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Hospital financing in Norway
ELSEVIER SCIENCE IRELAND
Health
Policy 28 (1994) 79-88
Hospital financing in Norway Fredrik
Carlsen
Department of Economics, University of Trondheim, N-7OS5 Dragvoll, Trondheim, Norway
(Accepted
8 February
1994)
Abstract
The Norwegian block grant reform of 1980 replaced state reimbursements to hospitals by block grants allocated to counties according to objective criteria. The reform was accompanied by a general decentralization of budget authority to local level. The reform aimed to promote primary care, equalize the supply of health care across regions and give counties incentives to improve hospital efficiency. A decade later, the reform was reversed. The government has imposed restrictions which reduce the budget discretion of the counties and part of the block grant has been made dependent on the performance of the hospitalsin the counties. The government has also issued a ‘waiting-list guarantee’ which states that patients who suffer from a serious disease are entitled to medical treatment within six months. This paper provides an overview of hospital financing in Norway during the last two decades and discusses why the block grant system did not fulfil the expectations of its architects. Key woruk
Norway; Hospital financing; Block grant reform
1. Introduction
Like several other European countries which reformed the system of hospital finance at the beginning of the eighties, Norway replaced retrospective cost reimbursements by global budgets [l]. Before 1980, hospitals received the bulk of their operating revenues as per diem reimbursements from the state. The reform of 1980 established a grant hierarchy. Block grants were channelled from the centre to the counties, the regional level of government, which in turn appropriated global budgets to hospitals. The aim of the reform was to create a balanced health care system by expanding primary care and equalizing the supply of health services across regions. The new financing system should facilitate the transformation of the health care system by 0168-8510/94/~07.00 0 1994 Elsevier Science Ireland SSDI 0168-8510(94)00626-P
Ltd. All rights reserved
80
F. Carlsen /Health Policy 28 (1994)
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strengthening government control of the distribution of grants and giving counties incentives to restrain hospital costs as well as develop alternatives to inpatient care. A decade later, policy makers concluded that the block grant system had serious flaws. During the nineties, part of the block grant has been made dependent on the performance of the counties’ hospitals, and the discretion of the counties to prioritize within their budget frames has been restricted. This paper provides an overview of hospital financing in Norway during the last two decades and discusses why the block grant reform was reversed. We argue that the system failed because it was based on a critical assumption which turned out to be unrealistic, that the government would be willing to incur the political costs of enforcing the budget frames of the counties. The new health policy gave priority to primary care. County and hospital finances deteriorated during the first half of the eighties, and hospitals moved to the top of the political agenda due to soaring waiting lists for elective surgery and an increase in the number of commercial hospital beds. In response to the mounting political pressure, the government repeatedly intervened to raise hospital performance and prevent the closing of wards. The block grant system assigned a key role to the counties. The counties were supposed to adjust to tighter budget frames by reallocating resources from inpatient care and improving hospital efficiency. However, the frequent interventions by the government undermined the incentives of the counties to do their job. Since the state could be expected to provide additional appropriations when a financial crisis occurred, county politicians had strong incentives to postpone controversial budget decisions. Instead, counties engaged in various forms of lobbying activities directed at the government, acting as spokesmen for their institutions rather than as implementation agents for the state. As the block grant system evolved into a struggle between two tiers of government, the government concluded that the financing system delegated too much authority to the counties. While the counties enjoyed substantial spending discretion, the system provided the state with few effective instruments to influence the behaviour of the counties. To put the two levels of government on a more equal footing, the government introduced new regulations which strengthened the control of the counties by the state. The next section describes the background of, and rationale for, the reform while the subsequent two sections describe the evolution of the block grant system from 1980 to 1993. The concluding section discusses why the system did not fultil the expectations of its architects. 2. The block grant reform Most Norwegian hospitals are owned and run by the counties. Until 1980, the state reimbursed 50-75% of the operating expenditures of the hospitals on a per diem basis while the rest was provided by the counties out of their tax revenues. During the seventies, policy makers concluded that the reimbursement system had serious flaws [2-41. Compared to other industrialized countries, Norway had many hospital beds per capita but insufficient community care and low capacity for out-
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patient treatment. The financing system exacerbated the imbalance of the health care system by providing higher state reimbursements for expenditures incurred by health institutions than by primary health care. Since new activities created local tax revenues in addition to generous reimbursements, counties had strong incentives to expand hospital capacity. By the end of the decade, the investment plans of the counties and the corresponding projected increase in hospital operating expenditures vastly exceeded the national targets set by the government. In addition, the distribution of hospital facilities was geographically unfair since counties with many hospital beds received most grants. In principle, the authorities sanctioned per diem rates after an individual examination of each hospital. But in practice, the government did not resist pressure to set rates close to actual costs. Therefore, the reimbursement system rewarded hospitals with inherent high costs and discouraged hospitals from launching cost-reducing initiatives such as measures which lowered average length of stay. The block grant system was introduced in 1980 [5]. With the exception of fees for outpatient treatment, state reimbursements were replaced by block grants to the counties, allocated according to demographic criteria. Counties were given the responsibility for financing health institutions within their geographical area (nursing homes were transferred to the municipalities in 1988). The municipalities, which received a block grant for primary care, were - from 1984 - assigned responsibility for financing primary care, including family practices and home care [6]. The reform was accompanied by a general decentralization of political decisions to local authorities. In 1986, several specific grants covering all sectors for which local authorities are responsible, were pooled into a limited number of unconditional grants [7]. To facilitate co-ordination between different parts of the health care system, the government established a system of rolling plans. The government would approve new specialities, appointments of new consultants and applications to the municipal bank for investment loans to health institutions. The objectives of the block grant reform were twofold. One aim was to strengthen government control of the distribution of state grants. The open-ended reimbursement system gave local decision makers substantial latitude over the size of their own appropriations. Policy makers believed the block grant system would allow the government to restrain health care expenditures, equalize the supply of hospital services among regions and - by increasing the municipalities’ transfers compared to those of the counties - expand the lower level of the health pyramid at the expense of health institutions. Improved primary care would raise the quality of care for the priority groups - the mentally ill, the mentally and physically handicapped and the elderly - as well as dampen the demand for hospital services. As more patients could be treated in outpatient departments, family practices or their homes, the number of hospitals could be reduced. The second objective was to improve the incentives offered to local decision makers. Prior to the block grant reform, a plethora of selective grants and reimbursements encouraged local authorities to tailor the pattern of services so as to elicit maximum state transfers. The block grant system gave local authorities discretion to prioritize within their budget frames but state transfers were supposed to be inde-
