Over the past several weeks, Albertans have seen multiple headlines about the province’s latest health care crisis: untenably long waits in emergency rooms. And, predictably, the province announced a plan to deal with the crisis that will ultimately have little meaningful impact because it ignores the underlying cause: how the province unwittingly encourages hospitals to maintain long waiting lists through how it pays for hospital care.

In Alberta, hospitals are funded through global budgets. That means every year hospitals are given money which they are expected to consume while caring for patients over the year. The advantage of global budgets is that they are simple to administer for the government, provide a direct means of controlling hospital expenditures, and allow planners to predict hospital expenditures with some accuracy.

That’s all very nice from the government end of things. But it’s not so nice for patients as is now obvious, and here’s why: Under global budgets, hospital administrators have an incentive to discharge patients quickly, avoid admitting costly patients, and shift patients to other outside institutions (other hospitals or care providers) as a means of controlling expenditures. One way of doing this is to have long wait times for or limited access to hospital services, which leaves doctors struggling to care for patients who need these services, which brings us to the crisis we have in ER today.

The core problem is that global budgets disconnect funding from the provision of services to patients. Incentives to provide a higher, or superior quality of care to patients, (including access to services) are virtually absent, particularly in Canada’s uncompetitive health care environment. There is also no incentive to function effectively.

There is however, a better way to pay hospitals. A method that creates powerful incentives to deliver a greater quantity and quality of services while still incorporating an incentive to control the costs of services delivered. It’s called activity-based funding and boils down to the simple concept of money following the patient. Hospitals are paid a fee for each individual cared for, based on the expected costs of treating the patient’s condition as diagnosed at the time of admission (including other significant conditions and health factors such as a pre-existing illness) or sometime thereafter.

Replacing global budgets with activity based funding would have a significant impact on Alberta’s health care system. Vitally, under activity-based funding, the more patients a hospital treats, the more resources accrue to the hospital. This is the opposite result of what happens under a global budget model.

The benefits of moving to activity based funding are not just theoretical. The experiences of European nations confirm that money following the patient will improve the state of affairs considerably.

Swedish county councils (responsible for hospitals in that country) moved to activity-based funding in 1993 and 1994. Councils that adopted activity based funding became more efficient than those that had not; one study estimated a cost savings of such a reform to be approximately 13 per cent. Stockholm county in particular experienced an eight per cent increase in inpatient care, a 50 per cent increase in day surgeries, and a 15 per cent increase in outpatient visits (an 11 per cent increase in activity overall) while total costs actually fell one per cent. Notably, the improvements in hospital efficiency do not appear to have been accompanied by reductions in the quality of or access to care for Swedes.

Italy had a similar experience with the introduction of activity based funding: the Italian health care system was able to care for twice as many patients in 1998 as in 1994 despite having fewer inpatient acute care beds per 1,000 population. Notably, Italian hospitals did not resort to admitting less ill patients to increase revenues either.

A partial move to activity-based funding in Denmark also led to an improvement in the state of affairs for patients: a study following 18 common surgical procedures measured a 13 per cent increase in hospital activity in the year immediately following implementation and measured a 17 per cent reduction in average waiting times. This mirrors work done by the OECD which found that waiting lists are less likely to be seen as a problem in the presence of activity-based funding.

By disconnecting funding from the provision of care, the current global budget funding system for hospitals in Alberta creates serious problems for Albertans in need of care. It is well time we moved to activity based funding and got the hospitals working for Albertans.