Hospital Financing in Seven Countries

May 1995

OTA-BP-H-148

GPO stock #052-003-01413-1
Recommended Citation: U.S. Congress, Office of Technology Assessment, Hospital

Financing in Seven Countries, OTA-BP-H-148 (Washington, DC: U.S. Government

Printing Office, May 1995).
iii

oreword

ospitals—the largest single item in the health care budget—have

been a prime target of policymakers in attempts to rein in rising

health care spending. In the search for new ideas about how to organize and pay for health care, U.S. policymakers and researchers

have looked to other countries that appear to have been more successful at

holding down costs. This seven-country study of hospital financing is an attempt to find lessons for the United States.

The individual experiences over the past decade of the United States and

six of its international peers—Canada, England, France, Germany, the

Netherlands, and Sweden—in hospital financing and payment systems are

reviewed by experts in each country. In the other countries, the cost of hospital care (and of all health care) has, in fact, risen more slowly than it has in

the United States. Perhaps surprisingly, though, reforms have been and continue to be instituted in these countries not only to keep cost increases down,

but also to improve the efficiency of the systems, in part by introducing selected aspects of a market system, many borrowed from the United States.

At a national policy level, there appears to be little for the United States

to adopt from abroad. Other countries have managed to keep hospital and

total costs down by, in one way or another, imposing cash limits on the

health care system. A market-oriented system, such as the current U.S. system, is not as amenable to absolute limits, and in the 1990s progress is more

likely to come from within than through imported solutions.

This background paper is part of a larger study, International Differences

in Health Care Technology and Spending, which consists of a series of

background papers. International Health Statistics: What the Numbers

Mean for the United States was published in November 1993, International

Comparisons of Administrative Costs in Health Care appeared in September 1994, and Health Care Technology and Its Assessment in Eight Countries, in February 1995.

OTA has been greatly assisted by the advisory panel for the overall study,

chaired by Rosemary Stevens of the University of Pennsylvania. Miriam M.

Wiley, of the Economic and Social Research Institute in Dublin, Ireland,

guided the country authors and coordinated much of the work. As with all

OTA documents, however, responsibility for the content rests with OTA.

ROGER C. HERDMAN

Director
iv

dvisory Panel

Rosemary Stevens, Chair

University of Pennsylvania

Philadelphia, Pennsylvania

Stuart Altman

Brandeis University

Waltham, Massachusetts

Jan E. Blanpain

Leuven University

Leuven, Belgium

Harry P. Cain II

Blue Cross and Blue Shield

Association

Washington, DC

Louis P. Garrison, Jr.

Syntex Development Research

Palo Alto, California

Annetine Gelijns

Columbia University

New York, New York

John Iglehart

Health Affairs

Bethesda, Maryland

Ellen Immergut

Massachusetts Institute of

Technology

Boston, Massachusetts

Lynn E. Jensen

American Medical Association

Chicago, Illinois

Bengt Jonsson

Stockholm School of Economics

Stockholm, Sweden

Kenneth G. Manton

Duke University

Durham, North Carolina

Edward Neuschler

Health Insurance Association of

America

Washington, DC

Jean-Pierre Poullier

Organisation for Economic

Cooperation and Development

Paris, France

Mark Schlesinger

Yale University

New Haven, Connecticut
v

roject Staff

Clyde J. Behney

Assistant Director, OTA

Sean R. Tunis

Health Program Director

Hellen Gelband

Project Director for International

Differences in Health Care

Technology and Costs

PRINCIPAL STAFF

MARY A. LASCHOBER

Study Director

Nell Eisenberg

Research Assistant

David Kaufman

Research Assistant

Romulo Colindres

Research Assistant

Laura Esslinger

Summer Intern

ADMINISTRATIVE STAFF

Louise Staley

Office Administrator

Carolyn Martin

Word Processing Specialist

Carolyn Swann

PC Specialist

Monica Finch

Word Processing Specialist

CONTRACTOR

Martha Cooley

Washington, DC
vi

ontributors

Miriam M. Wiley

The Economic and Social

Research Institute

Dublin, Ireland

Morris L. Barer

Centre for Health Services and

Policy Research, and

Department of Health Care and

Epidemiology

University of British Columbia

Vancouver, Canada

Alastair M. Gray

Centre for Socio-Legal Studies

Wolfson College

Oxford, England

Mary A. Laschober

Office of Technology Assessment

US Congress

Washington, DC

Reiner Leidl

Department of Health Economics

University of Limburg

Maastricht, The Netherlands

J.A.M. Maarse

University of Limburg

Maastricht, The Netherlands

Charles Normand

Department of Public Health and

Policy

London School of Hygiene and

Tropical Medicine

London, England

Eric M. Paulson

Department of Social Medicine

Uppsala University

Uppsala, Sweden

Marie-José Sourty-Le Guellec

Centre de Recherche, d’Etudes et

de Documentation en Economie

de la Santé (CREDES)

Paris, France

James C. Vertrees

SOLON Consulting Group, Ltd.

Silver Spring, Maryland
vii

cknowledgments

Dave Arbuthnott

Manitoba Health

Winnipeg, Canada

Linda Bakken

Manitoba Health

Winnipeg, Canada

Regis Blais

University of Montreal

Montreal, Canada

Carol Clemenhagen

Canadian Hospital Association

Ottawa, Canada

Diana Davis

SIMBA

Takoma Park, Maryland

Sean Drain

Manitoba Health

Winnipeg, Canada

Robert Evans

University of British Columbia

Vancouver, Canada

Douglas Fletcher

Alberta Health

Edmonton, Canada

William Glaser

New School for Social 

Research

New York, New York

Stuart Guterman

Prospective Payment Assessment

Commission

Washington, DC

Tord Hedström

Uppsala University Hospital

Uppsala, Sweden

John Henderson

Department of Health

London, England

Philip Jacobs

University of Alberta

Edmonton, Canada

Steve Kenny

British Columbia Ministry

of Health

Victoria, Canada

Jean-Marie Lance

Association des Hopitaux 

du Quebec (AHQ)

Montreal, Canada

Barb Markham

Centre for Health Economics and

Policy Analysis

McMaster University

Hamilton, Canada

Günther Neubauer

München, Germany

Sara Nordling

Swedish Planning and

Rationalization Institute (Spri)

Stockholm, Sweden

Lars Palmgren

Nacka Hospital

Nacka, Sweden

George Pink

University of Toronto

Toronto, Canada

Jean-Pierre Poullier

Organisation for Economic

Cooperation and Development

Paris, France

Michael Stückrath

Aachen, Germany

G.J. Thigpen

Princeton, New Jersey

Barbara Zelle

München, Germany
ix

1 Summary and Lessons for the United

States 1

The Changing Profile of Hospital Use 2

Hospital Financing in the United States

and Abroad 7

Conclusions 17

References 19

2 Hospital Financing in Canada 21

Structure of the Hospital Sector 22

Physicians 22

Hospital Operating Costs 23

Capital Expenditures 33

Future Directions 39

References 40

3 Hospital Financing in England 43

Structure of the Hospital Sector 44

Physicians 45

Hospital Operating Costs 47

Hospital Capital Costs 50

Hospital Indicators and Trends 52

Future Directions 52

References 54

4 Hospital Financing in France 55

Structure of the Hospital Sector 56

Physicians 58

Hospital Operating Costs 59

Hospital Capital Costs 67

Future Directions 73

References 74

ontents
x

5 Hospital Financing in Germany 75

Structure of the Hospital Sector 77

Physicians 78

Hospital Operating Costs 79

Hospital Capital Costs 86

Hospital Indicators and Trends 90

Future Directions 90

References 92

6 Hospital Financing in the Netherlands 95

Structure of the Hospital Sector 97

Physicians 98

Hospital Operating Costs 100

Hospital Capital Costs 110

Hospital Indicators and Trends 112

Future Directions 114

References 118

7 Hospital Financing in Sweden 121

Swedish Health Care System Reforms 123

The Health Care Delivery System 124

Physicians 124

National Health Care Expenditures 125

Source of Funds 125

Allocation of Funds 127

Hospital Capital Costs 128

Example I: The Stockholm County Council 128

Example II: The Uppsala County Council 130

Conclusions 132

Addendum 132

References 133

8 Hospital Financing in the United

States 135

Structure of the Hospital Sector 136

Physicians 137

Hospital Operating Costs 138

Hospital Capital Costs 144

Hospital Indicators and Trends 147

Future Directions 148

References 150

INDEX 153
Summary

and Lessons

for the

United States

he largest item of expenditure in the health care budgets of

most industrialized countries—including the United

States—is the acute care hospital sector. As a consequence, hospitals have attracted the attention of policymakers attempting to curb growth in health care costs by changing the financial landscape for hospitals. Hospital use has

declined, particularly dramatically since the early 1980s, in response to economic signals and the development of new medical

technologies. The rate of growth in hospital costs also has slowed,

but at least some costs have been diverted to other health care sectors, particularly outpatient care and long-term care. What happens in one part of the health care system often reverberates in

other sectors, so no component can be studied in complete isolation. Nonetheless, payment for hospital care in the United States

and other countries is governed by distinct policies that bear examination. 

Looking around the world, it appears that health care expenditures in other industrialized countries have remained lower than

in the United States, while at the same time, everyone in those

countries has financial access to care. Increasingly, U.S. policymakers and researchers have looked to other countries to find new

ways of organizing and paying for health care, which might be

transferable. This seven-country study of spending for hospital

services and the policies that affect spending is an attempt to find

lessons for the United States.

The individual experiences of the United States and six of its

international peers—Canada, England, France, Germany, the

Netherlands, and Sweden—in hospital financing and payment

systems over the past decade are reviewed in the chapters that fol- | 1
2 Hospital Financing in Seven Countries

15

13 -------------- -------------- -

- A

c

5 ’

I

1980 81 82 83 84 85 86 87 88 89 90 91 92

SOURCE: Organisation for Economic Cooperation and Development, OECD Health Data (Paris: OECD, 1995),

1OW.

l This summary focuses on general trends in

the United States and the other countries and on

recent reforms directed at hospitals.

THE CHANGING PROFILE OF

HOSPITAL USE

The acute care hospital continues to be home to

the most advanced medical technologies, but

much about hospitals has changed, and the change

has been especially rapid since 1980. Trends in

key indicators in different countries give an idea

of just what has occurred.2 Overall, health care

spending has taken up an increasing percentage of

the gross domestic product (GDP), most significantly in the United States, Canada, France, and

the United Kingdom, and to a lesser extent in Germany and the Netherlands, declining only in Sweden (figure l-l). In 1980, the percentage of GDP

devoted to health care was between 7 and 10 percent in all the countries except the United Kingdom (which was below the rest). The United

States was second to Sweden by this measure. By

1992, the United States stood well above the other

six countries, having experienced a steeper rise

than the rest, particularly during the late 1980s and

early 1990s.

As a percentage of total health care spending,

the amount devoted to acute hospital care has actually decreased since 1980 in the United States,

Canada, France, and the Netherlands (the only

other countries for which this figure is available)

(figure 1-2), because utilization in other sectors

has risen faster than hospital utilization (due in

part to the shift of services out of hospitals and into

other sites of care). Among these four countries,

France allots the highest percentage to hospitals,

1 The country chapters were first drafted in 1993. They have been updated to different degrees, and are current, on average, to early 1994.

z~e &ta refe~ed to in this section are from the Organisation for Cooperation and Development (OECD). me relative standings of coutries are probably very reliable, but because data from different countries are not necessarily entirely comparable, the actual numbers should be

interpreted with some caution.
Chapter 1 Summary and Lessons for the United States 3

SOURCE: Organisation for Economic Cooperation and Development, OECD Health Data (Paris: OECD, 1995)

and the United States the least (even though the Some of the reasons for changes in hospital

United States has spent more per capita than these spending can be gleaned from a few other statisfour countries in every year since 1980 (figure tics. The United States and the other six countries

1-3)). all have somewhat fewer hospital beds in the

700

400-------- ”----- ‘

- -- ‘- ‘- ‘ “---------- -

300-

1980 81 82 83 84 85 86 87 88 89 90 91 92

—— —————— .- —. ——.—————

SOURCE. Organisation for Economic Cooperation and Development, OECD Health Data (Paris: OECD, 1995), Organisation for Economic Cooperation and Development, OECD Health Systems, The Socio-Economic Environment. Statistical References, Volume II (Paris OECD, 1993).
4 Hospital Financing in Seven Countries

1980 81 82 83 84 85 86 87 88 89 90 91 92

SOURCE: Organisation for Economic Cooperation and Development, OECD Health Data (Paris: OECD, 1995).

1990s compared with 1980, in proportion to popu- hospital has fallen steadily in the United States

lation size (i.e., fewer hospital beds/1,000 popula- (this is not the case in all countries, with some

tion), and the United States has the lowest ratio of trending upward and others downward) (figure

any country except the United Kingdom (figure 1-5). By 1992, the United States had a lower ad1-4). The decline is a result of reduced demand. mission rate than any country except the NetherThe percentage of the population admitted to a lands. And once in the hospital, people in all coun2 3 ,

21 - - - - - - - - - - - - - - - - - - - - - - - - - - - - -

A

1980 81 82 83 84 85 86 87 88 89 90 91 92

SOURCE: Organisation for Economic Cooperation and Development, OECD Health Data (Paris: OECD, 1995).
Chapter 1 Summary and Lessons for the United States 15

1980 81 82 83 84 85 86 87 88 89 90 91 92

SOURCE: Organisation for Economic Cooperation and Development, OECD Health Data (Paris: OECD, 1995)

tries stay, on average, for a shorter period than hospital days per person of the seven countries,

they did in 1980 (figure 1-6). and Germany has consistently had the highest

Overall, the number of days spent in the hospi- rate. Hospital occupancy rates (the percentage of

tal each year per capita has declined in all seven beds occupied as a proportion of the number availcountries (figure 1-7). In 1992, the United States able) are determined by the numbers of beds, the

and the United Kingdom had the lowest rates of numbers of admissions, and how long people stay.

2.5 -I I

1980 81 82 83 84 85 86 87 88 89 90 91 92

SOURCE: Organisation for Economic Cooperation and Development, OECD Health Data (Paris: OECD, 1995)
6 Hospital Financing in Seven Countries

65

6 0 ’

I

SOURCE: Organisation for Economic Cooperation and Development, OECD Health Data (Pans: OECD, 1995)

Since the mid-1980s, the hospital bed occupancy

rate in the United States has dropped steeply, from

about 75 to about 65 percent, and is lower than in

the other six countries (figure 1-8). The low occupancy rates have already caused many U.S. acute

care hospitals to close, downsize, or shift into other areas (e.g., long-term care) and many more will

probably do so in the next few years.

■ Forces of Change

Two forces have been most influential in reducing

the demand for acute hospital services: financial

incentives and advances in medical technology.

Prospectively fixed hospital payments and pricing

strategies have encouraged hospitals to find ways

to reduce the cost of caring for patients, which includes shifting inpatient care to outpatient settings

where possible. In the United States, the rate of

growth of inpatient hospital spending slowed during the mid-1980s, but outpatient expenditures

rose steeply. This coincided with:

1. Medicare’s adoption of a prospective payment

system (discussed below), which sets per-case

payment limits only for hospital inpatients,

2.

3.

the beginnings of privately insured managed

care efforts to reduce inpatient expenditures,

and

Medicare’s and Medicaid’s liberalized coverage rules for nursing home and home health

services.

In the other six countries, most hospitals have

been operating under fixed annual budgets that

provide clear expenditure constraints, at least for

inpatient services. Recent and ongoing reforms

include pricing strategies designed to encourage

greater use of outpatient sites. For an example, the

Canadian province of Ontario has made outpatient

care more attractive by adjusting the relative rates

for the same services provided in and out of the

hospital. While still lowering costs overall, providers do better financially by using outpatient

sites. Several counties in Sweden also have used

price differentials to influence patient flows to inpatient and outpatient sites, in some cases including differences in patient cost-sharing amounts

rather than hospital reimbursement, giving the

consumer an incentive to choose the less expensive setting. In the Netherlands, as part of major
Chapter 1 Summary and Lessons for the United States | 7

health care reforms in 1992, payment rates for

hospital care not requiring an overnight stay were

increased to stimulate substitution of daycare for

inpatient care. One of the farthest reaching reforms in this area is currently being implemented

in Germany. Germany’s 1993 Health Sector Act

for the first time allows general hospitals to establish outpatient departments.

Existing medical technology has been exploited and the development of new technology

pushed in the quest to lower hospital costs. Some

of the improved efficiency in hospitals comes

from such advances as laparoscopic surgery (also

called “keyhole” surgery), which allows many

complex procedures to be carried out through extremely small incisions, reducing hospital stays

and the need for post-surgical care to a fraction of

what they are for “open” surgeries. Getting people

out of the hospital sooner after all kinds of procedures is also the rule now, since it is generally accepted (whether or not it is always true) that outcomes are no worse with shorter hospital stays.

HOSPITAL FINANCING IN THE UNITED

STATES AND ABROAD

Health care systems and their financing may be

categorized many ways. Looking at where most of

the money comes from is an obvious first cut

(table 1-1). Broadly speaking, health care systems

are financed either by tax revenues or by some

type of insurance premiums. Of the countries covered in this report, Canada, Sweden, and England

fall into the former category and the United States,

France, Germany, and the Netherlands into the latter. Among the insurance-based systems, participation is mandatory in all except the United

States. The source of revenue does not predict

how hospitals get their money, however, and in

fact there is considerable overlap between the two

groups, particularly since the recent series of reforms of the late 1980s and 1990s (tables 1-1 and

1-2).

In all the countries, operating expenses—the

costs of keeping the hospital running day-to-day

to treat patients—account for the lion’s share of

hospital spending. Capital spending—the money

to buy new equipment, build new hospital wings,

replace old ones, etc.—though small relative to

operating expenditures, can drive up operating expenses because it creates an atmosphere where

new technologies come into frequent use. In the

real world, the split between operating and capital

expenses is an artificial one, but in fact, policies in

most countries do treat them separately to some

extent, and they are discussed separately below.

Cost containment, increased efficiency, and a

more equitable allocation of hospital funds are the

objectives driving nearly all hospital financing reforms in the comparison countries, but other factors also are important. Enhancing patient choice

in the health care system, including greater choice

of hospitals, is another recurring theme. The organizational and social concerns that affect and are

affected by health care and hospital reforms are

discussed briefly in this chapter.

❚ The United States

There is no single “U.S. hospital system.” The

U.S. health care system may be described as insurance-based with patient-based payment as the predominant approach to reimbursing hospitals for

services, but really it is a combination of systems,

some overlapping and others existing independently. Money flows to hospitals in the United

States in much more varied ways than it does in

other countries. It comes from a multitude of private insurers, the joint federal-state Medicaid program, the federal government’s Medicare program, and out-of-pocket costs from both insured

and uninsured people (table 1-3). (The separate

hospital systems for veterans, military personnel,

and for Native Americans are paid for entirely by

the federal government.) Third-party payers use a

vast array of methods for reimbursing U.S. community hospitals (defined as nonfederal shortterm facilities), of which 59 percent are privately

owned nonprofit institutions, 14 percent are privately owned for-profit institutions, and the rest

are operated by state and local governments.

The Medicare program is federally funded primarily through payroll taxes on employers and
The

Canada Netherlands

General

tax-based

England France Germany Sweden United States

Private insurance/

social insurance

Predominant

financing source

for inpatient

hospital services

General tax-based Social insurance Social insurance Social insurance General tax-based

(central government

general tax revenues)

(payroll taxes paid

to social security

sickness funds)

(payroll taxes paid

to statutory sickness

funds and private

insurers)

(payroll taxes paid

to statutory sickness funds, premiums paid to private insurers)

(County Council

(provincial general income taxes)

tax revenues and

federal transfers)

(premiums paid to

private insurers,

payroll taxes and

general tax revenues for social

insurers)

Predominant

payment method

for inpatient

hospital services

Activity-based

financing

Prospective

“global” budgets

Prospective

budgets

(“global allocation”

plus daily charges)

Prospective

“flexible” budgetsb

Prospective “functional” budgets

(partially activitybased),

Prospective hospital department

budgets; some

activity-based

financing (funds

follow services or

patients)

Activity-based

(funds follow

patients)

(controlled by

provincial

governments)

(funds follow the

patient; total funds

cash-limited at

district level)

(negotiated between hospitals and

insurance funds,

with central government controls)

(some central or

state government

controls for social

Insurance programs)

(negotiated between hospitals

and sickness

funds, with central

government controls)

(controlled by the

government)

(county council

controlled)

Ownership of

hospitals

Public (100%) Public (NHS)

(91 .3%), private

(8.7%)

Public and public

affiliated (75%);

Public (62.3%);C

private nonprofit

(33.9%); private

for-profit (3,8%)

Public (15%),

private nonprofit

(85%)

Public (nearly

1 00%)

Public (18,2%),

private nonprofit

(71%), private

for-profit (1 0.8%)

private nonprofit

(5%); private

(percent of total

hospital beds)

for-profit (19%)

Predominant Salary

payment method

for inpatient

hospital services

provided by

physicians

Fee-for-service Salary Salary Fee-for-service Salary Fee-for-service

a

The information presented in this table relates primarily to the dominant acute hospital sector at the beginning of 1994

bBeginning January 1993, effective until 1995, Germany has adopted prospective “fixed” budgets (See definitions in text).

cThe figures refer to general hospitals and include both acute and nonacute services; they refer to all 16 states of unified Germany, The former East German states had a much higher proportion of public

hospitals and beds than the former West German states

SOURCE: OTA, 1995.
Level of Basis of reimbursement Role of health Relation of capital

Responsibility Source of funding for capital costs sector planning and operating costs

Canada Provinces Provincial funds, often com- Separate capital funds are The hospital sector is subject to Depreciation for major medical

bined with local community granted after provincial planning by the provincial govern- equipment may be reimbursed

or hospital funds. government approval of ment, which mostly determines through operating expenses.

proposed investments. the capacity of the system.

England Regional health National Health Service’s Separate capital projects are The central government, working Capital charges, including

authorities capital budget is allocated to funded if approved by through regional and district depreciation and interest

Regional and District Health Regional Health Authorities. health authorities, fully determines charges, now included in service

Authorities (under reforms, the capacity of the public hospital contracts.

hospitals will be able to gen- sector.

erate their own capital

funds).

France Ministry of Health, in Public and PSPH hospitals Upon approval by the ap- The entire health care system Depreciation and interest costs

consultation with obtain most funds from their propriate level of government (both public and private health are included in operating

regional authorities own resources, with some authority, hospitals finance institutions) are subject to formal charges.

funding from state or local the investment from own health sector planning through the

subsidies. sources and receive state Health Map. The central governsubsidies if eligible. ment fully determines the capacity

of the hospital sector.

Germany State authorities State capital budgets (trend State funding for approved Capital investments are approved Depreciation for fully state-fitoward combined state and projects only for hospitals in- and financed by state govern- nanced capital not included in

hospital funds). cluded in the state hospital ments on the basis of state hospi- operating charges; depreciation

plan (almost all hospitals); tal plans. State governments fully and interest costs Included in

trend toward combined state determine the capacity of the hos- operating charges for capital

and hospital funding of capi- pital sector. financed from combined state

tal after consensus among and hospital funds.

hospital, state, and sickness

funds.

The Central and regional Hospitals’ own financial re- Internal sources and loans Construction of facilities and Depreciation and interest costs

Netherlands governments sources. from private banks upon purchases of major medical fully recoverable through patient

regional or central govern- equipment require a government- charges.

mental approval of capital issued license, issued on the

investment. basis of regional and national

health-sector planning.
—

Level of Basis of reimbursement Role of health Relation of capital

Responsibility Source of funding for capital costs sector planning and operating costs

Sweden County Councils Separate county council cap- Buildings are rented and The capacity of the hospital Trend towards allocating building

ital budgets, but trend equipment leased upon sector is planned and controlled rents and capital-related costs to

toward including building approval from the county at the county council level, with in- hospital departments.

and equipment costs in council. put from regional organizations.

hospitals’ operating budgets.

United States Hospital Hospitals’ own financial Internal sources and private Almost none. Some states require Depreciation and interest costs

management resources. loans. a certificate-of-need process for mostly recoverable through pareviewing and approving capital tient charges, although not all.

projects.
Chapter 1 Summary and Lessons for the United States 111

employees. In 1993 Medicare covered about 13

percent of the population and paid 28 percent of all

hospital operating revenues. Until 1983, Medicare generally paid hospitals retrospectively

based on the costs of care for each patient hospitalized. Explosive cost increases throughout the

1970s and early 1980s led to introduction of a

“prospective payment system” (PPS) that uses nationally standardized payment rates by “diagnosis

related group” (DRG). DRG-based payments

were intended to provide incentives for hospitals

to improve efficiency by offering a standard payment for all similar patients receiving similar services. PPS was important in decreasing the length

of hospital stays. After PPS was instituted, the rate

of increase in hospital costs did decline, but only

temporarily. Within a couple of years, the rate of

growth was back up to pre-PPS levels. PPS was

also associated with a substantial shift to outpatient treatment for certain types of services, including outpatient surgery.

DRG payments have not kept pace with increases in hospital costs, but hospitals have, by

and large, maintained their previous rates of

growth by charging private insurers more, a practice known as “cost shifting.” Because insurers

traditionally have passed along these higher

charges in the form of higher premiums or copayments, the level and quality of care for Medicare

patients probably has not been affected greatly.

But with greater market pressure brought by private insurers on hospitals to lower their charges

(discussed below), hospitals will find it more and

more difficult to shift costs.

Medicare pays for most outpatient services on a

cost basis. In 1986, Congress first directed the

Health Care Financing Administration (HCFA,

the agency that administers Medicare) to propose

a PPS for outpatient services and provided a list of

requirements for the system to meet. Developing a

viable method turned out to be much more difficult than designing the DRG system for inpatient

care, and only now, in 1995, have options for establishing an outpatient PPS been submitted to

Congress. But the options developed so far would

apply to only about one-third of outpatient spending. Implementation may be years off.

Hospital All health

Program area expenditures expenditures

Private spending 1437 445,5

Public spending 182,9 337.0

Medicare 92.7 151,1

Medicaid 42.4 172,8

State & local public 3.1 5.0

assistance programs

Dept. of Veterans Affairs 118 14,2

Dept. of Defense 104 133

Workers Compensation 10.0 20,6

State & local Hospitals 10.3 10,3

Other public programs 21 9.7

SOURCE. U.S Department of Health and Human Services, Health

Care Financing Administration, Office of Research and Demonstrations, Health Care Financing Review 16(1), fall 1994

Medicaid is a tax-financed state-federal health

care program for low income and disabled people,

which covered 8 percent of the population in 1993

and accounted for 13 percent of hospital payments. Eligibility for Medicaid is determined by

each state within federally determined guidelines

and varies considerably across the country. Virtually all hospitals participate in Medicaid, although

the extent of participation varies widely. Medicaid

beneficiaries are more likely to get inpatient care

in public nonfederal hospitals and teaching hospitals, and less likely in private hospitals, which

may be reluctant to admit Medicaid patients because of low reimbursement rates and restrictions

on coverage.

Before 1980, Medicaid programs were required to use the same methods as Medicare to pay

for hospital services. Legislative changes in 1980

and 1981 allowed states to develop their own payment arrangements with hospitals. The substantial state autonomy and the imperative to constrain

costs in Medicaid programs has led to heterogeneous approaches to reimbursing hospitals. Prospectively determined payment rates are common, but are packaged differently in different

states. In addition, more and more states are

introducing managed care initiatives as a way to

either hold down costs, increase coverage to a

broader population, or to achieve both goals.
12 | Hospital Financing in Seven Countries

More than half the states have applied for waivers

that excuse them from certain Medicaid specifications so they can institute changes that move even

farther from a “standard” Medicaid program

States are being seen as laboratories for experimentation.

Government influence on the hospital sector

has been very strong, but most people—about

two-thirds of the population—still are covered by

private insurance, most sponsored by employers.

About 35 percent of hospital expenditures are paid

for by the hundreds of U.S. private insurers, under

a multitude of plans. The very essence of the private insurance sector is variability in its range of

plans, benefits covered, reimbursement systems,

payment rates, etc. These attributes are combined

with a range of payment mechanisms for beneficiary contributions, including coinsurance, copayments, deductibles, and other out-of-pocket

expenses.

The fact that health insurance benefits have

been consuming an increasing share of employee

compensation relative to wages has contributed to

the pressure to hold down costs. The constant

pressure of rising costs and expanding demands

means that insurers continually seek ways to cap

both expenditures and benefits. One important response to this pressure has been the extraordinary

growth in managed care organizations and the increasing tendency of purchasers to form large buying groups. Managed care organizations vary in

structure, scope, and size, but all constitute integrated service networks that often combine insurance functions with health care delivery. Purchasing groups (including large employer and

government purchasers) tend to contract selectively with managed care organizations or to contract directly with networks of providers to supply

health care services to the group’s members. The

growth of managed care organizations has also

been accompanied by greater financial risk-sharing by providers, which might include sharing

profits or surplus funds in risk pools with providers or paying providers on a per person (capitation) basis.

In response to greater purchaser collaboration,

providers are increasingly cooperating to form integrated networks or systems of care that can bargain with purchasing groups directly. During the

1980s and early 1990s, many hospitals have

merged with, acquired, or affiliated with other

institutions to create larger systems to compete effectively for patients under managed care contracts. This trend is, if anything, growing stronger,

and is a major force putting downward pressure on

hospital costs.

The effects of these changes are seen in a slowing of hospital cost growth in the 1990s, particularly dramatic since about 1993. Adjusting for the

effects of inflation, the real growth in costs per

case fell from 5 percent in 1992 to less than 2 percent in 1993 and the beginning of 1994. In addition to the declines in lengths of stay and per-capita admissions, discussed earlier, growth in

hospital salaries also has slowed.

This is not the first time that the rate of growth

in hospital costs has slowed down. Hospitals have

responded before, with a decline in growth rates

after introduction of the prospective payment system; earlier, in the 1970s, to the Nixon Administration’s economic stabilization program; and at

other times. These earlier slowdowns did not

hold, however, with rates of increase picking up

within a few years.

Whether the current slowdown will continue is

debatable. Part of the impetus for hospitals to improve efficiency and cut costs was undoubtedly

the prospect of comprehensive health care reform

at the national level. That pressure appears to be

off for the foreseeable future. But today’s pressures also come from the private sector, and

changes in the private insurance market are accelerating. Many people believe that these market

forces holding down health care costs will be sustained and will continue to keep growth in check

by wringing still more inefficiency out of the system, by promoting cost-saving new technology,

and by abandoning services with only marginal

health benefits.
Chapter 1 Summary and Lessons for the United States | 13

Hospital Capital Expenditures

U.S. hospitals have great freedom to decide how

much capital they need, with relatively few regulatory constraints. Public hospitals may be required to follow government guidelines for competitive bidding arrangements, but few states

exert direct control over the decisionmaking or acquisition process for capital. About 30 states operate some kind of certificate-of-need program requiring prior approval of large capital

expenditures, and other states limit the amount of

capital available by other means, but these programs do not appear to have had much impact

overall.

Capital expenditures are financed through fundraising (i.e., gifts), loans, and routine payments

for services by insurers (including the federal government). About half of all capital expenditures

are financed by loans and the rest by other sources.

Under “traditional” cost-based reimbursement

systems, capital expenditures for buildings and

equipment (represented by depreciation and interest payments on debts) are passed through to

payers by adding on an appropriate amount to all

charges for services. But as cost-based reimbursement is being replaced more and more with prospective payment systems that pay a predetermined charge for each service, payers can exercise

more control over how much allowance they make

for capital costs. Medicare’s PPS system originally allowed capital costs to be paid directly as required, independent of DRG payments, but as of

the 1992 fiscal year, capital costs are gradually being incorporated into DRG payments, giving the

government greater control over the level of capital it provides to hospitals.

Through the 1980s, hospitals competed by continually upgrading their facilities and providing

the most sophisticated medical technology. These

capital expenditures were a major contributor to

the rise in hospital and health care costs. Today,

with price competition a much greater factor in the

survival of hospitals, investments in the latest

technology are no longer a given. In this case, limits on new technology may be imposed by market

forces. At the moment, however, capital spending

is still growing as a percentage of total hospital

spending.

❚ International Trends

The upward pressures of medical costs, especially

in hospitals, are felt in all countries and the responses are a continual series of reforms that attempt to maintain control over costs and improve

the quality of services. The six countries included

in this study, though crossing the spectrum of organization and financing, all maintain near-universal coverage of their populations, and no reforms have sought to exclude segments of the

population from coverage (though in some countries the amount people must pay out-of-pocket

has risen, which may effectively reduce access for

some people, and the range of benefits to be covered by public or sickness fund insurance is alive

in policy discussions). Changes to improve the

countries’ health systems have focused more on

the supply side of the system through provider incentives and on the demand side through the creation of purchasing organizations.

Canada, England, France, Germany, the Netherlands, and Sweden all currently have or have recently had some form of prospective budgeting

system for most hospitals, i.e., they determine

ahead of time how much money a hospital will get

for operations in the next year. One of the most

pervasive factors underlying reform in these countries is the belief that, while prospectively fixed

hospital budgets help promote overall expenditure constraint, at least for inpatient services, explicit incentives and controls are needed to encourage the efficient and equitable allocation of

funds within individual hospitals or across hospitals. In simpler terms, where no appeal for more

money is possible, a fixed budget can hold costs

down to an absolute level, but not necessarily improve the return on the money spent in terms of the

quality or quantity of hospital services.

Traditionally, annual hospital budgets have

been based largely on historical costs, adjusted for

such factors as general inflation, service growth,

new technologies, and wage and salary increases.
14 | Hospital Financing in Seven Countries

A hospital budgeting system based on historical

costs, however, may not encourage hospitals to try

to find cheaper ways to produce hospital services

or to improve the quality of services to attract patients. Hospitals only have to ensure that their expenditures stay within the amount provided from

the government or insurance funds. Of course, if

annual budget determinations do not keep pace

with the demands placed on a hospital’s services,

the overall budget restraint may require hospitals

to cut their costs. Historical cost budgeting may

also lock in inequitable funding arrangements.

Hospitals that have been historically underfunded

or become underfunded because of changes in local population needs often remain underfunded

while other hospitals may be inefficiently overfunded.

For these reasons, countries with prospectively

fixed budgets have chosen to redesign hospital financing or payment mechanisms to better account

for patient flows and patient needs, and to promote

more efficient use of resources. Cost containment

has not been abandoned as a primary goal in hospital financing reforms, but this goal is increasingly accompanied by attempts to encourage more

efficient production of hospital services. Reallocation of funds among hospitals is not always

designed to decrease aggregate hospital spending,

but may be used to provide more money to hospitals where health care needs are greatest and less

where needs are lower in order to obtain better

“value” for the same amount of resources spent.

Different ways of paying individual hospitals

(e.g., a fixed payment per hospital episode) have

also been adopted to a limited extent in some

countries to motivate hospitals to lower their production costs by reducing lengths of stay, using

less expensive labor, or using cheaper medical

technologies or settings where appropriate.

Financing reforms adopted by the six studied

countries follow one or both of the following

broad strategies:

1. strategies that depend on greater internal or external market competition to reallocate funds

among hospitals and within hospital departments, and

2. strategies that depend on activity- or case-mix

based budget determinations.

The first strategy has recently been adopted by

the Netherlands, England, and some Swedish

county councils. In these places, reforms have focused on separating the purchasers of hospital services from service providers. Money is directed to

individual hospitals either through patient decisions to choose a specific hospital (i.e., “money

follows the patient”), through a purchasing organization’s decision to contract with a hospital to

provide services to the organization’s members,

or, as in some Swedish hospitals, hospital departments “purchase” services from other departments.

In Sweden, several county councils have established internal hospital markets under which some

hospital departments (usually clinical departments) are given budgets out of which they purchase services (e.g., diagnostic tests, food, and

housekeeping services) from other departments,

encouraging scrutiny of the costs and benefits of

services that patients get. Other Swedish county

councils have established external markets by allocating budgets to authorized purchasing organizations that are responsible for buying all health

care for a defined population through contracts

with health care providers.

England and the Netherlands have adopted

more decentralized, market-oriented mechanisms

to pay for hospital (and other) services. Following

reforms in these two countries, a large part or all of

a hospital’s operating revenues are determined

largely by the contracts it negotiates with purchasers for specific services. In England, purchasing

organizations (District Health Authorities or general practitioners who have become “fundholders”) receive a budget from the government,

which is proportional to the size of the population

for whom they provide health services. The purchasing organizations are responsible for contracting with hospitals to provide inpatient services to their enrolled populations (a very small

number of British hospitals still operate on prospectively determined budgets).
Chapter 1 Summary and Lessons for the United States | 15

In the Netherlands, about half of a hospital’s

revenue comes from a prospective budget based

on the size of the population it serves and on the

number of authorized beds and medical specialist

units that it has. The other half is determined by

“production contracts,” the result of annual negotiations between hospitals and health insurers

(both sickness funds and private insurers) over the

projected volume of hospital use by each insurer’s

beneficiaries. Health insurers agree to pay hospitals for a predetermined number of hospital admissions, inpatient days, outpatient visits, and

daycare visits, and for some specific high-cost

treatments. Payment rates for hospital services are

determined by a quasi-governmental agency. Production contracting acts as an instrument for

adapting hospital budgets to changes in demand

for a hospital’s services, making the budgeting

scheme more flexible. Production contracts have

also increased the role of health insurers in the

budgeting process and have tended to decentralize

the process.

The second broad strategy for financing reforms moves from budgets based on historical

costs to allocating money in ways that more accurately reflect each hospital’s patient load and activity. These methods use measures of the hospital’s case mix or severity mix, often derived from

the diagnosis-related groups (DRGs) used in U.S.

Medicare’s prospective payment system, to determine at least a portion of the budget. The Canadian provinces of British Columbia, Alberta, and

Manitoba have begun using various forms of population- or case-mix based measures to set a percentage of hospitals’ budgets to encourage hospitals to produce services more efficiently or to align

hospital funding more closely with population

needs. France is also conducting limited experiments in a number of hospitals to test a case-mix

based approach to financing, with hospital

charges based on homogeneous patient groups

that are similar to DRGs. Germany has recently

expanded the use of special fees and case-based

payments that are conceptually similar to U.S.

Medicare’s DRGs with the goal of bringing most

hospital inpatient care under a more performancerelated system.

Hospital Capital Expenditures

Trends toward greater hospital efficiency are

echoed, but to a much lesser extent, in the six

countries’ reforms of capital financing. Some reforms have been aimed at requiring explicit consideration of the “opportunity costs” of making

specific capital expenditures—i.e., what other opportunities there are for investing the money that

will be lost by spending it a certain way. Others

have changed the threshold for approving capital

expenditures in countries where approval is required and changing the way in which hospitals

are paid for capital expenditures.

In England, before recent National Health Service (NHS) reforms, depreciation and the opportunity costs of using capital assets were not explicitly separated out in NHS accounts because all

hospitals were owned, operated, and funded by

the NHS. But since 1991 and the reforms that have

separated purchasers and providers, charges for

capital have begun to be incorporated into contracted rates for hospital services. The reforms

also for the first time allow NHS Trusts to finance

their capital requirements from within their own

budgets and by borrowing.

Until recently, private loans to hospitals in the

Netherlands were guaranteed by the national government, which is estimated to have decreased interest payments by about 1 percent. This arrangement was recently ended to encourage hospitals to

behave like private companies in obtaining loans

for capital investments. A general trend in Sweden’s county councils is to allocate rents for hospital buildings and investment costs directly to hospital departments to motivate them to more

efficiently use different kinds of hospital inputs

(e.g., labor versus high-technology equipment) to

provide services. Although France has not

changed its policy of providing free state and local

government subsidies and interest-free loans from

sickness funds for public hospital investment,

public hospitals are obtaining an increasing share

of their capital funds from internal sources and interest-bearing loans.

Because of the split between capital planning

and budgeting and operating cost budgeting, the

impact that capital investments will have on future
16 | Hospital Financing in Seven Countries

hospital operating costs often is not considered

when decisions about capital investments are

made, but this, too, is being addressed in some

countries. The Canadian provinces are increasingly requiring that requests for approval of hospital

capital expenditures include an “economic case”

that the capital purchase will either reduce operating costs by improving technical efficiency or that

it will lead to improvements in patient outcomes

sufficient to justify the expenditures. In the province of Manitoba, getting approval for new equipment requires that the implications for future hospital operating costs be predicted before a decision

is made. If it is likely to significantly increase operating costs, e.g., require additional staff or maintenance, it may be treated as a new program proposal, which is evaluated more rigorously. In

Germany, with only some recent exceptions, the

law has allowed the cost of capital investment to

be added directly to hospital charges only for projects designed to reduce operating costs.

U.S. hospitals must raise their own funds, usually through equity or borrowing, and therefore already include the opportunity costs of capital investment funds and possible impacts on future

operating costs in their decisionmaking process.

Individually, U.S. hospitals have incentives to

purchase capital when the expected benefits of an

investment project outweigh its cost, but the lack

of overall planning and allocation of capital

among regions and hospitals does not promote

maximization of the net benefits of capital investments in the hospital industry or country as a

whole.

Overall Hospital Spending

Recent and ongoing reforms are expected to increase hospital efficiency and patient satisfaction.

However, unlike the United States, in all six comparison countries there are still explicit limits on

the total amount of money available to pay for

hospital services.

In Sweden, hospital funds are limited by the

county councils, which determine hospital department budgets or the budgets of purchasing organizations; beginning in 1991, the central government restricted county councils’ ability to further

increase tax revenues. In England, the amount of

money flowing to District Health Authorities or to

general practitioner fundholders to purchase hospital services is still cash-limited by their respective Regional Health Authority, and, ultimately,

by aggregate limits on National Health Service

funding from general tax revenues.

French public (and affiliated private) hospital

budgets are still largely constrained by prospective budgets (called global allocations) that must

be approved by government authorities. Negotiations between German sickness funds and German hospitals over a hospital’s prospective budget

are more constrained since that country’s most recent health reforms were adopted. The German

Health Sector Act of 1993 requires fixed prospective hospital budgets from 1993 to 1995 that can

no longer be adjusted for the difference between

the actual number of inpatient days delivered and

the predicted number. The Health Sector Act also

strictly constrained growth in hospital budgets

during that period, tying growth to increases in

sickness fund income.

The Canadian provinces have also become

more forceful in the 1990s in developing institutional expectations that hospital budgets are binding. The Netherlands’ hospital reforms provide a

partial exception to this rule of aggregate limits on

hospital spending. The new budgeting scheme

with production contracts leaves one avenue for

hospital spending open-ended, and the Health

Ministry may now only issue expenditure targets

for any given year. However, the Ministry may

make up a cost overrun by reducing the next year’s

budget.

❚ Other Areas of Health Care and 

Hospital Reform

A trend in the six countries, though not as pervasive as strategies to improve efficiency, is the

movement toward allowing greater patient choice

of insurance organization, health care providers,

or both. Strategies to achieve this goal often overlap with schemes to promote greater efficiency.

Greater choice may not only make consumers
Chapter 1 Summary and Lessons for the United States | 17

more satisfied with their health care system, but it

also may encourage providers and insurers to try

to improve quality and lower costs to attract customers.

In 1997, blue-collar workers in Germany will

for the first time have the right to choose among

sickness funds.3 In Sweden’s traditional health

care system, patients were assigned to a primary

health center and a hospital. However, the established, well-defined catchment areas of health

centers and hospitals have been increasingly questioned by the general public. In response, the

Swedish Federation of County Councils adopted a

statement in 1991 that calls for all Swedes to be allowed to choose their physician and hospital.

Under the Netherlands’ reformed system, patients may choose their health insurer—either a

sickness fund or a private insurer—and insurers

compete to attract subscribers. A major element of

the United Kingdom’s reforms was increased consumer choice of providers and services. General

practitioner fundholders will compete for patient

enrollment, and public and private hospitals in

turn are expected to compete for their patients. Canadian citizens have always had free choice of

physicians and hospitals under Canada’s Medicare system. France’s 1991 health reform act reiterated patients’ freedom to choose a physician or

hospital. 

Decentralization of decisionmaking is another

trend in these countries. England’s purchaser-provider split shifts hospital decisionmaking from local government entities to individual hospital

managers. Canada has always been decentralized

to the provincial level, which allows for experimentation and for funds to be more closely

aligned with local population needs. British Columbia’s new restructuring initiatives attempt to

create a more efficient and patient-friendly match

of needs and levels of care by downsizing large urban hospitals, expanding community-based programs, and generally moving patients “closer to

home.” The Netherlands’ production contracts

have decentralized the hospital budgeting process. Some Swedish county councils’ and England’s purchaser-provider splits have put more

power into the hands of health care purchasers. In

Sweden, the tax and planning powers of county

councils allows different councils to experiment

with financing and payment arrangements.

CONCLUSIONS

The period since 1980 has seen constant change in

the role of hospitals all over the world, reflecting

both the dynamism of medicine and the tightening

financial climate. The countries studied by OTA

all started from different places, but all have

shared the reform goals of greater cost containment, efficiency, and health service coverage. The

prevailing approaches to hospital financing and

the recent reforms emerge from specific historical,

cultural, political, and societal contexts that do not

lend themselves to unidimensional categorization. Broadly, financing models are tax-based

(Canada, Sweden, England) or insurance-based

(France, Germany, the Netherlands, and the

United States), but the mode of financing appears

to be neither a constraint against nor a requirement

for any particular type of hospital financing reform.

The United States stands out among its international peers as having the highest level of hospital

costs since 1980, but also for pioneering financing

mechanisms—especially prospective payment

systems—that have led hospitals to reduce the

hospital resources used to care for individual patients, including shifting the site of care away

from the inpatient setting for many patients. These

mechanisms, especially the DRG system

introduced in the mid-1980s in the United States,

are now, in the 1990s being adopted by other

countries as ways to allocate funds among hospi3White-collar workers already have this right, and they can also choose to leave the statutory insurance system and go to a private insurer.

German consumers have always been able to choose their physicians, but sickness fund patients usually have to go the nearest hospital with

suitable facilities.
18 | Hospital Financing in Seven Countries

tals, most often within the constraints of prospective budgets.

Other countries have had greater control over

total hospital spending at a central level. To a large

degree, these countries’ reforms seek to integrate

the advantages of spending controls that they have

already with more efficient and equitable production of hospital services. Decentralizing hospital

financing, creating incentives for competition

within the hospital system, and basing a greater

amounts of a hospital’s revenues on the needs of

the population it serves are the goals of reform,

while also giving consumers more choice in

where and from whom they get their health care.

Basically, they are attempting to introduce selected market-type forces into their systems,

choosing largely from mechanisms deemed successful in the U.S. system.

The United States is moving to a more forcefully market-driven health care system in which price

competition has become more important than it

has ever been. In the early 1980s, the Medicare

program’s prospective payment system led to a

slowdown in cost increases to the federal government, though not in national health care spending.

In the 1990s, the private sector is applying the

greatest pressure to slow cost growth. Ratcheting

down by private insurers will also affect publicly

funded health care by making it more difficult for

hospitals to recoup their deficits from Medicare

and Medicaid patients by shifting costs to the privately insured. Ultimately, this will mean

constraining the growth of services, finding ways

of providing the same services at lower cost, or

both. Advances in medical technology already

have contributed to this effort and will probably

continue to do so. Continuing to wring inefficiency out of the system—by eliminating unnecessary

care and by further streamlining the functions that

remain—also will contribute.

The Medicare program’s move to eliminate the

historical separation of operating costs and capital

expenditures is also a step toward increasing the

rationality of the system. Some other countries

also are moving in this direction, a move that

should place their health care systems—regardless of how they are financed—in a more marketdrive mode.

What can the United States learn from its international peers about the costs of hospital care?

The way that other countries have kept spending at

a lower level than the United States is no mystery:

fixed (or relatively fixed) budgets have been set in

virtually all these countries by some central authority. The U.S. system as it is today and is likely

to be in the foreseeable future does not allow for

this type of centralized decisionmaking. Fixed,

prospective budgets have apparently not made the

other countries’ systems more efficient, either; in

fact, they may have had the opposite effect.

There is intrinsic value in understanding more

about how other countries function, and their similarities and differences with the United States.

There may well be some important lessons to be

learned at the operational level of hospitals from

international comparisons, but at a national policy

level, the great efforts that have gone into international comparative studies over the past decade or

so have produced relatively little practical return

for the United States. They may be of greater value

among countries with systems that are more similar in their health care systems. The United States

should continue to be aware of and examine other

countries’ successes and failures in managing

health care, but with limited expectations. The

U.S. health care system is peculiarly our own. In

the 1990s, progress is more likely to come from

within than from imported solutions. 
Chapter 1 Summary and Lessons for the United States | 19

REFERENCES

1. Organisation for Economic Cooperation and

Development, The Reform of Health Care: A

Comparative Analysis of Seven OECD Countries (Paris: OECD, 1992).

2. Organisation for Economic Cooperation and

Development, OECD Health Data (Paris:

OECD, 1995).

3. Organisation for Economic Cooperation and

Development, OECD Health Systems, The

Socio-Economic Environment. Statistical

References, Volume II (Paris: OECD, 1993).

4. U.S. Department of Health and Human Services, Health Care Financing Administration,

Office of Research and Demonstrations,

Health Care Financing Review 16(1), fall

1991.
Hospital

Financing

in Canada

by Morris L. Barer

anada is often described as having a national health insurance system; this is not entirely accurate, however, since

each of the 10 Canadian provinces (and two territories)

administers its own health insurance plans. Although the

hospital and medical components of those plans are subject to

federal guidelines, the provincial governments make their own

decisions about health care financing and payment of providers,

benefits other than hospital and medical care, and the organization of health services. Despite some heterogeneity among provinces, however, the provincial health systems have several features that are common across the provinces.

To qualify for federal contributions, provincial hospital and

medical insurance plans must fulfill federal eligibility and coverage standards, which include public nonprofit administration,

portability of benefits across provinces, comprehensive coverage

defined as “all medically necessary services,” accessibility, and

universal coverage. All 27 million Canadian residents, regardless

of age or financial or health status, are entitled to participate in

their respective provincial plans. Provinces can insure benefits in

addition to hospital and physician services, but they are left to

each province’s discretion and vary among provinces.

Among the Organisation for Economic Cooperation and Development (OECD) countries, Canada is unique in having no private-sector involvement in hospital and medical insurance. Private insurers cannot compete with the public medical and hospital

insurance programs, but can only cover services not covered by

provincial plans (e.g., outpatient prescription drugs, dental care,

cosmetic surgery, optometry, physiotherapy). A large percentage

of the population has some private coverage, usually paid by employers. Hospitals (and physicians) are largely prohibited from | 21
22 | Hospital Financing in Seven Countries

treating both patients whose care is paid for by

provincial plans and patients who pay directly.

The prohibition of private insurance for benefits

covered by the provinces virtually establishes provincial governments as single payers of much of

the health care received by Canadian residents.

Provincial health plans are financed almost entirely from general revenues (from provincial

sources and federal transfers to provinces), raised

through personal, corporate, sales, payroll, and

other broad-based taxes (residents of Alberta and

British Columbia also pay monthly premiums). In

1993, provinces funded approximately 70 percent

of Canada’s total health expenditures (which includes federal transfer payments) and paid for almost 90 percent of all physician and hospital

charges. The remaining 30 percent of national

health spending came predominantly from private

payments, mainly for the costs of long-term care,

adult dental care, nonprescription drugs, and other

items (27).

The simple story of Canadian hospital financing—which might be summed up as single-source

public funding allocated to hospitals via global

budgets established by provincial Ministries of

Health—offers a relatively accurate picture. However, this general description masks both provincial/territorial variations in the details of hospital

funding and the different ways in which hospital

capital and operating costs are paid for and allocated. The objective of this chapter, therefore, is to

clarify the general story, with particular emphasis

on recent new provincial funding initiatives for

hospital operating costs and on the less well-understood capital funding process.1 Approaches to

funding capital and operating costs are described

in more detail for several provinces to illustrate

the general structure of the Canadian hospital financing system.

STRUCTURE OF THE HOSPITAL SECTOR

Hospitals were brought into the Canadian health

care system under the Hospital Insurance and

Diagnostic Services Act (HIDS) of 1956 (41).

(For the purposes of this chapter, “hospitals” are

acute care and rehabilitation care facilities, some

of which also contain extended care beds.)2 By

1961, all provinces had met the terms and conditions required to receive federal funds for hospital

cost-sharing. Since that time, hospital care in Canada has been provided largely through publicly

owned and funded nonprofit institutions. There is

virtually no private acute care hospital sector in

Canada, although an active private long-term care

sector includes a variety of chronic care institutions. These institutions, even though privately

owned, receive a significant amount of public

funding. (The Canadian Hospital Directory lists

over 50 private hospitals, but most are psychiatric,

drug and alcohol rehabilitation, and long-term

care facilities.)

PHYSICIANS

For nearly all Canadian physicians, hospitals

serve as free workshops. General/family practitioners may admit patients directly to a hospital or

may refer their patients to specialists who may

then recommend hospitalization. In either case the

primary care practitioner or specialist can follow

the patient into the hospital and bill the provincial

medical plan for hospital visits or for surgical procedures or assists. Physicians are paid fees for inpatient services but are responsible for none of the

hospital costs incurred.

Many specialists (particularly tertiary care subspecialists) are hospital based; some have their offices within the physical confines of the hospital.

Most hospital-based physicians, however, are

1This document reflects the situation in Canada as of the spring of 1993, and rapid changes occurring in the provinces may render it an

inaccurate representation of hospital financing in 1995.

2For more detail on hospital classifications, see (13,40).
Chapter 2 Hospital Financing in Canada | 23

paid fees for services from provincial medical

plans rather than from the hospital’s budget. Also,

a sizable number of diagnostic physicians (e.g.,

radiologists, pathologists) are in salaried hospital

positions. Many of the services they provide are

also paid for on a fee-for-service basis to the hospital by the provincial medical plan.

A small (but growing) number of specialists is

negotiating alternative payment arrangements

with provincial medical plans. For example, a

teaching hospital-based neonatology unit may negotiate with the provincial ministry of health for

sessional (half-day) payments to its practitioners

or even for block operating funds. These funds

generally flow to the hospital separately from its

operating budget; they derive from a different

branch of the provincial ministry.

In general, like the United States but different

from most of the other five countries in this study,

the only physician costs that appear in a hospital’s

operating budget are for salaried medical staff,

such as the heads of clinical departments or diagnostic salaried positions, postgraduate medical

students (interns and residents), or physicians

serving in administrative posts (e.g., CEOs or vice

presidents). These costs represent only a very

small fraction of the total cost of physicians’ services delivered in hospitals.

HOSPITAL OPERATING COSTS

❚ Financing Model

Historical Hospital Financing Approach

Hospital funding in the early years of the public

program was characterized by either line-by-line

budgeting or per diem reimbursement. Under

line-by-line budgeting, individual institutions negotiated specific budgetary line items with provincial ministries of health. The total budget allocation for an individual hospital was the

aggregate of the line items. Reallocation of funds

between different line items was severely restricted, and the effort involved in scrutinizing the

line-by-line detail eventually persuaded ministries to move away from this approach.

Per diem reimbursement involved retrospective adjustments to hospital operating budgets

based on the actual number of inpatient days of

care provided, leaving provincial ministries with a

large open-ended line in their budgets. (For example, a special request for additional funding in

British Columbia in fiscal year 1980-81, amounting to almost 25 percent of hospital expenditure

estimates, was required to cover actual per diem

costs that year [24]). Inflation-adjusted per capita

hospital expenditures increased by 7.6 percent

annually during the 1960s, in part because funding increases were relatively generous and also

because ministries tended to cover year-end budget deficits.3

The line-by-line budgeting approach has largely disappeared (although about 20 percent of hospital budgets in Québec continue to be determined

on a line-by-line basis [14], and Alberta only recently moved away from this method [28]). The

move toward “global budgeting” began in Ontario

in the late 1960s (17). With this method, budget

negotiations focused on the total budget rather

than on individual activity or cost centers within

the budget (and hospitals gained considerable

flexibility in moving funds among operating

lines). Under the original global budgeting method, the annual funding allocation was based on a

series of relatively mechanical adjustments to the

previous year’s hospital expenditures. Special

provisions were made for new programs, unanticipated and justifiable increases in service provision, or other unforeseen circumstances. The effort required of ministry staff in approving

budgets was reduced significantly. Retrospective

line-by-line review was invoked only in situations

in which hospitals exceeded their budgets.

For many years the change from open line-byline budgets to the theoretically capped global

budgets lacked “teeth” for controlling the growth

of hospital expenditures because most expendi3 Per-capita hospital expenditure data are from Barer and Evans (6) and were deflated using a GDP implicit price index (16).
24 | Hospital Financing in Seven Countries

ture overruns were ultimately covered by provincial health ministries. Québec tried to close off

year-end coverage of deficits, and several provinces, led by Québec, experimented with a variety

of incentive reimbursement schemes to motivate

hospitals to use their funds more efficiently. Yet

this movement had a rather checkered history

(14,21), in part because of glaring failures to understand the motivations of key hospital stakeholders. For example, for some time in Ontario,

hospitals could not run deficits but also could not

retain the full amount of any surpluses. Not surprisingly, actual expenditures clustered tightly

around approved budgets.

Only in the more fiscally constrained late

1980s and especially in the early 1990s have ministries of health become more forceful in developing institutional expectations that budgets are not

starting points but rather binding constraints.

Concurrent with this more hard-nosed approach

have come a number of attempts to refine the criteria used to allocate funds among hospitals. The

global budgeting approach remains a relatively

accurate portrayal of the process today, however.

In most provinces (Alberta being one exception,

as will be seen later), the more recent funding innovations are applied only to the portion of the

following year’s funding that represents an increase over hospital budgets in the current year. To

a large extent any relative inefficiencies and inequities that existed in each province when it

switched to global budgeting have been fossilized. In many instances historical problems may

even have been exacerbated by the current relatively ad hoc process of allocating new funds and

covering deficits (35).

Current Hospital Financing Approach

Details of the current budget development, approval, and allocation process vary among provinces, but a general picture can be sketched without straying too far from the specifics of any one

province. Despite some other minor sources, provincial and federal general tax revenues constitute

the lion’s share of funds for hospitals in Canada.

There are no tax revenues earmarked specifically

for hospitals. Although provinces receive federal

transfer funding for health care programs governed by the Canada Health Act, these funds fall

far short of the total cost of the programs; therefore, they are treated simply as part of general 

provincial tax and transfer revenues. Provincial

ministries of health must compete with other ministries in their provinces for a piece of the general

revenue pie and must then allocate their share

among hospitals, other health care institutions,

health agencies and programs, private health care

providers (the majority of whom are physicians),

and some health research agencies and programs.

Individual hospital budgets are based largely

on approved budgets from the previous year, with

allowable adjustments depending on provincespecific factors, such as new or expanded programs, patient increases, anticipated wage settlements or other expected increases in production

costs (e.g., the costs of pharmaceutical, surgical,

and other supplies), or other policies expected to

affect the bed capacity of each hospital. This approach might be labeled a service-based approach

to budget estimation. Ministry staff are generally

responsible for developing estimates of each hospital’s funding requirements. The amount of interaction between ministry staff and individual institutions during this phase of the budget development process varies considerably among provinces. Individual hospital budget estimates are aggregated to an overall hospitals line in each health

ministry’s budget estimating process.

An alternative approach—adopted recently in

British Columbia, for example—begins with total

hospital expenditures in the previous year and develops a rationale for adjusting the budget in the

current year based on changes in the characteristics of the population (e.g., size or age composition) and information on alternative ways of providing services to that population. This might be

labeled a more “population-based” approach to

budget development.

The aggregate hospital budget line that emerges

from either of these approaches is subject to modification as a result of internal provincial government negotiations over the final request from the
Chapter 2 Hospital Financing in Canada | 25

health ministry. Because hospital expenditures

constitute the single largest item within provincial

ministry of health budgets,4 they are subject to

special scrutiny. A very small reduction in hospital allocations will easily fund a variety of other

programs—a fact that has escaped neither those

programs nor ministry staff.

Two factors characterizing the current situation—one resulting from the current economic environment and one the result of new policy directions (which are themselves influenced, of course,

by the economic setting)—ensure that hospital

funding is even more carefully scrutinized than in

the past. First and most obvious is the current fiscal crisis facing all provincial governments (and

the federal government). As a result of declining

federal health care transfers to provinces, slow or

no growth in provincial tax revenues, and increasing demands on social support programs because

of slow economic growth, provincial governments are finding themselves with very little room

to maneuver, and hospital funding makes a very

large target. Second, various new and major provincial restructuring initiatives are attempting to

create a more efficient and patient-friendly match

of patient needs and levels of care by downsizing

large urban hospitals, expanding community-based

programs, and more generally moving patients

“closer to home” (12,33). The consequent reduction

in bed capacity has been matched by an expectation that hospitals will require lower budgets.

At the conclusion of the internal ministry “estimates” process, the aggregate of all hospitals’

budgets is presented to the provincial department

of finance, or treasury board, as part of the health

ministry’s request for funds. This request is scrutinized by treasury board staff as part of the process

of determining how the province’s aggregate

budget will be allocated across competing sectors

of the public economy (e.g., education, social services, justice, health, and housing). Finally, recommendations are presented to the provincial

cabinet (composed of the elected ministers for

each of these sectors) for approval.

The approved budget has to withstand debate in

each province’s House of Commons before it

passes into law. Until then, ministries do not know

what their allocations will be for the fiscal year.

