Hospital Financing in Seven Countries - UNT Digital Library

Hospital Financing in Seven Countries

May 1995

OTA-BP-H-148

GPO stock #052-003-01413-1

Recommended Citation: U.S. Congress, Office of Technology Assessment, HospitalFinancing in Seven Countries, OTA-BP-H-148 (Washington, DC: U.S. GovernmentPrinting Office, May 1995).

iii

oreword

ospitals—the largest single item in the health care budget—havebeen a prime target of policymakers in attempts to rein in risinghealth care spending. In the search for new ideas about how to or-ganize and pay for health care, U.S. policymakers and researchers

have looked to other countries that appear to have been more successful atholding down costs. This seven-country study of hospital financing is an at-tempt to find lessons for the United States.

The individual experiences over the past decade of the United States andsix of its international peers—Canada, England, France, Germany, theNetherlands, and Sweden—in hospital financing and payment systems arereviewed by experts in each country. In the other countries, the cost of hos-pital care (and of all health care) has, in fact, risen more slowly than it has inthe United States. Perhaps surprisingly, though, reforms have been and con-tinue to be instituted in these countries not only to keep cost increases down,but also to improve the efficiency of the systems, in part by introducing se-lected aspects of a market system, many borrowed from the United States.

At a national policy level, there appears to be little for the United Statesto adopt from abroad. Other countries have managed to keep hospital andtotal costs down by, in one way or another, imposing cash limits on thehealth care system. A market-oriented system, such as the current U.S. sys-tem, is not as amenable to absolute limits, and in the 1990s progress is morelikely to come from within than through imported solutions.

This background paper is part of a larger study, International Differencesin Health Care Technology and Spending, which consists of a series ofbackground papers. International Health Statistics: What the NumbersMean for the United States was published in November 1993, InternationalComparisons of Administrative Costs in Health Care appeared in Septem-ber 1994, and Health Care Technology and Its Assessment in Eight Coun-tries, in February 1995.

OTA has been greatly assisted by the advisory panel for the overall study,chaired by Rosemary Stevens of the University of Pennsylvania. Miriam M.Wiley, of the Economic and Social Research Institute in Dublin, Ireland,guided the country authors and coordinated much of the work. As with allOTA documents, however, responsibility for the content rests with OTA.

ROGER C. HERDMANDirector

iv

dvisory Panel

Rosemary Stevens, ChairUniversity of PennsylvaniaPhiladelphia, Pennsylvania

Stuart AltmanBrandeis UniversityWaltham, Massachusetts

Jan E. BlanpainLeuven UniversityLeuven, Belgium

Harry P. Cain IIBlue Cross and Blue Shield

AssociationWashington, DC

Louis P. Garrison, Jr.Syntex Development ResearchPalo Alto, California

Annetine GelijnsColumbia UniversityNew York, New York

John IglehartHealth AffairsBethesda, Maryland

Ellen ImmergutMassachusetts Institute of

TechnologyBoston, Massachusetts

Lynn E. JensenAmerican Medical AssociationChicago, Illinois

Bengt JonssonStockholm School of EconomicsStockholm, Sweden

Kenneth G. MantonDuke UniversityDurham, North Carolina

Edward NeuschlerHealth Insurance Association of

AmericaWashington, DC

Jean-Pierre PoullierOrganisation for Economic

Cooperation and DevelopmentParis, France

Mark SchlesingerYale UniversityNew Haven, Connecticut

v

roject Staff

Clyde J. BehneyAssistant Director, OTA

Sean R. TunisHealth Program Director

Hellen GelbandProject Director for International

Differences in Health CareTechnology and Costs

PRINCIPAL STAFF

MARY A. LASCHOBERStudy Director

Nell EisenbergResearch Assistant

David KaufmanResearch Assistant

Romulo ColindresResearch Assistant

Laura EsslingerSummer Intern

ADMINISTRATIVE STAFF

Louise StaleyOffice Administrator

Carolyn MartinWord Processing Specialist

Carolyn SwannPC Specialist

Monica FinchWord Processing Specialist

CONTRACTORMartha CooleyWashington, DC

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ontributors

Miriam M. WileyThe Economic and Social

Research InstituteDublin, Ireland

Morris L. BarerCentre for Health Services and

Policy Research, andDepartment of Health Care andEpidemiology

University of British ColumbiaVancouver, Canada

Alastair M. GrayCentre for Socio-Legal StudiesWolfson CollegeOxford, England

Mary A. LaschoberOffice of Technology AssessmentUS CongressWashington, DC

Reiner LeidlDepartment of Health EconomicsUniversity of LimburgMaastricht, The Netherlands

J.A.M. MaarseUniversity of LimburgMaastricht, The Netherlands

Charles NormandDepartment of Public Health and

PolicyLondon School of Hygiene and

Tropical MedicineLondon, England

Eric M. PaulsonDepartment of Social MedicineUppsala UniversityUppsala, Sweden

Marie-José Sourty-Le GuellecCentre de Recherche, d’Etudes et

de Documentation en Economiede la Santé (CREDES)

Paris, France

James C. VertreesSOLON Consulting Group, Ltd.Silver Spring, Maryland

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cknowledgments

Dave ArbuthnottManitoba HealthWinnipeg, Canada

Linda BakkenManitoba HealthWinnipeg, Canada

Regis BlaisUniversity of MontrealMontreal, Canada

Carol ClemenhagenCanadian Hospital AssociationOttawa, Canada

Diana DavisSIMBATakoma Park, Maryland

Sean DrainManitoba HealthWinnipeg, Canada

Robert EvansUniversity of British ColumbiaVancouver, Canada

Douglas FletcherAlberta HealthEdmonton, Canada

William GlaserNew School for Social

ResearchNew York, New York

Stuart GutermanProspective Payment Assessment

CommissionWashington, DC

Tord HedströmUppsala University HospitalUppsala, Sweden

John HendersonDepartment of HealthLondon, England

Philip JacobsUniversity of AlbertaEdmonton, Canada

Steve KennyBritish Columbia Ministry

of HealthVictoria, Canada

Jean-Marie LanceAssociation des Hopitaux

du Quebec (AHQ)Montreal, Canada

Barb MarkhamCentre for Health Economics and

Policy AnalysisMcMaster UniversityHamilton, Canada

Günther NeubauerMünchen, Germany

Sara NordlingSwedish Planning and

Rationalization Institute (Spri)Stockholm, Sweden

Lars PalmgrenNacka HospitalNacka, SwedenGeorge PinkUniversity of TorontoToronto, Canada

Jean-Pierre PoullierOrganisation for Economic

Cooperation and DevelopmentParis, France

Michael StückrathAachen, Germany

G.J. ThigpenPrinceton, New Jersey

Barbara ZelleMünchen, Germany

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1 Summary and Lessons for the UnitedStates 1The Changing Profile of Hospital Use 2Hospital Financing in the United States

and Abroad 7Conclusions 17References 19

2 Hospital Financing in Canada 21Structure of the Hospital Sector22Physicians 22Hospital Operating Costs23Capital Expenditures 33Future Directions 39References 40

3 Hospital Financing in England 43Structure of the Hospital Sector44Physicians 45Hospital Operating Costs47Hospital Capital Costs 50Hospital Indicators and Trends52Future Directions 52References 54

4 Hospital Financing in France 55Structure of the Hospital Sector56Physicians 58Hospital Operating Costs59Hospital Capital Costs 67Future Directions 73References 74

ontents

x

5 Hospital Financing in Germany 75Structure of the Hospital Sector77Physicians 78Hospital Operating Costs79Hospital Capital Costs 86Hospital Indicators and Trends90Future Directions 90References 92

6 Hospital Financing in the Netherlands 95Structure of the Hospital Sector97Physicians 98Hospital Operating Costs100Hospital Capital Costs 110Hospital Indicators and Trends112Future Directions 114References 118

7 Hospital Financing in Sweden 121Swedish Health Care System Reforms123The Health Care Delivery System124Physicians 124National Health Care Expenditures125Source of Funds 125Allocation of Funds 127Hospital Capital Costs 128Example I: The Stockholm County Council128Example II: The Uppsala County Council130Conclusions 132Addendum 132References 133

8 Hospital Financing in the UnitedStates 135Structure of the Hospital Sector136Physicians 137Hospital Operating Costs138Hospital Capital Costs 144Hospital Indicators and Trends147Future Directions 148References 150

INDEX 153

Summaryand Lessons

for theUnited States

he largest item of expenditure in the health care budgets ofmost industrialized countries—including the UnitedStates—is the acute care hospital sector. As a conse-quence, hospitals have attracted the attention of policy-

makers attempting to curb growth in health care costs by chang-ing the financial landscape for hospitals. Hospital use hasdeclined, particularly dramatically since the early 1980s, in re-sponse to economic signals and the development of new medicaltechnologies. The rate of growth in hospital costs also has slowed,but at least some costs have been diverted to other health care sec-tors, particularly outpatient care and long-term care. What hap-pens in one part of the health care system often reverberates inother sectors, so no component can be studied in complete isola-tion. Nonetheless, payment for hospital care in the United Statesand other countries is governed by distinct policies that bear ex-amination.

Looking around the world, it appears that health care expendi-tures in other industrialized countries have remained lower thanin the United States, while at the same time, everyone in thosecountries has financial access to care. Increasingly, U.S. policy-makers and researchers have looked to other countries to find newways of organizing and paying for health care, which might betransferable. This seven-country study of spending for hospitalservices and the policies that affect spending is an attempt to findlessons for the United States.

The individual experiences of the United States and six of itsinternational peers—Canada, England, France, Germany, theNetherlands, and Sweden—in hospital financing and paymentsystems over the past decade are reviewed in the chapters that fol-

| 1

2 Hospital Financing in Seven Countries

15

1 3 - - - - - - - - - - - - - - - - - - - - - - - - - - - - -- A

c

5 ’ I1980 81 82 83 84 85 86 87 88 89 90 91 92

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

1OW.l This summary focuses on general trends inthe United States and the other countries and onrecent reforms directed at hospitals.

THE CHANGING PROFILE OFHOSPITAL USEThe acute care hospital continues to be home tothe most advanced medical technologies, butmuch about hospitals has changed, and the changehas been especially rapid since 1980. Trends inkey indicators in different countries give an ideaof just what has occurred.2 Overall, health carespending has taken up an increasing percentage ofthe gross domestic product (GDP), most signifi-cantly in the United States, Canada, France, andthe United Kingdom, and to a lesser extent in Ger-many and the Netherlands, declining only in Swe-den (figure l-l). In 1980, the percentage of GDP

devoted to health care was between 7 and 10 per-cent in all the countries except the United King-dom (which was below the rest). The UnitedStates was second to Sweden by this measure. By1992, the United States stood well above the othersix countries, having experienced a steeper risethan the rest, particularly during the late 1980s andearly 1990s.

As a percentage of total health care spending,the amount devoted to acute hospital care has ac-tually decreased since 1980 in the United States,Canada, France, and the Netherlands (the onlyother countries for which this figure is available)(figure 1-2), because utilization in other sectorshas risen faster than hospital utilization (due inpart to the shift of services out of hospitals and intoother sites of care). Among these four countries,France allots the highest percentage to hospitals,

1 The country chapters were first drafted in 1993. They have been updated to different degrees, and are current, on average, to early 1994.z~e &ta refe~ed to in this section are from the Organisation for Cooperation and Development (OECD). me relative standings of cou-

tries are probably very reliable, but because data from different countries are not necessarily entirely comparable, the actual numbers should beinterpreted with some caution.

Chapter 1 Summary and Lessons for the United States 3

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

and the United States the least (even though the Some of the reasons for changes in hospitalUnited States has spent more per capita than these spending can be gleaned from a few other statis-four countries in every year since 1980 (figure tics. The United States and the other six countries1-3)). all have somewhat fewer hospital beds in the

700

400- - - - - - - - ” - - - - - ‘- - - ‘ - ‘ - ‘ “ - - - - - - - - - - -

300-

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

—— —————— .- —. ——.—————

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

tion and Development, OECD Health Systems, The Socio-Economic Environment. Statistical References, Volume II (Paris OECD, 1993).


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

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

1990s compared with 1980, in proportion to popu- hospital has fallen steadily in the United Stateslation size (i.e., fewer hospital beds/1,000 popula- (this is not the case in all countries, with sometion), and the United States has the lowest ratio of trending upward and others downward) (figureany country except the United Kingdom (figure 1-5). By 1992, the United States had a lower ad-1-4). The decline is a result of reduced demand. mission rate than any country except the Nether-The percentage of the population admitted to a lands. And once in the hospital, people in all coun-

2 3 ,

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

A

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

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


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


tries stay, on average, for a shorter period than hospital days per person of the seven countries,they did in 1980 (figure 1-6). and Germany has consistently had the highest

Overall, the number of days spent in the hospi- rate. Hospital occupancy rates (the percentage oftal each year per capita has declined in all seven beds occupied as a proportion of the number avail-countries (figure 1-7). In 1992, the United States able) are determined by the numbers of beds, theand the United Kingdom had the lowest rates of numbers of admissions, and how long people stay.

2.5 -I I

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



65

6 0 ’ I

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

Since the mid-1980s, the hospital bed occupancyrate in the United States has dropped steeply, fromabout 75 to about 65 percent, and is lower than inthe other six countries (figure 1-8). The low occu-pancy rates have already caused many U.S. acutecare hospitals to close, downsize, or shift into oth-er areas (e.g., long-term care) and many more willprobably do so in the next few years.

■ Forces of ChangeTwo forces have been most influential in reducingthe demand for acute hospital services: financialincentives and advances in medical technology.Prospectively fixed hospital payments and pricingstrategies have encouraged hospitals to find waysto reduce the cost of caring for patients, which in-cludes shifting inpatient care to outpatient settingswhere possible. In the United States, the rate ofgrowth of inpatient hospital spending slowed dur-ing the mid-1980s, but outpatient expendituresrose steeply. This coincided with:

1. Medicare’s adoption of a prospective paymentsystem (discussed below), which sets per-casepayment limits only for hospital inpatients,

2.

