Norway, ABF was correlated with increased patient satisfaction.

ABF is not unknown in Canada. It was recommended by the Kirby Commission, and in 2006, Gordon Campbell, then premier of British Columbia, returned from a health care tour of Europe impressed by the use of ABF to reduce wait lists. This resulted in B.C. launching some pilot projects utilizing ABF. These pilots were successful in reducing some wait lists by 50 per cent and almost eliminating others. Consequently, B.C. adopted a program called patient-focused funding, which was to shift up to $170 million to ABF by 2012.

In January 2012, Ontario announced its health-system funding reform with a target of moving away from global funding to what it is calling patient-based funding with global funding shrinking to 30 per cent and patient-based funding growing to 70 per cent of hospital funding. Those interested in a more rigorous analysis of hospital funding methods should refer to Hospital Payment Mechanisms: An Overview and Options For Canada by Jason M Sutherland, Centre For Health Services and Policy Research, U.B.C., 2011.

We also believe the implementation of LEAN in hospitals, especially in conjunction with the implementation of ABF, offers opportunities to drastically reduce wait times and simultaneously slow the rate of growth of hospital costs. Such a combination will result in real incentives for hospital administrators to improve all aspects of hospital operations, resulting in better patient outcomes and more efficient hospitals. The use of LEAN in health care is relatively new. The earliest adopters in Canada date from 2005. St. Boniface Hospital embarked on its LEAN journey in 2008.

In view of the successes achieved with ABF in other advanced industrial countries, Manitoba should at least be conducting pilot projects with ABF. We in Canada and Manitoba are far behind other industrialized nations in this aspect of health care delivery, and if we are to improve, we must change what we are doing.

Originally published in the Winnipeg Free Press, March 28, 2016

Wayne Anderson is chair of the Frontier Centre for Public Policy.  He is past chairman of the board of St. Boniface General Hospital. He wrote this in co-operation with Dal McCloy, past chairman of Riverview Health Centre, and Judith Scanlan, R.N., PhD, past secretary of St. Boniface hospital’s board.