(Unfortunately, this stage is often reached well

into the fiscal year for which estimates are being

debated, so that hospitals must run on faith and

hope during the early part of the fiscal year.) In

some provinces approval comes with very specific directives as to the internal allocation of funds

among health ministry programs, allowable

salary increases, and similar instructions. In other

provinces the approved aggregate health budget is

returned to the ministry, at which point decisions

on the allocation of funds to individual program

areas within the ministry must be made if the approved amount is different from the budget request. In either case the allocation to individual

hospitals and other institutions is still an internal

ministry responsibility. The budget estimation

process will usually have generated the information necessary for this exercise. For example, in

Manitoba, where the hospital budget line is developed by aggregating individual hospital estimates

after adjustments for production cost increases

and new programs, the allocation of available

funding across institutions mirrors closely the relative size of individual hospital budgets developed during the estimates process. Whatever the

detailed allocation process, hospital budget levels

have been and continue to be dominated by budgeted amounts from the preceding year.5

4For example, in fiscal year 1991-92 total payments to hospitals in British Columbia were $2.2 billion for a population of about 3 million;

this represented over 40 percent of the Ministry of Health’s aggregate budget in that year. Similarly, hospital expenditures represented about 42

percent of public health care expenditures in Ontario in 1992, down sharply from about 50 percent in 1983. This reflects the overall trend shown

in figure 2-1.

5In 1988, for example, the previous year’s funding accounted for 92 percent of the funding allocated to Ontario hospitals; the remainder was

made up of a variety of adjustments for inflation, service increases, and new or expanded programs (31).
26 | Hospital Financing in Seven Countries

New approaches for allocating hospital funds

have been adopted in recent years in several provinces. It is important to note, however, that these

initiatives still leave the previous year’s base

budget for each institution largely intact. In some

provinces the new adjustments are applied only to

the annual increment in funding levels (i.e., new

funds for the current year are allocated on the basis

of new rules, but base budgets remain largely unchanged); in Alberta the adjustments affect 5 percent of each hospital’s previous year’s budgeted

amount.

These approaches indicate an increasing interest among ministries of health in making hospital

budgets more sensitive to the relative efficiency of

different institutions given the mix of patients

served (e.g., in Alberta and Ontario) or to changes

in population composition and patient flows (or

the needs of a hospital’s catchment area) (e.g., in

British Columbia).6 Three provincial experiences

are described in more detail below to illustrate the

types of changes occurring in the funding of Canadian hospital operating costs.

Alberta

The Alberta Acute Care Funding Plan (ACFP) is

designed to redistribute a component of the province’s inpatient operating budget from less to

more efficient institutions (1). It involves the estimation of a hospital performance measure

(HPM) for each hospital equal to the number of

case- and severity-weighted days treated per dollar of inpatient expense (see box 2-1).7 The higher

the measure (i.e., the more adjusted inpatient days

a hospital has been able to provide for each dollar

it spent), the more efficient the hospital. An individual hospital’s budget adjustment is based on its

HPM relative to all other hospitals’ HPMs.

The Alberta system is a service-based approach

for adjusting hospital funding that takes as a given

(and therefore as implicitly acceptable) the “efficiency” of the average hospital. It rewards or

penalizes institutions not on the basis of their designated roles, the patient populations they serve,

or the technical efficiency with which they meet

specific objectives, but rather on the basis of their

prior care-providing experience (as reported by

them) and the costs incurred as a result of that care

provision. A hospital that aggressively pursues

community-based partnerships that have the effect of keeping patients out of the hospital could

easily end up being penalized under such a system, whereas a hospital that uses clever accounting practices to move inpatient costs out of the denominator of its HPM and creative patient

classifications to increase the value of the numerator would end up being rewarded.8

Another major problem with the use of this

type of funding system in a Canadian context is

that case weights are based on U.S. cost or charge

data.9 U.S. data are used because there are as yet

no reliable patient-centered cost data systems in

place in Canadian hospitals, but the provinces that

have adopted case-mix adjustment of inpatient

funding have chosen to use costs as a key component of their weight calculations. There are other

approaches to estimating the relative complexity/

severity of cases (see, for example, Barer (4),

Evans and Walker (19)), but these have received

much less development and, perhaps more im6As with so many other health and social policy initiatives, Québec was ahead of the other provinces in experimenting with peer groupbased incentive reimbursement programs (21) but appears to be doing relatively little on this front at present.

7The exchange rate in January 1994 was approximately $CAN1.00 to $U.S.0.75.

8“Case mix creep” is no stranger to the United States, where such reimbursement systems have been in place for much longer. As Botz (9)

notes, no case weight system, no matter how carefully constructed, will be devoid of case-shifting incentives. The extent to which such case

shifting occurs depends on the degree of clinical flexibility in the patient classification system and how adept institutions become at ascertaining

the differences between the marginal revenues and costs associated with each case mix/severity category.

9Whether or not the data are adjusted for the relationship between costs and charges in New York State seems moot as the New York patterns

of care are likely to be more service-intensive for comparable patients than those in Canada. Only if care were uniformly more service-intensive

across all types of cases would such an adjustment be appropriate for application in a Canadian setting, but this is not likely to be true.
Chapter 2 Hospital Financing in Canada 127

A detailed description of the methodology underlying Alberta’s approach to funding hospital inpatient services is beyond the scope of this chapter, but more details are available elsewhere (1 ,23,28).

The hospital performance measure (HPM) method begins by estimating inpatient costs for each

hospital by netting out a variety of outpatient activities and a share of joint activities (e.g., diagnostic

services, administration) from the hospital’s total operating costs. (This process of inpatient cost estimation is a modified form of a methodology developed in the late 1970s to compare different hospitals

inpatient costs [3,5].) Second, each of the hospital’s inpatient cases is assigned to one of 1,100 refined

diagnosis-related groups (RDRGs) on the basis of the case’s diagnostic group, diagnostic or procedure

code, and level of co-morbidity or complications. Each RDRG is assigned a weight that measures the

relative amount of resources used (i.e., the relative costs) to produce the services of that RDRG. The

weights are constructed by marrying per diem cost or charge information from New York State with

RDRG average length-of-stay information based on recent historical experience in Alberta (after trimming outliers). Minor case weight adjustments are made for outlier cases on the grounds that these are

of extraordinary severity that would not be adequately reflected in the RDRG weight.

This patient classification system, together with the case weight calculations for the province, provides the means to calculate a measure of weighted cases for each hospital. The measure of weighted

cases is then scaled up or down to take account of other factors alleged to influence inpatient costs per

case--namely, the size of the institution (based on the number of inpatient beds) and the extent of its

teaching role. This latter adjustment is motivated by evidence from Canadian hospital cost analyses

(e.g., 4) indicating that even after extracting the costs of direct teaching-related activity in estimating

inpatient costs, the teaching function continues to have indirect effects on those costs.

The adjusted weighted cases become the numerator of the HPM, and the denominator equals total

estimated inpatient costs for the institution. ’ The resulting HPM values for each hospital are converted

to index values, and each hospital’s index value determines its budget adjustment. For example, if a

hospital has a value of 125, it would be eligible for a funding adjustment amounting to an increase of 25

percent over its previous year’s approved budget In practice, however, adjustments have been applied

only to a small fraction (about 5 percent) of the previous year’s budget. A 25-percent increase to the

hospital’s total budget might be substantial, but a 25 percent increase to 5 percent of the budget usually represents a relatively small increase in the amount of funds for the coming year. There are a number

of serious problems with this system. Some of those flaws are being actively worked on; others are generic to any system of reimbursement tied to case/severity mix and case weights.

1 In fact, the official and published literature on the Acute Care Funding Plan generates an aura Of additional complexity that is

unnecessary (1,28). Specifically, it suggests that the measure of weight cases for each hospital is divided by actual cases to construct

something mislabeled the “severity predicted cost per case” (SPCC) (which does not, in fact, have anything to do with cost per case; it

is a measure of the average case weight). Then this SPCC, after adjustment for size and teaching activity, is divided by the actual cost

per case. This amounts, of course, to dividing both the numerator and denominator by the unadjusted number of cases--a superfluous step that nevertheless makes the entire technical exercise seem more complex and less logical than it is.

portantly, much less marketing than the system The adjustment factors for hospital size and

based on diagnosis-related groups (DRGs) that teaching status have also come under attack for

was developed in the United States. (Much of the being arbitrary and not particularly sensitive to the

literature in this area simply assumes that cost data phenomena that they are supposed to capture. Efmust be used to develop case weights; see, for forts are presently under way to alleviate some of

instance, [31]). these problems, but they beg the larger question of
28 | Hospital Financing in Seven Countries

whether such adjustments are appropriate at all

and, if so, whether there are other similar types of

adjustments that ought to be considered as well.

Inevitably, each hospital has an incentive to claim

that the key factors that make it unique have not

been captured within the adjustment process. Indeed, it could be argued that no hospital would be

happy unless and until sufficient adjustments had

been incorporated to ensure that some hospitals

were better off and none worse off than at present.10

Ontario

The recent patient case-mix-based adjustments to

hospital budgets in Ontario are similar in many respects to Alberta’s methodology. The Ontario

method also computes a measure of weighted

cases using weights that measure resource intensity for different cases, constructed as a hybrid of

New York State hospital cost and charge data and

Canadian length of stay data, and then constructs

a measure of relative inpatient cost per weighted

case (the inverse of Alberta’s weighted units per

inpatient cost) using a method similar to Alberta’s

to estimate inpatient costs (31,32,35).

There are several differences, however, both in

methodology and in the way that the resulting

measure of relative efficiency is applied in the

funding allocation process in Ontario as opposed

to Alberta. For example, the Ontario process

makes no additional direct adjustments for hospital size or teaching status, but instead creates hospital peer groups based on teaching status, size,

and geographic location and makes allocation adjustments within the context of those groups. Furthermore, the province uses patient case-mix

groups designed for Canadian use rather than the

U.S.-based refined diagnosis-related groups.

The reallocation amounts for which a hospital

is eligible are limited both by the fact that the

funding adjustments are applied only to separately

designated pools of “equity” or “growth” funds

and by some predetermined percentage of the previous year’s budget (currently a maximum of 2

percent for an individual hospital for the growth

adjustment). “Equity” funding is intended to recognize inter-hospital inequities that may have

been locked into place when global budgeting became effective in 1982. Because the original global budgets were based largely on previous funding

levels, any such inequities that existed at the time

became entrenched (and even exacerbated by the

largely across-the-board funding increases during

the 1980s). This sort of problem becomes more

visible in times of financial restraints, which may

explain the emergence of the equity funding concept in the early 1990s. “Growth” funding is intended to compensate hospitals for greater than

anticipated patient volumes (35). The growth formula also incorporates weights for inpatient services and a variety of outpatient services (e.g., day

surgery and outpatient clinics). By adjusting the

“price” weights attached to these different services, the Ontario Ministry of Health attempts to

create incentives for hospitals to shift services

from inpatient to outpatient settings.

A number of equity fund pools have been allocated, most recently in the fall of 1992 (35,36).

However, these sums represent well under 1 percent of total hospital operating expenses. Funds

available for growth adjustments have also been

limited to about 1 percent of aggregate hospital

base budgets. In Ontario this process has not yet

been used to reduce a hospital’s budget below the

previous year’s budget. Instead, it has replaced the

old formula of providing general increases to all

hospitals for inflation, service increases, and new

or expanded programs.

The method is plagued by all of the problems

identified for Alberta plus some of its own

(31,32). (For example, the problems with adjustments for bed size and teaching status in Alberta

were noted. In Ontario, the construction of peer

groups has to date been relatively unsophisticated—although it has been improved from the

original seven groups—and so is equally subject

10Jacobs et al. (28) describe other problems with the Alberta system that are not noted here.
Chapter 2 Hospital Financing in Canada 129

Like the Ontario and Alberta methods, British Columbia’s approach to allocating funds among hospitals relies heavily on the Hospital Medical Records Institute database, which contains detailed records

on each patient discharged from a Canadian hospital. These data are used to compute provincial ageand sex-specific utilization rates for each of five types of care: acute or rehabilitation days; long-term

(chronic) care provided in acute care hospitals; intensive care; inpatient surgery; and day surgery. Recent historical utilization rates are then applied to age- and sex-specific changes in the provincial population to estimate aggregate changes in service use for each level of care for the province as a whole

(e.g., the 1993-94 model used data from 1991-92).

Changes in service “needs” are next allocated to hospitals on the basis of where the population

changes have occurred and on existing referral patterns for each type of care. Thus, if historical utilization patterns suggest that a specific large urban hospital provided 20 percent of inpatient surgery for

the residents of its own region plus 80 percent of inpatient surgery for residents of the rest of the province, then 20 percent of the population-based change in surgical utilization for that region plus 80 percent of the change for the rest of the province would be assigned to that hospital.

The result of this process is five separate measures of population-based utilization changes for each

hospital. These are aggregated to a single volume-change figure for each hospital using relative resource weights developed by internal Ministry of Health staff. For example, a weight of 3.5 is assigned

to an intensive care day, 1.65 to a day involving a surgical service (inpatient or outpatient), 1.0 to an

acute/rehabilitation inpatient day, 0.45 for an extended or continuing care day, and 0.4 for a newborn

patient day. Using these weights, new weighted patient days (NWPD) can be computed for each

hospital,

The final technical step in the process is to compute a measure of cost per weighted patient day for

each institution by dividing the hospitals’s most recent year’s total operating costs by the total number

of weighted patient days. The relative value of this measure for each hospital is then used to adjust that

hospital’s NWPD, on the assumption that higher costs per weighted patient day imply a more complex

than average mix of patients within the five service categories. The result of this exercise is adjusted

new weighted patient days (ANWPD) for each hospital. The available incremental funding is then allocated on the basis of each hospital’s share of total provincial ANWPD.

to criticism by the hospitals themselves.) Addi- cate this incremental funding solely on the basis

tionally, the amounts reallocated through the

budget adjustment process may not be sufficiently

large to effect the sorts of equity and efficiency

shifts sought by the province’s Ministry of Health.

British Columbia11

Like Ontario, British Columbia’s recent budget

allocation adjustments have been applied only to

new or incremental budgetary allocations to the

hospital sector as a whole. Unlike Ontario and Alberta, however, British Columbia does not alloof service volumes (although historical utilization

rates do play a role in determining estimated population needs; see box 2-2). By adopting a population- rather than an institution-based focus, this

province attempts to ensure that new funds follow

prospective patients. The funding adjustments are

sensitive to regional changes in population

growth and age structure and to changes in patterns of care-seeking. The adjustments appear to

be a serious attempt to begin aligning hospital

funding more closely with underlying population

11 Much of the information on which this section is based is taken from Haazen (24).
30 | Hospital Financing in Seven Countries

needs for institutional care, although to date they

can only be regarded as a tentative step in that

direction. British Columbia’s approach is, however, complemented by local initiatives to plan future bed capacity on the basis of an overall provincial bed-to-population target of 2.75 beds per

1,000 population. Individual hospital capacity

would be determined by the projected relative

growth in population in the region and by estimated patterns of referral or care-seeking.

On first blush British Columbia’s approach

may seem more need driven than the approaches

being applied in Alberta or Ontario because it is

less dependent on historical service patterns. In

fact, though, this may be no more than an illusion.

To begin with, historical patterns of utilization are

used to estimate expected population-based

changes in future utilization. This procedure locks

in whatever service patterns are used to compute

the age-specific provincial utilization rates.12

Furthermore, the two-part approach to weighting patient days is questionable on several counts.

The differentiation of types of care is not likely to

be sufficiently discriminating to take account of

the fact that different hospitals may treat quite different segments of the case distribution (in terms

of resource intensity) within any type of care (e.g.,

only 10 different weights are used to distinguish

among inpatient days [10].) One hospital may

treat a higher proportion of severely ill patients

within the intensive care category than another,

but that would not be reflected by the former hospital’s receiving a greater weight. The adjustment

on the basis of cost per weighted patient day may

simply make matters worse. For example, if a hospital has below-average-severity patients in all

five levels of care but is an inefficient facility, its

new weighted patient days (NWPD) value will be

scaled up in computing the adjusted NWPD

(ANWPD).

Thus, this approach draws on existing patterns

of utilization and on the existing cost performance

of each institution in its computation of the relative share of each hospital of new “population/

demographic” funding. On the one hand, it is perhaps less subject to institutional manipulation

than the systems employed in Ontario and Alberta. On the other, it seems far less sophisticated in

distinguishing the resource intensity of different

types of cases and currently offers little to compensate for that shortcoming in terms of population-based needs information.

Efforts are under way within the Ministry of

Health to make some adjustments. First, factors

other than age and sex that may contribute to or be

correlated with individual variations in need are

being incorporated within a more comprehensive

model for computing NWPD. Second, efforts are

being made to adjust each hospital’s NWPD not

by its own cost per WPD experience but rather by

a composite average cost experience based on peer

hospitals. Although still imperfect, these would

both seem to be improvements.

Future Trends in Financing

In future years one might anticipate some convergence of case-mix-based and population-based

approaches to budget allocation along with increases in the shares of hospital budgets that are

subject to such reallocation criteria. A hybrid approach might, for example, draw on the richness

of a case-mix groups (CMG)- or refined diagnosis-related groups (RDRG)- type patient classification system to distinguish the resource requirements of alternative types of patients, develop

case weights based on real resource use in “efficient” Canadian hospitals, and use populationbased methods and appropriateness evidence to

estimate the expected volume of services within

12If the proportion of those rates that is inappropriate varies either by level of service or by age, then regions experiencing atypical changes

in population age structure, and hospitals offering relatively more or less of particular types of services than average, may be differentially and

inappropriately affected in terms of the attribution of new service “needs” to particular institutions.
Chapter 2 Hospital Financing in Canada | 31

each patient category. Such an integrated system

is likely to be at least a decade away, however, in

part because the Canadian hospital sector lacks the

information systems necessary to support this

type of approach. (On this point see, for instance,

Auditor General of British Columbia [2].) In the

meantime one can expect to see more technical adjustments to methods in the provinces that have

been involved in these new initiatives, involvement of additional provinces in similar efforts,

and increasing proportions of hospital budgets

subjected to these types of reallocation procedures.

❚ Sources of Funding

Hospital operating costs are funded largely from

general tax revenues made up of general provincial taxes and transfers of federal tax revenues to

the provinces.13 Yet funds available for annual operations are not restricted to the hospital allocations that come from the provincial ministries or

departments of health. Hospitals are able (indeed,

increasingly encouraged) to call on a variety of

other potential sources of revenue to supplement

ministry budgets. Charges to patients for “luxury”

accommodations (e.g., semi-private or private

rooms) when they are not medically necessary

provide one such source of revenue for most institutions.14

An equally important revenue source is the provision of outpatient diagnostic services (e.g., laboratory tests, radiology and ultrasound exams,

ECGs). If salaried medical staff provide the service, the entire fee accrues to the hospital. Even

when these services are supervised by private

practitioners with no employment status at the

hospital, the hospital may charge the provincial

medical plan for the technical component of the

fee.15 In British Columbia, for example, fees received from the provincial Medical Services Plan

for outpatient diagnostic services accounted for

just under 5 percent of total hospital revenues in

1993-94. This was the second-largest source of

revenue, after the operating grants from the Ministry of Health, which accounted for 85 percent of

hospital revenues. Private/semi-private room

charges represented well under 1 percent of revenues. Some provinces, such as Ontario, restrict the

range of ambulatory services provided by hospitals to avoid competition between publicly funded

hospitals and “private” diagnostic practices (35).

(”Private” diagnostic practices are also publicly

funded through the provincially funded fees paid

for these services.) Thus, hospitals in Ontario cannot charge the provincial medical plan (OHIP) for

laboratory tests to outpatients unless such tests are

available only within the hospital sector. They

can, however, charge for a variety of other diagnostic services not available in the private sector

(e.g., most scans and scopes).

Other sources of hospital funds include revenues from parking, cafeterias, gift shops, the provision of uninsured patient services or services to

patients from other provinces or countries and the

provision of specialized hospital consulting services (38). One particularly innovative and com13Although numerous provinces over the years have used premiums to raise a component of hospital funds, only Alberta does so now. Even

when premiums were used, hospital care could not legally be denied to Canadian residents even if premium payments were in arrears, because

of the universality provisions in the federal HIDS Act.

14Many provinces in the past imposed a variety of other small hospital user fees for such things as emergency department visits. With the

passage of the Canada Health Act of 1984, federal transfers could be withheld on a dollar-for-dollar basis from any province continuing to allow

user fees for medically necessary services. By 1986 such fees had virtually disappeared from the Canadian landscape.

15The technical component of the fee is that part intended to cover the overhead cost of the equipment (usually diagnostic) used to provide

the service. For example, an x-ray provided in the hospital for an outpatient would generate two separate charges: a technical fee would be billed

by the hospital and a professional fee for reading the x-ray would be charged by the radiologist. However, if the x-ray was provided to an inpatient of the hospital, the hospital would be expected to provide this service from its global operating budget (although the nonhospital-staff

physician would still be entitled to bill a professional fee). For diagnostic services provided outside hospitals, the professional and technical

component are billed together.
32 | Hospital Financing in Seven Countries

prehensive approach to revenue generation was

the establishment of the St. Michael’s Hospital

Health Centre in Toronto, a remarkable example

of product line expansion (37). This free-standing

building was purchased by the hospital and attracted a variety of patient-service-related tenants

(e.g., a family medical practice, a women’s health

clinic, a nutrition clinic).

❚ Allocation of Operating Costs

The largest single component of hospital operating costs is salaries of hospital employees. For example, in Québec in 1991-92, employee salaries

and benefits represented about 75 percent of total

hospital operating costs (30). Hospital employees

in most provinces are represented by a small number of trade unions, and province-wide wages are

negotiated and often determined by arbitrators

who do not feel bound by hospitals’ ability to pay.

Thus, for most Canadian hospitals, wage settlements are largely outside their control and must be

dealt with in terms of staying within budget.

Often, if a collective agreement runs over several

years so that wage increases are known in advance, ministries of health will make allowance

for at least part of this in their annual allotments

to hospitals. For example, in a letter sent to all

Manitoba hospitals by that province’s responsible

associate deputy minister in 1992 an explicit note

was made that the ministry’s allocations would

fund salary increases in existing collective agreements (34). As discussed earlier, only hospitalbased salaried physicians’ incomes are included

in hospital budgets.

Other major hospital cost items are pharmaceuticals and surgical supplies. In some provinces,

bulk purchase arrangements are in place. Hospitals nationwide may enter into bulk purchasing arrangements and, in the past, have been able to take

advantage of their purchasing power to negotiate

reduced rates for pharmaceuticals. However, as a

result of recent federal legislation introduced in

response to pressure from the U.S. government

(stimulated by U.S.-based multinational pharmaceutical firms), the ability of such joint purchase

arrangements to reduce pharmaceutical costs is

likely to be severely undermined.

❚ Operating Expenditures

The statistical picture of hospital expenditure

trends in Canada mirrors the general evolutionary

story of hospital budgeting. In inflation-adjusted

terms, hospital expenditures increased about 10

percent annually during the 1960s under open-ended budgets; the rate of increase declined sharply

to just under 6 percent in the 1970s after the adoption of Canada’s universal medical care insurance

and the initiation of hospital global budgeting,

and continued on down to an average of 4.6 percent annual growth in the more fiscally constrained 1980s.16

As figure 2-1 shows, the effect of Canada’s increasingly constrained expenditure environment

has been to stabilize and then reduce hospital outlays as a share of national health expenditures

(NHE). Although NHE has increased considerably as a share of gross domestic product (GDP)

since 1956, much of this increase came in the period prior to 1971, which was also characterized by

rapid expansion in hospital capacity and generous

line-by-line budgeting (6,18). Since then, however, NHE as a share of GDP stabilized during the

1970s and was stable again during the 1980s, following a sharp increase early in that decade that

was in part recession-induced. Hospital expenditures as a share of GDP reflect this overall pattern

(figure 2-2).

The worsening economic situation in Canada

in the early 1990s has placed hospital financing

under even greater strain. Although finalized national data beyond 1991 were not yet available at

the time this chapter was written, they will almost

certainly show additional reductions in the rate of

hospital expenditure growth even while hospital

16 Hospital expenditure data for 1960 to 1970, 1970 to 1980, and 1980 to 1990 are from Health and Welfare Canada (25,26). The GDP

implicit price indexes used to construct real growth rates are from Department of Finance (16).
Chapter 2 Hospital Financing in Canada 133

SOURCE: Health and Welfare Canada, National Health Expenditures in

Canada (Ottawa: HWC, 1979; n.d., 1984); Health Canada, Policy and

Consultation Branch, Health PoIicy Division, National Health Expenditures in Canada 1975-1993 (Ottawa: Health Canada, 1994).

expenditures as a share of GDP will have increased because of the severe effect of the recession on Canada’s GDP growth. For example, in

fiscal year 1993-94, Ontario hospitals were told to

expect no increase in funding-a far cry from the

heady 4-to 10-percent increases during the mid1980s.

CAPITAL EXPENDITURES

■ Relationship of Operating and Capital

costs

In general, equipment depreciation is handled in

an ad hoc and relatively unsatisfactory manner in

Canadian hospital accounts. Published depreciation expense figures are not reliable indicators of

the underlying value of equipment or of the extent

of consumption of the useful life of equipment in

any year, and practices vary markedly among

provinces. In many provinces capital depreciation

is reimbursed through the operating side of hospital accounts, but the actual funding that flows to

hospitals for depreciation may have virtually

11

10”‘ “---------------------- - f

9 ‘ -------------- ”------- -

National health expenditures

8 ----------------------- -

4 - “ -

----------- ” --------- -

Hospital expenditures

1947 51 55 59 63 67 71 75 79 83 87 91

Year

SOURCE: R.D. Fraser, ‘(Vital Statistics and Health, ” Historical Statistics

of Canada, F.H. Leacy (cd.) (Ottawa: Statistics Canada with the Social

Science Federation of Canada, 1983),

nothing to do with either the useful life or the current replacement cost of the underlying equipment. For example, Manitoba “pays back” hospitals for equipment purchases over a 16-year

period, and this amount appears in the hospital’s

operating budget. Yet the 16 years is an arbitrary

payback period unrelated to the useful life or replacement cost of the equipment. No depreciation

appears on the operating side of hospital accounts

for building depreciation. In some instances, the

impact of capital acquisitions on future operating

costs is considered. For example, part of the

equipment purchase approval process in Manitoba involves seeking information from the hospital

on the predicted operating cost implications of

new medical equipment. If the equipment is likely

to involve significant additional operating requirements, such as additional staff or maintenance contracts, it may be treated as a new program proposal and require more extensive

evaluation by Manitoba’s Ministry of Health.

There is an obvious reason for this seeming

lack of any relationship between capital expendi-
34 | Hospital Financing in Seven Countries

tures and operating costs. Because most capital

costs and operating expenses are covered by the

same provincial Ministry and the replacement of

obsolete equipment is also largely covered by a

separate pool of Ministry funds, there is no compelling reason on the hospital side to expend any

significant energy in depreciation expense estimation, or on the Ministry side to earmark depreciation funds for hospitals. This leads rather naturally to a more detailed consideration of the manner

in which provincial ministries of health control

the process of allocating funds for medical equipment and buildings.

❚ Financing Model and Determining

Capital Requirements

As with hospital operating cost financing and

funds allocation, the details of capital funding

vary considerably across provinces (8,15,39). Yet

even more so than on the operating side, where

there are some relatively new approaches being

developed in some provinces, provincial specifics

concerning capital financing are probably less important than the general story.

The first and perhaps most important piece of

the story is that the same provincial health ministry from which hospitals derive most of their operating funds is also the major source of funding and

the control point for capital equipment purchases

and building construction. Although in many

provinces hospitals or their communities are responsible for some component (usually less than

50 percent) of the funding for new construction or

major new equipment, the final decision as to

whether to build (or, in the case of equipment, to

buy) almost always rests with the ministry of

health. (Exceptions to this rule tend to be purchases of major diagnostic equipment funded

from private philanthropic sources, often without

the approval of the provincial ministry and without any guarantee that associated operating costs

will be covered in future years’ budgets.)

Health ministries’ control over approvals

means that funding for hospital capital follows the

same type of process described above for operating funds. The provincial ministry develops a capital funding budget that is scrutinized and usually

modified by the provincial treasury board or department of finance before being returned to the

ministry as part of its annual budget request. However, the process differs in two key respects from

that associated with operating budgets. First, ministries of health generally do not come close to

funding 100 percent of capital expenditures. Second, the determination of how the ministry’s capital funds are allocated across competing hospital

projects bears no relation to the process of allocating operating funds. In fact, because most ministries only partially fund capital projects, even

projects formally approved by the ministry can be

initiated only if the hospital or the community can

raise the remaining funds. This generally means

that:

. . . by design or default, . . . capital equipment

acquisition is based, not on objectively defined

needs but on the success of fund raising campaigns. Not only the nature of the equipment being sought but numerous other factors such as

hospital prominence, location, and overall program appeal can affect a hospital’s ability to attract public funds (8).

As for replacement of existing capital, particularly hospital buildings, very few provinces have

any long-range plans in place. Many of the country’s hospitals were built during the health care

construction boom of the 1950s and 1960s,17 and

some of the key institutions are much older than

that. Such facilities will eventually need at least to

be upgraded. Because this represents the major

component of future capital requirements, ministries of health are likely to become increasingly

stingy with respect to new facilities or equipment

as the need to upgrade or replace existing physical

structures becomes more pressing (42). British

17Between 1951 and 1971, the bed capacity of Canada’s hospitals doubled (6).
Chapter 2 Hospital Financing in Canada | 35

Columbia has recently attempted to ameliorate

this situation by allowing hospitals with excess

operating funds to apply to the Ministry of Health

for authorization to use such funds to purchase

equipment without invoking adjustments to their

base operating budgets (24).

Most provinces have no formalized, long-term

plan for the orderly replacement of capital, nor do

they appear to have any detailed and accurate accounting of capital inventory. Several provinces

have begun to move in this direction through the

establishment of multiyear planning and funding

approval processes and by requiring that hospitals

report regularly on all equipment purchased.

Funding sources and approval processes vary considerably among provinces.

❚ Sources of Capital Funds

Funding shares from ministries of health commonly vary by the type of project (e.g., they are

often different for medical equipment and capital

construction) and by the type of hospital (e.g.,

rates of ministry financing participation tend to be

higher for provincial tertiary/teaching facilities

than for small community facilities). Yet although

descriptions can be found of the formal decisionmaking processes used by most provinces in determining levels of co-funding, there is much less

documentation on how decisions are reached as to

which projects receive ministry approval and

which do not. A common allegation is that such

decisions often have more to do with a community’s political persuasion or with the presence of an

influential local politician or community member

than with any provincial plan for capital replacement or expansion (see Smith [39]). Furthermore,

the actual provincial level of cost sharing does not

always match the publicized formula. (Again, see

Smith [39], particularly for the description of the

process in Ontario.)

Any equipment purchases in any province that

proceed without ministry approval (i.e., funds are

raised privately) are not guaranteed the necessary

operating funds. Provincial ministries frown on

such purchases and may even penalize hospitals

that proceed with them; nevertheless, they continue to occur. For example, Ontario hospitals tend to

purchase equipment as part of the process of developing claims for funding of new programs

(31).

❚ Capital Expenditures

Unfortunately, published Canadian data do not

provide information on hospital capital expenditures. Although the official health expenditure statistics (25) report a “capital” line item, it cannot be

used reliably to ascertain hospital capital expenditures. To begin with, the capital expenditure data

are not restricted to hospitals. These figures include construction, renovation, and equipment

costs for all health care facilities. Because hospital

capacity has grown at quite different rates and

times than, for example, long-term care facilities,

one cannot infer hospital capital expenditure

growth from aggregate capital expenditure increases. Furthermore, federal officials must estimate national hospital capital expenditures using

provincial ministry expenditure data and the official provincial cost-sharing formulas. To the extent that such formulas understate actual practice,

the Health and Welfare Canada data understate

capital expenditures. Additionally, capital purchases made by hospitals without ministry approval may not be included at all.

A sense of the relative importance of capital

and operating costs within provincial ministries’

budgets can be gained by seeking such data directly from each province, although these do not generally distinguish between plant and equipment.

For example, 1991-92 hospital capital expenditures by the British Columbia Ministry of Health

amounted to just under 4 percent of operating

costs (before depreciation) (29). The equivalent

figure for Québec was slightly higher, between 5

and 6 percent (30).

In general, provincial ministry expenditures on

capital are dwarfed by annual operating costs. Of

course, this does not mean that such expenditures

are unimportant. Decisions on expenditures for

new capital create a stream of operating cost commitments that often last well beyond any accounting evidence of the original capital purchase (7).
36 | Hospital Financing in Seven Countries

Ministries are increasingly requiring that requests

for approval of capital expenditures make an “economic case,” especially for new capital purchases.

That is, a case must be made that the new capital

will either reduce operating costs by improving

technical efficiency or will lead to improvements

in patient outcomes sufficient to justify the expenditures. Yet there are very few situations in which

new capital is expected to reduce operating costs,

and even in cases where such cost reductions can

be identified, they rarely materialize in practice.

As a result, ministries of health tend to be skeptical of such claims (2).

As for improving cost-effectiveness, hospital

equipment requests are often for “life-saving”

equipment that has not been sufficiently evaluated

to make any such case (2). Provinces such as Québec and British Columbia have recently established formal technology assessment capabilities

to assist them in evaluating such requests. Most

provinces rely on ad hoc technical advisory committees to review the likely utilization of new

equipment, the availability of clinical expertise,

and where the most logical site(s) might be. The

new technology assessment offices in Québec and

British Columbia provide the means to bring external evidence on effectiveness and efficiency to

such internal committee processes.

❚ Provincial Experiences

A more accurate account of capital financing requires a focus on specific provinces, as there is

considerable variation in the mix of sources of

capital funding and in the detailed processes followed for bringing capital projects on line. Accordingly, the situations in British Columbia and

Manitoba are described in greater detail below.18

They are examples, respectively, of provinces in

which ministry capital funding falls well short of

100-percent financing, and provinces in which the

general rule is that capital projects (both equipment and capital construction or renovation) are

fully funded by the provincial ministry of health.

British Columbia19

Hospital Construction

Hospital construction and renovation are guided

by a five-year rolling capital plan that must be approved by the elected representatives responsible

for the various provincial ministries (the Cabinet).

This has several implications. It means that hospital capital funding is approved by the highest provincial government body, that capital expenditures are controlled by the same broad governmental process that dictates other budgetary allocations to the Health Ministry, and thus that provincial capital planning (such as it is) can be a victim of political influence.

A hospital must submit a proposal to the Health

Ministry for consideration to have a project incorporated within the five-year plan. In principle,

hospitals are also required to gain the support of

their regional hospital district before their proposal can proceed. British Columbia is divided into

29 official regional hospital districts (RHD),

which are geographic areas used for a variety of

planning purposes. The operating funds for the

RHDs derive from local property taxation. Approval of a project by a hospital’s RHD is particularly important in the largest urban district, where

many institutions may concurrently be developing major capital projects. (See Greater Vancouver Regional Hospital District [22] for more details

on the local approval process.) Regions complain,

often bitterly, about the fact that they are expected

to contribute to projects financially, often quite

substantially, yet at the same time do not have

commensurate influence or control over the project approval process, which is still dominated by

18Because decisions and sources of funds tend to vary at least with the value and type of equipment and the type of hospital, the interested

reader is encouraged to consult representatives of the individual provincial ministries for more detail. (For a relatively comprehensive picture of

the situation in each province in 1987, see Smith [39]. However, capital funding is a dynamic process, and the details are constantly changing.)

19The material in this section borrows heavily from Barer and Evans (7).
Chapter 2 Hospital Financing in Canada | 37

the Ministry of Health. The Ministry considers

each request against competing priorities for hospital and other health care facility construction requests, bearing in mind projected regional needs

for beds of various types. The current Ministry target is 2.75 beds per thousand population. Recent

provincial planning initiatives are intended to

bring beds closer to the population distribution in

the province and to move beds away from tertiary

care settings whenever possible (11).

A successful proposal is returned to the originating hospital with “approval in principle,” at

which point funds are made available in the provincial hospitals’ capital budget for the planning

phase of the project. Also, funds are tentatively

earmarked for subsequent phases in the remaining

years within the five-year plan. The hospital must

then develop a more detailed functional program

and various physical design proposals.

With Ministry approval comes a commitment

of 60 percent of the costs of the project, including

the cost of the land and servicing to the site.20 The

hospital must find the remaining funds from its

RHD and/or from other private sources, increasingly including its own hospital foundation. (For

example, all the major urban teaching hospitals in

Vancouver have their own hospital foundations

which are actively involved in soliciting funds

from the business sector and from individual donors on a continuing basis. One enterprising hospital runs a local lottery twice a year, offering an

upscale condominium apartment as the carrot; it

raises in excess of $500,000 from each lottery.)

The exception to this rule is full ministry funding

of provincial tertiary care facilities (e.g., the

provincial Cancer Agency, parts of Children’s

Hospital).

Capital Equipment

A similar process is in place for medical equipment requests. Hospitals must submit “annual rolling five-year equipment plans, with fairly detailed specifications for the first year” (24). The

plans consist of two parts, part one containing

equipment associated with new programs or

equipment costing in excess of $100,000 and part

two containing all remaining capital items. They

are reviewed by the hospital’s RHD before being

submitted to the Ministry. Items in part one must

go through much the same sort of internal approval process as capital construction projects and 60

percent of approved purchases are funded by the

Ministry.

Each hospital receives an approved funding

level for items on the second part of the list; if the

list is approved, it is approved in its entirety. Once

a hospital receives approval, it is free to purchase

any item on its part two list until it has exhausted

part two funding. The funding level for each hospital is determined on the basis of the hospital’s

size, role, and mix of beds, but again the Ministry

funds only 60 percent of that level (including costs

to replace equipment). Hospitals are thus forced to

pare their own lists to stay within the available

cost-shared funding limit. Although hospitals are

free to make purchases from within their submitted lists, actual purchases are audited for consistency with the hospital’s rolling five-year

equipment plans. Furthermore, hospitals may still

require more detailed approval of specific items if

they wish to receive RHD funds (e.g., see Greater

Vancouver Regional Hospital District [22]).

If new equipment is associated with a new service or facility, the hospital must also submit a request for adjustment to its base operating budget

to take account of the expanded services and

associated operating costs. A hospital cannot expect to receive support for increased operating

costs for an unapproved capital acquisition.

Thus, funding for hospital capital generally

derives from British Columbia’s Ministry of

Health (at least 60 percent of all approved pur20In practice the RHD is responsible for raising 100 percent of the funds, usually through the issuing of debentures. The Ministry then covers

its share by contributing 60 percent of the costs of carrying the debentures and by paying down 60 percent of the value of the debentures to

retirement. This entire process is coordinated by the Ministry through the Regional Hospital District Financing Act.
38 | Hospital Financing in Seven Countries

chases), regional hospital districts, or hospitals’

own charitable foundations. There are rare occasions in which hospitals raise the funds for a major

equipment purchase and receive the required operating funds from the RHD. In an environment of

continued financial restraint, such innovative

funding arrangements may become more common, as appears to be the case in Ontario (38). Although the Ministry is under no operating cost obligation in such situations, it cannot prevent the

provision of services using the capital equipment.

(If the operating funds are found within the hospital’s approved operating budget, however, the

Ministry can certainly scrutinize and adjust the

budget downward in future years.) Furthermore,

private practitioners are allowed to bill the province’s medical services plan for the professional

component of any fees (i.e., the physician’s portion of the charge) associated with the use of such

equipment as long as there is an appropriate fee

code in the physicians’ fee schedule.

Manitoba

The capital financing processes in British Columbia and Manitoba are relatively similar, although

the financial involvement of the province in Manitoba is far more substantial, and the dollar value

of equipment funding requiring detailed scrutiny

in Manitoba is lower than in British Columbia.

Hospital Construction

As with British Columbia, the Manitoba Department of Health maintains a five-year capital plan

for major construction or renovation projects, and

projects go through an approval process separate

from the process of establishing annual operating

budgets.21 In contrast to British Columbia, the

province funds 100 percent of the costs of approved projects. (However, the funding does not

include the cost of serviced land, unapproved embellishments, space, or changes occurring after

project tendering has been completed.) All capital

requirements for renovations, expansions, maintenance, or fire and life safety upgrades are included in the five-year capital plan. The plan provides borrowing authority and sets out repayment

requirements and operating budget implications

for each capital project. Once a project is completed, the approved operating costs are rolled into

the operating budget.

Each approved project receives separate funding for design and construction. Larger hospitals

have planning departments that undertake the early design and planning work, and some projects

receive some financial support from the Department of Health to support this early functional

planning phase. The functional plan for each project arises from a “role statement” for the institution. This statement is intended to ensure that capital expenditure allocations are consistent with the

overarching strategic policy direction of the province’s health care system, which is currently attempting to align health care expenditures of all

types more closely with health needs (33). The

role statement phase concludes with a project definition that specifies the programs or services that

will drive the remaining phases of the planning

process for each capital project.

The phases of each approved project—functional planning, architectural design, and construction—each require approval, and the Department of Health is heavily involved in reviewing

and approving the various stages within each of

these phases. Once a functional program is approved by the Department, the hospital is able to

proceed with the design phase. At that point the

Department provides interim borrowing authority, which the hospital can take to its chosen financial institution. A “letter of comfort” can be provided to a financial institution on request; it

essentially assures the lending institution that the

province stands behind the project.

Approval of architectural plans allows the hospital to seek competitive site preparation and

21In addition, the province can provide funding of up to $500,000 out of a contingency project fund. This fund is intended primarily for

unanticipated major repairs or maintenance that the hospital is unable to cover from its operating funds.
Chapter 2 Hospital Financing in Canada | 39

construction bids (at least five are required). Bids

are reviewed by the facility and Department of

Health staff, the lowest appropriate bid is chosen,

and a tender price is fixed. The hospital generally

borrows the necessary funds up front; once a project is completed, the hospital converts the loan

into some form of long-term debt that is paid back

by the province through contributions of principal

and interest included in the hospital’s operating

budget.

Capital Equipment

Major medical equipment purchases are also

funded largely by the Department of Health. Hospitals can purchase equipment from depreciation

accounts, other internal hospital funds (e.g.,

through donations or fundraising), or approved

equipment loans. They are also allowed to purchase equipment that is an approved element of a

capital project from project funds.

Hospitals periodically purchase unapproved

equipment, but the Department not only feels no

obligation to fund the operating costs associated

with such equipment, it can actually reduce a hospital’s operating budget if unapproved equipment

is used.

Manitoba remains more involved than does

British Columbia’s Ministry of Health in approving relatively small equipment purchases. Small

rural hospitals are free to proceed with purchases

up to $5,000 without prior approval. The equivalent amount for large urban hospitals is $20,000.

Any other proposed purchases must go through

the Department’s capital approval process. Once

approved, a hospital may proceed to solicit competitive bids and, after final approval of one of

them, to purchase the equipment. The Department

covers the cost of the equipment by way of

straight-line contributions to the hospital’s depreciation fund for 16 years (regardless of the value of the equipment or its likely useful life).

Because many hospitals have insufficient

funds in their depreciation accounts to cover necessary equipment replacement (in part because of

slow payback for some types of equipment that

quickly become obsolete, and in part because of

rapidly increasing prices for such equipment),

Manitoba has established a separate “capital

equipment approved borrowing fund.” It equaled

slightly more than $9 million in fiscal year

1992-93 for a population of slightly over 1 million. This fund is intended to augment resources

available from depreciation accounts and to support new program initiatives. All hospitals can

submit wish lists that are reviewed and prioritized

by Department staff. Some Manitoba hospitals are

able to supplement their depreciation fund

through private donations. Hospitals are also able

to move up to 20 percent of revenues generated

from non-Department sources (e.g., private room

charges and parking fees) to their depreciation

fund. Although hospitals are not supposed to dispose of equipment without Department approval,

in practice this happens frequently, and these proceeds also find their way into the depreciation accounts. Nevertheless, all prospective purchases

exceeding the levels noted above require Department of Health approval. The private sources of

funding provide an important means for hospitals

to cope with a funding mechanism that is insensitive to useful life, price changes, and other factors

that may leave depreciation fund balances below

necessary levels of funding for approved equipment purchases.

In the case of major new imaging equipment,

the province has established a tiered structure of

imaging advisory committees, one for each type

of major equipment (e.g., CT, MRI, ultrasound).

Each committee obtains input from representatives in each region and is responsible for making

recommendations to the Department for equipment diffusion that will best meet the overall

“needs” of the province’s population. The recommendations of these committees play an important role in the process of evaluating and approving purchase requests from individual hospitals.

FUTURE DIRECTIONS

The major features of hospital financing in Canada have not changed appreciably in the past 20

years. During that time all provinces moved from

prospective line-by-line budgeting of operating
40 | Hospital Financing in Seven Countries

costs to some form of prospective global budgeting. Although efforts to improve the efficiency of

hospital operations and to make hospital capacity

more responsive to population health needs are

beginning to emerge, Canada has as yet seen only

very timid moves in these directions. For the most

part, the allocation of operating funds among

institutions is dictated by historical happenstance,

and more political energy is devoted to overall expenditure control than to attempts to realign the

aggregate allocation of funds among provincial

hospitals.

Hospital capital planning and funding still appears quite chaotic in most provinces, being driven in large part not by an overall assessment of

needs or the cost-effectiveness of alternative capital configurations but rather by needs as defined

by the staff and practitioners of institutions that

stand to be major beneficiaries of new capital

spending. Both British Columbia and Manitoba,

however, are currently involved in major initiatives to circumvent these past problems. In both

provinces capital planning is now beginning to be

tied more closely to population movements, taking into consideration alternative approaches to

delivering services. This is expected to become

more widespread over the next few years.

Despite relatively ad hoc capital and operating

cost financing, Canada has been fairly successful

in containing hospital expenditures over the past

20 years, at least relative to the United States.

Whether this relatively effective top-down budgetary control can continue to survive is a large

question. The race appears to be on, with provinces attempting to stay one step ahead of the pressures for rapid adoption of new, predominantly

cost-expanding (and provider income-increasing)

technological innovations. Provincial ministries

of health are developing new policies intended to

result in more appropriate placement of large segments of traditional hospital populations. They

show every intention of becoming more rather

than less stingy with hospital funding, even as the

hospital sector raises alarm bells about waiting

lists for high-technology interventions, decaying

facilities, and declining quality of care.

One outcome that seems relatively predictable

is that private (and increasingly creative) sources

of funding will become ever more important outlets for hospitals, at least as means to raise funds

for capital projects. Just how hospitals will fund

associated operating costs remains an interesting

question. Yet human ingenuity knows no bounds

when there are incomes at stake, and the temptation for ministries to cost-shift back to patients by

giving hospitals more rope may be overwhelming.

Canada’s overall health care cost control record

will stand or fall on the tenacity and perseverance

of its provincial ministries of health in dealing

with the issue of hospital financing.

REFERENCES

1. Alberta Health, Acute Care Funding Plan

Newsletter, vols. 1 and 2 (Edmonton: Alberta

Health, 1991).

2. Auditor General of British Columbia, Comprehensive Audit of Hospital Programs (Victoria: Province of B.C. Legislative Assembly,

1989).

3. Barer, M.L., Community Health Centres and

Hospital Costs in Ontario, Occasional Paper

13 (Toronto: Ontario Economic Council,

1981).

4. Barer, M.L., “Case Mix Adjustment in Hospital Cost Analysis: Information Theory Revisited,” Journal of Health Economics 1:53-80,

1982.

5. Barer, M.L. and Evans, R.G., “Hospital Costs

over Time: Approaches to Price Deflation and

Output Standardization,” unpublished mimeo, Vancouver, University of British Columbia, Division of Health Services Research

and Development, 1980.

6. Barer, M.L. and Evans, R.G., “Riding North

on a South-Bound Horse? Expenditures,

Prices, Utilization and Incomes in the Canadian Health Care System,” R.G. Evans and

G.L. Stoddart (eds.) Medicare at Maturity:

Achievements, Lessons and Challenges (Calgary: University of Calgary Press, 1986).

7. Barer, M.L. and Evans R.G., “Reflections on

the Financing of Hospital Capital: A Cana-
Chapter 2 Hospital Financing in Canada | 41

dian Perspective,” HPRU Paper 90:17D, Vancouver, Health Policy Research Unit, Division of Health Services Research and Development, University of British Columbia, 1990.

8. Bayne, L. and Walker, M., “Capital Equipment Acquisition: A Discussion Paper,” Vancouver, Stevenson Kellogg Ernst and Whinney, 1989.

9. Botz, C.K., “Principles for Funding on a Case

Mix Basis: Construction of Case Weights

(RIWs),” Healthcare Management Forum

4(4):22-32, 1991.

10. British Columbia Ministry of Health, personal communication, March 1993.

11. British Columbia, New Directions for a

Healthy British Columbia, Ministry of Health

and Ministry Responsible for Seniors, 1993.

12. British Columbia Royal Commission on

Health Care and Costs, Closer to Home (Victoria: Crown Publications Inc., 1991).

13. Canadian Hospital Association, Canadian

Hospital Directory 1992-1993 (Ottawa: Canadian Hospital Association, 1992).

14. Contandriopoulos, A.P., “Prospective Budgeting of Hospital Costs and Related Measures: the Evidence from the Canadian Provinces,” paper presented at International

Symposium 1988, controlling cost while

maintaining health: the experience of Canada,

the United States of America, and the Federal

Republic of Germany with alternate cost-containment strategies, Bonn, June 27-28, 1988.

15. Deber, R.B., Thompson, G.G., and Leatt, P.,

“Technology Acquisition in Canada: Control

in a Regulated Market,” International Journal of Technology Assessment in Health Care

4:185-206, 1988.

16. Department of Finance, Economic Reference

Tables (Ottawa, 1992).

17. Detsky, A.S., Stacey, S.R., and Bombardier,

C., “The Effectiveness of a Regulatory Strategy in Containing Hospital Costs,” New England Journal of Medicine 309:151-159, 1983.

18. Evans, R.G., Strained Mercy: The Economics

of Canadian Health Care (Toronto: Butterworths, 1984).

19. Evans, R.G. and Walker, H.D., “Information

Theory and the Analysis of Hospital Cost

Structure,” Canadian Journal of Economics

5:398-418, 1972.

20. Fraser, R.D., “Vital Statistics and Health,”

Historical Statistics of Canada, F.H. Leacy

(ed.) (Ottawa: Statistics Canada with the Social Science Federation of Canada, 1983).

21. Glaser, W.A., Paying the Hospital: The Organization, Dynamics, And Effects of Differing

Financial Arrangements (San Francisco, CA:

Jossey-Bass Publishers, 1987).

22. Greater Vancouver Regional Hospital District, Fact Book 1993 (Vancouver: GVRHD,

1993).

23. Greenaway-Coates, A., “Development of the

Hospital Performance Index,” technical brief

prepared for the ACFP (Kingston: Case Mix

Research, Queen’s University, 1990).

24. Haazen, D.S., “Redefining the Globe: Recent

Changes in the Financing of British Columbia

Hospitals,” R. Deber and G. Thompson (eds.)

Restructuring Canada’s Health Services System: How Do We Get There from Here? (Toronto: University of Toronto Press, 1992).

25. Health and Welfare Canada, National Health

Expenditures in Canada (Ottawa: HWC,

1979; n.d., 1984).

26. Health and Welfare Canada, “Health Expenditures in Canada,” fact sheets, Ottawa,

Policy, Planning and Information Branch,

1992.

27. Health Canada, Policy and Consultation

Branch, Health Policy Division, National

Health Expenditures in Canada 1975-1993

(Ottawa: Health Canada, 1994).

28. Jacobs, P., Hall, E.M., Lave, J.R., and Glendening, M., “Alberta’s Acute Care Funding

Project,” Healthcare Management Forum

5(3):4-11, 1992.

29. Kenny, S.R., personal communication, Jan.

1993.

30. Lance, J.M., personal communication, Jan.

1993.

31. Lave, J.R., Jacobs, P., and Markel, F., 

“Ontario’s Hospital Transitional Funding Ini-
42 | Hospital Financing in Seven Countries

tiative: An Overview and Assessment,”

Healthcare Management Forum 4(4):3-11,

1991.

32. Lave, J.R., Jacobs, P., and Markel, F., “Transitional Funding: Changing Ontario’s Global

Budgeting System,” Health Care Financing

Review 13(3):77-84, 1992.

33. Manitoba Health, Quality Health for Manitobans: The Action Plan (Winnipeg: Manitoba

Health, 1992a).

34. Manitoba Health, Letter from F. DeCock to

Board Chairs of all hospitals and health care

facilities, May 20, 1992b.

35. Pink, G.H., “Hospital Operating Funding in

Ontario, Canada,” paper prepared for the

Symposium on Global Budgeting and Health

Care Financing in New York State, Albany,

N.Y., Jan. 13, 1993.

36. Pink, G.H., personal communication, March

1993.

37. Pink, G.H., Deber, R.B., Lavoie, J.N., and

Aserlind, E., “Innovative Fund Raising: The

St. Michael’s Hospital Health Centre,” final

report, project no. 6606-3989-HT, National

Health Research and Development Program,

Health and Welfare Canada, 1989.

38. Pink, G.H., Deber, R.B., Lavoie, J.N., and

Aserlind, E., “Innovative Revenue Generation,” Health Management Forum 12:33-41,

1991.

39. Smith, K., Capital Funding of Canada’s Hospitals (Ottawa: Canadian Hospital Association, 1990).

40. Statistics Canada, Hospital Annual Statistics,

Publication number 82,-003S, suppl. #20

(formerly publication number 82-232) (Ottawa: Statistics Canada, various years).

41. Taylor, M., Health Insurance and Canadian

Public Policy (Montreal: McGill-Queen’s

University Press, 1978).

42. Thompson, C., “Hospital Capital Funding in

Canada,” Dimensions 65(8):15-18, 1988.
Hospital

Financing

in England 3

by Alastair M. Gray and Charles Normand 

ntroduced in 1948 by the Labor Party, Britain’s National

Health Service (NHS) is based on the principle that everyone

is entitled to any kind of medical treatment for any condition,

free of charge. The NHS is not insurance-based but is funded

almost exclusively from general tax revenues. The aggregate

NHS budget is fixed every year, based on the previous year’s

budget and adjusted for inflation estimates and the population’s

estimated health care needs. The Department of Health allocates

the aggregate NHS budget for hospital care to regional and district health authorities who, under the traditional system, were responsible for providing and paying for hospital services; Family

Practitioner Committees are responsible for providing primary

care for several district populations and receive funding directly

from the Department of Health. The third component of the NHS

is the personal social services category. Local governments receive payments from district health authorities to provide community-based services, including nursing home care, home care

for the elderly, and other support services.

The United Kingdom’s centralized, mostly public, comprehensive health care system was a pioneer of national health care.

Currently, however, the NHS is undergoing an important program

of reforms, principally announced in the government’s 1989

White Paper entitled Working for Patients and enacted as legislation in the NHS and Community Care Act of 1990 (7). The United

Kingdom’s comprehensive health care reform program, based on

concepts of “managed competition,” will result in the most significant changes to the NHS since its creation more than 40 years

ago (10). The main elements of the reforms are as follows:

■ the introduction of contractual funding designed to separate the

provider and purchasing roles for health services within I 43
44 Hospital Financing in Seven Countries

NHS to encourage efficiency through “managed competition” among both public and private providers, and

■ increased consumer choice of providers and

services.

These changes, which became effective April

1, 1991, will substantially affect the way that hospitals conduct their business. Although the British

government will continue to play a key role in

health care planning, financing, management, and

limiting of the aggregate amount of funds available for health services, the distribution of these

funds among regions and among hospitals may

change dramatically. The locus of hospital decisionmaking will also shift from local government

entities to individual hospital managers.

The NHS is currently divided into three distinct

components: one for hospital care (which includes

inpatient and hospital outpatient care), one for primary care, and the third for community/social services and long-term care. In the hospital sector,

there are 14 regional health authorities (RHAs)

that are each responsible for four to five million

people. Every RHA is divided into approximately

15 district health authorities (DHAs), which are

each responsible for around 260,000 people and 4

to 5 hospitals. The aggregate hospital sector has a

cash-limited budget that (even under the reforms)

is allocated to the RHAs according to a formula

that takes into account the age and mortality rates

of the particular population it is to cover. In turn,

RHA budgets are allocated to DHAs.

Previously, the responsibility for both the funding and provision of hospital services rested with

the approximately 190 DHAs. The responsibility

for strategic management and coordination of services resided with the higher administrative layer

of the RHAs. However, under the reformed system, DHAs now have the central functions of

assessing the health of their resident population,

determining the population’s health care needs,

and purchasing services appropriate to those

needs. 1 Thus, DHAs now mainly fund hospital

services, while the provision of services is competitively determined. The nature of the reforms

as they affect the hospital sector are described in

more detail in the rest of this chapter.

STRUCTURE OF THE HOSPITAL SECTOR

The public (NHS) and independent (private voluntary and for-profit) hospital sectors coexist in

England. In 1990, there were approximately

115,000 acute care beds available in NHS public

hospitals, comprising almost nine-tenths of all

available acute care beds. Prior to the reforms,

public hospitals were both owned and operated by

DHAs; however, the structure of the public hospital sector was changed substantially by the reforms. DHAs may continue to manage hospitals

as directly managed units (DMUs), but NHS hospitals are encouraged to become self-managing

NHS Trusts independent of the DHAs.

The first wave of NHS Trusts, involving 57

hospitals and units, became operational on April

1, 1991, and a further 99 hospitals and units became Trusts on April 1, 1992. Following the third

wave, which became operational on April 1,1993,

approximately two-thirds of NHS hospital provider units in England are estimated to have Trust

status. 2

In the future, NHS Trusts will compete with

private providers of hospital services by negotiating contracts or service agreements with DHAs.

(Currently, such contracts include both hospital

outpatient and inpatient services; however, in the

future, separate contracts for inpatient and ambulatory care may be negotiated). DHAs will purchase care from NHS hospitals, private hospitals,

or the self-governing Trusts. The Trusts will also

1 A number of DHAs have entered into formal or informal agreements with other DHAs to jointly negotiate contracts and purchase services,

which has resulted in approximately 80 to 90 purchasers within the NHS.

2 As of April 1995, all but a few percent of hospital provider units have Trust status.
Chapter 3 Hospital Financing in England 145

be able to contract with general practitioners to

provide hospital services to their patients, as well

as with other self-governing hospitals and private

insurers (10).

The entire population, both publicly and privately insured, is entitled to treatment in NHS

hospitals. Inpatient access for nonemergency care

is mainly through referral from a general practitioner. In principle, access is based on need and is rationed in part through waiting lists for consultations and treatment.

The independent sector plays a relatively small

role in England’s hospital sector, with 10,906 beds

in acute care medical and surgical hospitals (8.7

percent of total acute care beds). In addition,

approximately 3,000 beds within NHS hospitals

are authorized as “pay beds” for the treatment of

private patients. (These beds have only about a 30

percent average rate of occupancy by private patients.) Private ownership of hospital facilities, although small now, is increasingly playing a larger

part in the British system. Between 1978 and

1988, the number of beds in private hospitals increased by 50 percent ( 10). Traditionally, most independent hospitals have been nonprofit. The recent expansion in private beds, however, has been

almost entirely in for-profit hospitals, most of

which are subsidiaries of U.S. companies. Private

medical care plays an essentially complementary

role to NHS services, offering a choice of physicians, avoidance of waiting periods for elective

surgery, and higher standards of comfort and privacy than the NHS (16).

Access to private hospitals depends on the patient’s ability to pay through private insurance or

out-of-pocket. Most of the private sector’s caseload is limited to elective surgery (e.g., hernia repair, varicose vein surgery). A 1986 survey indicated that private patients accounted for 16.7

percent of elective surgery in England and Wales,

with the proportion varying considerably among

regions.

The public and independent hospital sectors in

England coexist and are also interrelated in several ways:

Most private hospital services are delivered by

NHS consultants, who are hospital-based senior specialists. All full-time NHS consultants

are permitted to earn up to 10 percent of their

gross income from private practice. Consultants can also enter into contracts with the NHS

that enable them to devote a greater proportion

of their time to private practice. Approximately

12,000 of the 15,170 consultant-grade staff in

NHS hospitals undertake some private practice.

As noted previously, some private treatment is

carried out in NHS hospitals through NHS pay

beds. In 1989, the NHS earned 99 million pounds

from private treatment.3 This amount may increase in the future, since the requirement to

obtain authorization from the Secretary of State

for Health for pay beds was removed in the

1990 health reform legislation.

The NHS and private sectors are allowed to enter into partnerships. For example, a private

partner might be given a lease on an NHS site

to undertake a capital investment or might be

given a contract to manage an NHS facility.

Only a few such arrangements exist at present.

NHS patients may be treated in private hospitals if their purchasing authority agrees to pay

for treatment, although the volume of such

cases is currently low.

PHYSICIANS

In 1990 there were 15,170 senior hospital doctors

(consultants) in England and 32,848 other hospital medical staff. Hospital consultants have the

choice of taking a full-time or part-time position

with the NHS. If they choose part-time, they are

allowed to perform as many private sector services as they like. If they choose full-time, how3 The exchange rate in January 1994 was approximately $U.S. 1.48 to l.00 pound.
46 Hospital Financing in Seven Countries

ever, their private practice is limited to 10 percent

of their NHS salary (10).

Hospital doctors are paid for the delivery of

hospital services through nationally negotiated

salary scales. 4 Since 1960, salaries have been

based on the annual report of the independent Review Body on Doctors’ and Dentists’ Remuneration, which takes evidence from medical and dental representatives, the Department of Health, and

other interested parties. The Review Body’s recommendations are subject to governmental approval; they have never been rejected, although

they have been deferred or modified.

All consultants are also eligible to obtain distinction awards that supplement their basic salaries. The number and value of awards is fixed by

the Review Body; recommendations concerning

distinction awards come primarily from the medical profession. Approximately one-third of all

hospital consultants hold a distinction award. As

noted earlier, consultants may also obtain contracts that allow them to devote part of their time

to private practice.

Consultants’ contracts are held by regional

health authorities, which also administer the payment of distinction awards. Other hospital medical staff are employed by district health authorities

or DMUs, or, if they work in an NHS Trust, by the

Trust.

Following the NHS reforms, hospitals can alter

the pay and conditions of the staff they employ, including the medical staff. There is little evidence

so far, however, that hospitals have deviated to

any great extent from national salary scales, although many Trust hospitals are currently making

plans to do so. Little change is expected before

1995.

Very few medical staff work on a full-time basis

in private hospitals. Most physicians are NHS

consultants who devote part of their time to private practice. Medical staff in the private sector

are predominantly paid on a fee-for-service basis.