3.

the beginnings of privately insured managedcare efforts to reduce inpatient expenditures,andMedicare’s and Medicaid’s liberalized cover-age rules for nursing home and home healthservices.

In the other six countries, most hospitals havebeen operating under fixed annual budgets thatprovide clear expenditure constraints, at least forinpatient services. Recent and ongoing reformsinclude pricing strategies designed to encouragegreater use of outpatient sites. For an example, theCanadian province of Ontario has made outpatientcare more attractive by adjusting the relative ratesfor the same services provided in and out of thehospital. While still lowering costs overall, pro-viders do better financially by using outpatientsites. Several counties in Sweden also have usedprice differentials to influence patient flows to in-patient and outpatient sites, in some cases includ-ing differences in patient cost-sharing amountsrather than hospital reimbursement, giving theconsumer an incentive to choose the less expen-sive setting. In the Netherlands, as part of major

Chapter 1 Summary and Lessons for the United States | 7

health care reforms in 1992, payment rates forhospital care not requiring an overnight stay wereincreased to stimulate substitution of daycare forinpatient care. One of the farthest reaching re-forms in this area is currently being implementedin Germany. Germany’s 1993 Health Sector Actfor the first time allows general hospitals to estab-lish outpatient departments.

Existing medical technology has been ex-ploited and the development of new technologypushed in the quest to lower hospital costs. Someof the improved efficiency in hospitals comesfrom such advances as laparoscopic surgery (alsocalled “keyhole” surgery), which allows manycomplex procedures to be carried out through ex-tremely small incisions, reducing hospital staysand the need for post-surgical care to a fraction ofwhat they are for “open” surgeries. Getting peopleout of the hospital sooner after all kinds of proce-dures is also the rule now, since it is generally ac-cepted (whether or not it is always true) that out-comes are no worse with shorter hospital stays.

HOSPITAL FINANCING IN THE UNITEDSTATES AND ABROADHealth care systems and their financing may becategorized many ways. Looking at where most ofthe money comes from is an obvious first cut(table 1-1). Broadly speaking, health care systemsare financed either by tax revenues or by sometype of insurance premiums. Of the countries cov-ered in this report, Canada, Sweden, and Englandfall into the former category and the United States,France, Germany, and the Netherlands into the lat-ter. Among the insurance-based systems, partici-pation is mandatory in all except the UnitedStates. The source of revenue does not predicthow hospitals get their money, however, and infact there is considerable overlap between the twogroups, particularly since the recent series of re-forms of the late 1980s and 1990s (tables 1-1 and1-2).

In all the countries, operating expenses—thecosts of keeping the hospital running day-to-dayto treat patients—account for the lion’s share ofhospital spending. Capital spending—the money

to buy new equipment, build new hospital wings,replace old ones, etc.—though small relative tooperating expenditures, can drive up operating ex-penses because it creates an atmosphere wherenew technologies come into frequent use. In thereal world, the split between operating and capitalexpenses is an artificial one, but in fact, policies inmost countries do treat them separately to someextent, and they are discussed separately below.

Cost containment, increased efficiency, and amore equitable allocation of hospital funds are theobjectives driving nearly all hospital financing re-forms in the comparison countries, but other fac-tors also are important. Enhancing patient choicein the health care system, including greater choiceof hospitals, is another recurring theme. The orga-nizational and social concerns that affect and areaffected by health care and hospital reforms arediscussed briefly in this chapter.

❚ The United StatesThere is no single “U.S. hospital system.” TheU.S. health care system may be described as insur-ance-based with patient-based payment as the pre-dominant approach to reimbursing hospitals forservices, but really it is a combination of systems,some overlapping and others existing indepen-dently. Money flows to hospitals in the UnitedStates in much more varied ways than it does inother countries. It comes from a multitude of pri-vate insurers, the joint federal-state Medicaid pro-gram, the federal government’s Medicare pro-gram, and out-of-pocket costs from both insuredand uninsured people (table 1-3). (The separatehospital systems for veterans, military personnel,and for Native Americans are paid for entirely bythe federal government.) Third-party payers use avast array of methods for reimbursing U.S. com-munity hospitals (defined as nonfederal short-term facilities), of which 59 percent are privatelyowned nonprofit institutions, 14 percent are pri-vately owned for-profit institutions, and the restare operated by state and local governments.

The Medicare program is federally funded pri-marily through payroll taxes on employers and

TheNetherlandsCanada

Generaltax-based

England France Germany Sweden United StatesPrivate insurance/social insurance

Predominantfinancing sourcefor inpatienthospital services

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

(central governmentgeneral tax reve-nues)

(payroll taxes paidto social securitysickness funds)

(payroll taxes paidto statutory sicknessfunds and privateinsurers)

(payroll taxes paidto statutory sick-ness funds, pre-miums paid to pri-vate insurers)

(County Councilincome taxes)(provincial general

tax revenues andfederal transfers)

(premiums paid toprivate insurers,payroll taxes andgeneral tax reve-nues for socialinsurers)

Predominantpayment methodfor inpatienthospital services

Activity-basedfinancing

Prospective“global” budgets

Prospectivebudgets(“global allocation”plus daily charges)

Prospective“flexible” budgetsb

Prospective “func-tional” budgets(partially activity-based),

Prospective hospi-tal departmentbudgets; someactivity-basedfinancing (fundsfollow services orpatients)

Activity-based(funds followpatients)

(controlled byprovincialgovernments)

(funds follow thepatient; total fundscash-limited atdistrict level)

(negotiated be-tween hospitals andinsurance funds,with central govern-ment controls)

(some central orstate governmentcontrols for socialInsurance programs)

(negotiated be-tween hospitalsand sicknessfunds, with centralgovernment con-trols)

(controlled by thegovernment)

(county councilcontrolled)

Ownership ofhospitals

Public (100%) Public (NHS)(91 .3%), private(8.7%)

Public and publicaffiliated (75%);

Public (62.3%);C

private nonprofit(33.9%); privatefor-profit (3,8%)

Public (15%),private nonprofit(85%)

Public (nearly1 00%)

Public (18,2%),private nonprofit(71%), privatefor-profit (1 0.8%)

private nonprofit(5%); private

(percent of totalhospital beds)

for-profit (19%)

SalaryPredominantpayment methodfor inpatienthospital servicesprovided byphysicians

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

aThe information presented in this table relates primarily to the dominant acute hospital sector at the beginning of 1994bBeginning January 1993, effective until 1995, Germany has adopted prospective “fixed” budgets (See definitions in text).cThe figures refer to general hospitals and include both acute and nonacute services; they refer to all 16 states of unified Germany, The former East German states had a much higher proportion of public

hospitals and beds than the former West German states

SOURCE: OTA, 1995.

Level of Basis of reimbursement Role of health Relation of capitalResponsibility Source of funding for capital costs sector planning and operating costs

Canada Provinces Provincial funds, often com- Separate capital funds are The hospital sector is subject to Depreciation for major medicalbined with local community granted after provincial planning by the provincial govern- equipment may be reimbursedor hospital funds. government approval of ment, which mostly determines through operating expenses.

proposed investments. the capacity of the system.

England Regional health National Health Service’s Separate capital projects are The central government, working Capital charges, includingauthorities capital budget is allocated to funded if approved by through regional and district depreciation and interest

Regional and District Health Regional Health Authorities. health authorities, fully determines charges, now included in serviceAuthorities (under reforms, the capacity of the public hospital contracts.hospitals will be able to gen- sector.erate their own capitalfunds).

France Ministry of Health, in Public and PSPH hospitals Upon approval by the ap- The entire health care system Depreciation and interest costsconsultation with obtain most funds from their propriate level of government (both public and private health are included in operatingregional authorities own resources, with some authority, hospitals finance institutions) are subject to formal charges.

funding from state or local the investment from own health sector planning through thesubsidies. sources and receive state Health Map. The central govern-

subsidies if eligible. ment fully determines the capacityof the hospital sector.

Germany State authorities State capital budgets (trend State funding for approved Capital investments are approved Depreciation for fully state-fi-toward combined state and projects only for hospitals in- and financed by state govern- nanced capital not included inhospital funds). cluded in the state hospital ments on the basis of state hospi- operating charges; depreciation

plan (almost all hospitals); tal plans. State governments fully and interest costs Included intrend toward combined state determine the capacity of the hos- operating charges for capitaland hospital funding of capi- pital sector. financed from combined statetal after consensus among and hospital funds.hospital, state, and sicknessfunds.

The Central and regional Hospitals’ own financial re- Internal sources and loans Construction of facilities and Depreciation and interest costsNetherlands governments sources. from private banks upon purchases of major medical fully recoverable through patient

regional or central govern- equipment require a government- charges.mental approval of capital issued license, issued on theinvestment. basis of regional and national

health-sector planning.

—

Level of Basis of reimbursement Role of health Relation of capitalResponsibility Source of funding for capital costs sector planning and operating costs

Sweden County Councils Separate county council cap- Buildings are rented and The capacity of the hospital Trend towards allocating buildingital budgets, but trend equipment leased upon sector is planned and controlled rents and capital-related costs totoward including building approval from the county at the county council level, with inhospital departments.and equipment costs in council. put from regional organizations.hospitals’ operating budgets.

United States Hospital Hospitals’ own financial Internal sources and private Almost none. Some states require Depreciation and interest costsmanagement resources. loans. a certificate-of-need process for mostly recoverable through pa-

reviewing and approving capital tient charges, although not all.projects.


employees. In 1993 Medicare covered about 13percent of the population and paid 28 percent of allhospital operating revenues. Until 1983, Medi-care generally paid hospitals retrospectivelybased on the costs of care for each patient hospital-ized. Explosive cost increases throughout the1970s and early 1980s led to introduction of a“prospective payment system” (PPS) that uses na-tionally standardized payment rates by “diagnosisrelated group” (DRG). DRG-based paymentswere intended to provide incentives for hospitalsto improve efficiency by offering a standard pay-ment for all similar patients receiving similar ser-vices. PPS was important in decreasing the lengthof hospital stays. After PPS was instituted, the rateof increase in hospital costs did decline, but onlytemporarily. Within a couple of years, the rate ofgrowth was back up to pre-PPS levels. PPS wasalso associated with a substantial shift to outpa-tient treatment for certain types of services, in-cluding outpatient surgery.

DRG payments have not kept pace with in-creases in hospital costs, but hospitals have, byand large, maintained their previous rates ofgrowth by charging private insurers more, a prac-tice known as “cost shifting.” Because insurerstraditionally have passed along these highercharges in the form of higher premiums or copay-ments, the level and quality of care for Medicarepatients probably has not been affected greatly.But with greater market pressure brought by pri-vate insurers on hospitals to lower their charges(discussed below), hospitals will find it more andmore difficult to shift costs.

Medicare pays for most outpatient services on acost basis. In 1986, Congress first directed theHealth Care Financing Administration (HCFA,the agency that administers Medicare) to proposea PPS for outpatient services and provided a list ofrequirements for the system to meet. Developing aviable method turned out to be much more diffi-cult than designing the DRG system for inpatientcare, and only now, in 1995, have options for es-tablishing an outpatient PPS been submitted toCongress. But the options developed so far wouldapply to only about one-third of outpatient spend-ing. Implementation may be years off.

Hospital All healthProgram area expenditures expenditures

Private spending 1437 445,5Public spending 182,9 337.0

Medicare 92.7 151,1Medicaid 42.4 172,8State & local public 3.1 5.0

assistance programsDept. of Veterans Affairs 118 14,2Dept. of Defense 104 133Workers Compensation 10.0 20,6State & local Hospitals 10.3 10,3Other public programs 21 9.7

SOURCE. U.S Department of Health and Human Services, HealthCare Financing Administration, Office of Research and Demonstra-tions, Health Care Financing Review 16(1), fall 1994

Medicaid is a tax-financed state-federal healthcare program for low income and disabled people,which covered 8 percent of the population in 1993and accounted for 13 percent of hospital pay-ments. Eligibility for Medicaid is determined byeach state within federally determined guidelinesand varies considerably across the country. Virtu-ally all hospitals participate in Medicaid, althoughthe extent of participation varies widely. Medicaidbeneficiaries are more likely to get inpatient carein public nonfederal hospitals and teaching hospi-tals, and less likely in private hospitals, whichmay be reluctant to admit Medicaid patients be-cause of low reimbursement rates and restrictionson coverage.

Before 1980, Medicaid programs were re-quired to use the same methods as Medicare to payfor hospital services. Legislative changes in 1980and 1981 allowed states to develop their own pay-ment arrangements with hospitals. The substan-tial state autonomy and the imperative to constraincosts in Medicaid programs has led to heteroge-neous approaches to reimbursing hospitals. Pro-spectively determined payment rates are com-mon, but are packaged differently in differentstates. In addition, more and more states areintroducing managed care initiatives as a way toeither hold down costs, increase coverage to abroader population, or to achieve both goals.

12 | Hospital Financing in Seven Countries

More than half the states have applied for waiversthat excuse them from certain Medicaid specifica-tions so they can institute changes that move evenfarther from a “standard” Medicaid programStates are being seen as laboratories for exper-imentation.

Government influence on the hospital sectorhas been very strong, but most people—abouttwo-thirds of the population—still are covered byprivate insurance, most sponsored by employers.About 35 percent of hospital expenditures are paidfor by the hundreds of U.S. private insurers, undera multitude of plans. The very essence of the pri-vate insurance sector is variability in its range ofplans, benefits covered, reimbursement systems,payment rates, etc. These attributes are combinedwith a range of payment mechanisms for benefi-ciary contributions, including coinsurance, co-payments, deductibles, and other out-of-pocketexpenses.

