SHAPING THE FUTURE THROUGH FUNDING STRATEGIES ADVICE TO GOVERNMENT ON LHIN AND HOSPITAL FUNDING

Transcription

1 SHAPING THE FUTURE THROUGH FUNDING STRATEGIES ADVICE TO GOVERNMENT ON LHIN AND HOSPITAL FUNDING ONTARIO HOSPITAL ASSOCIATION JANUARY 2007

2 Message from the President and CEO At the start of another new year, the health care system in Ontario continues to transform. One of the most anticipated changes, slated for April 1, 2007, will see Local Health Integration Networks (LHINs) assume funding responsibility from the Ministry of Health and Long-Term Care. The Ontario Hospital Association (OHA) has developed a number of initiatives to aid the transition to LHINs. This report, Shaping the Future through Funding Strategies: Advice to Government on LHIN and Hospital Funding, is our first formal contribution to the development of new funding policies. The report outlines the OHA s preferred method for determining the size of each LHIN s budget, determining how LHINs will allocate their budgets among providers and how this should be done in the early stages to ensure stability at Ontario hospitals. We believe that hospitals and other stakeholders have a great deal to contribute to the success of new funding policies and that involvement with the Ministry as a partner is a critical success factor. We also believe that determining how funding is distributed from the LHINs to the providers is as important as deciding how the LHINs themselves will be funded. This paper comes at a critical juncture in that process. For our part, the research and consultation we undertook for this report has been comprehensive. Over the last four months, we have engaged many key stakeholders, including the Ministry, the Ontario Association of Community Care Access Centres (OACCAC), the Ontario Long Term Care Association (OLTCA) and the Ontario Association of Non-Profit Homes and Services for Seniors (OANHSS). The OHA Board has also reviewed the report on two occasions and experts in the field of health care funding and in academia have given us their feedback and suggestions. The report is also informed by the OHA s new strategic directions, which were launched last year. Our new strategic plan mandates that we create strong and lasting partnerships that advance health system integration and provide thought leadership on health system issues based on facts, evidence and our hospital experience. These are just some of the new directions our members asked us to take, and we believe this paper illustrates our commitment these principles. While this report on LHIN funding represents initial comments from the OHA, we believe its recommendations will contribute to a constructive funding discussion over the next several months and years. The OHA plans to continue consulting and advising our members, partners and other health care stakeholders on this issue to ensure both the success of LHINs and a stable transition period for Ontario hospitals and other providers. Yours sincerely, Hilary Short President and CEO

3 Table of Contents EXECUTIVE SUMMARY... 1 INTRODUCTION... 6 BACKGROUND... 7 BUILDING ON MULTI-YEAR FUNDING AND ACCOUNTABILITY AGREEMENTS... 7 THE CALL FOR SERVICE-BASED FUNDING... 8 FUNDING MODELS ARE CRITICAL TO INTEGRATION... 8 EXPLAINING DIVERSE ORGANIZATIONAL MODELS FOR INTEGRATION EXPLORING THE CAPITATION FUNDING MODEL OHA S APPROACH TO FUNDING IN A LHIN ENVIRONMENT FUNDING PRINCIPLES SIZING THE PROVINCIAL HEALTH CARE PIE THROUGH SYSTEM-LEVEL PLANNING CONSIDERING THE LHIN FUNDING MODEL OHA S APPROACH TO HOSPITAL FUNDING: SERVICE-BASED FUNDING CONCLUSION REFERENCES APPENDIX I INTEGRATION MODELS AND MAIN RESPONSIBILITIES... 24

4 Executive Summary LHINs and Funding: The Pressing Challenge Local Health Integration Networks (LHINs) were created on March 1, 2006 with the passing of the Local Health System Integration Act (LHSIA), a key component of the Ontario government s transformation agenda. Fourteen LHINs will be responsible for planning, funding and integrating local health services provided by hospitals, Community Care Access Centres (CCACs), Community Health Centres and the home care, longterm care, mental health and addiction sectors. The Ministry of Health and Long-Term Care (MOHLTC) will delegate responsibilities to LHINs in phases over a five or six year rollout. The MOHLTC will assume the role of steward of the system, shifting its focus to strategic decision-making, setting direction and creating an environment in which local decisions, at the LHIN and provider level, can be made to best serve communities. A major milestone in LHIN implementation is currently planned for April 1, 2007 when LHINs officially assume responsibility for provider funding. The pressing challenge for the MOHLTC is to develop new methodologies for the two-stage process of allocating provincial funding to LHINs and subsequently for allocating LHIN funding to providers. The choice of LHIN and provider funding models is critical to LHINs success in integrating the system. It is also vital that a standard approach be adopted across LHINs, in the allocation of funding from LHINs to providers. Hospital funding in particular, comprising an estimated two-thirds of LHIN budgets, will factor largely in the equation and will likely change from the current funding approach. In this transition period, LHINs will build on important achievements to date in particular, multi-year Accountability Agreements and will also provide the opportunity to implement further needed change in the approach to hospital funding. In support of strategies to promote patient access, integration, accountability and sustainability, this paper presents the Ontario Hospital Association s (OHA) advice to the MOHLTC on LHIN and hospital funding. OHA views this paper as an initial statement in what will be a constructive dialogue with government and other stakeholders in the months ahead. Specifically, the paper presents OHA s recommended approach for: I. Allocating LHIN funding during LHINs initial two to three years of operation, to ensure stability in the system; II. Allocating LHIN funding beyond the short term, using a coordinated approach involving robust system-level and local-level planning; and III. Further reforming the hospital funding system through implementation of Service- Based Funding (SBF). 1