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pendent of local expenditure decisions. The architects of the reform argued that as local authorities were required to cover the full marginal cost of different activities - each authority would have both the opportunity and incentives to allocate revenues optimally between various categories of care. If counties were able to develop alternatives to inpatient hospital care and reduce hospital costs, resources could be released for other purposes. 3. Modification of the block grant system The eighties can be divided into two phases. Until 1984, the new health policy was implemented. The government restrained the growth in overall state transfers to the local sector while giving priority to the municipalities. In the same period, the tax revenues of the counties stagnated due to the economic recession. The combination of these three factors - a restrictive fiscal policy, a health policy which emphasized primary care and the recession - caused a sharp deterioration in hospital finances. Hospital real expenditures increased by 3.5% annually from 1972 to 1980 but remained constant from 1980 to 1983. In contrast, primary care expanded by 6% in real terms annually in the latter period [8]. During the second half of the decade, the government modified the block grant system by introducing a range of earmarked transfers in order to stimulate hospital performance. These interventions did not follow from a comprehensive evaluation of the new financing system but were rather ad hoc measures introduced to dampen the growing criticism against the government for neglecting health care in general and hospitals in particular. Although comprehensive data on hospital waiting lists are not available, most studies indicate that waiting lists for elective surgery soared during the first half of the eighties [9]. The lack of adequate operating capacity was particularly prevalent for rheumatic and orthopedic surgery, and heart and cataract operations [8,10]. Despite the stagnation in revenues, hospitals managed to treat more patients. However, the increase was not sufficient to match the rapidly growing demand for hospital services due to demographic changes and medical innovations which enabled hospitals to offer new types of treatment. For instance, from 1982 to 1986, the number of heart surgery operations almost doubled while the estimated demand increased threefold [ 111. As media increasingly focused on personal tragedies due to inadequate treatment, counties in financial trouble and proposals to close hospital wards, hospitals became a major area of dispute between the centre-right coalition government and the Labour opposition. Prior to the general election in 1985, polls showed that the electorate considered health policy to be the single most important political issue. The government responded to the mounting pressure by launching several initiatives to fight hospital queues. In 1984, a system of state subsidies to so-called ‘guest patients’ was established [ 121.The resident county paid admission fees to hospitals in other counties on a per diem basis. The block grant reform had increased the marginal cost incurred by the counties of sending patients across county borders since the state no longer reimbursed part of the expenditures of the hospitals. From 1980 to 1983, guest patient prices rose considerably in real terms, and the number
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of patient days decreased. The government suspected counties were keeping the exchange of patients at a minimum in order to save cash, resulting in underutilization of hospital capacity. The state subsidies were raised several times during the eighties in response to hospital cost increases. The government also entered into bilateral agreements with individual counties where the state promised fresh funds in exchange for higher performance. The state either paid a specified grant per operation, financed new surgery facilities or appropriated grants based on general information from the county about the need for revenues. In 1984 and 1985, the government gave counties generous block grant increases. However, early in 1986, oil prices collapsed and the fiscal policy was contracted. The debt/revenue ratio of the local sector soared, partly due to the investment boom during the mid-eighties and partly due to the new fiscal policy. To balance their budgets, counties imposed cutbacks on hospitals. In the face of political criticism, the government frequently intervened to prevent the closing of hospital wards, both by granting additional funds to counties in trouble and by raising subsidies for guest patients and fees for outpatient treatment. The initiatives of the government implied that the health policy no longer aimed to change the balance between primary and hospital care. During the first half of the decade, primary care received top priority. From 1984 to 1989, both types of care experienced an annual growth rate of approximately 2% in real expenditure [13]. 4. Towards a new health policy A comprehensive evaluation of the block grant system took place during the end of the eighties. Two public commissions submitted reports in 1987, the Eilertsen committee on the financing and organization of hospitals and the Lonning committee on health care priorities [14,15]. The view of the government was presented in the National Health Plan for 1988 [8], and the annual budget documents. Concerning objective number one, to establish better control of the size and distribution of grants, observers agreed that the block grant system had been a success. The financing system had proved effective in restraining hospital expenditures and equalizing the geographical supply of health care. However, the expansion of primary care did not seem to dampen the demand for hospital services, which is not surprising as empirical research has not identified a significant effect of ambulatory care on the demand for inpatient services [16]. The major flaws of the grant system related to the second objective, providing agents with appropriate incentives. Neither hospitals nor counties were encouraged to improve cost efficiency or reallocate resources in response to shifts in the demand for services. In principle, hospitals received block budgets. In practice, they regularly incurred deficits which were covered by the counties. For instance, in 1986, hospitals exceeded their budgets by 9% on average. A study revealed that deficits were not related to variations in patient volume [17]. Hence, hospitals were still rewarded for cost increases, as they were under the old reimbursement system. The internal budget routines of the hospitals mirrored the lax budget discipline
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of the counties. Accounting systems were crude, and hospital departments frequently overspent their budgets [ 181. The Eilertsen committee pointed out that many hospitals were forced to cut performance in order to comply with their budget frames. The committee suggested that hospitals should be allowed to improve their financial position by admitting more patients and recommended that approximately 20% of hospital revenues should depend on the number of patients discharged according to a DRG formula. The new grant should be paid by the state as the counties could not carry the financial risk imposed by the DRG system on the hospital sponsor. An important objective of the block grant reform was to give counties budget frames which were independent of budget priorities, thus providing incentives to evaluate carefully the costs and benefits of each appropriation. However, due to external effects and competition for state funds, the counties did not face the social costs of alternative activities. First, the counties initiated too many specialities because university hospitals received funding directly from the state. The national planning system was established to avoid inefficient duplication of services but had failed to secure a rational division of tasks between the counties as the state did not exercise sufficient control over hospital investment. Second, externalities between primary and institutional care were not internalized. Counties had incentives to shuffle patients from institutions to home-based care provided by municipalities while hospital beds were