The fact that health insurance benefits havebeen consuming an increasing share of employeecompensation relative to wages has contributed tothe pressure to hold down costs. The constantpressure of rising costs and expanding demandsmeans that insurers continually seek ways to capboth expenditures and benefits. One important re-sponse to this pressure has been the extraordinarygrowth in managed care organizations and the in-creasing tendency of purchasers to form large buy-ing groups. Managed care organizations vary instructure, scope, and size, but all constitute inte-grated service networks that often combine insur-ance functions with health care delivery. Purchas-ing groups (including large employer andgovernment purchasers) tend to contract selec-tively with managed care organizations or to con-tract directly with networks of providers to supplyhealth care services to the group’s members. Thegrowth of managed care organizations has alsobeen accompanied by greater financial risk-shar-ing by providers, which might include sharingprofits or surplus funds in risk pools with provid-ers or paying providers on a per person (capita-tion) basis.

In response to greater purchaser collaboration,providers are increasingly cooperating to form in-tegrated networks or systems of care that can bar-gain with purchasing groups directly. During the1980s and early 1990s, many hospitals havemerged with, acquired, or affiliated with otherinstitutions to create larger systems to compete ef-fectively for patients under managed care con-tracts. This trend is, if anything, growing stronger,and is a major force putting downward pressure onhospital costs.

The effects of these changes are seen in a slow-ing of hospital cost growth in the 1990s, particu-larly dramatic since about 1993. Adjusting for theeffects of inflation, the real growth in costs percase fell from 5 percent in 1992 to less than 2 per-cent in 1993 and the beginning of 1994. In addi-tion to the declines in lengths of stay and per-capi-ta admissions, discussed earlier, growth inhospital salaries also has slowed.

This is not the first time that the rate of growthin hospital costs has slowed down. Hospitals haveresponded before, with a decline in growth ratesafter introduction of the prospective payment sys-tem; earlier, in the 1970s, to the Nixon Adminis-tration’s economic stabilization program; and atother times. These earlier slowdowns did nothold, however, with rates of increase picking upwithin a few years.

Whether the current slowdown will continue isdebatable. Part of the impetus for hospitals to im-prove efficiency and cut costs was undoubtedlythe prospect of comprehensive health care reformat the national level. That pressure appears to beoff for the foreseeable future. But today’s pres-sures also come from the private sector, andchanges in the private insurance market are accel-erating. Many people believe that these marketforces holding down health care costs will be sus-tained and will continue to keep growth in checkby wringing still more inefficiency out of the sys-tem, by promoting cost-saving new technology,and by abandoning services with only marginalhealth benefits.


Hospital Capital ExpendituresU.S. hospitals have great freedom to decide howmuch capital they need, with relatively few regu-latory constraints. Public hospitals may be re-quired to follow government guidelines for com-petitive bidding arrangements, but few statesexert direct control over the decisionmaking or ac-quisition process for capital. About 30 states oper-ate some kind of certificate-of-need program re-quiring prior approval of large capitalexpenditures, and other states limit the amount ofcapital available by other means, but these pro-grams do not appear to have had much impactoverall.

Capital expenditures are financed through fun-draising (i.e., gifts), loans, and routine paymentsfor services by insurers (including the federal gov-ernment). About half of all capital expendituresare financed by loans and the rest by other sources.Under “traditional” cost-based reimbursementsystems, capital expenditures for buildings andequipment (represented by depreciation and inter-est payments on debts) are passed through topayers by adding on an appropriate amount to allcharges for services. But as cost-based reimburse-ment is being replaced more and more with pro-spective payment systems that pay a predeter-mined charge for each service, payers can exercisemore control over how much allowance they makefor capital costs. Medicare’s PPS system original-ly allowed capital costs to be paid directly as re-quired, independent of DRG payments, but as ofthe 1992 fiscal year, capital costs are gradually be-ing incorporated into DRG payments, giving thegovernment greater control over the level of capi-tal it provides to hospitals.

Through the 1980s, hospitals competed by con-tinually upgrading their facilities and providingthe most sophisticated medical technology. Thesecapital expenditures were a major contributor tothe rise in hospital and health care costs. Today,with price competition a much greater factor in thesurvival of hospitals, investments in the latesttechnology are no longer a given. In this case, lim-its on new technology may be imposed by marketforces. At the moment, however, capital spending

is still growing as a percentage of total hospitalspending.

❚ International TrendsThe upward pressures of medical costs, especiallyin hospitals, are felt in all countries and the re-sponses are a continual series of reforms that at-tempt to maintain control over costs and improvethe quality of services. The six countries includedin this study, though crossing the spectrum of or-ganization and financing, all maintain near-uni-versal coverage of their populations, and no re-forms have sought to exclude segments of thepopulation from coverage (though in some coun-tries the amount people must pay out-of-pockethas risen, which may effectively reduce access forsome people, and the range of benefits to be cov-ered by public or sickness fund insurance is alivein policy discussions). Changes to improve thecountries’ health systems have focused more onthe supply side of the system through provider in-centives and on the demand side through the cre-ation of purchasing organizations.

Canada, England, France, Germany, the Neth-erlands, and Sweden all currently have or have re-cently had some form of prospective budgetingsystem for most hospitals, i.e., they determineahead of time how much money a hospital will getfor operations in the next year. One of the mostpervasive factors underlying reform in these coun-tries is the belief that, while prospectively fixedhospital budgets help promote overall expendi-ture constraint, at least for inpatient services, ex-plicit incentives and controls are needed to en-courage the efficient and equitable allocation offunds within individual hospitals or across hospi-tals. In simpler terms, where no appeal for moremoney is possible, a fixed budget can hold costsdown to an absolute level, but not necessarily im-prove the return on the money spent in terms of thequality or quantity of hospital services.

Traditionally, annual hospital budgets havebeen based largely on historical costs, adjusted forsuch factors as general inflation, service growth,new technologies, and wage and salary increases.


A hospital budgeting system based on historicalcosts, however, may not encourage hospitals to tryto find cheaper ways to produce hospital servicesor to improve the quality of services to attract pa-tients. Hospitals only have to ensure that their ex-penditures stay within the amount provided fromthe government or insurance funds. Of course, ifannual budget determinations do not keep pacewith the demands placed on a hospital’s services,the overall budget restraint may require hospitalsto cut their costs. Historical cost budgeting mayalso lock in inequitable funding arrangements.Hospitals that have been historically underfundedor become underfunded because of changes in lo-cal population needs often remain underfundedwhile other hospitals may be inefficiently over-funded.

For these reasons, countries with prospectivelyfixed budgets have chosen to redesign hospital fi-nancing or payment mechanisms to better accountfor patient flows and patient needs, and to promotemore efficient use of resources. Cost containmenthas not been abandoned as a primary goal in hos-pital financing reforms, but this goal is increasing-ly accompanied by attempts to encourage moreefficient production of hospital services. Real-location of funds among hospitals is not alwaysdesigned to decrease aggregate hospital spending,but may be used to provide more money to hospi-tals where health care needs are greatest and lesswhere needs are lower in order to obtain better“value” for the same amount of resources spent.Different ways of paying individual hospitals(e.g., a fixed payment per hospital episode) havealso been adopted to a limited extent in somecountries to motivate hospitals to lower their pro-duction costs by reducing lengths of stay, usingless expensive labor, or using cheaper medicaltechnologies or settings where appropriate.

Financing reforms adopted by the six studiedcountries follow one or both of the followingbroad strategies:1. strategies that depend on greater internal or ex-

ternal market competition to reallocate fundsamong hospitals and within hospital depart-ments, and

2. strategies that depend on activity- or case-mixbased budget determinations.

The first strategy has recently been adopted bythe Netherlands, England, and some Swedishcounty councils. In these places, reforms have fo-cused on separating the purchasers of hospital ser-vices from service providers. Money is directed toindividual hospitals either through patient deci-sions to choose a specific hospital (i.e., “moneyfollows the patient”), through a purchasing orga-nization’s decision to contract with a hospital toprovide services to the organization’s members,or, as in some Swedish hospitals, hospital depart-ments “purchase” services from other depart-ments.

In Sweden, several county councils have estab-lished internal hospital markets under which somehospital departments (usually clinical depart-ments) are given budgets out of which they pur-chase services (e.g., diagnostic tests, food, andhousekeeping services) from other departments,encouraging scrutiny of the costs and benefits ofservices that patients get. Other Swedish countycouncils have established external markets by al-locating budgets to authorized purchasing orga-nizations that are responsible for buying all healthcare for a defined population through contractswith health care providers.

England and the Netherlands have adoptedmore decentralized, market-oriented mechanismsto pay for hospital (and other) services. Followingreforms in these two countries, a large part or all ofa hospital’s operating revenues are determinedlargely by the contracts it negotiates with purchas-ers for specific services. In England, purchasingorganizations (District Health Authorities or gen-eral practitioners who have become “fundhold-ers”) receive a budget from the government,which is proportional to the size of the populationfor whom they provide health services. The pur-chasing organizations are responsible for con-tracting with hospitals to provide inpatient ser-vices to their enrolled populations (a very smallnumber of British hospitals still operate on pro-spectively determined budgets).


In the Netherlands, about half of a hospital’srevenue comes from a prospective budget basedon the size of the population it serves and on thenumber of authorized beds and medical specialistunits that it has. The other half is determined by“production contracts,” the result of annual ne-gotiations between hospitals and health insurers(both sickness funds and private insurers) over theprojected volume of hospital use by each insurer’sbeneficiaries. Health insurers agree to pay hospi-tals for a predetermined number of hospital ad-missions, inpatient days, outpatient visits, anddaycare visits, and for some specific high-costtreatments. Payment rates for hospital services aredetermined by a quasi-governmental agency. Pro-duction contracting acts as an instrument foradapting hospital budgets to changes in demandfor a hospital’s services, making the budgetingscheme more flexible. Production contracts havealso increased the role of health insurers in thebudgeting process and have tended to decentralizethe process.

The second broad strategy for financing re-forms moves from budgets based on historicalcosts to allocating money in ways that more accu-rately reflect each hospital’s patient load and ac-tivity. These methods use measures of the hospi-tal’s case mix or severity mix, often derived fromthe diagnosis-related groups (DRGs) used in U.S.Medicare’s prospective payment system, to deter-mine at least a portion of the budget. The Cana-dian provinces of British Columbia, Alberta, andManitoba have begun using various forms of pop-ulation- or case-mix based measures to set a per-centage of hospitals’ budgets to encourage hospi-tals to produce services more efficiently or to alignhospital funding more closely with populationneeds. France is also conducting limited experi-ments in a number of hospitals to test a case-mixbased approach to financing, with hospitalcharges based on homogeneous patient groupsthat are similar to DRGs. Germany has recentlyexpanded the use of special fees and case-basedpayments that are conceptually similar to U.S.Medicare’s DRGs with the goal of bringing mosthospital inpatient care under a more performance-related system.

Hospital Capital ExpendituresTrends toward greater hospital efficiency areechoed, but to a much lesser extent, in the sixcountries’ reforms of capital financing. Some re-forms have been aimed at requiring explicit con-sideration of the “opportunity costs” of makingspecific capital expenditures—i.e., what other op-portunities there are for investing the money thatwill be lost by spending it a certain way. Othershave changed the threshold for approving capitalexpenditures in countries where approval is re-quired and changing the way in which hospitalsare paid for capital expenditures.

In England, before recent National Health Ser-vice (NHS) reforms, depreciation and the oppor-tunity costs of using capital assets were not explic-itly separated out in NHS accounts because allhospitals were owned, operated, and funded bythe NHS. But since 1991 and the reforms that haveseparated purchasers and providers, charges forcapital have begun to be incorporated into con-tracted rates for hospital services. The reformsalso for the first time allow NHS Trusts to financetheir capital requirements from within their ownbudgets and by borrowing.

Until recently, private loans to hospitals in theNetherlands were guaranteed by the national gov-ernment, which is estimated to have decreased in-terest payments by about 1 percent. This arrange-ment was recently ended to encourage hospitals tobehave like private companies in obtaining loansfor capital investments. A general trend in Swe-den’s county councils is to allocate rents for hospi-tal buildings and investment costs directly to hos-pital departments to motivate them to moreefficiently use different kinds of hospital inputs(e.g., labor versus high-technology equipment) toprovide services. Although France has notchanged its policy of providing free state and localgovernment subsidies and interest-free loans fromsickness funds for public hospital investment,public hospitals are obtaining an increasing shareof their capital funds from internal sources and in-terest-bearing loans.

Because of the split between capital planningand budgeting and operating cost budgeting, theimpact that capital investments will have on future


hospital operating costs often is not consideredwhen decisions about capital investments aremade, but this, too, is being addressed in somecountries. The Canadian provinces are increasing-ly requiring that requests for approval of hospitalcapital expenditures include an “economic case”that the capital purchase will either reduce operat-ing costs by improving technical efficiency or thatit will lead to improvements in patient outcomessufficient to justify the expenditures. In the prov-ince of Manitoba, getting approval for new equip-ment requires that the implications for future hos-pital operating costs be predicted before a decisionis made. If it is likely to significantly increase op-erating costs, e.g., require additional staff or main-tenance, it may be treated as a new program pro-posal, which is evaluated more rigorously. InGermany, with only some recent exceptions, thelaw has allowed the cost of capital investment tobe added directly to hospital charges only for proj-ects designed to reduce operating costs.

U.S. hospitals must raise their own funds, usu-ally through equity or borrowing, and therefore al-ready include the opportunity costs of capital in-vestment funds and possible impacts on futureoperating costs in their decisionmaking process.Individually, U.S. hospitals have incentives topurchase capital when the expected benefits of aninvestment project outweigh its cost, but the lackof overall planning and allocation of capitalamong regions and hospitals does not promotemaximization of the net benefits of capital invest-ments in the hospital industry or country as awhole.

