- Email: [email protected]
Incorporation of public hospitals: A “Silver Bullet” against overcapacity, managerial bottlenecks and resource constraints?
Health Policy 81 (2007) 328–338
Incorporation of public hospitals: A “Silver Bullet” against overcapacity, managerial bottlenecks and resource constraints? Case studies from Austria and Estonia Armin H. Fidler a,∗ , Reinhard R. Haslinger b , Maria M. Hofmarcher c , Maris Jesse d , Toomas Palu e a
b
Europe and Central Asia Region, Human Development Sector, The World Bank, 1818 H Street NW, Room H-7-269, Washington, DC 20433, United States Consultant, Europe and Central Asia Region, Human Development Sector, The World Bank, 1818 H Street NW, Washington, DC 20433, United States c OECD Health Division, 2 rue Andre-Pascal, 75775 Paris, Cedex 16, France d Europe and Central Asia Region, Human Development Sector, The World Bank, 2 Lysenka Street, Kiev 01034, Ukraine e East Asia Region, Human Development Sector, The World Bank, 113 Norodom Blvd., Phnom Penh, Cambodia
Abstract This paper presents a new approach for incorporating public hospitals by contrasting the experience from an “old” EU country (Austria) with a new EU member state (Estonia). In the EU (including the new member states) hospital overcapacity is a serious problem, from a technical, fiscal and political perspective. Few countries have succeeded in establishing an appropriate framework for resource management and for guaranteeing long-term financial viability of their hospital network. Many countries are in search of effective policies for improved hospital management and more cost-effective resource use in the health sector. Over the past decade, experiences in Austria and Estonia have emerged as innovative examples which may provide lessons for other EU countries and beyond. This paper describes the evolution of public hospitals from public budgetary units and public management to incorporated autonomous organizations under private corporate law, resulting in a contractual relationship between (public) owners and private hospital management. Outdated and inefficient public sector structures were replaced by more agile corporate management. The arrangement allows for investments, operating costs and budgeting according to strategic business goals as opposed to political “fiat”. Shielding hospitals from local political influence is an important aspect of this concept. Horizontal integration through networking of public hospitals and introducing private management helps create a new corporate culture, allowing for more flexibility to achieve efficiencies through downsizing and economies of scale. Based on contracts the new balance between ownership and managerial functions create strong incentives for a more business-like, results-oriented and
∗
Corresponding author. Tel:+1 202 473 0162; fax: +1 202 477 0711 E-mail addresses: [email protected] (A.H. Fidler), [email protected] (R.R. Haslinger), [email protected] (M.M. Hofmarcher), [email protected] (M. Jesse), [email protected] (T. Palu). 0168-8510/$ – see front matter © 2006 Elsevier Ireland Ltd. All rights reserved. doi:10.1016/j.healthpol.2006.06.007
A.H. Fidler et al. / Health Policy 81 (2007) 328–338
329
consumer-friendly management. This was achieved both in Austria and Estonia in a politically sensitive way, adopting a long-term vision and by protecting the interests of hospital owners and staff. © 2006 Elsevier Ireland Ltd. All rights reserved. Keywords: Health service delivery; Hospital; Public hospital; Hospital reform; Incorporation; Corporatization; Privatization; Autonomization; Organization; Organizational reform; Institution; Innovation; Performance; Management; Governance; New public sector management; Public sector
1. Introduction Advances in medical technology, less invasive surgical procedures and effective new drugs have dramatically reduced the need for long hospital stays. New incentives in management and in resource allocation, such as prospective payment systems (DRGs1 ) have reduced the average length of stay (ALOS) and generated some efficiency gains, but have done little to reduce infrastructure overcapacity in most hospital markets. Nevertheless, hospital beds declined across Europe, as a result of increased productivity, reduced ALOS and higher patient turn-over. Pressure to contain costs because of limited resources and demand for cutting-edge quality health services is forcing countries to look for innovative ideas to “right-size” their hospital sector, which accounts for the lion’s share of total health expenditures. This is a considerable problem for the new EU member states (NMS) from the former socialist bloc that have inherited double the hospital capacity compared to the West, but dispose of less than a quarter of the per capita resources that OECD countries are spending on health. Entry into the EU in 2004 and the need to comply with Maastricht Criteria2 is putting pressure on transition economies and creates the need for health systems modernization, including hospital reforms. However, such reforms are politically highly sensitive and an important concern for consumers and voters. Furthermore, hospitals are typically large employers, and traditionally enjoy the lobbying power and political influence of the medical profession. Some countries have shown progress in designing and implementing reforms of health service delivery, overcoming obstacles of the political economy. Such successful reforms include the incorporation of hospitals, horizontal integration of service providers
1 2
Diagnosis Related Groups. These are five criteria that determine whether an EU country is
and the use of private sector management while maintaining public oversight and ownership of assets. We analyze a decade of experience in Austria and Estonia in restructuring and re-organizing hospital care. While the paper does not claim empirical evidence it demonstrates in two case studies that hospital incorporation and market incentives combined with public ownership has the potential to introduce more cost-efficient and flexible management of hospitals while offering at the same time a politically acceptable solution to stakeholders. Austria and Estonia, chosen because of their similar and sustained reform path over the past decade and because of the fact that their experience has not been published internationally to date, each represent case studies of a small “old” and a “new” EU member state. In both countries the hospital sectors have undergone fundamental restructuring and face further organizational changes in order to reduce costs, achieve efficiencies and improve service quality. In Austria, the primary focus was horizontal integration of municipal hospitals through establishment of holding companies in most of the nine states (Laen-
ready to adopt the euro. They relate to: Price stability: The inflation rate should be no more than 1.5 percentage points above the rate for the three EU countries with the lowest inflation over the previous year; Budget deficit: (See above): This must generally be below 3% of gross domestic product (GDP); Debt: The national debt should not exceed 60% of GDP, but a country with a higher level of debt can still adopt the euro provided its debt level are falling steadily; Interest rates: The long-term rate should be no more than two percentage points above the rate in the three EU countries with the lowest inflation over the previous year; Exchange rate stability: The national currency’s exchange rate should have stayed within certain pre-set margins of fluctuation for 2 years.
330
A.H. Fidler et al. / Health Policy 81 (2007) 328–338
der). In Estonia, all hospitals (public or private) were incorporated under company or foundation (trust) law and several hospitals were merged into larger integrated organizations. Results from qualitative research including interviews with political leaders, stakeholders and hospital managers as well as quantitative data highlighting changes over time help understand the characteristics and potentials of the two models. The use of control groups or the comparison of single variables was not practical or applicable. External factors such as the introduction of DRG systems in both countries have had their independent share in changing hospital performance.
2. Background–—hospital behavior and organizational reform Hospital behavior is covered extensively in the literature. In the first generation of models in the literature, the focus is on the systematic and balanced integration of both quality and the quantity of services provided [1,2,39]. Newhouse [1] argues that hospitals may tend to provide “too much” quality: if competition in the hospital market is monopolistic, hospitals purchase too many devices and too many services will be provided. Later models consider hospital behavior as a result of the interaction between different groups of decision makers [3]: Doctors avoid rationing and thus demand more resources. Consequently they may have an incentive to work on the capacity limit in order to add more resources, which in turn may also lead to a bias towards “too much” quality. Thus, in many developed countries health technology assessment (HTA) is used and hospital master plans and capacity and equipment plans were developed to optimize inputs. A key question is which organizational model features strong incentives to allow both, financially sustainable hospital care and at the same time comprehensive service provision at the highest level of quality. The literature on organizational structures of hospital markets suggests a predominance of non-profit organizations, irrespective whether institutions are state owned or owned by a private providers such as religious orders. The reasons is asymmetric information in the health care market, where consumers are generally not able to judge the quality of service provision and thus tend to be more trusting in non-profit than for-profit
entities [40,41]. Other reasons include the supposition that non-profit hospitals are likely to be a more efficient instrument for the provision of public goods [42–44]. Generally, the literature suggests that non-profit organizations are the response to the combination of both, market and government failures, which are particularly pronounced in health care markets [45,46]. However, a non-profit status may also be restrictive and lead to waste of resources because decision makers without a profit motive have little incentives to produce at minimal cost. Expected to minimize the impact of the inherent quality bias in hospital service provision, the incorporation of public hospitals has been on the health policy agenda in many countries [4]. A similar solution is described in more detail in [5,6,7,8,9,47] and features organizational models like management autonomy or autonomization to full privatization. All models attempt to combat government and market failures and to promote rational decision-making in hospital service provision through contractual incentives. Incorporated hospitals are publicly owned, but managed by private entities [10]. Resources, investments in personnel, operating costs, budget and goals are planned according to strategic business goals. More independence from local political influence is often a side benefit of this concept. During incorporation, hospitals are removed from public administration and incorporated under private law. But the government remains as the one and only shareholder and is represented by a supervisory board that ensures the compliance with its strategic goals (such as comprehensive provision of services and universal access to health care as well as cost-efficient management). Management enjoys a large degree of independence and flexibility in handling capacities and resources as well as exploiting economies of scale.