blocked by patients due to inadequate community care. Third, the counties had insufficient incentives to eliminate waiting lists for elective surgery because sick-leave payments were covered by the state. An evaluation report on an initiative to increase the capacity for orthopaedic surgery concluded that the financial gain due to lower social security expenses exceeded the cost of additional operations [ 19). Fourth, the government suspected counties of raising spending for other activities because they expected the state to rescue hospitals in financial trouble. Hospitals complained that counties reallocated earmarked state transfers to other activities by cutting the ordinary budgets of the hospitals. Some hospitals repeatedly received extra grants, apparently without effect on waiting lists [20]. A case study showed that one county received additional state grants every year from 1986 to 1992 due to financial crises at the biggest hospital caused by cutbacks imposed by the county [21]. The county did not expect to receive extra grants for activities within the cultural and infrastructural sectors. Therefore, cutbacks were targeted at politically sensitive activities for which the government could not accept lower performance. In several European countries, governments embarked on radical market experiments during the beginning of the nineties. In Norway, dissatisfaction with the block grant system spurred centralization. The government has taken steps to limit the discretion of the counties in budget matters and link the grants of the counties to the performance of their hospitals. Leading politicians as well as the federation of physicians and the central health authority argued in favour of transferring hospitals to the state. However, the government decided to let hospitals stay with the counties. Full centralization of hos-
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85
pita1 financing would probably mean the end of the county as an administrative level of government since health care covers two-thirds of the expenditure of the counties. Instead, the government launched a pilot project in 1991, involving four hospitals which receive 40% of their revenues from the state as payment per DRG normalized patient. The new health policy involves stronger central control of hospital acquisition of advanced medical equipment. The government also strengthened the control of local sector borrowing. Counties for which projected expenditures exceed projected revenues are required to cut investment outlays. The cornerstone of the new policy is the so called ‘waiting list guarantee’ [22]. In 1990, the government announced that, after April 1991, counties must provide treatment to patients who suffer from a serious disease and have waited for admission for more than six months, if there exists a Norwegian hospital with spare capacity. The resident county is obliged to pay guest patient prices for the treatment. The counties responded that they could only abide by the decree if the state provided extra funding. The government then decided to accompany the guarantee by a specific grant earmarked for hospitals, distributed partly according to the block grant formula and partly to counties where waiting lists were long. During 1992, several counties reported that they were unable to fulfill the guarantee because the grant was insufficient, By early 1992, more than 6000 patients covered by the guarantee had not received appropriate treatment [23]. To force the counties to respect the guarantee, the government transferred part of the block grant to the new specific hospital grant. From 1993, counties must sign contracts which require their hospitals to admit a certain number of DRG normalized patients in order to achieve specific grants [24]. Hence, the block grant has been replaced by an unconditional grant and an output-dependent grant. While the purpose of the DRG based pilot project was to encourage hospitals to improve cost efficiency, the new output-dependent grant was established to reduce the budget discretion of the counties. 5. Discussion Like several other public sector reforms in Europe and North America during the sixties and seventies, the block grant reform was inspired by the rational theory of organization [25]. The reform was based on the implicit assumption that each agent in the government hierarchy would formulate policy goals consistent with the budget constraint and appropriate budget frames to the next level according to these objectives. Counties would respect budget frames assigned by the state while hospitals would respect budget frames received from the counties. However, empirical studies of budgeting in public organizations suggest that budget frames are neither firm, nor considered to be legitimate [26-281. Agents disagree about policy goals and whether budgets are sufficient to implement specific objectives. Due to uncertainty about future needs as well as the causal relationship between policy goals and budget instruments, policy makers must retain flexibility to reallocate resources when the environment changes. And since allocation decisions reflect the power balance between several agents, administrators, political
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parties and party factions, budgets will be adjusted when the relative strength of the agents is altered. Elected officials are particularly reluctant to forgo the discretion to adjust budgets in response to fluctuations in voter sentiments. Since constituencies are heterogeneous, political bodies often make ambiguous budget decisions which are moditied at a later stage of the process. Consistent, long-term budget policies may disappoint potential supporters and spark internal party conflicts. When budget frames are neither firm nor legitimate, agents have strong incentives to engage in activities aimed at achieving higher budgets. Compared to their sponsors, agents have superior information about the benefits and costs of available projects. Agents can take advantage of this asymmetry by submitting biased forecasts or distorting budget priorities. If the budget process evolves into a struggle between different tiers in the hierarchy, delegation of authority and block budgets may not be a sensible policy. Delegation gives agents at the lower levels of the hierarchy discretion to undertake strategic actions directed at their superiors. The architects of the block grant system believed that the government would be willing to incur the political costs of enforcing the budget frames of the counties. This assumption turned out to be too optimistic. Hospitals, and waiting lists in particular, are politically sensitive issues. The health policy of the eighties implied reallocation of resources away from hospitals. When the consequences of this policy began to appear, the government launched a range of initiatives to raise hospital performance, including extra transfers to hospitals in financial trouble. County politicians are under strong pressure to raise expenditures from various interest groups, including patient and pupil organizations and district representatives. Based on case studies of Swedish communities, Nils Brunsson concludes that budget decisions are not only judged on the basis of their consequences but also on the motives of the decision maker [29]. Implementing an unpopular budget decision becomes much harder when it is widely recognized that the decision maker may receive additional grants which will make the decision unnecessary. Interventions by the government showed that the ordinary block grant did not represent a fixed budget constraint for the counties. The interventions therefore undermined the incentives of the counties to adapt their budget policies to existing budget frames. Unless county politicians exploited every opportunity to achieve higher grants, they would be held personally responsible for the consequences of tight budgets. As a result, counties incurred deficits, targeted strategic cutbacks at hospitals and lobbied for state transfers to waiting-list initiatives or new specialities. Since counties faced soft budget constraints, attempts to impose strict budget frames on hospitals lacked credibility. The hospitals knew that budget decisions were part of a game between two tiers of government. Repeatedly, hospitals in financial trouble were rescued, either by the state or by the county. The conflict between the counties and the state escalated during the second half of the eighties. By the end of the decade, the authorities would no longer tolerate a financing system which gave counties substantial discretion to undertake strategic actions directed at the state but provided the state with few instruments to influence the behaviour of the counties.
