The Ontario Ministry of Health and Long-Term Care is changing the way it funds hospitals for the upcoming fiscal year, which starts on April 1.

The new funding formula is intended to improve efficiency. However, many hospitals are unprepared for the change.

We spoke with hospital executives and other experts to better understand what is likely to happen and the implications.

Earlier this month, in a presentation to hospital executives across Ontario, officials from the Ministry of Health and Long-Term Care described substantial changes to how the government proposes to fund hospitals in the upcoming fiscal year, beginning on April 1. The changes are intended to improve hospital efficiency. However,  hospitals are still in the dark about some of the details, and many are unprepared for the shift.

The government has indicated that hospitals will receive 54% of their funding in the traditional manner, called global budgeting. The remaining 46% will be determined in a new manner – 40% will be allocated to hospitals based on the results of a funding model called the Health-Based Allocation Model (HBAM) and 6% via what are being called “clinical quality groupings.” The Ministry of Health has said that over the next 3 years it expects to shift to a model where the global budget share is 30%, the HBAM-calculated share is 40%, and the “clinical quality groupings” share is 30%.

These funding reforms have significant implications for how hospitals provide services. In a future article, will explore the pros and cons of allocating funds via the “clinical quality groupings” mechanism, which appears to work in a manner similar to what others have called activity-based funding. In this article, we focus on the implications of using HBAM to determine hospital funding levels.

What’s wrong with global budgets anyway?

Hospitals in Ontario receive money from the Ministry of Health and Long-Term Care via the Local Health Integration Networks. Each hospital’s allocation is determined by historical spending patterns, inflation and one-off negotiations between hospital executives and civil servants. Global budgets provide stable funding but do not provide financial incentives for increased efficiency. As well, some hospitals have been more successful at negotiating than others, and critics of global budgeting argue that these negotiations lead to some hospitals receiving more than their fair share of resources.

Adalsteinn Brown, a former Assistant Deputy Minister at the Ministry of Health and now a professor at the University of Toronto says “there is widespread recognition that there is a need to shift away from global budgets to new funding models that can incent higher productivity, better technical quality and improved patient satisfaction.”

The government appears to agree. In its presentation to hospital executives, Ministry of Health officials indicated that they believe that changing the way hospitals are funded will improve access and quality, reduce wait times and reduce costs.

The Health-Based Allocation Model – HBAM

With the creation of the Local Health Integration Networks in 2006, the Ministry of Health began to experiment with new funding approaches for health provider organizations. A planning tool, the Health Based Allocation Model (HBAM) was developed as a ‘made in Ontario’ solution to inform funding models. Although the government states that HBAM supports “an evidence-based distribution of funding,” the model is neither publicly available for others to use and test, nor does it appear to have been validated in the academic literature on health care financing.

A detailed description of the HBAM model is provided on a password-protected Ministry of Health website. obtained access to this website and spoke to several Ontario experts in an attempt to better understand how the model works.

HBAM uses a number of inputs (historical service volumes, expected population growth and health care access patterns in a specific region, the size and teaching status of a hospital, etc.) to predict how many services each hospital should be providing each year and the cost for each service.

While the Ministry of Health has been using HBAM as an internal planning tool for several years, only this month did it announce that it would use the model to determine 40% of each hospital’s annual funding allocation. This change is expected to take effect starting on April 1. Many health system decision makers that we spoke with told us that hospitals in Ontario are not prepared for this shift.

A major reason for the unpreparedness is that most hospitals do not have systems to keep track of how much each clinical service costs. Instead, hospitals generally keep track of costs at the department level. For example, a hospital in Ontario might know how much it is spending on its emergency department but not how much it costs to treat the average patient with a broken arm. This is problematic because a hospital that is deemed to be inefficient after the introduction of HBAM will only be able to understand where it is inefficient if it knows how much it spends to provide each service.

What are some possible outcomes of the new funding model?

The best-case scenario is that the use of HBAM eventually leads to funding being allocated to hospitals according to actual need. This would eventually lead to more equitable service provision across Ontario and better value for money.

But with so little understanding about how HBAM will work in practice, it is also possible that the formula predicts neither the need for services nor their cost with a high degree of accuracy. If the formula doesn’t do what it is supposed to, then its usage might not improve funding allocation decisions. And because of the disruption to the current system, the use of the HBAM formula could make things worse.

Even if the formula accurately predicts the need for services and their costs, a sudden decrease in funding (even as small as 1%) could force “inefficient” hospitals to close beds, cut services and lay off staff. If that were to happen, wait times could increase and the quality of care could deteriorate. When asked about this, both hospital executives and Ministry of Health officials stated that it is the job of the LHINs to ensure that decreases to the budget of individual hospitals do not lead to inferior access or quality for patients. But many experts have noted that many LHINs do not have sufficient expertise or staff to adequately fulfill this role.

The Ministry of Health has also committed to establishing a ‘corridor’ within which budgets can increase or decrease based on HBAM, at least for the upcoming fiscal year. However, the exact limits of this corridor have not yet been confirmed.

Why change now?

Almost everyone we talked to within both the Ministry of Health and the hospital sector agreed that very few civil servants and hospital staff understand how the HBAM formula works. Furthermore, most hospitals are unprepared for budget cuts that would take effect in a little over a month.

However, making substantial change within health care is almost always disruptive. Many experts we spoke with noted that international experience suggests that incremental approaches to changing funding models tend to fail, and that Ontario’s approach to changing how hospitals are funded should “go big or go home.”

Is Ontario taking the right approach with moving away from global budgets for hospitals?

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