3. Austria In Austria, a federal master plan prepared by the 3 ) and intro¨ Federal Austrian Health Institute (OBIG duced by ministerial decree by the Federal Ministry of Health and Women’s Affairs (Austrian Hospital ¨ and Major Biomedical Equipment Plan “OKAP/GGP”,
3
¨ Osterreichisches Bundesinstitut f¨ur Gesundheitswesen.
A.H. Fidler et al. / Health Policy 81 (2007) 328–338
Fig. 1. Average length of stay, Austrian hospitals. Source: Ministry of Health, Austria.
1997) provides a general framework for the provision of medical care. However, ultimately responsible for the provision of health care are Austria’s nine State governments, including the financing and provision of hospital care. Structural deficits and unsustainable expenditures for inpatient services led to the change from an input-based financing system, based on bed numbers and length of stay to an output-based prospective payment system in 19974 (LKF5 —Austrian DRGs). This and advances in medical technology resulted in a significant reduction of average length of stay (ALOS) from 7.2 days in 1995 to 5.97 days in 2003 (Fig. 1), in turn leading to an oversupply of beds and facilities. In addition, Austria joined the EU in 1995 and the European Monetary Union in 2002 which required the consolidation of budgets and the compatibility with the economic indicators of the Maastricht Criteria. The continued federal master planning exercise resulted by 2003 in a legally binding hospital and major biomedical equipment plans for the 9 State governments and an agreement to create 32 Health Care Regions/4 Health Care Zones which comprised federal, State and insurance fund resources. In parallel, and in order to achieve this, municipalities as hospital owners opted increasingly to relinquish ownership and transfer their hospital assets into a State hospital holding company. Since municipalities are liable for the residual deficit accrued by their hospitals they had a large incentive to transfer ownership to the State, who in turn also took over the debt management. By
4 Currently 874 DRGs are being reimbursed including intensive care service delivery and psychiatric care. 45% of those are reimbursed on a fee for service basis (Medinische Einzelleistungen) and 55% on DRGs. In the course of time credit points allocated to individual hospitals have been re-weighted towards hospitals with higher specialization. 5 Leistungsorientierte Krankenanstaltenfinanzierung.
331
now, hospital holding organizations6 have evolved in the majority of the nine Austrian States (still excluding the capital Vienna) and are currently responsible for the administration of around 60% of all hospital beds [11]. The second largest group of hospital owners includes religious orders that largely follow a similar practice of ownership transfer, as the inpatient services of most private hospitals are fully integrated and funded by the same public financing scheme. The holding concept introduced a horizontal integration of all acquired individual hospitals and featured contractual relationships between State governments and hospital management. Each State hospital holding is managed by a professional hospital manager employed under private contract law [12]. Holding companies are established under Austrian corporate law and feature just like any other corporation a board of directors, which represents the owner(s) and oversees management. All assets of the hospitals such as medical equipment, facilities and infrastructure were transferred into this new corporation [13]. For profit management was never a goal for the creation of holding organizations. Holding organizations were founded as not-for-profit entities, with a binding mandate to provide comprehensive secondary health care for the population, to meet high quality standards and to ensure financial sustainability at the same time. The regional government as owner of the holding company still assumes the residual liability for any debts the holding may incur. But the added managerial flexibility and autonomy resulted in improved management of resources and considerable efficiency gains, particularly from economies of scale. This includes the reduction of excess infrastructure, the consolidation of medical departments and specialties and strict adherence to the Austrian Hospital Master Plan with regard to investment in high-end equipment. These policies were largely responsible for continued cost containment as outlined in Fig. 2. The first hospital holding was founded as a pilot test in the Austrian State of Vorarlberg, in 1979.7 The establishment of the Krankenhaus Betriebsgesellschaft (KHBG) (hospital operating company) was facilitated 6 The creation of hospital holdings in Austria corresponds to formal privatization. As opposed to material privatization, formally privatized hospitals include organizations, which are still owned by public authorities but are run by a private entities [4]. 7 Krankenhaus Betriebsgesellschaft m.b.H.
332
A.H. Fidler et al. / Health Policy 81 (2007) 328–338
Fig. 2. Yearly cost increase, Austrian hospitals. Source: Ministry of Health, Austria.
by the fact that most municipal hospital owners were in deep debt and were not keen to maintain ownership of their local hospital which was seen as a large liability for municipal finances. The KHBG is now the largest provider of health care in the State of Vorarlberg and has a market share of 84%, serving around 450,000 people in a geographical area of around 2600 km2 . The KHBG is legally owned by the Government of Vorarlberg (96%) and four towns8 (and former hospital owners), each representing a 1% share, (which secures them a seat on the board). It manages five public hospitals with around 1700 hospital beds at eight different locations. With a total of about 3100 employees, it is the largest employer in Vorarlberg [14]. The various centralized services such as IT and most laboratory services are based in the LKH9 Feldkirch, which is Vorarlberg’s largest hospital (677 beds, 1500 employees) and the State’s only tertiary facility, affiliated with the University Clinic of Innsbruck Medical School as a teaching facility. Focusing on its core competencies, the KHBG encourages the outsourcing of ancillary services such as facility management, laundry, and consumer services such as restaurants, banking, and shops, maintenance services (medical equipment and general maintenance) and partly IT services. In addition, there are plans to convert central sterilization services into a public–private partnership project [15]. Three hospital sites were closed over a 10 year time period, their beds eliminated and their technical capacity merged into more specialized sites. The closing of another two sites is planned. This first hospital holding project turned out to be politically viable and economically successful, as acknowledged already in 1992 by the Court of Accounts, Austria’s supreme auditing authority. Over 8 9
Feldkirch, Bludenz, Bregenz and Hohenems. Landeskrankenhaus (State Hospital).
the past decade the same concept became the key model for hospital restructuring in Austria, by transferring hospitals ownership from local governments and private operators (largely religious orders) into privately managed but publicly owned holding organizations. Since then, eight of the nine Austrian States have established holding organizations to generate efficiency gains in the hospital sector. Maikisch [15] and leading to considerable cost reductions in the sector (Fig. 2). In Upper Austria with the size of around 12,000 km2 and a population of around 1.4 million (2001) among Austria’s largest states, the newly established holding coveres 12 public hospitals until then owned by the State Government. Established in 2002 as a holding corporation10 , the GESPAG11 has a market share of around 50% and is with around 8500 employees Upper Austria’s largest health care provider. It runs 12 hospitals at 16 different locations; 9 of those are general public hospitals and three are mono-profile, specialized hospitals. The creation of this holding led to several changes in structure and capacity of the Upper Austrian hospital landscape. Mirroring the experience in other states, some hospitals of the network will be closed and beds partially transferred to more appropriate sites, resulting in improved efficiency and substantial cost reduction, especially of management costs. In 2005 two more hospitals, will have merged into the holding and will contribute to the network’s specialized internal medicine and psychosomatic medicine services [16]. Qualitative research has shown that the incorporation in a holding structure has allowed for faster decision making and more managerial flexibility. Compared to stand-alone hospitals, resources can be managed in a more efficient way, leading to synergies, economies of scale and risk-sharing of large capital investments for medical equipment. In addition, individual hospitals in the same geographical area specialize in certain areas to avoid redundancy and overlapping, resulting in reduced overall costs [17]. In all states, and in particular demonstrated in the case of Styria, the horizontal integration was preceded by elaborate hospital master plans, factoring in variables such as emerging burden of disease as well as future trends in epidemiology and demography. In addition, the master plan recognized international evidence that 10 11
Aktiengesellschaft. Ober¨osterreichische Gesundheits- und Spitals-AG.
A.H. Fidler et al. / Health Policy 81 (2007) 328–338
in some specialties a minimum service volume must be observed to comply with international quality standards. This led to the merging of specialties and transfer of staff to generate centers of excellence for certain medical specialties. The newly created holding companies have few employees of their own, in most cases only its management board. Hospital employees, such as nurses and doctors are contracted under state employment law. Earlier, the civil servant status of hospital employees which included special rights such as flexible working hours and protection from lay-offs was abolished and for newly hired staff replaced by employment regulations similar to ones under private law. Still, employment policies were some of the most sensitive concerns in the transformation process as hospital employees are formally employed under state law but required to report to management of a private holding corporation. For that reason hospital employees employed under state laws are contractually transferred to the holding company by means of a special law. This arrangement gives the holding company similar rights like a private employer, including hiring and firing and the transfer of employees to other sites, according to skill mix needs. Additionally, it assures that only one type of employment contract is in place. Compensation schemes are exclusively based on the employment law of the state government. As a result, staff selection and hiring procedures are much shorter and more flexible, as they are at arms length from political influence and are directly processed by the holding company. Time consuming selection procedures that had to be approved by local and state governments can now be avoided and hospital directors can independently select doctors, nurses and other staff. However, managerial selection needs to be cleared by senior management of the holding company [13]. Available data thus far demonstrate that Austria’s restructured hospital sector has achieved stated performance goals. Recent analysis shows that the incorporation of hospitals12 together with other reforms such as new payment systems resulted in improved resources management, better service quality and reduced costs. 12
This is also true for the hospitals owned by religious orders. Orders have followed similar practices and do not manage hospitals any longer on their own but feature similar non-profit hospital management organizations.