5 The paper also provides as background: a description of recent achievements relating to the funding environment that set the stage for moving to the next phase of LHIN and provider funding; and a discussion of integration and funding models in other jurisdictions with a view to identifying what may be effective in Ontario in the future. I. Determining LHIN s Initial Budgets to Ensure Stability To maintain stability in the system, the allocation of operating funding from the MOHLTC to the LHINs, initially and during the first two to three years of LHIN funding responsibilities, should: Reflect the aggregate of provider budgets within each LHIN, thereby avoiding significant funding fluctuations; Address pressures due to demographic change and inflation; Accommodate changes due to, for example, repatriation of services or other planned expansion or service re-configuration; Employ an accountability framework to clarify roles and responsibilities of hospitals, other health providers, LHINs and the MOHLTC. As LHINs take on their funding roles, it is essential that end-provider funding be stable so as not to adversely affect access. At the LHIN level, provider budgets and services should be rolled up to determine LHIN budgets and LHIN level service volumes. The aggregation of funding should be irrespective of the extent to which providers catchment areas fall within LHINs geographic boundaries. In the short term, planned volumes for the entire province and planned volumes for individual providers should be based on current utilization levels with realistic projections for this initial time period. Funding in the short term should be adjusted for inflation and population growth as well as any other appropriate additional funding requirements as would normally occur. LHIN-level planning (as is now done with hospitals through the Hospital Annual Planning Submissions (HAPS) process and with other providers through other planning methods), can consider the local population need and how best to provide for it. Effective mechanisms will be required to ensure that needs beyond the local ones those met through the provision of specialized and provincial services and hospitals are provided within LHINs. The introduction of a capitation funding model, at least for the early years of LHIN operations, is not recommended as it would likely introduce a significant degree of fluctuation in funding for sectors, providers and locales. 2

6 II. LHIN Funding Beyond the Short-Term: Taking a Planned Approach LHIN funding allocations should be based on robust, long-term planning at the level of the province and the LHINs, which adequately sizes and configures the system, to promote stability and sustainability. Planning should incorporate demographic and inflation forecasts using tools such as the OHA Health System Planning Model and the JPPC Economic Forecasting Model. LHIN budgets should reflect the cost of the types of services that are most appropriately provided within each LHIN. Planning and funding should involve consideration of parameters such as: Critical mass of services needed to ensure safety, quality, access and efficiency; Appropriate location of specialized or provincial-level services; Existing and projected market share of providers within LHINs; Coordination of planning for capital, operating expense and health human resource supply. System-level forecasting, coupled with LHIN-level planning, is critical to appropriately sizing LHINs prospective budgets and providing information essential for the Government-LHIN Accountability Agreement process. Planning should involve detailed projections of service and funding requirements using inflation and demographic forecasts. To support this, efforts should continue in further developing the economic forecasting model recently utilized by the JPPC, and in enhancing OHA s Health System Planning Model a tool to predict both the future demand for hospital services and the corresponding resource requirements. These models can be adapted for broader application to the health care sector in general. Robust planning will ensure that population needs are being met, high quality care is provided, and the configuration and distribution of services within and across LHINs reflect sound financial or economic reasoning. To this end, factors that need to be considered in planning and funding include: the strengths of a LHIN s providers; the availability of scarce skilled human resources; the needs of the population served; and the size of operation required to achieve a level of quality. Economic/financial considerations include whether capital funding is available to allow for expansion (additional operating funding will not add services if there is insufficient capital capacity), and whether economies of scale or specialization can be achieved. 3