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6. Acknowledgement The author thanks a referee for helpful comments. 7. References I 2 3 4 5
6 7
8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24
OECD, Financing and delivering health care, OECD, Paris, 1987. Stm 9 (1974-75) Sykehusbygging m.v. i et regionalisert helsevesen [Hospitals in a region-based health care system], Offentlige publikasjoner, Oslo. NOU 197459 Effektiviseringsvirksomhet i sykehussektoren [Making hospitals more efficient], Offentlige publikasjoner, Oslo. NOU 1977:22Finansiering av helseinstitusjoner [Financing health institutions], Offentlige publikasjoner, Oslo. Ot prp 1 (1978-79) Endringer i sykehuslov i forbindelse med ny tinansieringsordning for helseinstitusjoner [Reforming the financing system for health institutions], Offenthge pubhkasjoner, Oslo. Ot prp 36 (1980-81) Helsetjenesten og sosialtjenesten i kommunene [Primary care and social services provided by the municipalities], Offentlige publikasjoner, Oslo. Ot prp 48 (1984-85) Om endringer i lover vedrdrende nytt inntektssystem for kommunene og fylkeskommunene [On the new grant system for municipalities and counties...], Offentlige publikasjoner, Oslo. Stm 41 (1987-88) Helsepolitikken mot ir 2000-Nasjonal helseplan [National health plan], Offentlige publikasjoner, Oslo. Nord, E. (Ed.), Privatisering i helsevesenet [Privatizing health care], Rapport l/87, Gruppe for belsetjenesteforskning, 1987. St prp 67 (1983-84) Tiltak for Hredusere ventetiden pi behandling i institusjoner [Reducing waiting lists for institutions], Offentlige publikasjoner, Oslo. NOU 19884 Behovet for ipne hjerteoperasjoner i Norge [The demand for heart surgery operations in Norway], Offentlige publikasjoner, Oslo. St prp 72 (1984-85) Om tiltak for H forbedre gjestepasientordningen [Improving the guest patient system], Offentlige publikasjoner, Oslo. Statistisk Sentralbyri, Helseinstitusjoner, Kommunehelsetjenesten [Health institutions, Primary care] (various issues), Oslo. NOU 1987:25Sykehustjenester i Norge - Organisering og tinansiering [Organizing and financing hospitals in Norway], Offentlige publikasjoner, Oslo. NOU 1987:23Retningslinjer for prioriteringer innen norsk helsetjeneste [On health care priorities], Offentlige publikasjoner, Oslo. Manning, W. et al., Health insurance and the demand for medical care: Evidence from a randomized experiment, American Economic Review, 77 (1987) 251-277. Jdrgensen, S. et al, Sykehussektorens okonomi [Hospital finances], Norsk institutt for sykehusforskning, Trondheim, 1987. Pettersen, I., Bkonomistyring i sykehus [Accounting in hospitals], Norsk institutt for sykehusforskning, Trondheim, 1989. Solstad, K., Amtzen, E. og Jorgensen, S. (Eds.), Hjelpe flere-spare mer? (The effect of surgery operations on sick leave payments), Norsk institutt for sykehusforskning, Trondheim, 1991. Iversen, T., A theory of hospital waiting lists, Journal of Health Economics, 12 (1993) 55-71. Carlsen, F., Block grants versus selective grants -A case study from Norway, mimeo, Department of Economics, University of Trondheim, 1993. Rundskriv I-43/1990 Forskrift om ventelisteregistre og prioritering av pasienter [Registration of waiting list patients], Sosialdepartmentet, Oslo. St prp 91 (1991-92) Om kommunedkonomien 1993 [Local government finances 19931,Offentlige publikasjoner, Oslo. St prp I (1992-93) Statsbudsjettet 1993 [National budget 19931,Offentlige publikasjoner, Oslo.
88 25
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Christensen, J., Hierarchical and contractual approaches to budgetary reform, Journal of Theoretical Politics, 4 (1992) 67-91. 26 Downs, G. and Larkey, P., The search for efficiency, Temple University Press, 1986. 27 Wildavsky, A., Budgeting - A comparative theory of budgetary processes, Transaction Books, 1986. 28 Olsen, J., The modernization of public administration in the Nordic countries, mimeo, Norwegian Research Center in Organization and Management, Bergen, 1988. 29 Brunsson, N., The organization of hypocrisy, Wiley, 1989.