333
Fig. 3. Inpatient bed capacity, Austria: ∼8% reduction between 1997 and 2003. Source: Ministry of Health and Women, Austria.
Compared to 1994 when hospitals were still part of a large public bureaucracy annual cost increase reached unsustainable dimensions (9.05% in 1994). In recent years this annual increase was successfully contained at a much lower levels (3.65% in 2003). This could largely be attributed to a changed incentive structure after incorporation, economies of scale and improved internal cooperation within the holding structure. Signals stemming from the newly introduced prospective payment mechanism (DRG) and advances in medical technology resulted in a significant reduction in average length of stay (ALOS). Data show a continuous downwards trend and a dramatically reduced need for bed capacity. In 1997 average length of stay was almost 8 days; it dropped until 2003 to 5.9 days with continued downward tendencies. The combined elements of hospital reform exposed overcapacities and increased political pressure to reduce fixed costs. Downsizing or closure of hospitals remains a politically charged and highly sensitive issue. Nevertheless, data from the Austrian Ministry of Health show a significant reduction of bed capacity of over 8% between 1997 and 2003 (Fig. 3). After the introduction of the holding company concept, the Austrian hospital sector has demonstrated to be more flexible after restructuring and better prepared to adapt to a changing business environment. At the same time there is evidence that the sector has improved financial sustainability while achieving one of Europe’s highest patient satisfaction rates—in the EU Commission Patient Satisfaction Survey 1999, Austria came in second behind Finland in the EU (Fig. 4).
4. Estonia Estonia established a market economy in 1991, after 50 years of socialism, but inherited a significant overca-
334
A.H. Fidler et al. / Health Policy 81 (2007) 328–338
Fig. 4. Patient satisfaction, Austria. Source: Eurostat (European Commission), 1999.
pacity of hospital bed stock from Soviet times. To serve a population of 1.4 million, Estonia had 120 hospitals with more than 17,000 beds. By 1996, the number of hospitals had declined to 78, mainly through administrative closures of small rural hospitals that did not meet the new licensing requirements. But the number of hospitals in bigger urban areas remained almost unchanged. However, hospitals had been given semiautonomous status granting management full employer rights, including hiring and firing of personnel. All medical staff lost its civil service status and began to work under private labor regulations starting in 1992. Also in 1992, a new prospective payment system was introduced, replacing the line item budget with contracts for services rendered (cost–volume contracts). Due to new medical technologies, improved financial incentives and pressure from the Estonian Health Insurance Fund average length of stay (ALOS) decreased in the Estonian hospital sector by 30% from 1993 to 1998. The number of hospital beds decreased by 20% during the same period. However, the reduction of overall hospital bed capacity was not as significant as the reduction of ALOS, the reason why acute bed occupancy remained below 70% in 1999. Several attempts by the Ministry of Social Affairs and the municipality of Tallinn (Estonia’s capital) to consolidate services in some hospitals, to achieve more efficiency and
to vacate remaining buildings failed, due to provider resistance supported by negative media coverage. Inefficiencies in the hospital sector in urban areas increased over the years and became even more acute during the 1998/1999 economic down-turn (Fig. 5). A new approach to increase efficiency in the hospital sector was formulated by the Estonian Government in 1999 and included the development of a longterm national hospital master plan; the provision of autonomous legal status for hospitals, including management rights and responsibilities conducive for costeffective management decision-making; and the exposure of hospitals to appropriate financial incentives to reward efficiency. During 1999–2000, the “National Hospital Master Plan 2015” was developed, which featured a vision for hospital capacity needs in the year 2015. To avoid conflicts of interest and local
Fig. 5. Average length of stay in Estonian hospitals. Source: Ministry of Social Affairs, Estonia.
A.H. Fidler et al. / Health Policy 81 (2007) 328–338
Fig. 6. Hospital capacity in Estonia. Source: Ministry of Social Affairs, Estonia.
biases, the work was carried out by an international consultant team. Criteria used for planning hospital capacity included sufficient population pools to support minimum service volume for quality and efficiency, development of medical technology, demographic and epidemiological projections and a requirement that a hospital should not be further away than 60 min travel time by car (70 km). This master planning exercise resulted in a proposed future hospital configuration of 13 hospitals by 2015 (instead of 78 in 1999) including two university level teaching hospitals, four multi-profile sub-regional central hospitals and 7 county hospitals. The Government endorsed the proposal in 2003, but included several changes after a series of political negotiations. The optimal target of only 13 hospitals as overall number of acute hospitals proposed by the consultant team was negotiated upward to a total of 21 acute hospitals including three regional hospitals with tertiary care (catchment population: 600,000–800,000), four central hospitals (catchment population: 100,000–150,000), 11 county hospitals (catchment population: 10,000–50,000), and in addition three local hospitals with smaller catchment areas, including islands. This plan included the proposition to turn many of the remaining hospitals into long-term care providers (Fig. 6). At the same time, new regulations for health care organizations were established under the 2001 Health Care Services Organization Act which required all public hospitals in Estonia to be incorporated under private law as foundations (trusts) or joint-stock companies by 2003. This led to a situation where hospitals remain in the public sector but are being run as companies according to private law, granting them full managerial rights over assets, full residual claimant status and access to financial markets. Supervisory boards govern newly established public hospital companies through supervisory boards for which members are appointed
335
by the owners (joint-stock company model) or founders (foundation model). The owners or founders are the central government, local governments, other public bodies (e.g., university) or a combination of the above. Subsequently, the board appointments reflect to large extent current political preferences. The legal transition of hospitals into either trusts or joint-stock companies allowed for the implementation of the Hospital Master Plan 2015 and resulted in several mergers of individual hospitals. In the period from 1999 to 2001, 41 hospitals and outpatient clinics in urban areas were merged into six networks. During this process management teams and supervisory boards were created and given operational responsibilities within the merged hospitals. The newly appointed hospital management teams were expected to realize efficiencies from economies of scale and to free hospitals from fixed costs by further restructuring buildings and bed capacity. Four of the networks were able to restructure their services and close seven facilities. The number of beds decreased in all merged hospitals, while bed occupancy increased to 70–80%. In the capital Tallinn, the Children’s Hospital Trust was created by merging two pediatric hospitals and a polyclinic, a total of four hospital and ambulatory buildings in three different locations. Only two years after the merger, two buildings were vacated. Also, there was a significant reduction in numbers of administrative personnel. The merger, including the closure of infrastructure was widely accepted by patients as well as staff. Extensive communication with staff and parents of patients addressed the efficiency and quality gains from downsizing and created the necessary knowledge and understanding. Additionally, staff was actively involved in the restructuring process and widely consulted, even on interior design for refurbished departments. Also, savings of fixed costs were re-directed to increase salaries of medical personnel. For other mergers such as the North Estonia Regional Hospital a different approach was chosen. Unlike the Children’s Hospital Trust this merger was prepared by a relatively small group at the central level. This approach lead to a lack of communication and trust between hospital staff and the management board and resulted in negative media attention (Table 1). Overall, the Estonian model of incorporating public hospitals and merging several individual facilities into larger legal entities helped to implement
336
A.H. Fidler et al. / Health Policy 81 (2007) 328–338
Table 1 Performance indicators, Estonian hospitals
No of buildings No of beds ALOS Bed occupancy No of hospitalizations (in .000) Annual turn-over (mill D )
National statisticsa
North-Estonia Regional Hospital
Tartu University Hospital Trust
Children Hospital Trust, Tallinn
2002
Change from 2000
2003
Change from 2000
2003
Change from 2000
2003
Change from 2000
n.a. 8248 8.5 65% 261.3
n.a. 12% −10% −1.5% −7%
12 1472 9.3 77% 40.6
−3 0% −19% 10% 22%
15 929 6.6 81% 41.5
−4 −28% −10% 16% −1%
2 241 5.3 75% 12.2
−2 −30% −12% 20% −7%
181.5b
31%
45.3
62%
50.8
44%
8.8
6%
Source: Ministry of Social Affairs, Medical Statistics, Estonia, 2004. a Source: National Statistics, Ministry of Social Affairs, Estonia, 2004. b Source: total hospital sector revenue (HP.1). Estonian National Health Accounts, 2000 and 2003.
politically and administratively challenging hospital reforms. The transfer of administrative decisions from publicly elected officials to corporate management has allowed for a significant restructuring of services and efficiency gains. This includes efforts to meet salaryexpectations of medical personnel, to increase quality of health care services and infrastructure while stabilizing public hospital expenditures at the same time. However, during the reform process it became also clear that too little attention was paid to better define roles and functions of hospital supervisory boards. In several cases, Government and municipalities in their role as owners failed to state clear objectives and terms of reference for these boards and expected in turn the board to define its own responsibilities. This led to a situation where boards focused largely on financial issues and financial sustainability only. This was essential during the first few years after the mergers, however, at a more stable stage, owners and their representatives in the supervisory boards often failed to address broader interests including those of patients and the community.