7 III. OHA s Approach to Hospital Funding: Service-Based Funding The allocation of funding from LHINs to hospitals should occur according to a new, Service-Based Funding approach in which funding is based on the volume of services provided and a rate paid per unit of service. A standard, provincial hospital service rate should be established to ensure funding equity and provincewide quality standards. Hospital volumes should be determined by way of a robust, longterm planning process. In the new LHIN environment, particularly with the focus on Accountability Agreements and their specified service volumes, OHA continues to favour the SBF approach to hospital funding. OHA first proposed SBF in an April 2004 report: Advancing Accountability through Hospital Funding Reform: A Policy Framework to Promote Greater Access, Efficiency and Quality of Care. Under SBF, hospitals are reimbursed using a true rate times volume or price times volume approach which recognizes the volume and price of services that hospitals actually provide. The current funding track already represents a movement towards SBF as it involves specifying both funding and service levels for a significant portion of hospital budgets in the Hospital Accountability Agreements. For the first time, with these Agreements, there are explicit expectations about what government is buying for its money. Other funding envelopes, such as for wait times, Post Construction Operating Plan funding (PCOP) and priority or provincial programs already employ an SBF approach in that budgets are calculated based on costs per unit of service. Establishing the Provincial Rate and Planning for Volumes The two key aspects of SBF involve a provincially set rate and locally determined LHIN and hospital level volumes. A standard, provincial hospital service rate needs to be established by the MOHLTC for all hospitals in all LHINs to ensure funding equity and quality standards across LHINs. It would be undesirable and destabilizing to have LHINs set or negotiate their own rates with hospitals. In technical terms, the rate would reflect an average base rate for an average case (using Case-Mix Groups or other measures of service depending on type, for example). The base rate paid to a hospital would then be fine-tuned using measures that are both valid and reliable to address appropriate differentials in hospital cost structures. For example, very small or rural hospitals tend to have high average costs and would require a modification or rate premium to remain viable. Academic hospitals outputs, beyond those of patient-specific services such as teaching and research, would require additional reimbursement for the value generated by those activities. For services that are not captured in acute care case-mix groupings, such as complex continuing care, rehabilitation or mental health services, a per-diem rate (or case weight) is required under a service-based formula. Rates would be adjusted annually to address inflation, innovation, productivity improvements and other factors. 4

8 Similar to the current approach with Accountability Agreements, at the level of the hospital, an annual range for service volumes would be estimated and planned for, for overall services (such as total weighted cases) and for specific sub-categories. Under SBF, hospitals would negotiate with LHINs the types and volumes of services that can be provided, considering the provincial reimbursement rate per unit and hospitals own actual cost per unit. Planned volumes can initially be based on current utilization plus near term projections in accordance with needs of the population served and the services provided by others across the LHIN. In particular, planned volumes would better address the requirements of hospitals in areas of the province that are experiencing high population growth. Conclusion Ontario s health care system requires a combination of efforts to promote better access, integration, accountability and sustainability. LHINs, as an organizational model, and their potential funding mechanisms are equally important in furthering integration. As a make or break success factor, funding mechanisms must receive due attention, as either potential integration enablers or barriers to integration. The funding approach must build on the sizable achievements to date. LHIN- Government and LHIN-provider Accountability Agreements are powerful levers for effecting the change that is needed and for implementing government policy. With the right funding models, they embody mechanisms for system-wide cost efficiency, quality and value for money. With the right planning models, they can improve access through appropriate sizing of the system and appropriate distribution of services. As for hospitals, a foundation for SBF already exists. Certain aspects of the existing IPBA funding formula can be used to support SBF in various capacities. Additionally, new methodologies can be developed to ensure that provincial rates are valid and reliable. Ontario is already on the threshold of service-based funding and should proceed with it in the LHIN environment. OHA s advice in this paper is the first step in what will be an ongoing productive discussion about many funding issues that will range from the high level to the very detailed. Other jurisdictions have shown that the road to integration is long and challenging. Ontario is well-positioned to learn from others experiences and has significant capacity for creating new funding approaches that can make the made-in- Ontario transformation successful, as it proceeds with LHIN implementation. 5

9 Introduction LHINs and Funding: The Pressing Challenge Local Health Integration Networks (LHINs) were created on March 1, 2006 with the passing of the Local Health System Integration Act (LHSIA), a key component of the Ontario Government s Transformation Agenda. Fourteen LHINs will be responsible for planning, funding and integrating local health services provided by hospitals, Community Care Access Centres (CCACs), Community Health Centres and the home care, longterm care, mental health and addiction sectors. The Ministry of Health and Long-Term Care (MOHLTC) will delegate responsibilities to LHINs in phases over a five or six year rollout. The MOHLTC will assume the role of steward of the system, shifting its focus to strategic decision-making, setting direction and creating an environment in which local decisions, at the LHIN and provider level, can be made to best serve communities. A major milestone in LHIN implementation is currently planned for April 1, 2007 when LHINs officially assume responsibility for provider funding. The pressing challenge for the MOHLTC is to develop new methodologies for the two-stage process of allocating provincial funding to LHINs and subsequently allocating LHIN funding to providers. The choice of LHIN and provider funding models is critical to LHINs success in integrating the system. It is also vital that a standard approach be adopted across LHINs, in the allocation of funding from LHINs to providers. Hospital funding in particular, comprising an estimated two-thirds of LHIN budgets, will factor largely in the equation. The current funding mechanisms for hospitals, developed and revised annually through the Joint Policy and Planning Committee (JPPC) and other groups, will likely change. In this transition period, LHINs will build on important achievements to date in particular, multi-year Accountability Agreements and will also provide the opportunity to implement further needed change in the approach to hospital funding. In support of strategies to promote patient access, integration, accountability and sustainability, this paper presents the Ontario Hospital Association s (OHA) advice to the MOHLTC on LHIN and hospital funding. OHA views this paper as an initial statement in what will be a constructive dialogue with government and other stakeholders in the months ahead. Specifically, the paper presents OHA s recommended approach for: I. Allocating LHIN funding during LHINs initial two to three years of operation, to ensure stability in the system; II. Allocating LHIN funding beyond the short term, using a coordinated approach involving robust system-level and local-level planning; and III. Further reforming the hospital funding system through implementation of Service- Based Funding (SBF). 6

