Ontario hospital funding: confusion for 2012/2013?

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.”

The comments section is closed.

  • Frusterated and dissapointed Healthcare professional says:

    I just received news that they are cutting two full-time jobs in our department. I am assuming it is because of this new HBAM funding. I guess I will be in the unemployment office this spring. I just wanted to personally thank the Minister of Health for this situation. There are no jobs in my field of work.

  • Karen Palmer says:

    Published October 27, 2014 in PLOS ONE:

    Activity-Based Funding of Hospitals and Its Impact on Mortality, Readmission, Discharge Destination, Severity of Illness, and Volume of Care: A Systematic Review and Meta-Analysis

    Karen S. Palmer, Thomas Agoritsas, Danielle Martin, Taryn Scott, Sohail M. Mulla, Ashley P. Miller, Arnav Agarwal, Andrew Bresnahan, Afeez Abiola Hazzan, Rebecca A. Jeffery, Arnaud Merglen, Ahmed Negm, Reed A. Siemieniuk, Neera Bhatnagar, Irfan A. Dhalla, John N. Lavis, John J. You, Stephen J. Duckett, Gordon H. Guyatt

  • Carsten says:

    Global budgets have their place, however in it’s current implementation it’s the ‘negotiation’ between individual hospitals and LHIN that is seriously flawed. As we so often see in government ‘negotiation’, this fosters various levels of ‘lobbying’, ‘favors’, ‘graft’ and personal agendas, not to mention hospitals ‘out of favor’ or with poor negotiation skills to loose funding affecting every citizen in their complete catchment area. This should never be accepted with public funds or public health.
    Proper sizing and inventory of Catchment areas has proven to be seriously flawed with little change in the forecast. Fast growing populations within existing catchment areas, or changing demographics within, are very poorly calculated and use extremely dated and suspect data to base their decisions on, making it more of an impression than a science. LHIN does not have the expertise to properly handle this analysis and does not have the necessary stakeholders involved to get the data needed for this approach.
    Couple these two serious inadequacies together seriously impedes the global funding approach and will affect HBAM approach if not addressed. Once done, a combination approach will be a badly needed improvement.

  • Crystal says:

    As a registered nurse employed by a hospital in Ontario, I can tell you that HBAM’s new funding allocation has and will continue to affect the quality of care patients are going to be recieving immensely.

    The only way to cut back large amounts of funding deficits (ie: $900,000 on the unit I am employed by based on the new funding model) is to cut back staffing. There is no way around it. When an influx occurs, there will be no one around to handle it as with HBAM you now staff for “what is not what if”.

    When what if happens, who will be around to care for these patients?

  • Julian Nam says:

    I hope this is just a first step. We should push some services out of the hospital into the community; for this the Ministry would have to address the funding issues from this perspective. This would also need a higher degree of integration between different service providers.

    I agree that costs are not easily determined. Though the costs may not always be accurate, since they are tied to expected performance (which is tied to resource use), would this not give the same incentive to all hospitals? That is, to encourage efficiency. Of course, the major downside is if the model underestimates the reality, we might be encouraging cutting necessary services. But to my knowledge, it is not relying solely on something like this to determine all of the funding.

    Performance-based funding could evolve into incorporating funding that is tied to the achievement of proven evidence-based best practices which, for whatever reason, were not being implemented.

    The model seems to be very cost-driven but I hope it will also be outcome driven in future developments. The model will need continuous improvement but I think it is a step in the right direction.

  • Mark MacLeod says:

    I have my concerns. HBAM is still at the end a funding allocation model. We are a long way from either case based funding or from a competitive model. We don’t know what anything costs and there seems no incentive to try and find out. It’s a paradox that we are asking for increases in efficiency when we have no idea what anything costs right now. How do we introduce competition into the current marketplace such that institutions that are not competitive either see a change in leadership or frank closure?

    We need a change to a competitive marketplace to supply services with clear expectations that hospitals neither can opt out of a certain field because they are not competitive and don’t have to provide every service – and there is one of the primary roles for the LHIN.

    Changing to a model where funding truly follows the patient means some hospitals will wither and disappear and laws of natural justice will, as they should, apply. It will force all participants to examine what they really want – from doctors to critically appraise how they diagnose and treat, to labour unions to whether a well paid job is preferable to no job at all, to administrators really managing and leading, demonstrating value add for their presence.

    HBAM will not solve any of this. We will see inefficient hospitals simply opting out of business they don’t provide effectively – just another form of rationing.

  • Lewis Hooper says:

    In a perfect world HBAM may be the turning point ensuring a fair distribution of funds. But to be seen as fair it will have to be well understood and accepted by the field and there will still need to be mechanisms to deal with any disruption and ensure that patients see an improvement in care, and staff and other stakeholders are dealt with fairly. Another interesting aspect is how this ties into the Drummond report and if /how LHIN’s will be engaged. My memory of HBAM is that although the principles behind it were sound, the details of the model were opaque.

    My bet is that in the actual implementation the model will be tuned so that the actual amount of funding that moves is very slight, and that the LHINS will be tasked with dealing with any redistribution and any impact so that any disruption falls on them.


Karen Born


Karen is a PhD candidate at the University of Toronto and is currently on maternity leave from her role as a researcher/writer with

Irfan Dhalla


Irfan is a Staff Physician in the of Department of Medicine at St. Michael’s Hospital and Vice President, Physician Quality and Director, Care Experience Institute at Unity Health Toronto. Irfan also continues to practice general internal medicine at St. Michael’s Hospital.

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