Essays April 2011

Delivery: Funding, human capital, incentives, and how they affect our healthcare

Will Falk

We know that quality care is cheaper. But we don’t yet pay more for higher quality and we do still pay for low quality care and its results such as hospital-acquired conditions and readmissions. We have, as a provider community, made significant progress around the transparency of information about quality of care and access to care. On quality, from the founding of ICES by the OMA and MOH in 1992 until today, we have built out more than a dozen good quality organizations. 6 provincial and one national quality council, ICES, LKS, McMaster, U of T, U of M, CPSI, and of course StatsCan and CIHI. Timidly we have put the quality infrastructure in place that will be needed for system reform. Now that we have the infrastructure and an idea about what we want to buy we need to put the funding muscle behind it.

We also experimented with buying or purchasing in the last decade for access to care. We have successfully used purchasing to change the game particularly for surgical wait times. We created an “active intelligence” that bought on behalf of citizens. Ontario was particularly successful at this because of the leadership of Dr. Hudson and the federal money that he had in his pocket to buy procedures. In a very short period of time, Ontario moved from a failing grade to an A grade in the Fraser Institute’s annual report Waiting Your Turn. There are other examples in home care, BC’s RHAs, and Ontario’s cancer care system that also show the value of this approach. In our own timid way, we have good practical examples of how active purchasing allows us to move the system.

So if we are going to discuss funding, incentives, and human capital in healthcare, we need to talk about what we want to buy and what we want to sell. Governments need to actively use their purchasing powers to buy quality, access and efficiency. The System is too big to be planned but it can be purchased —  If we are aggressive about using our buyer values to guide our purchases and allow the providers to innovate.

Michael Kirby pointed the way forward in the 2002 Senate report [] which recommended activity-based payments for hospitals. Rather than global budgets with their quarterly ritual of backing the cash wheel-barrow up to the hospitals, we need to pay for performance and much more actively purchase our acute care services. This recommendation was recently repeated in the 2010 September OECD report on Canada [,3343,en_2649_34569_45925432_1_1_1_37443,00.html] which recommended that: “For provinces which have not already done so, move to activity-based (e.g. DRG) budgets for hospital funding, contracting with private and public hospitals on an equal footing”

Note how I have timidly appealed to the Senate of Canada, Mike Kirby and the OECD as my authorities in recommending this most basically needed reform. And this is a basic reform that is increasingly recognized as needed and supported by interest groups and Ministries of Health. Whatever else the CD Howe does on health reform, you should articulate the economics of the purchaser/provider split as originally conceived by Kirby.

But let me try to improve on the authorities and to suggest a path to move forward to value more quickly. Specifically, we need to avoid the trap of “cost-plus” thinking. We should not used cost-based systems as more than a starting reference point for our purchasing of acute services. Cost-based systems [like the DRG or the CMG in Canada] lock in place the current model of production and do not reward innovative technologies. Think Telecoms in the 1980’s and the weighted average cost of capital.  They are also based upon “black box” cost accounting models that are easily gamed and unreliable.  While even “cost plus” would be an improvement over the current “wheel-barrow” approach we should take the opportunity of reforming funding to move fully to price-based competition.

Clay Christensen writes about this in detail in his book “The Innovator’s Prescription” and has useful advice for policy makers. [] He says that, “ ...hospitals need to deconstruct their activities into the two different business models: solution shops and value-adding process activities.” This model appears under several names, sometimes referred to as “Scheduled vs. Unscheduled” care or “Focused Factories”. The idea has been successfully implemented in Canada at Kensington for cataracts, Sunnybrook for colonoscopies, Shouldice for Hernia repair, Alberta Bone and Joint for Hips and Knees. In its simplest form it is the idea that once a treatment/procedure becomes well enough understood and systematic it should be done as a “value- added process”. Relentless efficiency and quality improvements and separation from the infrastructure needed by the general hospital are the results. Christensen values the GH services as well but separates them as a “Solution Shop;” a centre that specializes in superb diagnostics. We know from the experience that we can see substantial cost declines by moving to the price-based purchasing.