5. Conclusion The experience in Austria and Estonia demonstrates that the incorporation of hospitals and horizontal integration through the creation of holding companies or hospital networks under private law is a viable tool to combine market incentives for management while maintaining public ownership, and at the same time
achieving efficiency gains and economies of scale. The hospital sector is the largest expenditure category in any health system; cost escalation and user dissatisfaction with the quality of services are common features in many countries. Incorporation aims at expanding autonomy and decision rights with the ultimate goal to shift control (over inputs and outputs) from a public supervising agency to the hospital itself. Incorporation also intends to make hospitals earn revenue under market conditions as opposed to rely only on public budget allocation. The independence of an incorporated hospital holding or network not only allows for more flexibility for its management but also compels managers to focus on the financial liability of their institutions. The evidence this paper is providing is limited by the fact that the results presented are based on two case studies and not strictly on empirical methods. Nevertheless, both cases, Austria and Estonia, should be considered success stories as the two countries have achieved set goals over a sustained period—which sets them apart form most of their neighbors in the EU. Both countries have separated health services financing from provision (purchaser–provider split), introduced contracting and put in place financial incentives for hospitals that reward efficient and high quality service provision. The introduction of prospective casebased payment mechanisms changed the incentives of providers and helped to reduce excess bed capacity. Also, ALOS was decreased in both cases from being one of the worst of European performance to be in line
A.H. Fidler et al. / Health Policy 81 (2007) 328–338
with some of the better performing European countries. And, in both countries hospital financing was put on a more sustainable footing, by achieving savings due to economies of scale after horizontal integration of providers or legal mergers. In both countries this was achieved not ad hoc, but based on carefully developed, long-term hospital master plans, which included epidemiological and demographic models and which provide a continued rational framework for the planning of hospital and equipment capacity. Both countries have preserved public ownership of their hospital network, but introduced management concepts until now only used in a private sector context. This created a framework where public hospitals are run as networks or integrated providers and as true business entities, with management empowered to ensure good clinical practice and efficient financial performance. Yet, public oversight and the public service mandate have been guaranteed. While management changes led to optimization of staffing and resource management, the reforms were mostly well accepted by both staff and the political constituency in both countries. Also, as independent user surveys show in the case of Austria, the reform did not come at the expense of patient satisfaction—as consumers give top marks for performance. As a side benefit, hospital management is now at arms lengths from political influence. Interestingly, both country cases, while considered national best practice, have received little international attention thus far. Acknowledgements The authors are grateful for comments, insights and other intellectual contributions provided by Harald Maikisch, Engelbert Theurl, Silvia Oechsner, Heinrich Birner, Jutta Koenig, Harald Geck, Harald Weissenb¨ock, Harald Maier, Franz Sonnberger and Josef Kastl.
337
[3] Harris J. The internal organization of hospitals: some economic implications. Bell Journal of Economics 1977;8:467–82. [4] Strehl R. Privatisierungswelle im deutschen Krankenhauswesen? In: Arnold M, Klauber J, Schellschmidt H (Hrsg.), Krankenhaus-Report 2002. New York: Schattauer Verlag, Stuttgart; 2002. p. S113–29. [5] Preker A, Harding A. Innovations in health service delivery. The corporatization of public hospitals. The World Bank; 2003. [6] Jakab M, Preker A, Harding A, Hawkins L. The Introduction of Market Forces in the Public Hospital Sector. From New Public Management to Organizational Reform. The World Bank; 2002. [7] Rethelyi J, Miskovits E, Szocska K. Organizational reform in the hungarian hospital sector. institutional analysis of hungarian hospitals and the possibilities of corporatization. The World Bank; 2002. [8] Eid F. Applying the decision rights approach to a case of hospital institutional design. The World Bank; 2001. [9] Eid F. Hospital governance and incentive design. the case of corporatized public hospitals in lebanon. The World Bank; 2001. [10] Strehl R. Privatisierungswelle im deutschen Krankenhauswesen? In: Arnold M, Klauber J, Schnellschmidt H (Hrsg.): Krankenhaus-Report 2002. Schwerpunkt: Krankenhaus im Wettbewerb, 2003. p. S113–29. [11] Hofmarcher MM, Lietz Ch, Schnabl A, Weichselbauer M. Effizienzanalyse im intramuralen Bereich, Study commissioned by the Federal Ministry of Social Affairs and Generation, Wien; July 2003. [12] Theurl E. Personal communication; 15 June 2004. ¨ [13] Ochsner S. Personal communication; 15 June 2004. [14] KHBG Gesch¨aftsbericht (Annual Report); 2002, 2003. [15] Maikisch H. Personal communication; 8 June 2004. [16] Geck H, Koblm¨uller M. Personal communication; 8 June 2004. [17] Kastl J. Personal communication; 14 June 2004. [39] Feldstein M. Hospital cost inflation study of nonprofit dynamics; 1971. [40] Arrow K. Uncertainty and the welfare economics of medical care; 1963. [41] Dranove D, Satterthwaite M. The industrial organization of health care markets; 2000. [42] Frank RG, Salkever DS. Nonprofit organizations in the health sector; 1994. [43] Weisbrod BA. Rewarding performance that is hard to measure; May 1989. [44] Feldstein M. A self help guide for emerging market countries; 1999. [45] Badelt C. Contracting and institutional choice in Austria; 1997. [46] Sloan F. Non-for-profit ownership and hospital behavior; 2000. [47] McKee M, Fidler A. Health systems in transition. In: Chapter 4. Reforming the continuum of care; 2004.
References Further reading [1] Newhouse J. Toward a theory of nonprofit institutions: an economic model for a hospital. American Economic Review 1970;60:64–74. [2] Lee M. A conspicuous production theory of hospital behavior. Southern Economic Journal 1971;38:48–58.
[18] Arnold M, Klauber J, Schnellschmidt H (Hrsg.), KrankenhausReport 2002. Schwerpunkt: Krankenhaus im Wettbewerb; 2003. p. S113–29. [19] Birner H. Personal communication, 8 June 2004.
338
A.H. Fidler et al. / Health Policy 81 (2007) 328–338
[20] Busse R,W¨orz M. Marktorientierung von Krankenhaeusern: Ein ¨ Uberblick u¨ ber Reformen im europischen Vergleich. In: Arnold M, Klauber J, Schnellschmidt H (Hrsg.), Krankenhaus-Report 2002. Schwerpunkt: Krankenhaus im Wettbewerb; 2003. p. S21–30. [21] Embacher G. The Austrian DRG System. Presentation for Study Tour. Austrian Ministry of Health; 2005 (unpublished). [22] Estonian Ministry of Social Affairs, National Health Accounts; 1998–2003. www.sm.ee. [23] Estonian Ministry of Social Affairs. Estonia Hospital Masterplan 2015. Technical Report; 2005. http://www.sm.ee/est/ HtmlPages/HMP2015/$file/HMP2015.pdf. [24] Estonian Ministry of Social Affairs. Estonian Health Statistics; 2000–2002. [25] Estonian Ministry of Social Affairs. Social sector in numbers. Tallinn; 2004. [26] Gespag Gesch¨aftsbericht (Annual Report); 2002, 2003, 2004. [27] Hofmarcher MM, Kraus M, Riedel M. Finanzierungsmodus der Fondskrankenanstalten nach Bundesl¨andern, Mimeo Institute for Advanced Studies, IHS HealthEcon Wien; 2004. [28] Hofmarcher MM, Riedel M. Health Expenditure in the EU: no public sector without the private one. Focus: The Austrian Hospital Sector—One System or Nine? Health System Watch I2001. http://www.ihs.ac.at/departments/fin/HealthEcon/watch/ hsw01 1e.pdf; 20 June 2004.
[29] Hofmarcher MM, Weichselbaumer M. The impact of Austria’s EU-accession on the health sector labor market. Wirtschaftspolitische Bl¨atter; 1/2004. [30] Hofmarcher MM, Riedel M. Impact of Case-Mix Hospital Payment Reforms on Health Systems—Case Study Austria, Research Report commissioned by the World Bank, Institute for Advanced Studies; April 2003. [31] Jesse M. Evaluation of Estonian hospital reform. Draft report; 2005 (unpublished). [32] Kroneman M, Nagy J. Introducing DRG-based financing in Hungary: a study into the relationship between supply of hospital beds and use of these beds under changing institutional circumstances. Health Policy 2001;55:19–36. [33] Lakdawalla D, Philiplson T. Nonprofit Production and Competition, National Bureau of Economic Research Working Paper 6377; 1998. http://www.nber.org/papers/w6377. [34] M¨uller D. The health care system in Austria. Presentation 2005. [35] Palu T, Kadakmaa R. Estonian hospital sector in transition. Eurohealth 2000;7(3). Special Issue. [36] Rechnungshofbericht (Report of Central Auditing Authority), Wien; 1992. [37] Sudy R. Von der Vision zur Realit¨at. Die Managementorientierung der steirischen Landeskrankenh¨auser. KAGES (unpublished). [38] The World Bank: Case Study: Estonian Hospital Reform. Reorganization of Tartu University Hospital. World Bank Consultant Report; 2003 (unpublished).