Overall Hospital SpendingRecent and ongoing reforms are expected to in-crease hospital efficiency and patient satisfaction.However, unlike the United States, in all six com-parison countries there are still explicit limits onthe total amount of money available to pay forhospital services.

In Sweden, hospital funds are limited by thecounty councils, which determine hospital depart-ment budgets or the budgets of purchasing orga-nizations; beginning in 1991, the central govern-

ment restricted county councils’ ability to furtherincrease tax revenues. In England, the amount ofmoney flowing to District Health Authorities or togeneral practitioner fundholders to purchase hos-pital services is still cash-limited by their respec-tive Regional Health Authority, and, ultimately,by aggregate limits on National Health Servicefunding from general tax revenues.

French public (and affiliated private) hospitalbudgets are still largely constrained by prospec-tive budgets (called global allocations) that mustbe approved by government authorities. Negoti-ations between German sickness funds and Ger-man hospitals over a hospital’s prospective budgetare more constrained since that country’s most re-cent health reforms were adopted. The GermanHealth Sector Act of 1993 requires fixed prospec-tive hospital budgets from 1993 to 1995 that canno longer be adjusted for the difference betweenthe actual number of inpatient days delivered andthe predicted number. The Health Sector Act alsostrictly constrained growth in hospital budgetsduring that period, tying growth to increases insickness fund income.

The Canadian provinces have also becomemore forceful in the 1990s in developing institu-tional expectations that hospital budgets are bind-ing. The Netherlands’ hospital reforms provide apartial exception to this rule of aggregate limits onhospital spending. The new budgeting schemewith production contracts leaves one avenue forhospital spending open-ended, and the HealthMinistry may now only issue expenditure targetsfor any given year. However, the Ministry maymake up a cost overrun by reducing the next year’sbudget.

❚ Other Areas of Health Care and Hospital Reform

A trend in the six countries, though not as perva-sive as strategies to improve efficiency, is themovement toward allowing greater patient choiceof insurance organization, health care providers,or both. Strategies to achieve this goal often over-lap with schemes to promote greater efficiency.Greater choice may not only make consumers


more satisfied with their health care system, but italso may encourage providers and insurers to tryto improve quality and lower costs to attract cus-tomers.

In 1997, blue-collar workers in Germany willfor the first time have the right to choose amongsickness funds.3 In Sweden’s traditional healthcare system, patients were assigned to a primaryhealth center and a hospital. However, the estab-lished, well-defined catchment areas of healthcenters and hospitals have been increasingly ques-tioned by the general public. In response, theSwedish Federation of County Councils adopted astatement in 1991 that calls for all Swedes to be al-lowed to choose their physician and hospital.

Under the Netherlands’ reformed system, pa-tients may choose their health insurer—either asickness fund or a private insurer—and insurerscompete to attract subscribers. A major element ofthe United Kingdom’s reforms was increased con-sumer choice of providers and services. Generalpractitioner fundholders will compete for patientenrollment, and public and private hospitals inturn are expected to compete for their patients. Ca-nadian citizens have always had free choice ofphysicians and hospitals under Canada’s Medi-care system. France’s 1991 health reform act reit-erated patients’ freedom to choose a physician orhospital.

Decentralization of decisionmaking is anothertrend in these countries. England’s purchaser-pro-vider split shifts hospital decisionmaking from lo-cal government entities to individual hospitalmanagers. Canada has always been decentralizedto the provincial level, which allows for exper-imentation and for funds to be more closelyaligned with local population needs. British Co-lumbia’s new restructuring initiatives attempt tocreate a more efficient and patient-friendly matchof needs and levels of care by downsizing large ur-ban hospitals, expanding community-based pro-

grams, and generally moving patients “closer tohome.” The Netherlands’ production contractshave decentralized the hospital budgeting proc-ess. Some Swedish county councils’ and Eng-land’s purchaser-provider splits have put morepower into the hands of health care purchasers. InSweden, the tax and planning powers of countycouncils allows different councils to experimentwith financing and payment arrangements.

CONCLUSIONSThe period since 1980 has seen constant change inthe role of hospitals all over the world, reflectingboth the dynamism of medicine and the tighteningfinancial climate. The countries studied by OTAall started from different places, but all haveshared the reform goals of greater cost contain-ment, efficiency, and health service coverage. Theprevailing approaches to hospital financing andthe recent reforms emerge from specific historical,cultural, political, and societal contexts that do notlend themselves to unidimensional categoriza-tion. Broadly, financing models are tax-based(Canada, Sweden, England) or insurance-based(France, Germany, the Netherlands, and theUnited States), but the mode of financing appearsto be neither a constraint against nor a requirementfor any particular type of hospital financing re-form.

The United States stands out among its interna-tional peers as having the highest level of hospitalcosts since 1980, but also for pioneering financingmechanisms—especially prospective paymentsystems—that have led hospitals to reduce thehospital resources used to care for individual pa-tients, including shifting the site of care awayfrom the inpatient setting for many patients. Thesemechanisms, especially the DRG systemintroduced in the mid-1980s in the United States,are now, in the 1990s being adopted by othercountries as ways to allocate funds among hospi-

3White-collar workers already have this right, and they can also choose to leave the statutory insurance system and go to a private insurer.German consumers have always been able to choose their physicians, but sickness fund patients usually have to go the nearest hospital withsuitable facilities.


tals, most often within the constraints of prospec-tive budgets.

Other countries have had greater control overtotal hospital spending at a central level. To a largedegree, these countries’ reforms seek to integratethe advantages of spending controls that they havealready with more efficient and equitable produc-tion of hospital services. Decentralizing hospitalfinancing, creating incentives for competitionwithin the hospital system, and basing a greateramounts of a hospital’s revenues on the needs ofthe population it serves are the goals of reform,while also giving consumers more choice inwhere and from whom they get their health care.Basically, they are attempting to introduce se-lected market-type forces into their systems,choosing largely from mechanisms deemed suc-cessful in the U.S. system.

The United States is moving to a more forceful-ly market-driven health care system in which pricecompetition has become more important than ithas ever been. In the early 1980s, the Medicareprogram’s prospective payment system led to aslowdown in cost increases to the federal govern-ment, though not in national health care spending.In the 1990s, the private sector is applying thegreatest pressure to slow cost growth. Ratchetingdown by private insurers will also affect publiclyfunded health care by making it more difficult forhospitals to recoup their deficits from Medicareand Medicaid patients by shifting costs to the pri-vately insured. Ultimately, this will meanconstraining the growth of services, finding waysof providing the same services at lower cost, orboth. Advances in medical technology alreadyhave contributed to this effort and will probablycontinue to do so. Continuing to wring inefficien-cy out of the system—by eliminating unnecessarycare and by further streamlining the functions thatremain—also will contribute.

The Medicare program’s move to eliminate thehistorical separation of operating costs and capitalexpenditures is also a step toward increasing therationality of the system. Some other countriesalso are moving in this direction, a move thatshould place their health care systems—regard-less of how they are financed—in a more market-drive mode.

What can the United States learn from its in-ternational peers about the costs of hospital care?The way that other countries have kept spending ata lower level than the United States is no mystery:fixed (or relatively fixed) budgets have been set invirtually all these countries by some central au-thority. The U.S. system as it is today and is likelyto be in the foreseeable future does not allow forthis type of centralized decisionmaking. Fixed,prospective budgets have apparently not made theother countries’ systems more efficient, either; infact, they may have had the opposite effect.

There is intrinsic value in understanding moreabout how other countries function, and their sim-ilarities and differences with the United States.There may well be some important lessons to belearned at the operational level of hospitals frominternational comparisons, but at a national policylevel, the great efforts that have gone into interna-tional comparative studies over the past decade orso have produced relatively little practical returnfor the United States. They may be of greater valueamong countries with systems that are more simi-lar in their health care systems. The United Statesshould continue to be aware of and examine othercountries’ successes and failures in managinghealth care, but with limited expectations. TheU.S. health care system is peculiarly our own. Inthe 1990s, progress is more likely to come fromwithin than from imported solutions.


REFERENCES1. Organisation for Economic Cooperation and

Development, The Reform of Health Care: AComparative Analysis of Seven OECD Coun-tries (Paris: OECD, 1992).

2. Organisation for Economic Cooperation andDevelopment, OECD Health Data (Paris:OECD, 1995).

3. Organisation for Economic Cooperation andDevelopment, OECD Health Systems, TheSocio-Economic Environment. StatisticalReferences, Volume II (Paris: OECD, 1993).

4. U.S. Department of Health and Human Ser-vices, Health Care Financing Administration,Office of Research and Demonstrations,Health Care Financing Review 16(1), fall1991.

HospitalFinancingin Canada

by Morris L. Barer

anada is often described as having a national health insur-ance system; this is not entirely accurate, however, sinceeach of the 10 Canadian provinces (and two territories)administers its own health insurance plans. Although the

hospital and medical components of those plans are subject tofederal guidelines, the provincial governments make their owndecisions about health care financing and payment of providers,benefits other than hospital and medical care, and the organiza-tion of health services. Despite some heterogeneity among prov-inces, however, the provincial health systems have several fea-tures that are common across the provinces.

To qualify for federal contributions, provincial hospital andmedical insurance plans must fulfill federal eligibility and cover-age standards, which include public nonprofit administration,portability of benefits across provinces, comprehensive coveragedefined as “all medically necessary services,” accessibility, anduniversal coverage. All 27 million Canadian residents, regardlessof age or financial or health status, are entitled to participate intheir respective provincial plans. Provinces can insure benefits inaddition to hospital and physician services, but they are left toeach province’s discretion and vary among provinces.

Among the Organisation for Economic Cooperation and De-velopment (OECD) countries, Canada is unique in having no pri-vate-sector involvement in hospital and medical insurance. Pri-vate insurers cannot compete with the public medical and hospitalinsurance programs, but can only cover services not covered byprovincial plans (e.g., outpatient prescription drugs, dental care,cosmetic surgery, optometry, physiotherapy). A large percentageof the population has some private coverage, usually paid by em-ployers. Hospitals (and physicians) are largely prohibited from | 21


treating both patients whose care is paid for byprovincial plans and patients who pay directly.The prohibition of private insurance for benefitscovered by the provinces virtually establishes pro-vincial governments as single payers of much ofthe health care received by Canadian residents.

Provincial health plans are financed almost en-tirely from general revenues (from provincialsources and federal transfers to provinces), raisedthrough personal, corporate, sales, payroll, andother broad-based taxes (residents of Alberta andBritish Columbia also pay monthly premiums). In1993, provinces funded approximately 70 percentof Canada’s total health expenditures (which in-cludes federal transfer payments) and paid for al-most 90 percent of all physician and hospitalcharges. The remaining 30 percent of nationalhealth spending came predominantly from privatepayments, mainly for the costs of long-term care,adult dental care, nonprescription drugs, and otheritems (27).

The simple story of Canadian hospital financ-ing—which might be summed up as single-sourcepublic funding allocated to hospitals via globalbudgets established by provincial Ministries ofHealth—offers a relatively accurate picture. How-ever, this general description masks both provin-cial/territorial variations in the details of hospitalfunding and the different ways in which hospitalcapital and operating costs are paid for and allo-cated. The objective of this chapter, therefore, is toclarify the general story, with particular emphasison recent new provincial funding initiatives forhospital operating costs and on the less well-un-derstood capital funding process.1 Approaches tofunding capital and operating costs are describedin more detail for several provinces to illustratethe general structure of the Canadian hospital fi-nancing system.

STRUCTURE OF THE HOSPITAL SECTORHospitals were brought into the Canadian healthcare system under the Hospital Insurance andDiagnostic Services Act (HIDS) of 1956 (41).(For the purposes of this chapter, “hospitals” areacute care and rehabilitation care facilities, someof which also contain extended care beds.)2 By1961, all provinces had met the terms and condi-tions required to receive federal funds for hospitalcost-sharing. Since that time, hospital care in Can-ada has been provided largely through publiclyowned and funded nonprofit institutions. There isvirtually no private acute care hospital sector inCanada, although an active private long-term caresector includes a variety of chronic care institu-tions. These institutions, even though privatelyowned, receive a significant amount of publicfunding. (The Canadian Hospital Directory listsover 50 private hospitals, but most are psychiatric,drug and alcohol rehabilitation, and long-termcare facilities.)

PHYSICIANSFor nearly all Canadian physicians, hospitalsserve as free workshops. General/family practitio-ners may admit patients directly to a hospital ormay refer their patients to specialists who maythen recommend hospitalization. In either case theprimary care practitioner or specialist can followthe patient into the hospital and bill the provincialmedical plan for hospital visits or for surgical pro-cedures or assists. Physicians are paid fees for in-patient services but are responsible for none of thehospital costs incurred.

Many specialists (particularly tertiary care sub-specialists) are hospital based; some have their of-fices within the physical confines of the hospital.Most hospital-based physicians, however, are

1This document reflects the situation in Canada as of the spring of 1993, and rapid changes occurring in the provinces may render it aninaccurate representation of hospital financing in 1995.

2For more detail on hospital classifications, see (13,40).

Chapter 2 Hospital Financing in Canada | 23

paid fees for services from provincial medicalplans rather than from the hospital’s budget. Also,a sizable number of diagnostic physicians (e.g.,radiologists, pathologists) are in salaried hospitalpositions. Many of the services they provide arealso paid for on a fee-for-service basis to the hos-pital by the provincial medical plan.

A small (but growing) number of specialists isnegotiating alternative payment arrangementswith provincial medical plans. For example, ateaching hospital-based neonatology unit may ne-gotiate with the provincial ministry of health forsessional (half-day) payments to its practitionersor even for block operating funds. These fundsgenerally flow to the hospital separately from itsoperating budget; they derive from a differentbranch of the provincial ministry.