10 Background Building on Multi-year Funding and Accountability Agreements Hospitals and government were in agreement on the need for funding reform even before LHINs were conceived. In the 2002 Speech from the Throne and the 2002 Ontario Budget, government committed to a multi-year funding (MYF) approach for hospitals and schools as a remedy for stop and go funding. The timing of the annual budget and planning cycle was problematic for both hospitals and government in that it led to difficult, yet predictable, financial challenges each year. Multi-year funding was needed to eliminate the instability and uncertainty in the system. Following government s 2002 MYF commitment, OHA formed a Multi-Year Funding Working Group (MYFWG) to propose principles and recommendations to advance funding discussions with the MOHLTC. As part of its work, the MYFWG released Stability and Sustainability: A Multi-Year Funding Policy Framework for Ontario Hospitals in October The report advised that the benefits of multi-year funding would be best realized as part of a broader reform agenda an agenda still relevant today that: Multi-year funding was a major achievement. It is essential that the multiyear approach be preserved, through Accountability Agreements, in any future funding model. adequately sizes the system according to patient need; fosters sustainability; stabilizes hospital base funding and patient services; and employs an accountability framework to clarify roles and responsibilities of hospitals, government and consumers as key stakeholders. The vision of multi-year funding became a reality in 2004 with the start of the Interim Hospital Accountability Agreement (HAA) process. Significant change in the funding environment occurred when hospitals and government entered into jointly negotiated Agreements for the 2005/06 and 2006/07 fiscal years. Multi-year funding alone, through the two-year HAAs, has improved stability and certainty by enabling longer term planning. Furthermore, the HAAs raised the level of accountability in the system to new heights by specifying for the first time, service levels, funding levels and performance objectives, in advance of the 2006/07 fiscal year. The 2007/08 agreements, negotiated between hospitals and government beginning Fall 2006, are planned to be assigned to LHINs on April 1, Subsequently, hospitals and other providers will negotiate annual Service Accountability Agreements directly with LHINs and LHINs will negotiate Accountability Agreements with the MOHLTC. Multi-year funding was a major achievement. It is essential that the multi-year approach be preserved through Service Accountability Agreements in any future funding model. 7

11 The Call for Service-Based Funding In addition to advocating for MYF to bring greater stability and certainty to the system, hospitals had concerns with various aspects of the actual funding formula. As it was applied at the time, the formula, known as IPBA, 1 was complex, not sufficiently transparent and inconsistently applied. Incentives were unclear and inequities in funding across hospitals persisted 2. The OHA examined these issues, as recognized by hospitals and government alike, in an April 2004 report and proposed that a new, service-based approach be implemented. In Advancing Accountability through Hospital Funding Reform: A Policy Framework to Promote Greater Access, Efficiency and Quality of Care, 3 the OHA described how under service-based funding, hospitals are reimbursed according to the number and type of services they deliver. As discussed in greater detail below, SBF would help achieve equitable access for Ontarians and equitable, transparent funding for providers. It would foster quality and efficiency as well as stability and predictability. The OHA s report was endorsed by The Honourable Michael J.L. Kirby, Chairman of the Standing Senate Committee on Social Affairs, Science and Technology which first coined the term Service Based Funding in its October 2002 Final Report. The Kirby Committee recommended that incentive-based reform occur by funding hospitals according to the number and type of services delivered. The Committee identified several benefits of SBF over other non-outcome/output based funding methods in Canada, such as fostering quality and timeliness of care, improving transparency and accountability and ensuring performance reporting. Funding Models are Critical to Integration LHINs are the made-in-ontario organizational model to achieve integration. Integration as a means rather than an end is intended to address some of health care s complex organizational issues related to the fragmentation of providers and sectors. Integration reflects a systems approach to addressing issues. As the LHIN legislation states: The purpose of this Act is to provide for an integrated health system to improve the health of Ontarians through better access to high quality health services, coordinated health care in local health systems and across the province and effective and efficient management of the health system at the local level by local health integration networks. Local Health System Integration Act, Integrated Population Based Allocation. 2 In terms of funding levels across hospitals not being reflective of the services actually provided. 3 Online: See Communications/Reports & Studies. 8