Incorporation of public hospitals: A “Silver Bullet” against overcapacity, managerial bottlenecks and resource constraints? Case studies from Austria and Estonia Armin H. Fidler a,∗ , Reinhard R. Haslinger b , Maria M. Hofmarcher c , Maris Jesse d , Toomas Palu e a
b
Europe and Central Asia Region, Human Development Sector, The World Bank, 1818 H Street NW, Room H-7-269, Washington, DC 20433, United States Consultant, Europe and Central Asia Region, Human Development Sector, The World Bank, 1818 H Street NW, Washington, DC 20433, United States c OECD Health Division, 2 rue Andre-Pascal, 75775 Paris, Cedex 16, France d Europe and Central Asia Region, Human Development Sector, The World Bank, 2 Lysenka Street, Kiev 01034, Ukraine e East Asia Region, Human Development Sector, The World Bank, 113 Norodom Blvd., Phnom Penh, Cambodia
Abstract This paper presents a new approach for incorporating public hospitals by contrasting the experience from an “old” EU country (Austria) with a new EU member state (Estonia). In the EU (including the new member states) hospital overcapacity is a serious problem, from a technical, fiscal and political perspective. Few countries have succeeded in establishing an appropriate framework for resource management and for guaranteeing long-term financial viability of their hospital network. Many countries are in search of effective policies for improved hospital management and more cost-effective resource use in the health sector. Over the past decade, experiences in Austria and Estonia have emerged as innovative examples which may provide lessons for other EU countries and beyond. This paper describes the evolution of public hospitals from public budgetary units and public management to incorporated autonomous organizations under private corporate law, resulting in a contractual relationship between (public) owners and private hospital management. Outdated and inefficient public sector structures were replaced by more agile corporate management. The arrangement allows for investments, operating costs and budgeting according to strategic business goals as opposed to political “fiat”. Shielding hospitals from local political influence is an important aspect of this concept. Horizontal integration through networking of public hospitals and introducing private management helps create a new corporate culture, allowing for more flexibility to achieve efficiencies through downsizing and economies of scale. Based on contracts the new balance between ownership and managerial functions create strong incentives for a more business-like, results-oriented and
∗
Corresponding author. Tel:+1 202 473 0162; fax: +1 202 477 0711 E-mail addresses: [email protected] (A.H. Fidler), [email protected] (R.R. Haslinger), [email protected] (M.M. Hofmarcher), [email protected] (M. Jesse), [email protected] (T. Palu). 0168-8510/$ – see front matter © 2006 Elsevier Ireland Ltd. All rights reserved. doi:10.1016/j.healthpol.2006.06.007
A.H. Fidler et al. / Health Policy 81 (2007) 328–338
329
consumer-friendly management. This was achieved both in Austria and Estonia in a politically sensitive way, adopting a long-term vision and by protecting the interests of hospital owners and staff. © 2006 Elsevier Ireland Ltd. All rights reserved. Keywords: Health service delivery; Hospital; Public hospital; Hospital reform; Incorporation; Corporatization; Privatization; Autonomization; Organization; Organizational reform; Institution; Innovation; Performance; Management; Governance; New public sector management; Public sector
1. Introduction Advances in medical technology, less invasive surgical procedures and effective new drugs have dramatically reduced the need for long hospital stays. New incentives in management and in resource allocation, such as prospective payment systems (DRGs1 ) have reduced the average length of stay (ALOS) and generated some efficiency gains, but have done little to reduce infrastructure overcapacity in most hospital markets. Nevertheless, hospital beds declined across Europe, as a result of increased productivity, reduced ALOS and higher patient turn-over. Pressure to contain costs because of limited resources and demand for cutting-edge quality health services is forcing countries to look for innovative ideas to “right-size” their hospital sector, which accounts for the lion’s share of total health expenditures. This is a considerable problem for the new EU member states (NMS) from the former socialist bloc that have inherited double the hospital capacity compared to the West, but dispose of less than a quarter of the per capita resources that OECD countries are spending on health. Entry into the EU in 2004 and the need to comply with Maastricht Criteria2 is putting pressure on transition economies and creates the need for health systems modernization, including hospital reforms. However, such reforms are politically highly sensitive and an important concern for consumers and voters. Furthermore, hospitals are typically large employers, and traditionally enjoy the lobbying power and political influence of the medical profession. Some countries have shown progress in designing and implementing reforms of health service delivery, overcoming obstacles of the political economy. Such successful reforms include the incorporation of hospitals, horizontal integration of service providers
1 2
Diagnosis Related Groups. These are five criteria that determine whether an EU country is
and the use of private sector management while maintaining public oversight and ownership of assets. We analyze a decade of experience in Austria and Estonia in restructuring and re-organizing hospital care. While the paper does not claim empirical evidence it demonstrates in two case studies that hospital incorporation and market incentives combined with public ownership has the potential to introduce more cost-efficient and flexible management of hospitals while offering at the same time a politically acceptable solution to stakeholders. Austria and Estonia, chosen because of their similar and sustained reform path over the past decade and because of the fact that their experience has not been published internationally to date, each represent case studies of a small “old” and a “new” EU member state. In both countries the hospital sectors have undergone fundamental restructuring and face further organizational changes in order to reduce costs, achieve efficiencies and improve service quality. In Austria, the primary focus was horizontal integration of municipal hospitals through establishment of holding companies in most of the nine states (Laen-
ready to adopt the euro. They relate to: Price stability: The inflation rate should be no more than 1.5 percentage points above the rate for the three EU countries with the lowest inflation over the previous year; Budget deficit: (See above): This must generally be below 3% of gross domestic product (GDP); Debt: The national debt should not exceed 60% of GDP, but a country with a higher level of debt can still adopt the euro provided its debt level are falling steadily; Interest rates: The long-term rate should be no more than two percentage points above the rate in the three EU countries with the lowest inflation over the previous year; Exchange rate stability: The national currency’s exchange rate should have stayed within certain pre-set margins of fluctuation for 2 years.
330
A.H. Fidler et al. / Health Policy 81 (2007) 328–338
der). In Estonia, all hospitals (public or private) were incorporated under company or foundation (trust) law and several hospitals were merged into larger integrated organizations. Results from qualitative research including interviews with political leaders, stakeholders and hospital managers as well as quantitative data highlighting changes over time help understand the characteristics and potentials of the two models. The use of control groups or the comparison of single variables was not practical or applicable. External factors such as the introduction of DRG systems in both countries have had their independent share in changing hospital performance.
2. Background–—hospital behavior and organizational reform Hospital behavior is covered extensively in the literature. In the first generation of models in the literature, the focus is on the systematic and balanced integration of both quality and the quantity of services provided [1,2,39]. Newhouse [1] argues that hospitals may tend to provide “too much” quality: if competition in the hospital market is monopolistic, hospitals purchase too many devices and too many services will be provided. Later models consider hospital behavior as a result of the interaction between different groups of decision makers [3]: Doctors avoid rationing and thus demand more resources. Consequently they may have an incentive to work on the capacity limit in order to add more resources, which in turn may also lead to a bias towards “too much” quality. Thus, in many developed countries health technology assessment (HTA) is used and hospital master plans and capacity and equipment plans were developed to optimize inputs. A key question is which organizational model features strong incentives to allow both, financially sustainable hospital care and at the same time comprehensive service provision at the highest level of quality. The literature on organizational structures of hospital markets suggests a predominance of non-profit organizations, irrespective whether institutions are state owned or owned by a private providers such as religious orders. The reasons is asymmetric information in the health care market, where consumers are generally not able to judge the quality of service provision and thus tend to be more trusting in non-profit than for-profit
entities [40,41]. Other reasons include the supposition that non-profit hospitals are likely to be a more efficient instrument for the provision of public goods [42–44]. Generally, the literature suggests that non-profit organizations are the response to the combination of both, market and government failures, which are particularly pronounced in health care markets [45,46]. However, a non-profit status may also be restrictive and lead to waste of resources because decision makers without a profit motive have little incentives to produce at minimal cost. Expected to minimize the impact of the inherent quality bias in hospital service provision, the incorporation of public hospitals has been on the health policy agenda in many countries [4]. A similar solution is described in more detail in [5,6,7,8,9,47] and features organizational models like management autonomy or autonomization to full privatization. All models attempt to combat government and market failures and to promote rational decision-making in hospital service provision through contractual incentives. Incorporated hospitals are publicly owned, but managed by private entities [10]. Resources, investments in personnel, operating costs, budget and goals are planned according to strategic business goals. More independence from local political influence is often a side benefit of this concept. During incorporation, hospitals are removed from public administration and incorporated under private law. But the government remains as the one and only shareholder and is represented by a supervisory board that ensures the compliance with its strategic goals (such as comprehensive provision of services and universal access to health care as well as cost-efficient management). Management enjoys a large degree of independence and flexibility in handling capacities and resources as well as exploiting economies of scale.
