Needs-based health care funding: implications for resource distribution inOntario

Capitation models have been suggested as an alternative to funding methods based on historical utilization patterns. Capitation funding distributes re sources to regions or programs according to their population, adjusted for the age and gender composition and relative need. The most commonly used re lative needs measure is the Standardized Mortality Ratio (SMR). This paper compares the distribution of resources in Ontario implied by a variety of c apitation formula. Another aspect of this research is to design a mechanism that translates the SMR into a funding allocation index. We specify a non- linear model to capture the relationship between current expenditures and t he SMR while controlling for historical utilization factors. In contrast to previous work, in which a linear relationship between expenditures and nee d was assumed, our estimates suggest that the relationship may actually be highly non-linear. This non-linearity increases transfers to regions of rel ative need relative to a linear capitation program. JEL Classification: I0, H51.