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Is health care a revenue, or an expense?

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THE recent federal government decision to provide health care transfers to the provinces without conditions or demands has prompted a flurry of opinions concerning health care delivery. Some of the issues under discussion are wait lists and emergency room challenges.

Unfortunately, much of public discourse about health care has focused on addressing specific issues piecemeal, rather than the need for major policy reform. The system itself is the problem, and we would be wise to address the underlying problems at the heart of Canadian health care rather than simply trying to deal with the symptoms.

A key to improving health care performance is improving the efficiency of hospital services, which consume 30 per cent of health care spending. The current funding model used for most Canadian hospitals is known as "global funding," a system where hospital budgets are funded on the basis of historical spending, inflation, negotiation and politics.

This system creates perverse incentives. For example, the situation can arise in which a hospital becomes more efficient at providing a specific service quickly, which reduces wait times but results in higher volumes, which in turn leads to higher costs. In this situation, the hospital has actually become worse-off financially as a result of becoming more efficient and treating more patients in the same amount of time. Obviously, this is not a rational system of incentives if you’re trying to cut wait times.

The current system isn’t working as it should, but there are real prospects for reform. Currently, in health care circles, experts are paying a lot of attention to a concept known as "patient focused health care." A patient centered health care system would consistently provide high quality, timely care similar to what is already being provided at places like the Mayo Clinic and Mercy North Iowa.

A personal example illustrates some of the reason these hospitals are able to provide such a high volume of outstanding care. I recently had occasion to contact The Mayo Clinic about hip replacement surgery as an alternative to a 10-month wait. The first difference was that they quoted me a price, so they know what their costs are, and the second was that it could be done immediately.

Canadian hospitals wanted me to wait almost a year, while the Mayo Clinic wanted to help me right away. The reason is that, for the Mayo Clinic, my hip was a source of revenue, while for Canadian hospitals it was an expense that would strain a pre-determined budget. That difference profoundly influences attitudes and incentives, and in the case of Mayo, creates incentives to focus on patients needs and to develop efficiencies.

Proponents of the status quo in Canada may accuse me of promoting a shift to an Americanstyle system. Nothing could be further from the truth. I used Mayo as an example because of its reputation for quality, patient-focused hospital care and its reliance on volume based funding.

Hospital funding models used in other industrialized countries (particularly in Europe) produce significantly better outcomes than Canada and very short wait times. What’s more, they accomplish all this while spending no more (and in many cases less) than Canada on a per capita basis. These are the examples Canada should follow.

Almost all of these high performing countries use a hospital funding model known as Activity Based Funding" (ABF) or "Case Based Funding." ABF is a system of funding based on the type, volume and quality of services provided by each hospital. Under ABF, if a hospital improves efficiency and treats more patients in the same amount of time, they receive more money from government.

Experience in other jurisdictions indicates that ABF can stimulate productivity, dramatically reduce or eliminate wait lists, reduce excess capacity, improve patient choice and improve transparency.

There are hopeful signs that Canadian policy makers are learning from the European experience. The government of British Columbia has begun to shift towards ABF and. in January, Ontario announced it would follow suit.

In addition to adopting ABF, health ministries can further improve the hospital funding model by:

  • Permitting hospitals to retain any surplus funds they generate.
  • Provide funding for innovative pilot projects
  • Encourage system-wide adoption of continuous improvement programs.

There are defenders of the status quo who view any suggestions for reform with suspicion, but every aspect of our modern society is subjected to continuous review, change and improvement. The same process should be applied to hospital funding in Canada. If we are to improve we must change what we are doing.


Wayne Anderson is on the board of St. Boniface Hospital in Winnipeg and is the chair of the Frontier Centre for Public Policy.

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