Commissioned Research

Hospital Payment Policy in Canada: Options for the future

by admin admin | Mar 15, 2011

Jason Sutherland
Centre for Health Services and Policy Research, University of British Columbia 

PDF version (324 KB)

Key messages

Canada’s publicly funded healthcare system is facing increasing cost control pressures. Hospitals alone represent a substantial burden on provincial health budgets, accounting for 28% of total costs. Presently, in the Canadian system, the primary source of funding for hospitals is through a global budget. Under this model, a fixed (global) amount of funding is distributed to each hospital to pay for all hospital-based services for a fixed period of time (commonly one year). Global budgets:

  • Are based on historical spending, inflation, negotiations and politics in many provinces, rather than on the type and volume of services provided.
  • Constrain hospital spending growth and create budgetary predictability; however, its consequences may be decreased services and increases in waiting times.
  • Do not provide incentives to improve access, quality or efficiency of hospital care.

Funding hospitals on the basis of the type and volume of services they provide has become the international norm. Known as activity-based funding (ABF), these systems have been systematically supplementing global budgets in public and private insurance-based health systems around the world. ABF:

  • Provides powerful financial incentives to stimulate productivity and efficiency: efficient hospitals retain the difference between the payment amount and the hospital’s actual cost of production.
  • Is associated with higher volumes of hospital care, shorter lengths of stay, and yet has not been linked to poorer quality of care.
  • Is linked to higher overall spending, due to higher volumes of patients being treated, and evidence of lower cost per admission is mixed.

Combining properties of ABF and global budgets may optimize the strengths of both global budgets and ABF. Many countries that have ABF to fund their hospital systems utilize a blend of global budgets to control spending, while instituting an ABF mechanism to create incentives for hospitals to provide timely and equitable access, appropriate volume of care, and efficient care.

In the Canadian context, recommendations are:

  • Adopt population-based funding at the regional level to reduce historical funding inequities by recognizing differences in need across populations, regions and over time.
  • Blend ABF and global budgets to create incentives for hospitals to improve hospital efficiency and access.