12 The degree of integration that LHINs can achieve, as an organizational model, depends on the model s inherent financial incentives, and the financial relationships between the sectors, organizations and individual providers. Funding arrangements are therefore a key factor through which integration can occur they are the connecting wires of the system. Conversely, the funding arrangements, if poorly conceived, can also be barriers to integration as well as serious sources of disruption and unintended consequences across the system. For this reason, in Ontario today, the choice of LHIN and provider funding models is critical. Without carefully designed funding mechanisms in support of the goals of LHINs, the opportunity for integration will be lost. The choice of LHIN and provider funding models is critical. Funding arrangements are the connecting wires of integration. If poorly conceived, they will be barriers to integration. Without carefully designed funding mechanisms, the opportunity for integration will be lost. In order to further inform the development of LHIN and provider funding models, OHA commissioned a paper by Marriott Mable entitled Fully Integrated Options: A Comprehensive Approach to Health System Integration. The March 2006 report presents integrated organizational models and related funding mechanisms that have been adopted in other provinces and countries. A major emphasis in the paper is that the organizational model alone is insufficient in achieving integration. The organizational model and the funding mechanism as two sides of a coin must be balanced in order to integrate the system effectively. In Ontario, the organization and funding of health care is silo-based, with multiple funding streams existing within sectors and institutions. The incentive that exists in an environment where funding generally does not flow between providers, is to shift costs to other silos, either explicitly or implicitly. 4 As is widely acknowledged, a potential result in this environment is reduced access to care for individuals with more costly needs. However, with careful consideration of the choice of organizational model and the design of financial incentives, gains can be made in consumer access, equitable funding for providers, and efficiency for the system overall. An effective funding model will ensure that funding follows the patient, or to be more technically accurate, that funding follows the costs. Providers, organizations or sectors will not be integrated (however defined and by whatever model) unless mechanisms are used to integrate funding as well, by traversing or connecting the silos. The organizational model and the funding mechanism as two sides of a coin must be balanced in order to integrate the system effectively. 4 Whether a provider or organization s behaviour is strongly or weakly influenced by an incentive depends on a complex combination of factors including competing or reinforcing incentives and various constraints on behaviour. An incentive may be present but not acted upon. 9

13 Explaining Diverse Organizational Models for Integration The range of integrated organizational models is described by Marriott Mable. These models include: Voluntary models; Roster-based models including Integrated Delivery Systems and; Regional Health Authorities (RHAs). Appendix I provides a schematic of their main functions. Organizational models may have a relatively small range of delineated functions such as funding and/or planning, as with LHINs, or may encompass a broad range of functions that includes the entire continuum of governance, administration, funding and direct delivery of service (as well as various arrangements within each of these functions.) Organizational models may be categorized as geographically-based. For example, roster-based models involve integrated providers that service specifically defined populations of enrolled members, regardless of where the members reside or where the providers are located. The Regional Health Authority model is geographically-based, by definition. In other Canadian provinces, RHAs typically involve provision of services by integrated providers to people who reside within a defined area. Providers included in this RHA arrangement may or may not be located within the geographic area. In Ontario, LHINs are categorized as a form of RHA, of which there are two types: The Command and Control model in which the RHA funds, governs and manages all or most of the region s providers. The Allocator/Contractor model in which the RHA funds but does not govern or manage providers who remain independent, with their own boards and administration. As an Allocator/ Contractor type of RHA, LHINs are fundamentally different from RHAs in other Canadian provinces. 10

14 Other Canadian provinces that have implemented an RHA model have applied a Command and Control RHA model to varying degrees. It must be stressed that Ontario s LHIN model is fundamentally different from the RHAs in other provinces. LHINs are unique in Canada in that, as an Allocator/Contractor type of RHA, they are responsible for funding providers in their regions, but do not have responsibility for directly governing providers or for provider administration. Maintaining communitybased governance is a key priority of the current Ontario government: We ve sought to give strong assurances to the literally hundreds and hundreds of different organizations, from hospitals to long-term-care homes, from community health centres to those 600 or so agencies that are delivering mental health and addiction services right there at the community level, that a fundamental principle that we base our efforts on, this made-in-ontario solution to the development and real life and meaning of the word system, was founded on the principle that community-based governance must be there. We re moving forward on that basis. The Hon. George Smitherman, November 29, Internationally, there is a range of integration models which have evolved, seemingly, through trial and error. The emerging trend has been to advance integration by increasing the degree of financial responsibility for a more specifically defined population. This mitigates financial risk by monitoring precise information about individuals utilization and risk factors, as opposed to tracking more general information on entire populations. The single integrated organization, being responsible for a more complete range of services, sectors or providers, takes a Despite having the authority to reallocate funding within a system, even a command and control model faces persistent political and other challenges in actually doing so. systems view of its jurisdiction and has the authority to move funding around within the system. Although RHAs in other provinces have not followed the international trend to the farthest point on the integration continuum, being command and control models with governance, administration and funding powers, they have still faced political and other challenges in reallocating resources even within a single institution. Having the incentive and power to directly impose change, as may appear to be the advantage with fully integrated systems, does not necessarily mean that implementing change is easy or always possible. Furthermore, Ontario s LHINs, like the RHAs in other provinces can, at best, be only partially integrated as, most significantly, physician services funding (the second largest category of public expenditure next to hospitals) remains centrally controlled. 5 "Local Health System Integration Act, 2005." In Ontario. Legislative Assembly. Legislative Debates (Hansard).38th Parl., 2nd Sess. 11