Health
Policy 28 (1994) 79-88
Hospital financing in Norway Fredrik
Carlsen
Department of Economics, University of Trondheim, N-7OS5 Dragvoll, Trondheim, Norway
(Accepted
8 February
1994)
Abstract
The Norwegian block grant reform of 1980 replaced state reimbursements to hospitals by block grants allocated to counties according to objective criteria. The reform was accompanied by a general decentralization of budget authority to local level. The reform aimed to promote primary care, equalize the supply of health care across regions and give counties incentives to improve hospital efficiency. A decade later, the reform was reversed. The government has imposed restrictions which reduce the budget discretion of the counties and part of the block grant has been made dependent on the performance of the hospitalsin the counties. The government has also issued a ‘waiting-list guarantee’ which states that patients who suffer from a serious disease are entitled to medical treatment within six months. This paper provides an overview of hospital financing in Norway during the last two decades and discusses why the block grant system did not fulfil the expectations of its architects. Key woruk
Norway; Hospital financing; Block grant reform
1. Introduction
Like several other European countries which reformed the system of hospital finance at the beginning of the eighties, Norway replaced retrospective cost reimbursements by global budgets [l]. Before 1980, hospitals received the bulk of their operating revenues as per diem reimbursements from the state. The reform of 1980 established a grant hierarchy. Block grants were channelled from the centre to the counties, the regional level of government, which in turn appropriated global budgets to hospitals. The aim of the reform was to create a balanced health care system by expanding primary care and equalizing the supply of health services across regions. The new financing system should facilitate the transformation of the health care system by 0168-8510/94/~07.00 0 1994 Elsevier Science Ireland SSDI 0168-8510(94)00626-P
Ltd. All rights reserved
80
F. Carlsen /Health Policy 28 (1994)
79-88
strengthening government control of the distribution of grants and giving counties incentives to restrain hospital costs as well as develop alternatives to inpatient care. A decade later, policy makers concluded that the block grant system had serious flaws. During the nineties, part of the block grant has been made dependent on the performance of the counties’ hospitals, and the discretion of the counties to prioritize within their budget frames has been restricted. This paper provides an overview of hospital financing in Norway during the last two decades and discusses why the block grant reform was reversed. We argue that the system failed because it was based on a critical assumption which turned out to be unrealistic, that the government would be willing to incur the political costs of enforcing the budget frames of the counties. The new health policy gave priority to primary care. County and hospital finances deteriorated during the first half of the eighties, and hospitals moved to the top of the political agenda due to soaring waiting lists for elective surgery and an increase in the number of commercial hospital beds. In response to the mounting political pressure, the government repeatedly intervened to raise hospital performance and prevent the closing of wards. The block grant system assigned a key role to the counties. The counties were supposed to adjust to tighter budget frames by reallocating resources from inpatient care and improving hospital efficiency. However, the frequent interventions by the government undermined the incentives of the counties to do their job. Since the state could be expected to provide additional appropriations when a financial crisis occurred, county politicians had strong incentives to postpone controversial budget decisions. Instead, counties engaged in various forms of lobbying activities directed at the government, acting as spokesmen for their institutions rather than as implementation agents for the state. As the block grant system evolved into a struggle between two tiers of government, the government concluded that the financing system delegated too much authority to the counties. While the counties enjoyed substantial spending discretion, the system provided the state with few effective instruments to influence the behaviour of the counties. To put the two levels of government on a more equal footing, the government introduced new regulations which strengthened the control of the counties by the state. The next section describes the background of, and rationale for, the reform while the subsequent two sections describe the evolution of the block grant system from 1980 to 1993. The concluding section discusses why the system did not fultil the expectations of its architects. 2. The block grant reform Most Norwegian hospitals are owned and run by the counties. Until 1980, the state reimbursed 50-75% of the operating expenditures of the hospitals on a per diem basis while the rest was provided by the counties out of their tax revenues. During the seventies, policy makers concluded that the reimbursement system had serious flaws [2-41. Compared to other industrialized countries, Norway had many hospital beds per capita but insufficient community care and low capacity for out-
F. Carlsen / Health Policy 28 (1994) 79-88
81
patient treatment. The financing system exacerbated the imbalance of the health care system by providing higher state reimbursements for expenditures incurred by health institutions than by primary health care. Since new activities created local tax revenues in addition to generous reimbursements, counties had strong incentives to expand hospital capacity. By the end of the decade, the investment plans of the counties and the corresponding projected increase in hospital operating expenditures vastly exceeded the national targets set by the government. In addition, the distribution of hospital facilities was geographically unfair since counties with many hospital beds received most grants. In principle, the authorities sanctioned per diem rates after an individual examination of each hospital. But in practice, the government did not resist pressure to set rates close to actual costs. Therefore, the reimbursement system rewarded hospitals with inherent high costs and discouraged hospitals from launching cost-reducing initiatives such as measures which lowered average length of stay. The block grant system was introduced in 1980 [5]. With the exception of fees for outpatient treatment, state reimbursements were replaced by block grants to the counties, allocated according to demographic criteria. Counties were given the responsibility for financing health institutions within their geographical area (nursing homes were transferred to the municipalities in 1988). The municipalities, which received a block grant for primary care, were - from 1984 - assigned responsibility for financing primary care, including family practices and home care [6]. The reform was accompanied by a general decentralization of political decisions to local authorities. In 1986, several specific grants covering all sectors for which local authorities are responsible, were pooled into a limited number of unconditional grants [7]. To facilitate co-ordination between different parts of the health care system, the government established a system of rolling plans. The government would approve new specialities, appointments of new consultants and applications to the municipal bank for investment loans to health institutions. The objectives of the block grant reform were twofold. One aim was to strengthen government control of the distribution of state grants. The open-ended reimbursement system gave local decision makers substantial latitude over the size of their own appropriations. Policy makers believed the block grant system would allow the government to restrain health care expenditures, equalize the supply of hospital services among regions and - by increasing the municipalities’ transfers compared to those of the counties - expand the lower level of the health pyramid at the expense of health institutions. Improved primary care would raise the quality of care for the priority groups - the mentally ill, the mentally and physically handicapped and the elderly - as well as dampen the demand for hospital services. As more patients could be treated in outpatient departments, family practices or their homes, the number of hospitals could be reduced. The second objective was to improve the incentives offered to local decision makers. Prior to the block grant reform, a plethora of selective grants and reimbursements encouraged local authorities to tailor the pattern of services so as to elicit maximum state transfers. The block grant system gave local authorities discretion to prioritize within their budget frames but state transfers were supposed to be inde-