3. Austria In Austria, a federal master plan prepared by the 3 ) and intro¨ Federal Austrian Health Institute (OBIG duced by ministerial decree by the Federal Ministry of Health and Women’s Affairs (Austrian Hospital ¨ and Major Biomedical Equipment Plan “OKAP/GGP”,
3
¨ Osterreichisches Bundesinstitut f¨ur Gesundheitswesen.
A.H. Fidler et al. / Health Policy 81 (2007) 328–338
Fig. 1. Average length of stay, Austrian hospitals. Source: Ministry of Health, Austria.
1997) provides a general framework for the provision of medical care. However, ultimately responsible for the provision of health care are Austria’s nine State governments, including the financing and provision of hospital care. Structural deficits and unsustainable expenditures for inpatient services led to the change from an input-based financing system, based on bed numbers and length of stay to an output-based prospective payment system in 19974 (LKF5 —Austrian DRGs). This and advances in medical technology resulted in a significant reduction of average length of stay (ALOS) from 7.2 days in 1995 to 5.97 days in 2003 (Fig. 1), in turn leading to an oversupply of beds and facilities. In addition, Austria joined the EU in 1995 and the European Monetary Union in 2002 which required the consolidation of budgets and the compatibility with the economic indicators of the Maastricht Criteria. The continued federal master planning exercise resulted by 2003 in a legally binding hospital and major biomedical equipment plans for the 9 State governments and an agreement to create 32 Health Care Regions/4 Health Care Zones which comprised federal, State and insurance fund resources. In parallel, and in order to achieve this, municipalities as hospital owners opted increasingly to relinquish ownership and transfer their hospital assets into a State hospital holding company. Since municipalities are liable for the residual deficit accrued by their hospitals they had a large incentive to transfer ownership to the State, who in turn also took over the debt management. By
4 Currently 874 DRGs are being reimbursed including intensive care service delivery and psychiatric care. 45% of those are reimbursed on a fee for service basis (Medinische Einzelleistungen) and 55% on DRGs. In the course of time credit points allocated to individual hospitals have been re-weighted towards hospitals with higher specialization. 5 Leistungsorientierte Krankenanstaltenfinanzierung.
331
now, hospital holding organizations6 have evolved in the majority of the nine Austrian States (still excluding the capital Vienna) and are currently responsible for the administration of around 60% of all hospital beds [11]. The second largest group of hospital owners includes religious orders that largely follow a similar practice of ownership transfer, as the inpatient services of most private hospitals are fully integrated and funded by the same public financing scheme. The holding concept introduced a horizontal integration of all acquired individual hospitals and featured contractual relationships between State governments and hospital management. Each State hospital holding is managed by a professional hospital manager employed under private contract law [12]. Holding companies are established under Austrian corporate law and feature just like any other corporation a board of directors, which represents the owner(s) and oversees management. All assets of the hospitals such as medical equipment, facilities and infrastructure were transferred into this new corporation [13]. For profit management was never a goal for the creation of holding organizations. Holding organizations were founded as not-for-profit entities, with a binding mandate to provide comprehensive secondary health care for the population, to meet high quality standards and to ensure financial sustainability at the same time. The regional government as owner of the holding company still assumes the residual liability for any debts the holding may incur. But the added managerial flexibility and autonomy resulted in improved management of resources and considerable efficiency gains, particularly from economies of scale. This includes the reduction of excess infrastructure, the consolidation of medical departments and specialties and strict adherence to the Austrian Hospital Master Plan with regard to investment in high-end equipment. These policies were largely responsible for continued cost containment as outlined in Fig. 2. The first hospital holding was founded as a pilot test in the Austrian State of Vorarlberg, in 1979.7 The establishment of the Krankenhaus Betriebsgesellschaft (KHBG) (hospital operating company) was facilitated 6 The creation of hospital holdings in Austria corresponds to formal privatization. As opposed to material privatization, formally privatized hospitals include organizations, which are still owned by public authorities but are run by a private entities [4]. 7 Krankenhaus Betriebsgesellschaft m.b.H.
332
A.H. Fidler et al. / Health Policy 81 (2007) 328–338
Fig. 2. Yearly cost increase, Austrian hospitals. Source: Ministry of Health, Austria.
by the fact that most municipal hospital owners were in deep debt and were not keen to maintain ownership of their local hospital which was seen as a large liability for municipal finances. The KHBG is now the largest provider of health care in the State of Vorarlberg and has a market share of 84%, serving around 450,000 people in a geographical area of around 2600 km2 . The KHBG is legally owned by the Government of Vorarlberg (96%) and four towns8 (and former hospital owners), each representing a 1% share, (which secures them a seat on the board). It manages five public hospitals with around 1700 hospital beds at eight different locations. With a total of about 3100 employees, it is the largest employer in Vorarlberg [14]. The various centralized services such as IT and most laboratory services are based in the LKH9 Feldkirch, which is Vorarlberg’s largest hospital (677 beds, 1500 employees) and the State’s only tertiary facility, affiliated with the University Clinic of Innsbruck Medical School as a teaching facility. Focusing on its core competencies, the KHBG encourages the outsourcing of ancillary services such as facility management, laundry, and consumer services such as restaurants, banking, and shops, maintenance services (medical equipment and general maintenance) and partly IT services. In addition, there are plans to convert central sterilization services into a public–private partnership project [15]. Three hospital sites were closed over a 10 year time period, their beds eliminated and their technical capacity merged into more specialized sites. The closing of another two sites is planned. This first hospital holding project turned out to be politically viable and economically successful, as acknowledged already in 1992 by the Court of Accounts, Austria’s supreme auditing authority. Over 8 9
Feldkirch, Bludenz, Bregenz and Hohenems. Landeskrankenhaus (State Hospital).
the past decade the same concept became the key model for hospital restructuring in Austria, by transferring hospitals ownership from local governments and private operators (largely religious orders) into privately managed but publicly owned holding organizations. Since then, eight of the nine Austrian States have established holding organizations to generate efficiency gains in the hospital sector. Maikisch [15] and leading to considerable cost reductions in the sector (Fig. 2). In Upper Austria with the size of around 12,000 km2 and a population of around 1.4 million (2001) among Austria’s largest states, the newly established holding coveres 12 public hospitals until then owned by the State Government. Established in 2002 as a holding corporation10 , the GESPAG11 has a market share of around 50% and is with around 8500 employees Upper Austria’s largest health care provider. It runs 12 hospitals at 16 different locations; 9 of those are general public hospitals and three are mono-profile, specialized hospitals. The creation of this holding led to several changes in structure and capacity of the Upper Austrian hospital landscape. Mirroring the experience in other states, some hospitals of the network will be closed and beds partially transferred to more appropriate sites, resulting in improved efficiency and substantial cost reduction, especially of management costs. In 2005 two more hospitals, will have merged into the holding and will contribute to the network’s specialized internal medicine and psychosomatic medicine services [16]. Qualitative research has shown that the incorporation in a holding structure has allowed for faster decision making and more managerial flexibility. Compared to stand-alone hospitals, resources can be managed in a more efficient way, leading to synergies, economies of scale and risk-sharing of large capital investments for medical equipment. In addition, individual hospitals in the same geographical area specialize in certain areas to avoid redundancy and overlapping, resulting in reduced overall costs [17]. In all states, and in particular demonstrated in the case of Styria, the horizontal integration was preceded by elaborate hospital master plans, factoring in variables such as emerging burden of disease as well as future trends in epidemiology and demography. In addition, the master plan recognized international evidence that 10 11
Aktiengesellschaft. Ober¨osterreichische Gesundheits- und Spitals-AG.
A.H. Fidler et al. / Health Policy 81 (2007) 328–338
in some specialties a minimum service volume must be observed to comply with international quality standards. This led to the merging of specialties and transfer of staff to generate centers of excellence for certain medical specialties. The newly created holding companies have few employees of their own, in most cases only its management board. Hospital employees, such as nurses and doctors are contracted under state employment law. Earlier, the civil servant status of hospital employees which included special rights such as flexible working hours and protection from lay-offs was abolished and for newly hired staff replaced by employment regulations similar to ones under private law. Still, employment policies were some of the most sensitive concerns in the transformation process as hospital employees are formally employed under state law but required to report to management of a private holding corporation. For that reason hospital employees employed under state laws are contractually transferred to the holding company by means of a special law. This arrangement gives the holding company similar rights like a private employer, including hiring and firing and the transfer of employees to other sites, according to skill mix needs. Additionally, it assures that only one type of employment contract is in place. Compensation schemes are exclusively based on the employment law of the state government. As a result, staff selection and hiring procedures are much shorter and more flexible, as they are at arms length from political influence and are directly processed by the holding company. Time consuming selection procedures that had to be approved by local and state governments can now be avoided and hospital directors can independently select doctors, nurses and other staff. However, managerial selection needs to be cleared by senior management of the holding company [13]. Available data thus far demonstrate that Austria’s restructured hospital sector has achieved stated performance goals. Recent analysis shows that the incorporation of hospitals12 together with other reforms such as new payment systems resulted in improved resources management, better service quality and reduced costs. 12
This is also true for the hospitals owned by religious orders. Orders have followed similar practices and do not manage hospitals any longer on their own but feature similar non-profit hospital management organizations.