15 Exploring the Capitation Funding Model Capitation Funding to Evenly Divide the Pie Capitation funding is commonly used in both roster and geographically-based models. Used by most RHAs in other provinces in different ways at different times, this model enables funding to be more evenly distributed across regions to promote a more even distribution of services. Funding is based on, but not identical to, a per person amount that is derived from measures of costs of servicing a given population. Capitation determines how to evenly divide a given-sized pie, it is not a method to determine the size of the pie. It is sometimes, but incorrectly assumed, that under capitation, as the size of a population grows, the size of the budget will grow proportionally (i.e. funding equals per person funding multiplied by the number of people.) In fact, an area with more people and/or higher needs, as measured by the formula, may receive relatively more funding than another geographic area, but there is not necessarily a one-to-one relationship. Capitation, it should be stressed, is used to divide a fixed-size pie, not for determining the size of the pie. The overall capitation budget is determined by what government is willing and able to pay for in any given year. Robust system-level planning and forecasting can, however, provide the intelligence needed to predict discrepancies in need vs. affordability. Determining the Capitation Rate The per person capitation rate, used in determining relative budgets, takes into account certain population characteristics that impact cost such as the age/sex profile, overall health status and other measures. In a geographically-based model, the population includes all who reside within a region s boundaries. In this case, the profile is based on a region s census and other data which may have varying levels of accuracy and specificity. In an RHA, information on socio-economic status or more detailed measures of local need may be used to further refine the rate. In a rostered model, the population is comprised of specifically identified, enrolled individuals. With such a model, data are available at the level of the individual, allowing providers of health services a relatively accurate measure of need and expected resource requirements. The more specifically identified the population and the more information that is available about the health needs of the population, the more accurate the capitation rate can be in reflecting actual per person costs. In contrast, in a geographic model, highly detailed data may be required to accurately compare health needs on a geographic basis. 12

16 Issues in Evenly Distributing Funding and Services Although capitation strives to ensure that regions with similar populations receive similar funding, it does not necessarily follow that the result will be a similar mix of services provided in each region. Capitation funding must be adjusted to reflect the fact that it is often necessary and appropriate to have an uneven distribution of services across regions. This fact relates to the cross-boundary issue which can be a significant administrative complication in geographically-based models. Simply, people will cross regional boundaries to access services at specialized hospitals and centres which are not necessarily located in all regions. Personal preference also results in crossboundary travel. Services or providers may be located only in particular areas due to economic and clinical considerations. Economies of scale, the requirement to maintain quality standards through high volumes and the availability of health care human resources result in an uneven distribution of services. The cross-boundary issue has been addressed in other provinces in at least two ways. Firstly, provinces have separated funding for specialized or provincial services and hospitals from the RHA funding envelope. This capitation overlay ensures that these specialized services (commonly accessed by individuals from any region) are not in direct competition for funding with local or more core services. Secondly, other provinces track cross-border utilization and redistribute funding to RHAs in a reconciliation process. In addition, other provinces have reduced the number of RHAs (correspondingly increasing each region s population size) to reduce cross-border travel. Tracking and redistributing funding is effectively a workaround solution that adds administrative cost and effort. The cross-boundary issue represents a significant administrative challenge. As well, within a single LHIN, under capitation, specialized and provincial level services and local services may be forced to compete directly for funding. Other provinces have reduced the number of regions to reduce crossborder travel, and have designated separate funding envelopes for provincial services. LHINs would certainly face a cross-boundary funding issue under capitation. LHIN legislation allows Ontarians to access services in any LHIN (with the exception of CCAC services). As well, specialized and provincial-level services and hospitals are not currently spread evenly across LHINs. For example, hospitals such as Bloorview Kids Rehab or the Centre for Addiction & Mental Health, are but two specific examples of one-of-a-kind, highly specialized centres serving people from well beyond their local areas. Certain hospitals or other providers offering unique categories of care will necessarily be limited in number. In anticipation of the cross-boundary problem, LHIN boundaries were in fact created by identifying actual hospital catchment areas. Efforts have been made to include as large a segment of a catchment area within a single LHIN as possible. Figure Two below illustrates the proportion of each LHIN s population that has historically sought 13