In general, like the United States but differentfrom most of the other five countries in this study,the only physician costs that appear in a hospital’soperating budget are for salaried medical staff,such as the heads of clinical departments or diag-nostic salaried positions, postgraduate medicalstudents (interns and residents), or physiciansserving in administrative posts (e.g., CEOs or vicepresidents). These costs represent only a verysmall fraction of the total cost of physicians’ ser-vices delivered in hospitals.

HOSPITAL OPERATING COSTS

❚ Financing Model

Historical Hospital Financing ApproachHospital funding in the early years of the publicprogram was characterized by either line-by-linebudgeting or per diem reimbursement. Underline-by-line budgeting, individual institutions ne-gotiated specific budgetary line items with pro-vincial ministries of health. The total budget al-location for an individual hospital was theaggregate of the line items. Reallocation of fundsbetween different line items was severely re-stricted, and the effort involved in scrutinizing the

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

Per diem reimbursement involved retrospec-tive adjustments to hospital operating budgetsbased on the actual number of inpatient days ofcare provided, leaving provincial ministries with alarge open-ended line in their budgets. (For exam-ple, a special request for additional funding inBritish Columbia in fiscal year 1980-81, amount-ing to almost 25 percent of hospital expenditureestimates, was required to cover actual per diemcosts that year [24]). Inflation-adjusted per capitahospital expenditures increased by 7.6 percentannually during the 1960s, in part because fund-ing increases were relatively generous and alsobecause ministries tended to cover year-end budg-et deficits.3

The line-by-line budgeting approach has large-ly disappeared (although about 20 percent of hos-pital budgets in Québec continue to be determinedon a line-by-line basis [14], and Alberta only re-cently moved away from this method [28]). Themove toward “global budgeting” began in Ontarioin the late 1960s (17). With this method, budgetnegotiations focused on the total budget ratherthan on individual activity or cost centers withinthe budget (and hospitals gained considerableflexibility in moving funds among operatinglines). Under the original global budgeting meth-od, the annual funding allocation was based on aseries of relatively mechanical adjustments to theprevious year’s hospital expenditures. Specialprovisions were made for new programs, unantici-pated and justifiable increases in service provi-sion, or other unforeseen circumstances. The ef-fort required of ministry staff in approvingbudgets was reduced significantly. Retrospectiveline-by-line review was invoked only in situationsin which hospitals exceeded their budgets.

For many years the change from open line-by-line budgets to the theoretically capped globalbudgets lacked “teeth” for controlling the growthof hospital expenditures because most expendi-

3 Per-capita hospital expenditure data are from Barer and Evans (6) and were deflated using a GDP implicit price index (16).


ture overruns were ultimately covered by provin-cial health ministries. Québec tried to close offyear-end coverage of deficits, and several prov-inces, led by Québec, experimented with a varietyof incentive reimbursement schemes to motivatehospitals to use their funds more efficiently. Yetthis movement had a rather checkered history(14,21), in part because of glaring failures to un-derstand the motivations of key hospital stake-holders. For example, for some time in Ontario,hospitals could not run deficits but also could notretain the full amount of any surpluses. Not sur-prisingly, actual expenditures clustered tightlyaround approved budgets.

Only in the more fiscally constrained late1980s and especially in the early 1990s have min-istries of health become more forceful in develop-ing institutional expectations that budgets are notstarting points but rather binding constraints.Concurrent with this more hard-nosed approachhave come a number of attempts to refine the crite-ria used to allocate funds among hospitals. Theglobal budgeting approach remains a relativelyaccurate portrayal of the process today, however.In most provinces (Alberta being one exception,as will be seen later), the more recent funding in-novations are applied only to the portion of thefollowing year’s funding that represents an in-crease over hospital budgets in the current year. Toa large extent any relative inefficiencies and ineq-uities that existed in each province when itswitched to global budgeting have been fossil-ized. In many instances historical problems mayeven have been exacerbated by the current rela-tively ad hoc process of allocating new funds andcovering deficits (35).

Current Hospital Financing ApproachDetails of the current budget development, ap-proval, and allocation process vary among prov-inces, but a general picture can be sketched with-out straying too far from the specifics of any oneprovince. Despite some other minor sources, pro-vincial and federal general tax revenues constitutethe lion’s share of funds for hospitals in Canada.There are no tax revenues earmarked specifically

for hospitals. Although provinces receive federaltransfer funding for health care programs gov-erned by the Canada Health Act, these funds fallfar short of the total cost of the programs; there-fore, they are treated simply as part of general provincial tax and transfer revenues. Provincialministries of health must compete with other minis-tries in their provinces for a piece of the generalrevenue pie and must then allocate their shareamong hospitals, other health care institutions,health agencies and programs, private health careproviders (the majority of whom are physicians),and some health research agencies and programs.

Individual hospital budgets are based largelyon approved budgets from the previous year, withallowable adjustments depending on province-specific factors, such as new or expanded pro-grams, patient increases, anticipated wage settle-ments or other expected increases in productioncosts (e.g., the costs of pharmaceutical, surgical,and other supplies), or other policies expected toaffect the bed capacity of each hospital. This ap-proach might be labeled a service-based approachto budget estimation. Ministry staff are generallyresponsible for developing estimates of each hos-pital’s funding requirements. The amount of inter-action between ministry staff and individual insti-tutions during this phase of the budget devel-opment process varies considerably among prov-inces. Individual hospital budget estimates are ag-gregated to an overall hospitals line in each healthministry’s budget estimating process.

An alternative approach—adopted recently inBritish Columbia, for example—begins with totalhospital expenditures in the previous year and de-velops a rationale for adjusting the budget in thecurrent year based on changes in the characteris-tics of the population (e.g., size or age composi-tion) and information on alternative ways of pro-viding services to that population. This might belabeled a more “population-based” approach tobudget development.

The aggregate hospital budget line that emergesfrom either of these approaches is subject to modi-fication as a result of internal provincial govern-ment negotiations over the final request from the


health ministry. Because hospital expendituresconstitute the single largest item within provincialministry of health budgets,4 they are subject tospecial scrutiny. A very small reduction in hospi-tal allocations will easily fund a variety of otherprograms—a fact that has escaped neither thoseprograms nor ministry staff.

Two factors characterizing the current situa-tion—one resulting from the current economic en-vironment and one the result of new policy direc-tions (which are themselves influenced, of course,by the economic setting)—ensure that hospitalfunding is even more carefully scrutinized than inthe past. First and most obvious is the current fis-cal crisis facing all provincial governments (andthe federal government). As a result of decliningfederal health care transfers to provinces, slow orno growth in provincial tax revenues, and increas-ing demands on social support programs becauseof slow economic growth, provincial govern-ments are finding themselves with very little roomto maneuver, and hospital funding makes a verylarge target. Second, various new and major pro-vincial restructuring initiatives are attempting tocreate a more efficient and patient-friendly matchof patient needs and levels of care by downsizinglarge urban hospitals, expanding community-basedprograms, and more generally moving patients“closer to home” (12,33). The consequent reductionin bed capacity has been matched by an expecta-tion that hospitals will require lower budgets.

At the conclusion of the internal ministry “esti-mates” process, the aggregate of all hospitals’budgets is presented to the provincial departmentof finance, or treasury board, as part of the healthministry’s request for funds. This request is scruti-nized by treasury board staff as part of the processof determining how the province’s aggregate

budget will be allocated across competing sectorsof the public economy (e.g., education, social ser-vices, justice, health, and housing). Finally, rec-ommendations are presented to the provincialcabinet (composed of the elected ministers foreach of these sectors) for approval.

The approved budget has to withstand debate ineach province’s House of Commons before itpasses into law. Until then, ministries do not knowwhat their allocations will be for the fiscal year.(Unfortunately, this stage is often reached wellinto the fiscal year for which estimates are beingdebated, so that hospitals must run on faith andhope during the early part of the fiscal year.) Insome provinces approval comes with very specif-ic directives as to the internal allocation of fundsamong health ministry programs, allowablesalary increases, and similar instructions. In otherprovinces the approved aggregate health budget isreturned to the ministry, at which point decisionson the allocation of funds to individual programareas within the ministry must be made if the ap-proved amount is different from the budget re-quest. In either case the allocation to individualhospitals and other institutions is still an internalministry responsibility. The budget estimationprocess will usually have generated the informa-tion necessary for this exercise. For example, inManitoba, where the hospital budget line is devel-oped by aggregating individual hospital estimatesafter adjustments for production cost increasesand new programs, the allocation of availablefunding across institutions mirrors closely the rel-ative size of individual hospital budgets devel-oped during the estimates process. Whatever thedetailed allocation process, hospital budget levelshave been and continue to be dominated by bud-geted amounts from the preceding year.5

4For example, in fiscal year 1991-92 total payments to hospitals in British Columbia were $2.2 billion for a population of about 3 million;this represented over 40 percent of the Ministry of Health’s aggregate budget in that year. Similarly, hospital expenditures represented about 42percent of public health care expenditures in Ontario in 1992, down sharply from about 50 percent in 1983. This reflects the overall trend shownin figure 2-1.

5In 1988, for example, the previous year’s funding accounted for 92 percent of the funding allocated to Ontario hospitals; the remainder wasmade up of a variety of adjustments for inflation, service increases, and new or expanded programs (31).


New approaches for allocating hospital fundshave been adopted in recent years in several prov-inces. It is important to note, however, that theseinitiatives still leave the previous year’s basebudget for each institution largely intact. In someprovinces the new adjustments are applied only tothe annual increment in funding levels (i.e., newfunds for the current year are allocated on the basisof new rules, but base budgets remain largely un-changed); in Alberta the adjustments affect 5 per-cent of each hospital’s previous year’s budgetedamount.

These approaches indicate an increasing inter-est among ministries of health in making hospitalbudgets more sensitive to the relative efficiency ofdifferent institutions given the mix of patientsserved (e.g., in Alberta and Ontario) or to changesin population composition and patient flows (orthe needs of a hospital’s catchment area) (e.g., inBritish Columbia).6 Three provincial experiencesare described in more detail below to illustrate thetypes of changes occurring in the funding of Cana-dian hospital operating costs.

AlbertaThe Alberta Acute Care Funding Plan (ACFP) isdesigned to redistribute a component of the prov-ince’s inpatient operating budget from less tomore efficient institutions (1). It involves the es-timation of a hospital performance measure(HPM) for each hospital equal to the number ofcase- and severity-weighted days treated per dol-lar of inpatient expense (see box 2-1).7 The higherthe measure (i.e., the more adjusted inpatient daysa hospital has been able to provide for each dollar

it spent), the more efficient the hospital. An indi-vidual hospital’s budget adjustment is based on itsHPM relative to all other hospitals’ HPMs.

The Alberta system is a service-based approachfor adjusting hospital funding that takes as a given(and therefore as implicitly acceptable) the “effi-ciency” of the average hospital. It rewards orpenalizes institutions not on the basis of their des-ignated roles, the patient populations they serve,or the technical efficiency with which they meetspecific objectives, but rather on the basis of theirprior care-providing experience (as reported bythem) and the costs incurred as a result of that careprovision. A hospital that aggressively pursuescommunity-based partnerships that have the ef-fect of keeping patients out of the hospital couldeasily end up being penalized under such a sys-tem, whereas a hospital that uses clever account-ing practices to move inpatient costs out of the de-nominator of its HPM and creative patientclassifications to increase the value of the numera-tor would end up being rewarded.8

Another major problem with the use of thistype of funding system in a Canadian context isthat case weights are based on U.S. cost or chargedata.9 U.S. data are used because there are as yetno reliable patient-centered cost data systems inplace in Canadian hospitals, but the provinces thathave adopted case-mix adjustment of inpatientfunding have chosen to use costs as a key compo-nent of their weight calculations. There are otherapproaches to estimating the relative complexity/severity of cases (see, for example, Barer (4),Evans and Walker (19)), but these have receivedmuch less development and, perhaps more im-

6As with so many other health and social policy initiatives, Québec was ahead of the other provinces in experimenting with peer group-based incentive reimbursement programs (21) but appears to be doing relatively little on this front at present.

7The exchange rate in January 1994 was approximately $CAN1.00 to $U.S.0.75.8“Case mix creep” is no stranger to the United States, where such reimbursement systems have been in place for much longer. As Botz (9)

notes, no case weight system, no matter how carefully constructed, will be devoid of case-shifting incentives. The extent to which such caseshifting occurs depends on the degree of clinical flexibility in the patient classification system and how adept institutions become at ascertainingthe differences between the marginal revenues and costs associated with each case mix/severity category.

9Whether or not the data are adjusted for the relationship between costs and charges in New York State seems moot as the New York patternsof care are likely to be more service-intensive for comparable patients than those in Canada. Only if care were uniformly more service-intensiveacross all types of cases would such an adjustment be appropriate for application in a Canadian setting, but this is not likely to be true.

Chapter 2 Hospital Financing in Canada 127

A detailed description of the methodology underlying Alberta’s approach to funding hospital inpa-

tient services is beyond the scope of this chapter, but more details are available elsewhere (1 ,23,28).

The hospital performance measure (HPM) method begins by estimating inpatient costs for eachhospital by netting out a variety of outpatient activities and a share of joint activities (e.g., diagnosticservices, administration) from the hospital’s total operating costs. (This process of inpatient cost estima-tion is a modified form of a methodology developed in the late 1970s to compare different hospitalsinpatient costs [3,5].) Second, each of the hospital’s inpatient cases is assigned to one of 1,100 refineddiagnosis-related groups (RDRGs) on the basis of the case’s diagnostic group, diagnostic or procedurecode, and level of co-morbidity or complications. Each RDRG is assigned a weight that measures therelative amount of resources used (i.e., the relative costs) to produce the services of that RDRG. Theweights are constructed by marrying per diem cost or charge information from New York State withRDRG average length-of-stay information based on recent historical experience in Alberta (after trim-ming outliers). Minor case weight adjustments are made for outlier cases on the grounds that these areof extraordinary severity that would not be adequately reflected in the RDRG weight.

