An epidemic of hospital budget overruns
While Canadian provinces and territories on average devote around 38 per cent of their health dollars to hospitals, Alberta’s acute care hubs devour more than 45 per cent of that funding, institute statistics show.
On a per-capita basis, that means Alberta spent an estimated $2,261 on hospitals for each resident last year, second only to Newfoundland and Labrador and topping the national rate by $600.
Since being elected in 2015, the NDP government has regularly championed its work to “bend the cost curve,” flattening the growth of total health spending to about three per cent a year versus the six-to-nine per cent increases seen under the previous government.
The growth of hospital overhead has similarly cooled in recent years, though not to the point the government was hoping.
The health ministry’s 2017-18 budget, for example, actually called for a tiny cut in overall acute-care spending. But such costs ended up exceeding budget projections by about $85 million, proving again how difficult it is to fully tighten the funding taps.
Of course, as experts note, it’s not a problem that can be solved easily or quickly, particularly for a province with a growing and aging population.
Governments, including Alberta’s, have attempted to hold back rising health costs through a multi-pronged approach that involves pumping more money into continuing care and home care in the hope of serving more patients in those settings.
At the same time, primary care providers have been pushed to expand hours of service and to offer more comprehensive, team-based care.
Effort also has gone into educating the public on avoiding unnecessary trips to the emergency room.
If more people can be helped at home or in a doctor’s office to manage their diseases and drugs, the theory goes, it will ultimately reduce traffic at hospitals.
Yet it’s fair to say such a cultural change has been slow to develop, in part because the public — and to some degree the health system itself — is hooked on hospital care as the traditional form of medicine.
Alberta maintains a relatively large number of hospitals compared with other jurisdictions, and these facilities can’t operate like businesses able to close up shop when they run out of cupcakes or hubcaps.
Hospitals run 24 hours a day, every day, and must treat patients who show up with all manner of illness and injury, even those maladies better suited for treatment in a lower care setting.
A bad flu season, spread of the opioid crisis or a prolonged drug shortage are all variables that are hard to control, yet they all have an effect on hospital resources.
“Even though science is a lot of what health care is about, there is definitely a bit of an art when it comes to forecasting how many babies are going to be born that year, or how effective is the flu immunization going to be and how busy is the emergency room going to be,” Health Minister Sarah Hoffman said in a recent interview.
What’s more, a shortage of continuing care spaces in the province means that on any given day there are around 800 Albertans waiting in an expensive hospital bed for a residential unit to open up.
The NDP government has vowed to create 2,000 new long-term care and dementia beds by next spring, but it’s unclear how much of a dent that will put in the wait lists.
All told, these factors have clearly acted as obstacles to the province’s efforts to rein in hospital costs.
Yet it’s also clear that so many Alberta hospitals chronically exceeding their spending limits has made the mission that much harder and potentially points to a deeper, systemic concern with how health funding is managed.
While some degree of inefficiency is inevitable for any large organization, persistent deficits are more than abrasions on a balance sheet.
They have ripple effects around the health system for both staff and patients, hurting efforts to address wait times and improve quality of care. After all, if more money than expected is regularly consumed by one area of the system, areas such as prevention, technology and research may get shortchanged.
WHAT DO THE NUMBERS SHOW?
The dominant trend in the statistics is that the majority of Alberta’s hospitals have repeatedly failed to stick to their budgets, to the point that it is almost routine.
Postmedia’s analysis found an average of 62 hospitals record a fiscal deficit each year, which is close to three-quarters of the 86 hospitals included in the investigation.
While it’s not always the same hospitals plagued by red ink, most are frequent offenders.
The deficits they post tend to be small, with spending typically exceeding budget projections by two to four per cent, though records show a handful of outliers.
The worst performance was in 2014-15 — the final year of the former Progressive Conservative government — when the hospitals’ collective deficit hit $227 million, overshooting budget projections by more than seven per cent.
However, over the eight-year time frame, deficits have averaged about $115 million per year, which equates to a reasonably modest 3.6 per cent shortfall.
As such, the most relevant finding from the analysis is not necessarily the size of the hospital deficits, but rather how often they occur.