17 hospital services within the LHIN. Several LHINs have high levels of localization, while others, even with large populations, have relatively lower levels. The cross-boundary issue is of greatest concern from a funding point of view, with respect to hospital use. LHIN boundaries do not impact centrally-funded physician services and LHIN and CCAC boundaries are now aligned (and people will be required to access CCAC services within their own LHIN). The sizable number of other providers with services provided across boundaries would contribute to administrative challenges and costs for both the LHINs and the providers. Figure One LHIN Overview LHIN Population Estimate Localization Index 1 Erie St. Clair 610, South West 871, Waterloo Wellington 633, Hamilton Niagara Haldimand Brant 1,262, Central West 627, Mississauga Halton 899, Toronto Central 1,093, Central 1,353, Central East 1,356, South East 443, Champlain 1,100, North Simcoe Muskoka 376, North East 553, North West 234, Replicated from Ontario government information. Population estimates based on 2001 Statistics Canada Census, for estimation purposes only. The Localization Index was developed by The Institute for Clinical Evaluative Sciences (ICES) and reflects the extent to which people who live within each LHIN have historically sought hospital services within the LHIN. Incentives for Cost Control A capitation funding model creates the incentive to control costs, since per capita costs must be in line with per capita funding (if deficits are prohibited) and because funding is prospective (i.e. provided in advance). These cost control features are a benefit of capitation, but they are not unique to the model. The incentive exists because funding is essentially fixed, through a set, prospective budget. Limits are very effectively employed in models that involve accountability agreements, without the use of capitation. OHA believes there are effective and practical alternatives to capitation funding for LHINs, at least for the initial period of LHIN funding. This approach aligns with the OHA s preferred SBF approach for hospitals and the current approaches for other providers. It will be possible to maintain stability, avoid some of the pitfalls of capitation funding and promote integration and all of its benefits to the extent possible, with a made-in-ontario funding approach. 14

18 OHA s Approach to Funding in a LHIN Environment Funding Principles Ontario s unique LHIN model requires methodologies for LHIN and provider funding that will further the integration of health care in the province. As these methods must align with each other, the following principles apply to both: 6 Funding shall consider: 1. Equitable access to the continuum of care; 2. Meeting health care needs across the continuum of care; 3. High quality care; 4. Fiscal accountability and sustainability; 5. Efficiency in the context of value for money; 6. Equitable and transparent allocation of funding; 7. Multi-year funding to ensure stability and predictability of health service provider operations; 8. Consistency with the integrated health services plan, the provincial strategic plan, provincial funding policies, provincial programs and services and other provincial plans and standards, and the roles and responsibilities of the health service provider. Sizing the Provincial Health Care Pie through System-Level Planning LHIN funding allocations should be based on robust, long-term planning at the level of the province and the LHINs, which adequately sizes and configures the system, to promote stability and sustainability. Planning should incorporate demographic and inflation forecasts using tools such as the OHA Health System Planning Model and the JPPC Economic Forecasting Model. Although some local level planning has occurred in Ontario and will continue in an even more comprehensive and coordinated way under LHINs, system-level health care planning has not been prominent. OHA believes that it is just as important to adequately size the pie as it is to adequately divide the pie, for all sectors in the system. To date however, little has been invested in detailed forecasting and planning for future service and funding requirements. The pro-active, long-range view has often been neglected in favour of short-term solutions for urgent issues. 6 These were OHA s suggested funding principles for Section 19 (2.1) of the proposed LHIN legislation. 15

19 The sustainability of the system depends in part on how well we can anticipate and plan for demographic and inflationary pressures and consciously make prospective decisions on the basket of services to be provided. An economic forecasting model recently utilized by JPPC, will be further developed for this purpose to better predict hospital spending requirements. The model could easily be adapted for broader application for health care in general. As well, a ten-year strategic plan is currently being developed by the MOHLTC and is expected by March Furthermore, changing health care needs due to demographics can be anticipated with the use of a model such as the OHA s Health System Planning Model. This model is currently being explored by the Ministry and the JPPC to predict the future demand for hospital services and the corresponding resource requirements (future supply) in specific hospital departments. System-level forecasting, coupled with LHIN-level planning, is critical to appropriately sizing LHINs prospective budgets and providing information essential for the Government-LHIN The only way LHINs can be successful early in their mandate is if they are given appropriate resources for the services they are expected to fund. Accountability Agreement process. The use of this model can enable Ontario to avoid errors that have occurred in other jurisdictions due to the faulty belief that downloading inadequate resources to the regional (LHIN) level, magically eliminates the resourcing issue. The only way LHINs can be successful early in their mandate is if they are given appropriate resources for the services they are expected to fund. Considering the LHIN Funding Model As LHINs assume their funding roles, it is critical that stability in funding be maintained. The OHA recommends an alternative funding approach to capitation one which will achieve similar benefits at minimum, for the initial two to three years of LHIN operation, for several reasons. Firstly, the cross-border funding issue is significant. In this period of transition, many hospitals have catchment areas beyond the LHIN as Figure One demonstrates. The same would be expected of other health care providers, possibly to an even greater extent. Although the scenario varies across the province, in LHINs with large populations, even a relatively high localization index still corresponds to large numbers of people accessing services in other LHINs. The system would be destabilized if funding were suddenly shifted from the current state, based on recent usage patterns, to a capitation state in which all the funding for a resident population is contained within the LHIN (while significant costs continue to occur outside the LHIN). Secondly, even if a capitation rate were applied, such that a LHIN received a higher level of funding than previously, it would not necessarily translate to an immediate or near term increase in the number of services provided. The new funding may be necessary to repatriate services to the home LHIN, to improve local access, but it would not necessarily be sufficient. In the absence of proper planning including As LHINs assume their funding roles, it is critical that stability in funding be maintained. A sudden shift in funding from the current state to a capitation funding model would destabilize the system. 16