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pendent of local expenditure decisions. The architects of the reform argued that as local authorities were required to cover the full marginal cost of different activities - each authority would have both the opportunity and incentives to allocate revenues optimally between various categories of care. If counties were able to develop alternatives to inpatient hospital care and reduce hospital costs, resources could be released for other purposes. 3. Modification of the block grant system The eighties can be divided into two phases. Until 1984, the new health policy was implemented. The government restrained the growth in overall state transfers to the local sector while giving priority to the municipalities. In the same period, the tax revenues of the counties stagnated due to the economic recession. The combination of these three factors - a restrictive fiscal policy, a health policy which emphasized primary care and the recession - caused a sharp deterioration in hospital finances. Hospital real expenditures increased by 3.5% annually from 1972 to 1980 but remained constant from 1980 to 1983. In contrast, primary care expanded by 6% in real terms annually in the latter period [8]. During the second half of the decade, the government modified the block grant system by introducing a range of earmarked transfers in order to stimulate hospital performance. These interventions did not follow from a comprehensive evaluation of the new financing system but were rather ad hoc measures introduced to dampen the growing criticism against the government for neglecting health care in general and hospitals in particular. Although comprehensive data on hospital waiting lists are not available, most studies indicate that waiting lists for elective surgery soared during the first half of the eighties [9]. The lack of adequate operating capacity was particularly prevalent for rheumatic and orthopedic surgery, and heart and cataract operations [8,10]. Despite the stagnation in revenues, hospitals managed to treat more patients. However, the increase was not sufficient to match the rapidly growing demand for hospital services due to demographic changes and medical innovations which enabled hospitals to offer new types of treatment. For instance, from 1982 to 1986, the number of heart surgery operations almost doubled while the estimated demand increased threefold [ 111. As media increasingly focused on personal tragedies due to inadequate treatment, counties in financial trouble and proposals to close hospital wards, hospitals became a major area of dispute between the centre-right coalition government and the Labour opposition. Prior to the general election in 1985, polls showed that the electorate considered health policy to be the single most important political issue. The government responded to the mounting pressure by launching several initiatives to fight hospital queues. In 1984, a system of state subsidies to so-called ‘guest patients’ was established [ 121.The resident county paid admission fees to hospitals in other counties on a per diem basis. The block grant reform had increased the marginal cost incurred by the counties of sending patients across county borders since the state no longer reimbursed part of the expenditures of the hospitals. From 1980 to 1983, guest patient prices rose considerably in real terms, and the number
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of patient days decreased. The government suspected counties were keeping the exchange of patients at a minimum in order to save cash, resulting in underutilization of hospital capacity. The state subsidies were raised several times during the eighties in response to hospital cost increases. The government also entered into bilateral agreements with individual counties where the state promised fresh funds in exchange for higher performance. The state either paid a specified grant per operation, financed new surgery facilities or appropriated grants based on general information from the county about the need for revenues. In 1984 and 1985, the government gave counties generous block grant increases. However, early in 1986, oil prices collapsed and the fiscal policy was contracted. The debt/revenue ratio of the local sector soared, partly due to the investment boom during the mid-eighties and partly due to the new fiscal policy. To balance their budgets, counties imposed cutbacks on hospitals. In the face of political criticism, the government frequently intervened to prevent the closing of hospital wards, both by granting additional funds to counties in trouble and by raising subsidies for guest patients and fees for outpatient treatment. The initiatives of the government implied that the health policy no longer aimed to change the balance between primary and hospital care. During the first half of the decade, primary care received top priority. From 1984 to 1989, both types of care experienced an annual growth rate of approximately 2% in real expenditure [13]. 4. Towards a new health policy A comprehensive evaluation of the block grant system took place during the end of the eighties. Two public commissions submitted reports in 1987, the Eilertsen committee on the financing and organization of hospitals and the Lonning committee on health care priorities [14,15]. The view of the government was presented in the National Health Plan for 1988 [8], and the annual budget documents. Concerning objective number one, to establish better control of the size and distribution of grants, observers agreed that the block grant system had been a success. The financing system had proved effective in restraining hospital expenditures and equalizing the geographical supply of health care. However, the expansion of primary care did not seem to dampen the demand for hospital services, which is not surprising as empirical research has not identified a significant effect of ambulatory care on the demand for inpatient services [16]. The major flaws of the grant system related to the second objective, providing agents with appropriate incentives. Neither hospitals nor counties were encouraged to improve cost efficiency or reallocate resources in response to shifts in the demand for services. In principle, hospitals received block budgets. In practice, they regularly incurred deficits which were covered by the counties. For instance, in 1986, hospitals exceeded their budgets by 9% on average. A study revealed that deficits were not related to variations in patient volume [17]. Hence, hospitals were still rewarded for cost increases, as they were under the old reimbursement system. The internal budget routines of the hospitals mirrored the lax budget discipline
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of the counties. Accounting systems were crude, and hospital departments frequently overspent their budgets [ 181. The Eilertsen committee pointed out that many hospitals were forced to cut performance in order to comply with their budget frames. The committee suggested that hospitals should be allowed to improve their financial position by admitting more patients and recommended that approximately 20% of hospital revenues should depend on the number of patients discharged according to a DRG formula. The new grant should be paid by the state as the counties could not carry the financial risk imposed by the DRG system on the hospital sponsor. An important objective of the block grant reform was to give counties budget frames which were independent of budget priorities, thus providing incentives to evaluate carefully the costs and benefits of each appropriation. However, due to external effects and competition for state funds, the counties did not face the social costs of alternative activities. First, the counties initiated too many specialities because university hospitals received funding directly from the state. The national planning system was established to avoid inefficient duplication of services but had failed to secure a rational division of tasks between the counties as the state did not exercise sufficient control over hospital investment. Second, externalities between primary and institutional care were not internalized. Counties had incentives to shuffle patients from institutions to home-based care provided by municipalities while hospital beds were blocked by patients due to inadequate community