And declines are what we should expect. We are conditioned to think that health care costs rise because we always look at aggregate numbers. We forget that healthcare is a high technology good and that many parts of the system follow declining costs curves that approach and even surpass Moore’s Law. Radiology, lab tests, Pathology, surgery, genome base pairs all have declining cost curves in terms of unit costs.

Yes. The market basket effects are up and often sharply so. But inflation at the unit cost level is often negative — and needs to be more so. Using last year’s costs as a reference point creates a tendency to overpay and removes our only hope to bring the system in to balance (until 2027 when the market basket effects may start moving the other way). We should expect our providers to have declining costs at the unit level and we should help remove the stickiness and regulations that impede our progress towards this.

We will be greatly assisted in achieving cost decreases by the virtualization of services and the internalization of services and human capital that is happening in our healthcare system. This trend towards “delocalization” will be a major trend for the coming decade. Some examples of delocalization:

  • OTN is almost doubling the number of remote RN caregivers in Ontario.
  • Teleradiology is now the standard in Canada.
  • 90% of residents are using smartphones to text about their patients
  • Telepathology will soon send NFLD and MB patients to University Ave (the emirates will follow)
  • One Hamilton hospital now does two surgeries a week in thunder bay.
  • Pharmatrust has developed an ATM for prescription drugs with a videophone hook-up to a remote pharmacist
  • Ontario’s nurse call line handles a million calls a year
  • Doctors and patients are sending one another emails. And not asking your permission.

In the next decade, delocalization will take off up the S-curve moving from virtually zero ten years ago to 1-2% of services today and (SWAG prediction here) we will see 1/4 of services delivered remotely/virtually by the end of the decade. This delocalization will allow us to consolidate, industrialize, and scale health services. The “electronic health record” will be produced as a natural afterthought as a result of this huge industry change.

As policy makers we can accelerate this delocalization trend and make Canadian health care the best for the world as well as the best in the world. To do this we need to get implicit physical contact out of the fee schedule and to simplify regulation of the professions. Imagine that in 2011, a physician cannot bill for many services delivered over email or by telephone. Imagine that we still don’t have reciprocal licensure in many jurisdictions. This causes all sorts of barriers to prudent technology adoption. In the upcoming fee negotiations we need to address this antiquated notion head on.

I have left human capital to the end because it is very difficult to know whether we have a health human resource problem or not. We would have a shortage on lawyers and accountants if we didn’t let them use the telephone and email in their work. [We might even have a shortage of professors and executive fellows.] And the solution to a shortage in one profession may not be to add more of that profession. So for example, we may be better to add nurse practioners than PCP’s or nurse anaesthetist than an anaesthesiologist.  Silo’ed professional HR planning is a very difficult game to get right and is almost always captured by interest groups. Deregulation of licensure, modern technology, and more permeable boundaries that allow our health systems to organize their providers is key.

There is one success story that we have had in HHR that I want to mention as brilliant if quiet public policy. We have opened our borders to health professionals. In particular the nursing diaspora [pace Bhagwati] from Manila has benefitted both Canada and the Philippines tremendously. There are hospitals in Toronto where more than a quarter of the nursing staff are Filipina. Filipinos are the number one group of immigrants to Canada.

I will close with a comment about international competition. If we believe that we have the best health care system in the world than why are we not exporting more? We should be reconceptualising our health system to capitalize on our excellence and on delocalization to produce for export. We have great examples right here in Toronto with UHN and telepathology, UHN is also active in China and internationally for education, Sick Kids is working with Qatar, and the PMH with Kuwait. There are many other examples and this is just the start of a huge economic driver for Canada. Our health systems should be reproducible and scalable so that once we have ensured access for Canadians we can produce and provide care for the world.

The end.

About the Author

Executive Fellow in Residence, Mowat Centre for Policy Innovation, SPPG; Adjunct Professor, Rotman School of Management


Remarks by Will Falk, Executive Fellow in Residence, Mowat Centre for Policy Innovation, SPPG; Adjunct Professor, Rotman School of Management, U of T. C.D. Howe Institute Policy Seminar | April 6, 2011


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