Changing how we fund hospitals to put the patient first could help eliminate health-care wait times, policy experts say

Over the next few weeks, The Hub will be expanding upon the top five submissions for the 2023 Hunter Prize for Public Policy, which asked for proposals that would tackle the wicked problem of Canada’s growing wait times for medically necessary care. In each of these dispatches, readers will get a closer look at the issues at play, as well as analysis from experts in the field.

In 2022, Canadians faced an average wait time of almost 28 weeks for medically necessary treatment—close to three times longer than in 1993. Could a new funding model help tackle the problem? 

In the runner-up entry for the 2023 Hunter Prize for Public Policy, “The Diagnosis-related Groups Domino-effect: From Hospital Remuneration to Healthcare Reform,” Bacchus Barua, director of health policy studies at the Fraser Institute, examines how medical wait times in Canada can be shortened through the adoption of activity-based funding for hospitals.

Under an activity-based funding system, Barua believes the problems inherent in the current global budgeting regime—such as a lack of transparency and disincentivizing efficiency—can be eliminated. According to Barua and several health-care policy experts, activity-based funding can better align patient needs and health-care spending, even if it means a more complex system overall.

Global budgeting vs. activity-based funding

Under the global budgeting system, hospitals typically receive funding based on historical budgets, adjusted for factors such as inflation and population growth. This system also takes into account the specific health-care needs and priorities of different regions, as well as performance and efficiency metrics.

Shawn Whatley, a physician and Munk senior fellow for health-care policy at the Macdonald-Laurier Institute, agrees that global budgeting no longer meets Canadians’ health-care needs.

“Global budgets make it very hard for hospitals to respond to demands. Activity-based funding means they can respond immediately,” says Whatley. “Patient demands go up, they immediately are getting extra funding, and they can hire more help or pay nurses overtime or do whatever they have to do.” 

While serving on the finance committee for a hospital near Toronto, Whatley experienced the global budgeting regime first-hand. If they came in under budget, he reveals, the government would cut their funding. If they broke even, the government would not provide funds for growth in the community. And if they were too far over budget, the government would replace the board. The aim, therefore, was always to slightly exceed their budget.

Unlike global budgeting, activity-based funding allocates funds according to the actual services provided. This model, Barua argues, could reduce wait times without necessitating increased private-sector involvement, creating a competitive and dynamic funding environment where funding follows the patients. 

Nadeem Esmail, a senior fellow at the Fraser Institute who served as its director of Health System Performance Studies from 2006 to 2009, says that with activity-based funding, patients are the source of hospital revenues. If a particular hospital doesn’t treat enough patients or if its emergency room is inaccessible, he notes, that hospital would not have the same revenue as a hospital that is performing well in both of those areas.

“For providers, all of a sudden patients no longer drag money out of the budget that the hospital is trying to hold on to for the end of the year so they can hit some magical mark,” says Esmail. 

Barua’s study calls for implementing activity-based funding alongside a national efficient price and diagnosis-related groups to ensure fair and demand-driven federal health-care transfers to provinces. This approach aims to improve transparency and remove political bias from the funding process.

For context, a national efficient price is a standardized cost measure used by health systems, including public health-care models, to determine the appropriate level of funding for services delivered by a hospital. A diagnosis-related group is a system designed to classify hospital cases into specific groups in order to identify the products and services that a hospital provides. Diagnosis-related groups help ensure health-care facilities are paid according to the conditions or illnesses they treat, and the services provided, instead of the resources used by a patient or the length of their stay.

Implementing activity-based funding

Barua writes that implementing activity-based funding would partially rely on a case-mix system. A case-mix is defined as a group of patients treated at a specific hospital that require similar tests, diagnostics, procedures, etc., and helps determine what different hospitals specialize in. 

Additionally, Barua says that an activity-based funding system would rely on a price per case-mix group. He notes that Canada already employs this system through a version of the International Classification of Disease (ICD) standard, which codes inpatient activity and features a version of case-mix grouping based on the diagnosis-related-groups system. 

Barua suggests that the federal government could assign the task of determining a nationally efficient price for medical services required for each case-mix to the Canadian Institute for Health Information, utilizing this standard.

Krystle Wittevrongel, a senior policy analyst at the Montreal Economic Institute, was intrigued by Barua’s proposition to use existing ICD codes to help implement activity-based funding. 

“We often talk about activity-based funding and using the diagnosis-related-groups basket as well, but when the author was talking about ICD codes and having the Canadian Institute for Health Information be the one to take ownership of this in that context, I thought it was really interesting,” she says. 

Barua writes that the federal government could also provide a one-time fund for the provinces to improve their electronic medical records (EMRs) to help centralize and enable cross-province patient referrals. Wittevrongel says Barua’s advocacy for the use of EMRs is very important.

“That’s also something that we have talked about a lot in the past—the need for interoperable digital medical health records, especially to connect the provinces,” she says, noting that the modernization and digitization of health care are recurring themes in all Hunter Prize submissions for 2023.

Canada out of step with its peers

Whatley and Esmail note that Canada stands out among its peer countries for not having made the transition to activity-based funding.

“The whole world left global budgets for hospitals years ago,” says Whatley. “Central planners try to estimate population growth and the burden of disease and demographic changes, and try to have evidence-based policy design, and decide this is how much a hospital needs. None of that works.”

Esmail points out that even the United Kingdom’s National Health Service, itself often maligned for long wait times, has modernized in the last 30 years to an extent that the Canadian health-care system has not.

“One of the big key reforms that has happened around the developed world over the last 30 years is changing hospitals from a budgetary-based funding to activity-based funding as Bacchus discusses, and that actually shifts incentives in any number of areas,” he says. 

Potential pitfalls

A summary of activity-based funding from the University of British Columbia (UBC) indicates that while the system has been adopted by most of the developed world over the past 30 years, there have been some drawbacks. The report found that hospital spending has increased in countries that adopted the funding model, causing administrative difficulties. According to UBC, much of this additional spending is due to an increase in volume, as well as the incentivizing of unnecessary care. 

Whatley further cautions that while activity-based funding works well for funding hip or knee replacements and emergency room procedures, it is less effective when it comes to people seeking help for depression or dizziness or dehydration.  

“The body can only go so fast in recovering from those kinds of things,” he says.

The UBC report notes that other areas—including intensive care and mental health care—have also been identified as difficult to manage with activity-based funding, due to heightened levels of care and higher costs. Many countries are still experimenting with funding these services through the activity-based funding system. 

Why governments still prefer global budgeting 

Barua says governments are predisposed to retaining global budgeting because it is simpler to administer and requires less accountability—and that patients are paying the cost in longer wait times. 

He notes that when activity-based funding systems are administered correctly—as in Switzerland or Germany, for example—the increased volume of care and potentially shorter wait times can lead to lower costs per procedure. However, he cautions that without other reforms, such as cost-sharing and private partnerships, there will be higher costs.

“This is beneficial for patients and providers, but not necessarily for the government that will have to either raise taxes in response, cut bureaucracy, or consider additional common-sense reforms,” says Barua.

Esmail agrees that global budgets are administratively simple for governments and operationally simple for hospitals because everyone understands the amounts of money being transferred. Negotiating activity-based funding will be complex, he says, and will require work from sides to set costs for procedures and establish billing for services on a more individualized basis. In the end, however, he believes the effort would be worth it.

Right now, he says, “it’s simply a politicking game where the hospital is trying to encourage the provincial government or the health authority to give them more budget, for whatever reasons,” he says Esmail. “On the flip side [with activity-based funding], we now have transparency from the government and a clear record of what health care is being purchased from providers.”