ABF Small hospitals

While most may think of large, urban-based hospitals when they think of the provision of acute care in Canada, the reality is that there are a number of small hospitals that also provide a portion of this care. “Small hospitals” are not consistently defined across the country. The Ministry of Health and Long Term Care (MOHLTC) in Ontario, for example, convened the Ontario Joint Policy and Planning Committee (JPPC) Multi-Site/Small Hospitals Advisory Group, which defines small hospitals as those with fewer than 4,000 inpatient weighted case per year (CIHI 2011b). Whereas, the Canadian Institute for Health Information’s Sparsely Populated Regions Advisory Group defines small hospitals as those with 2,000 or fewer weighted cases (Ontario Joint Policy & Planning Committee 2006).

Under the former definition, there are 93 small hospitals in Ontario. Under the latter definition, there are 204 small hospitals in western Canada (including BC, AB, SK, MB, Yukon, NWT, and Nunavut). Many of these hospitals are in areas that can be considered rural, so the term “small hospital” and “rural hospital” are often used interchangeably. We see a distinction between these two types of hospitals and have made every attempt to distinguish between the two in the text where appropriate.

While ABF may increase volume and reduce wait times – for the same reasons they do in large hospitals, the policy may also carry some unintended consequences for smaller hospitals. We raise some of those below.

Data collection and (marginal) price setting

Reliable and accurate data collection is crucial under ABF. The information generated from these data is used to set prices and inform hospital-level and policy-level decision making. With this data collection comes an increase in administration and oversight (McKillop et al 2001), and it is unclear if small hospitals have the resources to be able to handle this increase in workload.

Under ABF, hospitals – both large and small – must become responsible for more record keeping and data reporting associated with ABF services. Audits of these data have to be carried out to ensure accuracy and legitimacy, in order to avoid errors or intentional up-coding (Audit Commission 2008; Serden et al 2003). The infrastructure for collecting and reporting data to appropriately adjust for small hospital activity have not yet been defined in Canada (McKillop et al 2001).

Prices set under ABF are based on the average cost of providing care to specific patient types (or case mix classifications). In Canada, hospital cost data used to define prices are dominated by larger, urban hospitals, primarily from Ontario, Alberta, and (to a very small degree) BC. This has unintended consequences for smaller hospitals. The cost structure for delivering care in a large hospital can be different than that for a small hospital. For example, smaller hospitals often face higher costs for recruiting and retaining staff.

Costs and efficiency

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). However, small hospitals may not be able to achieve economies of scale needed to reduce their costs below the average cost (and funding amount) because the cost of labour and supplies can be considerably higher in the areas (i.e., rural) where these hospitals tend to be located (Li et al 2009).

However, it is very important to note that assumptions regarding the existence of effect of economies of scale vary; Queensland and South Australian diseconomies of scale are assumed and payments are higher in larger hospitals than in smaller hospitals (Duckett 1998).

In the U.S., for example, Medicare payments to small, non-ABF hospitals rose on an annual basis by 9.5% from 1998-2003, compared to 3.3% for hospitals of similar size and scope paid using ABF (Rosko & Mutter 2010). On several important productivity measures, these non-ABF hospitals were observed to be less efficient compared to ABF hospitals (Lawler et al 2002).

Whether or not these observations can be generalized to the Canadian context is uncertain – small U.S. hospitals may be quite different from those in Canada. Further research is needed into the cost structure of these types of hospitals in order to understand how ABF policies might affect these Canadian providers.


Ensuring access to hospital-based care concurrent with the implementation of ABF is critical for many communities (Stensland et al 2002). Based on experiences in several countries, ABF can place substantial financial pressure on small hospitals (and close) (Rosko & Mutter 2010). In rural areas this has the potential to result in:

  • Decrease in appropriate hospital admissions
  • Lower perceived quality-of-life and lower perceived health status by residents
  • Increase in wait times for hospital care
  • Decrease in medication compliance (Lawler et al 2002).

Small hospitals tend to have more chronic patients and whose patients have difficulty accessing the spectrum of post-acute care services (Li et al 2009; Lawler et al 2002; Russell-Weisz & Hindle 2000). In Australia, for example, significant variations in hospital length of stay have been observed for clinically similar patients living in rural and urban setting; rural patients tend to have longer stays due in part to the availability of appropriate health care resources post-discharge (Encinosa & Bernard 2005). If small hospitals in Canada experience similar issues, their ability to increase volume, and improve access would be limited.

Duckett has also observed, after ABF was introduced, “very small hospitals” (i.e., those with fewer than 20 beds) in Australia had an average decrease in activity of 1.2% (Duckett 1995). Whether or not this reduction indicates hospitals become more efficient (reducing unnecessary/inefficient activity) or reducing access to certain activities remains unclear.

Quality and adverse events

The evidence relating to small hospitals, ABF, and the quality of care is mixed. Notably, most of this research pertains to small, rural, hospitals, making it difficult to tease out if the quality is related to the size or the rurality of the hospital.

One study compared the profit margins of small hospitals to 1) surgery-related adverse events, 2) nursing-related adverse events, and 3) all preventable adverse events (Li et al 2007). In all three cases, the odds of an adverse event were lower when profit margins increased. Yet another study reported a significant improvement in selected patient safety measures as rural hospitals moved away from ABF, to an alternative funding model (cost-based funding model) (Joynt et al 2011).

Collectively, these studies could be interpreted hospital’s ability to promote in quality improvement and safety programming when there is less emphasis placed on cutting costs and more money available to invest into these efforts. Lower profit margins, or more emphasis placed on cutting costs to improve margins may come to the detriment of quality of care.

This is tempered, however, by recent research observing poorer performance on process measures, clinical outcomes, and higher rates of mortality when comparing non-ABF rural hospitals to ABF rural hospitals (CIHI 2008a). Clearly, more research is needed into this important issue.