There are no statutory controls on fee levels, although the British Medical Association recommends fee scales, and some insurers will reimburse patients for fees only up to a certain amount.

The basis for setting fees is the subject of a current

investigation by the Monopolies and Mergers

Commission, which is concerned that there is too

little price competition for private medical services.

General practitioners (GPs) working in the

community are self-employed. They contract with

the NHS to provide services to NHS patients.

Each British citizen enrolls with a GP, who is the

patient’s first point of contact with the health system. GPs determine when a patient will see a hospital-based consultant. They are paid under a

mixed payment system with four elements:

annual cavitation payments for each patient on

the GP’s list, weighted according to age;

fees for some services (e.g., treating temporary

residents or making night visits);

a basic practice allowance to cover practice expenses; and

payments for attaining certain targets, such as

cervical screening or infant immunization rates.

The recent health reforms also introduced some

major changes to GP practices. Because general

practitioners are the main source of nonemergency referrals to NHS hospitals, reforms to the

framework within which general practitioners

work also affect hospitals. Under the reforms,

larger GP practices have been given the option to

become “fundholding” practices. These practices

are allocated funds per enrolled citizen by their respective RHA to purchase nonemergency hospital

services and community health services for their

patients. They can purchase hospital services from

public or private hospitals, which compete for the

patients of these GPs. In theory, money follows

patients to the most efficient providers of care.

In turn, because GPs receive more money for

each additional patient they sign up, they will be

4 The pay of junior hospital doctors is determined primarily by national salary scales, supplemented in most posts by payments related to

their hours of employment above a standard working week.
Chapter 3 Hospital Financing in England 147

encouraged to compete for patients. GP fundholding aims to bring the purchasing of health services

closer to the patient, with the GP negotiating contracts with providers based on the needs of patients. GP fundholding also aims to make GPs

more conscious of the cost of services and to put

pressure on providers to increase efficiency. It is

also hoped that GPs will provide more services

themselves, better coordinate services provided to

patients, and reduce referrals of straightforward

cases to hospitals.

The first wave of 306 GP fundholding practices, covering approximately 7.5 percent of the

population, became operational on April 1, 1991.

The number of GPs choosing to become fundholders has increased steadily, and perhaps 40 percent of England’s population is now enrolled (1 1).

Yet because only a limited range of treatments is

financed through the fundholding scheme, most

services are still purchased by DHAs, even for the

patients of fundholding GPs.

HM Treasury

Department of Health

Regional Health Authority

District Health Authority

I Hospital I

HOSPITAL OPERATING COSTS

SOURCE: A. Gray and C. Normand, 1994

❚ Financing Model

The prevailing approach to financing hospital operating expenses in England has been via the National Health Service. The NHS is funded primarily through general tax revenues allocated to it as

part of the central government’s expenditure plans

for its entire budget. NHS-owned (public) hospitals are funded mainly through NHS payments.

The recent reforms make no changes to the basic

flow of funds from the central government to hospitals, which follows the route shown in figure

3-1. However, the reforms affect the relationship

between the NHS and hospitals. Following thereforms, funds move from a district health authority

to a hospital on the basis of contracts for services

rather than as direct funding. This process is described in further detail below.

Nationally, the Department of Health represents the NHS in an annual process by which the

central government makes its expenditure plans

for the following three years. All major spending

departments and the Treasury are involved.

Spending plans are published each January in a

government White Paper on public expenditures

entitled The Government’s Expenditure Plans.

The plans set forth total cash limits for each main

spending program. For the NHS, the main programs are hospital and community health services

(HCHS) and Family Health Services, which include primary care provided by general practitioners, dentists, opticians, and pharmacists. (Hospital and community health services include home

nursing and ambulance services [16]). Separate

cash limits are established for operating expenditures and capital expenditures.

The Department of Health divides its cash allocation among the 14 RHAs on the basis of an allocation formula. The formula is based on each

RHA’s population, weighted for age and morbidity, measured in terms of standardized mortality

ratios. An RHA’s block allocation covers most

areas of service provision, but some specific services (e.g., research, teaching, the prevention and
48 | Hospital Financing in Seven Countries

treatment of HIV and AIDS) are funded separately

by means of other allocation formulas. RHAs then

distribute most of their allocations to the 190

DHAs, retaining a small proportion for spending

at the regional level. Prior to the reforms, DHAs

were allocated resources primarily on the basis of

the hospital services they provided, with some adjustments to allow for flows of patients across

DHA boundaries. Following the reforms, DHAs

have been funded on the basis of their population,

similar to the RHA formula, weighted for age distributions and morbidity patterns.

Although the initial allocation to the Department of Health limits the aggregate amount of

money available to fund hospital and community

health services, there is no formal guidance as to

the exact proportion that each RHA should devote

to hospital services from its cash allocation. Similarly, DHAs have freedom in dividing their block

allocation among different types of health services. This process determines an aggregate

amount available for hospital services, and purchasers (e.g., DHAs) are constrained to stay within their total allocation. The cash-limited system

at the national level ensures that it is not possible

to exceed aggregate expenditure limits.

Prior to the United Kingdom’s recent health reforms, hospitals received global budgets based

mainly on historical costs (16). Following the reforms, however, the operating costs of an individual NHS hospital—be it a Trust or a directly managed unit—have been determined by the contracts

it negotiates with purchasers for specific services.

In other words, there are no longer prospectively

fixed budgets for individual hospitals. Under the

reformed system, it is anticipated that hospitals

that are successful in making contracts with purchasers will expand and that hospitals that fail to

make or maintain contracts with purchasers will

reduce their capacity or close.

Private hospitals, consisting of independent

hospitals and hospitals owned by private health

insurers, are currently funded primarily through

private health insurance payments. The NHS reforms envisage that the NHS and private sectors

will become more interrelated, with private hospitals competing with NHS Trusts and directly managed NHS hospitals for contracts from purchasers.

❚ Sources of Funding

NHS hospital services are financed mainly

through general tax revenues and through a portion of national insurance contributions. In the

1990-91 fiscal year, 94.1 percent of total revenues

came from those sources, with general taxation

(from the Consolidated Fund) contributing 79.2

percent and the NHS element of national insurance contributions accounting for 14.9 percent.

The remaining 5.9 percent of NHS hospital revenues came from charges to patients for specific

courses of treatment, appliances, amenity beds,

and other private charges (4.2 percent), along with

miscellaneous income (1.7 percent) mainly from

the sale of capital assets (e.g., land).

Prior to the reforms, hospitals funded their operating costs through prospectively determined

budgets established by their respective DHA. Under the reformed health system, the operating

costs of NHS Trusts and DMUs are financed via

contracts with public and private purchasers.

Trust hospitals have a statutory duty to operate

within the income they obtain from these contracts; DHAs have the same duty with respect to

other NHS hospitals.5 Contracts may be of three

different types: block, cost and volume, and cost

per case, as described below:

5 A system of financial audit ensures that expenditures accord with contracts and rules. Trusts are obliged to submit audited accounts annually at a public meeting. External audit of NHS expenditures is the responsibility of the Audit Commission, an independent body funded by audit

fees, which appoints auditors to examine the accounts and financial systems of purchaser and provider units in the NHS. In extreme circumstances the Secretary of State for Health has the authority to appoint commissioners to take over the running of any unit within the NHS that is in

breach of cash limits or contracts, but there are no recorded instances of this.
Chapter 3 Hospital Financing in England 149

With block contracts, the purchasing health authority pays an annual amount in installments

to the providing hospital unit for access to a

specified set and volume of services, especially

for urgent and emergency cases requiring immediate treatment.

With cost and volume contracts, purchasers pay

a providing hospital a fixed sum for a baseline

number of treatment episodes or cases, thus

giving the purchaser some security; any additional cases treated are paid for on a cost-percase basis.

With cost-per-case contracts, purchasers pay a

specified price for a particular case. These contracts occur most frequently when a purchaser

does not have routine contact with a particular

hospital; such cases are called extra contractual

referrals (ECRs).

Approximately 80 percent of private revenues

for acute care hospital services comes from private insurance, mainly through fee-for-service

payments. Private insurers covered about 12.5

percent of the United Kingdom’s population in

1991; the remaining 20 percent of revenues comes

from direct patient payments. (Private hospital

revenues from contracts to treat NHS patients are

at present very small.)

❚ Bulk Purchases of Pharmaceuticals and

Supplies

Before the NHS reforms, most regional health authorities had established regional distribution centers that purchased pharmaceuticals and supplies

on behalf of district health authorities. In October

1991, a new NHS Supplies Agency was established that assumed national responsibility for

NHS supplies. All regional supplies staff have

been transferred to this agency, which is structured around six geographical divisions. Purchasing is intended to occur through the best priced local source except where bulk purchasing has the

potential to realize major savings. (The previous

more centralized system was criticized because

routine items were often available locally at lower

prices, but hospitals could not take advantage of

the lower prices because they were required to buy

from the regionally centralized system.)

A national purchasing unit within the NHS

Supplies Agency is responsible for developing

and maintaining a limited list of products that

should be purchased only via national NHS contracts. Typical products covered by national contracts include surgical gloves, batteries, and medical gases. The NHS Supplies Agency often

negotiates a national unit price for such products,

and the provider units draw off supplies under this

central contract rather than receiving them via the

Agency; therefore, it is not possible to estimate accurately the volume of pharmaceuticals and other

supplies covered by bulk contracts.

❚ Operating Expenditures

The 1989-90 fiscal year is the most recent year for

which accurate data on NHS acute care hospital

operating expenditures are available. Operating

expenditures for NHS acute hospital services totaled S6,112 million in that year(8). This is equivalent to 42.8 percent of the NHS’s operating expenditures for all hospital care, 28.9 percent of

total NHS expenditures (which equaled 21,102

million pounds in the 1989-90 year), and 1.2 percent of

GDP (which equaled 511,413 million pounds in current

market prices in calendar year 1989) (l). Hospital

expenditures rose by about 19 percent between the

1989-90 and 1991-92 periods in nominal terms

(i.e., not adjusted for general inflation), and by 2.5

percent in real terms (i.e., after adjustment for

inflation) (15).

Expenditures for private sector, acute care hospital services in the United Kingdom were estimated at l,217 million pounds in 1989 (12). This figure

includes expenditures for independent, psychiatric, and substance dependency hospitals. Excluding the latter group, this is equivalent to approximately 90 percent of all private sector hospital

expenditures, 45.6 percent of all private sector

hospital and residential home expenditures, and

18.6 percent of total private sector health expenditures using abroad definition that includes private

hospital and residential care, clinics, alternative
50 Hospital Financing in Seven Countries

medicine, and nonprescription medicines. Private

sector, acute care hospital expenditures in 1989

were equivalent to 0.2 percent of GDP.

Hospital-based doctors’ remuneration is included in estimates of U.K. hospital expenditures.

In the 1989-90 fiscal year, the salaries and wages

of all medical staff employed by regional and district health authorities (in NHS hospitals of all

types) was 1,437 million pounds. (No breakdown of expenditures for medical staff is available by type of

hospital.) This equaled 11.3 percent of hospital

expenditures, 6.8 percent of total health expenditures, and 0.28 percent of GDP.

HOSPITAL CAPITAL COSTS

❚ Relationship of Operating and Capital

costs

Prior to the recent NHS reforms, depreciation and

the opportunity costs of using capital assets were

not explicitly accounted for in NHS accounts.

Most of the facilities used to provide hospital services were owned and operated by the NHS. No

rent for the use of facilities or capital was paid, and

the opportunity costs of using the capital were not

calculated. Capital was considered an expense

only in terms of the costs initially incurred to buy

the capital; the NHS’s cost of using its money to

purchase hospital capital instead of paying for

other services or supplies was not considered. In

planning health services, there was no incentive

either to use existing capital resources efficiently

or to dispose of the surplus. The goal of reforming

capital financing was to introduce such incentives.

Beginning on April 1,1991, schemes for charging for hospitals’ use of capital assets are being

introduced gradually.6 In the early stages the

introduction of capital charges has been simply a

bookkeeping exercise. Contracts with purchasers

of hospital services include a charge for the use of

capital, which is taken from the hospital. Real incentives to use capital efficiently are likely to be

introduced shortly; hospitals using buildings and

equipment more efficiently will be able to charge

lower prices to purchasers of hospital services and

obtain more contracts.

Directly managed units must reflect the cost of

using assets in capital charges, which consist of

depreciation and an interest charge representing a

rate of return on the current value of assets. Depreciation is not provided for land assets. The rate

of return on the value of assets is set by the Treasury, currently at 6 percent. Interest charges are

applied to land and other assets used to provide

health care services.

NHS Trusts do not pay capital charges as such;

however, they are required to provide for depreciation on the same basis as DMUs. They must also

satisfy an annual target rate of return on the current

value of their assets, which is set at 6 percent so

that contract prices for the purchase of hospital

services are not distorted between Trusts and

DMUs.

The cash flows generated by capital charges

and Trust capital provisions typically do not leave

the NHS. The goal is to levy from hospitals depreciation costs and the opportunity cost of funds

tied up in hospital capital stock so that more accurate price signals are conveyed to purchasers and

providers. The rather complicated accounting

mechanism also aims to create a level playing

field for providers within the public sector and between the public and private sectors, giving equal

opportunities for all types of hospitals to win contracts.

❚ Financing Model and Source of Funding

NHS hospital capital expenditures are currently

funded in the same way as NHS operating expenditures: from general tax revenues, the NHS component of national insurance contributions, and

income from NHS service charges and other miscellaneous sources. Aggregate capital and operating budgets are subject to separate negotiations in

6 Capital assets are defined as buildings, land, or equipment valued in excess of l ,000 pounds. Beginning on April 1, 1993, this threshold was

raised to 5,000 pounds.
9a&Mm

Chapter 3 Hospital Financing in England 151

the annual public expenditure system. The Department of Health and the Treasury are the main

parties to the negotiations.

Once an aggregate capital expenditure limit has

been agreed upon, the Department of Health allocates it to the RHAs according to a formula similar

to that governing allocations of operating funds,

based on the size, age, and health distributions of

the resident population. RHAs then allocate capital resources to the DHAs. DHAs directly control

capital expenditures associated with minor building projects, but RHAs control major capital

schemes, such as the construction of new hospitals.

As the NHS reforms are implemented, however, hospitals will increasingly be allowed to

generate their own capital funds, which will then

account for a larger proportion of total capital

spending. Hospitals will also have more control

over their capital investment plans. Purchasers

will not influence the pattern of capital investment

directly but rather indirectly through the services

for which they contract.

❚ Determining Capital Requirements

The process of capital investment is detailed in the

codes of practice prepared by the Department of

Health. These codes specify procedures for planning, option appraisal, tendering, project management, and financial control. They also specify procedures for the sale and resale of plant, equipment,

and other capital assets. Policies for projects carried out over several years are no different in principle from those governing single-year projects.

Once an investment appraisal has been undertaken

and a capital expenditure plan is produced by the

hospital, and once any necessary authorization

from the RHA, NHS management executive, and/

or Treasury has been obtained, the capital requirements of the project are incorporated into the hospital’s current and future plans. In the case of

multiyear projects, it is likely that capital requirements will have first claim on the capital budget

once the project is under way.

DMUs are not allowed to raise private funds for

the purchase of building capital or equipment, although they may accept donations of equipment

(e.g., equipment purchased by a charity). Charitably donated assets need not be included in the

capital charging procedure.

NHS Trusts are allowed to finance their capital

requirements from internally generated income,

including contract income and income from the

sales of assets, and from external borrowing. External borrowing is subject to external financing

limits (EFLs), which are cash limits set by the Department of Health following negotiations with

the Treasury. An EFL is set globally and for each

Trust and may be positive (i.e., the allowable capital spending limit is in excess of the Trust’s internally generated capital funds), neutral, or negative

(i.e., the allowable agreed capital spending limit is

less than internally generated capital funds). Trust

hospitals are required to provide evidence that

they are likely to win enough purchasing contracts

to cover the costs of major capital schemes.

All capital investment projects by NHS Trusts

or DMUs will continue to require external authorization under the reformed health system if they

exceed certain limits. At present, a Trust must obtain approval from a regional office of the NHS

management executive for any capital project in

excess of 1 million pounds, approval from the national

office of the NHS management executive for any

capital project in excess of 10 million pounds, and approval from the Treasury for any project in excess

of 15 million pounds. In addition, RHAs have their own

limits above which national authorization is required, varying from approximately pounds 1 to 5 million.

Private sector hospital investment in land,

buildings, or equipment is not subject to government control. No mechanism exists to prevent

replications of the provision of services or equipment by the public and private sectors. Contracting between these sectors for services is encouraged by the purchaser/provider split introduced in

the NHS reforms. In addition, public and private

sectors may enter into formal partnerships involving capital schemes, leases, or shared access to

capital.
52 Hospital Financing in Seven Countries

❚ Capital Expenditures

In the 1989-90 fiscal year, total capital expenditures for all hospital and community health services equaled l,299 million pounds.7 The Department of

Health suggests that it would not be unreasonable

to assume that this was apportioned roughly in

line with the breakdown of operating expenditures. This would suggest that acute care hospital

capital expenditures totaled 556 million pounds, equivalent to 4.28 percent of total hospital expenditures,

2.6 percent of national health expenditures, and

0.11 percent of GDP.

Of the aggregate capital expenditures for hospital and community health services in 1989-90,58

percent was for buildings and engineering works,

2.5 percent for vehicles, 12.1 percent for equipment

and furniture, and 27.4 percent for other items.

Aggregate capital spending is controlled by the

nationally cash-limited system and by internal

and external auditing, similar to operating expenditures. Historically, capital funds have been particularly subject to modification in light of prevailing macroeconomic and political factors. For

instance, capital funds ran at very low levels in the

1950s and fell substantially during the later 1970s,

causing the House of Commons Public Expenditure Committee to express concern at the overall

balance between capital and operating funds.

HOSPITAL INDICATORS AND TRENDS

In fiscal year 1990-91 there were approximately

115,000 acute care beds available in the NHS providing 5.8 million inpatient episodes. The average

length of stay was 6.3 days, lower than in the

United States, and the average occupancy rate of

hospitals was quite high (at least as compared with

the United States) at 87 percent. NHS acute care

hospitals dealt with 1.2 million day cases, 7.5 million new outpatient visits, and 11.2 million accident and emergency visits.

In the private sector, there was a total of 10,906

beds in acute care medical and surgical hospitals

in 1990. The average occupancy rate was lower

than in NHS hospitals and more closely matched

the average occupancy rate of U.S. hospitals at

approximately 60 percent. The average rate of occupancy of the 3,000 pay beds within NHS hospitals by private patients is about 30 percent.

FUTURE DIRECTIONS

The greatest achievement of the NHS has probably been to provide universal access to medical

care, mainly based on need, at a low cost as

compared with other OECD countries. This has

been achieved at a price, however, in terms of

some poor facilities, delay in obtaining access to

nonemergency care, and some political unpopularity.

Control over health service expenditures

comes from the nearly complete cash limitations

of the system and various controls on access (in

particular, gatekeeping practices by general practitioners). The NHS experience suggests that

avoidance of rapid growth in health care costs requires overall control of budgets. It also may help

to have a large share of services provided by professionals paid salaries or via cavitation. It is interesting that the NHS reforms did not change these

features, which are often associated with effective

cost containment. Competition between providers

may lead to greater efficiency and lower costs, but

there is no evidence yet that this has occurred.

The extensive review of Britain’s National

Health Service and the resulting reforms followed

a heated public debate about the level of funding

for health care. No significant change was made,

however, to the main source of funds, and no additional spending was introduced as a direct result of

the reforms. Instead, the reforms primarily restructured the internal configuration of the British

health system by introducing “internal markets”

for health care services.

The main elements of these reforms affecting

hospitals include the following:

■ the introduction of contractual funding that

separated the provider and purchasing roles for

7 No information on capital expenditures is available by type of hospital.
Chapter 3 Hospital Financing in England 153

health services within the NHS, designed to encourage efficiency through “managed competition” among providers;

the introduction of GP fundholding practices

designed to increase the efficiency and quality

of care;

the ability of purchasers, especially DHAs, to

choose from a wide range of providers, thereby

enhancing competition and consumer choice;

and

a broader accounting of capital costs to encourage hospitals to use capital more efficiently.

It is difficult at this early stage to evaluate the

changes in detail, as many are in the early stages of

implementation and data are scarce. In addition,

the government has done little to encourage systematic evaluation of the reforms. There are reasons to expect some important benefits from the

changes, however. Introducing an awareness of

capital costs is likely to improve the efficiency

with which assets are used. Separating purchasers

from providers potentially allows health authorities to concentrate on the health care needs of their

populations instead of simply on running facilities. However, the small amount of available evidence shows little progress in purchasing for

health gain (i.e., purchasing packages of health

services that have been or can be shown to maximize effects on the population’s health), and patterns of service delivery still largely reflect historical patterns.

The early experience with Trust hospitals has

been mixed. Financial controls have sometimes

been inadequate, and it is not yet clear what will

happen if Trusts fail to generate sufficient income

to stay in business. There is some evidence of improved efficiency in the provision of services by

Trust hospitals, but also some evidence that measured improvements largely reflect changes in the

recording of work rather than in the actual volumes of services delivered. The need for a good

system of workload classification of has become

apparent.

The health reforms appear to have led to an increase in the costs of managing the NHS, although

no accurate data on this phenomenon exist. It can

be argued that the pre-reform NHS devoted inadequate resources to management and that possible

increases can be justified on the grounds of more

efficient services. It is not yet clear, however,

whether the additional costs of administration can

be justified.

The reforms have re-ignited the debate on equity and access to care. Patients whose GP is a fundholder have apparently been able to obtain more

rapid access to services at the expense of other patients. There is little doubt that some unequal access has resulted. Yet the move to funding populations according to their size, age, sex distributions,

and morbidity patterns is moving resources away

from historically overfunded regions and districts

and toward those that have been underfunded.

The process of setting priorities for access to

health care is increasingly visible following the

reforms. Purchasers have a duty to buy services to

meet the needs of their communities to the greatest extent possible. This has helped reveal the paucity of evidence available on health care needs,

and some of the more visible signs of rationing

have been controversial. Any system of health

care that gives access to all, free or nearly free at

the point of use, and that aims to control overall

expenditures, needs explicit rationing for some

services.

Overall, the NHS reforms attempt to increase

accountability, introduce certain market incentives, and increase efficiency and patient choice. It

is perhaps more interesting to note the features of

the former system that have not been changed than

those that have been reformed. General revenue financing of health care, free and universal access to

services, and a range of cost-controlling features

have been maintained in the United Kingdom’s

current health care system.
54 | Hospital Financing in Seven Countries

REFERENCES

1. Central Statistical Office, Annual Abstract

of Statistics (London: HMSO, 1992).

2. Department of Health, NHS Consultants:

Appointments, Contracts and Distinction

Awards, Working Paper No. 7, Working for

Patients (London: HMSO, 1989).

3. Department of Health, Capital Charges,

Working Paper No. 5, Working for Patients (London: HMSO, 1989).

4. Department of Health, Funding and Contracts for Hospital Service, Working Paper No. 2, Working for Patients (London:

HMSO, 1989).

5. Department of Health, Practice Budgets

for General Medical Practitioners, Working Paper No. 3, Working for Patients

(London: HMSO, 1989).

6. Department of Health, Self-Governing

Hospitals, Working Paper No. 1, Working

for Patients (London: HMSO, 1989).

7. Department of Health, Working for Patients, Cm 555 (London: HMSO, 1989).

8. Department of Health, The Government’s

Expenditure Plans, 1992-93 to 1994-95,

Cm 1913 (London: HMSO, 1992).

9. Department of Health, Health and Personal Social Service Statistics (London:

HMSO, 1992).

10. Graig, L.A., Health of Nations: An International Perspective on U.S. Health

Care Reform (Washington, DC: Wyatt

Co., 1991).

11. James, J.H., “Reforming the British National Health Service: Implementation

Problems in London,” Journal of Health

Politics, Policy and Law 20(1):191-210,

1995.

12. Laing’s Review of Private Health Care

(London: Laing and Buisson 1991).

13. National Association of Health Authorities and Trusts, NHS Handbook, 7th ed.

(London: NAHAT/Macmillan, 1991).

14. National Health Service, Management

Executive Health Service Indicators, July

1992.

15. Office of Health Economics, Compendium of Health Statistics (London: OHE,

1992).

16. Organisation for Economic Cooperation

and Development, The Reform of Health

Care: A Comparative Analysis of Seven

OECD Countries (Paris: OECD, 1992).
Hospital

Financing

in France

by Marie-José Sourty-Le Guellec

he French health care system is arguably the most complicated of the European (and Canadian) systems described

in this report. Its system includes universal, compulsory

social insurance, significant patient cost-sharing, and supplementary insurance on the financing side, and public providers

combined with a sizable number of private providers on the supply side. Overlaying both the public and private sectors are strong

governmental controls at all levels of government (11).

Almost the entire population (99 percent) is covered by the

statutory health insurance scheme, which is part of France’s social security system. Statutory health insurance expenditures account for over 70 percent of national health expenditures in

France. The scheme is administered by social security sickness

funds (Assurance Maladie de la Sécurité Sociale). A person’s occupation generally determines membership in a particular fund.

There is one large fund for salaried workers (CNAMTS), which

accounts for nearly 80 percent of the compulsorily insured and

about 15 smaller funds cover other workers. The government provides insurance for low income people. Contributions for sickness fund insurance are income-related and shared by employers

and employees or paid directly to the relevant fund by nonsalaried

or self-employed individuals (11).

Social insurance provides both cash benefits (e.g., sick pay)

and benefits in kind (e.g., ambulatory care, hospital care). Depending on the patient’s financial circumstances, the patient may

be required to pay coinsurance or copayment amounts; for

instance, patients may have to pay 20 percent of the cost of hospital services (the ticket modérateur) and a daily flat rate contribu-

| 55
56 Hospital Financing in Seven Countries

tion that is currently 50 francs.1 Employers sometimes provide supplementary insurance for their

employees through mutual fund organizations

(mutuelles) to cover patient cost-sharing amounts

and a few benefits not covered by the social insurance scheme. Individuals may also purchase private supplementary insurance. Mutuelles and private insurance payments account for about 8

percent of national health expenditures.

France’s sickness funds are quasi-autonomous,

non-governmental organizations; there are national, regional, and local organizations of these

funds. They are subject to national and local management by employer associations and trade

unions. They are also closely regulated by the central government; in particular, contribution rates,

fee schedules, and pharmaceutical prices are controlled by the central government (11).

Patients can consult any medical practitioner

for primary care, and can choose to go to either a

public or private hospital. Money follows the patient in the case of private hospitals, but public

hospitals are subject to prospectively fixed budgets. Compared with the other European countries

in this study and Canada, French patients have relatively large cost-sharing requirements. Patient

out-of-pocket payments currently account for

about 17 percent of national health expenditures;

however, cost-sharing for hospital services is fairly small with only about 4 percent of hospital expenditures financed directly by patients (1 1).

Similar to many other countries, the containment of health expenditures is a major concern in

France. Hospital care represents half of national

health expenditures, making the hospital sector a

primary target of France’s cost-containment efforts. Recent reforms have concentrated on effectively controlling sickness fund insurance payments to private hospitals by extending

governmental regulation over that sector, and by

creating a new balance between the private and

public sectors to harmonize their development

within an overall program designed to control

health spending. Also similar to many other countries, France’s health reforms are moving in the

direction of making individual hospital budgets

based more on each hospital’s level of activity and

less on historical costs.

STRUCTURE OF THE HOSPITAL SECTOR

France has a mixture of public, private nonprofit,

and private for-profit hospitals. Public hospitals

tend to be large and well equipped; private hospitals tend to be smaller and to specialize in elective

surgery, obstetrics, or long-term care. In 1990

there were 1,072 public institutions; they constituted only 28 percent of all French hospitals, but

provided almost two-thirds of total hospital beds,

hospital days, and inpatient admissions (tables

4-1 and 4-2). By law, a public institution is a corporate body governed by public law and is responsible for providing a specific public service. Public institutions have full legal status, their own

assets and resources, and full legal autonomy.

They are, however, subject to various forms of

public supervision and financial control. Public

hospitals cannot waive their obligations, defined

in the Act of December 31, 1970, to:

■

■

■

provide diagnosis, treatment, and (in particular) emergency care to their patients and those

referred to them, including necessary inpatient

care;

contribute to the training of medical and paramedical (nonmedical) staff; and

participate in medical and pharmaceutical research and health education.

In 1989 the private hospital sector included

2,721 institutions, constituting 72 percent of all

hospitals but accounting for only one-third of the

total hospital beds, patient days, and inpatient admissions in France in that year (tables 4-1 and

4-2). The private sector is divided into a private

for-profit or commercial sector with 1,515 institu1The exchange rate in January 1994 was approximately $USO.17 to F1 .00.
Chapter 4 Hospital Financing in France I 57

Category of hospital Percent of total hospitals Percent of beds

Public 28 65

Nonprofit, PSPH 12 11

Private nonprofit, non-PSPH 19 5

Private for-c) refit 40 19

a Data for public hospitals are for 1990; data for private hospitals are for 1989.

SOURCES: Documents Statistiques, “Les Etablissements d’Hospitalisation Privee en 1989,” Enquete EHP 1989, SESI no. 121,

Juillet 1991, Documents Statistiques, “Les Hopitaux Publics en 1990, Resuitats H80, ” SESI no. 154, Septembre 1992

tions and a private nonprofit sector with 1,206

institutions. For-profit hospitals are privately

funded and subject to the rules of commercial and

civil law. Private nonprofit hospitals are run by

voluntary organizations, religious orders, employee representatives, mutual fund associations,

and social security funds. They are similar to public institutions in that they do not attempt to maximize profits, and their surplus revenues are invested to further their health care objectives.

Private institutions are managed by individuals

or a legal entity. They make many of their own

management and investment decisions, and their

services are governed mainly by market forces, although they are subject to certain government

constraints. Fees charged by private institutions

are controlled and subject to formal agreements.

Increases in the number of beds and high-cost

equipment are controlled by the health map (carte

sanitaire), described later, and require formal auPublic PSPH Public and PSPH

Hospital days Hospital days Hospital days

Beds (in 1,000s) Beds (in 1,000s) Beds (in 1,000s)

Medicine 105,393 29,243 13,879 3,918 119,272 33,161

Surgery 61,282 14,827 8,986 2,315 70,268 17,142

Obstetrics/gynecology 17,337 4,101 1,393 356 18,730 4,458

Medium-stay 42,127 11,943 19,921 5,386 62,048 17,329

Long-stay 63,711 22,289 1,877 638 65,588 22,927

Psychiatry 68,600 18,669 12,733 3,921 81,333 22,590

Total 358,450 101,071 58,789 16,535 417,239 117,607

Private for-profit Private nonprofit Total private

Hospital days Hospital days Hospital days

Beds (in 1,000s) Beds (in 1,000s) Beds (in 1 ,000s)

Medicine 14,753 2,039 3,943 1,242 18,696 3,282

Surgery 50,820 17,123 4,675 1,484 55,495 18,607

Obstetrics/gynecology 10,083 3,084 882 254 10,965 3,338

Medium-stay 18,123 5,646 15,672 4,525 33,795 10,171

Long-stay 436 140 2,037 722 2,473 862

Psychiatry 13,405 4$767 1,960 637 15,365 5,404

Total 107,620 32,800 29,169 8,865 136,789 41,664

a Data for public hospitals are for 1990; data for private hospitals are for 1989.

SOURCES: Documents Statistiques, “Les Etablissements d’Hospitalisation Privee en 1989, ” Enquete EHP 1989, SESI no 121, Juillet 1991, Documents Statistiques, “Les Hopitaux Publics en 1990, Resultats H80, ” SESI no. 154, Septembre 1992.
58 Hospital Financing in Seven Countries

theorization. Additionally, the medical activities of

private hospitals are supervised by the sickness insurance funds’ medical officers.

Private institutions are allowed to participate in

the public sector, although to date only some of

France’s private nonprofit hospitals (467 in 1988)

have asked to be incorporated into the public hospital service. These hospitals, called PSPH hospitals, are governed by rules similar to those for public hospitals. There are thus two general categories

of hospitals in France: public and PSPH hospitals,

and private institutions that do not participate in

the public hospital sector.

Financing methods and operating arrangements vary greatly between the public and private

hospital sectors. Public and PSPH hospitals are

governed by the principles of public accounting,

whereas private for-profit hospitals are commercial undertakings that attempt to maximize their

surplus revenues. Reform legislation passed in

July 1991 and currently being implemented is designed to create a new balance between the private

and public sectors and to harmonize their development within an overall program to control health

expenditures. The reforms formally recognize

that public and private hospitals perform the same

basic functions. In the future, the two categories of

hospitals will share equal responsibility for ensuring public health through common provisions that

affect all types of hospitals. Furthermore, the reforms seek to strengthen and encourage cooperation between public and private hospitals (5).

At present, a statutorily insured patient in

France can go to either a public or private hospital,

although in practice the decision is usually made

by the patient’s physician. When the choice is a

personal one, it tends to reflect the hospital’s geographical proximity, its reputation, or other personal preferences. Under the 1991 reforms, patients’ freedom to choose a physician or hospital

became an even more integral part of the health

care system in France than it was under previous

health care legislation.

Many hospitals in France have short-, medium-, and long-stay beds as well as psychiatric

beds. It is difficult, if not impossible, to determine

the proportion of hospital care in France that is devoted to short-term acute care treatment; therefore, this chapter deals with the French hospital

sector as a whole. Purely residential institutions,

such as nursing homes, are excluded from data

cited herein, however.

PHYSICIANS

In public and PSPH hospitals, the medical staff includes residents or interns, who are physicians in

training, and hospital practitioners, who are fulltime or part-time with a salaried established post

(titulaire) or a salaried, nonestablished post (nontitulaire). Table 4-3 provides a breakdown of hospital physicians in private and public hospitals in

1989 and 1990. The central government controls

the growth of salaries and the number of hospital

staff in public hospitals.

Public PSPH Private for-profit Private nonprofit Total

Salaried practitioners Full-time

Part-time

Nonsalaried practitioners Full-time

Part-time

Occasional

Salaried residents Full-time

Part-time

Nonsalaried residents Full-time

Part-time

27,913 2,614

39,962 4,250

32

762

590

22,019 1,655

233

22

596

851

8,883

22,151

12,976

248

328

15

164

525

2,047

495

1,912

1,496

236

90

11

8

31,675

47,110

9,410

24,825

15,062

24,158

651

48

172

a Data for public hospitals are for 1990; data for private hospitals are for 1989.

SOURCES: Documents Statistiques, “Les Etablissements d’Hospitalisation Privee en 1989,” Enquete EHP 1989, SESI no. 121, Juillet 1991; Documents Statistiques, “Les Hopitaux Publics en 1990, Resultats H80,” SESI no. 154, Septembre 1992.
Chapter 4 Hospital Financing in France | 59

In certain circumstances hospital physicians

are authorized to treat private patients in public

hospitals through consultations or the use of public service beds for private patients. In such cases

the physician receives a fee from the patient,

which may be reimbursed by the patient’s insurance company. Income from private fees may not

exceed 30 percent of a physician’s total income

and the number of beds that can be used for private

patients may not exceed 8 percent of all public service beds.

Public hospital physicians often confer with office-based private practice physicians (médecins

libérals). Whether or not payment for the consultation is included in the hospital’s global allocation of funds (discussed further below) depends on the regularity of the consults. Any

physician in an office-based practice may be consulted on an occasional basis by a hospital physician. Payment is rendered according to the service

or consultation performed and falls outside the

hospital’s global allocation. Hospitals regularly

call on some physicians in private practice (called

affiliated practice physicians) who are paid a fee

per service provided. These fees are included in

the hospital global allocation.

There are no salaried physicians in rural hospitals and any private physician may consult there

subject to authorization. In these cases the physician may ask patients who are not covered by sickness funds to pay an agreed-upon fee. For patients

with sickness fund coverage, the physician may

claim 85 percent of the local daily charge per day;

for patients qualifying for social assistance, the

physician is paid 50 percent of the departmental

medical assistance charge. In these two cases the

hospital retains 10 percent of fees received.

In certain circumstances nonsalaried physicians operate clinics in public institutions. They

are paid on a fee-for-service basis; the level of fees

is agreed upon directly with the patient. Physicians pay 10 percent of their fee income to the hospital, which uses the proceeds for improving their

stock of medical equipment.

Thus, in public or PSPH hospitals, most payments to medical staff are included in the operating section of the budget and are taken into account in determining the hospital’s global

allocation. Exceptions to this are fees paid to physicians practicing in rural hospitals and in hospital

clinics, and fees received by hospital physicians as

part of their private practice.

In private for-profit hospitals, physicians are

nearly always paid on a fee-for-service basis and

patients are reimbursed by their insurance companies. Nevertheless, an increasing number of private institutions are taking the opportunity to invest in staff (particularly medical staff) by offering

the best-trained personnel attractive remuneration

packages, particularly in comparison with what

the public sector can offer. Physicians’ fees in private hospitals are set according to a national fee

schedule, but their incomes, other staff incomes,

and the number of staff hired are not regulated by

government.

HOSPITAL OPERATING COSTS

❚ Financing Model

There are two distinct methods of financing hospital operating costs in France. Public and PSPH

hospitals are paid largely through a prospectively

fixed budget. Private non-PSPH institutions are

paid a daily (per diem) rate for their services; inpatient physician and ancillary services are paid for

on a fee-for-service basis.

Public Hospitals

Since 1984-85, public and PSPH hospitals have

been subject to a global allocation scheme established by the prefect of the district in which they

are located and determined within the framework

of federal guidelines. The global allocation

scheme replaced a system of controlled rates of increase in per diem prices for public and PSPH hospitals (11). Under the new scheme each hospital

receives an annual global allocation to cover the

portion of its costs that is paid for by the sickness

funds. Hospitals also charge daily rates (tarifs

journaliers de présentations) to cover that part of

a hospital stay not provided for in the global allocation. Daily charges are established for several

purposes. Federal and local governments pay a

daily charge for patients on social assistance. The
60 Hospital Financing in Seven Countries

daily charge is also used to determine patient costsharing amounts for patient copayments (ticket

moderateur) and daily flat-rate payments (paid either by the patient or by a supplementary insurance company), and it constitutes the charge for

patients who have no insurance coverage.

Hospital Budgets

The hospital budget sets forth estimated expenditures and revenues for the coming year. This budget, like that of any public administrative institution, must conform to certain public accounting

principles. It has two sections, as described below:

The operating section deals with current activities, including the day-to-day running of the

hospital and financial management.

The investment section deals with operations

leading to an increase in durable capital assets

requiring depreciation (other than stocks), such

as permanent capital, real estate and tangible

property, stocks and securities, deposits and

sureties, and physical supplies.

Expenditures that require authorizations for the

operating section of the budget are divided into

three groups:

1.

2.

3.

is

1.

2.

3.

4.

5.

6.

7.

expenditures relating to the external purchase

of goods and services,

staff or personnel-related expenditures, and

all other types of expenditures.

A public or PSPH hospital’s operating revenue

derived from the following sources:

the global allocation described below;

income from services (e.g., via daily rate

charges or fees);

grants, donations, and legacies to be used for

operating purposes;

other surplus income unrelated to operational

activities;

income from reserves;

the value of liabilities reduced by expire or

lapse; and

the value of any repairs undertaken or surplus

produced by the institution itself (e.g., pharmaceutical products made by the hospital’s laboratory).

Appended Budgets

Current expenditures on certain activities and services (e.g., blood transfusion centers, mobile

emergency services, data processing centers)

must be included in appended budgets. Operating

costs are funded from both general and appended

budgets.

Authorized expenditures for the coming year

must take into consideration the average rate-ofincrease guidelines established by the central government’s ministries of the economy, budget,

health, and social security. The average rate of increase for hospital expenditures is based on general economic trends—in particular, forecasted

changes in prices and wages—and on national

health and social policies. The guideline rate was

4.2 percent in 1990.

Determination of the Global Allocation

Although a hospital receives a small amount of

revenues in addition to the global allocation and

daily charges, these two elements are essential to

a hospital’s ability to provide services. The global

allocation is designed to provide enough funds to

cover that part of the hospital’s expenses that will

be paid for by the sickness insurance funds. It represents the difference between total operating

costs as set forth in the authorized general and appended budgets and expected hospital revenues

other than the global allocation itself, so as to ensure that the hospital’s budget will be balanced after taking into account surpluses or deficits from

previous years. Annual increases in a hospital’s

global allocation are based on the federal guideline rate of increase and the hospital’s forecasted

level of activity.

Patient copayment and daily flat-rate contributions, repayments by mutual fund associations

and private insurance companies for their members’ expenses, and payments for patients covered

by medical or social assistance are not included in

the global allocation; they are billed according to

the daily service charges established for individual patients.

The global allocation covers costs relating to

inpatient care, day and night care in the hospital,
Chapter 4 Hospital Financing in France | 61

outpatient care,2 psychiatric care, legal abortions,

mobile emergency care units, and long-term care

institutions for the elderly.

Determination of Daily Charges

The partial nature of the global allocation makes

it necessary to establish a system of charges (tariffs) to recover expenses not paid for through the

global allocation. Daily service charges determine

the amounts to be paid by federal or local governments, patients, or any organization providing

supplementary coverage. Daily service charges

are calculated for different types of services by dividing the estimated total costs of each type of service by the estimated number of patient days for

each type, after adjusting costs for offsetting receipts and for any previous year’s surplus or deficit that has been carried forward.3

Service charges are calculated for inpatient care

(including specialist and nonspecialist services,

services relating to expensive specialties, and medium- and long-term services), day and night care,

and home care services. There are also three possible short-term charges for medicine, surgery,

and expensive specialties. Because individual

hospitals have different budget levels and estimated numbers of patient days for various types of

services, daily service charges vary by hospital. In

contrast, flat-rate charges for outpatient care and

for legal abortions apply uniformly throughout

France. Box 4-1 describes the different parties involved in hospital management and supervision,

and offers more details on the determination of

global allocations and daily rates.

Budget Adjustments

Except in the case of a budget revision, the global

allocation is paid on the basis of the amount initially provided for, regardless of the hospital’s actual level of activity. If the number of patient days

is lower than estimated, the hospital’s income (insofar as it relates to its global allocation) remains

unaltered.

If a hospital can show that there has been a significant and unforeseen change in its financial circumstances or medical activity leading to a substantial increase in the hospital’s costs during the

current year, changes to the budget (e.g., an increase in authorized revenues to meet higher-thananticipated expenses) may be approved. Additionally, in urgent cases the hospital’s director

may transfer appropriations between the first two

groups of authorized expenditures in the general

budget and the appended budgets during a financial year. These transfers may not, however, increase or reduce authorized expenditures within

these groups by more than 10 percent, reduce appropriations designed to cover unavoidable costs

(e.g., social security contributions or taxes), or

commit the institution to expenditures beyond the

current financial year.

End-of-year surpluses in the hospital’s administrative account resulting from more efficient

management (e.g., expenses are less than forecasted for the same or higher level of service delivery) are assigned to a compensation reserve account. Such reserves may be used to cover

subsequent years’ deficits or assigned to another

reserve account that can be used to finance operations or investments that do not increase operating

2Actually, only part of the cost of outpatient care is taken into account in calculating the global allocation. In particular, the allocation relating to this area covers the cost of supplying drugs for which the sickness insurance funds are statutorily responsible. It is estimated that on average, 50 percent of outpatient costs are covered by the global allocation. The remainder has to be covered by the patient through a copayment or

by a third-party payer other than the patient’s sickness fund.

3An excerpt from the decree of Aug. 11, 1983, section 32, states specifically that “[t]he estimated cost price shall be equal to total operating

expenditures, comprising:

a) direct costs, that is the costs of services belonging to a particular category of charges, excluding the cost of medical treatment, goods

and other medical services;

b) the cost of medical treatment, goods and services on the basis of their purchase price or, failing that, of their cost price;

c) other costs included in the operating section of the general budget which are not covered by their own resources, divided among the

different categories of charges in proportion to the estimated number of days for each category;

d) where appropriate, that part of the previous financial year’s deficit which has been carried forward.”
62 Hospital Financing in Seven Countries

Hospitals are managed by a board made up of locally elected representatives (of which the mayor of

the municipality concerned is the chairperson), representatives of the social security system, representatives of the hospital’s medical and nonmedical staff, and a director who is responsible for implementing the policies developed by the board and approved by representatives of the State. The board’s

director also authorizes expenditures and issues revenue orders, appoints nonmedical staff, and is the

hospital’s legal representative.

The supervisory role exercised by public authorities in the budget-making process places strict limits on the degree of managerial autonomy enjoyed by public and affiliated hospitals. Administrative supervision of public and PSPH hospitals operates at every level:

■ at the national level through the Hospital Department of the Ministry of Health;

■ at the regional level through the prefect of the region (appointed by the government), assisted by the

regional Department for Health and Social Services (DRASS); and

■ at the district level through the prefect of the district (also appointed), assisted by the district Department for Health and Social Services (DDASS).

The social security system, which is the principal source of funds for hospitals, has no formal supervisory responsibilities but only the right of oversight. Its role has been strengthened over time, however.

Social security sickness funds have contributed to the development of hospital policy at the national

and local levels through representation on various associations and through their significant oversight

rights for financial and medical matters. Additionally, supervisory authorities must consult representatives of sickness funds when drawing up hospital budgets. Furthermore, at the request of the sickness

funds, hospital directors must submit quarterly expenditure commitment statements and provide information on staffing. The sickness funds also partially supervise medical decisions, which can mean

that a sickness fund would refuse to pay the cost of treatment or would modify the financial terms of a

hospital admission that it deemed unjustified or inappropriate. The sickness funds monitor all hospital

medical activities but (except with regard to nonpayment of services) exercise a passive form of supervision, as the funds’ concerns are not backed up by any sanctions (3).

Financial monitoring of hospitals is the responsibility of the district Department for Health and Social

Services; the social security funds, which receive the quarterly expenditure statements; and the hospital

accountant (an official of the public treasury service) who ensures that spending commitments comply

with relevant legislation and regulations and that the necessary appropriations have been made.

costs in subsequent years. Priority is given to fi- account. If the reserve is not sufficient, the deficit

nancing services that have contributed to the surplus. Surpluses that do not result from improved

management (e.g., if services are lower than forecasted levels or the surplus arises from daily

charges or outpatient care) are transferred to a

compensation reserve account to cover operating

costs in future years.

Any deficits in the administrative account are

covered by drawing on the compensation reserve

amount is figured into the budget of two years later or can be spread over the following two financial years by adding it to the hospital’s operating

costs.

Sickness Fund Payments

Each sickness insurance fund in a given hospital’s

catchment area pays the so-called pivot fund (or

main fund in the area) its share of the hospital’s
Chapter 4 Hospital Financing in France 163

The budgetary process is relatively long, reflecting the desires of various categories of hospital staff

to be involved in the hospital’s planning and the strict supervision exercised by external authorities. The

director or director-general of the hospital is responsible for preparing and submitting budget proposals, taking account of the previous and current years’ activities. Assisted by hospital departments, the

director determines the level of expenditure that is essential for the hospital’s operations. The draft

budget is then submitted to a joint consultative committee and a medical staff committee for comment.

Budget proposals are adopted by the hospital’s board (conseil d’administration), which must express a

formal opinion on the director’s figures. Budget proposals are then sent to administrative authorities and

the regional sickness insurance fund for salaried employees, where they are available for comment.

Hospital budgets, global allocations, and daily service charges are determined by administrative

supervisory authorities by January 1 of the relevant year. With the exception of the Paris hospital service

(responsibility for which devolves on the Minister of Health), the prefect of the district is responsible for

establishing global allocations for the district’s public hospitals. This responsibility also involves a critical response to hospitals’ budget proposals to ensure that each institution can meet its obligations. The

prefect is empowered to increase income and expenditure estimates for hospitals whose estimates it

considers too low and to remove or reduce items that it considers unnecessary or too high—taking account of local heath care needs and the federal guideline rate for average increases in hospital expenditures (4). Prefects’ decisions are made only after consultations with the social security funds. The

opinions of the social security funds and the medical supervisory bodies are recorded by the regional

sickness insurance fund.

The district prefect notifies the hospital, the regional sickness fund for salaried employees, and the

fund responsible for paying the global allocation (the “pivot” fund) or main sickness insurance fund in

the area) regarding the final determination of daily service charges and the global allocation, together

with the hospital’s approved budget.

The hospital’s director is the principal authorizing officer for the budget and maintains a formal record of expenditures. The director submits quarterly accounts (upon request) to the prefect. At the end

of each quarter, the director also submits a chart a to the prefect showing the current number of hospital staff.

global allocation.4 At the end of the financial year, locations must reach a unanimous decision on the

the national sickness insurance fund for salaried

employees draws up a statement of contributions

required from each fund based on the number of

days provided to the fund’s members (weighted

according to coefficients that account for the different daily costs of hospital care provided, which

are determined by a joint ministerial order). Before June 1 of the following budget year, a committee for the apportionment of hospital global alfinal contribution from each sickness fund, taking

into account the statement drawn up by the national sickness insurance fund (8).

Recent Reforms

Although the 1991 health reforms did not alter the

basic method of global allocations, major changes

to the budgetary process were introduced. Under

this legislation (whose implementing regulations

4 Under the 1991 reform legislation, the pivot sickness fund makes an initial payment of 60 percent of the global allocation to the hospital on

the twenty-fifth day of the month, then 15 percent on the fifth of the following month, and the balance on the fifteenth day of the following

month.
64 | Hospital Financing in Seven Countries

were unpublished as of this writing), the budgetary process will start earlier in the year, budget negotiations will be faster and more streamlined,

management will be more flexible, and the hospital board will have more autonomy particularly

with regard to day-to-day matters (e.g., staffing,

loans, internal organization), which will no longer

be subject to the district prefect’s prior approval.

There will be closer cooperation between the authorizing officer and the accounting officer. New

provisions will also be made for the investment of

and return on funds. Moreover, it will be possible

to revise a hospital’s global allocation in the

course of a financial year to reflect changes in the

current volume of services provided as long as it

is related to greater patient needs.

Another important innovation included in the

1991 reforms and currently being experimented

with in several hospitals is the determination of

charges based on the identification of homogeneous patient groups (groupes homogénes de malades), which are in turn based on U.S. diagnosisrelated groups (DRGs) (5).

Private Hospitals

Private for-profit and nonprofit institutions that

do not participate in the public hospital sector operate on a fee-for-service basis, although fees are

usually regulated by the central government’s

health ministry. An agreement between hospitals

and their regional sickness funds fixes the amount

of money that the funds will reimburse patients in

the coming year. Private hospitals accept a certain

number of service obligations (inpatient days and

hospital admissions) to sickness fund patients in

exchange for guaranteed reimbursement from the

funds. If a private hospital has a surplus when it

closes its accounts, it is free to distribute that surplus to shareholders or to reinvest the surplus

funds. If it has an operating loss, the social security fund does not become involved in any way to

cover the deficit.5

Daily Rates and Fees

Private hospitals’ payments are based on negotiated daily rates that comprise a charge for hoteltype services and nonmedical personnel services

(e.g., nurses, social workers, therapists), fees for

operating and delivery room services, pharmaceutical fees, and fees for physician services. Patients

usually pay physicians’ fees directly and are then

partially reimbursed by their sickness fund. In the

past physicians have been paid separately from the

hospital’s charges, but physician payment is increasingly being included in the same schedule as

the costs for a hospital stay. One advantage of

folding in physician payments is that all payments

made by the sickness fund for a patient’s hospital

stay are included in a single document that provides the fund with an overview of total hospital

costs.

Physicians’ services are reimbursed according

to a national fee schedule classified as K, Kc, B,

and Z (for diagnostic activities, surgery, biological analyses, and imaging, respectively). One K is

worth approximately 12 francs, and one Kc is

worth about 13 francs. Reimbursement for physician or surgeon services is supplemented by an operating or delivery room fee (FSO) paid to the hospital. The FSO varies according to region and

category of hospital and by levels of K.

Private hospital per diem rates for hotel-type

and non-medical staff services are based on a classification of the hospital’s specialty and quality

ranking. Since 1973 the classification system has

assigned points to an individual hospital for each

of the following five areas (in order of significance for rate setting):

1. medical services,

2. nonmedical staffing,

3. technical equipment,

4. hotel facilities, or

5. a combination thereof.

Depending on the total number of points obtained, a hospital is classified as A, B, C, D, or E,

5 The agreement setting forth the responsibilities of all the parties concerned was drawn up by the Ministry of Health between 1975 and 1978

and approved by the Ministry in 1978.
Chapter 4 Hospital Financing in France | 65

each of which has a particular set of rates per specialty. The classification is decided by the regional

prefect after consultation with a joint committee

that includes representatives of sickness funds and

health care providers.

A total of 800 points is required for category A

classification, which indicates consistently high

performance; rates fall as a hospital’s classification moves from category A to E. Hospitals and

clinics classified within each category have the

same level of rates wherever they are located in the

region. Hospitals have an incentive to invest in

technologies, equipment, and staff to improve

their ranking to receive higher per diem rates. The

process of ranking hospitals is fairly rapid, and a

hospital may even have its ranking changed retrospectively. For several years, per diem rates have

been regulated and subject to authorized annual

increases, expressed in either absolute amounts or

percentage terms.

Operating room fees are directly linked to a

hospital’s rate category. Similarly, the pharmaceutical fee, formerly based on actual costs, is now

becoming more uniform. Charges and fees are

thus subject to limits and linked to the number of

inpatient days delivered by the hospital. There are

also government controls on the number of admissions and on the number of authorized beds in private hospitals.

Despite these measures to limit private hospital

rates and the number of services, the total volume

of medical services provided by private hospitals

has not been brought under control. In response,

the regional sickness funds require private hospitals to supply information on their activities from

which averages and comparisons among hospitals

are made. Hospital profiles are also drawn up to

identify potential abuses. These profiles serve

only as indicators of service provision, however,

and are not used as instruments for setting limits

or preventing abuses.

As an additional monitoring tool, regular

checks of hospital practices are conducted to prevent bad practices. If any are identified, a preliminary letter is sent to the director of the hospital

asking for remedial action. If the problem is serious or has occurred before, the hospital’s manager

is required to make the hospital’s case before a

committee of administrators of the regional sickness funds. A warning or reprimand may be sent

or, after a complex review procedure, the hospital’s classification may be downgraded. The ultimate sanction (for which there must be serious

grounds) is abrogation of the sickness funds’

agreement; costs are no longer paid in advance,

and the daily charge is paid at three-quarters of the

previous level. Although not applied frequently,

these sanctions have had some effect (17).

Supervision

A group of sickness fund physicians supervises

agreements between private hospitals and sickness funds that pertain to private hospital staffing

levels, current pharmaceutical regulations, standards for operating rooms, and standards regarding the size of patient rooms. A compulsory annual statistical survey of private hospitals must also

be provided to regional sickness fund organizations, making it possible to identify any possible

problems in a range of areas. The standards and

adherence to them have a direct effect on charges

for services.

Health Reforms

Although the 1991 health reform act initially retains the principle of fees and rates for private hospital services, the legal framework and the financial basis of for-profit institutions have been

altered. The tripartite system, involving the state,

sickness funds, and hospitals, may gradually become the norm in the private sector as it has already been for some time in the public sector. The

state could become involved in contractual relations regarding the volume of services that have

hitherto been the concern only of hospitals and

sickness funds.

There are no plans at this time to introduce a

global allocation scheme for the private sector.

Instead, there is a global ceiling on private hospital expenditures by the sickness funds, subject to a

guideline rate of annual increase in this ceiling

agreed on between the state and the other two

traditional partners in the private hospital sector.
66 Hospital Financing in Seven Countries

Public and PSPH Private Total

Percentage of Percentage of

total public total private Percentage

and PSPH hospital of total

Million operating Million operating Million operating

Source francs expenses francs expenses francs expenses

Sickness insurance funds 179,778 90.0 52,886 83.4 232,664 88,5

Individuals and private insurance 13,116 6.6 7,848 12.4 20,964 8.0

Mutual fund associations 3,023 1.5 2,329 3.7 5,352 2.0

Federal or local authorities 3,508 1.8 342 0.5 3,850 1.5

Total expenses 199,425 63,405 262,830

SOURCE: Centre de Recherche d’Etude et de Documentation en Economic de la Sante (CREDES) Programme Eco-Sante, 1990 and 1991.

This ceiling is allocated among regions and by

month and may not be exceeded.

The 1991 legislation requires that private institutions analyze their activities, develop an assessment policy, and implement information systems

(similar to programmed medical des systemes

d’Information, or PMSI). It also makes the submission of annual forecasts of activity to the sickness funds a precondition for setting rates or for

concluding rate agreements. The implementation

of a cost accounting system and a medical information system were intended to lead to a DRGtype of charge system by the end of 1993. An experiment using this new approach was introduced

in obstetrics-gynecology units and in volunteer

institutions for other specialties beginning on July

1, 1992 (5).

❚ Sources of Funds

The social security sickness funds pay for the

lion’s share of hospital care in France; they funded

90 percent of public and PSPH hospital operating

expenses and over 83 percent of private hospital

operating costs in 1991 (table 4-4). Private insurance, mutual fund associations, and individual

out-of-pocket payments accounted for a fairly

small share of hospital costs ( 10 percent), even for

private hospitals (16.1 percent). These figures

reflect sickness fund patients’ freedom to choose

either a public or a private hospital, and private insurers’ and mutual fund associations’ minor roles

in the French health care system of mainly providing supplementary insurance.

The relatively small part that private hospitals

have in France’s system is reflected by their share

of total hospital expenditures. In 1991, threefourths of all hospital spending was for care provided in public and PSPH hospitals; the other

fourth was for private hospital care (table 4-4).

Federal and local authorities pay hospitalization costs for patients who receive state medical or

social assistance. These payments, financed

through general revenues, funded 1.5 percent of

hospital expenses in 1991 (table 4-4). (Foreign patients who are not residents of France must pay

their own hospital bills although there are international agreements between France and certain

countries allowing payments to be made through

official channels.)

❚ Allocation of Operating Funds

Public Hospitals

Public hospital operating costs were F139 billion

in 1988, representing 87.8 percent of aggregate

hospital expenditures (which includes capital expenditures) (table 4-5). The largest single item

(F90.1 billion, or 65 percent of operating costs)
Chapter 4 Hospital Financing in France 67

Million Percentage Million Percentage

Operating costs francs of total Operating revenues francs of total

Staff

Pharmaceuticals, medical

services

Hotel facilities

Repairs, maintenance

General management

Mortgages

Other

Total

90,140

12,792

8,473

3,753

3,490

2,737

17,451

138,836

64.9 Global allocation

9.2 Service charges

6.1 Daily flat rate contributions

2,7 Outpatient care

2.5 Donations, contributions

2.0 Sales of products

12,6 Other

Total

118,074 81.0

9,631 6.6

1,877 1.3

2,543 1.7

219 0.2

469 0.3

13,121 9.0

145,934

SOURCES: Ministere de l’Economie des Finances et du Budqet, Direction de la Comptabilite Publique, Les Finances du Secteur Public Local, Hopitaux Publics 1983-1988.

was for hospital staffing costs. (It is not possible

to distinguish between medical and nonmedical

personnel costs.) Expenses for pharmaceuticals

and medical services accounted for 9 percent of

hospital operating costs in 1988; hotel-type services made up 6.1 percent, repairs and maintenance 2.7 percent, and management and transport

2.5 percent (table 4-5).

Public hospital operating revenues were nearly

F146 billion in 1988, of which the global allocation represented 81 percent, total daily service

charges accounted for 6.6 percent, total daily flatrate contributions were 1.3 percent, and outpatient

care charges accounted for 1.7 percent of hospital

operating income (table 4-5) (10).

Private Hospitals

In contrast to public and PSPH hospitals, there are

no systematic statistics on the revenues or costs of

private institutions. A 1985 study by the Centre

d’Etudes des Couts et des Revenus (CERC) estimated the operating costs of private hospitals and

clinics in 1980 at F11.7 billion. Fifty-five percent

of this was spent on staff; 17.4 percent on purchases; 17.2 percent on repairs, supplies, and external services; 4 percent on depreciation and provisions; 2.3 percent and 6.4 percent on other costs

(l).

❚ Operating Expenditures

Total hospital operating expenditures (which include both operating and capital spending) were

F263 billion in 1991, equaling 3.9 percent of the

gross domestic product (GDP) and 40.7 percent of

national health expenditures (NHE). Hospitals’

share of NHE has fallen over the past decade,

which was 44.9 percent in 1980, but hospital expenditures as a share of GDP have increased, starting at 3.6 percent in 1980. These trends indicate

that health care spending in France has commanded a greater share of the country’s financial resources over the past decade, although the hospital

sector has contributed less to this trend than have

other sectors of France’s health care system.

Approximately three-fourths of aggregate hospital outlays went to public and PSPH hospitals in

1991—slightly less than in 1980, when the public

sector accounted for 78 percent of hospital spending (2).

HOSPITAL CAPITAL COSTS

Located as they are in a rapidly changing sector

that is strongly affected by technological progress,

and faced with growing patient demands for the

latest technology and more patient amenities, all

hospitals are increasingly sensitive to competition

and have strong incentives to invest. In contrast to
68 Hospital Financing in Seven Countries

the private sector, public and PSPH hospital investments are subject to certain financial

constraints, although they also benefit from special public assistance.

The private sector is facing increasing competition, and its level of required investment is becoming more and more onerous; thus hospitals in

this sector find it necessary to seek new investors.

Few figures are available on private sector hospital investment, and most of the information in this

section relates only to the capital investments of

public and PSPH hospitals. Where appropriate,

legislation concerning the investment process and

current trends are discussed.

❚ Relationship of Capital and Operating

costs

In 1988 the aggregate budget for French public

hospitals was approximately Fbillion158, which

represented the purchase of goods and services.

These costs may be either operating or investment

costs, as follows:

■

■

The operating section of the budget includes all

consumable goods and services that are shortterm; such expenditures relate to day-to-day

supplies and to upkeep and maintenance.

The investment section includes expenditures

that are intended either to maintain a capital

good beyond its budgeted life or to purchase

new capital (3).

