With health care budgets steadily rising across most Canadian provinces, the limitations of conventional global budgets to fund acute hospitals are becoming more apparent. This type of care encompasses the single largest expenditure in provincial health care budgets across the country (CIHI 2009b). Activity based funding (ABF) offers an alternative to the global budget funding mechanism, one that is earning favour amongst policy makers across the country.
Budgetary concerns are only one issue that should be considered before pursing ABF initiatives. ABF has been widely implemented across most developed nations over the past 30 years, and a rich body of literature provides deep insight into further considerations for policy makers, hospital administrators, and researchers.
Data collection and (marginal) price setting
ABF relies heavily on standardized, timely and accurate hospital data (Farrar et al 2009). These data are then used to set the price of acute services. Setting the right price under ABF is crucial because it directly impacts hospital behaviour (Eaton 2006; Llewellyn & Northcott 2005). If marginal prices are set too low, there will be no incentives for hospitals to increase volume; setting prices too high will crowd-out other, non-ABF, services (Farrar et al 2009). Ensuring that prices are set accurately requires that policy makers and hospital administrators understand the cost structure associated with delivering specific types of acute care. To date, this has proven difficult in Canada, with few jurisdictions across the country having the capabilities of detailing their cost structure (Arnaboldi & Lapsley 2005).
Data collection also includes establishing some form of auditing to ensure that the data being reported is accurate. Some countries having implementing ABF policies have observed an increase in patients’ reported level of complexity, such as comorbidities (Audit Commission 2008; Serden et al 2003). This may be a result of better diagnostic and coding practices (Carter et al 1990), or it may be an attempt to “upcode” patients into a higher payment amount (Becker et al 2005; Hsia et al 1992; Silverman & Skinner 2004; Steinbusch et al 2007).
Competition and costs
ABF will likely spur competition amongst hospitals (Eldridge & Palmer 2009; Ettelt et al 2006). Under global budgeting, hospitals were concerned with only one side of the balance sheet: costs. ABF offers hospitals the ability to manage their revenues and deliver care by the most efficient means possible. Hospitals will have the opportunity to adjust their volume and patient mix to match their strengths and efficiencies, in order to maximize revenue (Duckett 2008).
Reduced per patient costs
Under ABF, hospitals earn the difference between the cost of service and the ABF payment amount. This creates strong incentives for hospitals to adjust their labour (e.g., operating room staff) and non-labour (e.g., technology) inputs to maximize cost efficiency (Arnaboldi & Lapsley 2005; Duckett 2009). Making more efficient use of resources will reduce the cost of hospital activities on a per patient basis.
Crowding-out
Some caution must be headed, however, for there is a risk of crowding-out other procedures in the name of revenue generation and efficiency. Crowding-out occurs when prices are set too high. Hospitals have a tendency to increase the volume of those activities with the highest margins, potentially at the expense of other activities not funded by ABF (or with lower margins) (Belanger & Tardif 2006; Fattore & Torbica 2006). However, recent studies conducted in Ontario have observed no such effects as a result of introducing incremental funding for some hospital activities (CIHI 2008b; Paterson et al 2007).
Higher overall costs
It should also be noted that as ABF increases the volume of services, there will be an increase in the overall, system-level, costs. There will also likely be costs associated with new investments in technology, data capturing and reporting procedures, and auditing costs. Policy makers should prepare accordingly, either increasing their acute care budget or look for an offsetting reduction in costs. Likewise hospital administrators should prepare for an increase in their administration and information technology (IT) costs.
Volume and length of stay
Australia (Duckett 1995), Norway (Directorate for Health & Social Affairs 2007), and Sweden (Gerdtham et al 1999) have all reported an increase in hospital volumes after implementing ABF policies (Street et al 2007); a generally desirable effect which may reduce waiting times. Increase in volume, however, is not without its drawbacks; research from some countries suggests that ABF may lead to an over-provision of hospital care, particularly for care that tends to be the most profitable (Ginsburg & Grossman 2005; Ginsburg 2006).
This increase in volume is made possible by a general reduction in the length of stay. Evidence from the United States (US) has reported an association between ABF and: 1) shorter length of stays in acute care and 2) greater use of post-acute care (Kahn et al 1999).
Likewise, similar observations have been made in health care systems with similar characteristics to the Canadian system. Some European countries (Ettelt et al 2006; Moreno-Sera & Wagstaff 2009) and Australia (Duckett 1995; Street et al 2007), for example, have reported shorter lengths of stay and a shift of activity from acute to post acute care with the adoption of ABF.
Access
The same financial incentives for hospitals to increase volumes (i.e., revenue generation) also translate to improved access. The greater the volume and more procedures being conducted, the lower the wait times (Duckett 1995; Ettelt et al 2006; Hagen et al 2006; Hurst & Siciliani 2003), thus improving access to care.
However, while access may be improved, the US has observed reduced access for more costly patients, such as those with chronic illnesses or disabilities (Antioch & Walsh 2004; Belanger & Tardif 2006; Fattore & Torbica 2006). Moreover, efforts to centralize some hospital services to capture economies of scale may lead to reductions in geographic access.
Quality
The effect of ABF on quality of hospital care has also been studied. Mortality was unchanged in the US (Eldridge & Palmer 2009; Mayer-Oakes et al 1988), England (Farrar et al 2009) and Italy (Louis et al 1999) after ABF implementation; while an evaluation of 28 countries detected a weak association between ABF policies and lower mortality (Moreno-Sera & Wagstaff 2009). Based on patient surveys, Norway has found an increase in patient satisfaction as a result of lower wait times attributed to ABF (Hagen et al 2006).
Services and hospitals for which ABF are problematic
Several types of services have been identified as difficult to manage with ABF. Emergency room, ICU, and mental health care are all examples of services which may not be appropriate for ABF because they are associated with more intensive levels of care and higher costs (Ontario Association of Community Care Access Centres et al 2007). Many systems have excluded these services from their ABF policies (Ettelt et al 2006).
Likewise, ABF may be problematic for some hospitals. Highly specialized hospitals, with a greater number of very complex cases, tend not to do work well under ABF policies (Ettelt et al 2006). Their costs per patient are often much higher than the average hospital, causing them to run a deficit.
Academic hospitals do not tend to work well under ABF because non-medical services, such as teaching and research, are not remunerated under ABF (Ettelt et al 2006).
ABF can also pose challenges to small, or rural hospitals. For further information, please refer to the content on small hospitals.
