It’s important to give credit where due: Premier Smith deserves to be applauded for her decision to fundamentally improve how hospitals are paid in Alberta. Just last month, I wrote an article on this platform in which I said, “switching hospital funding from the current ‘global budget’ model to [activity-based funding] is a common-sense reform that Premier Smith can begin implementing almost immediately.” It’s an idea I had also proposed as part of The Hub’s Hunter Prize for Public Policy contest two years ago, and which won second place.
On April 7, Smith announced a plan to do just that.
While a proposal to change the mechanics of hospital remuneration lacks the political flair of her sweeping re-organization of Alberta Health Services, I truly believe this shift will be remembered as Premier Smith’s signature health policy initiative and a watershed moment for common-sense reform.
Here’s why.
Alberta’s health-care system is in shambles. Last year, the province reported a median wait time of just over 38 weeks between referral to treatment—the longest in over 30 years of tracking. Add in reports of chronic ER closures and penny-pinching childhood cancer patients for popsicles, and you’re left with a system barely clinging to life support.
And this is not due to inadequate spending. Although Alberta ranked middle-of-the-pack among provinces for health-care spending per capita last year, Canada itself ranks among the top third of health-care spenders per capita in the world.
No. The problem is that the money we’re spending isn’t translating into performance.
One key reason—the focus of this piece—lies in how hospitals are generally funded in Canada (with some exceptions). Unlike most of our international peers, we rely on an outdated method called “global budgeting.” Basically, hospitals are allocated a budget based on historical trends, within which they need to function. This approach is disconnected from the current demand for health-care services. Worse, it doesn’t incentivize hospitals to treat patients—if anything, it does the opposite. Every patient walking through the door becomes a cost, chipping away at the pre-defined budget.
By contrast, activity-based funding [ABF] is a modern approach that ties dollars directly to the delivery of care. Under this system, hospitals are paid according to the number and complexity of services performed. If more patients walk through the door, hospitals receive commensurate funds to perform surgery. If operating rooms sit idle, resources shift to where they are needed most.
This is the system Smith is championing for Alberta—and for good reason.
ABF is used by the majority of universal health-care systems around the world—including countries with significantly shorter wait times than Canada (and Alberta). Empirical evidence consistently also shows that ABF has the potential to increase the volume of services and improve efficiency without a significant impact on quality. It is also worth considering that the Netherlands, Germany, and Switzerland—the three countries with the fewest patients waiting more than two months for elective care, according to the Commonwealth Fund—all primarily fund their hospitals on the basis of activity.
Another added benefit is that funding hospitals according to activity depoliticizes the entire public versus private debate and improves transparency. This is vital given the recent allegations of sweetheart deals between Premier Smith’s government and publicly-funded private clinics. Instead of the government determining the number of procedures to be performed by privately contracted facilities (and associated payment), a move towards activity-based funding ensures the decision goes back to the referring physician, with money following the patient to the (public or private) hospital accordingly.
Of course, every system comes with potential drawbacks. ABF is not well-suited for hospitals in small rural towns where the patient load may not provide a stable source of funding, which is why it is commendable that Smith has already announced these facilities will stick with the older model. And, while it’s entirely possible that ABF may incentivize unnecessary care, Alberta currently has over 80,000 patients waiting for medically necessary care to get through first before such a problem is even conceivable.
That said, the shift to ABF is simply one step towards improving Alberta’s universal health-care framework and must be accompanied by additional reforms. For example, the province should continue efforts towards a central intake system for patient referrals to eliminate bottlenecks and connect patients faster. If ABF successfully increases the volume of care delivered (thereby reducing wait times), there may be a surge in post-acute care in the short term, which the province should prepare for ahead of time. And finally, the absence of a market for health care means we lack true prices for services. As a result, the government will need to actively monitor and tweak reimbursement rates to ensure efficiencies are realized.
Finally, it’s worth tempering expectations to a certain extent. The benefits of activity-based funding are seen most prominently in countries that do not cap overall spending (Switzerland and Germany) and less so in countries that situate it within an overall budget (Australia and the U.K.).
While health-care policy during the first two years of Smith’s premiership might be (perhaps harshly, but appropriately) characterized as shuffling deck chairs on the Titanic, the current announcement represents a decision to chart a new course and boldly go where countries like Australia, Switzerland, and Germany have gone before.