The investment section regularly receives

transfers from the operating budget through provisions and depreciation accounts. Such accounts

represent the depreciation of assets with a view to

replacing them; depreciation is recorded as an income item in the investment section and as a cost

item in the operating section. Depreciation costs

are taken into account in determining the global

allocation and daily service charges.

Private for-profit hospitals and certain private

nonprofit institutions, even if they participate in

the public hospital service, are not entitled to direct reimbursement of depreciation costs because

the government is concerned about preventing the

accumulation of private wealth at the expense of

the sick. Such institutions may, however, receive a

remuneration equivalent to 3 percent of their capital (based on the nonamortized value of their assets, where necessary after revaluation). In addition, fixed assets in such institutions are almost

never the property of the hospital but are rented.

The depreciation of these assets is included in the

rent, which is an operating cost.

Hospitals that receive a global allocation are allowed to include interest payments on investment

loans as part of their operating costs. This option

does not extend to the repayment of loan principals, which are included in the investment section

of their budgets.

Another way in which operating and capital

costs are related in French public and PSPH hospitals is through the allocation of operating fund surpluses. Under certain circumstances (discussed

above), surpluses in the operating section can be

used to finance investments that are not expected

to increase operating costs in ensuing years.

Moreover, any surplus in the appended budget is

allocated to the purchase of equipment for hospitals (e.g., blood transfusion centers or computer

centers), to other hospital capital investment, or to

reduce operating costs in succeeding years.

The impact of capital costs on future operating

costs is determined informally. Some hospital

boards draw up program budgets as a means of improving quality of forecasting and planning, and

assisting management by highlighting the overall

impact of an activity in operational and investment terms. Activities examined may cover energy saving programs, computerization and major

equipment, or hospital buildings.

❚ Capital Financing ModeI

Investments in new construction, new major medical equipment, or replacement equipment in the

public sector can be financed by depreciation (applied to tangible assets such as hospital plant and

equipment) or amortization (applied to intangible

assets such as insurance policies). In the hospital

sector, however, this is inadequate due to the rate

of technological innovation, and other funding

sources are often required.
Chapter 4 Hospital Financing in France 169

Expenditures 1975 1986 1988 Percentage of 1988 total

Direct expenditures 3,722 8,842 13,456 69.9

Tangible assets 812 4,059 5,723 29.7

Real estate investments 169 434 3,171 16,5

Construction 2,741 4,349 4,562 23.7

Indirect expenditures 884 3,464 5,801 30.1

Total expenditures 4,606 12,306 19,257 100.0

Income 1975 1986 1988 Percentage of 1988 total

Subsidies, grants 985 1,707 1,583 7.6

Loans 2,533 3,521 4,545 21.8

Depreciation 1,513 6,989 7,702 36.9

Fixed assets 4,181 20.0

Other income 244 946 2,845 13.6

Total income 5,275 13,163 20,856 100.0

SOURCES: Ministere de l’Economie des Finances et du Budget, Direction de la Comptabilite Publique, Les Finances du Secteur Public Local, Hopitaux Publics 1983-1988.

Self-Financing

Hospitals obtain some of their funds from internal

sources, such as the sale of real estate and tangible

assets (a fairly unimportant source) and depreciation, which accounted for 37 percent of hospitals’ investment funds in 1988 (table 4-6). Since

the mid- 1980s, depreciation funds have increased

in importance because of trends in the structure of

investments and thus their patterns of depreciation. The decline in the acquisition of land and

buildings and of repairs with a long (often 30

years) depreciation period and the increase in tangible acquisitions with a short (around 5 years) depreciation life has significantly increased depreciation income and thus the level of self-financing.

Subsidies

Hospitals obtain a portion of their investment

funds from several external sources that may be

free or may incur a cost. State subsidies—which

normally vary between 5 and 40 percent of a hospital’s investment funds, depending on the institution’s capacity for self-financing-and subsidies

from local authorities are free. More than half the

subsidies received by hospitals come from the

state. Of local authority funding, the regions are

the most important source of assistance, followed

by the districts and municipalities (communes). In

1988, subsidies accounted for 7.6 percent of aggregate investment income (table 4-6).

Loans

The sickness funds have been authorized to make

interest-free loans to hospitals, which are required

to repay only the principal amount. For loans that

incur a cost, hospitals normally call on banks for

public authorities (Caisse des Depots et Consignations and the Caisse d’Aide a l’Equipement

des Collectivites Locales). Hospitals may also

borrow from other banks or even, with ministerial

approval, from the financial market (i.e., debenture loans). Such loans represented 21.8 percent of

aggregate investment income in 1988 (table 4-6)

(3).

Today, state subsidies and sickness insurance

fund loans play less of a role in hospital investment financing than they have in the past. Hospitals’ own resources now constitute a key element

of their capital finances. They even appear to be

gaining in importance, given a slight trend toward
70 | Hospital Financing in Seven Countries

a reduced level of debt and a refocusing of investment; that is, investment now seems to be geared

toward the acquisition of biomedical equipment,

which in turn generates a higher level of depreciation. If sufficiently short periods of depreciation

are allowed, a high level of debt generates considerable resources for investment. In fact, hospitals

that have borrowed at high rates have not been

penalized at all; rather, they have benefited from a

budgetary bonus, as the financial costs associated

with a high level of depreciation form part of the

base from which the initial budget is calculated

(9).

Financing from loans is restricted to 60 percent

of the estimated cost of an investment. Institutions

are required to meet the other 40 percent of the

cost (as well as any associated additional operating costs) from their own financial resources. To

help cover such costs, hospitals sometimes receive an additional allocation over and above the

federal guideline rate for updates to global allocations, although experience shows that this does

not occur often. Other internal sources include the

use of surpluses arising from improved management. In contrast to the private sector, such decisions are subject to the approval of supervisory authorities (17).

Private Hospitals

Private hospitals (often called clinics) are free to

use their profits for investment or to redistribute

them to shareholders. Private for-profit clinics

have traditionally been owned by physicians. It

has become increasingly difficult, however, for

clinics to finance investments in new major equipment from their own resources, which they need

to keep up with technological progress and the demands of competition (14). Clinics face a difficult

problem of finding outside investors mainly because in most cases there is no guarantee that the

investment will be profitable. In recent years this

“crisis” in the private sector has resulted in a transformation of the structure of such hospitals, which

are increasingly passing from the status of a family business to that of a limited company belonging

to a major financial group. Large French companies (e.g., Paribas, Suez, Lyonnaise des Eaux) and

foreign companies have invested in chains of clinics in search of profits (17).

Determining Capital Requirements

The entire French health care system (both public

and private health institutions) is subject to formal

health sector planning (15). In general, public hospitals are subject to the provision of public law

that governs public works and the placing of public work contracts. Commercial institutions must

operating according to private law, which allows

them to determine their own investment procedures within the limits of the law. Health care legislation in 1970, however, stipulated that repair

programs and projects relating to the creation, extension, or transformation of public and private

hospitals would be subject to authorization arrangements. Authorization is forthcoming only if

a scheme complies with the health map (carte sanitaire).

Health Maps

The foundation for health sector planning in

France is the health map. The health map forms

the reference point for public authorities in all decisions relating to the level of public and private

hospital construction of new buildings, additions

of hospital beds, or the acquisition of major medical equipment (15). It is based on a recognition

that the private sector must operate alongside the

public sector, as the latter is unable to meet all

public health care needs. The aim is to meet those

needs satisfactorily at the lowest cost by a rational

allocation of capital resources.

The health map, drawn up by the Ministry of

Health after consultation with regional and national health resources committees (12) was designed to meet three objectives: 1) to control the

rapid growth of the hospital sector, 2) to correct regional disparities, and 3) to coordinate public and

private sector development. To accomplish these

aims, the health map establishes the boundaries of

health sectors and regions. Each health sector is a

geographical area of about 30,000 to 40,000 inhabitants centered on a hospital with a certain
Chapter 4 Hospital Financing in France | 71

minimum level of technical facilities. There are

currently 21 regions divided into 284 health sectors. The health map also establishes the nature,

extent, and location of health facilities of national

importance or designed to serve several health regions. For each type of facility, the health map for

the particular sector or region concerned specifies

the buildings and major items of required equipment. Plans are detailed after an analysis of local

and regional needs. The health map also includes

an inventory of existing or authorized buildings

and a continuously updated record of major items

of medical equipment.

Each region draws up its health map in light of

directives issued by the Ministry of Health. The

work is then submitted for review to sector and regional hospital groups and the regional committee

for health and social resources. This is followed

by an examination of the health map at the federal

level. The Ministry then adopts the provisions of

each map after seeking the opinion of the national

committee for health and social resources.

This approach, it should be noted, is very broad

and general with indicators of need established for

major areas of activity (e.g., medicine, surgery,

obstetrics-gynecology, medium stays). It is not

based on epidemiological or population-based

data (2,4).

The Act of December 31, 1970, requires all

public and private institutions to secure authorization from the administrative authorities for new

buildings or extensions of existing ones with compulsory reference to the health map. (The map’s

indicators of beds per specialty represent ceilings

that may not be exceeded.) The Act also makes it

obligatory to obtain prior approval for conversions of hospital facilities, the merging of hospitals, or the installation of major medical equipment.

The prefect is responsible for issuing authorizations after consulting the Regional Health and Social Resources Committee, except in the case of

decisions of national importance; these are the responsibility of the Health Minister of the central

government after consultation with the National

Health and Social Resources Committee.

Reforms

The reforms initiated by the 1991 legislation

maintain the health map but substantially broaden

its scope with the addition of a new document: the

health organization scheme. Both the maps and

the schemes are to be drawn up on the basis of the

measurement of needs in the population and their

changes, with regard to demographic data and

technical progress in medicine, following a quantitative and qualitative analysis of existing care

provision.

In carrying out this task, the ministers responsible for health and social security (in the case of national and inter-regional maps and schemes) and

the regional prefects (in the case of their regional

and sub-regional equivalents) will be assisted by

health organization committees at national and regional levels. To reflect the need for assessment,

each regional health organization committee will

have a committee on regional medical assessments of hospitals.

The scope of health planning has been broadened by the health organization scheme to gradually break down the boundaries between inpatient

hospital care and outpatient ambulatory care and

to develop plans to rationally diffuse particularly

expensive or sensitive medical activities associated

with ambulatory care. The legislation is concerned with the type of care provided, not with the

physical structure of the buildings or the legal

context in which the care takes place. Alternatives

to hospitals are taken into account (particularly

ambulatory surgery) by establishing an equivalence between hospital beds and the number of

places providing alternatives to hospital care.

Under the new legislation, public hospitals are

also authorized to collaborate with public and private legal bodies, including those at the international level. In connection with these activities,

they may sign agreements and participate in interhospital syndicates and public and financial consortia. The creation of such consortia enables

health institutions to pool their operational or investment resources to undertake activities that

their individual resources would not allow. To
72 Hospital Financing in Seven Countries

achieve greater uniformity of the two hospital sectors, the new legislation also provides for all care

institutions and providers to be subject to the same

authorization arrangements. The overall aim is to

simplify and decentralize the administrative procedures for securing capital investment authorizations.

The reforms also introduce a hospital plan

which sets out (particularly in the context of the

medical plan) each institution’s objectives with

regard to medical and nursing atmospheres, social

policy, training, management, and information

systems. The plan, which must be compatible

with the objectives of the health organization

scheme, identifies all the resources in terms of

buildings, staff, and equipment that the hospital

requires to achieve its objectives. It is developed

for a period of up to five years (5).

Traditional Public Hospital Investments (16)

In any major hospital and even those of average

size, new buildings and expansion of existing facilities form part of an overall medium-term (10-

to 15-year) program. Three types of projects may

be identified: 1) those of national significance, for

which the ministry is responsible; 2) capital projects that are unique to a region and for which the

regional prefect is responsible; and 3) capital projects that are the responsibility of the district prefect, who gives approval in view of the overall resources allocated to each district.

Because most investments are carried out with

state assistance, investment priorities are spelled

out in the national economic and social development plans, which effectively determine the allocation of financial resources set aside for the different sectors of public investment. Receipt of

state subsidies for new capital investment is contingent on the proposed investments’ inclusion in

the plan.

Any building and major medical equipment investment project must pass through several stages

(e.g., purchase of a site, initial preliminary design,

final proposal) each of which must be approved by

the hospital board after they have been considered

by the hospital’s medical staff committee and the

joint technical committee. Each stage is subject to

final approval by the supervisory authority.

The financial appraisal of the project is accompanied by a financing scheme. The financing

rules are as follows:

When state funding is provided, it is always

equal to 40 percent of the capital expenditure

qualifying for subsidy.

Local authorities may also contribute to this assistance, bringing the rate of subsidy above 40

percent.

The balance is met by the hospital from its own

resources, by loans from the Caisse des Depots

et Consignations or the Caisse ‘Aide a l’Equip -

ment des Collectives Locales. In the case of investments that do not receive state funding, the

proportion of the cost met from borrowing may

not exceed 60 percent.

The different categories of equipment and materials subject to approval are care units equipment, ancillary care and technical medical equipment, and equipment for general services.

In 1974 a national center for hospital equipment (CNEH) was established that reports to the

Ministry of Health. It has responsibility for considering problems associated with the functioning

of hospitals. The rules governing the financing of

the provision of medical equipment are the same

as those relating to the building process.

Under the new legislation the supervisory authority will monitor only the legality of contracts

entered into by hospital directors. Such contracts

will come into force as soon as they are received

by the prefect’s office.

Private Hospital Investment

Once a private hospital decides to adopt new

technologies, provide new services, or expand its

hospital beds, it can acquire the necessary physical and staff resources and place them at their patient’s disposal, thus putting them to profitable

use more quickly than the public sector. Private

hospitals can also more quickly provide the resources required to meet an existing need. If an investment turns out to be profitable after the facili-
Chapter 4 Hospital Financing in France | 73

ties are in place, they can be adjusted to a certain

extent by the constant redeployment of resources

(particularly of staff), as there are few statutory

constraints. Private hospitals face no major impediments to increasing and modernizing their facilities as soon as a decision has been made (17).

❚ Capital Expenditures

Capital expenditures do not correspond to a single

year’s costs and may figure into the calculation of

more than just one year’s global allocation and

charges. In 1988, capital expenditures of public

hospitals equaled F19.3 billion, or 12.2 percent of

aggregate hospital expenditures. This represents a

more than threefold increase over 1975. (Expenditures for different capital investments are given in

table 4-6.) Since 1975 the structure of direct investment expenditure has changed, with the proportion funding real estate investments (e.g.,

construction of new hospital wings) falling from

78.2 percent in 1975 to 57.5 percent in 1988.

There has been an equivalent rise in investment in

other capital assets.

Total investment income in 1988 was F20.9

billion (shown by funding source in table 4-6).

This amount represents a corresponding threefold

increase in investment income over 1975. Over

the last decade, the proportion of capital expenditures paid for from internal funds has tended to increase, while the proportion met by grants, and especially by loans, has declined (table 4-6) (13).

FUTURE DIRECTIONS

The containment of health expenditures is a major

concern in France. The costs of hospital care represent half of national health expenditures, making the hospital sector a primary target of France’s

cost containment efforts. The hospital sector has

always expanded without much control, and its

evolution has been marked by the constant need

for an urgent response to perpetually growing demand. The urgent nature of hospital care has often

taken precedence over economic rules of efficiency and better management. Prior to 1971, hospitals would present their bills to the sickness insurance funds after having satisfactorily treated

patients. The funds would not hesitate to pay their

share of expenses, and little attention was given to

detailed analyses of hospital bills. Only in the

1970s did national economic conditions demand

closer scrutiny of the economics of hospital care.

By the end of the 1970s, containment of hospital

costs had become a high-priority issue and the primary goal of all reforms aimed at reducing health

expenditures since then.

Understandably, it is the public hospital sector

that has been most influenced by cost-containment reforms. In 1983, prospective budgeting became the standard in this sector. Its purpose was to

control spending by imposing guideline growth

rates for hospital spending. However, the determination of budgets across hospitals takes no consideration of changes in activity or volume of services demanded from individual hospitals but

merely applies a predetermined increase rate (the

federal guideline rate) to the previous year’s budget. Budgets are based on historical levels of expenditure, and rates of increase are determined centrally, with little scope for local deviation (11).

The medical program information system

(PMSI) was created to achieve a financing system

more reflective of an individual hospital’s activity

and to encourage continuous evaluation. This program systematically produces a standardized discharge form at the completion of each patient’s

hospital stay and enters the form’s data into a patient database. The system allows for detailed

analysis of hospital activity to enable comparisons of patient volume among departments or hospitals and to detect morbidity trends. The PMSI

was implemented as an initial move toward developing a DRG-type system of homogeneous patient groups and incorporating this classification

system into the hospital financing scheme. Implementation of the PMSI is proving to be complex

and involved, however, and the full achievement

of a DRG-based system in France remains a longterm objective.

A large gap still exists between the public and

private hospital sectors in France. The allocation

of funds to each sector is based on different mechanisms, and despite the sickness insurance funds’

increasing control over the private sector, cost
74 | Hospital Financing in Seven Countries

containment efforts for this sector have not been

very successful. A serious shortcoming of the

present financing scheme is that private institutions have an incentive to increase the number of

medical procedures to compensate for rigidly imposed fees and daily rates.

The 1991 health reform legislation in France is

designed to extend government control over the

private sector and to narrow the gap between the

public and private sectors. The legislation redefines hospitals according to general guidelines,

thus providing the private sector with the same

“public interest” mission as the public sector. The

reform also emphasizes the complementary role

of the public and private sectors. Private hospitals

are not yet paid through a global allocation

scheme, but growth in expenditures for private

hospital services are capped under the reforms.

Additionally, the PMSI is planned to be extended

to the private sector, and current experimentation

with a DRG-type system is in place for some special services. Now that the philosophy underlying

the DRG system is being tested in the public hospital sector, a relatively smoother implementation

of the DRG system in the private sector is likely.

Implementation of the necessary structural arrangements to achieve the objectives of recent reforms will be a long-term task. Both private and

public hospitals face new obligations, including

maintaining medical records that are readily available for consultation by the patient or the patient’s

physician, evaluating professional practice, reorganizing health care, analyzing service activity,

and implementing information systems that document different conditions and modes of care and

treatment (5).

REFERENCES

1. Centre d’Etudes des Coûts et des Revenus

(CERC), “L’Hospitalisation en France, 3ème

partie,” Hospitalisation Nouvelle, No. 137,

Février 1985.

2. Centre de Recherche d’Etude et de Documentation en Economie de la Santé (CREDES),

Programme Eco-Santé, 1990 and 1991.

3. Clément, J.M., Memento de Droit Hospitalier, 3e édition (Paris: Berger-Levrault, 1992).

4. Coudurier, P., Dotation Globale et Prix de

Journeé (Paris: Berger-Levrault, 1988).

5. Couty, E., Hôpitaux et Cliniques: Les Réformes Hospitalières (Paris: Berger-Levrault,

1993).

6. Documents Statistiques, “Les Etablissements

d’Hospitalisation Privée en 1989,” Enquête

EHP 1989, SESI no. 121, Juillet 1991.

7. Documents Statistiques, “Les Hôpitaux Publics en 1990, Résultats H80,” SESI no. 154,

Septembre 1992.

8. Dusart, E., Le Budget Global à l’Hôpital (Paris: Editions ESF, 1987).

9. “Investissement Hospitalier,” Informations

Hospitalières No. 30- 31, Avril-Mai 1991.

10. Ministère de l’Economie des Finances et du

Budget, Direction de la Comptabilité Publique, Les Finances du Secteur Public Local,

Hôpitaux Publics 1983-1988.

11. Organisation for Economic Cooperation and

Development, The Reform of Health Care: A

Comparative Analysis of Seven OECD Countries (Paris: OECD, 1992).

12. Peigné, F., Notre Système Hospitalier et Son

Avenir, ENSP éditeur, 1991.

13. Pizzo-Ferrato, C., “L’Évolution des Investissements Hospitaliers,” Gestions Hospitalières 307, Juin-Juillet 1991.

14. Poindron, P.Y., “Qu’est-ce qui fait courir les

investisseurs?,” Espace Social Européen

10-26:20-24, 1990.

15. Reinhardt, U.E., “Financing the Hospital:

The Experience Abroad,” contractor report

prepared for the Office of the Assistant Secretary for Planning and Evaluation, Department

of Health and Human Services, Washington,

DC, July, 1984.

16. Tordeux, “Législation Hospitalère, tomes 1 et

2,” Rennes, ENSP, Juillet 1986.

17. Toullalan, M., “Analyse Comparative des

Modalités de Fonctionnement des Établissements Sanitaires Publics et Privés à but Lucratif,” Revue Hospitalière de France

3:328-351, Mai-Juin 1991.
Hospital

Financing

in France

by Marie-José Sourty-Le Guellec

he French health care system is arguably the most complicated of the European (and Canadian) systems described

in this report. Its system includes universal, compulsory

social insurance, significant patient cost-sharing, and supplementary insurance on the financing side, and public providers

combined with a sizable number of private providers on the supply side. Overlaying both the public and private sectors are strong

governmental controls at all levels of government (11).

Almost the entire population (99 percent) is covered by the

statutory health insurance scheme, which is part of France’s social security system. Statutory health insurance expenditures account for over 70 percent of national health expenditures in

France. The scheme is administered by social security sickness

funds (Assurance Maladie de la Sécurité Sociale). A person’s occupation generally determines membership in a particular fund.

There is one large fund for salaried workers (CNAMTS), which

accounts for nearly 80 percent of the compulsorily insured and

about 15 smaller funds cover other workers. The government provides insurance for low income people. Contributions for sickness fund insurance are income-related and shared by employers

and employees or paid directly to the relevant fund by nonsalaried

or self-employed individuals (11).

Social insurance provides both cash benefits (e.g., sick pay)

and benefits in kind (e.g., ambulatory care, hospital care). Depending on the patient’s financial circumstances, the patient may

be required to pay coinsurance or copayment amounts; for

instance, patients may have to pay 20 percent of the cost of hospital services (the ticket modérateur) and a daily flat rate contribu-

| 55
56 Hospital Financing in Seven Countries

tion that is currently 50 francs.1 Employers sometimes provide supplementary insurance for their

employees through mutual fund organizations

(mutuelles) to cover patient cost-sharing amounts

and a few benefits not covered by the social insurance scheme. Individuals may also purchase private supplementary insurance. Mutuelles and private insurance payments account for about 8

percent of national health expenditures.

France’s sickness funds are quasi-autonomous,

non-governmental organizations; there are national, regional, and local organizations of these

funds. They are subject to national and local management by employer associations and trade

unions. They are also closely regulated by the central government; in particular, contribution rates,

fee schedules, and pharmaceutical prices are controlled by the central government (11).

Patients can consult any medical practitioner

for primary care, and can choose to go to either a

public or private hospital. Money follows the patient in the case of private hospitals, but public

hospitals are subject to prospectively fixed budgets. Compared with the other European countries

in this study and Canada, French patients have relatively large cost-sharing requirements. Patient

out-of-pocket payments currently account for

about 17 percent of national health expenditures;

however, cost-sharing for hospital services is fairly small with only about 4 percent of hospital expenditures financed directly by patients (1 1).

Similar to many other countries, the containment of health expenditures is a major concern in

France. Hospital care represents half of national

health expenditures, making the hospital sector a

primary target of France’s cost-containment efforts. Recent reforms have concentrated on effectively controlling sickness fund insurance payments to private hospitals by extending

governmental regulation over that sector, and by

creating a new balance between the private and

public sectors to harmonize their development

within an overall program designed to control

health spending. Also similar to many other countries, France’s health reforms are moving in the

direction of making individual hospital budgets

based more on each hospital’s level of activity and

less on historical costs.

STRUCTURE OF THE HOSPITAL SECTOR

France has a mixture of public, private nonprofit,

and private for-profit hospitals. Public hospitals

tend to be large and well equipped; private hospitals tend to be smaller and to specialize in elective

surgery, obstetrics, or long-term care. In 1990

there were 1,072 public institutions; they constituted only 28 percent of all French hospitals, but

provided almost two-thirds of total hospital beds,

hospital days, and inpatient admissions (tables

4-1 and 4-2). By law, a public institution is a corporate body governed by public law and is responsible for providing a specific public service. Public institutions have full legal status, their own

assets and resources, and full legal autonomy.

They are, however, subject to various forms of

public supervision and financial control. Public

hospitals cannot waive their obligations, defined

in the Act of December 31, 1970, to:

■

■

■

provide diagnosis, treatment, and (in particular) emergency care to their patients and those

referred to them, including necessary inpatient

care;

contribute to the training of medical and paramedical (nonmedical) staff; and

participate in medical and pharmaceutical research and health education.

In 1989 the private hospital sector included

2,721 institutions, constituting 72 percent of all

hospitals but accounting for only one-third of the

total hospital beds, patient days, and inpatient admissions in France in that year (tables 4-1 and

4-2). The private sector is divided into a private

for-profit or commercial sector with 1,515 institu1The exchange rate in January 1994 was approximately $USO.17 to F1 .00.
Chapter 4 Hospital Financing in France I 57

Category of hospital Percent of total hospitals Percent of beds

Public 28 65

Nonprofit, PSPH 12 11

Private nonprofit, non-PSPH 19 5

Private for-c) refit 40 19

a Data for public hospitals are for 1990; data for private hospitals are for 1989.

SOURCES: Documents Statistiques, “Les Etablissements d’Hospitalisation Privee en 1989,” Enquete EHP 1989, SESI no. 121,

Juillet 1991, Documents Statistiques, “Les Hopitaux Publics en 1990, Resuitats H80, ” SESI no. 154, Septembre 1992

tions and a private nonprofit sector with 1,206

institutions. For-profit hospitals are privately

funded and subject to the rules of commercial and

civil law. Private nonprofit hospitals are run by

voluntary organizations, religious orders, employee representatives, mutual fund associations,

and social security funds. They are similar to public institutions in that they do not attempt to maximize profits, and their surplus revenues are invested to further their health care objectives.

Private institutions are managed by individuals

or a legal entity. They make many of their own

management and investment decisions, and their

services are governed mainly by market forces, although they are subject to certain government

constraints. Fees charged by private institutions

are controlled and subject to formal agreements.

Increases in the number of beds and high-cost

equipment are controlled by the health map (carte

sanitaire), described later, and require formal auPublic PSPH Public and PSPH

Hospital days Hospital days Hospital days

Beds (in 1,000s) Beds (in 1,000s) Beds (in 1,000s)

Medicine 105,393 29,243 13,879 3,918 119,272 33,161

Surgery 61,282 14,827 8,986 2,315 70,268 17,142

Obstetrics/gynecology 17,337 4,101 1,393 356 18,730 4,458

Medium-stay 42,127 11,943 19,921 5,386 62,048 17,329

Long-stay 63,711 22,289 1,877 638 65,588 22,927

Psychiatry 68,600 18,669 12,733 3,921 81,333 22,590

Total 358,450 101,071 58,789 16,535 417,239 117,607

Private for-profit Private nonprofit Total private

Hospital days Hospital days Hospital days

Beds (in 1,000s) Beds (in 1,000s) Beds (in 1 ,000s)

Medicine 14,753 2,039 3,943 1,242 18,696 3,282

Surgery 50,820 17,123 4,675 1,484 55,495 18,607

Obstetrics/gynecology 10,083 3,084 882 254 10,965 3,338

Medium-stay 18,123 5,646 15,672 4,525 33,795 10,171

Long-stay 436 140 2,037 722 2,473 862

Psychiatry 13,405 4$767 1,960 637 15,365 5,404

Total 107,620 32,800 29,169 8,865 136,789 41,664

a Data for public hospitals are for 1990; data for private hospitals are for 1989.

SOURCES: Documents Statistiques, “Les Etablissements d’Hospitalisation Privee en 1989, ” Enquete EHP 1989, SESI no 121, Juillet 1991, Documents Statistiques, “Les Hopitaux Publics en 1990, Resultats H80, ” SESI no. 154, Septembre 1992.
58 Hospital Financing in Seven Countries

theorization. Additionally, the medical activities of

private hospitals are supervised by the sickness insurance funds’ medical officers.

Private institutions are allowed to participate in

the public sector, although to date only some of

France’s private nonprofit hospitals (467 in 1988)

have asked to be incorporated into the public hospital service. These hospitals, called PSPH hospitals, are governed by rules similar to those for public hospitals. There are thus two general categories

of hospitals in France: public and PSPH hospitals,

and private institutions that do not participate in

the public hospital sector.

Financing methods and operating arrangements vary greatly between the public and private

hospital sectors. Public and PSPH hospitals are

governed by the principles of public accounting,

whereas private for-profit hospitals are commercial undertakings that attempt to maximize their

surplus revenues. Reform legislation passed in

July 1991 and currently being implemented is designed to create a new balance between the private

and public sectors and to harmonize their development within an overall program to control health

expenditures. The reforms formally recognize

that public and private hospitals perform the same

basic functions. In the future, the two categories of

hospitals will share equal responsibility for ensuring public health through common provisions that

affect all types of hospitals. Furthermore, the reforms seek to strengthen and encourage cooperation between public and private hospitals (5).

At present, a statutorily insured patient in

France can go to either a public or private hospital,

although in practice the decision is usually made

by the patient’s physician. When the choice is a

personal one, it tends to reflect the hospital’s geographical proximity, its reputation, or other personal preferences. Under the 1991 reforms, patients’ freedom to choose a physician or hospital

became an even more integral part of the health

care system in France than it was under previous

health care legislation.

Many hospitals in France have short-, medium-, and long-stay beds as well as psychiatric

beds. It is difficult, if not impossible, to determine

the proportion of hospital care in France that is devoted to short-term acute care treatment; therefore, this chapter deals with the French hospital

sector as a whole. Purely residential institutions,

such as nursing homes, are excluded from data

cited herein, however.

PHYSICIANS

In public and PSPH hospitals, the medical staff includes residents or interns, who are physicians in

training, and hospital practitioners, who are fulltime or part-time with a salaried established post

(titulaire) or a salaried, nonestablished post (nontitulaire). Table 4-3 provides a breakdown of hospital physicians in private and public hospitals in

1989 and 1990. The central government controls

the growth of salaries and the number of hospital

staff in public hospitals.

Public PSPH Private for-profit Private nonprofit Total

Salaried practitioners Full-time

Part-time

Nonsalaried practitioners Full-time

Part-time

Occasional

Salaried residents Full-time

Part-time

Nonsalaried residents Full-time

Part-time

27,913 2,614

39,962 4,250

32

762

590

22,019 1,655

233

22

596

851

8,883

22,151

12,976

248

328

15

164

525

2,047

495

1,912

1,496

236

90

11

8

31,675

47,110

9,410

24,825

15,062

24,158

651

48

172

a Data for public hospitals are for 1990; data for private hospitals are for 1989.

SOURCES: Documents Statistiques, “Les Etablissements d’Hospitalisation Privee en 1989,” Enquete EHP 1989, SESI no. 121, Juillet 1991; Documents Statistiques, “Les Hopitaux Publics en 1990, Resultats H80,” SESI no. 154, Septembre 1992.
Chapter 4 Hospital Financing in France | 59

In certain circumstances hospital physicians

are authorized to treat private patients in public

hospitals through consultations or the use of public service beds for private patients. In such cases

the physician receives a fee from the patient,

which may be reimbursed by the patient’s insurance company. Income from private fees may not

exceed 30 percent of a physician’s total income

and the number of beds that can be used for private

patients may not exceed 8 percent of all public service beds.

Public hospital physicians often confer with office-based private practice physicians (médecins

libérals). Whether or not payment for the consultation is included in the hospital’s global allocation of funds (discussed further below) depends on the regularity of the consults. Any

physician in an office-based practice may be consulted on an occasional basis by a hospital physician. Payment is rendered according to the service

or consultation performed and falls outside the

hospital’s global allocation. Hospitals regularly

call on some physicians in private practice (called

affiliated practice physicians) who are paid a fee

per service provided. These fees are included in

the hospital global allocation.

There are no salaried physicians in rural hospitals and any private physician may consult there

subject to authorization. In these cases the physician may ask patients who are not covered by sickness funds to pay an agreed-upon fee. For patients

with sickness fund coverage, the physician may

claim 85 percent of the local daily charge per day;

for patients qualifying for social assistance, the

physician is paid 50 percent of the departmental

medical assistance charge. In these two cases the

hospital retains 10 percent of fees received.

In certain circumstances nonsalaried physicians operate clinics in public institutions. They

are paid on a fee-for-service basis; the level of fees

is agreed upon directly with the patient. Physicians pay 10 percent of their fee income to the hospital, which uses the proceeds for improving their

stock of medical equipment.

Thus, in public or PSPH hospitals, most payments to medical staff are included in the operating section of the budget and are taken into account in determining the hospital’s global

allocation. Exceptions to this are fees paid to physicians practicing in rural hospitals and in hospital

clinics, and fees received by hospital physicians as

part of their private practice.

In private for-profit hospitals, physicians are

nearly always paid on a fee-for-service basis and

patients are reimbursed by their insurance companies. Nevertheless, an increasing number of private institutions are taking the opportunity to invest in staff (particularly medical staff) by offering

the best-trained personnel attractive remuneration

packages, particularly in comparison with what

the public sector can offer. Physicians’ fees in private hospitals are set according to a national fee

schedule, but their incomes, other staff incomes,

and the number of staff hired are not regulated by

government.

HOSPITAL OPERATING COSTS

❚ Financing Model

There are two distinct methods of financing hospital operating costs in France. Public and PSPH

hospitals are paid largely through a prospectively

fixed budget. Private non-PSPH institutions are

paid a daily (per diem) rate for their services; inpatient physician and ancillary services are paid for

on a fee-for-service basis.

Public Hospitals

Since 1984-85, public and PSPH hospitals have

been subject to a global allocation scheme established by the prefect of the district in which they

are located and determined within the framework

of federal guidelines. The global allocation

scheme replaced a system of controlled rates of increase in per diem prices for public and PSPH hospitals (11). Under the new scheme each hospital

receives an annual global allocation to cover the

portion of its costs that is paid for by the sickness

funds. Hospitals also charge daily rates (tarifs

journaliers de présentations) to cover that part of

a hospital stay not provided for in the global allocation. Daily charges are established for several

purposes. Federal and local governments pay a

daily charge for patients on social assistance. The
60 Hospital Financing in Seven Countries

daily charge is also used to determine patient costsharing amounts for patient copayments (ticket

moderateur) and daily flat-rate payments (paid either by the patient or by a supplementary insurance company), and it constitutes the charge for

patients who have no insurance coverage.

Hospital Budgets

The hospital budget sets forth estimated expenditures and revenues for the coming year. This budget, like that of any public administrative institution, must conform to certain public accounting

principles. It has two sections, as described below:

The operating section deals with current activities, including the day-to-day running of the

hospital and financial management.

The investment section deals with operations

leading to an increase in durable capital assets

requiring depreciation (other than stocks), such

as permanent capital, real estate and tangible

property, stocks and securities, deposits and

sureties, and physical supplies.

Expenditures that require authorizations for the

operating section of the budget are divided into

three groups:

1.

2.

3.

is

1.

2.

3.

4.

5.

6.

7.

expenditures relating to the external purchase

of goods and services,

staff or personnel-related expenditures, and

all other types of expenditures.

A public or PSPH hospital’s operating revenue

derived from the following sources:

the global allocation described below;

income from services (e.g., via daily rate

charges or fees);

grants, donations, and legacies to be used for

operating purposes;

other surplus income unrelated to operational

activities;

income from reserves;

the value of liabilities reduced by expire or

lapse; and

the value of any repairs undertaken or surplus

produced by the institution itself (e.g., pharmaceutical products made by the hospital’s laboratory).

Appended Budgets

Current expenditures on certain activities and services (e.g., blood transfusion centers, mobile

emergency services, data processing centers)

must be included in appended budgets. Operating

costs are funded from both general and appended

budgets.

Authorized expenditures for the coming year

must take into consideration the average rate-ofincrease guidelines established by the central government’s ministries of the economy, budget,

health, and social security. The average rate of increase for hospital expenditures is based on general economic trends—in particular, forecasted

changes in prices and wages—and on national

health and social policies. The guideline rate was

4.2 percent in 1990.

Determination of the Global Allocation

Although a hospital receives a small amount of

revenues in addition to the global allocation and

daily charges, these two elements are essential to

a hospital’s ability to provide services. The global

allocation is designed to provide enough funds to

cover that part of the hospital’s expenses that will

be paid for by the sickness insurance funds. It represents the difference between total operating

costs as set forth in the authorized general and appended budgets and expected hospital revenues

other than the global allocation itself, so as to ensure that the hospital’s budget will be balanced after taking into account surpluses or deficits from

previous years. Annual increases in a hospital’s

global allocation are based on the federal guideline rate of increase and the hospital’s forecasted

level of activity.

Patient copayment and daily flat-rate contributions, repayments by mutual fund associations

and private insurance companies for their members’ expenses, and payments for patients covered

by medical or social assistance are not included in

the global allocation; they are billed according to

the daily service charges established for individual patients.

The global allocation covers costs relating to

inpatient care, day and night care in the hospital,
Chapter 4 Hospital Financing in France | 61

outpatient care,2 psychiatric care, legal abortions,

mobile emergency care units, and long-term care

institutions for the elderly.

Determination of Daily Charges

The partial nature of the global allocation makes

it necessary to establish a system of charges (tariffs) to recover expenses not paid for through the

global allocation. Daily service charges determine

the amounts to be paid by federal or local governments, patients, or any organization providing

supplementary coverage. Daily service charges

are calculated for different types of services by dividing the estimated total costs of each type of service by the estimated number of patient days for

each type, after adjusting costs for offsetting receipts and for any previous year’s surplus or deficit that has been carried forward.3

Service charges are calculated for inpatient care

(including specialist and nonspecialist services,

services relating to expensive specialties, and medium- and long-term services), day and night care,

and home care services. There are also three possible short-term charges for medicine, surgery,

and expensive specialties. Because individual

hospitals have different budget levels and estimated numbers of patient days for various types of

services, daily service charges vary by hospital. In

contrast, flat-rate charges for outpatient care and

for legal abortions apply uniformly throughout

France. Box 4-1 describes the different parties involved in hospital management and supervision,

and offers more details on the determination of

global allocations and daily rates.

Budget Adjustments

Except in the case of a budget revision, the global

allocation is paid on the basis of the amount initially provided for, regardless of the hospital’s actual level of activity. If the number of patient days

is lower than estimated, the hospital’s income (insofar as it relates to its global allocation) remains

unaltered.

If a hospital can show that there has been a significant and unforeseen change in its financial circumstances or medical activity leading to a substantial increase in the hospital’s costs during the

current year, changes to the budget (e.g., an increase in authorized revenues to meet higher-thananticipated expenses) may be approved. Additionally, in urgent cases the hospital’s director

may transfer appropriations between the first two

groups of authorized expenditures in the general

budget and the appended budgets during a financial year. These transfers may not, however, increase or reduce authorized expenditures within

these groups by more than 10 percent, reduce appropriations designed to cover unavoidable costs

(e.g., social security contributions or taxes), or

commit the institution to expenditures beyond the

current financial year.

End-of-year surpluses in the hospital’s administrative account resulting from more efficient

management (e.g., expenses are less than forecasted for the same or higher level of service delivery) are assigned to a compensation reserve account. Such reserves may be used to cover

subsequent years’ deficits or assigned to another

reserve account that can be used to finance operations or investments that do not increase operating

2Actually, only part of the cost of outpatient care is taken into account in calculating the global allocation. In particular, the allocation relating to this area covers the cost of supplying drugs for which the sickness insurance funds are statutorily responsible. It is estimated that on average, 50 percent of outpatient costs are covered by the global allocation. The remainder has to be covered by the patient through a copayment or

by a third-party payer other than the patient’s sickness fund.

3An excerpt from the decree of Aug. 11, 1983, section 32, states specifically that “[t]he estimated cost price shall be equal to total operating

expenditures, comprising:

a) direct costs, that is the costs of services belonging to a particular category of charges, excluding the cost of medical treatment, goods

and other medical services;

b) the cost of medical treatment, goods and services on the basis of their purchase price or, failing that, of their cost price;

c) other costs included in the operating section of the general budget which are not covered by their own resources, divided among the

different categories of charges in proportion to the estimated number of days for each category;

d) where appropriate, that part of the previous financial year’s deficit which has been carried forward.”
62 Hospital Financing in Seven Countries

Hospitals are managed by a board made up of locally elected representatives (of which the mayor of

the municipality concerned is the chairperson), representatives of the social security system, representatives of the hospital’s medical and nonmedical staff, and a director who is responsible for implementing the policies developed by the board and approved by representatives of the State. The board’s

director also authorizes expenditures and issues revenue orders, appoints nonmedical staff, and is the

hospital’s legal representative.

The supervisory role exercised by public authorities in the budget-making process places strict limits on the degree of managerial autonomy enjoyed by public and affiliated hospitals. Administrative supervision of public and PSPH hospitals operates at every level:

■ at the national level through the Hospital Department of the Ministry of Health;

■ at the regional level through the prefect of the region (appointed by the government), assisted by the

regional Department for Health and Social Services (DRASS); and

■ at the district level through the prefect of the district (also appointed), assisted by the district Department for Health and Social Services (DDASS).

The social security system, which is the principal source of funds for hospitals, has no formal supervisory responsibilities but only the right of oversight. Its role has been strengthened over time, however.

Social security sickness funds have contributed to the development of hospital policy at the national

and local levels through representation on various associations and through their significant oversight

rights for financial and medical matters. Additionally, supervisory authorities must consult representatives of sickness funds when drawing up hospital budgets. Furthermore, at the request of the sickness

funds, hospital directors must submit quarterly expenditure commitment statements and provide information on staffing. The sickness funds also partially supervise medical decisions, which can mean

that a sickness fund would refuse to pay the cost of treatment or would modify the financial terms of a

hospital admission that it deemed unjustified or inappropriate. The sickness funds monitor all hospital

medical activities but (except with regard to nonpayment of services) exercise a passive form of supervision, as the funds’ concerns are not backed up by any sanctions (3).

Financial monitoring of hospitals is the responsibility of the district Department for Health and Social

Services; the social security funds, which receive the quarterly expenditure statements; and the hospital

accountant (an official of the public treasury service) who ensures that spending commitments comply

with relevant legislation and regulations and that the necessary appropriations have been made.

costs in subsequent years. Priority is given to fi- account. If the reserve is not sufficient, the deficit

nancing services that have contributed to the surplus. Surpluses that do not result from improved

management (e.g., if services are lower than forecasted levels or the surplus arises from daily

charges or outpatient care) are transferred to a

compensation reserve account to cover operating

costs in future years.

Any deficits in the administrative account are

covered by drawing on the compensation reserve

amount is figured into the budget of two years later or can be spread over the following two financial years by adding it to the hospital’s operating

costs.

Sickness Fund Payments

Each sickness insurance fund in a given hospital’s

catchment area pays the so-called pivot fund (or

main fund in the area) its share of the hospital’s
Chapter 4 Hospital Financing in France 163

The budgetary process is relatively long, reflecting the desires of various categories of hospital staff

to be involved in the hospital’s planning and the strict supervision exercised by external authorities. The

director or director-general of the hospital is responsible for preparing and submitting budget proposals, taking account of the previous and current years’ activities. Assisted by hospital departments, the

director determines the level of expenditure that is essential for the hospital’s operations. The draft

budget is then submitted to a joint consultative committee and a medical staff committee for comment.

Budget proposals are adopted by the hospital’s board (conseil d’administration), which must express a

formal opinion on the director’s figures. Budget proposals are then sent to administrative authorities and

the regional sickness insurance fund for salaried employees, where they are available for comment.

Hospital budgets, global allocations, and daily service charges are determined by administrative

supervisory authorities by January 1 of the relevant year. With the exception of the Paris hospital service

(responsibility for which devolves on the Minister of Health), the prefect of the district is responsible for

establishing global allocations for the district’s public hospitals. This responsibility also involves a critical response to hospitals’ budget proposals to ensure that each institution can meet its obligations. The

prefect is empowered to increase income and expenditure estimates for hospitals whose estimates it

considers too low and to remove or reduce items that it considers unnecessary or too high—taking account of local heath care needs and the federal guideline rate for average increases in hospital expenditures (4). Prefects’ decisions are made only after consultations with the social security funds. The

opinions of the social security funds and the medical supervisory bodies are recorded by the regional

sickness insurance fund.

The district prefect notifies the hospital, the regional sickness fund for salaried employees, and the

fund responsible for paying the global allocation (the “pivot” fund) or main sickness insurance fund in

the area) regarding the final determination of daily service charges and the global allocation, together

with the hospital’s approved budget.

The hospital’s director is the principal authorizing officer for the budget and maintains a formal record of expenditures. The director submits quarterly accounts (upon request) to the prefect. At the end

of each quarter, the director also submits a chart a to the prefect showing the current number of hospital staff.

global allocation.4 At the end of the financial year, locations must reach a unanimous decision on the

the national sickness insurance fund for salaried

employees draws up a statement of contributions

required from each fund based on the number of

days provided to the fund’s members (weighted

according to coefficients that account for the different daily costs of hospital care provided, which

are determined by a joint ministerial order). Before June 1 of the following budget year, a committee for the apportionment of hospital global alfinal contribution from each sickness fund, taking

into account the statement drawn up by the national sickness insurance fund (8).

Recent Reforms

Although the 1991 health reforms did not alter the

basic method of global allocations, major changes

to the budgetary process were introduced. Under

this legislation (whose implementing regulations

4 Under the 1991 reform legislation, the pivot sickness fund makes an initial payment of 60 percent of the global allocation to the hospital on

the twenty-fifth day of the month, then 15 percent on the fifth of the following month, and the balance on the fifteenth day of the following

month.
64 | Hospital Financing in Seven Countries

were unpublished as of this writing), the budgetary process will start earlier in the year, budget negotiations will be faster and more streamlined,

management will be more flexible, and the hospital board will have more autonomy particularly

with regard to day-to-day matters (e.g., staffing,

loans, internal organization), which will no longer

be subject to the district prefect’s prior approval.

There will be closer cooperation between the authorizing officer and the accounting officer. New

provisions will also be made for the investment of

and return on funds. Moreover, it will be possible

to revise a hospital’s global allocation in the

course of a financial year to reflect changes in the

current volume of services provided as long as it

is related to greater patient needs.

Another important innovation included in the

1991 reforms and currently being experimented

with in several hospitals is the determination of

charges based on the identification of homogeneous patient groups (groupes homogénes de malades), which are in turn based on U.S. diagnosisrelated groups (DRGs) (5).

Private Hospitals

Private for-profit and nonprofit institutions that

do not participate in the public hospital sector operate on a fee-for-service basis, although fees are

usually regulated by the central government’s

health ministry. An agreement between hospitals

and their regional sickness funds fixes the amount

of money that the funds will reimburse patients in

the coming year. Private hospitals accept a certain

number of service obligations (inpatient days and

hospital admissions) to sickness fund patients in

exchange for guaranteed reimbursement from the

funds. If a private hospital has a surplus when it

closes its accounts, it is free to distribute that surplus to shareholders or to reinvest the surplus

funds. If it has an operating loss, the social security fund does not become involved in any way to

cover the deficit.5

Daily Rates and Fees

Private hospitals’ payments are based on negotiated daily rates that comprise a charge for hoteltype services and nonmedical personnel services

(e.g., nurses, social workers, therapists), fees for

operating and delivery room services, pharmaceutical fees, and fees for physician services. Patients

usually pay physicians’ fees directly and are then

partially reimbursed by their sickness fund. In the

past physicians have been paid separately from the

hospital’s charges, but physician payment is increasingly being included in the same schedule as

the costs for a hospital stay. One advantage of

folding in physician payments is that all payments

made by the sickness fund for a patient’s hospital

stay are included in a single document that provides the fund with an overview of total hospital

costs.

Physicians’ services are reimbursed according

to a national fee schedule classified as K, Kc, B,

and Z (for diagnostic activities, surgery, biological analyses, and imaging, respectively). One K is

worth approximately 12 francs, and one Kc is

worth about 13 francs. Reimbursement for physician or surgeon services is supplemented by an operating or delivery room fee (FSO) paid to the hospital. The FSO varies according to region and

category of hospital and by levels of K.

Private hospital per diem rates for hotel-type

and non-medical staff services are based on a classification of the hospital’s specialty and quality

ranking. Since 1973 the classification system has

assigned points to an individual hospital for each

of the following five areas (in order of significance for rate setting):

1. medical services,

2. nonmedical staffing,

3. technical equipment,

4. hotel facilities, or

5. a combination thereof.

Depending on the total number of points obtained, a hospital is classified as A, B, C, D, or E,

5 The agreement setting forth the responsibilities of all the parties concerned was drawn up by the Ministry of Health between 1975 and 1978

and approved by the Ministry in 1978.
Chapter 4 Hospital Financing in France | 65

each of which has a particular set of rates per specialty. The classification is decided by the regional

prefect after consultation with a joint committee

that includes representatives of sickness funds and

health care providers.

A total of 800 points is required for category A

classification, which indicates consistently high

performance; rates fall as a hospital’s classification moves from category A to E. Hospitals and

clinics classified within each category have the

same level of rates wherever they are located in the

region. Hospitals have an incentive to invest in

technologies, equipment, and staff to improve

their ranking to receive higher per diem rates. The

process of ranking hospitals is fairly rapid, and a

hospital may even have its ranking changed retrospectively. For several years, per diem rates have

been regulated and subject to authorized annual

increases, expressed in either absolute amounts or

percentage terms.

Operating room fees are directly linked to a

hospital’s rate category. Similarly, the pharmaceutical fee, formerly based on actual costs, is now

becoming more uniform. Charges and fees are

thus subject to limits and linked to the number of

inpatient days delivered by the hospital. There are

also government controls on the number of admissions and on the number of authorized beds in private hospitals.

Despite these measures to limit private hospital

rates and the number of services, the total volume

of medical services provided by private hospitals

has not been brought under control. In response,

the regional sickness funds require private hospitals to supply information on their activities from

which averages and comparisons among hospitals

are made. Hospital profiles are also drawn up to

identify potential abuses. These profiles serve

only as indicators of service provision, however,

and are not used as instruments for setting limits

or preventing abuses.

As an additional monitoring tool, regular

checks of hospital practices are conducted to prevent bad practices. If any are identified, a preliminary letter is sent to the director of the hospital

asking for remedial action. If the problem is serious or has occurred before, the hospital’s manager

is required to make the hospital’s case before a

committee of administrators of the regional sickness funds. A warning or reprimand may be sent

or, after a complex review procedure, the hospital’s classification may be downgraded. The ultimate sanction (for which there must be serious

grounds) is abrogation of the sickness funds’

agreement; costs are no longer paid in advance,

and the daily charge is paid at three-quarters of the

previous level. Although not applied frequently,

these sanctions have had some effect (17).

Supervision

A group of sickness fund physicians supervises

agreements between private hospitals and sickness funds that pertain to private hospital staffing

levels, current pharmaceutical regulations, standards for operating rooms, and standards regarding the size of patient rooms. A compulsory annual statistical survey of private hospitals must also

be provided to regional sickness fund organizations, making it possible to identify any possible

problems in a range of areas. The standards and

adherence to them have a direct effect on charges

for services.

Health Reforms

Although the 1991 health reform act initially retains the principle of fees and rates for private hospital services, the legal framework and the financial basis of for-profit institutions have been

altered. The tripartite system, involving the state,

sickness funds, and hospitals, may gradually become the norm in the private sector as it has already been for some time in the public sector. The

state could become involved in contractual relations regarding the volume of services that have

hitherto been the concern only of hospitals and

sickness funds.

There are no plans at this time to introduce a

global allocation scheme for the private sector.

Instead, there is a global ceiling on private hospital expenditures by the sickness funds, subject to a

guideline rate of annual increase in this ceiling

agreed on between the state and the other two

traditional partners in the private hospital sector.
66 Hospital Financing in Seven Countries

Public and PSPH Private Total

Percentage of Percentage of

total public total private Percentage

and PSPH hospital of total

Million operating Million operating Million operating

Source francs expenses francs expenses francs expenses

Sickness insurance funds 179,778 90.0 52,886 83.4 232,664 88,5

Individuals and private insurance 13,116 6.6 7,848 12.4 20,964 8.0

Mutual fund associations 3,023 1.5 2,329 3.7 5,352 2.0

Federal or local authorities 3,508 1.8 342 0.5 3,850 1.5

Total expenses 199,425 63,405 262,830

SOURCE: Centre de Recherche d’Etude et de Documentation en Economic de la Sante (CREDES) Programme Eco-Sante, 1990 and 1991.

This ceiling is allocated among regions and by

month and may not be exceeded.

The 1991 legislation requires that private institutions analyze their activities, develop an assessment policy, and implement information systems

(similar to programmed medical des systemes

d’Information, or PMSI). It also makes the submission of annual forecasts of activity to the sickness funds a precondition for setting rates or for

concluding rate agreements. The implementation

of a cost accounting system and a medical information system were intended to lead to a DRGtype of charge system by the end of 1993. An experiment using this new approach was introduced

in obstetrics-gynecology units and in volunteer

institutions for other specialties beginning on July

1, 1992 (5).

❚ Sources of Funds

The social security sickness funds pay for the

lion’s share of hospital care in France; they funded

90 percent of public and PSPH hospital operating

expenses and over 83 percent of private hospital

operating costs in 1991 (table 4-4). Private insurance, mutual fund associations, and individual

out-of-pocket payments accounted for a fairly

small share of hospital costs ( 10 percent), even for

private hospitals (16.1 percent). These figures

reflect sickness fund patients’ freedom to choose

either a public or a private hospital, and private insurers’ and mutual fund associations’ minor roles

in the French health care system of mainly providing supplementary insurance.

The relatively small part that private hospitals

have in France’s system is reflected by their share

of total hospital expenditures. In 1991, threefourths of all hospital spending was for care provided in public and PSPH hospitals; the other

fourth was for private hospital care (table 4-4).

Federal and local authorities pay hospitalization costs for patients who receive state medical or

social assistance. These payments, financed

through general revenues, funded 1.5 percent of

hospital expenses in 1991 (table 4-4). (Foreign patients who are not residents of France must pay

their own hospital bills although there are international agreements between France and certain

countries allowing payments to be made through

official channels.)

❚ Allocation of Operating Funds

Public Hospitals

Public hospital operating costs were F139 billion

in 1988, representing 87.8 percent of aggregate

hospital expenditures (which includes capital expenditures) (table 4-5). The largest single item

(F90.1 billion, or 65 percent of operating costs)
Chapter 4 Hospital Financing in France 67

Million Percentage Million Percentage

Operating costs francs of total Operating revenues francs of total

Staff

Pharmaceuticals, medical

services

Hotel facilities

Repairs, maintenance

General management

Mortgages

Other

Total

90,140

12,792

8,473

3,753

3,490

2,737

17,451

138,836

64.9 Global allocation

9.2 Service charges

6.1 Daily flat rate contributions

2,7 Outpatient care

2.5 Donations, contributions

2.0 Sales of products

12,6 Other

Total

118,074 81.0

9,631 6.6

1,877 1.3

2,543 1.7

219 0.2

469 0.3

13,121 9.0

145,934

SOURCES: Ministere de l’Economie des Finances et du Budqet, Direction de la Comptabilite Publique, Les Finances du Secteur Public Local, Hopitaux Publics 1983-1988.

was for hospital staffing costs. (It is not possible

to distinguish between medical and nonmedical

personnel costs.) Expenses for pharmaceuticals

and medical services accounted for 9 percent of

hospital operating costs in 1988; hotel-type services made up 6.1 percent, repairs and maintenance 2.7 percent, and management and transport

2.5 percent (table 4-5).

Public hospital operating revenues were nearly

F146 billion in 1988, of which the global allocation represented 81 percent, total daily service

charges accounted for 6.6 percent, total daily flatrate contributions were 1.3 percent, and outpatient

care charges accounted for 1.7 percent of hospital

operating income (table 4-5) (10).

Private Hospitals

In contrast to public and PSPH hospitals, there are

no systematic statistics on the revenues or costs of

private institutions. A 1985 study by the Centre

d’Etudes des Couts et des Revenus (CERC) estimated the operating costs of private hospitals and

clinics in 1980 at F11.7 billion. Fifty-five percent

of this was spent on staff; 17.4 percent on purchases; 17.2 percent on repairs, supplies, and external services; 4 percent on depreciation and provisions; 2.3 percent and 6.4 percent on other costs

(l).

❚ Operating Expenditures

Total hospital operating expenditures (which include both operating and capital spending) were

F263 billion in 1991, equaling 3.9 percent of the

gross domestic product (GDP) and 40.7 percent of

national health expenditures (NHE). Hospitals’

share of NHE has fallen over the past decade,

which was 44.9 percent in 1980, but hospital expenditures as a share of GDP have increased, starting at 3.6 percent in 1980. These trends indicate

that health care spending in France has commanded a greater share of the country’s financial resources over the past decade, although the hospital

sector has contributed less to this trend than have

other sectors of France’s health care system.

Approximately three-fourths of aggregate hospital outlays went to public and PSPH hospitals in

1991—slightly less than in 1980, when the public

sector accounted for 78 percent of hospital spending (2).

HOSPITAL CAPITAL COSTS

Located as they are in a rapidly changing sector

that is strongly affected by technological progress,

and faced with growing patient demands for the

latest technology and more patient amenities, all

hospitals are increasingly sensitive to competition

and have strong incentives to invest. In contrast to
68 Hospital Financing in Seven Countries

the private sector, public and PSPH hospital investments are subject to certain financial

constraints, although they also benefit from special public assistance.

The private sector is facing increasing competition, and its level of required investment is becoming more and more onerous; thus hospitals in

this sector find it necessary to seek new investors.

Few figures are available on private sector hospital investment, and most of the information in this

section relates only to the capital investments of

public and PSPH hospitals. Where appropriate,

legislation concerning the investment process and

current trends are discussed.

❚ Relationship of Capital and Operating

costs

In 1988 the aggregate budget for French public

hospitals was approximately Fbillion158, which

represented the purchase of goods and services.

These costs may be either operating or investment

costs, as follows:

■

■

The operating section of the budget includes all

consumable goods and services that are shortterm; such expenditures relate to day-to-day

supplies and to upkeep and maintenance.

The investment section includes expenditures

that are intended either to maintain a capital

good beyond its budgeted life or to purchase

new capital (3).

The investment section regularly receives

transfers from the operating budget through provisions and depreciation accounts. Such accounts

represent the depreciation of assets with a view to

replacing them; depreciation is recorded as an income item in the investment section and as a cost

item in the operating section. Depreciation costs

are taken into account in determining the global

allocation and daily service charges.

Private for-profit hospitals and certain private

nonprofit institutions, even if they participate in

the public hospital service, are not entitled to direct reimbursement of depreciation costs because

the government is concerned about preventing the

accumulation of private wealth at the expense of

the sick. Such institutions may, however, receive a

remuneration equivalent to 3 percent of their capital (based on the nonamortized value of their assets, where necessary after revaluation). In addition, fixed assets in such institutions are almost

never the property of the hospital but are rented.

The depreciation of these assets is included in the

rent, which is an operating cost.

Hospitals that receive a global allocation are allowed to include interest payments on investment

loans as part of their operating costs. This option

does not extend to the repayment of loan principals, which are included in the investment section

of their budgets.

Another way in which operating and capital

costs are related in French public and PSPH hospitals is through the allocation of operating fund surpluses. Under certain circumstances (discussed

above), surpluses in the operating section can be

used to finance investments that are not expected

to increase operating costs in ensuing years.

Moreover, any surplus in the appended budget is

allocated to the purchase of equipment for hospitals (e.g., blood transfusion centers or computer

centers), to other hospital capital investment, or to

reduce operating costs in succeeding years.

The impact of capital costs on future operating

costs is determined informally. Some hospital

boards draw up program budgets as a means of improving quality of forecasting and planning, and

assisting management by highlighting the overall

impact of an activity in operational and investment terms. Activities examined may cover energy saving programs, computerization and major

equipment, or hospital buildings.

❚ Capital Financing ModeI

Investments in new construction, new major medical equipment, or replacement equipment in the

public sector can be financed by depreciation (applied to tangible assets such as hospital plant and

equipment) or amortization (applied to intangible

assets such as insurance policies). In the hospital

sector, however, this is inadequate due to the rate

of technological innovation, and other funding

sources are often required.
Chapter 4 Hospital Financing in France 169

Expenditures 1975 1986 1988 Percentage of 1988 total

Direct expenditures 3,722 8,842 13,456 69.9

Tangible assets 812 4,059 5,723 29.7

Real estate investments 169 434 3,171 16,5

Construction 2,741 4,349 4,562 23.7

Indirect expenditures 884 3,464 5,801 30.1

Total expenditures 4,606 12,306 19,257 100.0

Income 1975 1986 1988 Percentage of 1988 total

Subsidies, grants 985 1,707 1,583 7.6

Loans 2,533 3,521 4,545 21.8

Depreciation 1,513 6,989 7,702 36.9

Fixed assets 4,181 20.0

Other income 244 946 2,845 13.6

Total income 5,275 13,163 20,856 100.0

SOURCES: Ministere de l’Economie des Finances et du Budget, Direction de la Comptabilite Publique, Les Finances du Secteur Public Local, Hopitaux Publics 1983-1988.

Self-Financing

Hospitals obtain some of their funds from internal

sources, such as the sale of real estate and tangible

assets (a fairly unimportant source) and depreciation, which accounted for 37 percent of hospitals’ investment funds in 1988 (table 4-6). Since

the mid- 1980s, depreciation funds have increased

in importance because of trends in the structure of

investments and thus their patterns of depreciation. The decline in the acquisition of land and

buildings and of repairs with a long (often 30

years) depreciation period and the increase in tangible acquisitions with a short (around 5 years) depreciation life has significantly increased depreciation income and thus the level of self-financing.

Subsidies

Hospitals obtain a portion of their investment

funds from several external sources that may be

free or may incur a cost. State subsidies—which

normally vary between 5 and 40 percent of a hospital’s investment funds, depending on the institution’s capacity for self-financing-and subsidies

from local authorities are free. More than half the

subsidies received by hospitals come from the

state. Of local authority funding, the regions are

the most important source of assistance, followed

by the districts and municipalities (communes). In

1988, subsidies accounted for 7.6 percent of aggregate investment income (table 4-6).