This patient classification system, together with the case weight calculations for the province, pro-vides the means to calculate a measure of weighted cases for each hospital. The measure of weightedcases is then scaled up or down to take account of other factors alleged to influence inpatient costs percase--namely, the size of the institution (based on the number of inpatient beds) and the extent of itsteaching role. This latter adjustment is motivated by evidence from Canadian hospital cost analyses(e.g., 4) indicating that even after extracting the costs of direct teaching-related activity in estimating

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

The adjusted weighted cases become the numerator of the HPM, and the denominator equals totalestimated inpatient costs for the institution. ’ The resulting HPM values for each hospital are convertedto index values, and each hospital’s index value determines its budget adjustment. For example, if ahospital has a value of 125, it would be eligible for a funding adjustment amounting to an increase of 25percent over its previous year’s approved budget In practice, however, adjustments have been appliedonly to a small fraction (about 5 percent) of the previous year’s budget. A 25-percent increase to thehospital’s total budget might be substantial, but a 25 percent increase to 5 percent of the budget usual-ly represents a relatively small increase in the amount of funds for the coming year. There are a numberof serious problems with this system. Some of those flaws are being actively worked on; others are ge-neric to any system of reimbursement tied to case/severity mix and case weights.

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

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

something mislabeled the “severity predicted cost per case” (SPCC) (which does not, in fact, have anything to do with cost per case; itis a measure of the average case weight). Then this SPCC, after adjustment for size and teaching activity, is divided by the actual cost

per case. This amounts, of course, to dividing both the numerator and denominator by the unadjusted number of cases--a super-

fluous step that nevertheless makes the entire technical exercise seem more complex and less logical than it is.

portantly, much less marketing than the system The adjustment factors for hospital size andbased on diagnosis-related groups (DRGs) that teaching status have also come under attack forwas developed in the United States. (Much of the being arbitrary and not particularly sensitive to theliterature in this area simply assumes that cost data phenomena that they are supposed to capture. Ef-must be used to develop case weights; see, for forts are presently under way to alleviate some ofinstance, [31]). these problems, but they beg the larger question of


whether such adjustments are appropriate at alland, if so, whether there are other similar types ofadjustments that ought to be considered as well.Inevitably, each hospital has an incentive to claimthat the key factors that make it unique have notbeen captured within the adjustment process. In-deed, it could be argued that no hospital would behappy unless and until sufficient adjustments hadbeen incorporated to ensure that some hospitalswere better off and none worse off than at pres-ent.10

OntarioThe recent patient case-mix-based adjustments tohospital budgets in Ontario are similar in many re-spects to Alberta’s methodology. The Ontariomethod also computes a measure of weightedcases using weights that measure resource intensi-ty for different cases, constructed as a hybrid ofNew York State hospital cost and charge data andCanadian length of stay data, and then constructsa measure of relative inpatient cost per weightedcase (the inverse of Alberta’s weighted units perinpatient cost) using a method similar to Alberta’sto estimate inpatient costs (31,32,35).

There are several differences, however, both inmethodology and in the way that the resultingmeasure of relative efficiency is applied in thefunding allocation process in Ontario as opposedto Alberta. For example, the Ontario processmakes no additional direct adjustments for hospi-tal size or teaching status, but instead creates hos-pital peer groups based on teaching status, size,and geographic location and makes allocation ad-justments within the context of those groups. Fur-thermore, the province uses patient case-mixgroups designed for Canadian use rather than theU.S.-based refined diagnosis-related groups.

The reallocation amounts for which a hospitalis eligible are limited both by the fact that thefunding adjustments are applied only to separatelydesignated pools of “equity” or “growth” fundsand by some predetermined percentage of the pre-

vious year’s budget (currently a maximum of 2percent for an individual hospital for the growthadjustment). “Equity” funding is intended to rec-ognize inter-hospital inequities that may havebeen locked into place when global budgeting be-came effective in 1982. Because the original glob-al budgets were based largely on previous fundinglevels, any such inequities that existed at the timebecame entrenched (and even exacerbated by thelargely across-the-board funding increases duringthe 1980s). This sort of problem becomes morevisible in times of financial restraints, which mayexplain the emergence of the equity funding con-cept in the early 1990s. “Growth” funding is in-tended to compensate hospitals for greater thananticipated patient volumes (35). The growth for-mula also incorporates weights for inpatient ser-vices and a variety of outpatient services (e.g., daysurgery and outpatient clinics). By adjusting the“price” weights attached to these different ser-vices, the Ontario Ministry of Health attempts tocreate incentives for hospitals to shift servicesfrom inpatient to outpatient settings.

A number of equity fund pools have been allo-cated, most recently in the fall of 1992 (35,36).However, these sums represent well under 1 per-cent of total hospital operating expenses. Fundsavailable for growth adjustments have also beenlimited to about 1 percent of aggregate hospitalbase budgets. In Ontario this process has not yetbeen used to reduce a hospital’s budget below theprevious year’s budget. Instead, it has replaced theold formula of providing general increases to allhospitals for inflation, service increases, and newor expanded programs.

The method is plagued by all of the problemsidentified for Alberta plus some of its own(31,32). (For example, the problems with adjust-ments for bed size and teaching status in Albertawere noted. In Ontario, the construction of peergroups has to date been relatively unsophisti-cated—although it has been improved from theoriginal seven groups—and so is equally subject

10Jacobs et al. (28) describe other problems with the Alberta system that are not noted here.


Like the Ontario and Alberta methods, British Columbia’s approach to allocating funds among hospi-tals relies heavily on the Hospital Medical Records Institute database, which contains detailed recordson each patient discharged from a Canadian hospital. These data are used to compute provincial age-and sex-specific utilization rates for each of five types of care: acute or rehabilitation days; long-term(chronic) care provided in acute care hospitals; intensive care; inpatient surgery; and day surgery. Re-cent historical utilization rates are then applied to age- and sex-specific changes in the provincial popu-lation to estimate aggregate changes in service use for each level of care for the province as a whole(e.g., the 1993-94 model used data from 1991-92).

Changes in service “needs” are next allocated to hospitals on the basis of where the populationchanges have occurred and on existing referral patterns for each type of care. Thus, if historical utiliza-tion patterns suggest that a specific large urban hospital provided 20 percent of inpatient surgery forthe residents of its own region plus 80 percent of inpatient surgery for residents of the rest of the prov-ince, then 20 percent of the population-based change in surgical utilization for that region plus 80 per-cent of the change for the rest of the province would be assigned to that hospital.

The result of this process is five separate measures of population-based utilization changes for eachhospital. These are aggregated to a single volume-change figure for each hospital using relative re-source weights developed by internal Ministry of Health staff. For example, a weight of 3.5 is assignedto an intensive care day, 1.65 to a day involving a surgical service (inpatient or outpatient), 1.0 to anacute/rehabilitation inpatient day, 0.45 for an extended or continuing care day, and 0.4 for a newbornpatient day. Using these weights, new weighted patient days (NWPD) can be computed for eachhospital,

The final technical step in the process is to compute a measure of cost per weighted patient day foreach institution by dividing the hospitals’s most recent year’s total operating costs by the total numberof weighted patient days. The relative value of this measure for each hospital is then used to adjust thathospital’s NWPD, on the assumption that higher costs per weighted patient day imply a more complexthan average mix of patients within the five service categories. The result of this exercise is adjustednew weighted patient days (ANWPD) for each hospital. The available incremental funding is then allo-cated on the basis of each hospital’s share of total provincial ANWPD.

to criticism by the hospitals themselves.) Addi- cate this incremental funding solely on the basistionally, the amounts reallocated through thebudget adjustment process may not be sufficientlylarge to effect the sorts of equity and efficiencyshifts sought by the province’s Ministry of Health.

British Columbia11

Like Ontario, British Columbia’s recent budgetallocation adjustments have been applied only tonew or incremental budgetary allocations to thehospital sector as a whole. Unlike Ontario and Al-berta, however, British Columbia does not allo-

of service volumes (although historical utilizationrates do play a role in determining estimated pop-ulation needs; see box 2-2). By adopting a popula-tion- rather than an institution-based focus, thisprovince attempts to ensure that new funds followprospective patients. The funding adjustments aresensitive to regional changes in populationgrowth and age structure and to changes in pat-terns of care-seeking. The adjustments appear tobe a serious attempt to begin aligning hospitalfunding more closely with underlying population

11 Much of the information on which this section is based is taken from Haazen (24).


needs for institutional care, although to date theycan only be regarded as a tentative step in thatdirection. British Columbia’s approach is, how-ever, complemented by local initiatives to plan fu-ture bed capacity on the basis of an overall provin-cial bed-to-population target of 2.75 beds per1,000 population. Individual hospital capacitywould be determined by the projected relativegrowth in population in the region and by esti-mated patterns of referral or care-seeking.

On first blush British Columbia’s approachmay seem more need driven than the approachesbeing applied in Alberta or Ontario because it isless dependent on historical service patterns. Infact, though, this may be no more than an illusion.To begin with, historical patterns of utilization areused to estimate expected population-basedchanges in future utilization. This procedure locksin whatever service patterns are used to computethe age-specific provincial utilization rates.12

Furthermore, the two-part approach to weight-ing patient days is questionable on several counts.The differentiation of types of care is not likely tobe sufficiently discriminating to take account ofthe fact that different hospitals may treat quite dif-ferent segments of the case distribution (in termsof resource intensity) within any type of care (e.g.,only 10 different weights are used to distinguishamong inpatient days [10].) One hospital maytreat a higher proportion of severely ill patientswithin the intensive care category than another,but that would not be reflected by the former hos-pital’s receiving a greater weight. The adjustmenton the basis of cost per weighted patient day maysimply make matters worse. For example, if a hos-pital has below-average-severity patients in allfive levels of care but is an inefficient facility, itsnew weighted patient days (NWPD) value will bescaled up in computing the adjusted NWPD(ANWPD).

Thus, this approach draws on existing patternsof utilization and on the existing cost performanceof each institution in its computation of the rela-tive share of each hospital of new “population/demographic” funding. On the one hand, it is per-haps less subject to institutional manipulationthan the systems employed in Ontario and Alber-ta. On the other, it seems far less sophisticated indistinguishing the resource intensity of differenttypes of cases and currently offers little to com-pensate for that shortcoming in terms of popula-tion-based needs information.

Efforts are under way within the Ministry ofHealth to make some adjustments. First, factorsother than age and sex that may contribute to or becorrelated with individual variations in need arebeing incorporated within a more comprehensivemodel for computing NWPD. Second, efforts arebeing made to adjust each hospital’s NWPD notby its own cost per WPD experience but rather bya composite average cost experience based on peerhospitals. Although still imperfect, these wouldboth seem to be improvements.

Future Trends in FinancingIn future years one might anticipate some conver-gence of case-mix-based and population-basedapproaches to budget allocation along with in-creases in the shares of hospital budgets that aresubject to such reallocation criteria. A hybrid ap-proach might, for example, draw on the richnessof a case-mix groups (CMG)- or refined diagno-sis-related groups (RDRG)- type patient classifi-cation system to distinguish the resource require-ments of alternative types of patients, developcase weights based on real resource use in “effi-cient” Canadian hospitals, and use population-based methods and appropriateness evidence toestimate the expected volume of services within

12If the proportion of those rates that is inappropriate varies either by level of service or by age, then regions experiencing atypical changesin population age structure, and hospitals offering relatively more or less of particular types of services than average, may be differentially andinappropriately affected in terms of the attribution of new service “needs” to particular institutions.


each patient category. Such an integrated systemis likely to be at least a decade away, however, inpart because the Canadian hospital sector lacks theinformation systems necessary to support thistype of approach. (On this point see, for instance,Auditor General of British Columbia [2].) In themeantime one can expect to see more technical ad-justments to methods in the provinces that havebeen involved in these new initiatives, involve-ment of additional provinces in similar efforts,and increasing proportions of hospital budgetssubjected to these types of reallocation proce-dures.

❚ Sources of FundingHospital operating costs are funded largely fromgeneral tax revenues made up of general provin-cial taxes and transfers of federal tax revenues tothe provinces.13 Yet funds available for annual op-erations are not restricted to the hospital alloca-tions that come from the provincial ministries ordepartments of health. Hospitals are able (indeed,increasingly encouraged) to call on a variety ofother potential sources of revenue to supplementministry budgets. Charges to patients for “luxury”accommodations (e.g., semi-private or privaterooms) when they are not medically necessaryprovide one such source of revenue for most insti-tutions.14

An equally important revenue source is the pro-vision of outpatient diagnostic services (e.g., lab-oratory tests, radiology and ultrasound exams,ECGs). If salaried medical staff provide the ser-

vice, the entire fee accrues to the hospital. Evenwhen these services are supervised by privatepractitioners with no employment status at thehospital, the hospital may charge the provincialmedical plan for the technical component of thefee.15 In British Columbia, for example, fees re-ceived from the provincial Medical Services Planfor outpatient diagnostic services accounted forjust under 5 percent of total hospital revenues in1993-94. This was the second-largest source ofrevenue, after the operating grants from the Minis-try of Health, which accounted for 85 percent ofhospital revenues. Private/semi-private roomcharges represented well under 1 percent of reve-nues. Some provinces, such as Ontario, restrict therange of ambulatory services provided by hospi-tals to avoid competition between publicly fundedhospitals and “private” diagnostic practices (35).(”Private” diagnostic practices are also publiclyfunded through the provincially funded fees paidfor these services.) Thus, hospitals in Ontario can-not charge the provincial medical plan (OHIP) forlaboratory tests to outpatients unless such tests areavailable only within the hospital sector. Theycan, however, charge for a variety of other diag-nostic services not available in the private sector(e.g., most scans and scopes).