Similarly, the analysis found the province’s hospitals have been receiving annual budget hikes with about same regularity.
On average, around 65 hospitals see a budget increase each year. The high point was again in 2014-15, when 78 facilities received beefier budgets.
For the most part these hikes are small in size, which can be at least be partially justified by the need to accommodate annual population and cost-of-living increases.
More substantial bumps are sometimes required when hospitals add new beds or are asked to take on new surgeries or services.
Still, the fact that increases happen so commonly suggests facility administrators are not facing much pressure to stay within their spending limits.
WHAT ARE THE DIFFERENCES BETWEEN RURAL AND URBAN HOSPITALS?
Hospitals in the province’s cities tend to have more beds and offer more services than those in smaller communities, which means they spend more money.
A lot more.
In fact, AHS operates two hospitals — the University of Alberta/ Stollery Children’s Hospital in Edmonton and the Foothills Medical Centre in Calgary — that each have annual costs of more than $565 million.
That’s higher than all the rural hospitals combined.
On the other end of the spectrum, the four-bed Swan Hills Healthcare Centre in northern Alberta spends just over $1.2 million a year.
As such, it is no surprise to find the biggest facilities with the biggest costs generally produce some of the biggest deficits.
The numbers show that the 12 urban hospitals included in the analysis have collectively posted a $824-million deficit over the last eight years, whereas their 74 rural counterparts have combined for a $102-million deficit.
In addition to the size of the deficits, the analysis also found the urban facilities generally post deficits more frequently, and overshoot budget projections by wider margins.
On average, 83 per cent of the urban hospitals post a deficit each year, while the collective deficit they racked up over the past eight years exceeded spending limits by 3.9 per cent.
For rural hospitals, 70 per cent of the facilities produce deficits in an average year, and the combined spending over the last eight years was 2.3 per cent over budget.
Urban hospitals have also been slightly more likely than their rural counterparts to receive a budget hike each year.
There is definitely a bit of an art when it comes to forecasting how many babies are going to be born that year, or how effective is the flu immunization going to be and how busy is the emergency room going to be. SA%AH HOFFMAN, A.be36a24 mi0i46e3 1f hea.6h
WORST PERFORMERS
While most hospitals that record red ink tend to stay within a few percentage points of their budgets, there are a handful of facilities that have gone much deeper into the deficit hole.
By far the most conspicuous of these is the Devon General Hospital, a small facility just outside Edmonton that posted seven annual deficits during the last eight years.
Over that time, the hospital has overspent its cumulative $30.1-million budget by $6.2 million, resulting in a whopping deficit of nearly 19 per cent.
In comparison, the hospital with the second highest shortfall recorded a deficit of just over 10 per cent during the same period.
Devon’ s worst year was in 2014-15, when it exceeded its budget by about 74 per cent.
Asked to explain the hospital’s financial performance, AHS said a decision was made in the past to “remove operating budget” from the facility even though it was expected to keep providing services at the same level — a move that has deliberately kept the hospital in a deficit position.
The health authority did not give a rationale for the decision.
“Over the last few years, we have been working to reestablish an appropriate operating budget that matches appropriate operating expenses for the site,” AHS’s statement said. “This process is taking time as resources are available and will continue for the next few fiscal years.”
Behind Devon, the next highest percentage deficits were recorded by hospitals in Swan Hills, Wabasca-Desmarais, Bassano, Fort Vermilion and Boyle — all of which had shortfalls of more than nine per cent over the eight years examined by Postmedia.
Among the eight sites with the biggest deficits, six are in AHS’s north zone.
Notably, a number of those hospitals have maintained low patient occupancy rates of 50 per cent or less. This raises questions about whether they are operating too many beds, though it’s unclear what effect this might have on the facilities’ financial management.
Among the 12 urban facilities, the Red Deer Regional Hospital posted the highest percentage deficit of 8.1 per cent, followed by the Peter Lougheed Centre in Calgary at 7.6 per cent and Grande Prairie’s Queen Elizabeth II Hospital at 5.3 per cent.