Loans

The sickness funds have been authorized to make

interest-free loans to hospitals, which are required

to repay only the principal amount. For loans that

incur a cost, hospitals normally call on banks for

public authorities (Caisse des Depots et Consignations and the Caisse d’Aide a l’Equipement

des Collectivites Locales). Hospitals may also

borrow from other banks or even, with ministerial

approval, from the financial market (i.e., debenture loans). Such loans represented 21.8 percent of

aggregate investment income in 1988 (table 4-6)

(3).

Today, state subsidies and sickness insurance

fund loans play less of a role in hospital investment financing than they have in the past. Hospitals’ own resources now constitute a key element

of their capital finances. They even appear to be

gaining in importance, given a slight trend toward
70 | Hospital Financing in Seven Countries

a reduced level of debt and a refocusing of investment; that is, investment now seems to be geared

toward the acquisition of biomedical equipment,

which in turn generates a higher level of depreciation. If sufficiently short periods of depreciation

are allowed, a high level of debt generates considerable resources for investment. In fact, hospitals

that have borrowed at high rates have not been

penalized at all; rather, they have benefited from a

budgetary bonus, as the financial costs associated

with a high level of depreciation form part of the

base from which the initial budget is calculated

(9).

Financing from loans is restricted to 60 percent

of the estimated cost of an investment. Institutions

are required to meet the other 40 percent of the

cost (as well as any associated additional operating costs) from their own financial resources. To

help cover such costs, hospitals sometimes receive an additional allocation over and above the

federal guideline rate for updates to global allocations, although experience shows that this does

not occur often. Other internal sources include the

use of surpluses arising from improved management. In contrast to the private sector, such decisions are subject to the approval of supervisory authorities (17).

Private Hospitals

Private hospitals (often called clinics) are free to

use their profits for investment or to redistribute

them to shareholders. Private for-profit clinics

have traditionally been owned by physicians. It

has become increasingly difficult, however, for

clinics to finance investments in new major equipment from their own resources, which they need

to keep up with technological progress and the demands of competition (14). Clinics face a difficult

problem of finding outside investors mainly because in most cases there is no guarantee that the

investment will be profitable. In recent years this

“crisis” in the private sector has resulted in a transformation of the structure of such hospitals, which

are increasingly passing from the status of a family business to that of a limited company belonging

to a major financial group. Large French companies (e.g., Paribas, Suez, Lyonnaise des Eaux) and

foreign companies have invested in chains of clinics in search of profits (17).

Determining Capital Requirements

The entire French health care system (both public

and private health institutions) is subject to formal

health sector planning (15). In general, public hospitals are subject to the provision of public law

that governs public works and the placing of public work contracts. Commercial institutions must

operating according to private law, which allows

them to determine their own investment procedures within the limits of the law. Health care legislation in 1970, however, stipulated that repair

programs and projects relating to the creation, extension, or transformation of public and private

hospitals would be subject to authorization arrangements. Authorization is forthcoming only if

a scheme complies with the health map (carte sanitaire).

Health Maps

The foundation for health sector planning in

France is the health map. The health map forms

the reference point for public authorities in all decisions relating to the level of public and private

hospital construction of new buildings, additions

of hospital beds, or the acquisition of major medical equipment (15). It is based on a recognition

that the private sector must operate alongside the

public sector, as the latter is unable to meet all

public health care needs. The aim is to meet those

needs satisfactorily at the lowest cost by a rational

allocation of capital resources.

The health map, drawn up by the Ministry of

Health after consultation with regional and national health resources committees (12) was designed to meet three objectives: 1) to control the

rapid growth of the hospital sector, 2) to correct regional disparities, and 3) to coordinate public and

private sector development. To accomplish these

aims, the health map establishes the boundaries of

health sectors and regions. Each health sector is a

geographical area of about 30,000 to 40,000 inhabitants centered on a hospital with a certain
Chapter 4 Hospital Financing in France | 71

minimum level of technical facilities. There are

currently 21 regions divided into 284 health sectors. The health map also establishes the nature,

extent, and location of health facilities of national

importance or designed to serve several health regions. For each type of facility, the health map for

the particular sector or region concerned specifies

the buildings and major items of required equipment. Plans are detailed after an analysis of local

and regional needs. The health map also includes

an inventory of existing or authorized buildings

and a continuously updated record of major items

of medical equipment.

Each region draws up its health map in light of

directives issued by the Ministry of Health. The

work is then submitted for review to sector and regional hospital groups and the regional committee

for health and social resources. This is followed

by an examination of the health map at the federal

level. The Ministry then adopts the provisions of

each map after seeking the opinion of the national

committee for health and social resources.

This approach, it should be noted, is very broad

and general with indicators of need established for

major areas of activity (e.g., medicine, surgery,

obstetrics-gynecology, medium stays). It is not

based on epidemiological or population-based

data (2,4).

The Act of December 31, 1970, requires all

public and private institutions to secure authorization from the administrative authorities for new

buildings or extensions of existing ones with compulsory reference to the health map. (The map’s

indicators of beds per specialty represent ceilings

that may not be exceeded.) The Act also makes it

obligatory to obtain prior approval for conversions of hospital facilities, the merging of hospitals, or the installation of major medical equipment.

The prefect is responsible for issuing authorizations after consulting the Regional Health and Social Resources Committee, except in the case of

decisions of national importance; these are the responsibility of the Health Minister of the central

government after consultation with the National

Health and Social Resources Committee.

Reforms

The reforms initiated by the 1991 legislation

maintain the health map but substantially broaden

its scope with the addition of a new document: the

health organization scheme. Both the maps and

the schemes are to be drawn up on the basis of the

measurement of needs in the population and their

changes, with regard to demographic data and

technical progress in medicine, following a quantitative and qualitative analysis of existing care

provision.

In carrying out this task, the ministers responsible for health and social security (in the case of national and inter-regional maps and schemes) and

the regional prefects (in the case of their regional

and sub-regional equivalents) will be assisted by

health organization committees at national and regional levels. To reflect the need for assessment,

each regional health organization committee will

have a committee on regional medical assessments of hospitals.

The scope of health planning has been broadened by the health organization scheme to gradually break down the boundaries between inpatient

hospital care and outpatient ambulatory care and

to develop plans to rationally diffuse particularly

expensive or sensitive medical activities associated

with ambulatory care. The legislation is concerned with the type of care provided, not with the

physical structure of the buildings or the legal

context in which the care takes place. Alternatives

to hospitals are taken into account (particularly

ambulatory surgery) by establishing an equivalence between hospital beds and the number of

places providing alternatives to hospital care.

Under the new legislation, public hospitals are

also authorized to collaborate with public and private legal bodies, including those at the international level. In connection with these activities,

they may sign agreements and participate in interhospital syndicates and public and financial consortia. The creation of such consortia enables

health institutions to pool their operational or investment resources to undertake activities that

their individual resources would not allow. To
72 Hospital Financing in Seven Countries

achieve greater uniformity of the two hospital sectors, the new legislation also provides for all care

institutions and providers to be subject to the same

authorization arrangements. The overall aim is to

simplify and decentralize the administrative procedures for securing capital investment authorizations.

The reforms also introduce a hospital plan

which sets out (particularly in the context of the

medical plan) each institution’s objectives with

regard to medical and nursing atmospheres, social

policy, training, management, and information

systems. The plan, which must be compatible

with the objectives of the health organization

scheme, identifies all the resources in terms of

buildings, staff, and equipment that the hospital

requires to achieve its objectives. It is developed

for a period of up to five years (5).

Traditional Public Hospital Investments (16)

In any major hospital and even those of average

size, new buildings and expansion of existing facilities form part of an overall medium-term (10-

to 15-year) program. Three types of projects may

be identified: 1) those of national significance, for

which the ministry is responsible; 2) capital projects that are unique to a region and for which the

regional prefect is responsible; and 3) capital projects that are the responsibility of the district prefect, who gives approval in view of the overall resources allocated to each district.

Because most investments are carried out with

state assistance, investment priorities are spelled

out in the national economic and social development plans, which effectively determine the allocation of financial resources set aside for the different sectors of public investment. Receipt of

state subsidies for new capital investment is contingent on the proposed investments’ inclusion in

the plan.

Any building and major medical equipment investment project must pass through several stages

(e.g., purchase of a site, initial preliminary design,

final proposal) each of which must be approved by

the hospital board after they have been considered

by the hospital’s medical staff committee and the

joint technical committee. Each stage is subject to

final approval by the supervisory authority.

The financial appraisal of the project is accompanied by a financing scheme. The financing

rules are as follows:

When state funding is provided, it is always

equal to 40 percent of the capital expenditure

qualifying for subsidy.

Local authorities may also contribute to this assistance, bringing the rate of subsidy above 40

percent.

The balance is met by the hospital from its own

resources, by loans from the Caisse des Depots

et Consignations or the Caisse ‘Aide a l’Equip -

ment des Collectives Locales. In the case of investments that do not receive state funding, the

proportion of the cost met from borrowing may

not exceed 60 percent.

The different categories of equipment and materials subject to approval are care units equipment, ancillary care and technical medical equipment, and equipment for general services.

In 1974 a national center for hospital equipment (CNEH) was established that reports to the

Ministry of Health. It has responsibility for considering problems associated with the functioning

of hospitals. The rules governing the financing of

the provision of medical equipment are the same

as those relating to the building process.

Under the new legislation the supervisory authority will monitor only the legality of contracts

entered into by hospital directors. Such contracts

will come into force as soon as they are received

by the prefect’s office.

Private Hospital Investment

Once a private hospital decides to adopt new

technologies, provide new services, or expand its

hospital beds, it can acquire the necessary physical and staff resources and place them at their patient’s disposal, thus putting them to profitable

use more quickly than the public sector. Private

hospitals can also more quickly provide the resources required to meet an existing need. If an investment turns out to be profitable after the facili-
Chapter 4 Hospital Financing in France | 73

ties are in place, they can be adjusted to a certain

extent by the constant redeployment of resources

(particularly of staff), as there are few statutory

constraints. Private hospitals face no major impediments to increasing and modernizing their facilities as soon as a decision has been made (17).

❚ Capital Expenditures

Capital expenditures do not correspond to a single

year’s costs and may figure into the calculation of

more than just one year’s global allocation and

charges. In 1988, capital expenditures of public

hospitals equaled F19.3 billion, or 12.2 percent of

aggregate hospital expenditures. This represents a

more than threefold increase over 1975. (Expenditures for different capital investments are given in

table 4-6.) Since 1975 the structure of direct investment expenditure has changed, with the proportion funding real estate investments (e.g.,

construction of new hospital wings) falling from

78.2 percent in 1975 to 57.5 percent in 1988.

There has been an equivalent rise in investment in

other capital assets.

Total investment income in 1988 was F20.9

billion (shown by funding source in table 4-6).

This amount represents a corresponding threefold

increase in investment income over 1975. Over

the last decade, the proportion of capital expenditures paid for from internal funds has tended to increase, while the proportion met by grants, and especially by loans, has declined (table 4-6) (13).

FUTURE DIRECTIONS

The containment of health expenditures is a major

concern in France. The costs of hospital care represent half of national health expenditures, making the hospital sector a primary target of France’s

cost containment efforts. The hospital sector has

always expanded without much control, and its

evolution has been marked by the constant need

for an urgent response to perpetually growing demand. The urgent nature of hospital care has often

taken precedence over economic rules of efficiency and better management. Prior to 1971, hospitals would present their bills to the sickness insurance funds after having satisfactorily treated

patients. The funds would not hesitate to pay their

share of expenses, and little attention was given to

detailed analyses of hospital bills. Only in the

1970s did national economic conditions demand

closer scrutiny of the economics of hospital care.

By the end of the 1970s, containment of hospital

costs had become a high-priority issue and the primary goal of all reforms aimed at reducing health

expenditures since then.

Understandably, it is the public hospital sector

that has been most influenced by cost-containment reforms. In 1983, prospective budgeting became the standard in this sector. Its purpose was to

control spending by imposing guideline growth

rates for hospital spending. However, the determination of budgets across hospitals takes no consideration of changes in activity or volume of services demanded from individual hospitals but

merely applies a predetermined increase rate (the

federal guideline rate) to the previous year’s budget. Budgets are based on historical levels of expenditure, and rates of increase are determined centrally, with little scope for local deviation (11).

The medical program information system

(PMSI) was created to achieve a financing system

more reflective of an individual hospital’s activity

and to encourage continuous evaluation. This program systematically produces a standardized discharge form at the completion of each patient’s

hospital stay and enters the form’s data into a patient database. The system allows for detailed

analysis of hospital activity to enable comparisons of patient volume among departments or hospitals and to detect morbidity trends. The PMSI

was implemented as an initial move toward developing a DRG-type system of homogeneous patient groups and incorporating this classification

system into the hospital financing scheme. Implementation of the PMSI is proving to be complex

and involved, however, and the full achievement

of a DRG-based system in France remains a longterm objective.

A large gap still exists between the public and

private hospital sectors in France. The allocation

of funds to each sector is based on different mechanisms, and despite the sickness insurance funds’

increasing control over the private sector, cost
74 | Hospital Financing in Seven Countries

containment efforts for this sector have not been

very successful. A serious shortcoming of the

present financing scheme is that private institutions have an incentive to increase the number of

medical procedures to compensate for rigidly imposed fees and daily rates.

The 1991 health reform legislation in France is

designed to extend government control over the

private sector and to narrow the gap between the

public and private sectors. The legislation redefines hospitals according to general guidelines,

thus providing the private sector with the same

“public interest” mission as the public sector. The

reform also emphasizes the complementary role

of the public and private sectors. Private hospitals

are not yet paid through a global allocation

scheme, but growth in expenditures for private

hospital services are capped under the reforms.

Additionally, the PMSI is planned to be extended

to the private sector, and current experimentation

with a DRG-type system is in place for some special services. Now that the philosophy underlying

the DRG system is being tested in the public hospital sector, a relatively smoother implementation

of the DRG system in the private sector is likely.

Implementation of the necessary structural arrangements to achieve the objectives of recent reforms will be a long-term task. Both private and

public hospitals face new obligations, including

maintaining medical records that are readily available for consultation by the patient or the patient’s

physician, evaluating professional practice, reorganizing health care, analyzing service activity,

and implementing information systems that document different conditions and modes of care and

treatment (5).

REFERENCES

1. Centre d’Etudes des Coûts et des Revenus

(CERC), “L’Hospitalisation en France, 3ème

partie,” Hospitalisation Nouvelle, No. 137,

Février 1985.

2. Centre de Recherche d’Etude et de Documentation en Economie de la Santé (CREDES),

Programme Eco-Santé, 1990 and 1991.

3. Clément, J.M., Memento de Droit Hospitalier, 3e édition (Paris: Berger-Levrault, 1992).

4. Coudurier, P., Dotation Globale et Prix de

Journeé (Paris: Berger-Levrault, 1988).

5. Couty, E., Hôpitaux et Cliniques: Les Réformes Hospitalières (Paris: Berger-Levrault,

1993).

6. Documents Statistiques, “Les Etablissements

d’Hospitalisation Privée en 1989,” Enquête

EHP 1989, SESI no. 121, Juillet 1991.

7. Documents Statistiques, “Les Hôpitaux Publics en 1990, Résultats H80,” SESI no. 154,

Septembre 1992.

8. Dusart, E., Le Budget Global à l’Hôpital (Paris: Editions ESF, 1987).

9. “Investissement Hospitalier,” Informations

Hospitalières No. 30- 31, Avril-Mai 1991.

10. Ministère de l’Economie des Finances et du

Budget, Direction de la Comptabilité Publique, Les Finances du Secteur Public Local,

Hôpitaux Publics 1983-1988.

11. Organisation for Economic Cooperation and

Development, The Reform of Health Care: A

Comparative Analysis of Seven OECD Countries (Paris: OECD, 1992).

12. Peigné, F., Notre Système Hospitalier et Son

Avenir, ENSP éditeur, 1991.

13. Pizzo-Ferrato, C., “L’Évolution des Investissements Hospitaliers,” Gestions Hospitalières 307, Juin-Juillet 1991.

14. Poindron, P.Y., “Qu’est-ce qui fait courir les

investisseurs?,” Espace Social Européen

10-26:20-24, 1990.

15. Reinhardt, U.E., “Financing the Hospital:

The Experience Abroad,” contractor report

prepared for the Office of the Assistant Secretary for Planning and Evaluation, Department

of Health and Human Services, Washington,

DC, July, 1984.

16. Tordeux, “Législation Hospitalère, tomes 1 et

2,” Rennes, ENSP, Juillet 1986.

17. Toullalan, M., “Analyse Comparative des

Modalités de Fonctionnement des Établissements Sanitaires Publics et Privés à but Lucratif,” Revue Hospitalière de France

3:328-351, Mai-Juin 1991.
Hospital

Financing

in Germany

by Reiner Leidl

ermany has a federal political system and 16 states with

state-level governments. Like its political system, Germany’s health care system is strongly influenced by both

the federal and state governments. Germany has both private and public provision of health care. On the supply side, doctors and pharmacists are independent, private providers. Most

hospitals are not publicly owned, but more than half of all hospital

beds are in public hospitals. On the demand side, statutory health

insurance—compulsory for many employees—is organized by

associations (called sickness funds) under public law and covers

almost 90 percent of the population; private health insurance covers most of the rest.

The statutory sickness funds are primarily financed through income-related premiums. Premium stability requires that the

growth of health care expenditures not exceed the growth of employees’ incomes. Stability of income contributions has been

made a cornerstone of German health policy, which also applies

to the hospital sector.

Germany’s pluralism in health care is also marked by the influence of several interest groups. Sickness fund and provider organizations exist at different regional levels (including federal

associations). These interest groups play a prominent and welldefined role in regulating the provision and financing of health

care, subject to legal control by public authorities. An example of

a nonpublic regulatory entity is Concerted Action in Health Care

(Konzertierte Aktion im Gesundheitswesen), which includes all

the major parties involved in the provision of health care and

health insurance as well as representatives from labor unions, employers, and public authorities from the community to the federal

level. The group issues proposals for problems concerning health | 75
76 | Hospital Financing in Seven Countries

care organization, delivery, and financing, including guidelines for payment negotiations between

sickness funds and hospitals. Although Concerted

Action has not managed to keep health care costs

within the constraint of income growth through its

statements (which are not legally binding for the

negotiating parties), the group has functioned as

a forum for the exchange of ideas; it has thus

played a highly relevant role in the development

and discussion of reform proposals (9).

The roles of interest groups are quite different

in ambulatory and hospital care, which are distinctly separate sectors in Germany. In ambulatory

care, physicians who provide care to sickness fund

patients must belong to regional and federal

associations of office-based physicians, which negotiate payments with sickness funds and regulate

the entry of new physicians. In contrast, the regulation of the hospital sector relies much less on interest groups. Membership in hospital associations is voluntary, individual hospitals separately

negotiate their budgets with the regional sickness

funds, and market access of hospitals is determined almost exclusively by the state.

A 1972 federal framework law (Krankenhausfinanzierungsgesetz) addresses the basic regulation of hospital care, including the guidelines for

hospital planning and financing. This law is accompanied by federal acts that specify the technical aspects for financing hospital operating costs

(Bundespflegesatzverordnung) and accounting

(Krankenhausbuchführungsverordnung). The

1972 law sets out a two-tier system for financing

hospital capital and operating expenses:

1. Public authorities at the state level finance hospital buildings, beds, and medical equipment

and are responsible for hospital planning.

2. Operating costs are covered by patients and/or

their third-party insurers.

The two-tier system was established at a time

when hospitals faced tremendous problems with

financing their investment needs. This task was

thus shifted to the public budget. Despite the twotier system’s difficult design (i.e., those responsible for authorizing hospital capacity and largescale medical technologies are not responsible for

the capital’s possible economic impacts on operating costs), the system has survived until today.

States are responsible for implementing the

1972 federal framework law and have established

individual state hospital laws for this purpose.

One major state activity is the development of the

annual hospital plan, which defines hospital capacities and new capital that will be publicly funded.

Within this comprehensive framework of regulation, the hospitals are independent economic entities. They act on their own behalf and are responsible for their own economic performance.

Major changes in the German health care system and in hospital financing have taken place in

recent years. Two events impede a comprehensive

description of the current national hospital financing system: the unification of East and West Germany, and recent approval of a far-reaching health

care reform act.

The unification of Germany in October 1990

admitted five new states in which West German

economic and political systems were established.

The structure of the former West German health

system was also adopted for the new states, following a transition period. Restructuring of the

former East German health care system involved

establishing new state administrative agencies,

sickness funds, and doctor and hospital associations. It also required state legislation for hospital

planning, discussion of hospital investment

needs, and establishment of new documentation

systems. The federal hospital financing law came

into full force in the new states at the beginning of

1991. Transitional rules—for example, on special

investment funding or reduced documentation requirements—were to continue until the end of

1993; federal accounting rules came into force

only at the beginning of 1993. Consequently,

comparable financial data for unified Germany

have not yet become available, and this chapter’s

observations are often restricted to the situation in

the former West German states. (An investigation

of the restructuring process, though quite interesting, has also been left out as it is not likely to contribute to the clarity of the health care system’s description).
Chapter 5 Hospital Financing in Germany 177

The second recent change is the adoption of the

Health Sector Act (Gesundheitsstrukturgesetz) effective January 1, 1993 (HSA of 1993). The HSA

is designed to protect and improve the structure of

the statutory health insurance system (5). The new

act introduced important rules regarding hospital

care and financing; many of the changes have not

yet been implemented. Some rules are transitional, and others establish a schedule for changes to

be implemented during the next few years.

The ongoing changes in Germany make it difficult to provide a description of Germany’s current

health care system. The data presented in this

chapter were produced under the old system; however, the paper does represent Germany’s hospital

financing system as of the beginning of 1995. It

discusses reforms included in the HSA, as well as

hospital reforms set out in Germany’s new act on

the financing of hospital operating costs, adopted

July 8, 1994. The rules established in this act will

come into force for all hospitals by January 1,

1996. Individual hospitals, however, were allowed to implement the new financing system as

early as January 1, 1995. The paper also explains

relevant parts of Germany’s former hospital financing system and its philosophy, which are important for understanding the new acts.

STRUCTURE OF THE HOSPITAL SECTOR

Since 1990, German hospitals statistics have not

differentiated between acute and nonacute care

hospitals but rather between general and “other”

hospitals. General hospitals, which are the focus

of this chapter, provide beds in inpatient departments. The definition excludes hospitals that provide beds only for psychiatric and necrologic patients; the latter belong to the “other” hospital

category, which also includes day clinics and

night clinics. About 90 percent of all hospitals are

general, and about 90 percent of all hospital beds

are in general hospitals. Inpatient institutions for

preventive care and rehabilitation also exist but

are not discussed in this chapter.

General hospitals are categorized as public, private nonprofit (voluntary), or private for-profit.

One of the hospital law’s goals is pluralism of

owners. Public hospitals are owned by public authorities at the federal, state, regional, or community level; they accounted for 62 percent of hospital beds in 1990 (table 5-1). Some public hospitals

are owned by associations of public authorities or

by corporations under public law. Because universities are run by states, an important category of

public hospitals are the large university hospitals,

which accounted for a little more than 8 percent of

general hospital beds in 1990 (20). Private nonprofit (voluntary) hospitals, which are owned by

churches, welfare organizations, foundations, or

other nonprofit associations, accounted for about

a third of hospital beds in 1990. Private for-profit

hospitals, which are often owned by a head physician, accounted for almost 4 percent of hospital

Percentage of Percentage of Total number

Percentage of private, nonprofit private, for-profit of hospitals

public hospitals hospitals hospitals and beds

Former West German states

Hospitals 40.0’% 42.5% 17.5% 1,818

Beds 53.9 41,4 4.8 474,083

Former East German states

Hospitals 82.2 17.3 0.5 365

Beds 92.8 7.0 0.2 131,160

All German states

Hospitals 47.0 38.3 14.7 2,183

Beds 62.3 33.9 3.8 605,243

SOURCE: Statistisches Bundesamt, Grunddaten der Krankenhauser und Vorsorge-oder Rehabilitationseinrichtungen 1990, Fachserie 12, Wiesbaden, 1992.
78 I Hospital Financing in Seven Countries

<1oo 100-200 200-500 500-1000 >1000

Hospital size (in beds)

NOTE Former West German states only, data for 2 of 1,818 hospitals

are missing; the height of the bar equals total cost, while the figure

above the bar equals average cost per day

SOURCE. Statistisches Bundesamt, Kostennachweise Krankenhauser

1990, Fachserie 12, Wiesbaden, 1992

beds (table 5-1). If they render care to patients who

are insured by statutory sickness funds (which

they must do to be integrated into the hospital plan

and receive funding for capital expenses, as explained below), private hospitals are subject to the

same financing and payment rules as other types

of hospitals. Prospectively fixed budgets for sickness fund expenditures constrain excess revenues

in private hospitals. An important source of revenues for private hospitals, specifically if physicians own the hospital, stems from care provided

to privately insured patients.

In summary, nonprofit voluntary hospitals and

for-profit private hospitals together account for

the largest proportion of hospitals, but public hospitals have the largest share of beds; private owners play only a minor role in the provision of beds.

Total operating costs and average inpatient costs

per day, by type and size of hospital, are displayed

in figure 5-1.

Access to hospitals, except for emergencies, is

determinedly referral from an office-based physician. Privately insured people and sickness fund

members have equal access to all hospitals included in the hospital plan. Access to departments

for private patients in all types of hospitals is restricted to those patients who choose a specific

physician and pay extra for that physician’s services. In a few cases, private clinics do not participate in the provision of care for sickness fund patients and are accessible only to privately paying

patients. However, they do not receive any public

funding for capital expenses.

PHYSICIANS

Office-based physicians (both general practitioners and specialists) play a central role in Germany‘s health care system. The association of officebased physicians holds the right and obligation to

ensure medical care for sickness fund members.

Physicians fulfill this task and, when necessary,

refer their patients to hospitals. Fees for ambulatory services for sickness fund patients are negotiated between sickness fund and physician

associations. Physicians can charge privately insured patients up to 2.3 times the fee for statutorily

insured patients. In those cases in which hospitalbased physicians render ambulatory services, they

are reimbursed according to the fee schedule for

office-based physicians.

Hospital-based doctors are generally paid a

salary. They bill private-paying patients for hospital services according to a federal fee schedule. All

revenues from private patients are collected by the

head physician of a unit. A portion of the revenues

is then distributed to a pool for physicians working in the hospital, either on a compulsory or a voluntary basis, depending on the hospital law in the

respective state. Physicians are also required toreimburse the hospital for the use of hospital facilities to treat their private patients. Prior to the HSA,

there was only minor federal regulation of hospital cost reimbursement. Reimbursement rules

were typically established in the working contract

between the head physician and the hospital. The

new hospital financing act, however, mandates

that 40 percent of private fees (for some types of

services, only 20 percent) must be included in the

hospital’s budget as costs already reimbursed.
Chapter 5 Hospital Financing in Germany | 79

This reduces the budget available for other services. An estimate of the total revenue received

from privately billed services delivered by hospital doctors is not available.

Although the ambulatory care and hospital care

sectors are usually separated in Germany, there is

a number of office-based physicians who hold the

right to treat patients in hospitals. These physicians bill their patients for hospital services on a

fee-for-service basis, and have to reimburse the

hospitals for costs incurred. The hospital in turn

bills patients at reduced rates and fees.

HOSPITAL OPERATING COSTS

❚ Financing Model

Operating costs in German hospitals that serve

sickness fund patients (almost all hospitals, including public, voluntary, and private for-profit

hospitals) are financed primarily through annual

prospective budgets. A hospital’s budget is negotiated each year between the hospital and those

statutory sickness funds that paid more than 5 percent of the hospital’s previous year’s revenues. In

practice, the sickness funds form working groups

to represent them in negotiations. The regional

association of the statutory sickness funds, the organizations of private health insurers, and hospitals participate in budget negotiations. 

Negotiations focus on the services that a hospital expects to render to sickness fund members and

to the costs that can legally be charged for these

services. A prospective daily rate is simultaneously determined with the budget. This daily rate—

the result of dividing the budgeted amount by the

expected number of inpatient days—functions as

the primary payment unit for patients and sickness

funds. The daily rate is supplemented by special

fees for costly services, and beginning in 1995, by

case-based rates also.

Regardless of their insurance, all patients generally pay the same rates. In the past, privately insured patients who chose the service of a specific

physician paid a 5 percent reduced daily rate and

were extra-billed separately by the physician. Under the new hospital financing act, private patients

pay the full daily rate to the hospital and a reduced

bill to their private physician.

Flexible Budgets

Germany’s current prospective budgeting system

has grown out of a system in which the full costs

of hospital operations were reimbursed retrospectively (11). Beginning in 1985, a “flexible” prospective budgeting system was introduced, which

was designed to fully reimburse costs only for

those hospitals that operated efficiently.1 To assess efficient operation, hospitals were classified

into similar groups by types and intensity of care

and then compared with respect to cost and activity data. A hospital’s budget for the coming year

was influenced by cost comparisons with efficient

hospitals in its group.

Under flexible budgets, when the actual number of inpatient days delivered was less than the

planned number, the hospital still received 75 percent of the daily rate for the missing days in the

next round of budget negotiations; when it delivered more than the planned amount, the hospital

had to pay back 75 percent of the excess daily rates

that it had already collected. Hospitals were therefore partially at risk for overprovision of services.

Negotiations on flexible hospital budgets were

quite unfettered. The only external reference for

the negotiations—apart from the aim of financing

only “efficiently working hospitals”—was Concerted Action’s guidelines, which served as proposals for the negotiations. Their nonbinding

character is underlined by the fact that Concerted

Action itself did not always reach agreement on

the guidelines (sometimes providing none at all)

and sometimes sickness funds and hospital

associations had divergent guidelines. Concerted

Action did not effectively limit the growth of hos1 All budget concepts discussed do not include physicians’ earnings for treating private patients in hospitals or hospital revenues from elective services, such as private rooms, for which patients are billed directly.
80 Hospital Financing in Seven Countries

pital expenditures to that of the sickness funds’ incomes, as desired.

Fixed Budgets for 1993 to 1995

The HSA of 1993 establishes steps to reform hospital financing, which will be implemented sequentially over a number of years. With cost containment as a top political priority, the HSA

enforces the income-oriented policy on growth in

individual hospital budgets for the period 1993 to

1995. For these three years, the HSA requires a

“fixed” prospective budget that can no longer be

adjusted for the difference in the number of inpatient days delivered from the negotiated number.

A hospital’s 1992 budget will be used as its base,

with increases in its budget limited to income

growth of the sickness funds. The federal minister

of health is to estimate the national increase in

sickness funds’ incomes by February 15, so as to

determine the maximum growth rate for the coming year.

The hospital budget growth rate constraint applies to the sum of the hospital’s budget and the

revenues from special fee categories, which existed outside of hospital budgets in 1992. The

growth rate may be corrected for some factors

such as wage increases, as wages for hospital personnel are determined in negotiations between

unions and general employers. Budgets may also

be corrected for cost increases due to unforeseen

legal changes that affect hospital expenses.

Flexlble Budgets in 1996

From 1996 forward, hospitals will again be subject to flexible budgets. The HSA has established

that a hospital’s budget must provide sufficient

revenues for the hospital to provide all of the care

needed by its catchment population, based on its

function as defined in the hospital plan. In cases

in which the hospital cannot meet its obligations,

the hospital will even be allowed to receive funding that is greater than the growth in sickness

finds’ incomes. The basic mechanism of flexible

budgets will be the same as that adopted in 1985.

Other Hospital Payments

Although most hospital services are financed

through prospective budgets, other payment components received a much greater role in hospital financing under the HSA than they had previously.

In addition to the general daily rate, other types of

payments for hospital inpatient costs include:

special daily rates for some hospital departments;

special fees for costly services, billed in addition to the general daily rate; and

case-based lump sums, which cover the total

cost of inpatient care for a particular hospital

admission.

A number of special daily rates for hospital departments have been used in the past. The 1985

federal financing law defined 10 categories,

among them high-cost categories (e.g., care for severely burned patients or neonatal intensive care)

and low-cost categories (e.g., psychiatric day

care) that are financed through special daily rates.

The 1994 act on the financing of hospital operating costs requires special rates for all hospitals and

all departments beginning in 1996. In fact, the former general daily rate will vanish and will be substituted by two new types of rates. The first type

will pay for physician and nursing services that are

specific to a given hospital department; this rate

will vary depending on the medical department

that admits the patient. The second type, the “basic daily rate,” will cover the remaining nondepartment-specific costs of hospital stays, such as

food and housekeeping, that are common to all departments. The new act envisions that sickness

funds and hospitals will agree on a state-level

standard price for these “hotel-type” services.

In 1985 the first federal fee schedule for costly

services to be funded through special fees included 16 items, among them open-heart operations, transplantations, implantations, and lithotripter treatment. More services could be defined

for special fee financing or for case-based rates at

the state level. Actual rates were determined in individual negotiations between the hospital and
Chapter 5 Hospital Financing in Germany 81

Point values Length of stay

Personnel Equipment Total Average Threshold

Done by hospital physician

12.06: appendicitis non perforata;

appendectomy, Iaparoscopic 2,250 1,330 3,580 6.04 14

16.01: delivery after completed

37th week of pregnancy;

vaginal delivery up to 8 hours,

normal presentation 2,360 600 2,960 4,90

Done by practice-based physician

12.06: appendicitis non perforata;

appendectomy, Iaparoscopic 1,560 1,250 2,810 5.20

16.01: delivery after completed

37th week of pregnancy; vaginal

delivery up to 8 hours, normal

presentation 2,010 590 2,600 4,90 13

13

13

Done by hospital physician

12.1 7: appendectomy,

Iaparoscopic 1,040 650 1,690 NA NA

Done by practice-based physician

12,1 7: appendectomy, Iaparoscopic 690 650 1,340 NA NA

NOTES: NA = not applicable; positions for special fees concerning delivery have not yet been defined; the calculation basis for the development of

these schedules has been 1993, with a basis of DM1.00 per point; prices differ as to whether a patient is served by a hospital physician or by a

practice-based physician who holds a right to provide care in hospitals (the case of the practice-based surgeon has been chosen here, another

schedule applies to practice-based anesthesiologists); average length of stay refers to the population from which this schedule was calculated,

outlier patients beyond the threshold length of stay will be billed on a daily rate basis for their excess days. For further explanation, see text

SOURCES: Federal Act on Financing of Hospital Operating Cost (Bundespflegesatzverordnung) of 8 July 1994 (author’s translation)

sickness funds. These options have been used to

some extent but so far have made up only a minor

share of total hospital revenues.

The HSA of 1993 clearly aimed to extend these

types of financing to achieve more performancerelated payments for individual hospitals. The final results from a working group defines 104 special fees and 40 cases in the 1994 hospital

financing act. Another 37 special fees and 13 case

definitions are expected to be added in 1995 (6).

Each of the services or cases carries a point value

as a relative price tag, with one point value for personnel input and the other for equipment (table

5-2).2 The monetary value (i.e., conversion rates)

of the fees and case-rates will be determined in

state-level negotiations between sickness funds

and hospital associations. If the population in a

hospital’s catchment area has specific needs, rates

higher than state-level determined prices can be

agreed on during budget negotiations. Additionally, hospitals that are highly specialized might receive lower rates than the state-level prices. It remains to be seen how often these exceptions will

be used. At the state level, sickness fund and hos2 The point values were constructed on the basis of 1993 cost and utilization figures (1). Because it was expected that the average length of

stay will decline by 30 percent in the next few years, the calculations accounted for half of this decline (19). Point values are lower for cases in

which an office-based physician delivers the service (see table 5-2). To account for lower wage levels in the new states, lower point values for

personnel input will be used in state-level negotiations.
82 I Hospital Financing in Seven Countries

pital associations may also agree to introduce

more case definitions and special fees.3

Outpatient Care

The HSA establishes special financing for hospital outpatient care. Prior to 1992, a standard hospital did not have an outpatient department. The

property right for providing ambulatory care services was held by office-based physicians. Outpatient services could be provided by hospitals only

in special cases. For instance, a hospital-based

physician could provide ambulatory care if a qualified office-based specialist was not available in

the area. Hospital departments had to be authorized by the sickness funds or hospital physicians

had to be acknowledged as members of the

association of office-based physicians to provide

the care. Because of their teaching function, outpatient departments in university hospitals also

held the right to provide ambulatory care. All ambulatory services were reimbursed by the association of office-based physicians.

The HSA of 1993 now entitles hospitals to render outpatient care on three occasions:

■

■

●

if it is required to determine whether inpatient

treatment is necessary (pre-inpatient care),

if it is required to assure and improve the effectiveness of inpatient treatment (post-inpatient

care), or

if ambulatory surgery can be substituted for inpatient surgery.

The first two cases are paid by lump sums, the

last by a fee schedule that is being developed. The

revenue for all three types of services will be included as part of a hospital’s prospective budget

until 1996.

Coordination of Payment Components

After 1995

An important feature of the new financing system

for hospital operating costs is how the different

payment components will be coordinated. With

respect to inpatient care, hospitals will be paid for

two main categories of care:

1. care that is reimbursed by the daily rates (departmental and the basic daily rate), and

2. care that is reimbursed by special fees and casebased rates.

Special fees will be added to the daily rates (for

surgical interventions, the departmental rates will

be reduced by 20 percent), while case-based rates

will fully cover the cost of a hospital admission. If

a case-based rate can be calculated, the hospital

may not bill its patients through special fees and

daily rates.

The interplay between the hospital’s prospective budget and the other payment components is

complex and will change during Germany’s transition to a performance-related hospital payment

system. Currently, anticipated revenues from

case-based rates and special fees, as well as expected revenues from outpatient care, are subtracted from the hospital’s accountable costs for

calculating the hospital’s budget.4 Until 1998, if

revenues from special fees and case-based rates

are different from negotiated revenues, half of this

deviation will be compensated in the next round of

budget negotiations. This means that unexpectedly high volumes of hospital services will be partially compensated. Until 1998, it will also be possible to mutually compensate deviations of actual

revenues from negotiated revenues that occur in

3 Another important change introduced in the 1994 act is that inpatient days delivered in a particular case category that are above the federally defined length-of-stay threshold must be reimbursed through the daily rate. However, the hospital will not be paid for days of care for patients

readmitted to the hospital for complications if the number of days is within the length-of-stay threshold.

4 Until 1997, however, only 95 percent of the expected revenues from case-based rates and special fees will be subtracted in order to reduce

hospitals’ financial risks during the introductory period.
Chapter 5 Hospital Financing in Germany | 83

opposite directions in the two categories. This will

smooth the planning of care in the negotiations.

Beginning in 1998, however, revenues from

case-based rates and special fees will be completely separated from the hospital’s budget. Surprisingly, the new act on financing hospital operating

costs envisions that the volume of care for these

categories of services will no longer be negotiated, but will be reimbursed by sickness funds

and insurance companies as the services are provided, releasing hospitals from a negotiated volume constraint.

Payment Negotiations

In budget negotiations each hospital has to present

its current cost and service figures according to the

types of data required by the hospital law (e.g.,

number of admissions, number of operations,

lengths of stays per department). Each hospital

also has to present projections of those factors for

the coming year. Under the new financing system,

the number of special services performed and the

number of (defined) cases treated will also have to

be presented and projected so that revenues from

these services can be accounted for in the hospital’s budget. 

For cost comparisons, a hospital’s figures are

compared with those of other hospitals that are

similar in departmental structure and in the general level of care. Cost information from earlier negotiations is available to both hospitals and sickness funds. Hospital associations sometimes

compile comparative information in advance for

their members. Because some sickness funds contract with all of the hospitals, the sickness fund

association has a complete picture of comparable

hospital costs at the end of a negotiation round.

The actual negotiation process is not public,

and little is known about the strategies and tactics

of the negotiating parties. From the sickness

funds’ perspective, the total budget for hospital

services for the forthcoming year is constrained by

the growth rate of wages and salaries of the insured individuals from whom they receive their

premiums. Hospitals try at least to recover their

full costs.

If an agreement among the negotiating parties

is reached, the result has to be approved by the responsible state authority. In case of disagreement

(at the latest after six weeks of negotiation), a referee commission can set the daily rates on application from one of the negotiating parties. This commission consists of a neutral chairperson and the

same number of delegates from the hospital and

the sickness funds, including private health insurers. The referee commission, the decisionmaking

process, and the legal control of its activities are

regulated by state law.

In addition to the inpatient components of the

budget, lump sums are negotiated at the state level

for pre- and post-inpatient treatment. Sickness

funds and hospital associations have to consider

the opinions of the regional associations of officebased physicians. The same associations at the

federal level currently negotiate the fee schedule

for ambulatory surgery, which will be used by

both hospitals and office-based physicians who

deliver those services.

Once a hospital’s budget and other payment

components are determined, the hospital is free to

operate as it deems appropriate. Hospitals retain

all surpluses and are responsible for all deficits in

their operating budget. There are no general rules

for the internal allocation of funds within the hospital. Because all payment arrangements are

derived from cost estimates, however, cross-subsidizing across cost centers in the hospital is restricted compared with systems based on charges.

Because negotiations take place each year,

there is some danger that individual hospitals will

lose surpluses that result from greater efficiency in

subsequent year negotiations. The HSA intends to

eliminate this disincentive by prohibiting sickness funds from negotiating away such surplus

funds. There is a clear need to develop more sophisticated incentive structures in Germany’s predominantly nonprofit environment.

The financing law requires a tremendous

amount of cost information for the negotiations

between hospitals and sickness funds. In addition

to the cost and service figures required, information on diagnoses and surgical services delivered
8 4

has

Hospital Financing in Seven Countries

also been required since 1985, but this has

been difficult to obtain. Furthermore, prospective

budgeting requires projections of these data. Information on the different types of costs at the hospital level and indicators such as inpatient days by

department have always been well documented.

Nationwide documentation for these statistics has

been available from the Federal Office of Statistics since 1990. In 1993, statistics on hospital discharge by diagnosis began to be produced nationwide. Germany’s increasingly case-based payment

system will heighten the need for much more sophisticated information on hospital production.

❚ Sources of Funding5

Insurance covered about four-fifths of hospital operating costs in 1990 (sickness funds paid 70.7

percent and private insurers paid 8.1 percent).

Public authorities directly covered 14.3 percent of

hospital expenditures and employers directly paid

5.6 percent (4). (Employers’ 50 percent contribution to sickness fund premiums is included in the

sickness fund figures.) Public employers also contributed to private patients’ hospital costs through

the so-called Beihilfe, which covers up to 50 percent of hospital care for civil servants. Patients insured by sickness funds directly payDM116 each

day for the first two weeks of a hospital stay. Outof-pocket payments by private patients depend on

individual cost-sharing arrangements with private

insurance companies. In total, the contribution of

direct patient payments is small, accounting for

just 1.3 percent of the total bill for hospital care in

1990.

The relative contributions from the various

payers for individual hospital revenues depend on

the hospital’s patient and services mix. Prior to the

HSA reforms, the main revenue of a hospital came

from the general daily rate. Other revenue sources

include special departmental rates, special fees for

costly medical services, and special charges for

hotel-type services (e.g., private or semiprivate

rooms). Prices for additional hotel services are established by the hospital and are paid directly by

patients.7 Special daily rates and special fees varied by hospital under the old system.8 Of the

DM56.3 billion in revenue reported in 1990 for all

hospitals that contracted with sickness funds

(which only excluded some specialized private

clinics), 93.5 percent came from the general daily

rate, 4.2 percent from special charges, and 2.2 percent from special fees (16).

❚ Operating Costs and Expenditures

Personnel salaries made up almost two-thirds of

German hospital operating expenses in 1990

(table 5-3). Medical equipment and supplies accounted for the other third of operating costs. Capital-related costs do not (yet) play a role in GermaPersonnel

Physicians

Nurses

Other staff

Equipment

Medical needs

Other

Miscellaneous costs

Total

66.0

14.1

123.1

28.8

33.1

16.6

16.5

0.9

100.0

NOTE: Former West German states only; data for 2 of 1,818 hospitals

are missing; miscellaneous costs are composed of the cost of nursing

education (0.7%) and the cost of interest on debts incurred during operation (0.2%); total costs were DM59.9 billion, cost per day was

DM400.55, cost per case was DM5,384.22, and cost per bed was

DM126,308.65.

SOURCE: Statistisches Bundesamt, Kostennachweise Krankenhauser 1990, Fachserie 12, Wiesbaden, 1992.

5 me dis~bution of financing by payer does not refer solely to acute care expenditures but includes all hospital care and Capibl expenses.

s~e exch~ge rate in JaINIary 1994 was approximately $USO.58 to DM1.00.

7 ~ Jme 1994, he gener~ daily ra~ r~ged from DM33’2 t. DM656 at the s~te level; the ex~a rate for a private room was between DM1 11

and DM205 and for semi-private rooms, rates were between DM58 and DM117 (8).

8 Ave~ges me not available at the federal level.
Chapter 5 Hospital Financing in Germany 185

Numerator

total hospital

Total hospital expenditures, Hospital operating Hospital

expenditures, FOS FOS/OECD costs, FOS investment, SVR

Denominator DM65,977 million DM73,651 million DM63,577 million DM5,074 million

Gross national product,

FOS, DM2,439,100 million 2.70 3.02 2.61 0.21

Gross domestic product,

FOS, DM2,417,830 million 2.73 3.05 2.63 0.21

Total hospital expenditures,

DMFOS, 65,977 million 100.00 111.63 96.36 7.69

Total hospital expenditures,

DMFOS/OECD 73,651 million 89.58 100.00 86.32 6.89

National health care expenditures,

OECD, DM201,220 million 32.79 36.30 31.60 2.52

National health expenditures,

FOS, DM303,972 million 21.70 24.23 20.92 1,67

NOTE: Former West German states only; FOS indicators from the financial statistics of the Federal Off Ice of Statistics; FOS/OECD indicator on total

hospital expenditure includes DM7.7 million for inpatient rehabilitation expenditures; FOS cost indicators from federal hospital statistics, author’s

calculations.

SOURCES: Bundesministerium fur Gesundheit, Statistisches Taschenbuch Gesundheit, Bonn, Dezember, 1992; Federal Office of Statistics, personal communication, August 1993; Statistisches Bundesamt, Kostennachweise Krankenhauser 1990, Fachserie 12, Wiesbaden, 1992; Organisation

for Economic Cooperation and Development, OECD Health Data File, 1993, SVR: Sachverstandigenrat fur die Konzertierte Aktion im Gesundheitswesen (Baden-Baden, Nomos, 1992).

ny’s hospital budgets because the costs of capital

are borne almost entirely by state governments and

do not show up in hospitals’ operating expenses.

The Federal Office of Statistics (FOS) reported

DM66 billion in total expenditures for hospital inpatient care in 1990 (this refers to the former West

German states only) (table 5-4, column 1). Of the

DM66 billion, the statutory sickness funds spent

DM45 billion on hospital services (which cannot

be disaggregate into acute and nonacute care).

This equals about one-third of total health care expenditures by sickness funds. Almost one-third of

hospital expenditures (the other DM22 billion)

came from private health insurers, employers,

public authorities, and directly from patients.

The DM73.7 billion figure used by Organisation for Economic Cooperation and Development

(OECD) to represent total expenditures for inpatient care adds DM7.7 billion for inpatient rehabilitation expenditures to the DM66 billion figure

(table 5-4, column 2) (12). The amount of DM56.3

billion has been cited as the total revenue for hospitals in the same year (16), whereas the total sum

of operating costs reported in federal hospital statistics is DM63.6 billion, exceeding the revenue

figure (table 5-4, column 3). Not all costs listed in

accounting statements are automatically financed

in a prospective budgeting system, but before concluding that the difference between aggregate cost

and revenue figures is the result of operating deficits, more detailed analysis would be required.

Hospital expenditures are related to six reference variables in table 5-4. (Investment data are

covered later in this chapter.) The reference variables include the OECD’s definition of national

health expenditures and the Federal Office of

Statistics’ definition of national health expenditures which includes cash and in-kind benefits re9 National health expenditures data from the Federal 0ffice of Statistics that include expenditures for curative and preventive care but not

cash and in-kind benefits lies within a 1 percentage point range of OECD’s national health expenditures figure and is not reported in table 5-4.
86 | Hospital Financing in Seven Countries

lated to illness. The almost DM8 billion difference arising from the OECD’s and FOS’s different

definitions of hospital expenditures causes hospital expenditures as a share of gross national (or

gross domestic) product to increase from 2.7 percent according to FOS’s figures to over 3 percent

according to OECD’s figures. Both definitions

produce ratios of hospital expenditures to

OECD’s national health care expenditures of

about one-third, similar to the figure reported by

the sickness funds. The FOS’s more inclusive definition of national health expenditures results in a

22 to 24 percent hospital expenditures share.

HOSPITAL CAPITAL COSTS

❚ Relationship of Capital and Operating

Costs

There is almost no link between operating and

capital costs in Germany’s health care system.

Hospital capacities are established according to

hospital plans (described below), and allowable

operating expenses are financed as described previously. Generally, capital depreciation and interest costs for capital debt are not allowable operating costs for hospitals included in the hospital

plan, as capital investments are usually funded by

state authorities. 

Integrated economic decisionmaking is lacking with respect to the possible impact of new capital purchases on hospital operating costs. Although the hospital law formally requires hospital

planners to consider the impact of investment decisions on operating costs, quantitative economic

evaluations of such decisions do not take place on

a regular basis. Hearings are held to solicit input

from the sickness funds, which are ultimately responsible for paying for any associated increase in

operating costs, but sickness funds do not have a

right to veto investment decisions.

Sickness funds, however, are only required to

finance the costs of efficiently working hospitals.

This has led to conflicts about the issue of hospital

capacity: sickness funds claim that hospitals operate inefficiently because there is more capacity

than needed, while hospitals claim that hospital

capacities included in the hospital plan must be financed through operating revenues. This dispute

is likely to obtain greater relevance as hospital operating revenues are increasingly based on negotiated volumes of specific types of hospital services (2).

The lack of integration of economic responsibilities in Germany’s two-tier system has been criticized for many years. It has survived because of

the unwillingness of state authorities to waive

their planning powers. State authorities have a

seat in the legislature’s second chamber, which

must approve every federal law. The HSA states

the intent of eventually integrating the two separate lines of authority and the financing of capital

and operating expenses, while leaving legal control with state authorities.

The 1985 revision of hospital financing allowed for one instance in which capital acquisitions can be linked to their effects on operating

costs. Sickness funds and hospitals can contract

for investment projects that are expected to reduce

subsequent hospital operating costs, called “rationalization” projects. The capital-related costs of

these projects can be added to a hospital’s operating expenses. Because of resistance from the sickness funds, however, this regulation has not been

used often (13).

Another exception to the principle of not passing capital costs to payers through operating

charges was introduced in the HSA. Under the act,

capital expenditures for investment projects included in the hospital plan may be partially funded

via private funds and hospitals will be allowed to

include the respective capital depreciation in the

calculation of their operating costs.

❚ Capital Financing Model

Prior to adoption of the Health Sector Act, almost

all hospital capital expenditures in Germany were

funded by state governments (and most funding

still comes from the states). Expenditures for hospital construction and medical equipment are part

of a state’s budget, which is derived from general

tax revenues. Several taxes contribute to a state’s

revenues, including large revenue sources such as
Chapter 5 Hospital Financing in Germany | 87

income and value-added taxes. The financial burdens of these taxes fall differently on different income groups in the population and on businesses

and households. Therefore, a person’s share of

payments for hospital capital expenditures depends on the person’s share of federal and state tax

revenues. There is also no direct link between the

source of general tax revenue and the type of government expenditure. A state’s treasury determines the amount of funds available for hospital

capital investment as part of its decisions on how

to allocate the state’s budget. Until 1985 both state

and federal authorities paid a share of the investment budget; since then, however, only states pay

for capital expenditures. Special federal subsidies

have been reintroduced for investment needs in

the five former East German states.

Financing of hospital capital is fully integrated

with hospital planning. The key reference point

for funding is a state’s annual hospital plan. The

state’s plan—which includes public, nonprofit

voluntary, and private for-profit hospitals—defines the location of each hospital, its specialties,

the number of the hospital’s beds that will be

funded, and the level of the hospital’s care (e.g.,

general care, specialty care only, or top-level

care). Some states issue more detailed plans—for

example, by determining the number of funded

beds for each hospital specialty. The specific criteria used to determine whether a particular hospital

is admitted to the state’s hospital plan are not publicly available.

If a hospital is admitted to the plan, it will receive capital funding from the state, both in terms

of lump sums and through special capital grants,

described below. Hospitals not included in the

annual hospital plan do not receive public funding

for capital investments. Moreover, they cannot

claim higher operating costs than comparable hospitals that receive public funding in order to finance their investments from internal funds. This

mechanism makes the integrated capital planning

and financing system almost universal in Germany. In 1990, more than 96 percent of all beds in

general hospitals were included in hospital plans

(of the prior West German states) (20).

The general legal framework for hospital planning and investment financing is determined at the

federal level, but implementation is left to state

authorities who issue the hospital plan. Planning

methods are also subject to state law and regulation. Their implementation differs among the 16

states of the Federal Republic of Germany.

❚ Determining Capital Requirements

The hospital capital planning process is ostensibly

based on bed-to-population ratios, which establish the number of beds needed in a region. The

planning formula is a simple equation: the number

of hospital beds needed equals the number of predicted inpatient admissions times the predicted

average length of stay (corrected for trends), divided by the occupancy-rate standard (85 percent), times 365 (the number of days in a year). In

some states the bed-to-population ratio is differentiated by hospital department and/or by region.

Despite the establishment of a formal planning algorithm, there is no evidence that the ratios are

used in any regular or fixed way to determine capital funding patterns. Hospital plans are published,

but they report on current hospital capacities rather than on future plans or options.

The federal hospital financing law has established a right for hospital owners, and other substantially affected parties, to present their views to

state authorities during the state’s process of determining hospital capacities and approving applications for new capital purchases. The law’s objective is to achieve a consensus among all participants. States have the authority to implement

the federal law. In all states the hospital associations, sickness fund associations, and private

health insurers participate in such hearings. Other

organizations, such as community associations or

city and community governments, are represented; for example, there are seven participants

in Bavaria and six in Baden-Würthemberg (18).

The state authority ultimately retains the right to

make final decisions. The actual decisionmaking

process (specifically decisions on how to allocate

the state’s budget by region or by hospital) cannot
88 Hospital Financing in Seven Countries

be observed by outside researchers and investment schedules are not published.

Applications for large-scale capital investments are drawn up by the hospital’s management

and sent to state authorities. Once application

hearings have been held, the state authorities decide which projects will be funded. Approved

investment projects are included in the state’s

hospital plan and in the individual hospital’s

construction or investment plans. The rules and

procedures governing hospital construction plans

are not publicly available. There is no established

policy for estimating the revenue implications or

costs and benefits arising from new hospital capacities except for the cost-saving rationalization

projects described above.

The purchase of construction and equipment by

state authorities is subject to general public bidding rules. There are no specific guidelines concerning resale of hospital plant or equipment. Resale of equipment and the use of these funds,

however, must be in accordance with the hospital

plan. Each state funds capital requirements subject to a binding planning process under which the

use and purpose of the investment is exclusively

defined in the plan; the capital asset may not be

used for other purposes.

All public and private hospitals included in a

state’s hospital plan are subject to the capital planning and approval process. An important factor

undermining the closed-shop system of capital acquisition in Germany’s hospital sector is private

investment by office-based physicians. In contrast

to the strictly regulated hospital system, officebased physicians run their businesses as free enterprises, determine their own capital needs, and

have in the past notified the association of officebased physicians only about purchases of large

medical equipment. Because of constrained hospital budgets, office-based physicians have substantially influenced the diffusion of many technologies, such as computed tomography, gamma

cameras, and nuclear magnetic resonance imagers

(table 5-5).

Germany’s 1989 health reform law changed

this loophole by requiring the coordination of

planning for large medical technologies between

the hospital and ambulatory care sectors (3). A

coordination committee comprising physician

associations, hospital associations, and sickness

funds was established. The committee defines

what is considered to be a large-scale technology,

determines the need for these technologies, and

decides on the types of setting where they will be

provided (e.g., in hospitals or physicians’ offices).

The committee’s decisions are binding in the hospital sector because big-ticket technologies that

are not included in the hospital plan (which the

hospital associations review) do not receive public funding, and any associated operating costs do

Percentage in Percentage In

Technology hospitals doctors’ practices Total number

Left ventricular catheterization sites

Digital subtraction angiography

Computer tomographs

Nuclear magnetic resonance imagers

Gamma cameras, single photon emission CT

Linear accelerator

Telecobalt machine

Extracorporeal shockwave Iithotripter

97

78

58

51

56

97

91

96

3

22

42

49‘

44

3

9

4

230

531

707

159

1,257

166

171

89

NOTE: Former West German states only; author’s calculations.

SOURCE: Sachverstandigenrat fur die Konzertierte Aktion im Gesundheitswesen (Baden-Baden, Nomos, 1992).
Chapter 5 Hospital Financing in Germany | 89

not have to be reimbursed by sickness funds. The

law also prohibits reimbursement for services provided by large-scale technologies in physicians’

offices if the coordination committee has not approved the technology.

The coordination committees have not yet effectively integrated major capital purchases in the

hospital and ambulatory sectors. Establishment of

the coordination committees has been slow (15).

Moreover, the HSA generally assumed that largescale technologies in physicians’ offices that had

been applied for and were in use in 1992 were approved by the coordination committees, thus resolving all pending decisions in favor of officebased physicians.

Since 1990, capital inventories of large-scale

medical technologies have been published regularly at the state and federal levels. Aside from this

inventory and the usual statistics on hospital resources, such as number of beds and departments

by specialty, information on total hospital capital

stock is not available.

❚ Sources of Capital Funds

The state’s capital budget is split into lump sum

payments for small projects and a part payable on

approval for large investment projects. Lumpsum amounts are determined annually by state

governments and are based on the number of beds

in a hospital and its level of care. State rules differ

as to how the amounts are determined; overviews

of these determinations are not publicly available.

At the end of the 1980s, lump sums of DM2,500

to DM4,500 per bed had been reported for different levels of hospital care (3). The federal hospital

financing law set higher sums for the new former

East German states for the period from 1991 to

1993; they vary between DM8,000 per bed for

hospitals rendering basic care up to DM15,000 for

top-level care and specialty hospitals.

Lump-sum payments cover short-term capital

goods with an economic life of less than three

years and small construction work, defined as

costing less than DM100,000 (net of the valueadded tax). The hospital is free to decide how to

use lump-sum payments to purchase these types

of capital goods. Because the payment per hospital bed provides disincentives for hospitals to reduce the number of beds, the HSA has introduced

the possibility of using other factors for determining lump-sum payments.

Large investment projects approved by the

state are funded from state revenues. Real estate,

medium and major construction, reconstruction

or restructuring, medical equipment to provide

new services, and all large-scale equipment expenditures are subject to the procedure described

above.

In contrast to the previous policy of allowing

only state funding for capital investments, the

HSA has enabled state authorities and hospitals to

agree to partial funding of an investment project

for hospitals not included in the hospital plan. The

hospital is allowed to enter capital depreciation

and interest expenses in its calculation of operating costs. State authorities and hospitals are supposed to first achieve a consensus with the sickness funds to cover these costs.

Additionally, capital expenditures for cost-saving investments (rationalization projects) may be

financed through operating cost charges. Savings

in operating expenses must be large enough to offset the cost of the investment in at most seven

years, however. This regulation thus requires an

exact calculation of the capital costs and projected

associated operating costs. Sickness funds and

hospitals must contract for rationalization projects. Because of the sickness funds’ resistance to

this method of hospital capital financing, the HSA

enables hospitals to call on a referee commission

in cases in which sickness funds refuse to contract.

Over the long run, the German parliament has

declared its goal to substitute for the two-tier financing system a single system that would cover

both operating and capital costs. In addition, responsibility for planning and financing is to be integrated in the hands of the sickness funds, although legal control by state authorities would be

maintained.
90 Hospital Financing in Seven Countries

(1) Hospital beds:

75.2 per 10,000 population

(2) Hospital doctors:

16.14 per 100 beds

(3) Hospital admissions:

176.4 per 1,000 population

(4) Inpatient days:

2.37 per population

(5) Average length of stay:

13.4 days

(6) Occupancy rate:

86.4 % of beds

(7) Operating cost per day in

general hospitals: DM400.55

(8) Expenditures for inpatient

care per sickness fund member:

DM820.30

NOTES: Figures refer to the former West German states only; figures 1 and 3-7 refer to general hospitals, figures 2 and 8 to all

inpatient care (for definitions, see text); for figure 2, the 1991 number of doctors was used because this figure was not collected

in 1990; figure 8 refers to about 90 percent of the German population; figures 7 and 8 are in current prices.

SOURCES: Statistisches Bundesamt, Grunddaten der Krankenhauser und Vorsorge-oder Rehabilitationseinrichtungen

1990, Fachserie 12, Wiesbaden, 1992; Sachverstandigenrat fur die Konzertierte Aktion im Gesundheitswesen (Baden-Baden, Nomos, 1992).

❚ Capital Expenditures

Investment expenditures by state authorities in

1990 totaled DM5,074 million, equaling 0.21 percent of gross domestic product (for the former

West German states only) (table 5-4, column 4)

(16). This amount corresponds to about DM80 per

capita. Among the 11 former West German states,

there was a remarkable variation in capital expenditures. In 1990 Schleswig-Holstein spent a low

of DM50 per capita and West Berlin spent a high

of DM230 per capita.

10 Breakdowns of these figures into expenditures for plant and equipment at

the federal level is not available. Capital expenditures ranged from 6.9 to 7.7 percent of aggregate

hospital expenditures depending on the definition

of hospital expenditures used, and from 1.7 to 2.5

percent of national health expenditures, again depending on the definition of national health expenditures used (table 5-4).

