Karen Howlett

Toronto — From Monday’s Globe and Mail Published on Sunday, Mar. 07, 2010 10:07PM EST Last updated on Monday, Mar. 08, 2010 3:31AM EST

Ontario is preparing a radical change to hospital funding, tackling health costs by tailoring hospital budgets to match the size and age of their communities.

The new formula, which could quickly spread to other provinces if successful, would also give more money to hospitals that treat patients more efficiently, according to health care insiders and sources close to the government.

Governments across Canada face aging populations that are driving up health costs. The pressure is particularly acute in Ontario, where health care consumes 42 cents of every dollar in program spending, while the province struggles with a record deficit of $24.7-billion.

The new approach would do away with the global hospital budgets that for decades have allocated funding evenly across the board, and could reshape the way health spending priorities are set. Premier Dalton McGuinty’s so-called Health Based Allocation Model, or HBAM for short, would divert more money to hospitals in regions where the population is growing and aging . The proposed model, which may be announced as soon as the provincial budget later this month, would also reward better-performing hospitals. They would be in line for additional money based on how cost-effectively they treat patients.

“It’s hugely controversial because there could be winners and losers,” said a hospital executive who asked not to be named.

The model is designed to close the gap between hospitals that have more than enough funding to meet their operating budgets and those that are deep in deficit. Under such a scenario, some hospitals would receive no funding increase at all, the sources said.

Changing the way hospitals are funded would not actually produce savings for the province, especially when labour costs account for a huge chunk of a hospital’s budget. But the change would slow down the pace of growth, now running about 6 per centv a year, because it would put pressure on hospitals to operate more efficiently, the sources said.

“HBAM has never been about saving money,” said a source close to the government. “It’s all about getting the incremental new dollars to the most needed areas.”

The new model would direct extra funding to hospitals that serve growing populations, or populations of above-average age, which can be expected to have higher health care costs.

Under the current regime, Ontario’s 154 hospitals received a funding increase of 2.1 per cent for the fiscal year ending March 31, 2010, bringing their total base funding to $14.9-billion. But the government also quietly topped-up funding for a handful of cash-strapped hospitals. William Osler Health Centre, which operates three hospitals in Etobicoke, Brampton and Peel, received a $20-million increase to its base funding, the largest of any group.

Duncan Sinclair, professor emeritus and former dean of medicine at Queen’s University who led a restructuring of Ontario’s system in the 1990s, said most provinces are moving in the direction of introducing incentives for hospitals to boost their productivity.

“It would seem that Ontario is following a general trend,” he said.

Some hospitals already receive a portion of their funding based on pay-for-performance. For example, just under one-third of the funding for University Health Network, one of Canada’s largest operators, is based on performance because of the complexity of services offered by its three hospitals in Toronto.

Tom Closson, head of the Ontario Hospital Association, has urged the government to adopt a funding system that takes into account the quality of service a hospital provides as well as the mix of patients.

“The concept makes a lot of sense,” he said in an interview yesterday. “It ensures that we’re taking into consideration the community being served as well as the efficiency of the organization.”

But he cautioned that the proposed system should not be applied across the board to smaller hospitals in small towns and rural Ontario. Natalie Mehra of the Ontario Health Coalition also said expanding pay-for-performance to small hospitals would lead to further disparities between the level of care available in rural versus urban Ontario, and would force patients to travel farther for care.