Activity-Based Funding (ABF)

Under Activity-Based Funding the services that patients receive in hospitals for a particular illness are classified into clinical groups that use similar levels of hospital resources. Hospitals receive a fixed amount for treating patients in these groups. The money follows the patient to the facility that provides the service. Thus, hospitals do not receive an annual budget from the government based on what was spent last year, but instead receive money based on the numbers of patients seen with a given medical problem and diagnosis-related group classification. It is argued that Activity-Based Funding (ABF) would provide an incentive for hospitals and surgical facilities to improve productivity, thereby decreasing waiting times and costs. It is postulated that if hospitals rely on high volumes of “activity” to get their funding, then they will perform more procedures and see more patients.

There is little, if any, evidence that ABF on its own is a cure for waiting times. If not implemented and monitored carefully, ABF can provide a disincentive for hospitals to provide low-volume but needed care and lead to hospital closures in rural communities. If linked to increased investor-owned for-profit delivery it can also threaten coordination of care, increase the unit cost of health care, and threaten care quality.

If Canadians are to explore activity-based hospital funding, we should do so with our eyes wide open to the risks and benefits. Canadian Doctors for Medicare supports experiments with ABF to learn whether this approach might be useful, but only if it does not undermine the public system. CDM recommends a set of principles for approaching ABF that draw from international experience. See our ABF position paper for a full exploration of these principles.

A new study, published by PLOS One in October, 2014, provided the first systematic review of worldwide evidence on how ABF performs.The results show cause for significant concern, with a 24% relative increase in discharge from hospital to post-acute care after ABF was implemented. Consistent with the shortened length of hospital stays associated with ABF, patients discharged from hospital sooner put far more pressure on community services and families. The study’s results also showed possible increases in readmissions to hospitals. The results of this study are summarized in this fact sheet.

Canadian Doctors for Medicare welcomes the insights from the new study. Such evidence-based studies assist decision-makers in designing sound policy, and in laying the building blocks for an equitable and effective health care system.

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