In monetary terms, Red Deer’s shortfall has added up to $87.1 million over the last eight years. That’s higher even that the $86.3-million deficit posted by the Royal Alexandra Hospital, one of the province’s biggest teaching and trauma centres that has more than twice the beds of Red Deer.
AHS said higher patient traffic, expansion of various services and a focus on complex surgeries have increased spending at the Red Deer site in recent years, but simultaneous efforts to produce savings have been slow to develop.
Red Deer has been the subject of a number of complaints from staff groups that the facility is overburdened and under-resourced to keep up with demand.
While doctors have campaigned for a new building or wing that would include a cardiac catheterization lab, nurses in the emergency department have argued that insufficient hiring has led to excessive demands to work overtime.
Of the 86 hospitals include in the analysis, 11 posted a deficit in each of the last eight years: Athabasca, Bassano, Edson, Mayerthorpe, Raymond, Red Deer, Rimbey, Rockyview (Calgary), Three Hills, University of Alberta, and Wabasca-Desmarias.
In general, Calgary’s hospitals have produced larger deficits than Edmonton’s, though this may be partly explained by the fact that Calgary’s facilities have tended to receive smaller annual budget hikes.
Hospitals that fall into a deficit situation are not left hanging. AHS continues to pay for beds, bandages and blood work as necessary, but may have to pull funding from other places to make up the shortfall.
BEST PERFORMERS
The biggest outlier on the surplus side of the ledger was the Canmore General Hospital, which during the last eight years spent $17 million less than its $109 million budget — a variance of nearly 16 per cent.
The hospital at the edge of the Rockies has seen its annual budget double over the past six years, while at the same time experiencing a gradual decline in patient traffic.
“Most of our rural site (facilities) have seen a decrease in emergency visits because of the improved primary care access. This shows that we are spending money in the right place,” AHS said in a statement.
The health authority said Canmore’s budget increases are explained by the decision to take over responsibility for ambulances from the town, along with the transfer of the region’s obstetric services from the Banff hospital.
Recent surpluses are largely tied to the ambulance portfolio, but AHS insisted these are “artificial” because of a “misalignment” in how ambulance finances are managed in the broader Calgary region.
After Canmore, the next largest surplus of 6.7 per cent was recorded by the Manning Community Health Centre, followed by hospitals in Grande Cache, McLennan and Redwater.
Those last four sites are all in AHS’s north zone.
Postmedia’s analysis found none of the 86 hospitals were completely immune from deficits over the past eight years, though there were two that limited their red ink to one year: Sacred Heart Health Centre in McLennan and the Westlock Healthcare Centre.
While these facilities could be held up as models of financial efficiency for others to follow, AHS indicated other factors may have played a role in the frequent surpluses.
In Westlock’s case, the health authority credited the site’s managers for working hard to reduce overtime costs, but also said the hospital has experienced high staff turnover that has forced the hiring of younger, cheaper labour.
Among urban hospitals, the only facility to post a surplus over the last eight years was the Medicine Hat Regional Hospital, which came in under budget by just 0.8 per cent.
As with hospitals that record deficits, sites that generate surpluses don’t usually keep the excess money. AHS redirects the funds to other areas in need of more support.
WHY DO CHRONIC DEFICITS HAPPEN?
Financial management is an intricate endeavour — especially for a $15-billion health service with more than 100,000 employees — so it’s no surprise there are different suggestions for how hospital overruns occur.
For example, is it conceivable that hospitals are habitually, or even deliberately, underfunded each year in an attempt to keep costs down?
Is there a lack of financial discipline inherent in the system that provides too few deterrents against overspending ?
Can the trend be linked to hospital and unit managers spending more than they need out of fear that any surplus will trigger a funding cut the following year?
As it turns out, depending on whom you ask, all of these factors are likely playing a role.
Duncan Campbell, a former chief financial officer for both AHS and Vancouver Coastal Health, said there is some truth to the belief that program managers often find ways to avoid having leftover funds — perhaps by purchasing a piece of equipment or sending staff to medical conferences.
“The ‘use it or lose it’ mentality is still around,” said Campbell, who now runs the consulting firm Craigavon Enterprises. “I know when I was in both Alberta and B.C., you would just look at the runup on expenses in the last month. If there was money to be spent, it would be spent.”
