Hospital remuneration—the key to health-care reform

Burned out health-care workers, overcrowded hospitals, emergency room closures and the longest wait times in recorded history. This is the portrait of Canadian health care in 2023. Last year, patients faced a median wait of 27.4 weeks for medically necessary (elective) treatment—almost three times longer than in 1993 (9.3-weeks).

In other words, this is a crisis decade in the making.

Simply put, there’s a fundamental imbalance between the demand and supply of medical services in Canada. In the absence of a pricing mechanism, this manifests in the rationed care we have come to expect in our health-care system. Of course, solutions exist but many of the best remain contentious in our increasingly polarized world. And so, little is done beyond lip-service and large cash injections.

There is, however, one commonsense reform that’s packed with potential, but without the political baggage—simply pay hospitals according to the care they provide.

At present, most hospitals in Canada are primarily funded by an opaque and outdated method of remuneration called “global budgets.” Under this arrangement, the funding total for the system, including which hospitals get those dollars, is set at the beginning of the year, primarily based on historical trends. While simple to administer and relatively easy for governments to control, global budgets are disconnected from the true demand for services. They neither incentivize efficiency nor the treatment of complex cases. And when exhausted, hospitals are forced to put patients on ever-growing waiting lists.

Most other high-income countries know this is poor health-care policy and have therefore shifted towards a more modern approach—activity-based funding (ABF). As the name suggests, hospitals under an ABF system are paid according to the number and complexity of services they deliver. If more patients turn up at the door in need of care, hospitals receive the money needed to treat them. Alternatively, if operating rooms are sitting idle, funds can be diverted to other areas with more demand.

Basically, money follows patients to the hospitals where their care is delivered.

This commonsense approach is generally employed by 23 (of 28) universal health-care systems, and for good reason. Empirical evidence consistently shows that ABF has the potential to increase the volume of services, lower wait times and generate efficiency gains without significant impact on quality. Countries such as Australia, Sweden and the Netherlands have used some form of ABF for decades.

The result?

The switch to ABF was usually accompanied by an increase in the number of patients treated, shorter lengths of stays in hospital, and lower wait times. However, the increase in the volume of care provided can come at the price of an increase in overall spending; not necessarily a problem so long as the money actually goes towards providing care.

Of course, the manner in which ABF is adopted—and the proportion of funding it accounts for—can vary significantly. For example, countries such as Australia and the United Kingdom tend to employ ABF within an overall global budget, limiting the extent to which hospital activity can truly respond to demand. By contrast, Germany and Switzerland do not generally employ such budget constraints to their ABF model. Perhaps unsurprisingly, Commonwealth Fund data examining wait times for elective surgery in 10 universal health-care countries in 2020 ranked Germany and Switzerland at the top with the greatest proportion of patients receiving care within for months, while Australia and the U.K. were middle-of-the-pack. Canada, with its outdated global budgeting approach, ranked at the bottom of the list.

Some provinces have previously experimented with ABF funding in Canada. British Columbia launched a limited pilot project between 2010-2013 in select hospitals, and Ontario began employed a blended approach for a portion of hospital funding in 2012. However, the results of these experiments were unsurprisingly small in magnitude and mixed in outcomes. This is not unexpected given that hospitals were primarily still operating under defined budgets, and overall healthcare spending was still budgeted by the province. Quebec, however, is soon expected to use ABF for about 25 per cent of hospitals by the end of the year.

The manner in which the federal government currently provides provinces with health care dollars via the Canada Health Transfer (CHT) furthers the disconnect between funding and activity. This is because federal health-care payments to the provinces are currently determined on a per-capita basis. As a result, the amount of federal dollars provinces receive are also not directly related to the number and complexity of cases performed, which also contributes to the lack of transparency with regards to how the transferred money is ultimately spent on services.

So what’s to be done?

Simply put, Canada must change both the manner in which hospitals are funded as well as the manner in which federal health-care dollars are transferred. To encourage this change, the federal government could do the following:

1. clarify that funding hospitals according to activity does not contravene the spirit of the CHA and allow provinces to more fully experiment with ABF
2. task the Canadian Institute for Health Information with determining a nationally efficient price for services by building upon the already existing “Case Mix Groups+” grouping system
3. allocate the CHT to provinces on the basis of health-care activity
4. provide a onetime fund for provincial efforts to improve electronic medical records and the centralization of intra-provincial patient referrals, while also potentially better enabling inter-provincial referrals via ABF

Of course, design and implementation matters, and the devil is in the details. However, a well-designed ABF system that broadly mirrors the German and Swiss approach could potentially increase transparency, more directly link spending to measurable activity, and tackle wait times.

While the impact of ABF will undoubtedly be more powerful if accompanied by additional reforms, it’s a relatively uncontroversial commonsense approach that should bring both public health-care purists and private-market advocates together for the sake of Canadian patients waiting for medical care.