333
Fig. 3. Inpatient bed capacity, Austria: ∼8% reduction between 1997 and 2003. Source: Ministry of Health and Women, Austria.
Compared to 1994 when hospitals were still part of a large public bureaucracy annual cost increase reached unsustainable dimensions (9.05% in 1994). In recent years this annual increase was successfully contained at a much lower levels (3.65% in 2003). This could largely be attributed to a changed incentive structure after incorporation, economies of scale and improved internal cooperation within the holding structure. Signals stemming from the newly introduced prospective payment mechanism (DRG) and advances in medical technology resulted in a significant reduction in average length of stay (ALOS). Data show a continuous downwards trend and a dramatically reduced need for bed capacity. In 1997 average length of stay was almost 8 days; it dropped until 2003 to 5.9 days with continued downward tendencies. The combined elements of hospital reform exposed overcapacities and increased political pressure to reduce fixed costs. Downsizing or closure of hospitals remains a politically charged and highly sensitive issue. Nevertheless, data from the Austrian Ministry of Health show a significant reduction of bed capacity of over 8% between 1997 and 2003 (Fig. 3). After the introduction of the holding company concept, the Austrian hospital sector has demonstrated to be more flexible after restructuring and better prepared to adapt to a changing business environment. At the same time there is evidence that the sector has improved financial sustainability while achieving one of Europe’s highest patient satisfaction rates—in the EU Commission Patient Satisfaction Survey 1999, Austria came in second behind Finland in the EU (Fig. 4).
4. Estonia Estonia established a market economy in 1991, after 50 years of socialism, but inherited a significant overca-
334
A.H. Fidler et al. / Health Policy 81 (2007) 328–338
Fig. 4. Patient satisfaction, Austria. Source: Eurostat (European Commission), 1999.
pacity of hospital bed stock from Soviet times. To serve a population of 1.4 million, Estonia had 120 hospitals with more than 17,000 beds. By 1996, the number of hospitals had declined to 78, mainly through administrative closures of small rural hospitals that did not meet the new licensing requirements. But the number of hospitals in bigger urban areas remained almost unchanged. However, hospitals had been given semiautonomous status granting management full employer rights, including hiring and firing of personnel. All medical staff lost its civil service status and began to work under private labor regulations starting in 1992. Also in 1992, a new prospective payment system was introduced, replacing the line item budget with contracts for services rendered (cost–volume contracts). Due to new medical technologies, improved financial incentives and pressure from the Estonian Health Insurance Fund average length of stay (ALOS) decreased in the Estonian hospital sector by 30% from 1993 to 1998. The number of hospital beds decreased by 20% during the same period. However, the reduction of overall hospital bed capacity was not as significant as the reduction of ALOS, the reason why acute bed occupancy remained below 70% in 1999. Several attempts by the Ministry of Social Affairs and the municipality of Tallinn (Estonia’s capital) to consolidate services in some hospitals, to achieve more efficiency and
to vacate remaining buildings failed, due to provider resistance supported by negative media coverage. Inefficiencies in the hospital sector in urban areas increased over the years and became even more acute during the 1998/1999 economic down-turn (Fig. 5). A new approach to increase efficiency in the hospital sector was formulated by the Estonian Government in 1999 and included the development of a longterm national hospital master plan; the provision of autonomous legal status for hospitals, including management rights and responsibilities conducive for costeffective management decision-making; and the exposure of hospitals to appropriate financial incentives to reward efficiency. During 1999–2000, the “National Hospital Master Plan 2015” was developed, which featured a vision for hospital capacity needs in the year 2015. To avoid conflicts of interest and local
Fig. 5. Average length of stay in Estonian hospitals. Source: Ministry of Social Affairs, Estonia.
A.H. Fidler et al. / Health Policy 81 (2007) 328–338
Fig. 6. Hospital capacity in Estonia. Source: Ministry of Social Affairs, Estonia.
biases, the work was carried out by an international consultant team. Criteria used for planning hospital capacity included sufficient population pools to support minimum service volume for quality and efficiency, development of medical technology, demographic and epidemiological projections and a requirement that a hospital should not be further away than 60 min travel time by car (70 km). This master planning exercise resulted in a proposed future hospital configuration of 13 hospitals by 2015 (instead of 78 in 1999) including two university level teaching hospitals, four multi-profile sub-regional central hospitals and 7 county hospitals. The Government endorsed the proposal in 2003, but included several changes after a series of political negotiations. The optimal target of only 13 hospitals as overall number of acute hospitals proposed by the consultant team was negotiated upward to a total of 21 acute hospitals including three regional hospitals with tertiary care (catchment population: 600,000–800,000), four central hospitals (catchment population: 100,000–150,000), 11 county hospitals (catchment population: 10,000–50,000), and in addition three local hospitals with smaller catchment areas, including islands. This plan included the proposition to turn many of the remaining hospitals into long-term care providers (Fig. 6). At the same time, new regulations for health care organizations were established under the 2001 Health Care Services Organization Act which required all public hospitals in Estonia to be incorporated under private law as foundations (trusts) or joint-stock companies by 2003. This led to a situation where hospitals remain in the public sector but are being run as companies according to private law, granting them full managerial rights over assets, full residual claimant status and access to financial markets. Supervisory boards govern newly established public hospital companies through supervisory boards for which members are appointed
335
by the owners (joint-stock company model) or founders (foundation model). The owners or founders are the central government, local governments, other public bodies (e.g., university) or a combination of the above. Subsequently, the board appointments reflect to large extent current political preferences. The legal transition of hospitals into either trusts or joint-stock companies allowed for the implementation of the Hospital Master Plan 2015 and resulted in several mergers of individual hospitals. In the period from 1999 to 2001, 41 hospitals and outpatient clinics in urban areas were merged into six networks. During this process management teams and supervisory boards were created and given operational responsibilities within the merged hospitals. The newly appointed hospital management teams were expected to realize efficiencies from economies of scale and to free hospitals from fixed costs by further restructuring buildings and bed capacity. Four of the networks were able to restructure their services and close seven facilities. The number of beds decreased in all merged hospitals, while bed occupancy increased to 70–80%. In the capital Tallinn, the Children’s Hospital Trust was created by merging two pediatric hospitals and a polyclinic, a total of four hospital and ambulatory buildings in three different locations. Only two years after the merger, two buildings were vacated. Also, there was a significant reduction in numbers of administrative personnel. The merger, including the closure of infrastructure was widely accepted by patients as well as staff. Extensive communication with staff and parents of patients addressed the efficiency and quality gains from downsizing and created the necessary knowledge and understanding. Additionally, staff was actively involved in the restructuring process and widely consulted, even on interior design for refurbished departments. Also, savings of fixed costs were re-directed to increase salaries of medical personnel. For other mergers such as the North Estonia Regional Hospital a different approach was chosen. Unlike the Children’s Hospital Trust this merger was prepared by a relatively small group at the central level. This approach lead to a lack of communication and trust between hospital staff and the management board and resulted in negative media attention (Table 1). Overall, the Estonian model of incorporating public hospitals and merging several individual facilities into larger legal entities helped to implement
336
A.H. Fidler et al. / Health Policy 81 (2007) 328–338
Table 1 Performance indicators, Estonian hospitals
No of buildings No of beds ALOS Bed occupancy No of hospitalizations (in .000) Annual turn-over (mill D )
National statisticsa
North-Estonia Regional Hospital
Tartu University Hospital Trust
Children Hospital Trust, Tallinn
2002
Change from 2000
2003
Change from 2000
2003
Change from 2000
2003
Change from 2000
n.a. 8248 8.5 65% 261.3
n.a. 12% −10% −1.5% −7%
12 1472 9.3 77% 40.6
−3 0% −19% 10% 22%
15 929 6.6 81% 41.5
−4 −28% −10% 16% −1%
2 241 5.3 75% 12.2
−2 −30% −12% 20% −7%
181.5b
31%
45.3
62%
50.8
44%
8.8
6%
Source: Ministry of Social Affairs, Medical Statistics, Estonia, 2004. a Source: National Statistics, Ministry of Social Affairs, Estonia, 2004. b Source: total hospital sector revenue (HP.1). Estonian National Health Accounts, 2000 and 2003.
politically and administratively challenging hospital reforms. The transfer of administrative decisions from publicly elected officials to corporate management has allowed for a significant restructuring of services and efficiency gains. This includes efforts to meet salaryexpectations of medical personnel, to increase quality of health care services and infrastructure while stabilizing public hospital expenditures at the same time. However, during the reform process it became also clear that too little attention was paid to better define roles and functions of hospital supervisory boards. In several cases, Government and municipalities in their role as owners failed to state clear objectives and terms of reference for these boards and expected in turn the board to define its own responsibilities. This led to a situation where boards focused largely on financial issues and financial sustainability only. This was essential during the first few years after the mergers, however, at a more stable stage, owners and their representatives in the supervisory boards often failed to address broader interests including those of patients and the community.
