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Hospital funding needs strings attached

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As provincial government revenues stagnate with the sluggish economy, provinces are turning their eye to hospitals as a very obvious target for reductions in spending growth. Provinces spend more than $60 billion a year on hospitals — about $2.5 billion in Manitoba — which is more than they spend on many of their entire ministries.

Right now, most of this money flows to hospitals with few strings attached. Changes are underway to hospital funding pathways, however, to try and ensure that we get good value for that money.

The most recent data from the Canadian Institute for Health Information points to marked variation between hospitals in what this money buys. For example, a hospitalization for a hip replacement in one hospital can cost in excess of 50 per cent more than other hospitals in the same province.

The public should care about this, since large differences in spending between hospitals for the same type of care imply that there is potential for governments to cut spending. If hospital A can do hip replacements for $5,000 per patient why are we paying hospital B $8,000 per patient? If governments can find ways to bring hospital B’s costs closer to $5,000 the hospital has become more efficient and government spends less.

Every year provinces give hospitals a fixed percentage increase to their budget from the previous year. This across-the-board increase, similar to a cost-of-living increase, is intended to reflect increasing input costs, such as wage increases and new technologies and drugs. Over the past half-decade, these annual increases have been in the neighborhood of five per cent.

This type of budgeting and incentive structure rewards all hospitals with new funding equally. Perpetuating across-the-board increases provides little motivation for inefficient hospitals to change the way they operate.

Ontario and British Columbia are starting to change the way they fund hospitals. For the past few years, both provinces have directed hundreds of millions of dollars to hospitals as an incentive to perform more surgeries by tying funding to a fixed price per surgery. Hospitals that can perform surgeries at or below that price will generate free cash flow. Hospitals whose costs per surgery are higher quickly realize that they are receiving smaller increases than their more cost-efficient peers.

Some hospitals can’t compete on cost-efficiency alone. Hospital spending data shows that it costs more to operate hospitals in small and isolated communities than in urban centres.

Ontario and British Columbia are hoping their new hospital funding initiatives won’t close hospitals or undermine quality, but will instead put financial pressure on inefficient hospitals to change their management practices.

It’s not all about saving money.

Every opportunity to improve the safety and quality of hospital care should be seized. Government regulations can be vigilantly monitored to ensure hospitals are meeting acceptable standards of safety. Meeting such standards could also be tied to new hospital funding.

Another idea is to measure quality from the perspective of the patient. The experiences of patients at the hospital and changes in their quality-of-life after surgery should be tracked. Too often, provinces are choosing hip and knee replacements without considering other surgeries and procedures.

The value we get for the money we spend on hospital care can be improved by changing the way we spend that money. Perpetually distributing lump sums to hospitals with few strings attached can no longer be excused in the current economic climate. While change won’t be easy, it’s good that Ontario and British Columbia are leading the way. Other provinces will follow.


Jason M. Sutherland is an expert adviser with and assistant professor at the centre for health services and policy research, University of British Columbia. Nadya Repin is a research coordinator with the centre for health services and policy research, UBC. Their C.D. Howe Institute publication, Paying for Hospital Services: A Hard Look at the Options can be found at

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