Is activity-based funding for hospitals really a good idea?

What do you first think of when you learn that a loved one has been hospitalized? Most of us worry about our loved one getting the best treatment, having appropriate follow-up care and being sent home when they are well. As the person’s family doctor, I may connect with the team in the hospital to ensure a smooth transition when it is time for discharge. The last thing I would want for my patient or your loved one is for them to be discharged before it is medically appropriate.

As a family physician, I work along with patients in the ongoing management of their chronic diseases as well as providing preventative care services. However, if an elderly patient comes into my office with signs of severe pneumonia, the likelihood is that this patient needs to be hospitalized.

Historically, hospitals have been funded through global budgets. Global budgets mean hospitals have the flexibility to tailor care needs to patients, including how long they stay in hospital, without a set formula. However, critics have argued that there is no accountability in this funding model and a new model called Activity-Based Funding (ABF) has been gaining popularity.

Activity-based funding changes how hospitals receive funds so a pre-determined fee is reimbursed for each episode of care based on a diagnosis. That fee is intended to cover the bundle of services ordinarily provided to patients with that diagnosis. This would mean the hospital gets reimbursed a set amount for my patient with a diagnosis of pneumonia. The concern is that this type of payment model could have unintended consequences.

A systematic review and meta-analysis was recently published in PLOS ONE by an international team of researchers that reviewed the evidence from around the world on activity-based funding since 1980. The study showed that hospitals using ABF discharged patients earlier. Since the hospital gets the same amount for my patient with pneumonia whether he is admitted for four days or seven days, there is an incentive to discharge him early. While unnecessarily lengthy hospitalizations can lead to preventable infections and complications, the concern is whether this funding model would lead to patients being discharged before it is medically appropriate – “quicker, but sicker”. The study also found a possible increase in the rate of re-admission to hospital after discharge, which would be in keeping with this concern. As well, there is an incentive to claim a patient has a more severe condition than they do to maximize reimbursement, something referred to as ‘upcoding’.

The study also found that hospitals with ABF had a 24% relative increase in the number of patients discharged to “post-acute care” meaning rehab centres, convalescent care, long term care, nursing homes, or home care. This means ABF puts increased pressure on our community services, many of which receive limited or no publicly-funding, which can mean increased costs for patients. Despite this, there has been no indication that a move to ABF would be accompanied by governments funds to pay for the increased pressure on these community services and patient’s pocketbooks. Under activity-based funding, my patient with pneumonia may get coded as more severe than he is, be discharged earlier with home care services which he may have to pay for out of pocket, and potentially have a higher likelihood of getting readmitted. This does not strike me a good public policy.

Ontario, BC and Quebec’s health systems are moving towards activity-based funding to replace our current hospitals funding mechanisms, but it is clear that there may be some significant concerns with this approach. Canadians should consider the findings of this study and the implications that ABF could have for our health. We ought to pause and ask whether this is really the direction we want to go in for our patients and our loved ones.

The comments section is closed.

  • Wilmer Matthews says:

    Regardless of the funding model for Hosps. the real roadblock to discharging patients to appropriate community facilities is the lack of capacity in the community! We need to invest more in building up assisted living; LTC; Homecare(CCAC); and the CSS sectors to accommodate this ever increasing number of sick people–mainly frail seniors .
    The other expectation of this model, not mentioned above is that the bundled funding $$$ must ‘follow the patient’! No one has clearly articulated how this will happen. Also, this appears to be a’big ‘Hosp. funding initiative–how will small, rural and isolated Hosps. with low patient volumes cope with this??
    MOH needs to reach out to all the partners to gather their views, and seek their direction since they will be the ones responsible for implementing this funding model. Failure to really consult and collaborate with these key partners will result in a process that leads to, as mentioned above, ‘quicker, but sicker, discharge practices. Our patients deserve better.

  • Mrs. W says:

    Until the culture of healthcare is cured and providers and hospitals are aligned on a unified purpose (to provide great health care that enhances the health and well-being of patients) – it does not matter what funding mechanism is used (ABF versus Global budgets). Further, patients need to have more power in the relationship as they are at the whim of government budgets with respect to getting access to care and the quality of care that they experience.

    ABF might have some of the same consequences that global budgets do. I do not see government being willing to give hospitals a blank check for however many procedures they can pump through – there will be caps, and once the budget cap is reached there will still be rationed care. If the hospital is reluctant to provide services under a global budget, they will be just as reluctant to provide services when the marginal gain from doing so is $0 once the cap has been met. Conversely, under a global budget, there is very little incentive for hospitals to do more or find ways to be more efficient. If a hospital gets paid the same regardless of whether it does 1500 knees or 2500 knees, it’ll do 1500 and people will be left waiting. Both systems are problematic – and ultimately what is most problematic is the very fixed nature of government funding, which is not based on health needs but rather resource availability.

    Ideally the system would provide a truly universal and comprehensive (read: same accross the country, including pharmaceuticals and para-health professionals and community services) floor and allow for individuals to use their own resources to fund services above that floor (like what is done in most other advanced economies in Europe).

    Further, patients might well have a preference to get access, even if it means more out-of-pocket costs for post-surgical recovery and should be included in the discussion as ultimately the way in which health services are funded impacts access to care and quality of care experienced.


Ritika Goel


Ritika Goel is a family physician at Unity Health Toronto, Inner City Health Associates and Assistant Professor at University of Toronto.

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