care. Third, the counties had insufficient incentives to eliminate waiting lists for elective surgery because sick-leave payments were covered by the state. An evaluation report on an initiative to increase the capacity for orthopaedic surgery concluded that the financial gain due to lower social security expenses exceeded the cost of additional operations [ 19). Fourth, the government suspected counties of raising spending for other activities because they expected the state to rescue hospitals in financial trouble. Hospitals complained that counties reallocated earmarked state transfers to other activities by cutting the ordinary budgets of the hospitals. Some hospitals repeatedly received extra grants, apparently without effect on waiting lists [20]. A case study showed that one county received additional state grants every year from 1986 to 1992 due to financial crises at the biggest hospital caused by cutbacks imposed by the county [21]. The county did not expect to receive extra grants for activities within the cultural and infrastructural sectors. Therefore, cutbacks were targeted at politically sensitive activities for which the government could not accept lower performance. In several European countries, governments embarked on radical market experiments during the beginning of the nineties. In Norway, dissatisfaction with the block grant system spurred centralization. The government has taken steps to limit the discretion of the counties in budget matters and link the grants of the counties to the performance of their hospitals. Leading politicians as well as the federation of physicians and the central health authority argued in favour of transferring hospitals to the state. However, the government decided to let hospitals stay with the counties. Full centralization of hos-
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pita1 financing would probably mean the end of the county as an administrative level of government since health care covers two-thirds of the expenditure of the counties. Instead, the government launched a pilot project in 1991, involving four hospitals which receive 40% of their revenues from the state as payment per DRG normalized patient. The new health policy involves stronger central control of hospital acquisition of advanced medical equipment. The government also strengthened the control of local sector borrowing. Counties for which projected expenditures exceed projected revenues are required to cut investment outlays. The cornerstone of the new policy is the so called ‘waiting list guarantee’ [22]. In 1990, the government announced that, after April 1991, counties must provide treatment to patients who suffer from a serious disease and have waited for admission for more than six months, if there exists a Norwegian hospital with spare capacity. The resident county is obliged to pay guest patient prices for the treatment. The counties responded that they could only abide by the decree if the state provided extra funding. The government then decided to accompany the guarantee by a specific grant earmarked for hospitals, distributed partly according to the block grant formula and partly to counties where waiting lists were long. During 1992, several counties reported that they were unable to fulfill the guarantee because the grant was insufficient, By early 1992, more than 6000 patients covered by the guarantee had not received appropriate treatment [23]. To force the counties to respect the guarantee, the government transferred part of the block grant to the new specific hospital grant. From 1993, counties must sign contracts which require their hospitals to admit a certain number of DRG normalized patients in order to achieve specific grants [24]. Hence, the block grant has been replaced by an unconditional grant and an output-dependent grant. While the purpose of the DRG based pilot project was to encourage hospitals to improve cost efficiency, the new output-dependent grant was established to reduce the budget discretion of the counties. 5. Discussion Like several other public sector reforms in Europe and North America during the sixties and seventies, the block grant reform was inspired by the rational theory of organization [25]. The reform was based on the implicit assumption that each agent in the government hierarchy would formulate policy goals consistent with the budget constraint and appropriate budget frames to the next level according to these objectives. Counties would respect budget frames assigned by the state while hospitals would respect budget frames received from the counties. However, empirical studies of budgeting in public organizations suggest that budget frames are neither firm, nor considered to be legitimate [26-281. Agents disagree about policy goals and whether budgets are sufficient to implement specific objectives. Due to uncertainty about future needs as well as the causal relationship between policy goals and budget instruments, policy makers must retain flexibility to reallocate resources when the environment changes. And since allocation decisions reflect the power balance between several agents, administrators, political
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parties and party factions, budgets will be adjusted when the relative strength of the agents is altered. Elected officials are particularly reluctant to forgo the discretion to adjust budgets in response to fluctuations in voter sentiments. Since constituencies are heterogeneous, political bodies often make ambiguous budget decisions which are moditied at a later stage of the process. Consistent, long-term budget policies may disappoint potential supporters and spark internal party conflicts. When budget frames are neither firm nor legitimate, agents have strong incentives to engage in activities aimed at achieving higher budgets. Compared to their sponsors, agents have superior information about the benefits and costs of available projects. Agents can take advantage of this asymmetry by submitting biased forecasts or distorting budget priorities. If the budget process evolves into a struggle between different tiers in the hierarchy, delegation of authority and block budgets may not be a sensible policy. Delegation gives agents at the lower levels of the hierarchy discretion to undertake strategic actions directed at their superiors. The architects of the block grant system believed that the government would be willing to incur the political costs of enforcing the budget frames of the counties. This assumption turned out to be too optimistic. Hospitals, and waiting lists in particular, are politically sensitive issues. The health policy of the eighties implied reallocation of resources away from hospitals. When the consequences of this policy began to appear, the government launched a range of initiatives to raise hospital performance, including extra transfers to hospitals in financial trouble. County politicians are under strong pressure to raise expenditures from various interest groups, including patient and pupil organizations and district representatives. Based on case studies of Swedish communities, Nils Brunsson concludes that budget decisions are not only judged on the basis of their consequences but also on the motives of the decision maker [29]. Implementing an unpopular budget decision becomes much harder when it is widely recognized that the decision maker may receive additional grants which will make the decision unnecessary. Interventions by the government showed that the ordinary block grant did not represent a fixed budget constraint for the counties. The interventions therefore undermined the incentives of the counties to adapt their budget policies to existing budget frames. Unless county politicians exploited every opportunity to achieve higher grants, they would be held personally responsible for the consequences of tight budgets. As a result, counties incurred deficits, targeted strategic cutbacks at hospitals and lobbied for state transfers to waiting-list initiatives or new specialities. Since counties faced soft budget constraints, attempts to impose strict budget frames on hospitals lacked credibility. The hospitals knew that budget decisions were part of a game between two tiers of government. Repeatedly, hospitals in financial trouble were rescued, either by the state or by the county. The conflict between the counties and the state escalated during the second half of the eighties. By the end of the decade, the authorities would no longer tolerate a financing system which gave counties substantial discretion to undertake strategic actions directed at the state but provided the state with few instruments to influence the behaviour of the counties.