5. Conclusion The experience in Austria and Estonia demonstrates that the incorporation of hospitals and horizontal integration through the creation of holding companies or hospital networks under private law is a viable tool to combine market incentives for management while maintaining public ownership, and at the same time
achieving efficiency gains and economies of scale. The hospital sector is the largest expenditure category in any health system; cost escalation and user dissatisfaction with the quality of services are common features in many countries. Incorporation aims at expanding autonomy and decision rights with the ultimate goal to shift control (over inputs and outputs) from a public supervising agency to the hospital itself. Incorporation also intends to make hospitals earn revenue under market conditions as opposed to rely only on public budget allocation. The independence of an incorporated hospital holding or network not only allows for more flexibility for its management but also compels managers to focus on the financial liability of their institutions. The evidence this paper is providing is limited by the fact that the results presented are based on two case studies and not strictly on empirical methods. Nevertheless, both cases, Austria and Estonia, should be considered success stories as the two countries have achieved set goals over a sustained period—which sets them apart form most of their neighbors in the EU. Both countries have separated health services financing from provision (purchaser–provider split), introduced contracting and put in place financial incentives for hospitals that reward efficient and high quality service provision. The introduction of prospective casebased payment mechanisms changed the incentives of providers and helped to reduce excess bed capacity. Also, ALOS was decreased in both cases from being one of the worst of European performance to be in line
A.H. Fidler et al. / Health Policy 81 (2007) 328–338
with some of the better performing European countries. And, in both countries hospital financing was put on a more sustainable footing, by achieving savings due to economies of scale after horizontal integration of providers or legal mergers. In both countries this was achieved not ad hoc, but based on carefully developed, long-term hospital master plans, which included epidemiological and demographic models and which provide a continued rational framework for the planning of hospital and equipment capacity. Both countries have preserved public ownership of their hospital network, but introduced management concepts until now only used in a private sector context. This created a framework where public hospitals are run as networks or integrated providers and as true business entities, with management empowered to ensure good clinical practice and efficient financial performance. Yet, public oversight and the public service mandate have been guaranteed. While management changes led to optimization of staffing and resource management, the reforms were mostly well accepted by both staff and the political constituency in both countries. Also, as independent user surveys show in the case of Austria, the reform did not come at the expense of patient satisfaction—as consumers give top marks for performance. As a side benefit, hospital management is now at arms lengths from political influence. Interestingly, both country cases, while considered national best practice, have received little international attention thus far. Acknowledgements The authors are grateful for comments, insights and other intellectual contributions provided by Harald Maikisch, Engelbert Theurl, Silvia Oechsner, Heinrich Birner, Jutta Koenig, Harald Geck, Harald Weissenb¨ock, Harald Maier, Franz Sonnberger and Josef Kastl.
337
[3] Harris J. The internal organization of hospitals: some economic implications. Bell Journal of Economics 1977;8:467–82. [4] Strehl R. Privatisierungswelle im deutschen Krankenhauswesen? In: Arnold M, Klauber J, Schellschmidt H (Hrsg.), Krankenhaus-Report 2002. New York: Schattauer Verlag, Stuttgart; 2002. p. S113–29. [5] Preker A, Harding A. Innovations in health service delivery. The corporatization of public hospitals. The World Bank; 2003. [6] Jakab M, Preker A, Harding A, Hawkins L. The Introduction of Market Forces in the Public Hospital Sector. From New Public Management to Organizational Reform. The World Bank; 2002. [7] Rethelyi J, Miskovits E, Szocska K. Organizational reform in the hungarian hospital sector. institutional analysis of hungarian hospitals and the possibilities of corporatization. The World Bank; 2002. [8] Eid F. Applying the decision rights approach to a case of hospital institutional design. The World Bank; 2001. [9] Eid F. Hospital governance and incentive design. the case of corporatized public hospitals in lebanon. The World Bank; 2001. [10] Strehl R. Privatisierungswelle im deutschen Krankenhauswesen? In: Arnold M, Klauber J, Schnellschmidt H (Hrsg.): Krankenhaus-Report 2002. Schwerpunkt: Krankenhaus im Wettbewerb, 2003. p. S113–29. [11] Hofmarcher MM, Lietz Ch, Schnabl A, Weichselbauer M. Effizienzanalyse im intramuralen Bereich, Study commissioned by the Federal Ministry of Social Affairs and Generation, Wien; July 2003. [12] Theurl E. Personal communication; 15 June 2004. ¨ [13] Ochsner S. Personal communication; 15 June 2004. [14] KHBG Gesch¨aftsbericht (Annual Report); 2002, 2003. [15] Maikisch H. Personal communication; 8 June 2004. [16] Geck H, Koblm¨uller M. Personal communication; 8 June 2004. [17] Kastl J. Personal communication; 14 June 2004. [39] Feldstein M. Hospital cost inflation study of nonprofit dynamics; 1971. [40] Arrow K. Uncertainty and the welfare economics of medical care; 1963. [41] Dranove D, Satterthwaite M. The industrial organization of health care markets; 2000. [42] Frank RG, Salkever DS. Nonprofit organizations in the health sector; 1994. [43] Weisbrod BA. Rewarding performance that is hard to measure; May 1989. [44] Feldstein M. A self help guide for emerging market countries; 1999. [45] Badelt C. Contracting and institutional choice in Austria; 1997. [46] Sloan F. Non-for-profit ownership and hospital behavior; 2000. [47] McKee M, Fidler A. Health systems in transition. In: Chapter 4. Reforming the continuum of care; 2004.
References Further reading [1] Newhouse J. Toward a theory of nonprofit institutions: an economic model for a hospital. American Economic Review 1970;60:64–74. [2] Lee M. A conspicuous production theory of hospital behavior. Southern Economic Journal 1971;38:48–58.
[18] Arnold M, Klauber J, Schnellschmidt H (Hrsg.), KrankenhausReport 2002. Schwerpunkt: Krankenhaus im Wettbewerb; 2003. p. S113–29. [19] Birner H. Personal communication, 8 June 2004.
338
A.H. Fidler et al. / Health Policy 81 (2007) 328–338
[20] Busse R,W¨orz M. Marktorientierung von Krankenhaeusern: Ein ¨ Uberblick u¨ ber Reformen im europischen Vergleich. In: Arnold M, Klauber J, Schnellschmidt H (Hrsg.), Krankenhaus-Report 2002. Schwerpunkt: Krankenhaus im Wettbewerb; 2003. p. S21–30. [21] Embacher G. The Austrian DRG System. Presentation for Study Tour. Austrian Ministry of Health; 2005 (unpublished). [22] Estonian Ministry of Social Affairs, National Health Accounts; 1998–2003. www.sm.ee. [23] Estonian Ministry of Social Affairs. Estonia Hospital Masterplan 2015. Technical Report; 2005. http://www.sm.ee/est/ HtmlPages/HMP2015/$file/HMP2015.pdf. [24] Estonian Ministry of Social Affairs. Estonian Health Statistics; 2000–2002. [25] Estonian Ministry of Social Affairs. Social sector in numbers. Tallinn; 2004. [26] Gespag Gesch¨aftsbericht (Annual Report); 2002, 2003, 2004. [27] Hofmarcher MM, Kraus M, Riedel M. Finanzierungsmodus der Fondskrankenanstalten nach Bundesl¨andern, Mimeo Institute for Advanced Studies, IHS HealthEcon Wien; 2004. [28] Hofmarcher MM, Riedel M. Health Expenditure in the EU: no public sector without the private one. Focus: The Austrian Hospital Sector—One System or Nine? Health System Watch I2001. http://www.ihs.ac.at/departments/fin/HealthEcon/watch/ hsw01 1e.pdf; 20 June 2004.
[29] Hofmarcher MM, Weichselbaumer M. The impact of Austria’s EU-accession on the health sector labor market. Wirtschaftspolitische Bl¨atter; 1/2004. [30] Hofmarcher MM, Riedel M. Impact of Case-Mix Hospital Payment Reforms on Health Systems—Case Study Austria, Research Report commissioned by the World Bank, Institute for Advanced Studies; April 2003. [31] Jesse M. Evaluation of Estonian hospital reform. Draft report; 2005 (unpublished). [32] Kroneman M, Nagy J. Introducing DRG-based financing in Hungary: a study into the relationship between supply of hospital beds and use of these beds under changing institutional circumstances. Health Policy 2001;55:19–36. [33] Lakdawalla D, Philiplson T. Nonprofit Production and Competition, National Bureau of Economic Research Working Paper 6377; 1998. http://www.nber.org/papers/w6377. [34] M¨uller D. The health care system in Austria. Presentation 2005. [35] Palu T, Kadakmaa R. Estonian hospital sector in transition. Eurohealth 2000;7(3). Special Issue. [36] Rechnungshofbericht (Report of Central Auditing Authority), Wien; 1992. [37] Sudy R. Von der Vision zur Realit¨at. Die Managementorientierung der steirischen Landeskrankenh¨auser. KAGES (unpublished). [38] The World Bank: Case Study: Estonian Hospital Reform. Reorganization of Tartu University Hospital. World Bank Consultant Report; 2003 (unpublished).