Equity in Case-based Funding: A Case Study of Meanings and Messages in Hospital Funding Policy

The Introduction of Case-Based Funding Case based funding reforms were introduced independently in Ontario and Alberta in 1988, with the goals of improving equity in funding across hospitals and efficiency in the delivery of services. Both provinces appointed multi-stakeholder steering committees to develop and implement hospital funding reforms in collaboration. The impetus for the reforms came from persistent complaints about inequities built into the existing global funding approach. Prior to case based funding, hospitals budgets were determined through annual negotiations between individual hospitals and the government, and based almost exclusively on historical costs. Funding levels did not reflect consistent or agreed upon measures of hospital outputs or population needs. Furthermore, the annual process was perceived to be inconsistent and subjective, favouring some hospitals or communities at the expense of others. Policy Maker Objectives The provincial health ministries’ objectives for case based funding were multiple. An explicit goal was to develop a more equitable process for distributing funds to hospitals based on output levels and efficiency, and improving equity in funding levels between health care sectors based on how effectively and efficiently different institutions improve “health”. Cost containment and accountability were other less prominently cited goals of the policy. The Signal The case based funding formulas proposed in Alberta and Ontario were almost identical, both based on the principle of paying hospitals for the mix and volumes of cases they treated. In each formula, similar cases (based on diagnosis and treatment) are grouped together and assigned a weight equivalent to their costs relative to the average cost of all cases. Each individual hospital’s average cost per weighted case (ACPWC) is calculated, to determine the hospital’s actual cost and then compared to the ACPWC of all hospitals in the system, which is the hospital’s expected cost. The difference between the actual and expected costs formed the basis for altering individual hospital budgets to more appropriately reflect a hospital’s activity. However, recognizing that some hospitals had valid reasons for higher costs per case than the system average, both provinces tried to incorporate these additional factors into their policies. Small hospitals (in Alberta, those with fewer than 60 beds and in Ontario, those with fewer than 50 beds) were excluded from the policy because their fixed to variable cost ratios were much higher than average and they were therefore disadvantaged by comparisons with larger hospitals, and also because their case-specific costs were perceived to be more difficult to differentiate. Specialty hospitals (such as psychiatric, paediatric, chronic care) were excluded from the policy due to the lack of appropriate case mix measures for their outputs. The two provinces used different techniques to compensate for differences in costs due to teaching activity and size. Ontario assigned hospitals into peer groups by size and teaching status, whereas Alberta developed adjustment factors or multipliers which were applied directly to a hospital’s ACPWC. In addition, Ontario developed a “northern” factor to compensate for higher cost of living in northern regions. The implementation of case based funding formulas differed across the two provinces. Ontario used its formula to allocate additional resources designated for “equity” and “growth” funding, while Alberta used it primarily to re-allocate resources between individual hospitals. However, the exclusions and peer groups, and to a lesser degree the adjustment factors, attenuated substantial differences in average costs and thus effectively preserved the status quo rankings and relative funding levels of institutions.