Published in the Toronto Sun on April 5, 2012
By Colin Busby
The Ontario government recently announced plans to radically change the way it pays hospitals. The plan is to gradually move from a system of lump-sum budgets to a system that pays hospitals according to patient needs.
Change is overdue: Most advanced countries have already developed consumer-driven payment models for more timely patient care. But Ontario’s hospital payment plan must get the incentives right to encourage innovation, maintain quality and curb the growth in health costs.
Hospitals were paid roughly $17.6 billion, or 36% of the overall public health budget, by the province of Ontario in 2011. That’s by far the largest slice of the health care pie, making hospitals an obvious target for improved healthcare efficiency.
Ontario has traditionally paid hospitals a lump-sum annual payment based upon past budgets, regardless of the volume, mix and costs of services that the hospital actually provides. Under this system, hospitals have no financial incentive to take on more patients, to deliver fast and efficient care, or discharge patients quickly.
Instead, under a patient-based funding model, hospitals are paid according to patients’ health needs. This creates incentives that encourage hospitals to take on more patients and compete for patients with nearby hospitals. Citizens would become choosing customers, not simply patients, in the health system.
Over time, Ontario is planning to reduce the lump-sum budget share of hospital pay from 100% to around 30%, with the remaining 70% dependent upon the services provided to patients. Patient-based payments will increase with the complexity of patient illnesses treated, and hospitals will be paid fixed fees for the number of patients they treat for selected procedures, such as hip and knee replacements.
These are welcome changes, but they face some challenges.
A payment mechanism based on the number of patients treated should produce a more efficient pattern in hospital care: some hospitals would treat only patients with uncomplicated problems, while complex problems would be treated in a small number of specialized institutions.
Some hospitals, however, may fail to respond to the new payment model. In such cases, they must be allowed to struggle with the new financial realities, without the support of government.
Under the proposed reforms, it is not clear if hospitals would keep the increased revenues from efficiency gains and reinvest these funds as they wish. If hospitals are not free to decide how to spend new revenues, the benefits of the new plan would be watered down.
Another criticism is that hospitals would have the incentive to overcharge. “Upcoding” patients would enable hospitals to characterize patient needs as being more dire than they are, and hence more financially valuable — to the hospital — to treat. This means that excessive patient-based funding, coupled with a rising volume of services, can result in the government losing control of the overall health budget.
What about the quality of care?
International evidence shows that for many illnesses, the expected outcomes are generally better in hospitals that treat a large number of patients with similar conditions. There are a few examples of quality deterioration, though this problem could be mitigated with patient monitoring after hospital treatment.
The reform has been a long time coming. In a better world, the province might, years ago, have started test runs in selected hospitals to learn what works and how to get the incentives right. The shift, however, shows change is possible.
— Colin Busby is a Senior Policy Analyst at the C.D. Howe Institute in Toronto