Sweetman, the McMaster University economist, agreed such behaviour likely goes on, but also linked it to broader overspending tendencies he suggests are an inherent vice of Canada’s publicly funded, single-payer health system.
While private care hasn’t necessarily proven any better at reducing costs, public systems face the challenge that the people making spending decisions have no personal financial incentive to keep spending down, he said.
The trend may be especially acute in Alberta because of the province’s wealth. Sweetman said it’s no secret that wealthy people have fewer inhibitions about spending money on their health, and the same trend applies to governments.
The trick, then, is to find ways to inject financial discipline into such an environment.
Sweetman said there is a belief among some experts that this ambition can result in a certain amount of game playing between health ministries and health authorities.
As an example, a government might deliberately give health providers an unreasonably low budget believing they are likely to exceed the funding limit regardless. Should that play out as predicted, then the effort designed to encourage restraint may contribute to chronic deficits.
“There is this idea in the public sector ... that you should give hospitals a budget they really have to work to meet, whereas if you give them a generous budget, then they are not going to try very hard,” Sweetman said.
“Not everyone would say this, but certainly there are many people who think this is sort of the culture of Canadian medicare.”
Campbell agreed that financial performance problems often begin with a flawed budgeting process.
He said budgets for individual programs or facilities are too often created by basically adding a percentage or two to the previous year’s funding, when the system would be better served by tying money to regular recalculations of what the unit actually does.
“So the numbers themselves get quite polluted, not only in Alberta but across the country,” Campbell said.
WHAT DO ALBERTA HEALTH LEADERS SAY?
Provincial leaders point out that overall operational spending by the health ministry actually came in under budget last year, while AHS has generally finished each year around the break-even point.
They note the vast majority of the province’s health workforce is under contract for the next two years with no pay hikes, while other initiatives are underway to address unnecessary utilization of services — all of which should help to further slow the growth of spending.
Nonetheless, those leaders also acknowledge more work has to be done to rein in overruns and control hospital costs in particular.
“A four per cent (deficit) is smaller than some other overruns in other areas of government, but of course we never want to see an overrun,” Hoffman said. “We always want to be as close to budget or slightly below if possible without affecting patient care.”
Deb Rhodes, AHS’s chief financial officer, said the budgeting process didn’t get a lot of attention in AHS’s early years, as the organization was struggling to cope with the overnight amalgamation of nine regional health authorities that all had their own ways of doing things.
Likewise, she acknowledged that there likely have been instances of deliberate unnecessary spending by facility and unit managers, in part to protect their turf from a funding cut.
However, Rhodes said she believes the health authority has made big strides — particularly in the last two years — to improve the budgeting process and get everyone on the same page around how funding should be managed.
As such, AHS corporate culture has “matured and evolved” beyond the need to sneak in extra spending or deliberately ignore budget limits, she said.
Hoffman agreed, saying she asked AHS leaders about the deficits and was convinced “of the opinion that it definitely isn’t happening intentionally.”
Rhodes said the AHS senior executive team keeps a close eye on the budget throughout the year, meeting weekly to discuss some of the pressure points.
“We try to understand what is driving those variances, which of those are one-time items, which are recurring items and which are items we want to influence going forward,” she said.
The health authority’s financial management system is a complex organism in which funding flows through a number of moving parts, she said, so what comes across as a deficit in one area may be offset by running a surplus in another area. Balance sheets don’t always reflect that.
In some cases, the organization may know a program or hospital is likely to incur higher costs, but won’t incorporate all of that into its budget.
That might happen at a site where health leaders are trying to redirect more care into the community from hospitals, but also understand that the process may be slower than hoped, Rhodes said.
“The budget is your plan and what you hope to accomplish,” she said. We do know that potentially some of those facilities could struggle right from the beginning of the year.”
You would just look at the run-up on expenses in the last month. Iftherewas money to be spent, it would be spent.
See Part 2 of Deficit Disorder on Monday, when we examine potential strategies to better control deficits and overall spending on hospitals.
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