It seems like common sense. Hospitals that provide more services to more patients should get more money than those that don't.
However, in Canada, a significant portion of the funding hospitals get is based on past budgets. This means that each year hospitals get regular budget increases to cover rising labour, medical equipment and other costs. However they have little in the way of a corresponding obligation to improve performance or cut waiting times.
Fortunately that seems to be changing. In recent months, the provincial governments of Ontario and British Columbia have taken steps to promote activity or patient-based funding, at least for a portion of hospital budgets. This means that the more clients they treat, the more money they will get.
Now, I will grant that some types of hospital activities are not particularly well suited for activity-based funding. Maintaining a certain level of availability and resources in an emergency room unit, regardless of the actual number of patients that may come on any given day, comes to mind.
But even for the parts of hospital activities that are perfectly well suited for this approach, the reformers will be confronted with opposition stemming from entrenched mentalities. Many hospital administrators tend to defend traditional hospital funding methods, and labour relations and union logic are often organized in a way that is not conducive to activity-based funding.
It has been observed that, under the current system, managers whose innovations lead to spending reductions have seen their funding cut in ensuing years' budgets. Similarly, innovations that cut wait times and attract more patients can actually hurt hospitals, because they increase pressures on their fixed budgets.
Lessons from European countries where activity-based funding has been introduced should be kept in mind. For example, delays in England's hospitals fell rapidly after the introduction of an activity-based funding system. The median wait time for elective surgery in England fell by an impressive two-thirds between 2000 and 2010. The reduction was even more pronounced for patients in less well-off areas that have hip and knee replacements, or cataract removals.
There is always a danger that implementing new initiatives like activity-based funding could lead to unexpected consequences. For example, some hospitals could be tempted to move toward treating less complex (and thus more profitable) cases.
But England dealt with this possibility by developing methods to identify atypical cases in order to take into account the extra costs, so as to avoid "perverse incentives."
Canada's medical system is large, complex and pretty bureaucratic. So no one should expect that moving toward activity-based funding for hospitals will be easy or that it will prove to be a silver bullet for all of our problems.
However both economic theory as well as practical empirical observations dictate that increasing the link between performance and actual services delivered, on the one hand, and funding, on the other hand, would be a hell of a good start.
Michel Kelly-Gagnon is president of the Montreal Economic Institute (www.iedm.org). The views reflected in this column are his own.