HOSPITAL INDICATORS AND TRENDS

Eight key hospital indicators are presented at the

national level for 1990 in table 5-6. Because of

10 Figures are rounded and based on the author’s calculations.

data availability, the data refer only to the former

West German states. Most of the eight indicators

are applicable to general hospitals, although some

are for all types of inpatient care. The number of

beds, hospital admissions, inpatient days, average

length of stay, and occupancy rates in German

hospitals tend to be high in a number of international comparisons-for example, with other

member states of the European Community and

the United States.11 Comparative analyses of the

cost and performance of acute hospital care in

Germany, Austria, the Netherlands, France, Sweden, and the United States generally indicate that

Germany, in spite of ranking high in the number

of beds and inpatient days provided, had very low

hospital costs (in fact, the lowest per inpatient

day)—although it has not always reached the top

level in the quality of care (10).

FUTURE DIRECTIONS

Two major perceived problems with its prior

health care system contributed to Germany’s recent health reform measures in the hospital sector:

11 Similar comarisons of the numbers of physicians per bed, daily hospital rates, and hospital expenditures per insured are difficult to make

because of the lack of directly comparable data.
Chapter 5 Hospital Financing in Germany 191

the ever present problem of cost containment and

problems in the regulation of hospital financing.

Cost containment became a major political issue

by the mid- 1970s in Germany, leading to almost

60 cost containment measures incorporated within eight health reform acts in the past two decades;

this figure does not even include the HSA legislation (17). Many of the interventions worked for

some time and in the aggregate contained growth

in health expenditures to some extent. Yet they did

not completely control costs, nor did they achieve

a rationally regulated system of health care financing. Like the other health care sectors, the hospital

sector has been the target of cost containment

measures—but it is not the chief culprit as is

sometimes claimed. The OECD reports a moderate 0.9 percentage point rise in hospitals’ share in

national health expenditures from 1970 to 1990

(14).

Following a steep rise in health care expenditures, in contrast to prior cost containment acts,

the Health Sector Act of 1993 began tackling the

basic structure of the health care system, including

the role of hospitals and their financing. The main

problems with Germany’s system of hospital financing have been as follows:

■ The daily rate for operating charges is too rough

a definition of the services that hospitals deliver. New payment units were introduced in 1985

but have not yet played a major role in hospital

financing.

■ The full-cost reimbursement principle for operating expenses was formally abandoned in

1985 but continued to be the financing promise

for hospitals that indicate efficient operation.

■ A two-tier system splits responsibility between

those who determine the capacities of the hospital system and those who are responsible for

its operation and financing. This problem was

tackled with little success in 1985.

The Health Sector Act of 1993 has addressed

all three of the foregoing problems. It tightened

the budgeting process, linked hospital budget updates to sickness fund income growth, and worked

toward the full abandonment of hospital cost reimbursement. It has also set forth a major plan to

expand performance-related financing of operating costs by introducing more greatly differentiated payment units. Finally, it has further tom

down the borders between the financing of operating costs and capital expenditures, aiming at full

integration in the future. (The historical development of hospital financing and its major changes

are summarized in table 5-7.)

Because the Health Sector Act was enacted

only recently and because it contains detailed

plans for future changes, its full implementation

and effects are not yet clear. Evaluation will not be

easy. There are several payment components for

hospital costs, with different groups deciding on

price and quantity levels; substitution may occur

between various payment components; and different time paths have been set for further development of the various components. It will be difficult to assess the separate impact of various

regulations on changes in the growth rate of hospital expenditures and on the efficiency, quality, and

availability of hospital care.

Recognizing these problems, anew federal act

addressing the financing of hospital operating

costs requires that the new system be evaluated by

a scientific working group at least over the next

three years. The results will be discussed by an advisory committee composed of all major actors in

hospital care delivery, planning, and financing.

The Health Sector Act has brought about fundamental innovations in hospital financing policy

in Germany. It has not only altered the existing

rules of the system but has also explicitly

introduced an ongoing process of change. Because the financing rules are defined for certain

time periods, future adaptation, evaluation, reconsideration, and further elaboration will be inevitable elements of the process.
I

92 Hospital Financing in Seven Countries

Payment unit,

product definitions Budgeting philosophy Overall financing design

1972

1985

1993

1995 and

beyond

(1)

(1)

(2)

(3)

(l-2)

(3)

(4)

(5)

(6)

(1)

(2)

(3-4)

(5-6)

(7)

.

Daily rate

Continued

Some departmental rates

Some special fees

Continued

Expanded

Some case-based rates

Outpatient lump sums

Fees for outpatient surgery

Abandoned

Departmental rates only

Full-cost reimbursement (1)

Flexible budgeting equal (1)

to the cost of an efficiently (II)

operating hospital

Fixed budget capped by (1)

employee wage and salary (II)

growth

Performance-related pay, and

flexible budget constrained by

Expanded

Continued

employee wage and salary growth

Base rate for hotel services

Two-tier system for operating

and capital expenses

Continued

Option to finance cost-saving

investments via operating

charges

Continued

Expanded to include the option

to partially finance investments

via operating charges

Approaching single financing

system

NOTE: All budgeting concepts exclude earnings of hospital physicians for services provided to private patients and revenues from hotel-type services extra-billed by hospitals

SOURCE. R. Leidl, 1994.

REFERENCES

1.

2.

3.

4.

5.

6.

7.

Achner, S., “Umsetzung der BPflV 1995,”

Das Krankenhaus 8:354-356, 1994.

Bruckenberger, E., “Von der Landerkompetenz zum ‘Einkaufsmodell’ der Krankenkassen,” Das Krankenhaus 2:77-85, 1993.

Bundesminister fur Arbeit und Sozialordnung, Erfahrungsbericht uber die Auswirkungen der Krankenhaus-Neuordnung 1984,

Bonn, 1989.

Bundesministerium fur Gesundheit, Statistisches Taschenbuch Gesundheit, Bonn, Dezember, 1992.

Bundesrat, GesetzesbeschluB des Deutschen

Bundestages: Gesetz zur Sicherung und

Strukturverbesserung der Gesetzlichen

Krankenversicherung (Gesundheits-Strukturgesetz), Drucksache 856/92, 9,12, 1992.

“Erste Anderungsverordnung zur BPflV

1995,” Das Krankenhaus (editorial) 6:241,

1994.

Federal Office of Statistics, personal communication, August 1993.

8.

9.

10.

11.

12.

13.

Gesamtverband der deutschen Versicherungswirtschaft, Die deutsche Versicherungswirtschaft, Jahrbuch 1994, Bonn.

Henke, K., Funktionsweise und Steuerungswirksamkeit der Konzertierten Aktion im

Gesundheitswesen, in G. Gafgen (cd) Neokorporatismus und Gesundheitswesen (Baden-Baden: 113-157, 1988).

Huber, M., Kose, A., and Schneider, M.,

Wirtschaftlichkeit und Leistungsniveau deutscher Krankenhauser im internationalen

Vergleich, BASYS Beratungsgesellschaft fur

Angewandte Systemforschung mbH, Augsburg, 1993.

Leidl R, “The Hospital Financing System of

the Federal Republic of Germany,” Effective

Health Care 1(3):133-142, 1983.

Muller, W., “Ausgaben fur Gesundheit 1990,”

Wirtschaft und Statistik 8:538-544, 1992.

Muller, H., “Das Gesundheitsstrukturgesetz

und seine Auswirkungen auf das Krankenhaus,” Krankenhausumschau, Januar:13-22,

1993.
Chapter 5 Hospital Financing in Germany | 93

14. Organisation for Economic Cooperation and

Development, OECD Health Data File, 1993.

15. Prößdorf, Krankenhauswesen, in Bachmann

et al. (eds.) Das Grüne Gehirn. Der Arzt des

öffentlichen Gesundheitswesens. 6. Ergänzung.

Schulz Verlag, 1990.

16. Sachverständigenrat für die Konzertierte Aktion im Gesundheitswesen (Baden-Baden,

Nomos, 1992).

17. Schneider, M., “Health Care Cost Containment in the Federal Republic of Germany,”

Health Care Financing Review, 12(3):87-101,

Spring 1991.

18. Schwefel, D., and Leidl, R., Bedarfsplanung

und Selbstregulierung der Beteiligten im

Krankenhauswesen, in G. Gäfgen (ed.), Neokorporatismus und Gesundheitswesen (Baden-Baden: 187-207, 1988).

19. “Sonderheft Bundespflegesatzverordnung,”

Krankenhausumschau, July suppl., 1994.

20. Statistisches Bundesamt, Grunddaten der

Krankenhäuser und Vorsorge-oder Rehabilitationseinrichtungen 1990, Fachserie 12,

Wiesbaden, 1992.

21. Statistisches Bundesamt, Kostennachweise

Krankenhäuser 1990, Fachserie 12, Wiesbaden, 1992.
Hospital

Financing

in the

Netherlands

by J.A.M. Maarse

s in other industrialized countries, the health care sector

is an important element of the Netherlands’ economy. As

a share of gross domestic product (GDP), national health

expenditures in the Netherlands rose from 6 percent in

1970 to 8.2 percent in 1980 (23). The growth rate slowed in the

1980s; by 1991, national health expenditures accounted for only a

slightly higher share of GDP at 8.3 percent.1Health care expenditures grew by a cumulative increase of 185 percent from 1970 to

1981 but by a cumulative increase of only 51 percent from 1981 to

1991 (2). The importance of health care to the Dutch economy is

also illustrated by the fact that health care employment accounted

for over one-tenth of total employment in 1991, and investments

in the health care sector amounted to 8.4 percent of total investments in the economy (18).

Despite the relatively constant ratio of national health expenditures to GDP over the past few years, major reforms of the Dutch

health care system initiated in the late 1980s arguably belong to

the most radical planned so far for the 1990s in any OECD country (4,22,24). The main objective of the reforms (which are based

on a report of the so-called Dekker Committee, Willingness to

Change) (4) was to combine a national health insurance system

with managed competition to improve efficiency and achieve

more effective cost containment. Currently, however, there is

substantial uncertainty about the future of the Netherlands’ re1 In some publications a higher percentage is found. For example, the Financial Report on Health (Financieel Overzicht Zorg), annually published by the Ministry of Health,

mentions a figure of 9.8 percent for 1991 (16). This percentage, however, includes a number of health-related social expenses and, for that reason, should be used carefully in international comparisons.

| 95
96 | Hospital Financing in Seven Countries

form process. The stepwise implementation of the

Dekker Committee reforms has stopped because

of increasing doubts about the ability of managed

competition to contain costs and because of strong

opposition from some interest groups. The new

government that took office in August 1994 has

rejected the approach of implementing major reforms to the system, preferring to change its health

care system on an incremental basis. Therefore, it

is not clear which of the Dekker Committee reforms will be adopted in the future. This chapter

presents changes to the system that have occurred

and discusses several possible future scenarios.

Prior to the reforms, the Dutch system had (and

still has, until or if the reforms are fully implemented) two important social health insurance

schemes. The first, the sickness fund scheme,

which came into force in 1965-66, provides mandatory health insurance to people earning less than

a given income and is administered by independent, nonprofit sickness funds. It covers basic

health services, which include the services of general practitioners and specialists, ambulatory and

outpatient care, and acute hospital care. The

scheme is financed by income-dependent contributions from employers and employees (i.e.,

payroll taxes), determined annually by the central

government. In 1991 about 61 percent of the population was enrolled in the sickness fund scheme.

People who earn more than the income ceiling

are not entitled to join a sickness fund. Most of

these people voluntarily enroll in a private health

insurance plan and pay risk-related premiums.

The income ceiling explains why the Netherlands

has the highest percentage of any national population within the European Community (39 percent)

with private health insurance for basic health services. This share is still relatively small, however,

compared with the share of the U.S. population

that is covered through employer-based private

health insurance. Private insurers in the Netherlands offer the same basic benefit package as the

sickness funds, but they are more flexible with respect to copayment rates and amenities (e.g., coverage of private hospital rooms). These arrangements, combined with different risk structures of

insurance plans, has led to considerable variation

in private health insurance premiums. Private

health insurers are not allowed to terminate insurance coverage for high-risk subscribers.

The private health insurance industry has a

complicated structure. Private health insurers can

operate on a for-profit or not-for-profit basis. Additionally, sickness funds have collectively organized their own private health insurance plans to

retain subscribers who pass the income ceiling set

for the sickness fund scheme. Private insurers may

also offer other kinds of insurance besides health

coverage to subscribers. In contrast to the sickness

funds that traditionally were regionally organized

with almost no competition among them (i.e.,

most have been regional monopolies), private

health insurers have operated nationwide in a

competitive market. Since 1994, however, sickness funds have been allowed to operate nationwide to stimulate competition between sickness

funds and private health insurers (13).

The second important type of health insurance

in the Netherlands is the exceptional medical expenses scheme established in 1968, which is national in scope. The entire population, irrespective

of income status, is compulsorily insured through

this system, which is financed primarily from income-related contributions (22).2 Originally it

covered long-term or chronic care (e.g., nursing

homes, psychiatric hospitals, care for the mentally

handicapped), but as part of the health care reform

process, the scheme now also provides some

benefits (e.g., pharmaceuticals) formerly covered

by the basic sickness fund scheme or private

health insurance. The administration of long-term

benefits is handled by the individual’s insurer for

basic services (22).

 2The exceptional medical expenses scheme also partially funds social services. The whole population is eligible for social services, which

includes domiciliary care and old peoples’ homes. These services are financed by the exceptional medical expenses fund, general taxation, and

patient out-of-pocket payments (22).
Chapter 6 Hospital Financing in the Netherlands | 97

Health care funding is derived from several

sources. In 1991, almost two-thirds (64.2 percent)

of health expenditures were paid by the social insurance sickness funds, 16.4 percent came from

private health insurance (which includes the separate system for civil servants), 10.3 percent were

paid from general tax revenues, and the remaining

9.1 percent was paid directly by patients out-ofpocket. (The greater part of patient payments are

contributions for the “hotel” costs of long-term

care facilities.)

One of the cornerstones of the health reform

process in the Netherlands is the introduction of a

compulsory, unified basic health insurance

scheme for people of all income levels designed to

eventually replace both the sickness fund and exceptional medical expenses schemes. According

to the Dekker Committee, basic insurance would

cover the bulk of health and social services, perhaps accounting for as much as 85 percent of expenditures on these services, but there has always

been considerable political discussion about this

percentage (26). Health services not covered by

the basic insurance scheme (e.g., some drugs, dental care for adults, cosmetic surgery (22)) could be

covered by voluntary supplemental health insurance. Health insurers would decide the premiums

for these supplemental services.

Sickness funds and private health insurers will

administer the new scheme and the traditional

boundaries between them will probably be eliminated. The basic health insurance scheme is to be

partially financed by means of income-dependent

contributions determined by the national government and paid into a central fund (tentatively estimated to cover 85 percent of health expenditures)

and partially by competitive flat-rate premiums

paid directly by individuals to insurers (the other

15 percent) (22). The central fund, in turn, will pay

a risk-related premium to the insurer (either a private carrier or a sickness fund) chosen by an individual. Insurers would have an incentive to keep

flat-rate premiums low (which could differ among

insurers) and the quality of care high to attract

consumers (25).

The competitive process envisaged for the

health insurance market will be managed by government regulation to counteract possible negative effects of free-market competition (6). Government regulation strictly precludes adverse

selection, although there are doubts about the effectiveness of this regulation (27). Sickness funds

will no longer be required to contract with all providers; all insurers will be free to contract with the

most efficient providers of care (22).

To date, implementation of the managed competition health reforms is still not complete because of political obstacles and many uncertainties about the reforms’ potential to contain health

care costs. Several major policy issues still need to

be resolved including the following:

 the relative shares of income-dependent contributions versus flat-rate premiums for financing the basic health insurance scheme,

 which health services should be covered

through supplemental instead of basic health

insurance, and

 the development of a system of risk-adjusted

payments from the central fund to the health insurance agencies that administer the basic

health insurance scheme (9,13).

STRUCTURE OF THE HOSPITAL SECTOR

Hospital care in the Netherlands is delivered primarily by private, nonprofit, voluntary institutions. Most former public hospitals (which were

often owned by local governments) have been

transformed into private entities. Usually, the

public proprietor has only formal authority to appoint the members of the hospital board. About 15

percent of acute care hospitals are still public (22).

For-profit hospitals were prohibited in 1971 by

the Hospital Facilities Act (Wet Ziekenhuisvoorzieningen). (Although most hospitals are nonprofit institutions, they can earn surplus revenues.) In

addition, the Sickness Fund Act (Ziekenfondswet)

and the Exceptional Medical Expenses Act (Algemene Wet Bijzondere Ziektekosten) prohibit reimbursement of health services provided by for-profit health centers or private clinics.

Acute hospitals can be divided into three categories: general, academic, and special hospitals.

General hospitals accounted for almost three-
98 | Hospital Financing in Seven Countries

fourths of all acute care hospitals in 1990. Special

(or categorical) hospitals (about 22 percent of

acute hospitals) perform only a limited number of

medical functions directed at a single category of

patients. Examples of services offered by special

hospitals include asthma treatment, pediatric care,

rehabilitation, and epilepsy treatment. Academic

hospitals (about 5 percent of acute hospitals) are

best understood as quasi-public entities. The Minister of Education appoints the members of the

board, and employees have the status of public

servants. Academic hospitals receive supplemental funds from the Ministry of Education for teaching and research activities.

PHYSICIANS

Acute care hospitals are the domain of medical

specialists. Organized in small professional units,

specialists deliver inpatient and ambulatory care

and daycare within hospitals. Only a small group

of hospital physicians, such as ophthalmologists,

psychiatrists, plastic surgeons, and orthopedic

surgeons, practice part-time outside of a hospital.

This may change in the near future, however, as

the number of freestanding ambulatory care centers increases.

The majority of medical specialists are paid on

a fee-for-service basis. Although the exact number

of medical specialists who receive fees for services is not available, a rough indication is that in

1986 about 63 percent of all registered specialists

worked on a fee-for-service basis. Unlike the incomes of salaried specialists, their earnings are

not included in a hospital’s budget. Fee-for-service specialists often pay the hospital in which

they work for the use of certain facilities (e.g., personnel in the outpatient setting, supporting physicians, space). Not much is known about these arrangements.

Fees for specialist care are determined in negotiations among the National Association of

Sickness Funds (Vereniging van Nederlandse Ziekenfondsen), the National Association of Private

Health Insurers (Kontaktorgaan Landelijke Organisatie van Ziektekostenverzekeraars), and the

National Association of Medical Specialists (Landelijke Specialisten Vereniging). Negotiated fees

require approval by the Central Agency for Health

Care Tariffs (COTG) (see the discussion of hospital operating costs). If the parties do not reach an

agreement, the COTG is authorized to establish

fees unilaterally. According to the Health Care

Tariffs Act, the Minister of Health may give binding instructions to the COTG for specialists’ fees

(10).

A continuing inefficiency in Dutch health care

is that specialists’ compensation is often very generous. Since the end of the 1970s, expenditures for

specialist care have been a source of great concern

and several initiatives to reduce them have not had

much success. In 1984 the Ministry of Health and

the National Association of Medical Specialists

negotiated an agreement that in part extended the

practice of reducing fees when specialists overprovided services. Implementation of the agreement was a great failure, however, because in part

it was impossible to detect when individual specialists overprovided services and there was no

explicit expenditure target in place.

Patient cost sharing was introduced in 1988 as a

means of curbing the costs of specialist care. Sickness fund patients were required to pay out-ofpocket Dfl25 when visiting a medical specialist.3

Heavy criticism of this requirement (which was

echoed by critics in the parliament) brought an

early end to this practice (10).

An interesting development took place in 1989

when a Five-Parties Agreement (Vijf Partijen Accoord, or VPA) was negotiated among the National Association of Sickness Funds, the National

Association of Private Health Insurers, the National Association of Civil Servants Health Insurance, the National Association of Medical Specialists, and the National Hospital Association.

The VPA is a good example of self-regulation: the

Ministry of Health did not act as a formal partici3The exchange rate in January 1994 was approximately $US.0PENDIXES52 to Dfl1.00.
Chapter 6 Hospital Financing in the Netherlands 199

pant in the negotiations but merely approved the

results. The VPA had important repercussions for

specialists’ fees. First, the 1989 level of expenditures was accepted as an expenditure target for

specialist care for the 1990 to 1992 period. If the

target were exceeded, fees would be retrospectively reduced to compensate for the difference between target and actual expenditures. A second

part of the agreement further equalized fees paid

by the sickness funds and private health insurers.

(Private insurance fees had always been much

more generous than sickness fund fees.) Third,

fees were restructured to reduce the income inequality among different medical specialties. Fees

for some specialties were lowered (e.g., cardiac

surgical fees were reduced by 30 percent, cardiology fees by 12.5 percent, and radiodiagnostics

fees by 15 percent), and fees for other specialties

were raised (e.g., pediatrics fees were increased by

10 percent, and psychiatry and rehabilitation fees

by 25 percent) (10).

Not surprisingly, specialists who lost income

under the agreement heavily opposed the VPA.

Some blamed the National Association of Medical Specialists for the poor bargaining outcome

and founded their own association (Nederlandse

Specialisten Federate). At the other end of the

spectrum, another association (Netherlandse Specialisten Genootschap) was formed that criticized

the National Association of Medical Specialists

for its exaggerated attention to earnings and its

lack of attention to the quality of care.

Aggregate expenditures for fee-for-service specialist care increased moderately in the 1980s

(table 6-l). The ratio of expenditures for specialist

care to expenditures for general and special hospiYear Percentage increase over

the previous year

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

8.0

3.8

0.2

3.2

4.3

1.8

2.1

3.8

5.8

10.5

NOTE Expenditures for dental specialists (orthodontists) are included

in the figures.

SOURCE Ministry of Health, Financial Report on Health (The Hague.

Ministry of Health, various years).

tals rose only slightly during the past decade, from

21.2 percent in 1983 to 22.4 percent in 1991 (table

6-2). Nevertheless, government goals with respect to specialist care were not achieved; for

instance, from 1986 to 1987, expenditures for specialist care exceeded government goals by about

Df1100 million. In addition, spending on specialist care has been escalating since 1989 (table 6-l).

The Ministry of Health estimated that outlays

exceeded the target by Dfl174 million in 1990 and

Df1360 million in 1992, although these amounts

were disputed by the National Association of

Medical Specialists.

There are several possible explanations for the

failure of expenditure targets. The number of medical specialists has increased and the demand for

health services continues to expand. Also, beMillions of Dfl 1983 1991 Change (in percent)

General, special, academic (A) 11,608 14,151 27.9

General and special (B) 8,882 11,064 24.6

Fee-for-service medical specialists (C) 1,887 2,47 31.2

Total hospital expenditures (THE) (A+C) 12,995 16,528 27.2

Share of THE in national health expenditures (%) 33.5 31.3 -2,2

Share of THE in gross domestic product (%) 3.4 3.1 -0.3

SOURCE: Ministry of Health, Financial Report on Health (The Hague Ministry of Health, various years)
100 | Hospital Financing in Seven Countries

cause the provision of services by other physicians affects an individual physician’s income under an expenditure target if that target is exceeded,

each physician has an incentive to provide more

services to counteract anticipated declines in income from retrospectively reduced fees.

As a result of these and other factors, expenditures for fee-for-service specialist care have risen

rapidly in recent years and are likely to continue to

do so in the future if nothing changes. Downward

adjustments of fees in reaction to target overruns

have led to fierce reactions among specialists,

who argue that the overruns are caused mainly by

the increasing demand for health services. This

appears in part to be a false argument, however,

because the growth of the population and the share

of the elderly in the population have not accelerated since 1989, and it is unlikely that medical

technological innovations spurred demand to the

extent that specialist care expenditures have risen

(12).

HOSPITAL OPERATING COSTS

❚ Financing Model

Funding of hospital operating costs can best be

conceptualized as a two-level decisionmaking

process. At the national level, the policy issue is

the share of the country’s total health care resources that should be spent on hospital care. At

the local level, decisions must be made about the

amount of financial resources allocated to individual hospitals during the year.

Aggregate Hospital Budget

The national government decides the total amount

of funds available to fund hospital services. Since

the 1970s, the Ministry of Health’s annual Financial Report on Health (Financiceel Overzicht

Zorg) has presented an evaluation of past spending on health care and statements about future

spending (8). Initially, those statements were

merely projections of health outlays; however,

over the past decade, they have evolved from expenditure projections to expenditure targets that

have not used coercive instruments to achieve

spending goals, and ultimately to expenditure

limits that are accompanied by coercive instruments to ensure that the limits are not exceeded.

The most frequently used instrument is the reduction of aggregate hospital funds in the following

year to offset cost overruns in the previous year.

The Financial Report on Health has therefore become an important policy document.

Decisions on the aggregate hospital budget are

political and largely dictated by a policy of budgetary restraint that has affected all sectors of public spending since the end of the 1970s. Cost containment and expenditure cuts have become

top-priority themes in public policy. Hospitals

were accustomed to rapid growth of funds prior to

the 1980s but have been confronted with increasingly scarce financial resources.

Individual Hospital Budgets

At the local level, the 1980s saw several major

changes in hospital funding. The most radical

change occurred in 1983 when the traditional hospital funding scheme was replaced by a new

scheme called hospital budgeting.

The Legal Framework

Prior to 1983, payment of hospital services was

regulated by the Hospital Tariffs Act (Wet Ziekenhuistarieven). The act, enacted in 1965, was a typical product of the 1960s when neo-corporatist

(i.e., self-regulatory) arrangements were popular

in policymaking. Decisions on hospital funding

were dominated by the Central Agency for Hospital Tariffs (Centraal Orgaan Ziekenhuistarieven

or COZ), in which representatives of the national

hospital and sickness fund associations played an

important role. The COZ was responsible for developing policy guidelines for hospital reimbursement. Those guidelines resulted from negotiations between representatives of the hospitals,

which wanted generous reimbursement levels,

and representatives of the sickness funds, which

wanted to pay less. The COZ also approved each

hospital’s annual budget estimate, which often required an intensive, line-by-line screening procedure. The Ministry of Health’s authority in this

process was limited (8).
Chapter 6 Hospital Financing in the Netherlands | 101

Beginning in 1982, hospital payment changed

under the Health Care Tariffs Act, which created a

more integrated decisionmaking structure for hospital rates and strengthened the national government’s influence over hospital financing. The new

act introduced a Central Agency for Health Care

Tariffs (Centraal Orgaan Tarieven Gezondheidszorg, or COTG). The structure of this agency was

a political compromise between the government,

which wanted more authority, and the representative organizations, which had a strong lobby in the

parliament and did not want to abandon their influence. The COTG is a quasi-nongovernmental

body that performs four main tasks:

 developing policy guidelines,

 reviewing and approving rate proposals,

 giving advice to the Minister of Health on rate

affairs, and

 providing arbitration in case of conflicts during

rate negotiations.

The Ministry of Health has strengthened its formal position in several ways. First, the Minister of

Health appoints the members of the COTG board

based on consultations with the national associations of employers, employees, health insurers,

and health care providers. Several committees

(kamers) operate within the COTG; their members are representatives of the national associations. Second and more importantly, the law

grants the Minister of Health the formal authority

to give the COTG binding instructions on the development of policy guidelines. These instructions limit the room for negotiations within the

COTG and its committees. (The introduction of

hospital budgeting in 1983 was based on such an

instruction.) Finally, the Minister has the authority to approve COTG rate guidelines (10).

Introduction of Hospital Budgeting

Prior to 1983 each hospital prepared an annual

budget estimate that was required to take account

of COZ guidelines, which regulated allowable

hospital costs that could be funded. There were

dozens of guidelines, including the maximum

amount of spending per patient-day for nursing

staff for hospitals of different sizes; the maximum

number of occupied beds per nurse; the maximum

number of administrators per 100 occupied beds;

and the estimated life and annual depreciation of

each class of equipment and building (8). The

budget estimate was screened by the local sickness fund and required formal approval from the

COZ.

Per diem charges operated as the main unit of

payment for sickness funds and private health insurers. Per diem charges were calculated by first

subtracting from the approved hospital budget

those projected revenues from outpatient care and

other services for which health insurers were

charged separately (nevenopbrengsten) and then

by dividing the remaining part of the budget by the

projected number of patient days.

This traditional funding scheme was open ended because the COZ guidelines did not control

the volume of hospital services. Guidelines mandating the maximum number of personnel to patient-days or occupied beds had a perverse effect,

giving hospitals an incentive to provide a high level of services to prevent financial deficits and to

achieve the growth considered necessary for highquality care. The funding scheme was also open

ended in other ways. In case of hospital deficits,

temporary surcharges on the per diem rates were

often approved.

Two major handicaps of the hospital funding

scheme were that it did not have strong cost containment incentives and it did not encourage hospitals to provide services more efficiently. Policymakers believed that the scheme had contributed

considerably to the escalating growth in hospital

services and expenditures. Another problem was

the labyrinth of COZ regulations, which strongly

restricted the autonomy of hospitals.

The introduction in 1983 of a new funding

scheme called hospital budgeting (with per diem

charges maintained as the primary payment unit)

meant that each hospital received an annual prospectively fixed budget under which most of its

expenses had to be covered. Interest and depreciation expenses largely remained subject to full reimbursement (after recalculation), however, because they vary widely among hospitals.
102 | Hospital Financing in Seven Countries

Additionally, hospital budgets did not include

fees paid to medical specialists as a political compromise to encourage specialists to accept hospital budgeting. The National Association of Medical Specialists effectively prohibited the incomes

of their members from becoming part of hospital

budgets, fearing that such an arrangement might

restrict their professional autonomy and reduce

their incomes. This exception has resulted in

many managerial problems and is a continuing

source of criticism and reform discussions. The

major complaint of hospital managers has been

that effective cost containment in hospitals cannot

be achieved as long as physician fee-for-service

payment remains outside of the budget and, therefore, outside the control of hospital management.

Hospital budgeting severed the traditional link

between the provision of services and revenues.

Because the new funding scheme was designed to

improve efficiency, if a hospital spent less than its

budget, it could add the surplus to its reserves.

Hospitals were held responsible for deficits, however. Budget adjustments to relieve financial

problems were no longer allowed.

Hospital budgeting also enhanced the decisionmaking autonomy of hospitals by eliminating many

COZ guidelines that were no longer needed under

a fixed budget. The National Hospital Association

supported the adoption of the new budgeting system in exchange for greater autonomy.

From Historical to Functional Budgeting

A problem in any budgeting system is how to determine the initial budget level and subsequent

budget increases for individual hospitals. When

hospital budgeting was introduced in 1983, the

pragmatic approach of “historical budgeting” was

chosen. Each hospital received funds equal to its

1982 level of expenses plus an adjustment for general inflation and wage increases. In 1983 the government also approved a 0.5 percent increase in

aggregate hospital budgets, but funds were reduced in 1985 and 1986.

Historical budgeting made rapid adoption of

hospital budgeting feasible and prevented major

funding shifts among hospitals. It also created

problems, however. Hospitals with relatively low

expenses in 1982 claimed that historical budgeting punished efficient hospitals and rewarded inefficient ones—a claim that has been justified by

empirical research (11,14). Historical budgeting

was also inflexible. Budgeted amounts did not reflect changes in the workload of hospitals, and adjusting budgets to changes in hospital capacity

(e.g., beds and medical specialists) also proved

difficult because of the absence of clear guidelines.

After some interim steps to address these problems, functional budgeting for general hospitals

was implemented in 1988.4 Functional budgeting

rests on a normative allocation model under which

the primary goal is to provide equal budgets to

hospitals that perform the same tasks or functions.

To achieve this, the functional budgeting scheme

has three budget components: availability, capacity, and production (or service volume). The availability component part of a hospital’s budget is determined by the size of the population residing in

the hospital’s clinical catchment area. The capacity component’s share is determined by the number of authorized beds and medical specialist

units.5 The production component’s share is established in annual negotiations between the hospital’s management and sickness funds and private health insurers regarding the projected

volume of services to be provided to the sickness

funds’ or insurers’ members (but they do not negotiate the prices for these services, which are set

by the COTG). Production (volume) contracts are

4 Funding of special and academic hospitals differs in some respects from the funding scheme for general hospitals (see box 6-2).

5 Under the Hospital Facilities Act, hospitals need a certificate of need (CON) for each bed and medical specialist unit to receive social health

insurance payments for these facilities (Wet Ziekenhuisvoorzieninger).
Chapter 6 Hospital Financing in the Netherlands | 103

negotiated for the expected number of hospital admissions, inpatient days, outpatient visits, and

daycare visits.6 Additional contracts are required

for some specific high-cost treatments, such as

cardiac surgery or renal dialysis (these payment

rates are also determined by the COTG) (see box

6-1 and table 6-B1).

The availability component averaged 15 percent of hospitals’ budgets in 1992, the capacity

component averaged 34 percent, and the production component averaged 48 percent. The remaining 3 percent was for specific high-cost treatments

(18).

The availability and capacity components are

designed to cover the fixed portion of a hospital’s

operating costs, and the production component is

designed to cover the variable portion. Production

contracts act as an instrument for adapting a hospital’s funding to changes in demand for its services,

making the budgeting scheme more flexible. Production contracts have also increased the role of

health insurers in the budgeting process, which

was marginal under historical budgeting, and have

made the process more decentralized.

The transition from historical to functional

budgeting was accompanied by major funding

shifts among hospitals. The difference between a

hospital’s historical and functional budget can either be positive, indicating that the hospital was

underfunded under historical budgeting, or negative, indicating that it was overfunded according

to the normative allocation model that underpins

the functional budgeting scheme. These reallocations may be substantial; for example, if functional budgeting had been introduced immediately

and not in increments, 14 hospitals would have

faced a negative reallocation of more than 8 percent and 20 hospitals a positive reallocation of

more than 8 percent (1). To dampen these effects, a

phase-in period required that a hospital’s budget

could be adjusted by at most +2 or -2 percent of its

budget from the previous year.

The introduction of a production component

has made the budgeting scheme more open ended

than historical budgeting. The historical budgeting scheme was more or less a closed system, enabling the Minister of Health to impose a cap on

aggregate hospital expenditures. The Health Ministry, however, cannot effectively control the volume of production contracts. Production contracting means that the Ministry can only issue

expenditure targets for a specific year. If total expenditures are higher than the target for a given

year, expenditure cuts in subsequent years are

needed to compensate for these overruns.

Hospital Charges

The determination of a hospital’s budget is different from the way in which hospitals get paid. Hospitals receive most of their funds (85 percent in

1992) through per diem charges for inpatient care.

Per diem charges are determined by subtracting

outpatient services (e.g., outpatient visits, daycare

visits, outpatient ancillary services) from the hospital’s budgeted amount (consisting of the availability, capacity, and negotiated production components). The net budget is divided by the

contracted number of inpatient days, which are

weighted by the class of hospital accommodations

contracted for (classes usually refer to a private

versus a double room) to arrive at the hospital’s

per diem charge.

Since the beginning of hospital budgeting, hospitals have continued to charge insurers separately

for outpatient activities. With respect to inpatient

services, each hospital has developed its own

policy as to whether it charges insurers an all-inclusive per diem rate (i.e., the costs of surgery and

ancillary services are included within the per diem

charge) or charges insurers separately for each of

6 A daycare visit is one in which a patient undergoes minor surgery or other minor treatment in a hospital. After treatment, the patient must

stay in the hospital for several hours for recovery and monitoring. The patient does not stay overnight in the hospital, however. An outpatient

visit is one in which a patient sees a specialist, receives diagnostic services (e.g., x-rays, echograms, lab tests), or even has minor surgery (e.g., a

vasectomy) but leaves the hospital directly after receiving the services.
1041 Hospital Financing in Seven Countries

The table below illustrates the practice of functional budgeting for a hypothetical Dutch general hospital, The hospital’s scores for the various budget parameters (column 3) are multiplied by the corresponding COTG-approved rates (column 2) to arrive at the amount of funds to be budgeted for each

budget component (column 4). Rates applied to the availability (a) and bed capacity (b) components

are the same for all hospitals. Rates applied to the medical specialization units (c) vary according to the

type of specialty and depend on the estimated average utilization of hospital resources for that specialty (for instance, a higher rate is assigned to cardiac surgery than to pediatrics). The rates of the production items (d through h) depend on the size of the hospital, with a larger hospital receiving a higher

rate than a smaller facility. This arrangement is justified by the argument that larger hospitals often perform more difficult and expensive treatments than smaller hospitals.

Interest and depreciation expenses (i) are subject to retrospective reimbursement because these

expenses vary widely among hospitals, which makes it difficult to develop general policy guidelines for

payment. Hospitals receive a normative budget for investments in medical and other equipment (j).

Hospitals also receive a normative budget for the number of salaried physicians in the hospital (k).

Table 6-3 also shows that the revenues of hospital physicians who are paid on a fee-for-service basis

are not included in the hospital’s budget. The reallocation amount of the hospital’s budget (1) depends

on whether the hospital was underfunded or overfunded under historical budgeting. The hospital budget may contain several fixed amounts for specific activities (m) (e.g., a budget for the treatment of AIDS

patients or for the utilization of high-cost pharmaceuticals, such as erythropoietin).

TABLE 6-B1: Determination of the Hypothetical Budget of a Hospital, 1988

Budget parameters Rate (Dfl) Score Budget component

(1) (2) (3) (4)

a. Catchment area (persons) 130 78,000 10,140,000

b. Beds 11,000 350 3,850,000

c. Specialist units (average) 350,000 3 5 12,250,000

d. Admissions 900 7,500 6,750,000

e. Inpatient days 4 5 89,500 4,027,500

f. Outpatient visits 115 28,000 3,220,000

g. Daycare visits 115 3,500 402,500

h. High-cost treatments P M

i. interest/depreciation P M

j Budget for investments in equipment P M

k. Budget for salaried physicians P M

1. Reallocation amount P M

m. Other P M

Total Hospital Budget 40,640,000 + PM —

NOTE PM= Pro memori: terms for which no figures have been given in the example

SOURCE: Budget parameters and rates are from Centraal Orgaan Tarieven Gezondheldszorg (COTG), Annual Report (Jaarverslag),

1990; scores and the resulting budget components are hypothetical and were provided by the author (J.A.M. Maarse, 1994)
Chapter 6 Hospital Financing in the Netherlands 1105

Special hospitals have been subject to historical budgeting since 1983. The development of a normative scheme, however, does not make as much sense for special hospitals as for general hospitals

as most special hospitals are not comparable with each other; for example, there is only one hospital for

ophthalmological diseases. Nevertheless, a budgeting system somewhat similar to the functional budgeting scheme for general hospitals has been used for special hospitals. In 1985, production contracts

with health insurers were introduced; as with general hospitals, such contracts have increasingly determined a larger proportion of a hospital’s budgeted amount. Additionally, the COTG has used some elements of the functional budgeting scheme for general hospitals to determine allowable reimbursable

costs for special hospitals. Finally, patient per diem charges are used as the primary unit of payment.

Arrangements for financing capital investments for special hospitals are similar to those for general

hospitals. After government approval, interest and depreciation payments are covered through per

diem charges. Special hospitals are also subject to Article 18 regulation.

Funding for academic hospitals differs in many respects from the funding of general hospitals. To

begin with, academic hospitals receive a budget from the Ministry of Education for teaching and research activities. In 1991 this budget amounted to 25 percent of the total budget for academic hospitals. Moreover, since 1985 budgets for academic hospitals have been based mainly on production contracts with health insurers for an extensive list of high-cost treatments. Examples include neonatology,

MRI, open-heart surgery, kidney transplantation, PTCA, renal dialysis, chronic ambulatory peritoneal

dialysis, radiotherapy, bone marrow transplantation, rehabilitation, heart transplantation, and IVF. Rates

for these treatments are determined by the COTG. Availability or capacity components do not determine any part of an academic hospital’s budget. Instead, academic hospitals are paid a much higher

rate for high-cost treatments than are general hospitals; academic hospitals receive the entire costs of

high-cost treatments, whereas general hospitals are paid only for that portion of the costs not covered

by the availability and capacity components. Academic hospitals argue that a considerable discrepancy often exists between allowable rates and the actual costs of providing high-cost services, in part

because the rate-setting process often lags behind the growth of medical innovation in academic hospitals, An important similarity between academic and general hospitals is that patient per diem charges

are the most important unit of payment. As with general hospitals, there is a trend toward uniform “output pricing” for some inpatient surgical and ancillary services.

Another difference between academic and general hospitals relates to the financing of capital investments. Until 1988, capital investments of academic hospitals were financed by the government,

however, capital financing arrangements are now similar to those of general hospitals.

SOURCE: J.A. M. Maarse, 1994

these inpatient services. Because of the different charge separately. Charges for these services will

policies: per diem rates charged by different hospitals cannot be directly compared with each

other.

The current trend, however, is toward uniform

“output pricing” for some inpatient surgical and

ancillary services. The COTG has developed uniform, country-wide rates for along list of inpatient

clinical services for which hospitals must now

no longer be included within the hospital’s inpatient per diem rate, making per diem charges less

inclusive. Another trend is that hospitals are increasingly required to charge COTG-determined

rates for some high-cost treatments (e.g., renal

dialysis, bone marrow transplantation, open-heart

surgery) that cover not only the costs of the medical treatment itself but also the costs of ancillary
106 | Hospital Financing in Seven Countries

services such as intensive care and nursing services. Under the reformed health system of managed competition, the COTG has set maximum

rates for all services. At least in theory, hospitals

can compete by charging lower rates.

Until 1992, inpatient per diem charges rose rapidly in part because hospital costs were increasing

and in part because of the somewhat paradoxical

effect of using per diem charges as the main unit of

hospital payment. If a hospital delivers fewer inpatient days than it contracted for in determining

its prospective budget, the hospital is entitled to

receive compensation for those undelivered days.

The hospital makes up the shortage in its budget

through surcharges (i.e., temporary additional

charges) on its per diem rates in subsequent years.

The higher per diem rates might even include interest payments on funds the hospital borrowed to

cover deficits in operating costs in the previous

year. The paradox is that a more efficient delivery

of hospital services that results in the provision of

fewer inpatient days correlates with an increase,

rather than a decrease, in inpatient per diem

charges in subsequent years. The trend toward

output pricing should mitigate this effect since

more services will be charged for on a per-service

basis. Currently, per diem charges are estimated to

account for about 70 percent of total hospital revenues, down from 85 percent in 1992.

If a hospital delivers more outpatient and daycare visits than it contracted for in determining its

prospective budget, the hospital must pay back the

surplus in the subsequent year by temporarily

lowering its per diem rate. On the other hand, if a

hospital provider fewer visits than contracted for,

the hospital still gets paid for these undelivered

services through temporary surcharges on per

diem rates in subsequent years.

Revision of Functional Budgeting

The functional budgeting scheme has been a continuing target for criticism. Hospitals have argued

that the initial model was too crude; health insurers warned of certain perverse incentives in the

scheme and also advocated a stronger position for

themselves in the budgeting procedure. These

criticisms prompted a second major revision of

the scheme in 1992, the most important elements

of which were as follows:

 The rate for a daycare visit was raised to stimulate substitution of daycare for inpatient care.

 A built-in weakness of functional budgeting

was that it encouraged hospital mergers because the rates for production items (e.g., admissions) increase with the size of the hospital.

This merger effect was halved.

 The rates for admissions and first outpatient

visits were weighted according to the average

utilization of hospital resources. The weights

were derived from those of the medical specialist units.

 The share of the production component was

raised to 51 percent. The rationale for this

change was to emphasize production factors

and increase the flexibility of hospital budgeting.

 The budgeted amount that hospitals receive for

services ordered by general practitioners

(mainly laboratory services and x-rays) was increased. To obtain a good fit between the budgeted amount and actual production volume,

the budgeted amount was made dependent on

production contracts with health insurers.

 Radiotherapy was added to the list of specific

high-cost treatments for which separate production contracts were required.

These changes have tempered criticisms of the

functional budgeting scheme, although there is no

reason to believe that they have ended. The revisions to the functional budgeting scheme have

added to its complexity because the number of parameters has increased along with the need for

more adequate and timely information.

Summary

Adoption of the functional budgeting scheme in

the Netherlands was the result of political influences and compromises. The fundamental

compromise concerned how to achieve the goals

of central cost control, on the one hand, and decentralized decisionmaking, on the other. Centralized cost control could be maximized by making
Chapter 6 Hospital Financing in the Netherlands I 107

General and special Academic Fee-for-service

Source hospitals hospitals specialists

Sickness funds scheme 64.0 47.0 45.2

Exceptional medical expenses scheme 5.5 0.2 5.5

Private health insurance 28.0 23.3 46.3

Taxes 0.0 25.2 0.0

Other 2,5 4.1 3.0

NOTE: Percentages may not add up to 100 percent due to rounding.

SOURCE: Ministry of Health, Financial Report on Health (The Hague: Ministry of Health, 1992)

the hospital budget solely dependent on its capacity characteristics. Decentralized decisionmaking, however, would require more room for negotiations between hospitals and health insurers at

the local level. The compromise was found in the

introduction of a production component in the

hospital budget. The price of this compromise is

that the scheme has again become open-ended.

Another important political compromise was

the decision not to include specialists’ revenues

within hospital budgets. The open-ended payment

scheme for specialists has placed hospital management under pressure to contain costs and has

also contributed to more open-ended hospital expenditures.

Political decisions and compromises also centered around more technical questions, such as

these: Which parameters should be selected?

What should be the weight of the parameters?

Which services should be singled out for special

“financial treatment” in the budget? Why do hospitals receive a special budget for AIDS patients

and not for other categories of patients? The resolution of these questions is likely have important

repercussions for hospital budgets.

■ Sources and Allocation of Operating

Funds

Table 6-3 demonstrates the major role of the sickness funds in financing hospital expenditures. In

1991, sickness funds paid for almost two-thirds of

general and special hospital care, almost one-half

of academic hospital care, and 45 percent of payments to fee-for-service specialists working in

those hospitals. The role of the exceptional medical expenses scheme is very limited, funding only

about 6 percent of general and special hospital expenses in 1991 (table 6-3). This is hardly surprising, as that scheme finances mainly long-term

care. Tax resources are important only with respect to the funding of academic hospitals (25 percent of their funds in 1991), which obtain most of

their money from the Ministry of Education. Private health insurance finances a relatively large

share of hospital expenditures, especially with respect to payments for medical specialists. In 1991,

private insurers paid for slightly more of their

costs than did the sickness funds, and funded

approximately a quarter of all hospital care (table

6-3).

In 1989, about 60 percent of aggregate hospital

expenses went to pay for staffing salaries and 13.5

percent was for medical supplies. Depreciation

and interest accounted for 14 percent of hospital

operating expenses. The other 12.5 percent was

for miscellaneous expenses.

■ Operating Expenditures

The introduction of hospital budgeting has had

many effects (see, for example, 15), but only the

financial ones are discussed in this chapter. A distinction is made between financial effects at the

aggregate level and those at the hospital level.
108 Hospital Financing in Seven Countries

Difference

Change in between

Change in aggregate budgeted

Aggregate budget budget over Aggregate hospital expenditures amount and

for hospital care previous year expenditures over previous aggregate

(million of Dfl) (in percent) (millions of Dfl) year (in percent) expendituresa

Year (A) (B) (c) (D) (E)

1979

1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

No budget

No budget

No budget

No budget

8,812

9,058

9,097

9,165

9,242

9,457

9,706

10,034

10,656

-

--

--

--

2.8

0.4

0.7

0.8

2.3

2.6

3.4

6.2

6,995

7,639

8,219

8,812

8,874

8,835

9,043

9,228

9,250

9,439

9,86

10,399

11,064

9.0

9.2

7 6

7.2

0.7

-0.4

2.3

2.0

0.2

2,0

4,5

5,4

6,4

--

--

--

--

-0.7

2.5

0.6

-0.7

-0.1

0.2

-1.7

-3.6

-3.8

a A negative percentage in column E indicates that actual aggregate expenditures were greater than the budgeted amount for that year

SOURCE: Ministry of Health, Financial Report on Health (The Hague: Ministry of Health, 1992).

Table 6-2 summarizes key information on the

growth of hospital expenditures over the past decade. (Total hospital expenditures as calculated in

this chapter include hospital payments to medical

specialists, which are not included in the OECD’s

estimates of hospital expenditures.) On average,

aggregate hospital expenditures increased by 27

percent over the eight-year period from 1983 to

1991—a very moderate amount under hospital

budgeting when compared to growth in the 1970s.

For example, for the pre-budgeting period from

1974 to 1983, expenditures for general and special

hospital services increased by almost 174 percent.

Table 6-4 compares the aggregate budget for

general and special hospitals with actual expenditures over the 1978 to 1991 period. Column A displays the aggregate amount budgeted for hospital

care, beginning with the adoption of historical

budgeting in 1983. After 1987, budgets may best

be considered expenditure targets because of the

incorporation of a production component in the

flexible budgeting process. The figures in columns A and B indicate that the growth in the aggregate budget was very limited during the first

years of hospital budgeting but has increased in

more recent years. Table 6-5 indicates that more

than 80 percent of this growth was to accommodate general inflation and wage increases. This

large increase is somewhat alarming from the

viewpoint of cost control because it suggests that a

policy of budgetary restraint is only a temporary

option. It maybe possible to curb expenses initially, but after some period of time, increases in hospital expenses may be inevitable. Current and past

adjustments of the aggregate budget to relieve

work pressures on nursing staffs point in the same

Final budget from 1990 10,216

Inflation 87

Wage increases 343

Adjustment for delays in negative reallocations -22

Construction activities 66

Bed-reduction -45

Top-clinical care 11

Total aggregate budget, 1991 10,656

SOURCE: Ministry of Health, Financial Report on Health (The Hague

Ministry of Health, 1992).
Chapter 6 Hospital Financing in the Netherlands | 109

direction. These adjustments are a result of political action by hospital workers who do not want to

accept the consequences of a policy of budgetary

restraint.

Columns C and D in table 6-4 suggest that there

have been three distinct periods of hospital spending trends in the Netherlands. During the pre-budgeting period from 1978 through 1982, aggregate

hospital expenditures grew by 33 percent. This

growth rate decreased dramatically after the

introduction of hospital budgeting. Growth of aggregate expenditures for hospital care declined to

about 5 percent over the 1983 to 1987 period.

Since the implementation of functional budgeting

in 1988, however, aggregate expenditures have

tended to rise again, increasing by 19.6 percent

over the period 1988 to 1991 period. These figures

look different when expenditures are adjusted for

the effects of general inflation. Unadjusted expenditures increased an average of 2.8 percent annually over the period from 1986 through 1990, but adjusted growth averaged only 0.2 percent a year

(17). The inflation-adjusted figure is even less

than the annual growth of the population.

The Ministry of Health claims that hospital

budgeting has been a success from a cost containment point of view because the excessive growth

in aggregate expenditures prior to budgeting has

stopped. This is obviously true for the 1983 to

1988 period, and for the 1989 to 1991 period in

which annual increases in aggregate expenditures

were still below those in the pre-budgeting period.

Nevertheless, the figures allow for conclusions

only about the gross effect of hospital budgeting

and not about its net effect. The fact that hospital

services are increasingly being delivered on an

outpatient basis may imply that some of the costs

formerly borne by hospitals themselves have been

shifted to other sectors of the health care system.

Unfortunately, studies of the cost-shifting effect

of the substitution of outpatient for inpatient care

are not available.

Another test for the effectiveness of hospital

budgeting to contain costs is a comparison of actual aggregate hospital expenditures with the aggregate budget for hospital services. Such a comparison is presented in column E of table 6-4. The

figures demonstrate that hospital budgeting was

successful over the 1983 to 1988 period. From

1989 to 1991, however, there were sizable gaps

between expenditure targets and actual hospital

expenditures (i.e., aggregate hospital budgets).

Moreover, these gaps coincided with considerable

increases in aggregate hospital budgets during

those years (see columns A and B).

There are several complementary explanations

for the recent gaps between expenditure targets

and actual expenditures. First, the government has

not sufficiently accounted for the growing demand for hospital services in establishing the targets. Decisions on aggregate funds for hospital

care are essentially political, dictated by the

necessity to constrain spending. They do not necessarily reflect the growth of hospitals’ workloads

or cost increases due to technological innovations.

This is a general weakness in the system of hospital budgeting. The National Association of Hospitals has repeatedly stressed these points but without much success; politicians simply argue that

hospitals should be more efficient.

A second explanation for the excess spending is

related to the role of production contracts in the

budgeting process. These contracts have weakened the ability of the Ministry of Health to control the aggregate budget for hospital care. The

Ministry has displayed too much optimism in setting its expenditure targets, underestimating the

total volume of production contracts, perhaps for

political reasons. The capacity component in hospital budgeting operates in a similar way. Any

delay in the implementation of bed-reduction programs automatically translates into a higher aggregate budget for hospital care, as individual hospital budgets also depend on their bed capacities.

It is fair to state that the Ministry has always been

overly optimistic about the pace of implementation of its bed-reduction programs.

Third, the gaps between expenditure targets

and actual expenditures can be explained in part

by the presence of certain expenditure-increasing

incentives in functional budgeting that have been

overlooked in setting expenditure targets. The

first mechanism is the merger effect. If two hospitals merge, the overall budget of the newly merged
110 | Hospital Financing in Seven Countries

hospital exceeds the sum of the budgets that the

two hospitals would have received had they remained separate entities. This is because rates for

production items are higher for larger hospitals

than for smaller ones. As noted earlier, this merger

effect has now been halved.

A second mechanism stems from the arrangement whereby interest costs for loans to cover deficits from hospital payment shortages are fully reimbursable. This arrangement does not motivate

hospitals to urge a quick payment of their full

budget. Total deficits amounted to Dfl1.7 billion

in 1991, but this amount was reduced by Dfl500

million in 1992, and administrative measures

have been taken by the COTG to prevent new

shortages in payments.

A fourth explanation for the failure to achieve

the expenditure targets may be that hospitals

reacted to the introduction of hospital budgeting

by postponing certain investments and other activities. Eventually, costs began to increase again

because investments could not be postponed indefinitely. According to this argument, the initial

effectiveness of hospital budgeting is in fact partially an illusion. Further research is needed to test

this hypothesis.

The growing gaps between the Ministry of

Health’s aggregate budgets and aggregate expenditures have resulted in increasing political tension between the Ministry and the hospital sector.

Problems are caused by the fact that the Ministry

requires compensation when its expenditure targets have been exceeded. To the degree that these

targets have failed because the volume of production contracts is too high, it can be argued that the

Ministry has behaved somewhat inconsistently.

On the one hand, it prefers a certain degree of decentralization in the budgeting procedure; on the

other, it does not accept the result of decentralized

decisionmaking if the result does not satisfy its expenditure target.

The policy of budget restraint has affected the

financial position of individual hospitals. Many

hospitals have not been able to keep their expenditures within budget. According to studies by the

COTG, the proportion of hospitals with deficits

has varied between 50 and 70 percent since 1986

(18). At the same time, the proportion of hospitals

with a negative reserve has risen from 10.9 percent

in 1986 to 15 percent in 1990. These figures clearly illustrate that the introduction of hospital budgeting has placed many hospitals under financial

pressure. It is no wonder that hospitals have always associated hospital budgeting with expenditure cuts.

HOSPITAL CAPITAL COSTS

❚ Relationship of Operating and Capital

Costs

Although investments in hospital construction

and certain types of major medical equipment require regional and central government approval,

such investments are not financed directly by the

government; hospitals take out loans from private

banks to financing major capital investment projects. Depreciation and interest payments are fully

recoverable through increases in inpatient per

diem charges. In contrast to Germany, for

instance, there is no dual financing system in the

Netherlands as both operating and capital expenses are paid for through hospital charges to

health insurers or patients.

Until recently, hospital loans were guaranteed

by the national government, which is estimated to

have decreased interest payments by 1 percent on

average. This arrangement was recently ended to

encourage hospitals to behave like other private

market companies in obtaining loans for capital

investments. Banks regretted this change and

even alleged that hospitals had lost much of their

attractiveness as investment partners.

❚ Determining Capital Requirements

Hospital Construction

Major hospital capital expenditures in the Netherlands have been subject to strong public regulation during the past two decades. Governmental

approval of new hospital construction occurs during the hospital planning process regulated by the

Hospital Facilities Act (Wet Voorzieningen Gezondheidszorg), initially implemented in 1971

and revised in 1979. Hospital construction re-
Chapter 6 Hospital Financing in the Netherlands | 111

quests must be included in the regional hospital

facilities plan for each of the 27 regions in the

Netherlands. This plan is prepared by regional

governments and comes into force after final approval by the Ministry of Health. Sickness funds

are not permitted to pay the operating costs of services provided with capital equipment that has not

received government approval.

The process of regional hospital planning has

not been a great success. At the end of 1988, only

one regional plan had been approved by the Minister of Health, and two plans had been sent to the

Minister for approval. Hospital planning is generally considered a very bureaucratic process. This

is due in part to the complicated framework of the

Hospital Planning Act, which gives all interested

parties numerous opportunities to delay the planning process. Planning is also hindered by political competition among hospitals for investment

approvals.

Because of delays in hospital planning, the

Ministry of Health created new instruments to bypass the Hospital Facilities Act. The most important instrument was a hospital building ceiling

introduced in 1974 that limits hospital capital expenditures. This ceiling equals the sum of the approved building expenditures for one year, assumed to be 50 percent of total investment

expenditures. The use of ceilings has strongly reduced building production (7). In 1980 the ceiling

was 1.7 percent of total health care expenditures

but in 1990, it was only 1.2 percent. The low ceiling has resulted in a huge backlog of building

projects, estimated at Dfl6.6 billion at the end of

1989. Hospitals are concerned about the backlog,

emphasizing its possible consequences for the

quality of care.

The Netherlands’ aggregate hospital investment budget is divided into several sections. At

present there are 12 provincial sections, a section

for national projects, a section for small investments for which a more rapid procedure applies,

and a general reservation section for bottlenecks

and calamities. Nineteen criteria have been developed to allow for preparation of a priority list for

investments for each section that is published

annually by the Ministry of Health. As this list indicates, a greater priority has been given to the

nonacute care hospital sector. The share of general

and special hospitals in total investment spending

was 60 percent in 1988, dropping to 39 percent in

1991.

Regional governments play a major role in deciding which hospital projects will be funded at

the regional level, subject to the central government’s priority list. Hospitals use all their political

muscle to lobby for a favorable decision. The

General Account Office has concluded that factors

that influence final decisions are difficult to comprehend and generally ad hoc.

In 1991, the approval procedures prescribed in

the Hospital Facilities Act were simplified to reduce bureaucracy and to enhance hospitals’ autonomy with respect to investment decisions. To

achieve those goals, the category of investments

not subject to government approval has been extended considerably. The COTG has developed a

model for budget allocations for these investments, with the amount of resources for each hospital dependent on the number of square meters of

the facility. Annual depreciation has been set at 10

percent of investment costs for all hospitals. Hospitals still need government approval for new

large construction projects, however.

Investments in Major Medical Equipment

Article 18 of the Hospital Facilities Act enables

the Ministry of Health to regulate high-cost care

and investments in medical equipment. By means

of a licensing system, the Minister concentrates

equipment in certain hospitals to improve the

quality of care, reduce expenses, and prevent uncontrolled growth. Hospitals have a strong interest in obtaining Article 18 facilities because these

facilities confer greater status and a larger budget.

Medical technologies are regulated under Article 18 if they are very expensive, require very

specialized knowledge, or are ethically controversial. In 1990, Article 18 applied to renal dialysis,

kidney transplantation, radiotherapy, complex

neurosurgery, heart surgery, percutaneous transluminal coronary angiography, neonatology, clinical genetic research, and in vitro fertilization
112 Hospital Financing in Seven Countries

Article 18 facilities Hospitals

Renal dialysis

Kidney transplantation

Radiotherapy

Neurosurgery (main centers)

Heart surgery

PTCA diagnostics

PTCA treatment

Neonatology

Clinical genetic research

In vitro fertilization

48

8

21

16

14

50

12

11

9

12

SOURCE: Ministry of Health, financial Report on Health (The Hague:

Ministry of Health, 1992).

(table 6-6). In 1993, bone marrow, liver and pancreas transplantation, and positron emission tomography were added to the list. Computed tomography, nuclear medicine, and magnetic

resonance imaging are not regulated by Article 18.

Article 18 does not work very well in practice.

One of its defects is that licensing procedures are

too slow and time consuming. Many hospitals invest in facilities before they have been licensed

under the article (3). Another criticism is that Article 18 suffers from lack of information on costs

and effects as well as lacking flexibility. Building

activities tend to be much more effectively regulated than investments in major medical equipment.

Minor Investments

Hospitals must cover smaller capital investments

that do not require a license from their own budgets, which contain a special component for such

investments. A fixed lump sum allows hospitals

to make their own decisions about small capital

purchases.

❚ Capital Expenditures

According to the Central Office for Statistics, total

investment in the institutional health care sector

(excluding academic hospitals) amounted to

Dfl l.2 billion in 1983, equaling 3.1 percent of national health expenditures. In 1990, investments

increased to Df1 2.6 billion (including academic

hospitals), equaling 5.3 percent of national health

expenditures.

HOSPITAL INDICATORS AND TRENDS

One of the most pervasive trends in the Netherlands’ hospital sector has been consolidation of

acute care hospitals during the past decade, as evidenced in table 6-7. This process has led to an almost complete disappearance of small general

hospitals; only 13 general hospitals had fewer

than 200 beds in 1992. The average number of

beds in general hospitals increased from 349 in

1981 to 437 in 1990 (table 6-8). A similar process

of consolidation also took place in special hospitals (table 6-7). However, special hospitals are still

usually small in terms of bed size (e.g., 10 hospitals had fewer than 50 beds in 1992).

Rapid consolidation within the hospital sector

has resulted largely from hospital mergers. Merging is often the only way for small hospitals to survive. Hospitals also consider mergers as a way to

improve the quality of care, strengthen their organizational and financial capabilities, end rivalries

among hospitals in times of scarce financial resources, and reduce uncertainties associated with

health care reform. Recent mergers of mediumsized general hospitals are mainly the result of an

Number of acute care hospitals 1981 1990 Change (in percent)

General hospitals 172 120 -30.2

Academic hospitals 7 9 +.28.6

Special hospitals 48 36 -25.0

SOURCE: National Hospital Institute, De Intramurale Gezondheidszorg in Cijfers (The Inpatient Sector in Figures), 1991.
Chapter 6 Hospital Financing in the Netherlands 113

1981 1990 Change (in percent)

General hospitals

Number of beds 60,021 52,423 -12,7

Number of specialists 5,057 5,830 15.3

Beds per hospital 349 437 25.2

Academic hospitals

Number of beds 6,748 7,579 12,3

Beds per hospital 964 842 -12.7

Special hospitals

Number of beds 6,143 4,687 -23.7

Number of specialists 422 350 -17.1

Beds per hospital 128 130 1.6

SOURCE: National Hospital Institute, De Intramural Gezondheidszorg in Cijfers (The Inpatient Sector in Figures), 1991

unintended incentive in the hospital funding

scheme, discussed earlier.