Other sources of hospital funds include reve-nues from parking, cafeterias, gift shops, the pro-vision of uninsured patient services or services topatients from other provinces or countries and theprovision of specialized hospital consulting ser-vices (38). One particularly innovative and com-

13Although numerous provinces over the years have used premiums to raise a component of hospital funds, only Alberta does so now. Evenwhen premiums were used, hospital care could not legally be denied to Canadian residents even if premium payments were in arrears, becauseof the universality provisions in the federal HIDS Act.

14Many provinces in the past imposed a variety of other small hospital user fees for such things as emergency department visits. With thepassage of the Canada Health Act of 1984, federal transfers could be withheld on a dollar-for-dollar basis from any province continuing to allowuser fees for medically necessary services. By 1986 such fees had virtually disappeared from the Canadian landscape.

15The technical component of the fee is that part intended to cover the overhead cost of the equipment (usually diagnostic) used to providethe service. For example, an x-ray provided in the hospital for an outpatient would generate two separate charges: a technical fee would be billedby the hospital and a professional fee for reading the x-ray would be charged by the radiologist. However, if the x-ray was provided to an inpa-tient of the hospital, the hospital would be expected to provide this service from its global operating budget (although the nonhospital-staffphysician would still be entitled to bill a professional fee). For diagnostic services provided outside hospitals, the professional and technicalcomponent are billed together.


prehensive approach to revenue generation wasthe establishment of the St. Michael’s HospitalHealth Centre in Toronto, a remarkable exampleof product line expansion (37). This free-standingbuilding was purchased by the hospital and at-tracted a variety of patient-service-related tenants(e.g., a family medical practice, a women’s healthclinic, a nutrition clinic).

❚ Allocation of Operating CostsThe largest single component of hospital operat-ing costs is salaries of hospital employees. For ex-ample, in Québec in 1991-92, employee salariesand benefits represented about 75 percent of totalhospital operating costs (30). Hospital employeesin most provinces are represented by a small num-ber of trade unions, and province-wide wages arenegotiated and often determined by arbitratorswho do not feel bound by hospitals’ ability to pay.Thus, for most Canadian hospitals, wage settle-ments are largely outside their control and must bedealt with in terms of staying within budget.Often, if a collective agreement runs over severalyears so that wage increases are known in ad-vance, ministries of health will make allowancefor at least part of this in their annual allotmentsto hospitals. For example, in a letter sent to allManitoba hospitals by that province’s responsibleassociate deputy minister in 1992 an explicit notewas made that the ministry’s allocations wouldfund salary increases in existing collective agree-ments (34). As discussed earlier, only hospital-based salaried physicians’ incomes are includedin hospital budgets.

Other major hospital cost items are pharmaceu-ticals and surgical supplies. In some provinces,bulk purchase arrangements are in place. Hospi-tals nationwide may enter into bulk purchasing ar-rangements and, in the past, have been able to takeadvantage of their purchasing power to negotiatereduced rates for pharmaceuticals. However, as aresult of recent federal legislation introduced in

response to pressure from the U.S. government(stimulated by U.S.-based multinational pharma-ceutical firms), the ability of such joint purchasearrangements to reduce pharmaceutical costs islikely to be severely undermined.

❚ Operating ExpendituresThe statistical picture of hospital expendituretrends in Canada mirrors the general evolutionarystory of hospital budgeting. In inflation-adjustedterms, hospital expenditures increased about 10percent annually during the 1960s under open-en-ded budgets; the rate of increase declined sharplyto just under 6 percent in the 1970s after the adop-tion of Canada’s universal medical care insuranceand the initiation of hospital global budgeting,and continued on down to an average of 4.6 per-cent annual growth in the more fiscally con-strained 1980s.16

As figure 2-1 shows, the effect of Canada’s in-creasingly constrained expenditure environmenthas been to stabilize and then reduce hospital out-lays as a share of national health expenditures(NHE). Although NHE has increased consider-ably as a share of gross domestic product (GDP)since 1956, much of this increase came in the peri-od prior to 1971, which was also characterized byrapid expansion in hospital capacity and generousline-by-line budgeting (6,18). Since then, how-ever, NHE as a share of GDP stabilized during the1970s and was stable again during the 1980s, fol-lowing a sharp increase early in that decade thatwas in part recession-induced. Hospital expendi-tures as a share of GDP reflect this overall pattern(figure 2-2).

The worsening economic situation in Canadain the early 1990s has placed hospital financingunder even greater strain. Although finalized na-tional data beyond 1991 were not yet available atthe time this chapter was written, they will almostcertainly show additional reductions in the rate ofhospital expenditure growth even while hospital

16 Hospital expenditure data for 1960 to 1970, 1970 to 1980, and 1980 to 1990 are from Health and Welfare Canada (25,26). The GDPimplicit price indexes used to construct real growth rates are from Department of Finance (16).


SOURCE: Health and Welfare Canada, National Health Expenditures inCanada (Ottawa: HWC, 1979; n.d., 1984); Health Canada, Policy andConsultation Branch, Health PoIicy Division, National Health Expendi-tures in Canada 1975-1993 (Ottawa: Health Canada, 1994).

expenditures as a share of GDP will have in-creased because of the severe effect of the reces-sion on Canada’s GDP growth. For example, infiscal year 1993-94, Ontario hospitals were told toexpect no increase in funding-a far cry from theheady 4-to 10-percent increases during the mid-1980s.

CAPITAL EXPENDITURES

■ Relationship of Operating and Capitalcosts

In general, equipment depreciation is handled inan ad hoc and relatively unsatisfactory manner inCanadian hospital accounts. Published depreci-ation expense figures are not reliable indicators ofthe underlying value of equipment or of the extentof consumption of the useful life of equipment inany year, and practices vary markedly amongprovinces. In many provinces capital depreciationis reimbursed through the operating side of hospi-tal accounts, but the actual funding that flows tohospitals for depreciation may have virtually

11

10” ‘ “ - - - - - - - - - - - - - - - - - - - - - - -f9 ‘ - - - - - - - - - - - - - - ” - - - - - - - -

National health expenditures8 - - - - - - - - - - - - - - - - - - - - - - - -

4 -“ -- - - - - - - - - - - ” - - - - - - - - - -Hospital expenditures

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

Year

SOURCE: R.D. Fraser, ‘(Vital Statistics and Health, ” Historical Statisticsof Canada, F.H. Leacy (cd.) (Ottawa: Statistics Canada with the SocialScience Federation of Canada, 1983),

nothing to do with either the useful life or the cur-rent replacement cost of the underlying equip-ment. For example, Manitoba “pays back” hospi-tals for equipment purchases over a 16-yearperiod, and this amount appears in the hospital’soperating budget. Yet the 16 years is an arbitrarypayback period unrelated to the useful life or re-placement cost of the equipment. No depreciationappears on the operating side of hospital accountsfor building depreciation. In some instances, theimpact of capital acquisitions on future operatingcosts is considered. For example, part of theequipment purchase approval process in Manito-ba involves seeking information from the hospitalon the predicted operating cost implications ofnew medical equipment. If the equipment is likelyto involve significant additional operating re-quirements, such as additional staff or mainte-nance contracts, it may be treated as a new pro-gram proposal and require more extensiveevaluation by Manitoba’s Ministry of Health.

There is an obvious reason for this seeminglack of any relationship between capital expendi-


tures and operating costs. Because most capitalcosts and operating expenses are covered by thesame provincial Ministry and the replacement ofobsolete equipment is also largely covered by aseparate pool of Ministry funds, there is no com-pelling reason on the hospital side to expend anysignificant energy in depreciation expense estima-tion, or on the Ministry side to earmark depreci-ation funds for hospitals. This leads rather natural-ly to a more detailed consideration of the mannerin which provincial ministries of health controlthe process of allocating funds for medical equip-ment and buildings.

❚ Financing Model and DeterminingCapital Requirements

As with hospital operating cost financing andfunds allocation, the details of capital fundingvary considerably across provinces (8,15,39). Yeteven more so than on the operating side, wherethere are some relatively new approaches beingdeveloped in some provinces, provincial specificsconcerning capital financing are probably less im-portant than the general story.

The first and perhaps most important piece ofthe story is that the same provincial health minis-try from which hospitals derive most of their oper-ating funds is also the major source of funding andthe control point for capital equipment purchasesand building construction. Although in manyprovinces hospitals or their communities are re-sponsible for some component (usually less than50 percent) of the funding for new construction ormajor new equipment, the final decision as towhether to build (or, in the case of equipment, tobuy) almost always rests with the ministry ofhealth. (Exceptions to this rule tend to be pur-chases of major diagnostic equipment fundedfrom private philanthropic sources, often withoutthe approval of the provincial ministry and with-out any guarantee that associated operating costswill be covered in future years’ budgets.)

Health ministries’ control over approvalsmeans that funding for hospital capital follows thesame type of process described above for operat-ing funds. The provincial ministry develops a cap-ital funding budget that is scrutinized and usuallymodified by the provincial treasury board or de-partment of finance before being returned to theministry as part of its annual budget request. How-ever, the process differs in two key respects fromthat associated with operating budgets. First, min-istries of health generally do not come close tofunding 100 percent of capital expenditures. Sec-ond, the determination of how the ministry’s capi-tal funds are allocated across competing hospitalprojects bears no relation to the process of allocat-ing operating funds. In fact, because most minis-tries only partially fund capital projects, evenprojects formally approved by the ministry can beinitiated only if the hospital or the community canraise the remaining funds. This generally meansthat:

. . . by design or default,. . . capital equipmentacquisition is based, not on objectively definedneeds but on the success of fund raising cam-paigns. Not only the nature of the equipment be-ing sought but numerous other factors such ashospital prominence, location, and overall pro-gram appeal can affect a hospital’s ability to at-tract public funds (8).

As for replacement of existing capital, particu-larly hospital buildings, very few provinces haveany long-range plans in place. Many of the coun-try’s hospitals were built during the health careconstruction boom of the 1950s and 1960s,17 andsome of the key institutions are much older thanthat. Such facilities will eventually need at least tobe upgraded. Because this represents the majorcomponent of future capital requirements, minis-tries of health are likely to become increasinglystingy with respect to new facilities or equipmentas the need to upgrade or replace existing physicalstructures becomes more pressing (42). British

17Between 1951 and 1971, the bed capacity of Canada’s hospitals doubled (6).


Columbia has recently attempted to amelioratethis situation by allowing hospitals with excessoperating funds to apply to the Ministry of Healthfor authorization to use such funds to purchaseequipment without invoking adjustments to theirbase operating budgets (24).

Most provinces have no formalized, long-termplan for the orderly replacement of capital, nor dothey appear to have any detailed and accurate ac-counting of capital inventory. Several provinceshave begun to move in this direction through theestablishment of multiyear planning and fundingapproval processes and by requiring that hospitalsreport regularly on all equipment purchased.Funding sources and approval processes vary con-siderably among provinces.

❚ Sources of Capital FundsFunding shares from ministries of health com-monly vary by the type of project (e.g., they areoften different for medical equipment and capitalconstruction) and by the type of hospital (e.g.,rates of ministry financing participation tend to behigher for provincial tertiary/teaching facilitiesthan for small community facilities). Yet althoughdescriptions can be found of the formal decision-making processes used by most provinces in de-termining levels of co-funding, there is much lessdocumentation on how decisions are reached as towhich projects receive ministry approval andwhich do not. A common allegation is that suchdecisions often have more to do with a communi-ty’s political persuasion or with the presence of aninfluential local politician or community memberthan with any provincial plan for capital replace-ment or expansion (see Smith [39]). Furthermore,the actual provincial level of cost sharing does notalways match the publicized formula. (Again, seeSmith [39], particularly for the description of theprocess in Ontario.)

Any equipment purchases in any province thatproceed without ministry approval (i.e., funds areraised privately) are not guaranteed the necessaryoperating funds. Provincial ministries frown onsuch purchases and may even penalize hospitalsthat proceed with them; nevertheless, they contin-

ue to occur. For example, Ontario hospitals tend topurchase equipment as part of the process of de-veloping claims for funding of new programs(31).

❚ Capital ExpendituresUnfortunately, published Canadian data do notprovide information on hospital capital expendi-tures. Although the official health expenditure sta-tistics (25) report a “capital” line item, it cannot beused reliably to ascertain hospital capital expendi-tures. To begin with, the capital expenditure dataare not restricted to hospitals. These figures in-clude construction, renovation, and equipmentcosts for all health care facilities. Because hospitalcapacity has grown at quite different rates andtimes than, for example, long-term care facilities,one cannot infer hospital capital expendituregrowth from aggregate capital expenditure in-creases. Furthermore, federal officials must esti-mate national hospital capital expenditures usingprovincial ministry expenditure data and the offi-cial provincial cost-sharing formulas. To the ex-tent that such formulas understate actual practice,the Health and Welfare Canada data understatecapital expenditures. Additionally, capital pur-chases made by hospitals without ministry ap-proval may not be included at all.

A sense of the relative importance of capitaland operating costs within provincial ministries’budgets can be gained by seeking such data direct-ly from each province, although these do not gen-erally distinguish between plant and equipment.For example, 1991-92 hospital capital expendi-tures by the British Columbia Ministry of Healthamounted to just under 4 percent of operatingcosts (before depreciation) (29). The equivalentfigure for Québec was slightly higher, between 5and 6 percent (30).

In general, provincial ministry expenditures oncapital are dwarfed by annual operating costs. Ofcourse, this does not mean that such expendituresare unimportant. Decisions on expenditures fornew capital create a stream of operating cost com-mitments that often last well beyond any account-ing evidence of the original capital purchase (7).


Ministries are increasingly requiring that requestsfor approval of capital expenditures make an “eco-nomic case,” especially for new capital purchases.That is, a case must be made that the new capitalwill either reduce operating costs by improvingtechnical efficiency or will lead to improvementsin patient outcomes sufficient to justify the expen-ditures. Yet there are very few situations in whichnew capital is expected to reduce operating costs,and even in cases where such cost reductions canbe identified, they rarely materialize in practice.As a result, ministries of health tend to be skepti-cal of such claims (2).

