Transitional funding: changing Ontario's global budgeting system

Health Care Financing Review, Spring, 1992 by Judith R. Lave, Philip Jacobs, Frank Markel

Introduction

In recent years, Americans have been looking at Canada's health care system(1) with increasing interest because it has managed to assure universal access at a per capita cost appreciably lower than that in the United States (Iglehart, 1989; Relman, 1989; Fuchs and Hahn, 1990). Indeed polls in the United States find that many Americans would prefer such a system to their own (Blendon and Taylor, 1989).(2) Policy analysts have been particularly interested in the methods that Canadians use to pay for health care services because it is largely through these methods that costs are controlled and access to services determined.

Since almost 50 percent of Canadian health care expenditures are made for services provided by hospitals, hospital financing is of critical importance.(3) Ontario, Canada's most populous province, implemented a hospital global budgeting system in 1969. While that funding mechanism has been attributed with considerable success in containing hospital costs (Detsky, Stacey, and Bombardier, 1983; and Detsky et al., 1990), the particular method used to establish the global budgets was increasingly criticized within the province (Ontario Hospital Association, 1988). The dissatisfaction with the budget allocation rules found public expression when the Minister of Health indicated at the Ontario Hospital Association (OHA) convention in October 1988 that her ministry would undertake a comprehensive review of hospital funding with the objective of making ". . . the hospital funding process in this province as fair and equitable as we possibly can." The new budgeting system that developed is called transitional funding.

In revising the hospital budgeting system, the people in Ontario looked to the United States for some of the tools to be used in the new process. There they found methods for classifying patients into groups and assigning cost weight factors to those groups. Thus, while some Americans were expressing an interest in a Canadian-style single payer system to replace their fragmented and inflationary funding mechanism (Himmelstein and Woolhandler, 1989), Canadians were looking to the United States for ideas on how to revamp their global budget system in order to increase equity and efficiency. An examination of how American-style hospital incentives are being tied into a Canadian-style system is of interest in the United States in that it may lead to the answer of whether and how a happy medium incorporating both fiscal restraint and sound economic incentives might be achieved.

In this article, we describe the Ontario global budgeting system as it existed through most of the 1980s, with particular emphasis on how the budgets were adjusted to take into account changes in inflation, volume, and new services. We describe some of the particular problems that led to the 1988 speech by the Minister of Health, the process that was put in place to develop the new system, the basic decisions that were taken the first year, and some of the modifications that were made in the second year. We note that while the process may be particular to Ontario, the problems that were addressed were universal. We conclude with a discussion on the implications of the revised approach to global budgeting in the context of Canadian and the United States funding system differences.

Global budgeting system

When universal hospital insurance (Medicare) was first implemented in Ontario, the Ministry of Health (MOH) engaged in an extensive line by line review of each hospital's budget. While this approach to budgeting severely restricted administrative flexibility, since managers had to get ministry approval to shift funds from one line to another, it was accompanied by a significant escalation in hospital costs. In 1969, hospital funding was converted to a global budgeting system. The global budgets are administered by the Ministry of Health and are designed to cover the hospital's operating costs and equipment depreciation; other capital costs and graduate medical education are funded through other methods.(4) In addition to ministry allocations, hospitals receive approximately 20 percent of total hospital operating funds from sources other than those of the ministry (Ontario Hospital Association, 1989). This includes: revenues from the workers' compensation program, payments for care provided to people living outside Ontario, differential room charges,(5) and income from endowments and parking lot fees. From this point we will largely concentrate on the methods that the MOH uses to set the hospital's global budget.

The starting point for a hospital's budget is the previous year's funding level. The funding level is increased each year to account for four different areas of designated increases: inflation, growth, new and expanded services, and life support.(6) The increases in the global budget to account for inflation and growth are set by formula, while the other two are subject to negotiations between each individual hospital and the ministry.