The decreasing number of hospitals and hospital beds has also been stimulated by Ministry of

Health policies. The Ministry has been eliminating the perceived overcapacity in the acute care

sector, arguing that “a built bed is a filled bed.”

The bed-to-population ratio decreased from 4.2

per thousand population in 1981 to 3.5 in 1990

(18). The latest Ministry target is 2.8 beds per

thousand population.

Ironically, the Ministry is concerned that the

trend toward larger hospitals, which often seek the

latest in medical technology and treatment facilities, will result in an oversupply of high-technology clinical care. A recent government report raised

the issue of whether these second-wave mergers

are a desirable development from the perspective

of cost containment and quality of care (20).

Since the mid- 1980s, consolidation in the acute

care sector has been accompanied by an increasing

number of freestanding ambulatory care centers.

Den Hartog and Janssen (5) counted 44 private

health centers (priveklinieken) in 1992. This development reflects the spirit of entrepreneurial

medicine and is clearly linked to the increase in

market-oriented thinking within the Netherlands’

health care system. It is unclear yet to what extent

these centers will become a permanent element of

the Dutch hospital system. Currently, such centers

have contracts only with private health insurers as

the Sickness Fund Act does not permit sickness

funds to contract with private health centers.

The declining number of hospital beds and the

concurrent growing number of specialists in general hospitals reflect another trend in hospital care.

The hotel functions of hospitals have lost importance and the treatment of patients has received

more emphasis than ever before. The specialistto-population ratio increased from 3.5 medical

specialists per 10,000 population in 1981 to 3.9 in

1990, and the specialist-to-bed ratio increased

from 8.4 to 11.1 over the same period.

Another trend, evidenced in table 6-9, is the

substantial decline in the volume of inpatient care

over the 1981 to 1990 period, accompanied by

substantial growth in outpatient care and daycare.

The percentage of same-day surgeries in seven

main categories of surgery increased from approximately 15 percent in 1985 to 28 percent in 1990.

The growth of outpatient care and daycare appear

to be mainly the result of new developments in

medical diagnostics and treatment. Another important stimulating factor was the introduction of

hospital budgeting for inpatient services in 1983,

which gave hospitals an incentive to expand outpatient and daycare.

The nursing home sector has surpassed the

acute care hospital sector with respect to the volume of inpatient days, exceeding that volume by

more than one million days in 1990. The prominent position of nursing homes in the Dutch health
114 I Hospital Financing in Seven Countries

1981 1990 Change (in percent)

Admissions (in thousands)

Inpatient days (in thousands)

First outpatient visits (in thousands)

Outpatient visits (in thousands)

Daycare (in thousands)

Average length of stays (in days)

Average occupancy rate

Production per 10,000 inhabitants

Admissions

Inpatient days

Outpatient visits

Daycare

1,392

18,149

3,364

16,276

0

13.0

82.8%

974

12,704

11,393

0

1,308

13,882

5,625

18,757

365

10,6

72.5%

871

9,248

12,496

243

-6.0

-23.5

67.2

15,2

NA

10.6

-27.2

9.7

NA

SOURCE: National Hospital Institute, De Intramurale Gezondheidszorg in Cijfers (The Inpatient Sector in Figures), 1991

care system is also illustrated by the fact that the

total number of nursing home beds for long-term

care increased by more than 9 percent during the

last decade—from 47,380 in 1980 to 51,682 in

1990-where as the number of acute care beds declined by more than 11 percent between 1981 and

1990.

FUTURE DIRECTIONS

Before analyzing the future of hospitals in the

Netherlands, the Dutch hospital budgeting

scheme’s strong and weak points are assessed.

The budgeting scheme is only an instrument for

allocating financial resources to hospitals. Hospital budgets can be used in combination with a

policy of cost restraint and expenditure cuts or in

combination with a more generous funding policy.

The main advantages of the scheme areas follows:

■ Hospital budgeting has improved cost control

over the earlier traditional, open-ended funding

scheme. Cost control was most effective under

the historical budgeting scheme; functional

budgeting has been less successful. Yet increases in aggregate hospital expenditures before the introduction of hospital budgeting exceeded growth of expenditures after the

adoption of functional budgeting.

The introduction of production contracts between hospitals and health insurers has contributed to the flexibility of the budgeting scheme.

These contracts have made it possible to more

easily adjust hospital budgets to changes in

workload.

Hospital budgeting has enhanced the prospects

for more efficient delivery of hospital services.

If a hospital spends less than its budget, it can

add the surplus to its reserves. Hospitals, however, are held responsible for their deficits;

budget adjustments to relieve financial problems are no longer allowed.

Hospital budgeting has improved hospital

management by giving hospitals greater decisionmaking autonomy. The traditional openended scheme did not encourage effective management.

The transition from historical to functional

budgeting has improved the equitable allocation of funds among hospitals.

The scheme’s main disadvantages are as follows:

Government decisions on the aggregate amount

of financial resources for hospital care are essentially political, dictated by the necessity to

constrain expenditures. They do not necessarily reflect the growth of hospital workload or

cost increases due to technological innovation.
Chapter 6 Hospital Financing in the Netherlands 1115

■

■

■

■

■

Hospital budgeting may negatively affect the

quality of care.

There is some inconsistency in the functional

budgeting scheme. On the one hand, the Ministry of Health has accepted the introduction of

production contracts to increase flexibility; on

the other, it does not accept overruns of its expenditure targets when the volume of production contracts is higher than expected.

From an administrative point of view, it would

be simpler to transfer to each hospital onetwelfth of its budget every month. However,

such payments are incompatible with a multitude of health insurers. The system of inpatient

per diem charges and additional charges has

been maintained, but this has made hospital

budgeting more complicated.

The incomes of hospital-based medical specialists who are paid fees for their services are not

included in the hospital budget, which adds to

the complexity of hospital management.

The financial situation of many hospitals appears to have deteriorated after the introduction

of hospital budgeting. The degree to which this

has happened appears to depend on the quality

of hospital management, however.

Certain aspects of the future of hospital financing can be investigated by exploring the impact of

ongoing health care reforms in the Netherlands.

Such an investigation can be only speculative at

present, however, because many uncertainties

persist concerning the eventual fate of the health

care reform process.

Figure 6-1 shows that under the reformed

health care system, there will be two flows of payments from the population/patients to health insurers. Each person will pay income-dependent

payroll taxes into a central fund (A), which will

then be channeled to health insurers through a

c

– Service flows

Financial flows

SOURCE: J.A.M. Maarse, 1994

system of risk-adjusted payments (B).7 The second flow consists of flat-rate premiums collected

directly from consumers that are determined by

health insurers (C). Health insurers contract with

physicians, health care institutions, and other providers to deliver services to the insurers’ members

(D). Health insurers eventually will be allowed to

contract selectively with all providers, although

currently, selective contracting applies only to

noninstitutional providers. Providers deliver

health services to patients (line E). Figure 6-1 is a

simplification insofar as individuals can opt for

some cost sharing when selecting insurance coverage.

The new framework for health care has important implications for health insurers. Under the

traditional scheme, sickness funds were reim7 Under health system refom, payments from subscribers to sickness funds for health-related expenditures have changed to a new system

called “sickness fired budgeting.” Since 1993, risk-adjusted payments from the central fund to the sickness funds have been based on age and

gender, but a large part of the difference between the budget of a sickness fund and its historical expenditures is calculated to prohibit gross

reallocations among sickness funds. This difference will be gradually reduced according to a sliding scale until only risk-adjusted payments are

made. When, or if, the new health care financing system is fully operational, both sickness funds and private health insurers will be reimbursed

according to the system of risk-adjusted payments.
116 | Hospital Financing in Seven Countries

bursed through employee/employer payroll contributions for all of their payments to hospitals if

these costs were reasonable and conformed with

national guidelines. The arrangement did not encourage sickness funds to enter into hard negotiations with hospitals or other providers because

extensive bargaining over costs did not benefit the

funds (11). In contrast, the introduction of risk-adjusted payments under the new system compels

insurers to pay more attention to costs. Risk-adjusted payments impose a limit on financial resources from the central fund to health insurers.

Flat-rate premiums also introduce incentives for

cost containment. If an insurer does not effectively control its expenses, it will have to raise its premiums, perhaps weakening its competitive position and causing it to lose subscribers. Because

private health insurers are allowed to operate as an

administering agency under the reforms, they too

now have to deal with the new budgeting system

(27). 

Although the eventual fate of health care reform in the Netherlands is still uncertain, it already has had a substantial impact on the health insurance industry. One of the most conspicuous

changes is mergers between sickness funds, which

have resulted in a decrease in the number of funds

from 53 in 1985 to 26 by the end of 1992. During

the same period the number of private health insurers decreased from 69 to 59. There has also

been a rapid growth in strategic alliances between

sickness funds and private health insurers, mainly

to increase market share. Mergers strengthen their

organizational and financial position in the health

insurance market and give them some protection

against the uncertainties and financial risks related to ongoing health reforms.

Health care reform will continue to have a large

impact on the role and position of health insurers.

Cost containment and improved efficiency have

gained more importance in recent years. In theory,

there are three major strategies for health insurers

to contain costs. The first is to practice some form

of medical underwriting. As noted earlier, this

strategy has been formally prohibited, although

the regulations may not be entirely effective (27).

The second strategy is to control insurance administrative costs. The third focuses on the insurerprovider relationship. One of the goals of health

care reform is to encourage health insurers to be

stronger bargaining agents for the purchase of

health services than they were under the previous

system. The transition from the traditional supply

approach to controlling health care costs (e.g.,

control of beds and specialist units) to a demand

approach is expected to improve efficiency and

the quality of care and may also help reduce health

care bureaucracy. The new purchasing role for

health insurers has caused them to redefine their

relationship with hospitals.

Health insurers face at least four major problems, however, in adapting to their new role under

the reforms. The first problem is the mismatch between the financial responsibilities that health insurers are required to bear under the reformed system and the instruments they have to fulfill these

responsibilities. This is particularly acute with respect to capital investments. The Hospital Facilities Act strongly limits the decisionmaking power

of insurers by creating an institutional separation

between the planning and financing of investments. Planning and investment decisions are

made during the planning process, but insurers

have to pay any increase in operating costs

associated with these decisions. Transferring

more financial responsibility to health insurers necessitates a much greater voice for them in investment decisions. The National Association of Sickness Funds has already expressed its desire to

obtain formal authority to influence the capacities

of hospitals. To date, the planning of hospital capacities is still under the jurisdiction of regional

and national governments, and the partial dismantling of that system has been slow.

The second problem concerns contracting for

hospital care. As noted previously, decisions

about the aggregate budget for hospital care are

political and do not necessarily reflect hospitals’

workloads. Health care reform means that hospital

budgets will now be determined by health insurers, which are expected to negotiate with hospitals

regarding the expected volume of care. But for

how much care should an insurer contract? What

knowledge is necessary to contract for sufficient
Chapter 6 Hospital Financing in the Netherlands | 117

care? What if a patient sues an insurer for not having contracted for sufficient care? Instead of negotiating with hospitals for production contracts, it

might make more sense for health insurers to negotiate charges for hospital services or to develop

a system of case-based payments using diagnosisrelated groups or patient management categories.

There is still a long way to go because health insurers lack such experience. Insurers may also secretly prefer that government continue to regulate

planning affairs because government guidelines

protect them against patient complaints about

waiting lists.

The third problem is that health insurers have to

negotiate with hospitals over the costs of services,

but the necessary cost information is still largely

unavailable. In the past, such information was unnecessary.

Fourth, health insurers need a strategic management approach to their relationship with providers. They can no longer afford to maintain a

mere administrative, pay-the-bill attitude. The development of a strategic management approach to

negotiating contracts with providers is a time-consuming process, however, and it requires new investment in personnel and knowledge.

Whatever the outcome of such transition difficulties, there is no doubt that health care reform

will fundamentally change the relationship of

health insurers and hospitals in several ways. To

begin with, health insurers are likely to become

much more involved in hospital affairs than they

were in the past, which hospitals will increasingly

have to accept. Detailed, complex negotiations

between hospitals and insurers are inevitable.

Many insurers have already used production contracts to induce shifts of inpatient care to outpatient settings. There is also ample evidence that

negotiations with hospitals have been broadened

to include other issues, such as investments in

medical equipment, beds, specialist units, and

other facilities.

Furthermore, there is speculation that functional budgeting will eventually be dissolved and replaced by other, more decentralized schemes.

Health insurers have often criticized their restricted role in this scheme, and hospitals have always argued that the scheme is not flexible enough.

Additionally, hospitals may have to deal with

more health insurers under the new system than

they do now. Hospitals currently conduct most of

their financial business with one sickness fund—

the regional monopoly—along with a large number of private health insurers that appoint one insurer as their regional representative. Often the

regional sickness fund pays for 60 to 70 percent of

hospital costs. The trend toward rapid concentration of health insurers and increasing competition

among them may erode the strong bilateral relationship of a hospital and its principal health insurer. Under one possible scenario, the group of

principal insurers negotiating contracts with an individual hospital will become more diverse, in

which case the hospital will have to negotiate with

three or four big insurance carriers. An alternative

scenario is that the relationship of a hospital and

its principal insurer will grow more intense as a result of health insurer mergers.

As a reaction to changes in the insurance sector,

hospitals may begin to develop networks to

strengthen their market position and to preclude a

“divide and conquer” policy by health insurers.

Networks might consist of agreements between

different types of providers at the regional level to

provide a full range of inpatient and outpatient

care or may consist of a group of hospitals providing a particular type of care, such as acute care.

Hospitals and health insurers have begun to

manage the changes in their relationship. Hospitals that have had good negotiating experiences

with health insurers over production contracts

often consider health insurers as potential partners

instead of opponents with skewed interests in cost

control. Some insurers have been willing to find

solutions to a hospital’s financial problems by adjusting contracts to its needs. Recent experiences

have convinced many hospitals that health insurers may be even more promising partners in the future than are regional or national governments.

Health insurers may also be willing to provide extra funds to hospitals to reduce waiting lists so that
118 | Hospital Financing in Seven Countries

the insurers are better able to market themselves

and attract more subscribers.

A good partnership with health insurers is also

indispensable to hospitals now that the government has stopped guaranteeing investment loans.

Long-term contracts with health insurers for services are essential for hospitals to establish financial credibility with commercial banks. Commercial banks are expected to become important

stakeholders in hospital financing, which may affect hospital decisionmaking. How their role will

develop remains to be seen.

Health care reform will also affect the relationship of medical specialists and hospital management. The introduction of hospital budgeting

placed this relationship under substantial pressure. Most specialists are still paid on a fee-forservice basis, giving them an incentive to maximize their personal income; hospital management

is responsible for keeping costs within the tight

limits of the hospital’s budget. Some argue that

the political compromise that produced this situation represents an obstacle to fully integrated

and comprehensive hospital management. The

introduction of an aggregate budget for medical

specialist expenditures in 1988 as part of the Five

Parties Agreement aggravated this problem as individual specialists have an even stronger incentive to provide more services.

In 1994, the report Gedeelde zorg: betere zorg,

released by a commission chaired by the Netherlands’ former prime minister (Mr. Biesheuvel),

strongly recommended that specialists’ revenues

be brought under the constraints of hospital budgets. The recommendations of the Biesheuvel commission have been accepted by the new government as an important part of its health care reform

program. Perhaps not surprisingly, specialists did

not welcome the recommendations, although

there have been some local experiments with reforming specialists’ reimbursement methods. It is

expected that these local experiments will eventually result in a new payment scheme for specialist

care under which specialists’ revenues become

part of the prospectively negotiated budget between hospitals and health insurers. One proposed

idea would be to link specialists’ revenues and

hospitals’ production contracts with health insurers.

The hospital financing system in the Netherlands has been undergoing rapid changes since the

beginning of the 1980s. This process, which began with the introduction of hospital budgeting,

will lead to further changes. Those changes are not

only financial; they also have a large effect on the

relationships among the three parties involved in

hospital care: hospital management, medical specialists, and health insurers.

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Chapter 6 Hospital Financing in the Netherlands | 119

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14. Maarse, J.A.M., Molin, E., and van der Horst,

A., “Ziekenhuisbudgettering en Doeftnatigheid,” Tijdschrift voor Sociale Gezondheidszorg 71:27-33, 1992.

15. Maarse, J.A.M., van der Horst, A., and Molin,

E., “Hospital Budgeting in the Netherlands:

Effects Upon Hospital Services,” European

Journal of Public Health 3:101-107, 1993.

16. Ministry of Health, Financial Report on

Health (The Hague: Ministry of Health,

1991).

17. Ministry of Health, Financial Report on

Health (The Hague: Ministry of Health,

1992).

18. Ministry of Health, Financial Report on

Health (The Hague: Ministry of Health, 1993).

19. Ministry of Health, Financial Report on

Health (The Hague: Ministry of Health, various years).

20. Ministry of Health, Nota positionering Ziekenhuiszorg (Report on Positioning of Hospital Care), Rijswijk, 1992.

21. National Hospital Institute, De intramurale

gezondheidszorg in cijfers (the inpatient sector in figures), 1991.

22. Organisation for Economic Cooperation and

Development, The Reform of Health Care: A

Comparative Analysis of Seven OECD Countries (Paris: OECD, 1992).

23. Schieber, G.J., Poullier, J.P., and Greenwald,

L.M., “Health Care Systems in Twenty-Four

Countries,” Health Affairs fall;10(3):22-38,

1991.

24. Schneider, M., et al., Health Care in the EC

Member States (Amsterdam: Elsevier, 1992).

25. van de Ven, W.P.M.M., “From Regulated Cartel to Regulated Competition in the Dutch

Health Care System,” European Economic

Review 34:632-645, 1990.

26. van de Ven, W.P.M.M., and Schut, F.T.,

“Should Catastrophic Risks be Included in a

Regulated Competitive Health Insurance

Market?,” Social Science and Medicine

39(10):1459-1472, 1994.

27. van de Ven, W.P.M.M., and van Vliet, R.C.,

“How Can We Prevent Cream Skimming in a

Competitive Health Insurance Market? The

Great Challenge for the 90’s,” P. Zweifel and

H.E. French (eds.), Health Economics Worldwide (Dordrecht: Kluwer Academic Publishers, 1992).
Hospital

Financing

in Sweden

by Eric M. Paulson1

weden is situated in northern Europe. Despite a rather small

population (8.7 million in 1992), the country is the fifth

largest in area in Europe. Most of the population lives in the

southern parts and the coastal areas, leaving many parts

sparsely populated. The demographic transition to an aged population is more accentuated in Sweden than other countries. In

1992, 18 percent of all citizens were 65 years or older.

All Swedish citizens are entitled to health care regardless of

where they live or their economic circumstances. Health care is

considered a public sector responsibility. Close to 90 percent of

Swedish health care expenditures are publicly financed, most of

the health care facilities are publicly owned, and most physicians

publicly employed. Responsibility for health care is, to a large extent, decentralized to the county council level. Sweden has three

political and administrative government levels: the national government, county councils, and local municipalities. All levels of

government are represented by directly elected politicians with

the authority to levy taxes. The three levels have extensive functions in the social welfare system and are also involved in different aspects of health care.1

The national government is responsible for ensuring that the

health care system develops efficiently and in keeping with overall objectives, based on the goals and the constraints of social welfare policy and macroeconomic factors. The Ministry of Health

and Social Affairs is part of the government office. It prepares

Cabinet business and draws up general guidelines in fields such as

1The body of this chapter describes the situation in Sweden through mid-1993. An addendum at the end of the chapter describes some key recent developments. | 121
122 I Hospital Financing in Seven Countries

health care, social welfare services, and health insurance. The National Board of Health and Welfare is a central administrative agency formatters

concerning health care and social welfare services. The tasks include supervision and evaluation of the developments in all areas of social

policy, including health services. All medical personnel, whether employed by the county councils

or in private practice, come under the supervision

of the Board.

Swedish health care is both financed and provided largely by the county councils. According to

the Health and Medical Services Act of 1982,

these councils are required to promote the health

of residents in their areas. It is also their responsibility to offer all inhabitants equal access to good —

medical care. The legislation requires county

councils to plan the organization of health care

based on the aggregate needs of the county population. Planning must also include health care provided by organizations other than the county

councils, such as private practitioners and industrial health services.

Sweden is divided into 23 county council areas

and three municipalities (City of Gothenburg,

City of Malmo, and the island of Gotland) that

also have the same responsibilities as the county

councils. The term “county councils” will be used

in this chapter to denote all 26 of these units. The

populations of the county councils ranged from

60,000 to 1.7 million inhabitants (averaging

300,000) in 1992 (see figure 7-l). County councils are members of the Federation of Swedish

County Councils, which provides services to its

members and represents their interests. The federation also serves as a central negotiating body

for concluding financial agreements with the national government.

Sweden’s 286 local municipalities are mainly

— Counties responsible for social services, child care, and pri- — Medical regions mary and secondary school education. Since

1992. this level of government has also been rea Regional hospitals are indicated by dots. sponsible for providing medical care (except phy -

SOURCE: E. Paulson, 1995. sician services) and other services in local nursing
Chapter 7 Hospital Financing in Sweden | 123

(i.e., long-term patients who have already been

homes and other specific accommodations for the

elderly and handicapped. Local municipalities

also finance the care of so-called “bedblockers,”

treated for their acute illness but remain in shortterm county council hospitals).

The Swedish health care system is decentralized with considerable freedom for each county

council to decide about the organization of health

care. Several allocation mechanisms for hospitals

are working in parallel in Sweden today. This

country chapter gives an overview of the Swedish

system with special reference to hospital financing followed by specific examples of hospital financing in two county councils.

SWEDISH HEALTH CARE SYSTEM

REFORMS

Structural changes in health care are on the political agenda in Sweden today. Several reviews of

the current system and options for change have

been published (1,2,3,4,12). One of the main

themes of discussion is a separation of the financing and provision functions of health care to increase productivity by competition. Another issue

suggesting structural change is the demand for

consumer choice within health care. The traditional and well defined catchment areas of health centers and hospitals are being increasingly questioned. Consumer preference is also considered in

the debate to be one mechanism for allocating resources to “effective” providers.

There are many areas of interaction between the

health services and other sectors of the Swedish

social welfare system, such as the national health

insurance and the social services provided by local

municipalities. The question of whether the current administrative structure in Sweden has

created artificial barriers between sectors, thereby

preventing efficient use of resources, is also being

debated. 

A national governmental committee was established in March 1992 to study the financing and

organization of health care. The committee was

instructed to investigate different approaches to

reforming the Swedish health care system, focusing on three models in particular:

1. Reformed county council model: County councils would still be responsible for the financing

and the supply of health care; however, market

mechanisms would be introduced within the

framework of the existing system. Public and

private providers would compete equally.

2. Primary care-based model: Health care resources would be allocated at the primary care

delivery level. Each citizen would be given the

opportunity to register with a family practitioner. The practitioner would be responsible for

all health care costs of the registered patients.

(This model has some similarity to the “general

practitioner fundholding” concept recently introduced in the United Kingdom.)

3. Compulsory health insurance model: Health

care would be financed by one or more insurance organizations and the existing authority

for taxation would be removed from the county

councils.

Despite some problems, the existing health situation and the health care organization in Sweden

has many positive aspects. National health care

expenditures are not high compared with those of

other OECD countries, when differences in population age structures are taken into account. Life

expectancy at birth was higher in Sweden than in

all other countries except for Iceland and Japan in

1988 (14). Sweden’s infant mortality rate is

among the lowest in the world (9). The health status of the population, of course, is affected by actions in many sectors of society. However, the statistics are compatible with a well-functioning

health care system. A recent review of the Swedish health care system by a group of foreign health

economists concluded:

What Sweden has is a set of problems—

whose solution is admittedly by no means

easy—that are shared with nearly every other

country in the developed world. Moreover, Sweden has these in a form that is often less severe

than can be found elsewhere and is already containing them in ways that seem superior to the
124 Hospital Financing in Seven Countries

ways adopted in at least some other developed

countries. (3).

THE HEALTH CARE DELlVERY SYSTEM

There were about 900 local health centers and

about 90 short-term hospitals in Sweden in 1991.

The number of hospital beds was relatively high

compared with other OECD countries, at 13.3 per

1,000 inhabitants in 1988 (of which 4.1 were general, 2.4 psychiatric, and 6.2 long-term). There

were also about 5 places per 1,000 inhabitants in

municipal homes for the elderly.

❚ County Council Providers

The financing and provision of health care in Sweden is, to a large extent, integrated within the

county council system. The public providers in

the traditional county council model are structured in three levels: primary care, county hospitals, and regional medical care (although emergency care is available at any institution).

The primary care level is usually organized in

districts that are primarily responsible for the

health of the population in their areas. Each district includes one or more health care centers for

ambulatory care. At the health centers, general

practitioners and in some cases specialists, provide medical treatment, advisory services, and

preventive care. The primary care system includes

district nurses and midwives and also operates

clinics for child and maternity health care. When

primary care resources are insufficient for diagnosis or treatment, the patient is referred to the

county or regional medical care level. At the

county hospital level, one or more short-term hospitals provide both outpatient and inpatient services. These county hospitals, which are owned

and operated by the county councils, are divided

according to their size and degree of specialization, into:

district county hospitals with at least four specialties (internal medicine, general surgery, radiology, and anesthesiology); and

central county hospitals with up to 15 to 20 specialities, usually one hospital for each county

council. These hospitals also serve as district

hospitals for their neighborhoods.

The regional medical care level is responsible

for patients whose problems require the collaboration of a large number of specialists and perhaps

also special equipment. Sweden is divided into six

medical care regions, each serving a population of

about one to two million. Each region has 1 or 2

regional hospitals (figure 7-1 ). These hospitals are

affiliated with medical schools and are thus involved in teaching and research activities. Each

regional hospital is owned by the county council

where it is located and it also serves as county hospital for the local area.

❚ Private Providers

Private providers deliver a small share of health

care services in Sweden. An estimated 7 percent

of beds for health care in 1989 were in private

institutions, which mainly provided long-term

nursing care (13). About 5 percent of physicians

worked full-time in private practice in 1989.

PHYSICIANS

Sweden had about 25,000 physicians, or one per

340 inhabitants in 1989. The number of physicians is expected to grow to more than 28,000 by

the year 2000. Physicians make up about 4 percent

of all county council employees in health care

were 1989. Swedish physicians work either in

hospitals or in primary care with a large proportion in hospitals. These physicians are usually involved in both inpatient and outpatient services.

The proportion of physicians working as general

practitioners (in primary care) is small compared

to most other OECD countries.

The annual number of visits to physicians in

Sweden is rather low in relation to many other

OECD countries, at about 3.1 visits per person in

1989. There were an additional 2.7 visits per person for paramedical care, e.g., to district nurses,

midwives, and physiotherapists. In 1989, 39 percent of doctor visits took place in hospitals, 39

percent were to physicians within the primary care
Chapter 7 Hospital Financing in Sweden 125

system, 13 percent were to doctors in private practice, and 9 percent were in other settings.

A large majority of Swedish physicians are salaried employees of county councils and have no

remuneration based on the fee-for-service principle. Hospital physicians are integrated into the departmental organization of public hospitals in

Sweden. The same general terms of employment

apply to general practitioners working in public

health centers. Minimum salaries for different

kinds of positions are negotiated nationally. Within this restriction the salary of the individual physician is decided in a local agreement. Information

on the proportion of short-term hospital expenditures related to physicians is not available in the

regular Swedish statistics on health care.

A few percent of Swedish physicians work fulltime in private practice. A large majority of private practitioners are affiliated with the national

health insurance system, which reimburses them

on a fee-for-service basis. Prices for various kinds

of services are decided prospectively in consultations between a national administrative agency

(Riksyforsakringsverket) and the Swedish Medical

Association.

NATIONAL HEALTH CARE

EXPENDITURES

National health care expenditures totaled SEK122

billion in 1991.2 This figure corresponds to about

SEK14,000 per inhabitant or to 8.5 percent of the

gross domestic product (GDP) (15). Public health

care consumption and capital investments

amounted to 78 percent of the total health care expenditures. An additional 10 percent was related

to subsidies for drugs and private practitioners.

The remaining 12 percent of the health care expenditures was for private consumption and capital

investments.

It is important to describe what is defined as

“healthcare” when making international comparisons. In 1991, nursing homes were included in

health care expenditures in Sweden but care for

the mentally retarded was not apart of this definition. However, in 1992, local nursing homes were

reclassified as “units for specific accommodation” and are no longer included in health care expenditures.

Total expenditures (operating costs and investments) for public hospitals were estimated at

about SEK70 billion in 1991 by the Federation of

Swedish County Councils (5). According to these

statistics about SEK55 billion of this sum was for

short-term somatic hospital expenditures.

SOURCE OF FUNDS

❚ Public Funding

As noted earlier, close to 90 percent of Swedish

health care expenditures were publicly financed in

1991, mostly through county councils. The expansion of county council expenditures slowed

down during the 1980s and reversed to a decrease

in fixed prices in 1991. During the 1970s, the total

county council expenditures showed an annual

growth rate of between 4 and 5 percent in fixed

prices. In the first half of the 1980s the average rate

of expansion in fixed price was limited to 2.5 percent yearly and it then decreased to just over 1 percent in the second half of the decade. Growth in

1991 was about zero and 1992 data point toward

a 1.2 percent decline in expenditures in fixed

prices (8).

The sources of revenues for the county councils

in 1991 are given in table 7-1. The most important

Source of revenue Percentage of total

County council income taxes 69

National health insurance 10

State subsidies 9

Patient fees 3

Other revenues 9

Total revenues 100

SOURCE: E. Paulson, 1995.

2 The exchange rate in January 1994 was approximately $U.S.0.67 to SEK1.00.
126 | Hospital Financing in Seven Countries

source is the county council income tax, which

represented 69 percent of total revenues. This revenue is a proportional tax on personal income

from work. The tax rate varies among county

councils, in 1991 ranging from 12.2 to 14.5 percent, and averaging 13.9 percent.3

In the traditional funding model, county council representatives decided on the rate of the

county council income tax and estimated the financial resources available for the next year’s

health care budget. However, since 1991, there

have been national limits to economic expansion

of the county councils and local municipalities.

According to the 1991 Finance Plan (Finansplanen) of the Ministry of Finance, annual increases

in county councils’ and local municipalities’ expenditures in fixed prices must be restricted to no

more than 1 percent. In an effort to control total

spending, the national government has placed restrictions on most kinds of county council revenues. By a temporary law, county councils were

not allowed to increase tax rates at 1991 and 1992,

and the restriction was extended into 1993

through an agreement between the national government and the county councils.

About 10 percent of county council revenues

came from national health insurance contributions and 9 percent were state subsidies in 1991

(see table 7-1). National health insurance is a part

of the social insurance system. It covers some allowances for medical expenses, sickness benefits,

and maternity and parental benefits. National

health insurance is financed from tax revenues and

contributions from the national government’s social insurance budget.

The principles of payments from the insurance

system were changed in 1985 (under the “Dagmar

reform”). A fixed sum of money for each county

council, mainly based on capitation, replaced the

previous activity-based reimbursement. The new

system produced a cap on health care spending at

the national level. The total amount of resources

transferred by the national government to the

county councils has decreased after adjustment for

inflation since the 1985 reform.

As noted earlier, a large majority of private

practitioners are reimbursed through the national

health insurance. This cost is subtracted from the

amount transferred to county councils from the

health insurance system. However, the county

councils have the power to restrict the number of

private practitioners eligible for reimbursement

by the health insurance.

❚ Patient Fees

In 1991, 3 percent of county council revenues

were raised through direct patient fees. County

councils are free to decide on patient cost-sharing

amounts for various kinds of ambulatory services,

although maximum amounts for inpatient services are still established by the national government. There is also a nationally determined annual

limit on patient payments, amounting to

SEK1,600 per person in 1993. Hospital care, primary care, and drugs are free after a patient has

spent this amount for health care (7).

The main function of patient fees in the Swedish system is not to generate revenues but to influence the consumption of health services. Several

county councils try to influence patient flows towards less expensive services through pricing

mechanisms. For example, in the Stockholm

county council, the patient’s cost for an outpatient

visit to a hospital in 1993 was SEK200 as

compared with SEK100 for a visit to a primary

care physician.

❚ Private Health Insurance

Private health insurance represents a new but still

infrequent source of financing for health care in

Sweden. The number of people covered by such

schemes was estimated to be 25,000 in 1991,

which corresponds to about 0.3 percent of the population (4).

3A proportional tax is one in which the average tax rate is the same at all income levels. The fraction of an individual’s income paid as taxes,

therefore remains constant whether income increases or decreases.
Chapter 7 Hospital Financing in Sweden | 127

ALLOCATION OF FUNDS

Decisions on the organization of health care in

Sweden, are to a large extent, decentralized to the

county councils. The advantage of decentralized

decisionmaking is the opportunity to adjust the

health care organization to local conditions. Consequently there are no nationally defined rules for

financing hospitals in Sweden. This is true for

both operating and capital expenditures.

There is considerable variation among county

councils, and sometimes also within the same

county council when it comes to financing hospitals. However, it is possible to describe a traditional Swedish model and outline some general trends

of development in the funding of county council

hospitals.

❚ Traditional Allocation Model

Under the traditional financing model, county

council health care funds are allocated to hospitals

and health care centers through an annual budget

negotiation process. Historical costs have been a

major determinant of future budgets. Each hospital clinical department has a rather crude production target, which is described in bed-days, number of admitted patients, and outpatient visits. In

this traditional system, cost control is achieved

through aggregate fixed budgets at the county

council level. 

The one major exception to prospective, fixed

budgets occurs when a patient is referred from an

outside county council for specialized care to a regional hospital. In these cases, the county referring the patient pays the actual cost of the treatment. This has created an incentive to develop

patient related cost accounting in some regional

hospitals.

The hospital department is a strong and rather

independent organizational level in Swedish hospitals. Budgets are allocated to this level and hospital beds belong to individual clinical departments. Patients are administratively discharged

from departments and not from the hospital itself

as in most other OECD countries. From a functional perspective a hospital can be divided into

three different kinds of units (departments):

1. clinical departments (e.g., general surgery),

2. medical service departments (e.g., diagnostic

radiology), and

3. general service departments (e.g., catering services).

Under the traditional model each department in

a Swedish hospital has its own budget. This structure results in a weak connection between authority and accountability for resources. For example,

a radiology investigation ordered for a patient by

the surgery department is a cost within the budget

of the diagnostic radiology department and not the

surgery budget. It has been estimated that for

some hospitals operating under the traditional

model, only about half of the costs generated by

surgeons consumed resources within the budget

of those surgeon’s own clinical departments. To

increase the accountability for consumption of resources several county councils have introduced

changes in the way hospital departments are

funded. Some general trends are identified below.

❚ Internal Hospital Markets

One trend is the creation of “internal markets”

within the hospital. There should be no “free services” available to physicians. In this new situation, service departments are financed by activitybased revenues instead of a fixed budget. The

revenues are generated by selling services to other

departments. In 1992, 25 out of 26 county councils had at least one service department financed

mainly through the sale of services (6). Developments along this line have been most pronounced

for general service departments. Clinical departments may still be financed under this new model

through fixed budgets. The traditional budget of

a clinical department is then expanded to include

estimated costs for all hospital services (including

medical and general services) needed by patients

admitted to the department.

❚ Purchasing of Hospital Services

Several county councils have also implemented

more profound changes in the organization and

funding of hospitals. One general trend is to sepa-
128 | Hospital Financing in Seven Countries

rate financing and provision of services within the

county council system. Under this new model the

resources for health care within a county council

are allocated to a purchasing organization. This

unit is then responsible for financing all health

care consumption for a defined population

through contracts with health care providers.

There is a considerable variation in the implementation of the general principle. The purchasing function may be carried out by a central organization or by several local units within each

county council. There are also different solutions

for how purchasers reimburse providers. Financing mechanisms for clinical departments in hospitals may be in the form of block contracts, per-case

payments, or fee-for-service payments. In 1992,

seven county councils used per-case payments

based on diagnosis-related groups (DRGs) to at

least partially finance hospital services (6). The

DRG system has been tested in Sweden since the

late 1980s (10).

Even under new hospital financing schemes, all

purchasers and more or less all hospital providers

are still within the county council system. Consequently, most payments are internal transactions

within different branches of the same organization. There are no legal barriers preventing a “renegotiation” of funding retrospectively in such a

system.

A few county councils began implementing

new funding arrangements for hospitals on a limited scale in 1992 and several county councils are

still in the process of defining or adjusting their

new organizational models. Two county councils

systems are described later in this chapter to illustrate some of the hospital funding mechanisms

currently working in parallel in Sweden.

HOSPITAL CAPITAL COSTS

Decisions on investments are made at the county

council level. There is currently no national planning for hospital structure or other investments in

the health care sector. There is, however, a planning organization within each of Sweden’s six

health care regions for consultations on health services at the regional level. These organizations include representatives of all the county councils

within a particular region.

The amount of investment and rules for financing are decided on by each county council. Under

the traditional model annual budgets are established for investments, but the costs for buildings

and expensive equipment are not included in the

operating budgets allocated to individual hospital

departments. New models for financing investments are now under development by many

county councils. One trend is to allocate rents for

facilities and costs for investments to hospital departments. The rationale is to make it possible for

hospital departments to substitute different kinds

of inputs (e.g., labor versus high-technology

equipment) for providing health services.

Two county councils and two public hospitals

within these councils are described below to illustrate financing methods that are being used in

Sweden today. The examples are a 250-bed district county hospital with both global budgets and

case-based funding, and one large 1,800-bed university hospital with both traditional and fee-forservice funding.

EXAMPLE I: THE STOCKHOLM COUNTY

COUNCIL

The Stockholm county council takes in the city of

Stockholm and surrounding areas. The county is

rather small in geographical terms, but its population is unusually large (1.7 million, or 20 percent

of the total 1992 population) compared with other

Swedish county councils, Stockholm being the

country’s biggest urban area. Within the Stockholm county council, there are four administrative

decisionmaking levels for hospital care: central

county council, health care area, hospital, and hospital department. The first two levels are governed

by politicians and the other two are administrative

only. General rules for financing and providing

health care are decided on by the political board at

the central county council level. Issues at this level

are principles for financing hospitals and systems

for quality assurance. Large investments are also

decided at this level.
Chapter 7 Hospital Financing in Sweden | 129

The Stockholm county council is divided into

nine health care areas. The total county council

budget for health care is allocated to these nine

areas based on the needs of the population. Needs

are estimated through a formula that includes the

number of people, the age distribution and the socioeconomic status of the population. Each health

care area has a board of politicians that is responsible for financing the health care provided to their

respective populations.

There were 10 county council-owned and two

private short-term hospitals within the county’s

boundaries in 1992. The two private hospitals

were small and combined had about 200 beds.

Two of the public institutions were university

hospitals affiliated with medical schools. It was

decided in 1992 that 10 percent of the services

provided by the county council should be “privatized” to increase competition.

Beginning in 1992, the Stockholm county

council changed from prospectively determined

budgets to a new method for allocating resources

to hospitals (the “Stockholm model”). Since

1992, four kinds of clinical departments (general

surgery, obstetrics/gynecology, orthopedic surgery, and urology) have been funded mainly from

revenues based on activity levels. The new financing scheme was extended to all somatic (nonpsychiatric) clinical departments in short-term hospitals in 1993. Reimbursement for inpatient care is

similar to the prospective payment system (PPS)

for Medicare inpatients in the United States.

Modified Medicare and Norwegian DRG cost

weights together with standard amounts based on

historical costs are used in the Stockholm county

council application.

Ambulatory surgery is financed in the same

way as inpatient surgery although price levels in

1992 were set at 60 percent of the corresponding

inpatient DRG rate. Care of other types of outpatients are reimbursed according to locally

constructed classifications of patient visits. Some

specific cost items (research, development, and

education) continue to be financed through a prospectively determined annual budget.

The change from fixed budgets to activitybased financing introduced a potential risk of escalating health care costs. However, a number of

measures have been taken to maintain cost containment within the new system. The initial DRG

rates were set 10 percent lower than estimated historical costs based on previous prospective budget

amounts. All transactions (except for the private

hospitals) are internal to the county council, because the hospitals are owned by them. This

creates the opportunity to make retrospective adjustments in funding arrangements in a way not

possible between independent organizations. It

was decided in advance that renegotiation of DRG

rates would take place if total service production

for all hospitals in the Stockholm county council

area increased by more than 10 percent.

It is obviously too early to draw firm conclusions about the overall effects of the new funding

system for hospital care. Preliminary data indicate

a greater than 10-percent increase in production

and a reduction in waiting lists. Major investments in new capacity in county council institutions are still controlled at the central county

council levels. A central planning process will

probably suggest a reduction both in the number

of clinical departments and county council general short-term hospitals.

❚ Nacka Hospital

The Nacka hospital is an example of a short-term

public hospital within the Stockholm county

council. It is a 250-bed district county hospital

with about 800 employees (full-time equivalents)

and an estimated turnover of SEK270 million in

1992. The hospital was financed according to two

different methods. About 30 percent of revenues

came from an annual fixed budget and the remaining 70 percent was based on the activity level. The

hospital was organized into seven units of which

five were clinical departments and two were general service departments. In 1992, the two surgical

departments were financed based on their activity

levels.

Heads of departments are responsible for balancing their annual budgets. They have considerable freedom in organizing the health care within

their departments. The clinical departments are
130 | Hospital Financing in Seven Countries

billed for services consumed by their patients in

other departments within the hospital. Services

bought from organizations outside the hospital

must also be paid for by the individual department.

Capital Costs

There is no separate capital investment budget for

the hospital. New investments in buildings and

equipment are financed from operating revenues.

Existing buildings are rented by the hospital from

a department (the central estate department) within the county council. Rents reflect the location

and the quality of the buildings and are based on

a calculated market value. All new equipment for

the hospital valued above SEK100,000 is purchased by the county council’s leasing department.

The equipment is then rented to the hospital.

The organizational level with the authority to

decide about an investment depends on the

amount of the transaction. Investment decisions

costing up to SEK200,000 may be made by the

heads of departments, and up to SEK3 million by

the hospital director. However, all investments

above SEK100,000 in value must be leased from

the central county council level.

EXAMPLE II: THE UPPSALA COUNTY

COUNCIL

The Uppsala county council had 279,000 inhabitants in 1992 and is situated northwest of Stockholm county. The turnover of the county council

was SEK5,700 million in 1990 and it had 19,000

employees. There were three county council

owned short-term hospitals and one small private

hospital (17 beds) within the geographic boundaries of the county council in 1992. The private

hospital was carrying out elective surgery mainly.

The Uppsala county council has a more traditional

organization for funding hospitals than the

“Stockholm model,” described above, and is also

adopting change more gradually. The primary

care level within the county council is responsible

for health care center services as well as the estimated costs of outpatient visits to hospitals and

private practitioners.

A part of the Uppsala county council is operated under special financial arrangements, as a

demonstration project. A purchasing committee

for the Enköping/Håbo district received all resources for medical care of the population in its

district. The purchasing committee then buys services from providers of primary and hospital care.

❚ University Hospital of Uppsala

The University Hospital of Uppsala (Akademiska

sjukhuset) is the major public hospital in the city

of Uppsala. In 1992 it had 1,800 beds and close to

10,000 employees (54 percent of whom worked

full time). The main tasks of the hospital are health

care, research, and education. Health care is delivered to both county council residents and to patients referred for specialist care from other

county councils. Funds flow to the hospital from

several organizations and are allocated according

to different payment methods. The hospital’s estimated revenues in 1992 totaled about SEK2,600

million (16) (see table 7-2). The diverse funding

of the hospital reflects both the complexity of

functions in a large university hospital and the transition period between different funding methods.

Approximately half of the hospital’s financing

was derived from prospectively fixed budgets. Inpatient services for people living within the

county council accounted for 46 percent of total

revenues and was funded by fixed budgets from

the central county council level. (An exception

was patients from the Enköping/Håbo district,

whose care was reimbursed by an activity-based

system, described below.) The other fixed budget

component was only 6 percent and included compensation for extra costs in the health care process

due to the education and research functions of the

hospital. These funds derive from the national

government.

The other half of the hospital’s revenues related

to services for which it was reimbursed according

to activity-based principles. The most important
Chapter 7 Hospital Financing in Sweden I 131

Source of revenue Amount Percentage

Revenues from prospectively fixed budgets

Inpatient from own county council 1,188 46

Additional costs due to education/research 152 6

Activity related revenues

Patients from other county councils 755 29

Outpatients from own county council 235 9

Inpatients from Enkoping/Habo district in own county council 105 4

Direct patient fees 40 2

Other revenues 124 5

Total Revenues 2,599 100

SOURCE Uppsala County Council, Preliminar budget for Akademiska sjukhuset 1992 (Preliminary Budget for Uppsala University Hospital 1992) (Uppsala: Uppsala County Council, 1991).

part of this financing (29 percent of the total) came

from patients referred by other county councils for

regional specialist care. Traditionally, the hospital

has been paid the “actual costs” of treatment on a

fee-for-service basis for these patients. However,

since 1993, some services have been paid for by

fixed prices decided on in advance, in accord with

agreements between the hospital and the seven

county councils in the Uppsala health care region.

Since 1992, the hospital has been paid for outpatient services to county council residents from

the primary care level budget, based on the number and types of visits. Prior to 1992, resources for

outpatient services had been incorporated into the

hospital’s annual fixed budget.

Revenues from inpatients paid for by the

Enkoping/Habo purchasing committee were 4

percent of the hospital’s total revenues. Direct fees

paid by the patients amounted to an additional 2

percent. Other revenues came from several

sources (see table 7-2). The main source was laboratory services sold to other institutions. Revenues received from local municipalities are also

included under this heading. Municipalities are

required to pay for patients who are still in the hospital although their acute illness has been treated.

The Uppsala University Hospital has aboard of

county council politicians. This body determines

the number of beds that are authorized and the preliminary budget (expenses and also revenues

when relevant) for each clinical department. The

hospital has a complex organization. Traditionally, it has had about 30 clinical, 10 medical service,

and several general service departments. Because

it has been difficult for hospital management to be

in contact with over 40 independent units, the departments are currently being organized into about

10 divisions. From a financing perspective, hospital departments and divisions are divided into

budget-funded and income-funded units. In 1992,

all clinical departments were of the former type,

and all medical and general service departments

(except one) were of the latter type. A preliminary

budget and estimated production targets are established for each division or clinical department.

Budgets are defined for expenses and also for revenues, when appropriate. Production targets are

expressed as the number of admitted patients, beddays, and outpatient visits. There is a trend toward

adding measures of more well-defined services

(production groups).

Capital Costs

Planning of investments and purchasing of equipment is to be made through a central department

of the county council and the hospital. Every year

a plan of investments is established for the hospital. This document is based on the planning of the

individual hospital departments. The investment

plan, which is specified for each department, is

confirmed by the hospital director. Investments

decisions costing up to SEK100,000 may be made

by heads of department if the sum is within the
132 | Hospital Financing in Seven Countries

current expenses budget (direct depreciation).

Larger amounts are decided by the hospital director. Rental contracts may be signed by the heads

of departments unless the amount exceeds

SEK100,000 and the duration is more than three

years. The limit of SEK100,000 does not apply to

heads of divisions. However, all rental contracts

for buildings must be signed by the hospital management. The hospital pays rent for buildings to

the central estate department of the county council. The total sum was about SEK400 million in

1992. In that year, the rent was not allocated to the

individual departments; however, there were incentives for heads of departments to reduce the

need for building space. If building space was reduced, the department received compensation

amounting to half of one year’s rent. Costs for

construction or modification of existing facilities

are included as operating expenses at the departmental level.

CONCLUSIONS

The Swedish health care system is characterized

by ongoing organizational change. New models

for funding hospitals are being applied within the

framework of the county council system. A common theme is the separation of the provision and

financing of services both within hospitals and

within county councils. There is considerable

variation in how the new principles for funding

hospitals are being implemented. The diversity is

not surprising given the decentralized nature of

the Swedish health care system. Variation is also

a consequence of the fact that many county councils are still in the process of defining or adjusting

new organizational models. It is still early to draw

conclusions from the scant empirical evidence

available about the effects of new funding models

for Swedish hospitals.

Some policymakers see a considerable potential for market mechanisms to improve Swedish

health care. Traditional budget-based funding has

been criticized for creating a rigid structure that

has prevented efficient use of resources. However,

there may be hidden costs in the new market-driven mechanisms. For example, administration of

the health care system may become more complex

(and expensive), and it is important that those

costs not outweigh the savings realized by increased productivity in the delivery of services.

High productivity in health care is not itself a

goal. What is more important is to have “value for

money,” that is maximizing health benefits in

relation to resources spent on health care. From a

theoretical perspective, it would be more relevant

in a market-oriented system to pay for results obtained than for “products” of health care like hospitalizations, days of care, and patient visits.

However, due to practical considerations, market

systems are often to a large extent focused on the

price of such intermediate products. It is also important to include quality of care incentives to improve the delivery of health care services.

The traditional health care budgeting system in

Sweden has been successful in containing costs

over the last ten years. Under a more market-oriented system, driven by what seems to be an unlimited demand for health care, it will be necessary to implement new restrictions on health care

utilization to prevent a loss of overall cost control.

The decentralized structure of Swedish health

care creates opportunities to test new approaches

to health care organization on a limited scale, as

well as to adjust health care models to local conditions. This is an important advantage, as the

conditions for health care are rather different in a

densely populated urban area like Stockholm

compared to a sparsely populated county in northern Sweden. The nature of medical specialties also

varies to a considerable extent (e.g., thoracic surgery versus psychiatry), and allowances for these

differences also are important.

Demonstration projects may be valuable in

learning how the new concepts of health care organization are working in practice in Sweden. Stepby-step implementation of new concepts make it

possible to learn from experience and to make

necessary adjustments in the evolving health care

organization.

ADDENDUM

Since this chapter was first drafted, two major

changes have taken place that affect the health care
Chapter 7 Hospital Financing in Sweden | 133

system: a general decline in the Swedish economy

and a change in the political leadership of the

country. The Swedish GDP decreased by 5 percent from 1991 to 1993 and unemployment has increased to high levels. These changes have put a

strain on national public finances and resulted in

a large national budget deficit. Decreased personal

earnings also affect county councils by reducing

revenues from the county council income tax. In

fact, total county council expenditures have decreased in the period 1992 to 1994.

The fall 1994 election brought a shift in power

from a nonsocialist to a social-democratic national government. The government committee (HSU

2000) mentioned earlier in this chapter received

new instructions from the government in December 1994. The committee is no longer considering

different options for financing and organizing

health care, but instead is working on several specific issues within the existing county council system. These issues include: measures to strengthen

the position of patients in health services; projecting health care needs up to the year 2010, with specific reference to the needs of the elderly; principles for the national control of health services;

evaluating new organizational arrangements

within county councils; paying for pharmaceuticals in ambulatory care; and reassessing public

health responsibilities by the different levels of

government.

Several county councils have instituted internal

divisions between purchaser and provider functions, within the overall county council framework. However, there has been a general shift in

emphasis during the last year from competition

among providers to cooperation and health care

planning. Examples include specialization and

sharing of services among hospitals in a given

area, and a reduction in the number of short-term

hospitals with full 24-hour acute surgical services

in urban areas.

Patients’ freedom to choose among providers

(at the primary care and hospital levels) has increased over the past few years. Patients are now

usually free to seek elective care at any public hospital within the county council. In some parts of

Sweden the freedom of choice is extended to hospitals in neighboring county councils. However,

there is a potential conflict between the patient’s

choice of health care provider and the cost containment and planning efforts at the county council level. It is not clear if patients’ freedom of

choice will be given priority over contracts established between the purchasing organizations and

the providers in county councils.

Private health insurance and private inpatient

care are still very small but expanding sectors of

Swedish health care. About 40,000 people (less

than 0.5 percent of the population) had private

health insurance in 1994, but the number of policies has doubled since 1990 (11). Private institutions represented 4.5 percent of all Swedish hospital beds for somatic short-term care in 1994, an

increase of 60 percent since 1992.

REFERENCES

1. Berleen, G., Rhenberg, C., and Wennström,

G., The Reform of Health Care in Sweden,

Spri report No. 339 (Stockholm: Spri, 1992).

2. Calltorp, J., Ham, C., and Rosenthal, M.,

(eds) “Special Issue: Swedish Health Services

at the Crossroads,” Health Policy 21:95-186,

1992.

3. Culyer, A.J., “Health Care and Health Care

Finance in Sweden: The Crisis that Never

Was; the Tension that Ever Will Be,” Occasional Paper No 33 (Stockholm: Swedish

Centre for Business and Policy Studies,

1991).

4. The Federation of Swedish County Councils,

Crossroads. Future Options for Swedish

Health Care (Stockholm: The Federation of

Swedish County Councils, 1991).

5. The Federation of Swedish County Councils,

Statistisk årsbok för Landsting 1992/93 (Statistical Yearbook of County Councils,

1992/93) (Stockholm: The Federation of

Swedish County Councils, 1992).

6. The Federation of Swedish County Councils,

Enkät om ekonomistyrning i landstingen

1992. Redovisning av enkätsvaren (Survey
134 | Hospital Financing in Seven Countries

on Economic Planning and Management in

the County Councils 1992. Presentation of the

Survey Answers) (Stockholm: The Federation of Swedish County Councils, 1992).

7. The Federation of Swedish County Councils,

Från sjukrona till aveglering. Landstingen

och patientavgifterna (From “Seven

Crowns” to Deregulation. The County Councils and Patient Fees) (Stockholm: The Federation of Swedish Country Councils, 1993).

8. The Federation of Swedish County Councils,

Health Care Utilization and Resources in

Sweden 1980-1992 (Stockholm: The Federation of Swedish County Councils, 1993).

9. Organisation for Economic Cooperation and

Development, OECD in Figures. Statistics on

the Member Countries, 1992 Edition, Supplement to the OECD Observer No. 176 (Paris:

OECD, 1992).

10. Paulson, E., “Sweden: A Health Care Model

in Transition,” J. Kimberly and G. Pourvourville (eds) The Migration of Management Innovation (San Francisco: Jossey-Bass Publishers, 1993).

11. Rehnberg, C., Garpenby, P., Privata Akörer i

Svensk Sjukvård (Private Participants in

Swedish Health Care) (Stockholm: Swedish

Centre for Business and Policy Studies,

1995).

12. Saltman, R. and von Otter, C., Planned Markets and Public Competition. Strategic Reform in Northern European Health Systems

(Buckingham: Open University Press, 1992).

13. Statistics Sweden, Hälsan i Sverige. Hälsostatistisk årsbok 1991/92. [Health in Sweden.

Yearbook of Health Statistics 1991/92]

(Stockholm: Statistics Sweden, 1991).

14. Statistics Sweden, Statistisk årsbok för Sverige 1992 (Statistical Yearbook of Sweden

1992) (Stockholm: Statistics Sweden, 1991).

15. Statistics Sweden, The Swedish National Accounts (Stockholm: Statistics Sweden, 1993).

16. Uppsala County Council, Preliminär budget

för Akademiska sjukhuset 1992 (Preliminary

Budget for Uppsala University Hospital

1992) (Uppsala: Uppsala County Council,

1991).
Hospital

Financing

in the

United States

by Mary A. Laschober and James C. Vertrees

ospitals are a basic element of America’s health care system. U.S. hospitals adopt much of the state-of-the-art

medical technology, train most new physicians, and are

often the point of access to health care for the uninsured.

In 1991, hospitals were the single largest category of health

spending at 38 percent of national health expenditures (NHE), although other services have increasingly accounted for a greater

share of health outlays (8). Hospital expenditures for acute care—

the focus of this chapter—equaled 33 percent of NHE in 1991

(table 8-1). Payments for hospital-based acute care rose by about

one and one-half times between 1981 and 1991, growing consistently faster than general inflation and contributing substantially

to the overall increase in NHE during that period (8,15) (table

8-1). These trends and the substantial amount of money devoted

to acute care in the United States have focused cost containment

efforts on hospital expenses and payments. 

Because of the greater focus on hospital costs in recent years

and especially on inpatient services, acute inpatient hospital expenditures have increased much more slowly than spending on

hospital outpatient care (8) (table 8-1). This trend has two main

causes. Changes in payment methods for inpatient services and

increased monitoring of inpatient care by public and private

payers have motivated hospitals to reduce costs through more

careful screening of admissions, reductions in lengths of stay, and

closures of empty hospital beds. The other important cause for the

decline in acute care inpatient expenditures as a share of total hospital outlays has been the displacement of inpatient care to outpatient sites (15).

The organization of the hospital system in the United States is

unique and complicated. No other country has such a heteroge- | 135
136 Hospital Financing in Seven Countries

Hospital expenditures 1981 1991 Change (in percent)

Total hospital expenditures $119,6 $288.6 + 141

Acute care hospital expenditures

(inpatient and outpatient care) $100.9 $249.4 + 147

Acute care hospital expenditures as of

share of NHE 35% 33 % -5.7

Acute inpatient hospital expenditures $87.5 $186.5 + 113

Acute outpatient hospital

expenditures $13.5 $63.0 + 367

SOURCE: S.W. Letsch, H.C. Lazenby, K.R. Levit, et al., “National Health Expenditures, 1991” Health Care Financing Review

14(2),1 -30, 1992.

neous collection of hospitals, payers, or payment

methods for hospital services (6). U.S. hospitals

can be classified as short-term (acute care) hospitals, teaching hospitals, or long-term care institutions; as public, private nonprofit, or private forprofit; or designated by the main type of services

provided, such as general, specialty, or referral

services. Financing for hospital services comes

from a multitude of private insurers as well as the

joint federal-state Medicaid program, the federal

Medicare program, and out-of-pocket costs paid

by insured and uninsured people. The various

third-party insurers pay hospitals through an even

wider assortment of methods, including retrospective cost-based reimbursement, discounted

charges, and prospective payment based on diagnosis-related groups (DRGs) of cases or based on

groups of hospitals with similar costs (peer groups).

STRUCTURE OF THE HOSPITAL SECTOR

The dominant type of hospital in the United States

is the community hospital, of which there were

5,342 in 1991 (6) (table 8-2). Community hospitals are nonfederal, short-term facilities serving

the general public, in which the majority of the

hospital’s patients are admitted to units where the

average length of stay is less than 30 days. Community hospitals can be private nonprofit (3,175,

or almost 60 percent of all community hospitals in

1991), private for-profit (738 in 1991), or owned

by state and local governments (1,429 in 1991) (6)

(table 8-2). Nonprofit hospitals are operated by organizations such as universities, churches, and

other charities, and they are exempt from taxes on

surplus revenues. For-profit hospitals are operated by individuals, partnerships, or corporations

and pay taxes on their surplus income. Public

community hospitals are owned and operated by

state or local governments, and they provide care

for large numbers of uninsured patients.

In addition to community hospitals, there are

hospitals owned and operated by the federal government (serving active military personnel, veterans, and Native Americans), specialty long-term

hospitals (e.g., psychiatric, long-term care, rehabilitation), and teaching hospitals. Teaching hospitals, which are more complex than community

hospitals, supply primary and tertiary care, proNumber of Percentage of Percentage of Percentage of

Type of hospital hospitals all hospitals acute care beds admissions

Private nonprofit 3,175 59.4 71,0 73.9

Private for-profit 738 13,8 10,8 9.7

State and local government 1,429 26.8 18,2 16.4

Total community hospitals 5,342 100 100 100

SOURCES: J.K. Iglehart, “The American Health Care System, ” The New England Journal of Medicine 329(5).372-376, 1993; American Hospital

Association, American Hospital Association Hospital Statistics, 1992-93
Chapter 8 Hospital Financing in the United States | 137

vide clinical education, and conduct biomedical

research. There are a considerable number of “hybrid” hospitals that combine features of community and teaching institutions (6).

U.S. hospitals deliver a wide variety of services. Some hospitals serve mainly as referral centers for the most highly specialized diagnostic and

treatment modalities; others mainly provide routine acute care and few intensive care services. In

between are hospitals that provide an assortment

of medical and technologically sophisticated services.

Public and private hospitals can serve any patient and receive reimbursement from any payer,

with the exception of certain population-based

hospitals, such as federal military and veterans’

hospitals. Most acute care admissions (74 percent

in 1991) are to private nonprofit hospitals, which

contain almost three-quarters of the total acute

care beds in community hospitals (table 8-2).

Community hospitals delivered 86 percent of all

hospital care in 1991, a proportion that has remained stable throughout the last decade (8).

PHYSICIANS

Physicians play an important role in the work of

all types of hospitals. The relationship between

private-practice physicians and hospitals in the

United States contrasts with that of most European countries. In general, European hospitals are

staffed primarily by full-time, salaried specialists

who limit their practices to inpatient care for patients referred by office-based physicians. In contrast, U.S. physicians are office-based; they not

only provide outpatient ambulatory care but also

follow their patients into hospitals to provide inpatient services. Hospitals in the United States

typically operate according to the “open-staff”

model, under which physicians in the community

are free to treat their patients in any number of different hospitals that grant them admitting privileges. U.S. hospitals exist mainly as locations for

physicians to provide inpatient services, with access to nursing and ancillary services. Relatively

recent cost containment approaches adopted by

private payers, such as utilization review, often

now limit the ability of physicians to hospitalize

their patients without prior approval by the patient’s insurer except in emergency situations.

This review of physician decisions is an important

component of “managed care.”

