The pandemic has shone a bright light on Canadian hospitals, which—unfortunately for patients and taxpayers—receive funding in an outdated manner. In the coming months, our hospitals will begin to see patients whose care was delayed during the pandemic, yet they have little incentive to provide care efficiently or even care for as many patients as possible.

As noted in a new study published by the Fraser Institute, Canada’s provincial governments in 2019 spent nearly $63 billion on hospital care, which at 36 per cent of all health expenditures was more than physicians (22 per cent) and drugs (7 per cent) combined. For the most part, every hospital in Canada is paid a sum of money each year, which is used to care for patients—a method commonly referred to as “global budgeting.”

While this system is relatively simple and predictable for governments and hospitals, it disconnects funding from the volume and quality of services. In other words, it incentivizes hospitals to view patients as costs rather than sources of funding, reduce activity levels to avoid exceeding budgets (for example, closing beds or limiting access to surgeries), and discharge higher-cost patients more quickly to reduce expenditures while preferring lower-cost patients with longer stays. Again, from a hospital’s perspective, there’s little financial incentive to operate more efficiently and provide more services for a given level of funding or even to provide superior quality services.

Consider for a moment what would happen if your local grocery store was paid the same way—with a giant bag of money each year to feed people. It’s easy to imagine the number of items would quickly fall to whatever was most convenient for the store to provide. (Have a favourite cereal? Too bad.) Store hours will become less convenient for customers, alongside a general decline in the overall level of service. This type of grocery store, like a Canadian hospital, is actually financially better off—it saves money—if you go elsewhere.

However, in countries such as Switzerland, Germany, France, Japan and every other developed country with universal health care (except Canada, Iceland, Ireland, Luxembourg and New Zealand), hospitals are paid with “activity-based funding” where money follows the patient. Instead of handing hospitals bags of money each year to care for patients, activity-based funding pays hospitals on a per-case basis (adjusted for medical complexity) with each patient bringing a predetermined amount of money with them based on their particular condition and unique care needs.

When money follows patients, patients transform from a drain on hospital budgets into a source of additional revenue.

Subsequently, activity-based funding creates powerful incentives for hospitals to increase activity, improve efficiency and focus more on patient-centred services. It also creates incentives to improve the quality of care because hospitals are not compensated for care taking longer than it should or for the cost of complications that arise from error. And quality, which produces a positive reputation, will attract more patients (and thus more revenue).

Clearly, the way our provincial governments pay for hospital care is outdated and out of step with other universal health-care countries that have transitioned to activity-based funding over the past 30 years. Hospital funding reform is indeed a serious undertaking, but as one of the last developed countries to undergo such reforms, Canada could learn from the experiences of others and avoid potential mistakes. To improve our universal health-care system and our hospitals, money should follow patients.