20 capital and human resource planning and funding new operating funding alone would be ineffective. Services cannot be shifted or added as readily as operating dollars. For example, it is unreasonable to expect specialized services such as double-lung transplants to be provided within each LHIN. In fact, a critical mass of service volumes is needed for efficiency, safe clinical care and for dealing with scarce skilled human resources. It cannot be overemphasized that comprehensive planning is essential for determining operating, capital and human resources requirements. This lesson has already been learned in the context of hospital funding with the experience of one component of the IPBA funding model. 7 LHINs with hospitals that provide more specialized or higher levels of care, would experience disastrous financial difficulties from the start, with a sudden shift to a new funding model and in the absence of proper planning. Thirdly, it is not necessary to implement capitation funding in order to determine LHIN budgets and effect cost control. LHINs and providers will already have an incentive to control costs and improve efficiency due to the Accountability Agreements between the Ministry and LHINs, and between the LHINs and providers. As per these contracts, LHINs and providers must adhere to their budgets and meet the other terms identified, or face specified consequences. Even with seemingly disparate sectors and individual providers within their funding envelope, with a contained budget, LHINs will have the incentive to take a systems view in determining the optimal arrangement of service provision while taking into account their local needs and circumstances. This may even extend to funding disease-based or particular clusters of cases within a diagnostic category, to achieve the least costly but highest quality combination of services, across all sectors. Again, realistic budgeting that employs system-level forecasting and planning will further the mission. Determining LHINs Initial Budgets to Ensure Stability To maintain stability in the system, the allocation of operating funding from the MOHLTC to the LHINs, initially and during the first two to three years of LHIN funding responsibilities, should: Reflect the aggregate of provider budgets within each LHIN, thereby avoiding significant funding fluctuations; Address pressures due to demographic change and inflation; Accommodate changes due to, for example, repatriation of services or other planned expansion or service re-configuration; Employ an accountability framework to clarify roles and responsibilities of hospitals, other health providers, LHINs and the MOHLTC. 7 This was documented in OHA A sub-component of IPBA, the volumes model, was intended to lead to increased/decreased services in hospitals where it was deemed necessary, given the profile of the 17

21 At the LHIN level, provider budgets and services should be rolled up to determine LHIN budgets and LHIN-level service volumes. The aggregation of funding should be irrespective of the extent to which providers catchment areas fall within LHINs geographic boundaries. In the short term, planned volumes for the entire province and planned volumes for individual providers should be based on current utilization levels with realistic projections for a time period such as three years. Funding in the short term should be adjusted for inflation and population growth as well any other appropriate additional funding requirements as would normally occur. LHIN-level planning (as is now done with hospitals through the Hospital Annual Planning Submissions (HAPS) process and with other providers through other planning methods), can consider the local population need and how best to provide for it. Effective mechanisms will be required to ensure that needs beyond the local ones those met through the provision of specialized and provincial services and hospitals are provided within LHINs. Organizations will be required under LHIN planning parameters to take a LHIN view of the coordination of services, and work with each other. Initially, this approach would be the least disruptive for the system and would ensure that funding continues to be distributed to where care is actually provided. LHIN Funding Beyond the Short Term: Taking a Planned Approach LHIN budgets should reflect the cost of the types of services that are most appropriately provided within each LHIN. Planning and funding should involve consideration of parameters such as: Critical mass of services needed to ensure safety, quality, access and efficiency; Appropriate location of specialized or provincial-level services; Existing and projected market share of providers within LHINs; Coordination of planning for capital, operating expense and health human resource supply. As LHINs become more established and coordinated planning becomes the norm, quality and economic decisions should be factored into the planning and funding process. This stems from the discussion above regarding the critical role of planning as a foundation for funding. Specifically, LHIN budgets should be adjusted to reflect the cost of the types of services that are most appropriately provided within that LHIN. In determining what makes sense to be provided within the LHIN, quality factors need to be considered such as the strengths of its providers, the availability of scarce skilled human resources, the size of operation needed to achieve a level of quality (practice makes perfect) and population need. Economic considerations include whether capital funding is available to allow for expansion (additional operating funding will not add hospitals catchment area population. The operating funding incentives alone under this model were not sufficient especially in the case of hospitals operating at capacity. 18