To improve health services, change the way hospitals are funded

With the Quebec hospital network’s difficulties continuing to make headlines, especially when it comes to wait times, calls to reform the way hospitals are funded have become increasingly common in recent months.

At the beginning of the year, the director-general of the McGill University Health Centre and the Quebec Association of Health and Social Services Institutions each proposed that hospitals should from now on be financed according to services provided, as is done in many countries.

The Quebec government has reacted by convening a panel of experts whose mandate is to evaluate the feasibility of a pilot project on activity-based funding for the hospital network. This is without a doubt a step in the right direction.

Currently, nearly all Quebec hospitals – and nearly all Canadian ones, too – receive their funding in the form of global budgets based essentially on amounts spent in the past.

Decision-makers have always regarded this funding model as easy to administer and useful for reining in rising costs. However, this cost control – which has not in fact prevented expenditures from rising – has historically come at the price of service rationing: given continually increasing demand, hospitals have had no choice but to limit admissions in order to stay within budget. The chronic problem of waiting lists in Quebec and in the rest of Canada is therefore rooted in part in hospitals’ funding models.

Furthermore, global funding offers no incentives for hospital managers to innovate in order to reduce expenses and improve access and wait times. Under the current model, a manager who devoted time and resources to developing innovative measures to improve care quality and reduce wait times in his or her hospital would not be rewarded for such initiative. On the contrary, an innovation that led to spending reductions would translate into an equivalent decrease in the hospital’s next budget.

The British experience is instructive. Before 2003, hospitals in England were funded mainly with global budgets and, mirroring the current situation in Canada, the population seemed resigned to long wait times before receiving treatments. Since then, just about all hospital care – including ambulatory care and emergency services – has been reimbursed through an activity-based funding system. It did not take long for results to be seen. Better use of resources by hospitals led to more patients being treated with no reduction in care quality. The median wait time for elective surgery in England has fallen by about 60 per cent since 2003.

Reforming hospitals’ funding model also paved the way for other changes to the English health-care system that have produced beneficial results. Patients can now choose the hospital in which they will be treated, and hospitals compete to attract them. This increased competition, which stems directly from the funding reform, has played a key role in the improvement of hospital management and in the quality of care provided to patients.

Thanks to activity-based funding and to the other incentives provided to hospitals, the speed with which patients are admitted in emergency rooms has also improved substantially, without causing other aspects of care to suffer. Ninety-seven per cent of patients who show up in emergency rooms now receive a doctor’s diagnosis within four hours, the targeted time frame.

The implementation of hospital-funding reform in Quebec will, however, probably face challenges.

Currently doctors enjoy a great deal of freedom in their practices. The responsibility for optimizing resource use and reducing service costs could be difficult to take on if hospital administrators cannot make the necessary decisions with regard to the allocation of resources, both human and material, within their hospitals.

This obstacle is not insurmountable, however. The experiences of other countries shows that hospital-funding reform can be accompanied by terms and conditions that will be embraced by health professionals and administrators alike.

Yanick Labrie is an Economist at the Montreal Economic Institute. The views reflected in this op-ed are his own.