Moving to an activity-based funding model would improve efficiency and reduce wait times in the Alberta healthcare system
Imagine that a theatre only lets in a limited number of viewers to watch a very popular film despite having many more usable seats and a lineup around the block. Suppose it sections off these perfectly usable seats, leaving a queue of eager viewers waiting in the cold.
This is happening right now, except that instead of theatregoers waiting in line for a show, it’s Albertans waiting in line for healthcare.
One reason for this is a seemingly harmless offender: how hospitals are funded.
Currently, hospitals in the province receive a set amount of money at the start of the year, a fixed pie based on an expected number of procedures for the year. This approach, known as global budgeting, relies mostly on historical volumes.
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Global budgets disregard the actual cost of providing care today and undermine incentives to improve care and efficiency.
There’s a better way. With activity-based funding (ABF), hospitals are paid according to the type and number of procedures actually performed. If a hospital treats more patients and delivers more services, it receives more funding; if it does less, it receives less.
This funding model is old news in most OECD countries and has been explored and expanded in other parts of Canada. For instance, based on its observed success over the past two decades, Quebec has just extended it to a number of new medical sectors, including emergency care.
Indeed, Quebec has had great success with activity-based funding. The sectors where it has been applied have experienced boosts in productivity and volume, alongside reductions in costs and wait times. For example, after implementing activity-based funding for MRIs, there was a 22 percent increase in the number performed, and the unit cost decreased by four percent.
Activity-based funding has been highly effective in reducing hospital congestion in Quebec. As a result, the province, which currently applies this funding model to approximately 25 percent of physical hospital care, plans to increase this to 100 percent by the 2027-2028 fiscal year.
And it doesn’t take decades to reap the rewards, either. In Australia, after activity-based funding was implemented 30 years ago, the volume of care rose, and waiting lists decreased by 16 percent within the first year.
Australia has since made activity-based funding the rule rather than the exception. When first introduced, it made up about 25 percent of hospital revenue, similar to Quebec at the moment. Now, it makes up 87 percent of total hospital spending in Australia.
The positive outcomes of activity-based funding were not limited to just the early years; studies indicate that it has consistently improved hospital performance in Australia.
Improved performance like Australia’s is just the medicine Alberta needs for its ailing healthcare system, which costs more and performs worse than many others across Canada and around the world.
Wait times alone tell the story: In 2022, Albertans waited a median 232 days for a hip replacement, Quebecers 203 days, and Ontarians 108 days. In Australia, they waited a median of 175 days in public hospitals.
It’s clear that the status quo is not working for Albertans, and its current funding system, which undermines efficiency and productivity, is one culprit. When the compensation for performing 10 procedures is the same as for 25, there’s little incentive to exceed the minimum required number.
Incentives matter in healthcare, as they do in all areas of economic activity. Activity-based funding can increase access to care for all Albertans by ensuring hospital administrators see a clear benefit in treating more patients.
Krystle Wittevrongel is a Senior Policy Analyst and Alberta Project Lead with the Montreal Economic Institute.
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