Paying for Hospital Services: A Hard Look at the Options

Hospitals hold a special place in the hearts of Canadians as the most visible representation of provinces’ commitment to publicly funded healthcare. As pillars of medicare and the centrepieces of provincial healthcare systems, hospitals are expected to be accessible when Canadians have healthcare crises, illnesses or injuries, irrespective of a patient’s ability to pay. Hospitals are also the most costly form of care, to the tune of over $58 billion per year across Canada. Provincial governments routinely dedicate a greater share of their budgets to hospitals than to many of their entire ministries. But in all provinces, there are many examples to be found of the inefficient or ineffective use of hospitals, including the continued use of obsolete procedures and the prevalence of beds filled by patients ready for discharge to the community. With all this money going to hospitals, provincial governments have historically paid little attention to how this money has flowed to hospitals and how it affects hospital behaviour. This Commentary draws attention to the strengths and weaknesses of alternate methods for funding hospital-based care in Canada. It examines both the funding models currently in use, such as global budgeting and fixed annual lump-sum transfers, and the methods that some provinces are contemplating for future reform efforts. The report then discusses the policy experiments currently underway in British Columbia and Ontario that are changing the financial incentives for hospitals in those provinces. While the appropriate reforms will vary by province, the status quo of near total reliance on global budgets for funding hospitals is not well aligned with the current policy imperatives of improving access stated by many provincial governments. Activity-based funding (ABF) – hospital payments based on the volume of care provided – is a viable complement to global budgets for rebalancing the financial incentives for Canadian hospitals. The dismal performance of Canada relative to other OECD countries on measures of access suggests this is an area with huge room for improvement across provinces, and where the introduction of ABF for partial funding of hospitals would have a good chance of driving meaningful change. Further, ABF for acute care should be complemented with funding policies for other sectors to align incentives across settings, and to promote the delivery of care in the most appropriate place, capturing as broad a range of activity as possible.