U.S. doctors most often bill for hospital services on a fee-for-service basis. Physician reimbursement for hospital-based services are subject

only to the limitations of fee schedules imposed

by each insurer. Only a very small number of physicians are salaried employees of hospitals (typically in academic medical centers). No reimbursement differences exist for physicians working

primarily in a hospital (e.g., anesthesiologists)

and those working in the community, except that

hospital-based procedures have historically been

more lucrative. Changes in payment—such as

Medicare’s relative value scale, which increased

fees for evaluation and management services and

reduced fees for surgeries and procedures—have

started to redress perceived inequalities in fees for

different services and incomes for different physician specialties.

Most hospital-based physician services in the

United States are not included in a hospital’s financial planning. This has intensified the tension

between physicians and hospitals as third-party

payers increasingly adopt prospective payment

methods (e.g., case-based payment, capitation

payment) that encourage hospitals to reduce services in general and expensive medical technologies in particular. For example, under Medicare’s

prospective hospital payment system, the fixed

payments for particular patient diagnoses place

hospitals at greater financial risk for the clinical

services provided by their medical staffs, motivating hospitals to reduce the cost of inpatient services and lengths of stay. However, physicians,

who largely control these decisions, were left untouched by Medicare’s new hospital payment

scheme and still frequently have incentives to provide more care (6).

Other factors also influence the relationship between hospitals and physicians. One of these is

hospitals’ increasing competition for market

share. To ensure a large base of referrals needed to
138 Hospital Financing in Seven Countries

maintain admission levels, hospitals actively

court physicians and their practices. This is especially true for primary care physicians, who are in

limited supply in the United States and who increasingly act as the “gatekeepers” for hospital

services in private managed care organizations.

Competition among hospitals for these providers

has led to a variety of financial arrangements with

physicians, including joint ventures and income

guarantees. Hospitals sometimes purchase physician practices outright, put clinicians on salary,

and manage the administration of the practices, in

order to recruit and retain needed providers.

HOSPITAL OPERATING COSTS1

❚ Financing Model

There is no uniform payment system or rates for

hospitals in the United States. Although Medicare

pays all hospitals using a common rate-setting

methodology (with different hospitals receiving

different rates), Medicaid rates and payment

methods are determined by individual states, and

private insurance companies and managed care

plans are free to set their own hospital rates and

payment arrangements within the constraints established by antitrust laws. Maryland is the only

state that has retained an all-payer, prospective

rate-setting system for hospital care, under which

services are paid for by multiple third-party payers

but all payers must adopt the same methods and

hospital-specific rates. A few states have less

comprehensive forms of rate-setting systems.

The plethora of payers and payment methods

creates considerable complexity for U.S. hospitals. Hospitals must design intricate administrative mechanisms to track services eligible for reimbursement for different patients, the amount of

money that a hospital will receive for those services, and the method of payment for each patient’s care. This complexity imposes high administrative costs on the U.S. system as a whole,

including its hospitals, and creates opportunities

for cost shifting among payers and services (17).

Medicare

Because Medicare’s payments to hospitals account for a substantial share of their revenues

(about 25 percent in 1991), its payment system

and rates have a large impact on hospitals’ financial condition. When Medicare was first established in 1965, mainly to pay for health care for the

elderly population, hospitals were reimbursed for

inpatient services on the basis of “reasonable cost”

plus 2 percent. (By definition, these costs included both patient-related direct costs and indirect costs.) Essentially, once costs were established by Medicare’s intermediaries, hospitals

billed Medicare for whatever services they provided. In response to concerns about rising Medicare expenditures—Medicare spending for inpatient hospital services rose between 12 and 20

percent yearly during the early 1980s—between

1972 and 1983 a number of constraints were

introduced to control Medicare’s hospital outlays

(15). These included changing Medicare’s payment method for hospital services away from retrospective payments to a prospective payment

schedule with hospital rates set in advance (10).

Beginning in 1983, Medicare implemented the

hospital prospective payment system (PPS). This

system changed the basis of Medicare’s payments

for inpatient hospital care from retrospective costs

to a prospective fixed rate per discharge. Under

PPS the basis of payment for each hospital discharge is the national standardized payment

amount, which represents the average payment for

the typical Medicare case. Cases are categorized

by diagnosis-related groups (DRGs), which are

groups of medically similar cases that require

comparable resource use by hospitals. Each DRG

1 Hospital operating expenses are the costs that a hospital incurs for its day-to-day operation, such as staff salaries, electricity bills, and medical supplies. They also include depreciation expenses (i.e., costs that represent capital equipment’s fall in value, which in turn represents at least

part of the cost of replacing the equipment) and interest expenses (i.e., the costs of borrowed funds) which are related to previous capital investments.
Chapter 8 Hospital Financing in the United States 139

is assigned a weight based on its cost relative to

the national average cost for all cases. Relative

DRG weights reflect the relative rates that Medicare pays for patients’ admissions for each DRG

case. Basic DRG payments are adjusted so that

they reflect the hospital’s location (i.e., large urban, other urban, or rural) and local wage rates as

well as the mix of the hospital’s Medicare cases.

Payments are also adjusted for cases with unusually long stays or extraordinarily high costs, for

hospitals that operate graduate medical education

programs, and for hospitals that serve a disproportionate share of patients with low incomes (15).

Charges for outpatient services are not included in

the DRG payment.

PPS is intended to lower Medicare’s inpatient

hospital expenditures by giving financial incentives to hospitals to improve efficiency in providing inpatient services, including reducing lengths

of stays and the quantity and cost of services provided during hospital stays. Hospitals that provide

care for a patient at less cost than the prospective

DRG rate are allowed to keep the surplus, whereas

those whose costs exceed the rate must bear the

loss. Medicare’s increased emphasis on utilization

review and the implementation of Peer Review

Organizations have also encouraged doctors and

hospitals to reduce hospital costs (15).

Some hoped that PPS would promote more emphasis on cost-saving (as opposed to cost-increasing) technologies, although this does not seem to

have taken place (10). According to the Congressional Prospective Payment Assessment Commission (ProPAC), which oversees Medicare’s

prospective rate system, Medicare expenditures

for inpatient care have continued to climb despite

its cost containment efforts, mainly because of

technological innovations that have changed the

types of services provided and thus increased the

cost of complex cases (15).

During its first year PPS led to pronounced decreases in the average length of stay for Medicare

patients as well as declines in admissions, shortstay hospital beds, and occupancy rates (9). After

PPS was introduced, the rate of growth in Medicare’s hospital expenditures declined substantially from previous annual spending increases (10).

However, because hospital costs for Medicare patients have grown faster than Medicare’s payment

updates, hospitals’ Medicare operating margins

(the difference between Medicare payments and

Medicare-allowed inpatient operating costs) have

steadily declined (10). (Because of the diversity in

DRG payments, individual hospital experiences

vary from the average.)

PPS’s savings maybe less than indicated if one

observes only changes in hospital inpatient services and spending. PPS is often cited as one reason for the accelerated shift of treatment from

inpatient settings to hospital outpatient sites, freestanding outpatient centers, and physicians’ offices (10). Medicare’s expenditures for post-acute

care services, for home health care, and for Medicare’s part B program have risen markedly over

the past decade (15). Payments for outpatient hospital services constitute an increasing percentage

of the revenue that hospitals receive from Medicare, which still pays for the majority of outpatient

services based on their costs. In response to these

trends, in 1986 Congress first directed the Health

Care Financing Administration (HCFA; the

agency that administers Medicare) to propose a

prospective payment system for outpatient services and provided a list of requirements for the

system to meet. Developing a viable method

turned out to be much more difficult than designing the DRG system for inpatient care, and only

now, in 1995, is the proposal finished and ready to

make its way through a review process. Implementation of an outpatient PPS may still be years

off (13).

Medicaid

Medicaid is the second-largest public payer, targeting low-income families, poor elderly, and the

blind and disabled populations. HCFA’s Medicaid

Bureau oversees state administration of individual Medicaid programs. The federal government

defines certain guidelines that states must meet to

receive federal funding, but states are free to develop their own Medicaid programs within these

guidelines. The guidelines include restrictions on

provider reimbursement methods and rates, which

must be consistent with efficiency, economy, and
140

qua

Hospital Financing in Seven Countries

lity of care, and they must be sufficient to attract adequate numbers of providers by geographic region and ensure that Medicaid beneficiaries

have access to care (providers are not required to

serve Medicaid patients). Payment amounts are

supposed to be set such that Medicaid beneficiaries have access to care equal to that of the general

population.

In the 1970s and early 1980s, many private and

public health insurers (including most Medicaid

programs) paid hospitals on a cost-reimbursement

basis. This payment method, under which hospitals passed on the costs of providing services to

third-party payers, encouraged the provision of

more, and more costly, services. Public insurers

were the first to implement major payment reforms during the 1980s to overcome these negative incentives for cost containment. Before 1980,

Medicaid programs were required to use the same

methods as Medicare in paying for inpatient hospital services. Legislative changes in 1980 and

1981 allowed states to develop their own payment

arrangements with hospitals. States have made

use of the legislation to adopt a wide variety of reimbursement mechanisms. In general, there are

two major payment types, as described below:

Retrospective Payment

Within this type, payment levels are based on the

actual costs of care incurred by the provider. Reimbursement is therefore determined after services are rendered, based on the exact number and

cost of services delivered. Retrospective or costbased payment usually takes into account depreciation of capital and equipment costs by distributing them as a percentage of the charge for each

service.

Prospective Payment

With this type, rates of reimbursement are set in

advance of the time period to which they apply.

Prospective rates, regardless of how they are determined, may be paid according to various units,

such as per service, per month, per day, per discharge, or per episode of illness for each patient

served. Rates may or may not include capital costs

and often leave the provider with the risk that costs

will exceed payments. Conversely, providers who

keep costs down may be able to collect payments

in excess of their actual costs.

Many states have also introduced prospective

limits or caps on retrospective spending to encourage cost-consciousness. Hospitals are given a predetermined limit on spending for a particular period, and Medicaid will retrospectively reimburse

hospital charges up to this limit. All charges above

the limit become the hospital’s liability. The

state’s aggregate Medicaid expenditures are therefore limited to the lesser of the prospective spending limit and hospitals’ actual costs of treating

Medicaid patients.

States have three general methods for determining either prospective limits or prospective

rates:

■ Trending. A rate or limit is established for the

base year using historical cost-based data. For

future years the base rate is trended forward using a projection of costs to reflect inflation.

Rates and limits may be specific to each individual hospital or statewide.

■ Peer Groups. Hospitals are statistically

grouped into peer groups based on the similarity of their costs to the costs of other hospitals

in their group. Peer groups may be determined

by populations served, number of beds, size

and type of hospital, geographic location,

teaching facilities, state or private ownership,

or special services provided. The peer group’s

average costs are used to determine reasonable

rates or limits for each hospital in that group.

Hospitals that exceed the group’s average costs

are reimbursed only for the average limit or

rate; hospitals with lower-than-average costs

receive full reimbursement.

■ Negotiation or Selective Contracting. A competitive bidding or negotiation process is used

to select Medicaid providers. The bidding or

negotiation process establishes the payment

rates for each individual hospital. Medicaid

beneficiaries are then restricted to receiving

services from facilities that have contracts with

Medicaid.
Chapter 8 Hospital Financing in the United States | 141

Several states are also reforming their Medicaid programs by enrolling Medicaid participants

in managed care plans ranging from health maintenance organizations (HMOs) to primary-care

case management systems.2 Eleven states enacted

major new Medicaid managed care initiatives in

1993 as a way to contain costs, broaden coverage

to uninsured people, and improve access and disease prevention (7). The most dramatic of the state

measures was Florida’s mandate that established a

minimum enrollment level of Medicaid recipients

in all state-licensed HMOs. Other state measures

directed the development and implementation of

Medicaid managed care systems or authorized

Medicaid managed care demonstration projects.

Oregon, for example, is implementing a controversial program that eliminates coverage for certain services deemed to be of lower priority to generate savings for expanding coverage to everyone

who is uninsured and whose income is at or below

100 percent of the federal poverty level. In addition, all recipients are required to enroll in some

form of managed care arrangement. Eight other

states enacted laws in 1993 that addressed existing

Medicaid managed care programs (7). Medicaid

managed care enrollment more than doubled between 1987 and 1992, to 12 percent of the Medicaid population (15).

Medicaid managed care programs are still in

their infancy. As yet there is no clear evidence

whether these programs have actually extended

coverage to a broader population; whether current

and new beneficiaries have better access to and

quality of care; whether provider capitation rates

(per person payments) are sufficient to ensure access, quality, and provider participation in the programs; or whether managed care networks and

tools (e.g., provider networks, gatekeeper systems, utilization review programs) in some states

are adequate to meet the challenges of serving the

Medicaid and uninsured populations.

The changes in Medicaid programs and payment methods affect how hospitals are paid and

the amount of Medicaid expenditures. From 1985

to 1993, Medicaid benefit payments tripled (15).

Much of this growth is attributable to rising enrollment, expanded coverage to additional populations, and improvement in payments to hospitals that serve a disproportionate share of

low-income people. Because of these confounding effects and the relatively recent adoption of alternative Medicaid payment methods and managed care requirements, it is difficult to discern the

effects on Medicaid hospital expenditures of different states’ policies for Medicaid cost containment.

Private Sector

One of the most dramatic changes in private health

care and health insurance markets during the past

decade has been the rapid increase in managed

care organizations (MCOs) and the continuing variety of organizational forms adopted by MCOs.

MCOs include HMOs, preferred provider organizations (PPOs), and other more recent forms of

integrated service networks that combine insurance functions with the delivery of a complete

continuum of inpatient, ambulatory, and postacute care services. In contrast to traditional insurance plans, which allowed members to choose any

hospital at which their doctor had admitting privileges, MCOs often limit member choice to specific hospitals even for urgent care. If MCO members

seek care from providers outside their plan, they

often must bear a larger share of the cost of that

care. Even most traditional fee-for-service plans

now use some of the managed care tools (e.g., utilization review, pre-admission certification to use

services, primary care referral requirements) to

control health care costs.

The joining of groups of providers and insurance companies into integrated health plans has

2 Health maintenance organizations provide a comprehensive set of health services in exchange for a predetermined payment per enrollee.

Fee-for-service reimbursement is retained under case management systems, but recipients must obtain prior approval for services from a physician, who receives an additional fee to monitor individuals’ service usage.
142 I Hospital Financing in Seven Countries

been in part a reaction to increased cost containment pressure from individual employers and

large employer purchasing cooperatives. In response to rising health insurance costs, more large

employers have also chosen to self-insure, which

allows them to avoid state benefit mandates and

premium taxes and reduce their premiums by assuming financial risk themselves (15).

The substantial changes in health care markets

have in turn altered the way in which private insurers and health plans interact with and pay hospitals. For example, HMOs either have their own

hospitals or contract with specific hospitals. Many

MCOs have been successful in negotiating favorable contract terms with hospitals, including discounts from the standard billed charge, fixed payment per admission, and per diem hospital rates

(fixed payments per day of hospital care provided). HMOs and other managed care plans as

well as traditional private insurance companies

also use nonfinancial methods to control inpatient

utilization, including prior authorization and second opinions, concurrent review and discharge

planning for hospitalized members, case management services, and programs aimed at identifying

physicians with patterns of unnecessarily high use

of inpatient services.

❚ Sources of Funding

The largest payer of hospital costs remains private

insurance, which paid over 35 percent of hospitals’ operating revenues in 1991 (8) (table 8-3). At

the end of 1985, over 1,000 private insurance

companies were writing individual or group plans

(4). Private insurance, which covers most inpatient and outpatient hospital care and physician

services, has historically been linked to employment. Almost 60 percent of the U.S. population

receives health insurance through employers, although employers are not required to provide insurance coverage (15).

Private policies often place upper limits on the

amount of benefits available per day or per illness.

Individual deductibles, co-insurance, and copayments are now considered standard, although

most plans place a maximum limit on patients’

annual out-of-pocket expenses. Many employers

who provide coverage are trying to limit their

costs by changing the types of plans offered, increasing employees’ share of premium payments,

raising copayments and deductibles, or dropping

benefits altogether. As a result, individual out-ofpocket spending for all health services has increased in recent years. Employers are also increasingly offering managed care plans in

addition to or instead of traditional fee-for-service

insurance coverage (15).

Health insurance benefits increasingly consume a larger proportion of employee compensation in relation to wages (18). Consequently, the

number of employed persons covered by voluntary employer/employee-funded private insurance has been shrinking. By 1993, the proportion

of the population covered by employer plans and

Hospital operating revenues in 1991 Population covered in 1993

Source of funds (in percent) (in percent)

Private insurance 35.2 64.5

Medicare 25.4 12,8

Medicaid 15,0 8.1

Other government funds 15,9 NA

Miscellaneous funds 5.1 NA

Out-of-pocket 3 4 NA

NA= Not applicable

SOURCES. SW. Letsch, H.C. Lazenby, K.R. Levit, et al., “National Health Expenditures, 1991” Health Care Financing Review 14(2) 1-30, 1992, Prospective Payment Assessment Commission, Medicare and the American Health Care System Report to the Congress (Washington DC: ProPAC,

June 1994)
Chapter 8 Hospital Financing in the United States 143

individually purchased insurance had declined to

58.5 and 6 percent, respectively, down from 66.3

and 6.9 percent in 1980 (15).

The second-largest source of hospital funds is

the federal Medicare program, which is financed

mainly through a payroll tax on employers and

employees. In 1993, Medicare covered approximately 12.8 percent of the population (15) and

paid over one-fourth of aggregate hospital operating revenues in 1991 (9) (table 8-3). Individuals

over the age of 65, some people with disabilities,

and people with end-stage renal disease are eligible to participate in the Medicare program. Eligible persons are enrolled at no charge in Medicare

part A, which covers inpatient acute care, recovery in a skilled nursing facility following hospitalization, limited home health visits, and hospice

care (10). Medicare patients pay deductibles and

copayments, although many beneficiaries purchase private “Medigap” policies to cover their

share of costs and uncovered services, such as outpatient prescription drugs and some skilled nursing care. Part A accounts for about 66 percent of

total Medicare payments. Medicare part B provides coverage for physician and outpatient services, for which beneficiaries pay a share of the

premium (25 percent of total outlays). There is no

limit on the amount of cost sharing for which

beneficiaries are theoretically liable (10).

The third major source of hospital revenues is

the Medicaid program, which pays hospital expenses for many low-income and disabled people.

Medicaid enrolled 8.1 percent of the population in

1993 (15) and accounted for 15 percent of spending on hospital services in 1991 (8) (table 8-3).

Medicaid is a joint state-federal program financed

from general tax revenues. Each state sets its own

eligibility and coverage standards within guidelines established by the federal government. The

federal government provides each state with funds

that range from 50 percent to 83 percent of the

state’s total Medicaid expenditures. Both the size

of state programs and the restrictiveness of their

eligibility policies vary. Some states require beneficiary cost sharing.

The share of hospital care financed by consumers out of pocket has been gradually declining

over the past three decades (6). Patients directly

paid 3.4 percent of 1991 hospital operating revenues. Hospitals generate additional revenues

through investments and private philanthropy and

by operating cafeterias, parking lots, and gift

shops. These miscellaneous funding sources

amounted to 5.1 percent of hospital operating revenues in 1991 (8) (table 8-3).

Because approximately 37 million people were

not covered by any form of third-party insurance

in 1993—representing 14.7 percent of the U.S.

population (15)—hospital charges to insured

people partially pay for the “bad debts” of those

who cannot pay for their own care. In addition,

public insurers appear to pay less than the actual

hospital costs of their beneficiaries. In 1991,

Medicare paid on average 88 percent of hospitals’

actual costs of treating Medicare patients, and

Medicaid paid 82 percent for their beneficiaries

(6). Despite the growth in aggregate hospital

costs, below-cost payments from Medicare and

Medicaid, and losses from uncompensated care,

hospitals have sustained their aggregate total margins (the difference between total revenues and total expenses as a percentage of revenues) by increasing income from other sources, particularly

through higher payments from some privately insured patients (15). In 1991, private insurers paid

an estimated 130 percent of the actual hospital

costs for their insured patients (6).

❚ Allocation of Operating Funds

Labor accounts for just over half (54 percent in

1993) of hospital expenses, making it a natural target for cost containment efforts. Nonlabor expenses (including pharmaceuticals, food, energy,

malpractice insurance, and surgical and medical

instruments) other than capital-related costs were

responsible for 38 percent(6), and capital depreciation and interest expenses constituted about 8

percent of aggregate hospital costs (15) (figure

8-l).

Largely in response to Medicare’s PPS, established in 1983, hospital staffs declined and wage

growth slowed dramatically from 1983 through

1985 (15). Beginning in 1985, however, hospital
144 Hospital Financing in Seven Countries

Capital-related costs

8%

Labor costs Non-labor costs

54% 38%

SOURCES:J.K. Iglehart, “The American Health Care System,” The New

England Journal of Medicine 329(5):372-376, 1993; Prospective Payment Assessment Commission, Medicare and the American Health

Care System. Report to the Congress (Washington DC: ProPAC, June

1994).

employment again climbed steadily, with the

number of full-time-equivalent employees increasing from 3 million to 3.5 million between

1981 and 1991 (6,15). According to Iglehart (6),

more staff was required to care for sicker patients

admitted for inpatient care and to handle the increase in outpatient business. Preliminary data indicate, however, that hospitals were more conservative in their hiring in 1992 and 1993 (15).

❚ Operating Expenditures

Spending for acute care hospitals (both inpatient

and outpatient care) totaled $268.9 billion in

1991, constituting a 12.1 percent growth over

1990 levels. Unusually large increases in Medicaid payments to hospitals of almost 50 percent accounted for much of the growth. In 1991, community hospital expenditures accounted for 33

percent of national health expenditures and 4.4

percent of the U.S. gross domestic product (8).

The rate of growth in inflation-adjusted total

and inpatient hospital expenditures slowed significantly during the mid- 1980s, but outpatient expenditures continued to rise at a high rate throughout that period. In addition to rapid growth of

private managed care systems, changes such as

Medicare’s adoption of PPS, Medicare’s and

Medicaid’s liberalization of coverage rules for

nursing home and home health services, greater

utilization review of inpatient procedures, and

emerging forms of technology that favor the outpatient setting have fostered a strong shift in services from inpatient acute care settings to less expensive outpatient care sites (15). (Outpatient

sites include outpatient care provided in hospitals,

doctors’ offices, freestanding health care centers,

and nursing homes and home care.) In 1984 only

half of all community hospitals had outpatient departments; by 1991 that proportion had risen to 87

percent (6). In 1981 only 16 percent of surgical operations were performed in an outpatient setting,

but that figure had risen to 52 percent a decade later (6). Payments for nursing facilities, home

health agencies, and physicians’ services increased at higher rates than did payments for inpatient hospital care (15).

According to ProPAC, substitution of outpatient services for inpatient services is not the only

reason for the growth in outpatient expenditures

(15). Some of the increase is due to greater patient

demand for new technologies that have made outpatient procedures less costly, less time consuming, and less invasive for patients.

HOSPITAL CAPITAL COSTS

❚ Relationship of Capital and Operating

costs

Operating and capital expenses have a direct

relationship in U.S. hospital financing. Capital

depreciation amounts and interest expenses are

frequently reimbursed by third-party payers

through their payments for hospital services, although that arrangement is changing. Additionally, even though capital represents in the aggregate

less than 10 percent of total U.S. hospital costs,

capital expenditures may generate additional operating costs. For instance, when a hospital de-
Chapter 8 Hospital Financing in the United States 145

cides to expand its capacity by opening new beds

or a new specialty unit, it must often employ more

people to staff those beds. The full long-term effect of U.S. hospital capital investments on operating expenses is not completely understood (2).

❚ Capital Financing ModeI

As with hospital operating costs, there is no single

financing mechanism for hospital capital investments. All U.S. third-party payers contribute in

varying proportions to the cost of hospital capital

spending. Under cost-based reimbursement, capital expenses for property, plant, and equipment are

passed through to patient charges by including in

the billed amount both capital depreciation

amounts and interest expense on debt. However,

cost-based reimbursement is increasingly being

phased out as a method for paying hospitals. Prospective payment methods, which are growing,

restrict the ability of hospitals to fund unlimited

capital purchases; for the most part, these limitations are only now beginning to be felt by hospitals.

When Medicare adopted PPS, capital costs

were excluded from the formula, retaining their

pass-through status. Until 1992, Medicare reimbursed hospitals for the “reasonable” cost of new

medical equipment by allowing them to bill for

depreciation, interest payments, and lease or rental expenses. Medicare’s share of hospital capital

costs was determined by its share of inpatient

days. For instance, Medicare paid half of a

100-bed hospital’s reasonable capital costs even if

only two beds were occupied all year, as long as

one of those beds was occupied by a Medicare patient (5). That payment arrangement essentially

provided a federal subsidy for acquisition of new

equipment and encouraged hospitals to substitute

capital equipment for operating expenses such as

labor. Policymakers also feared that Medicare’s

capital reimbursement method paid for excess inpatient capacity and discouraged hospitals from

decreasing unused beds (5).

To phase in their inclusion in DRG payment

calculations, the proportion of new capital costs

that could be directly passed through charges decreased over several years prior to 1992. Beginning in 1992, Congress established a new method

of paying for capital costs through Medicare (to be

phased in over a 10-year period) that added a fixed

capital cost payment to each DRG payment. Hospitals that spend more on capital investments no

longer receive higher payments from Medicare to

cover these capital costs; thus, a financial incentive to introduce expensive technologies that do

not reduce longer term hospital costs has been re

moved (14). Other payers may increasingly restrict the amount of capital spending that they will

reimburse under prospective payment methods.

Determining Capital Requirements

Each hospital in the United States determines its

own capital needs (within regulatory confines)

through a capital budgeting process. Capital

budgeting is ongoing and linked to the strategic

planning of an institution, but it is usually not

summarized separately in the hospital’s annual

budget. Each hospital carefully analyzes the costs

and benefits of a capital project, choosing among

competing demands. Expenditures for replace

ment capital usually do not undergo a lengthy decisionmaking process, as they are often viewed as

essential for continuing operations.

Medical staff demands for capital are a unique

problem for U.S. hospitals. Because physicians

are typically not employees of any one hospital,

they are free to treat their patients at whichever

hospital offers the best facilities. Administrators

face pressure from staff physicians to invest in

new technologies and hospital bed capacity. Although physicians strongly influence a hospital’s

profitability, they generally do not have a longterm financial interest in the hospital itself. Corn--

petition for physicians has encouraged hospitals

to purchase expensive medical technologies, further driving up health care costs in the United

States.

There is no collective planning process for the

allocation of capital among or within hospitals.

Few state governments exert direct control over

the capital decisionmaking process, although rate

setting by states and other payers may limit the
146 | Hospital Financing in Seven Countries

profitability of hospitals, which in turn affects the

amount of retained earnings available to fund capital projects. In the past, cost-based reimbursement payment encouraged capital spending by

mitigating the risks involved with hospital indebtedness. However, prospective payment has

increased those risks, as hospitals may have a

more difficult time recovering capital costs

through charges to patients.

There are currently no fixed guidelines governing the purchase of capital equipment in privately

owned hospitals. Many public hospitals are subject to governmental contracting procedures that

require competitive bids for the provision of products or services. Public hospitals are usually allowed to raise private funds for capital purchases

through bond issues, although often an independent authority is created to raise and administer

such funds. Public and private hospitals independently purchase and use capital equipment but are

free to arrange shared purchase agreements.

The most prominent attempt by the federal

government to control the introduction, diffusion,

and allocation of hospital capital is generally perceived to have failed its mission. In 1974 Congress passed the National Health Planning and Resources Development Act, which required each

state to establish a mechanism for reviewing and

approving hospital purchases of expensive

technologies and other capital expenditures

through a certificate-of-need (CON) process as a

condition for obtaining federal money. States

were directed to design health planning programs

that created comprehensive, areawide health plans

and to establish CON programs to review and approve capital expenditures. Some states, such as

California, had very permissive CON programs;

others established rigorous limits within their

states and, in some cases (e.g., New York), states

combined the CON program with hospital rate

regulation.

The perception is widespread that CON laws

failed to control health care costs and were usually

ineffective in promoting the rational introduction

and use of new technology. CON efforts to control

the supply of acute care beds may have been more

successful, and more stringent programs may

have affected some technologies. For example,

CON programs have been credited with slowing

the purchase of magnetic resonance imagers

(MRIs) in hospitals but not the total number of

MRI facilities. In New York state, regulatory policies related to cardiac surgery facilities may have

reduced inappropriate procedures (16).

One problem with the state CON programs is

that the agencies that approved CON applications

did not control the actual allocation of capital

funds and thus lacked the proper incentives to take

account of the aggregate amount of expenditures

approved when considering new applications.

Many of the programs were highly political and

subject to manipulation by special interests. In addition, CON laws applied to purchases of hospital

equipment but did not apply to medical technologies in outpatient settings. Because of the relative

ineffectiveness of the CON process and the elimination of federal funding in 1986, many states

abandoned or substantially weakened the process,

although about 30 states have continued without

federal support (15,18).

Sources of Capital Funds

Individual hospitals determine their need for

funds and desired method of funding capital within the confines of current reimbursement methods

and the law. Once a hospital has identified a need

for capital, it must seek financing from retained

earnings, from charitable contributions, or

through borrowing in private financial markets. In

the U.S. hospital industry, approximately 50 percent of assets are financed through equity and 50

percent through debt. Equity capital is generated

either through the retention of the hospital’s profits or through charitable contributions. Long-term

debt financing is available from at least four major

sources: tax-exempt revenue bonds, Federal

Housing Administration insured mortgages, public taxable bonds, and conventional mortgage financing.

A large influence on capital spending is the

availability of funds, either through excess revenues or from investors. To obtain debt financing,

hospitals must maintain a certain level of financial

performance as measured by various ratios of as-
Chapter 8 Hospital Financing in the United States 147

sets to liabilities or income to expenses. Investors

often specify the required levels for these ratios in

covenants that are included in the bond contract.

Some types of funding also require the creation of

fund balances in escrow accounts to be held by the

bond trustee, usually equal to at least one year’s

worth of principal and interest payments.

The sources of payment for capital funds for

hospitals are roughly proportional to those of operating expenses, as charges for hospital services

incorporate costs for interest and depreciation.

The exception is that many nonprofit hospitals

seek philanthropic donations to support capital

improvements. In 1991, private philanthropic

donations accounted for only 4.9 percent of capital expenditures, however.

❚ Capital Expenditures

Estimates by the Health Care Financial Management Association place capital spending at 10 percent of U.S. hospital expenditures annually. In

1991, approximately $27 billion was devoted to

capital spending, including both plant and equipment. Between 1985 and 1989, inflation-adjusted

capital expenditures increased greatly (3). The

value of real fixed capital in hospitals grew 6.9

percent per year from 1976 to 1987, compared to

only 3.5 percent yearly for the gross stock of fixed

private, nonresidential capital for the U.S. economy as a whole (12).3 From 1980 to 1987, capital

costs grew substantially faster than operating

costs, thus contributing more to total hospital

costs (12). Since 1987 the ratio of capital costs to

total hospital costs has declined slightly.

HOSPITAL INDICATORS AND TRENDS

Reflecting continued pressures to reduce inpatient

costs, inpatient admission rates, procedures, and

lengths of stay declined over the most recent decade, as did the number of community hospitals

and patient beds (6,18). According to the American Hospital Association, the total number of inpatient days fell between 1981 and 1991 as annual

admissions to community hospitals dropped from

36.4 million to 31.1 million and the average

length of stay declined from 7.6 days to 7.2 days

(6) (table 8-4). In response to the decreased use of

inpatient beds, between 1980 and 1992 approximately 8 percent (642) of community hospitals

were either closed or acquired by other hospitals

(6). The number of beds staffed for use in U.S.

hospitals subsequently fell from 988,000 in 1980

to 933,000 in 1990, a 6.2 percent decline (18).

Nevertheless, the reduction in the number of hospitals and hospital beds did not keep pace with the

fall in the use of inpatient services. Thus, hospital

occupancy rates decreased from an average of 76

percent of beds filled in 1980 to 61 percent in 1993

(15).

Characteristic 1981 1991 Change (in percent)

Number of hospitals 5,813 5,342 -8.1

Number of beds (thousands) 1,003 924 -7.9

Admissions (millions) 36.4 31.1 -14,7

Average length of stay (days) 7.6 7,2 -6.1

Inpatient days (millions) 278.4 222.9 -20.0

Occupancy rate (%) 76.0 66.1 -13,1

FTE employees (millions) 3.0 3.5 +16,7

SOURCE: J.K. Iglehart, “The American Health Care System,” The New England Journal of Medicine 329(5):372-376, 1993.

3 Fixed real capital is buildings, machinery, and equipment; it excludes land, working capital, and goodwill. Gross stock is the value of fixed

real capital; net stock would subtract accumulated depreciation.
148 | Hospital Financing in Seven Countries

In a reversal of earlier trends, the growth rate of

inpatient and aggregate hospital expenditures began to climb after 1987. ProPAC asserts that this

acceleration is explained in part by the greater intensity of services resulting from the complexity

of inpatient cases combined with the introduction

of new technologies to treat such cases. The possibilities for cost shifting among payers, which has

allowed hospitals to avoid any serious reduction

in costs, is also responsible for the return to higher

growth rates, according to ProPAC (15).

The most recent data show a somewhat improved picture. According to data from the American Hospital Association’s National Hospital

Panel Survey, inflation-adjusted costs per adjusted hospital admission4 declined from a 5 percent growth rate in 1992 to 1.8 percent in 1993

(15). It is not yet clear, however, whether this a

short- or long-term phenomenon, as hospital costs

often vary widely from year to year (15). The drop

might be due to public and private payers’ efforts

to contain costs or to transitory effects from the intense health reform debate that took place in 1994.

Moreover, U.S. hospital costs per admission are

still higher than in most other industrialized countries (18).

FUTURE DIRECTIONS

The U.S. hospital system has myriad owners, missions for care, third-party insurers, and payment

methods for both hospital operating and capital

expenses. On the positive side, such diversity has

allowed for an enormous amount of experimentation by the federal government, as evidenced by

the use of DRGs to pay for inpatient care; by state

governments, as evidenced by the wide variety of

methods used to reimburse hospitals for Medicaid

patients; and by the private sector, as evidenced by

the growth and variety of managed care organizations. On the negative side, the complexity and

lack of uniformity probably raises hospital administrative costs above those of many other countries

(17) and makes it difficult to efficiently allocate

and use hospital resources, such as expensive

medical technologies. The variety of payers also

makes cost shifting among payers possible, blunting incentives for hospitals to contain costs and increase efficiency.

Increasing and high hospital expenditures, like

all sectors of health care, combined with the large

and increasing number of uninsured people, led

President Clinton and Congress to consider major

reform of the health care system in the past congressional session. Although this consideration

did not focus explicitly on constraining hospital

costs and expenditures, proposed changes to the

entire health care system undoubtedly would have

affected hospitals. The two main goals of most

congressional proposals were to control growth in

total health expenditures and to provide universal

coverage, or at least broader insurance coverage to

the population.

Although Congress ultimately did not pass any

health reform legislation, the two basic strategies

under consideration tended to lie at opposite ends

of the spectrum. One set of strategies was market

oriented, with the major strategy being termed

“managed competition.” Managed competition is

a concept that describes an environment in which

a “sponsor” (e.g., employer, government entity,

purchasing cooperative), acting on behalf of a

large group of subscribers, purchases health services from networks of providers that compete for

members on the basis of price and quality. In response to greater price competition, health plans

or provider networks could be expected to reduce

health care costs by using the tools of managed

care. Other components of managed competition

proposals included limitations on employer contributions to the cost of low-priced plans, standard

benefit packages, community rating with open enrollment and limited underwriting and exclusions

4 Adjusted admissions are a measure of total patient care activity undertaken in a hospital, both inpatient and outpatient care. Adjusted admissions are equivalent to the sum of inpatient admissions and an estimate of the volume of outpatient services. This estimate is calculated by

multiplying outpatient visits by the ratio of outpatient charges per visit to inpatient charges per admission (15).
Chapter 8 Hospital Financing in the United States | 149

for insurance, “report cards” on health plan quality, and limits on the tax deductibility of premium

contributions. Other market-oriented proposals

included health vouchers, tax credits, or medical

savings accounts to put medical care and insurance purchasing power in the hands of individual

consumers.

The other major competing proposal was a

single-payer or national health insurance approach. The single-payer approach contained in

most proposed legislation encompassed a system

of tax-financed universal coverage with government as the sole purchaser of health services. Several of the reforms were closely modeled after the

Canadian health care system but also included

legislated limits on the rate of growth of national

health expenditures.

The central features of current Republican proposals for health system reform focus on changing

the rules for marketing insurance to individuals

and to businesses with 50 or fewer workers. Current insurance reform proposals would prohibit

insurance companies from rejecting employers

that look like bad risks; require insurance companies to guarantee policy renewal; limit exclusion

of coverage for pre-existing conditions; and narrow variations in premiums charged different buyers for the same insurance policy.

Absence of major reforms at the federal level

does not mean that the U.S. health care system is

standing still. Restructuring of the system by state

governments and by private insurers and providers has greatly affected, and will continue to affect, health care organization, access, quality, and

financing. 

The substantial rise in state health expenditures, particularly for the Medicaid program, and

the growing number of people without health insurance induced states to address health care issues more intensely. Over the last five years, every

state has enacted some type of health reform legislation. Several state legislatures recently passed

comprehensive reforms that combine cost containment and health care coverage goals. States

have also attempted to increase the purchase of

private insurance by reforming the health insurance market for individuals and small businesses.

In 1993, 46 states passed some form of “small

market” reform that included guaranteed issuance

or renewal of insurance policies, community rating laws that prohibit or limit the use of health status or prior utilization of health care services to determine premiums, and encouragement of small

businesses to form purchasing pools to gain better

access to the large group insurance market (15).

Various states have reinvigorated their health

planning programs, focusing more on reviews of

major medical equipment purchases and development of specialized services than on construction

of new facilities (15). Some states’ reforms expand Medicaid eligibility to uninsured persons,

move more people into managed care plans, or reconfigure their entire health care systems. Because several states had been waiting to see what

might occur at the federal level before proceeding

with their reforms, there is likely to be even more

activity at the state level in the coming years.

State legislation encouraging the formation of

managed care plans supports the changes in private health care markets that have occurred at a

quick pace over the past decade. Perhaps the most

important trend affecting the future of the U.S.

health care system is the phenomenal growth of

managed care organizations and the increasing

tendency of purchasers to form large buying

groups. These purchasing groups, along with other large employer and government purchasers, either contract selectively with managed care organizations that pay for services and arrange for the

provision of those services (e.g., health maintenance organizations and preferred provider organizations) or contract directly with networks of

providers to supply health care services to the

group’s members (e.g., physician-hospital organizations).

In response to greater purchaser collaboration,

providers are increasingly cooperating to form integrated networks or systems of care that can bargain with purchasing groups directly. Health care

mergers have included a great deal of restructuring

in the hospital sector during the 1980s and early

1990s. Hospitals merged with, acquired, or affiliated with other institutions to create larger systems to compete effectively for patients under
150 | Hospital Financing in Seven Countries

managed care contracts (15). After four for-profit

hospital chains complete their mergers, the resulting two hospital chains will control 61 percent of

the for-profit beds in the United States, although

they will still include less than 10 percent of the

nation’s hospitals (11). Some analysts contend

that consolidation in the health industry is necessary for squeezing out excess capacity among hospitals and specialists and for more efficient allocation and use of expensive medical technologies;

others fear that consolidation may lead to higher

prices and less quality and choice for consumers.

Changes by private and public payers over the

last decade appear to have reduced inpatient utilization of services and have had some impact on

slowing the rate of increase in inpatient costs. Although hospital staffing increased in 1993, it did

not match the growth in hospital output. Hospital

staff wages and benefits grew more slowly than

wages and benefits in all industries (15). Inpatient

admission rates, procedures, and lengths of stay

have continued to decline over the most recent

decade, as did the number of community hospitals

and patient beds. Low occupancy rates continue to

be a problem, however, as the number of beds has

not declined as rapidly as hospital use. In part this

may be a consequence of hospitals’ ability to shift

costs from patients with third-party payers who

have more strict payment controls to patients with

fewer payment restraints, thereby reducing hospitals’ incentives to constrain costs. The willingness

of private payers to continue to underwrite hospital cost increases may be limited, though, which

will add to the pressure on hospitals to reduce costs.

Changes in government programs and in private health care insurance and provider markets

have also encouraged the use of less costly providers and sites of care. Care has been shifting from

inpatient acute care settings to less expensive outpatient settings. These trends have led to substantial declines in the use of hospital inpatient services and rapid growth in spending for services

furnished in other settings. Consequently, the

share of national health spending attributable to

hospital inpatient care dropped from about 29 percent in 1983 to slightly less than 24 percent in

1991. Meanwhile, the share of spending for hospital outpatient services increased from about 5 percent in 1983 to 8 percent in 1991 (15).

Although hospital cost growth appears to have

slowed in 1993, it is difficult to determine whether

this is a long-term trend or only a transitory effect

of the recent health reform discussions at the national level. Overall, public and private reform efforts implemented over the past decade appear to

have had only a limited impact on the upward

trend in aggregate health spending in the United

States. Although the delivery system has been reconfigured, advances in medicine continue to

drive up the demand for and costliness of care. At

the same time, rising health insurance premiums

and changes in employment patterns have resulted

in higher numbers of uninsured people (15).

Effective control of overall health care expenditures may require that the set of cost containment strategies used be comprehensive in terms of

the types of services and providers covered, the

payers included, and the control of both prices and

volumes of services. Current U.S. reforms are not

moving in that direction, but are being implemented on an incremental basis for specific parts of the

U.S. health care system, by individual states, or

are occurring independently within private markets. It remains to be seen whether such reforms

will solve the dual problems of health expenditure

growth and increases in the uninsured or underinsured population.

REFERENCES

1. American Hospital Association, American

Hospital Association Hospital Statisitcs,

1992-93 (Chicago: AHA, 1993).

2. Anderson, G., Erickson, J., and Feigenbaum,

S., et al., “Examining the Relationship Between Capital Investment and Hospital Operating Expenditures,” The Review of Economics and Statistics 709-713, 1987.

3. Clarke, R.L., and Herr, W.W., “New Medicare

Capital Regulations: A Capital Idea?,” Journal of American Health Policy 1(1):23-6,

1991.
Chapter 8 Hospital Financing in the United States | 151

4. DeLew, N., Greenberg, G., and Kinchen, K.,

“A Layman’s Guide to the U.S. Health Care

System,” Health Care Financing Review

14(1):151-169, Fall 1992.

5. Hemesath, M., and Pope, G.C., “Linking

Medicare Capital Payments to Hospital Occupancy Rates,” Health Affairs 8(3):104-116,

fall 1989.

6. Iglehart, J.K., “The American Health Care

System,” The New England Journal of Medicine 329(5):372-376, 1993.

7. Intergovernmental Health Policy Project, The

George Washington University, Richard E.

Hegner, author, Medicaid and Indigent Care:

An Overview of 1993 State Legislative Activity, January 1994.

8. Letsch, S.W., Lazenby, H.C., Levit, K.R., et

al., “National Health Expenditures, 1991”

Health Care Financing Review 14(2):1-30,

1992.

9. Levit, K.R., et al., “National Health Expenditures, 1990,” Health Care Financing Review

13(1):39-40, 1991.

10. Moon, M., Medicare Now and in the Future

(Washington DC: The Urban Institute Press,

1993).

11. National Health Policy Forum, The George

Washington University, “Consolidation in the

Health Care Marketplance and Antitrust

Policy,” Issue Brief No. 660, January 17,

1995.

12. Peden, E.A., “Do Hospitals Behave Like

Consumers? An Analysis of Expenditures

and Revenues,” Health Care Financing Review 14(2):125-134, 1992.

13. Pettengill, J.H., Senior Policy Analyst, Prospective Payment Assessment Commission,

personal communication, Mar. 15, 1995.

14. Prospective Payment Assessment Commission, Report and Recommendations to Congress, Washington, DC, Mar. 1, 1994.

15. Prospective Payment Assessment Commission, Medicare and the American Health Care

System. Report to the Congress (Washington

DC: ProPAC, June 1994).

16. Tunis, S.R., and Gelband, H., “Health Care

Technology in the United States,” Health

Policy 30(1-3, special issue):335-396, 1994.

17. U.S. Congress, Office of Technology Assessment, International Comparisons of Administrative Costs in Health Care, OTA-BPH-135 (Washington, DC: U.S. Government

Printing Office, September 1994).

18. Vertrees, J.C., “Cross National Study of Hospital Financing; Country Report for the

United States,” Prepared for the Organization

for Economic Cooperation and Development,

SOLON Consulting Group, Ltd., Silver

Spring, MD, August 1993.
| 153

ndex

Canada

Alberta, 15, 22

Acute Care Funding Plan (ACFP), 26

hospital financing approach, 23, 24, 26-28

hospital performance measure (HPM), 26, 27

patient case-mix-based adjustments, 26, 27

refined diagnosis-related groups (RDRGs), 27

British Columbia, 15, 17, 22

adjusted new weighted patient days (ANWPD),

29, 30

capital equipment, 34-35, 37-38

capital planning, 40

funding sources, 31

Greater Vancouver Regional Hospital District, 36,

37

hospital capital expenditures, 35

hospital construction, 36-37

hospital financing approach, 23, 24, 29-30

Hospital Medical Records Institute database, 29

Medical Services Plan, 31

Ministry of Health, 31, 35, 36, 37-38, 39

new weighted patient days (NWPD), 29, 30

regional hospital districts (RHDs), 36-38

technology assessment capabilities, 36

Canada Health Act, 24

Canadian Hospital Directory, 22

capital expenditures, 16, 35-36

equipment depreciation, 33

financing model and determining capital requirements, 9, 34-35

provincial experiences, 36-39

relationship of operating and capital costs, 33-34

sources of capital funds, 35

decentralization of decisionmaking trend, 17

gross domestic product

national health expenditures and, 2, 32, 33

Health and Welfare Canada, 35

Hospital Insurance and Diagnostic Services Act

(HIDS) of 1956, 22

hospital operating costs

allocation of operating costs, 32

employee salaries, 32

financing model, 8, 23-30

funding sources, 31-32

future trends in financing, 30-31, 39-40

operating expenditures, 32-33

pharmaceuticals and surgical supplies, 32

hospital sector structure, 22

House of Commons, 25

Manitoba, 15, 16

capital equipment, 33, 39

capital planning, 40

Department of Health, 38-39

hospital construction, 38-39

hospital financing approach, 25

Ministry of Health, 34

Ontario, 6

equipment purchases, 35

funding sources, 31, 32

hospital financing approach, 23, 24, 28-29

Ministry of Health, 28, 30

restriction of ambulatory services, 31

St. Michael’s Hospital Health Centre, 32

outpatient care, 6, 31

physicians, 22-23

private hospitals, 22

private insurance, 21, 22

provincial ministries of health, 22, 40

Quebec

employee salaries, 32

hospital capital expenditures, 35

hospital financing approach, 23, 24

technology assessment capabilities, 36

tax revenue for health care, 7, 17, 22, 31
154 | Hospital Financing in Seven Countries

trends in hospital financing

case-mix groups (CMG), 30

future trends, 30-31, 39-40

Capital costs. See Hospital capital costs; individual

countries by name

Capital requirements determination. See Hospital

capital costs; individual countries by name

Decentralization of decisionmaking trend, 17

Diagnosis-related groups (DRGs)

Canada, 27, 30

United States, 11, 15, 17-18, 27, 64, 79, 136, 145

DRGs. See Diagnosis-related groups

Employer health insurance plans

United States, 142, 143

England

block contracts, 48-49

British Medical Association, 46

Community Care Act of 1990, 43

Consolidated Funds, 48

consumer’s choice of providers and services, 17

cost and volume contracts, 48-49

cost-per-case contracts, 48-49

Department of Health, 43, 46, 47-48, 51, 52

directly managed units (DMUs), 44, 46, 50, 51

district health authorities, 14, 16, 44, 47-48, 51

Family Health Services, 47

Family Practitioner Committees, 43

future directions of hospital financing, 52-53

general practitioners (GPs), 46-47, 53

The Government’s Expenditure Plans, 47

gross domestic product and health care spending

comparison, 2, 49

hospital and community health services (HCHS), 47

hospital capital costs

capital expenditures, 52

determination of capital requirements, 51

external financing limits (EFLs), 51

financing model and source of funding, 9, 50-51

relationship of operating and capital costs, 50

hospital indicators and trends, 52

hospital operating costs

financing model, 8, 47-48

funding sources, 48-49

operating expenditures, 49-50

pharmaceuticals and supplies, 49

hospital sector structure, 44-45

House of Commons Public Expenditure Committee,

52

independent hospital sectors, 44-45

National Health Service (NHS) reforms, 15, 43-44,

51, 52-53

National Health Service (NHS) Supplies Agency, 49

National Health Service (NHS) Trusts, 44-45, 46,

48, 50

physicians, 45-47

private hospitals, 45, 48, 49, 51, 52

private insurance, 45, 49

purchaser-provider split, 17

regional health authorities (RHAs), 16, 44, 47-48,

51

Review Body on Doctors’ and Dentists’ Remuneration, 46

tax revenues, 7, 17, 43, 48-49

Working for Patients, 43

European Community, 90, 96

France

Act of December 31, 1970, 56, 71

Centre d’Etudes des Coûts et des Revenus (CERC)

study, 67

district Department for Health and Social Services

(DDASS), 62

gross domestic product and health care spending

comparison, 2, 67

health care system description, 55-56

health reform act of 1991, 65-66

hospital beds and inpatient days, 57

hospital budgets

appended budgets, 60

budget adjustments, 61-62

daily charges determination, 61, 62

expenditures requiring authorization, 60

global allocation determination, 60-61

public accounting principles and, 60

reforms, 13, 56, 63-64

sickness fund payments, 55, 56, 62-63, 66

hospital capital costs

capital expenditures, 73

determining capital requirements, 70

financing model, 9, 68-73

health maps, 70-71

incentives to invest, 67

loans, 69-70
Index | 155

reforms, 71-72

relationship of capital and operating costs, 68-69

self-financing, 69

subsidies, 69

hospital management, 62-63

hospital operating costs

allocation of operating funds, 66-67

financing model, 8, 59-66

operating expenditures, 67

sources of funds, 66

hospital sector structure, 56-58

insurance-based system, 7, 17

medical program information system (PMSI), 66,

73-74

Ministry of Health, 62, 63, 70, 71

mutual fund organizations, 56

national center for hospital equipment (CNEH), 72

National Health and Social Resources Committee,

71

national health expenditures (NHE), 67

percentage of total health care expenditures allotted

to hospitals, 2-4

physicians, 58-59, 64, 65

primary care, 56

private hospitals

allocation of operating funds, 67

daily rates and fees, 64-65

health reforms, 65-66

investments, 70, 72-73

private for-profit hospitals, 56-58

private nonprofit hospitals (PSPH), 58, 59, 60, 67,

68

supervision, 65

public hospitals

financing model, 59-60

operating funds, 66-67

private hospitals comparison, 56-58

traditional investments, 72

regional Department for Health and Social Services

(DRASS), 62

Regional Health and Social Resources Committee,

71

salaried workers’ fund (CNAMTS), 55

social security sickness funds, 55, 56, 62-63, 66

trends in hospital financing

future trends, 73-74

GDP. See Gross domestic product

Germany

Baden-Würthemberg, 87

Bavaria, 87

Concerted Action in Health Care, 75-76, 79-80

consumer’s choice of providers and/or services, 17

federal framework law of 1972, 76

Federal Office of Statistics (FOS), 84, 85, 86

federal political system, 75

former East German states, 76, 87, 89

former West German states, 76, 85, 87, 90

future trends in financing, 90-92

general hospitals, 77-78

health reform law of 1989, 88

Health Sector Act of 1993 (HSA), 7, 16, 77, 80, 81,

82, 83, 86, 89, 91

historical development of hospital financing, 92

hospital capital costs

capital and operating costs relationship, 86

capital expenditures, 90

capital financing model, 9, 86-87

capital funds sources, 89

capital requirements determination, 87-89

hospital indicators and trends, 90

hospital operating costs

case-based lump sums, 80-82

financing model, 8, 79-84

fixed budgets for 1993 to 1995, 80

flexible budgets, 79-80, 80

operating costs and expenditures, 84-86

payment components coordination, 82-83

payment negotiations, 83-84

sources of funding, 84

special daily rates for hospital departments, 80-82

special fees for costly services, 80-82

hospital sector structure, 77-78

insurance-based system, 7, 17

interest groups, 75-76

medical technologies, 88-89

outpatient care, 7, 82

parliament, 89

physicians, 78-79

Schleswig-Holstein, 90

statutory health insurance, 75

two-tier system of finance, 76, 86

unification of East and West Germany, 76

West Berlin, 90

Great Britain. See England

Gross domestic product (GDP), national health expenditures as percentage of

Canada, 2, 32, 33

England, 2, 49

France, 2, 67

Germany, 2, 86

The Netherlands, 2, 95
156 | Hospital Financing in Seven Countries

Sweden, 2, 125, 133

United States, 2, 144

Health insurance. See Insurance; Private health insurance

Home health services United States, 144

Hospital budgets. See Hospital operating costs; individual countries by name

Hospital capital costs

Canada, 33-39

England, 50-52

France, 67-73

Germany, 86-90

The Netherlands, 110-112

Sweden, 128

United States, 144-147

Hospital financing

Canada, 21-42

future trends, 30-31, 39-40

England, 43-54

future trends, 52-53

France, 55-74

future trends, 73-74

general trends, 1-18

Germany, 75-93

future trends, 90-92

international trends, 13-17

The Netherlands, 95-119

future trends, 114-118

Sweden, 121-134

United States, 7, 11-13, 135-151

future trends, 148-150

Hospital indicators and trends

Canada, 30-31, 39-40

England, 52-53

France, 73-74

General, 1-18

Germany, 90-92

The Netherlands, 112-118

United States, 147-150

Hospital operating costs

Canada, 23-33

England, 47-50

France, 59-67

Germany, 79-86

The Netherlands, 100-110

Sweden, 125

United States, 138-144

Hospital sector structure

Canada, 22

England, 44-45

France, 56-58

Germany, 77-78

The Netherlands, 97-98

United States, 136-137

Hospital spending as percentage of total health care

expenditures, 2-4

Hospital use changes

decline in use, 1

forces of change

financial incentives, 6-7

medical technology, 7

profile of, 2-7

Insurance. See also Private health insurance

employer plans, 142, 143

insurance-based financing systems, 7, 17

self-insurance, 142

Medical technologies

Germany, 88-89

laparoscopic surgery, 7

The Netherlands, 111-112

reduction of demand for acute hospital services

and, 7

United States, 13, 18, 145

The Netherlands

academic hospitals, 97-98, 105

acute care hospitals, 97-98, 112, 113

basic health insurance scheme, 97

Central Agency for Health Care Tariffs (COTG), 98,

101, 102, 103, 105-106, 110, 111

Central Agency for Hospital Tariffs (COZ), 100, 101

Central Office for Statistics, 112

consumer’s choice of providers and/or services, 17

decentralization of decisionmaking trend, 17

Dekker Committee, 95-96, 97

exceptional medical expenses scheme, 96

fee-for-service specialist care, 99

Financial Report on Health, 100

Five-Parties Agreement, 98

future trends in financing

budget scheme advantages, 114

budget scheme disadvantages, 114-115

health insurance industry, 115-117

payment flows after reform, 115

relationship of medical specialists and hospital

management, 118

Gedeelde zorg: betere zorg report, 118

General Account Office, 111
Index | 157

general hospitals, 97-98, 108, 114

gross domestic product and national health expenditures comparison, 2, 95

Health Care Tariffs Act, 98, 101

hospital admission rate, 4

hospital capital costs

capital expenditures, 112

capital requirements determination, 110-112

hospital construction, 110-111

major medical equipment, 111-112

minor investments, 112

relationship of operating and capital costs, 110

Hospital Facilities Act, 97, 101, 102, 103, 105-106,

110

Article 18, 111-112

hospital indicators and trends, 112-114

hospital operating costs

aggregate hospital budget, 100, 108

financing model, 8, 100-110

functional budgeting, 102-103, 104, 106

historical budgeting, 102-103

hospital charges, 103, 105-106

hypothetical budgeting, 104

individual hospital budgets, 100

introduction to hospital budgeting, 101-102

legal framework, 100-101

operating expenditures, 107-110

sources and allocation of operating funds, 107

summary, 106-107

Hospital Planning Act, 111

hospital sector structure, 97-98

Hospitals Tariffs Act of 1965, 100

insurance-based system, 7, 17

medical technologies, 111-112

Ministry of Education, 107

Ministry of Health, 16, 98-99, 100, 101, 103, 109,

113

National Association of Civil Servants Health

Insurance, 98

National Association of Hospitals, 109

National Association of Medical Specialists, 98, 99,

102

National Association of Private Health Insurers, 98

National Association of Sickness Funds, 98, 116

National Hospital Association, 98, 102

nursing home sector, 113-114

outpatient care, 7, 113

physicians, 98-100

policy issues to be resolved, 97

private insurance, 96

reforms, 14, 15

Sickness Fund Act, 97

sickness fund scheme, 96, 97

special hospitals, 97-98, 105, 108

Willingness to Change, 95

Nursing homes

The Netherlands, 113-114

United States, 144

OECD. See Organisation for Economic Cooperation

and Development

Operating costs. See Hospital operating costs;

individual countries by name

Operating expenditures. See Hospital operating

costs; individual countries by name

Organisation for Economic Cooperation and 

Development (OECD), 21, 85-86, 91, 95,

108, 123, 124

Outpatient care

Canada, 6

Germany, 7, 82

The Netherlands, 7, 113

Sweden, 6

United States, 6, 11, 144, 150

Physicians

Canada, 22-23

England, 45-46

France, 58-59

Germany, 78-79

The Netherlands, 98-100

Sweden, 124-125

United States, 137-138

Private health insurance

Canada, 21, 22

England, 45, 49

The Netherlands, 96

Sweden, 126-127, 133

United States, 7, 12, 17, 142

Private hospitals. See Hospital sector structure

Sweden

ambulatory surgery, 129

“bedblockers,” 123

capital equipment, 130

capital expense financing, 10

City of Gothenburg, 122
158 | Hospital Financing in Seven Countries

City of Malmö, 122

consumer’s choice of providers and/or services, 17

Dagmar reform, 126

decentralization of decisionmaking trend, 17

decline in Swedish economy, 132-133

diagnosis related groups (DRGs), 128

Enköping/Habo district, 130, 131

Federation of Swedish County Councils, 17, 122,

125

Finance Plan of 1991, 126

funds allocation

internal hospital markets, 127

purchasing of hospital services, 127-128

traditional allocation model, 127

gross domestic product

national health care expenditures comparison, 2,

125, 133

Health & Medical Services Act of 1982, 122

health care delivery system

county council providers, 122, 124

private providers, 124

infant mortality rate, 123

island of Gotland, 122

life expectancy, 123

local municipalities, 122-123

market-driven mechanisms, 132

Ministry of Finance, 126

Ministry of Health and Social Affairs, 121-122

National Board of Health and Welfare, 122

national government committee for reform, 123,

133

national health care expenditures, 125

ongoing organizational changes, 132

operating expense financing, 8

outpatient care, 6

physicians, 124-125

price differentials to influence patient flows, 6

private health insurance, 126-127, 133

prospective payment system (PPS), 129

public sector responsibility for health care, 121

reforms

compulsory health insurance model, 123

primary care-based model, 123

reformed county council model, 123

revenue sources

patient fees, 126

public funding, 125-126

tax revenue, 7, 17

shift from nonsocialist to social-democratic national

government, 133

Stockholm county council, 126, 128-130

capital costs, 130

Nacka Hospital, 129-130

Swedish Medical Association, 125

unemployment, 133

Uppsala county council, 130-132

capital costs, 131-132

University Hospital of Uppsala, 130-131

United Kingdom. See England

United States

American Hospital Association, 147

National Hospital Panel Survey, 148

California, 146

certificate-of-need (CON) process, 146

Clinton, Bill, 148

community hospitals, 136, 147

Congress, 145, 146, 148

diagnosis-related groups (DRGs), 11, 15, 17-18, 27,

64, 73, 136, 145

employer plans, 142, 143

federal government hospitals, 7, 136

Federal Housing Administration, 146

fee-for-service plans, 141, 142

Florida, 141

future trends in financing, 148-150

gross domestic product and health care spending

comparison, 2

Health Care Financial Management Association,

147

Health Care Financing Administration (HCFA), 11,

139

health care mergers, 149-150

health maintenance organizations (HMOs), 141, 142

hospital capital costs

capital expenditures, 13, 147

capital financing model, 10, 145

capital funds sources, 146-147

capital requirements determination, 145-146

relationship of capital and operating costs,

144-145

hospital indicators and trends, 147-148

hospital occupancy rates, 6, 150

hospital operating costs

allocation of operating funds, 143-144

financing model, 8, 138-142

funding sources, 142-143

operating expenditures, 144

private sector, 141-142

hospital sector structure, 136-137

insurance-based financing system, 7, 17

managed care organizations (MCOs), 12, 141, 142,

149

market-driven health care system, 18

Maryland, 138
Index | 159

Medicaid program, 6, 11-12, 18, 136, 143, 144

prospective payment, 140

retrospective payment, 140-141

medical technology, 13, 18, 145

Medicare program, 6, 7, 11, 13, 18, 136, 138-139,

143, 144, 145

Medigap policies, 143

national health expenditures (NHE), 135

national health insurance, 149

National Health Planning and Resources Development Act, 146

New York (State), 146

Nixon administration’s economic stabilization program, 12

nonprofit hospitals, 136

operating expense financing, 8

Oregon, 141

outpatient care, 6, 11, 150

peer review organizations, 139

percentage of total health care spending allotted to

hospitals, 2-4

philanthropic donations, 146

physicians, 137-138

preferred provider organizations (PPOs), 141, 142

private insurance, 7, 17, 142

Prospective Payment Assessment Commission 

(ProPAC), 139, 144, 148

prospective payment system (PPS), 11, 13, 18, 138,

139 145

Republican proposals, 149

self-insurance, 142

single-payer approach, 149

“small market” reform, 149

teaching hospitals, 136-137

third-party payers, 7, 136, 150

uninsured persons, 143, 149