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6. Acknowledgement The author thanks a referee for helpful comments. 7. References I 2 3 4 5
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8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24
OECD, Financing and delivering health care, OECD, Paris, 1987. Stm 9 (1974-75) Sykehusbygging m.v. i et regionalisert helsevesen [Hospitals in a region-based health care system], Offentlige publikasjoner, Oslo. NOU 197459 Effektiviseringsvirksomhet i sykehussektoren [Making hospitals more efficient], Offentlige publikasjoner, Oslo. NOU 1977:22Finansiering av helseinstitusjoner [Financing health institutions], Offentlige publikasjoner, Oslo. Ot prp 1 (1978-79) Endringer i sykehuslov i forbindelse med ny tinansieringsordning for helseinstitusjoner [Reforming the financing system for health institutions], Offenthge pubhkasjoner, Oslo. Ot prp 36 (1980-81) Helsetjenesten og sosialtjenesten i kommunene [Primary care and social services provided by the municipalities], Offentlige publikasjoner, Oslo. Ot prp 48 (1984-85) Om endringer i lover vedrdrende nytt inntektssystem for kommunene og fylkeskommunene [On the new grant system for municipalities and counties...], Offentlige publikasjoner, Oslo. Stm 41 (1987-88) Helsepolitikken mot ir 2000-Nasjonal helseplan [National health plan], Offentlige publikasjoner, Oslo. Nord, E. (Ed.), Privatisering i helsevesenet [Privatizing health care], Rapport l/87, Gruppe for belsetjenesteforskning, 1987. St prp 67 (1983-84) Tiltak for Hredusere ventetiden pi behandling i institusjoner [Reducing waiting lists for institutions], Offentlige publikasjoner, Oslo. NOU 19884 Behovet for ipne hjerteoperasjoner i Norge [The demand for heart surgery operations in Norway], Offentlige publikasjoner, Oslo. St prp 72 (1984-85) Om tiltak for H forbedre gjestepasientordningen [Improving the guest patient system], Offentlige publikasjoner, Oslo. Statistisk Sentralbyri, Helseinstitusjoner, Kommunehelsetjenesten [Health institutions, Primary care] (various issues), Oslo. NOU 1987:25Sykehustjenester i Norge - Organisering og tinansiering [Organizing and financing hospitals in Norway], Offentlige publikasjoner, Oslo. NOU 1987:23Retningslinjer for prioriteringer innen norsk helsetjeneste [On health care priorities], Offentlige publikasjoner, Oslo. Manning, W. et al., Health insurance and the demand for medical care: Evidence from a randomized experiment, American Economic Review, 77 (1987) 251-277. Jdrgensen, S. et al, Sykehussektorens okonomi [Hospital finances], Norsk institutt for sykehusforskning, Trondheim, 1987. Pettersen, I., Bkonomistyring i sykehus [Accounting in hospitals], Norsk institutt for sykehusforskning, Trondheim, 1989. Solstad, K., Amtzen, E. og Jorgensen, S. (Eds.), Hjelpe flere-spare mer? (The effect of surgery operations on sick leave payments), Norsk institutt for sykehusforskning, Trondheim, 1991. Iversen, T., A theory of hospital waiting lists, Journal of Health Economics, 12 (1993) 55-71. Carlsen, F., Block grants versus selective grants -A case study from Norway, mimeo, Department of Economics, University of Trondheim, 1993. Rundskriv I-43/1990 Forskrift om ventelisteregistre og prioritering av pasienter [Registration of waiting list patients], Sosialdepartmentet, Oslo. St prp 91 (1991-92) Om kommunedkonomien 1993 [Local government finances 19931,Offentlige publikasjoner, Oslo. St prp I (1992-93) Statsbudsjettet 1993 [National budget 19931,Offentlige publikasjoner, Oslo.
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Christensen, J., Hierarchical and contractual approaches to budgetary reform, Journal of Theoretical Politics, 4 (1992) 67-91. 26 Downs, G. and Larkey, P., The search for efficiency, Temple University Press, 1986. 27 Wildavsky, A., Budgeting - A comparative theory of budgetary processes, Transaction Books, 1986. 28 Olsen, J., The modernization of public administration in the Nordic countries, mimeo, Norwegian Research Center in Organization and Management, Bergen, 1988. 29 Brunsson, N., The organization of hypocrisy, Wiley, 1989.