Earlier this week, Albertans learnt that Alberta Health Services may move to an activity-based funding model for hospital care next year. Albertans should applaud their provincial government and Alberta Health Services for considering this change. The evidence shows that the result, if the change is ultimately implemented, will be a more efficient and more accessible health care system.

Alberta’s hospitals are currently paid using global budgets, meaning that hospitals get paid a large sum of money in advance to provide services to Albertans. Unfortunately, the predictable result of paying a lump sum in advance for all health care to be delivered is fewer services and a lower standard of care for patients.

The problem is that global budgets disconnect funding from the provision of services to patients. Incentives to provide a higher or superior quality of care to patients are virtually absent, as are incentives to function efficiently. Conversely, administrators have an incentive to discharge patients quickly, avoid admitting costly patients, and shift patients to other outside institutions as a means of controlling expenditures.

Activity-based funding, on the other hand, is a far smarter way to pay hospitals because it creates powerful incentives to deliver a greater quantity and quality of services, and to operate more efficiently. Activity-based funding involves paying hospitals a fee for each individual cared for based on the condition that needs to be treated including patient characteristics that may complicate treatment of a given patient. Note that this does not mean paying for all services delivered to the patient regardless of need, cost, or efficacy.

If a provider fails to meet patients’ expectations under activity-based funding, their departure to another provider immediately results in lower revenues. This is far different from a global budget model where fewer patients results in savings to the budget. Similarly, increasing the number of patients treated results in increased financial resources for the hospital, which is the opposite effect that treating more patients has under the current global budget model.

The resulting competition for and focus on patients will result in better care in Alberta, just as it has in other developed nations who have adopted this approach to paying for hospital care.

For example, Swedish county councils (provinces) that moved to activity-based funding in 1993 and 1994 were found to outperform those counties that did not, both in terms of increased output and productivity. It was estimated that the cost savings of such a reform were approximately 13 per cent.

The Stockholm county council in particular experienced an eight per cent increase in inpatient care, a 50 per cent increase in day surgeries, and a 15 per cent increase in outpatient visits—all resulting in an 11 per cent increase in activity overall after the move to activity-based funding. Despite the increase in activity, total costs actually fell one per cent, due both to fewer personnel employed in the hospital sector and a price decrease of 10 per cent

It is also worth mentioning that these changes in hospital efficiency were not accompanied by reductions in the quality of or access to health care. No evidence was found that that the decreases in length of stay following reform had a negative affect on patients (in terms of re-admissions to hospital), that elderly patients had been discriminated against, or that providers gave treatment to only the simplest or most profitable cases.

The move to partial activity-based financing in Denmark led to increases in productivity, with hospital activity increasing by 13 per cent in the year immediately following implementation. Equally important, average waiting times fell 17 per cent following reform.

The wait times benefits of moving to activity-based funding have also been outlined in a study by researchers at the Organization for Economic Cooperation and Development (OECD) who found that waiting lists are less likely to be a problem in the presence of activity-based financing for hospitals. Another OECD report has noted that activity-based funding can reduce the costs of providing care and improve the quality of care delivered.

Albertans should not be misled by claims that activity-based funding is controversial or untried. Countries with universal-access health care programs that have either partially or fully implemented activity-based funding models include Australia, Austria, Belgium, the Czech Republic, Denmark, Germany,  Hungary, Italy, Japan, New Zealand, Norway, Sweden, and Switzerland. The vast experience with activity-based financing means that Alberta has many experiences and models to help inform its approach, and thus has the luxury of avoiding potential pitfalls in implementation that might be experienced if Alberta were to be an early adopter.

Alberta’s proposed move away from the current global budget system to activity-based funding is good policy. This change will mean better value for taxpayers’ dollars and an increase in the availability and quality of services for patients. Alberta’s government and Alberta Health Services should be applauded for considering this important change in policy. Albertans should only hope that their government doesn’t back down.