Healthcare Quarterly

Healthcare Quarterly 8(1) January 2005 : 8-9.doi:10.12927/hcq..16942

Quarterly Letters: The Case for Funder as Customer

Ron Freedman


The central problem of Canada's healthcare system is that it is a $120 billion business, which, in large part, operates without customers, and therefore without any semblance of market discipline. Provincial and federal governments are perpetuating a system that is failing Canadians. By adopting some simple new approaches, they could truly reform the system.
The vast majority of health services are delivered by private businesses, some of which are for-profit (doctors, dentists, physiotherapists, radiologists, laboratories), and some of which are not-for-profit (hospitals, voluntary organizations). Nonetheless, virtually all are incorporated businesses that strive to end the year with a surplus of money. Those that distribute their surplus to shareholders are for-profit businesses, and those that retain surpluses to advance their good works are not-for-profit businesses.

Two-thirds of the healthcare industry - about $80 billion - operates courtesy of government (taxpayer) funding. This is the component that is in difficulty. It is also the component that has no customers, defined as persons who buy goods or services from a business. Patients are not customers because they do not pay for the service they receive.

Provincial governments also are not customers; they are benefactors. They make grants - really charitable donations - to not-for-profit healthcare providers such as hospitals. Alternatively, they reimburse private sector providers such as doctors, after the fact, for services rendered. But they do not order those services in advance, and so have no idea at the start of each year how many services they will be paying for. (This is in part due to Canada's all-you-can-eat buffet-style healthcare system.)

Whether or not a hospital, medical office or any other health delivery service operates efficiently and effectively, there is nothing provincial governments can do about it, even if they have the relevant information. They are obligated to provide annual charitable donations to hospitals and to reimburse private providers such as doctors. Worse still, the federal government's role is even more impotent; it simply writes a cheque each year to the provinces to reimburse them for costs incurred. The federal government is not a customer either.

So, there's not a customer in sight in the system. The funders still operate largely in the fashion of a nineteenth century charity, albeit on a much larger scale.

Canada's healthcare problem can best be described as a shortage of procedures: GP visits, specialist examinations, MRIs, surgeries, home care visits and so on. All are in short supply, and the healthcare system is currently unable to provide sufficient procedures. (Ancillary problems, such as a shortage of hospital beds, simply reflect an inability to provide proced-ures.) The under-capacity of the system manifests itself in an annual procedures deficit. The growing backlog of procedures is akin to a procedures debt. As the deficit and debt build up, so do waiting times, threats to patient health, the economic burden on individuals and society, and public dissatisfaction with the system.

The immediate issue for the healthcare system - and for individual Canadians - is to eliminate the annual procedures deficit and tackle the accumulated procedures debt. How can we do this when the system relies on benefactors and not on customers?

We propose that the principal funders - the provincial and federal governments - begin to transform their roles from benefactor to customer. Let's start with the federal government. It should use any new funds to purchase incremental procedures from the provincial governments. If province X performed 1,000 bypass operations, 1,000 hip transplants and 1,000 MRI tests, then the federal government should offer to purchase an additional number of procedures (say 200, 200, 200) at a set cost. The cost of the procedures would be established on the basis of the lowest bid price by individual hospitals in the province. (Or in an adjacent province, in the case of communities close to another province.) Hospital A might offer to perform a hip transplant for $10,000 and Hospital B for $9,500 and so on. Hospital B would receive the contract and the federal government would reimburse the hospital through the provincial government. And so on for each type of procedure. (To eliminate the accumulated procedures debt, it may be necessary to purchase procedures from facilities in US border states. However, this is a separate issue not addressed here.)

Suddenly, the federal government would become a customer rather than a benefactor. It would only pay for what it receives, which is the essence of being a customer. It wouldn't shovel money out the door hoping that good things (new procedures) will happen - it would place a specific order for them. No procedure, no payment. Notice that we haven't even talked about profit. All the required services would be delivered by the not-for-profit sector.

The same theory should apply to the provinces. The provinces would provide base funding to the hospitals in order to keep the doors open. But any incremental procedures would be ordered explicitly, on long-term contracts. The province would identify how many of each procedure it needed, issue a tender to the healthcare system and individual not-for-profit institutions would bid on the requirement. The province would provide partial payment in advance and final payment on delivery.

This approach would have multiple benefits. First, any new money in the system would be explicitly tied to incremental activity. Second, Canadians would see where the money is going and what it is buying. Third, the customer approach would spur some specialization and competition among public institutions, which can't be a bad thing. Fourth, new money would go to fund the most efficient procedure providers. Fifth, total costs would probably go down as a result of specialization and competition. And finally, politicians could take credit and point to incremental activity.

Now is the time to introduce a customer into the healthcare equation. That's the only way to reform the current system and deliver maximum bang for the buck.

About the Author(s)

Ron Freedman
President, The Impact Group,


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