As for improving cost-effectiveness, hospitalequipment requests are often for “life-saving”equipment that has not been sufficiently evaluatedto make any such case (2). Provinces such as Qué-bec and British Columbia have recently estab-lished formal technology assessment capabilitiesto assist them in evaluating such requests. Mostprovinces rely on ad hoc technical advisory com-mittees to review the likely utilization of newequipment, the availability of clinical expertise,and where the most logical site(s) might be. Thenew technology assessment offices in Québec andBritish Columbia provide the means to bring ex-ternal evidence on effectiveness and efficiency tosuch internal committee processes.

❚ Provincial ExperiencesA more accurate account of capital financing re-quires a focus on specific provinces, as there isconsiderable variation in the mix of sources ofcapital funding and in the detailed processes fol-lowed for bringing capital projects on line. Ac-cordingly, the situations in British Columbia andManitoba are described in greater detail below.18

They are examples, respectively, of provinces inwhich ministry capital funding falls well short of100-percent financing, and provinces in which the

general rule is that capital projects (both equip-ment and capital construction or renovation) arefully funded by the provincial ministry of health.

British Columbia19

Hospital ConstructionHospital construction and renovation are guidedby a five-year rolling capital plan that must be ap-proved by the elected representatives responsiblefor the various provincial ministries (the Cabinet).This has several implications. It means that hospi-tal capital funding is approved by the highest pro-vincial government body, that capital expendi-tures are controlled by the same broad govern-mental process that dictates other budgetary al-locations to the Health Ministry, and thus that pro-vincial capital planning (such as it is) can be a vic-tim of political influence.

A hospital must submit a proposal to the HealthMinistry for consideration to have a project incor-porated within the five-year plan. In principle,hospitals are also required to gain the support oftheir regional hospital district before their propos-al can proceed. British Columbia is divided into29 official regional hospital districts (RHD),which are geographic areas used for a variety ofplanning purposes. The operating funds for theRHDs derive from local property taxation. Ap-proval of a project by a hospital’s RHD is particu-larly important in the largest urban district, wheremany institutions may concurrently be develop-ing major capital projects. (See Greater Vancouv-er Regional Hospital District [22] for more detailson the local approval process.) Regions complain,often bitterly, about the fact that they are expectedto contribute to projects financially, often quitesubstantially, yet at the same time do not havecommensurate influence or control over the proj-ect approval process, which is still dominated by

18Because decisions and sources of funds tend to vary at least with the value and type of equipment and the type of hospital, the interestedreader is encouraged to consult representatives of the individual provincial ministries for more detail. (For a relatively comprehensive picture ofthe situation in each province in 1987, see Smith [39]. However, capital funding is a dynamic process, and the details are constantly changing.)

19The material in this section borrows heavily from Barer and Evans (7).


the Ministry of Health. The Ministry considerseach request against competing priorities for hos-pital and other health care facility construction re-quests, bearing in mind projected regional needsfor beds of various types. The current Ministry tar-get is 2.75 beds per thousand population. Recentprovincial planning initiatives are intended tobring beds closer to the population distribution inthe province and to move beds away from tertiarycare settings whenever possible (11).

A successful proposal is returned to the origi-nating hospital with “approval in principle,” atwhich point funds are made available in the pro-vincial hospitals’ capital budget for the planningphase of the project. Also, funds are tentativelyearmarked for subsequent phases in the remainingyears within the five-year plan. The hospital mustthen develop a more detailed functional programand various physical design proposals.

With Ministry approval comes a commitmentof 60 percent of the costs of the project, includingthe cost of the land and servicing to the site.20 Thehospital must find the remaining funds from itsRHD and/or from other private sources, increas-ingly including its own hospital foundation. (Forexample, all the major urban teaching hospitals inVancouver have their own hospital foundationswhich are actively involved in soliciting fundsfrom the business sector and from individual do-nors on a continuing basis. One enterprising hos-pital runs a local lottery twice a year, offering anupscale condominium apartment as the carrot; itraises in excess of $500,000 from each lottery.)The exception to this rule is full ministry fundingof provincial tertiary care facilities (e.g., theprovincial Cancer Agency, parts of Children’sHospital).

Capital EquipmentA similar process is in place for medical equip-ment requests. Hospitals must submit “annual rol-

ling five-year equipment plans, with fairly de-tailed specifications for the first year” (24). Theplans consist of two parts, part one containingequipment associated with new programs orequipment costing in excess of $100,000 and parttwo containing all remaining capital items. Theyare reviewed by the hospital’s RHD before beingsubmitted to the Ministry. Items in part one mustgo through much the same sort of internal approv-al process as capital construction projects and 60percent of approved purchases are funded by theMinistry.

Each hospital receives an approved fundinglevel for items on the second part of the list; if thelist is approved, it is approved in its entirety. Oncea hospital receives approval, it is free to purchaseany item on its part two list until it has exhaustedpart two funding. The funding level for each hos-pital is determined on the basis of the hospital’ssize, role, and mix of beds, but again the Ministryfunds only 60 percent of that level (including coststo replace equipment). Hospitals are thus forced topare their own lists to stay within the availablecost-shared funding limit. Although hospitals arefree to make purchases from within their sub-mitted lists, actual purchases are audited for con-sistency with the hospital’s rolling five-yearequipment plans. Furthermore, hospitals may stillrequire more detailed approval of specific items ifthey wish to receive RHD funds (e.g., see GreaterVancouver Regional Hospital District [22]).

If new equipment is associated with a new ser-vice or facility, the hospital must also submit a re-quest for adjustment to its base operating budgetto take account of the expanded services andassociated operating costs. A hospital cannot ex-pect to receive support for increased operatingcosts for an unapproved capital acquisition.

Thus, funding for hospital capital generallyderives from British Columbia’s Ministry ofHealth (at least 60 percent of all approved pur-

20In practice the RHD is responsible for raising 100 percent of the funds, usually through the issuing of debentures. The Ministry then coversits share by contributing 60 percent of the costs of carrying the debentures and by paying down 60 percent of the value of the debentures toretirement. This entire process is coordinated by the Ministry through the Regional Hospital District Financing Act.


chases), regional hospital districts, or hospitals’own charitable foundations. There are rare occa-sions in which hospitals raise the funds for a majorequipment purchase and receive the required op-erating funds from the RHD. In an environment ofcontinued financial restraint, such innovativefunding arrangements may become more com-mon, as appears to be the case in Ontario (38). Al-though the Ministry is under no operating cost ob-ligation in such situations, it cannot prevent theprovision of services using the capital equipment.(If the operating funds are found within the hospi-tal’s approved operating budget, however, theMinistry can certainly scrutinize and adjust thebudget downward in future years.) Furthermore,private practitioners are allowed to bill the prov-ince’s medical services plan for the professionalcomponent of any fees (i.e., the physician’s por-tion of the charge) associated with the use of suchequipment as long as there is an appropriate feecode in the physicians’ fee schedule.

ManitobaThe capital financing processes in British Colum-bia and Manitoba are relatively similar, althoughthe financial involvement of the province in Man-itoba is far more substantial, and the dollar valueof equipment funding requiring detailed scrutinyin Manitoba is lower than in British Columbia.

Hospital ConstructionAs with British Columbia, the Manitoba Depart-ment of Health maintains a five-year capital planfor major construction or renovation projects, andprojects go through an approval process separatefrom the process of establishing annual operatingbudgets.21 In contrast to British Columbia, theprovince funds 100 percent of the costs of ap-proved projects. (However, the funding does notinclude the cost of serviced land, unapproved em-bellishments, space, or changes occurring afterproject tendering has been completed.) All capital

requirements for renovations, expansions, main-tenance, or fire and life safety upgrades are in-cluded in the five-year capital plan. The plan pro-vides borrowing authority and sets out repaymentrequirements and operating budget implicationsfor each capital project. Once a project is com-pleted, the approved operating costs are rolled intothe operating budget.

Each approved project receives separate fund-ing for design and construction. Larger hospitalshave planning departments that undertake the ear-ly design and planning work, and some projectsreceive some financial support from the Depart-ment of Health to support this early functionalplanning phase. The functional plan for each proj-ect arises from a “role statement” for the institu-tion. This statement is intended to ensure that cap-ital expenditure allocations are consistent with theoverarching strategic policy direction of the prov-ince’s health care system, which is currently at-tempting to align health care expenditures of alltypes more closely with health needs (33). Therole statement phase concludes with a project defi-nition that specifies the programs or services thatwill drive the remaining phases of the planningprocess for each capital project.

The phases of each approved project—func-tional planning, architectural design, and con-struction—each require approval, and the Depart-ment of Health is heavily involved in reviewingand approving the various stages within each ofthese phases. Once a functional program is ap-proved by the Department, the hospital is able toproceed with the design phase. At that point theDepartment provides interim borrowing author-ity, which the hospital can take to its chosen finan-cial institution. A “letter of comfort” can be pro-vided to a financial institution on request; itessentially assures the lending institution that theprovince stands behind the project.

Approval of architectural plans allows the hos-pital to seek competitive site preparation and

21In addition, the province can provide funding of up to $500,000 out of a contingency project fund. This fund is intended primarily forunanticipated major repairs or maintenance that the hospital is unable to cover from its operating funds.


construction bids (at least five are required). Bidsare reviewed by the facility and Department ofHealth staff, the lowest appropriate bid is chosen,and a tender price is fixed. The hospital generallyborrows the necessary funds up front; once a proj-ect is completed, the hospital converts the loaninto some form of long-term debt that is paid backby the province through contributions of principaland interest included in the hospital’s operatingbudget.

Capital EquipmentMajor medical equipment purchases are alsofunded largely by the Department of Health. Hos-pitals can purchase equipment from depreciationaccounts, other internal hospital funds (e.g.,through donations or fundraising), or approvedequipment loans. They are also allowed to pur-chase equipment that is an approved element of acapital project from project funds.

Hospitals periodically purchase unapprovedequipment, but the Department not only feels noobligation to fund the operating costs associatedwith such equipment, it can actually reduce a hos-pital’s operating budget if unapproved equipmentis used.

Manitoba remains more involved than doesBritish Columbia’s Ministry of Health in approv-ing relatively small equipment purchases. Smallrural hospitals are free to proceed with purchasesup to $5,000 without prior approval. The equiva-lent amount for large urban hospitals is $20,000.Any other proposed purchases must go throughthe Department’s capital approval process. Onceapproved, a hospital may proceed to solicit com-petitive bids and, after final approval of one ofthem, to purchase the equipment. The Departmentcovers the cost of the equipment by way ofstraight-line contributions to the hospital’s de-preciation fund for 16 years (regardless of the val-ue of the equipment or its likely useful life).

Because many hospitals have insufficientfunds in their depreciation accounts to cover nec-essary equipment replacement (in part because ofslow payback for some types of equipment thatquickly become obsolete, and in part because of

rapidly increasing prices for such equipment),Manitoba has established a separate “capitalequipment approved borrowing fund.” It equaledslightly more than $9 million in fiscal year1992-93 for a population of slightly over 1 mil-lion. This fund is intended to augment resourcesavailable from depreciation accounts and to sup-port new program initiatives. All hospitals cansubmit wish lists that are reviewed and prioritizedby Department staff. Some Manitoba hospitals areable to supplement their depreciation fundthrough private donations. Hospitals are also ableto move up to 20 percent of revenues generatedfrom non-Department sources (e.g., private roomcharges and parking fees) to their depreciationfund. Although hospitals are not supposed to dis-pose of equipment without Department approval,in practice this happens frequently, and these pro-ceeds also find their way into the depreciation ac-counts. Nevertheless, all prospective purchasesexceeding the levels noted above require Depart-ment of Health approval. The private sources offunding provide an important means for hospitalsto cope with a funding mechanism that is insensi-tive to useful life, price changes, and other factorsthat may leave depreciation fund balances belownecessary levels of funding for approved equip-ment purchases.

In the case of major new imaging equipment,the province has established a tiered structure ofimaging advisory committees, one for each typeof major equipment (e.g., CT, MRI, ultrasound).Each committee obtains input from representa-tives in each region and is responsible for makingrecommendations to the Department for equip-ment diffusion that will best meet the overall“needs” of the province’s population. The recom-mendations of these committees play an impor-tant role in the process of evaluating and approv-ing purchase requests from individual hospitals.

FUTURE DIRECTIONSThe major features of hospital financing in Cana-da have not changed appreciably in the past 20years. During that time all provinces moved fromprospective line-by-line budgeting of operating


costs to some form of prospective global budget-ing. Although efforts to improve the efficiency ofhospital operations and to make hospital capacitymore responsive to population health needs arebeginning to emerge, Canada has as yet seen onlyvery timid moves in these directions. For the mostpart, the allocation of operating funds amonginstitutions is dictated by historical happenstance,and more political energy is devoted to overall ex-penditure control than to attempts to realign theaggregate allocation of funds among provincialhospitals.

Hospital capital planning and funding still ap-pears quite chaotic in most provinces, being driv-en in large part not by an overall assessment ofneeds or the cost-effectiveness of alternative capi-tal configurations but rather by needs as definedby the staff and practitioners of institutions thatstand to be major beneficiaries of new capitalspending. Both British Columbia and Manitoba,however, are currently involved in major initia-tives to circumvent these past problems. In bothprovinces capital planning is now beginning to betied more closely to population movements, tak-ing into consideration alternative approaches todelivering services. This is expected to becomemore widespread over the next few years.

Despite relatively ad hoc capital and operatingcost financing, Canada has been fairly successfulin containing hospital expenditures over the past20 years, at least relative to the United States.Whether this relatively effective top-down bud-getary control can continue to survive is a largequestion. The race appears to be on, with prov-inces attempting to stay one step ahead of the pres-sures for rapid adoption of new, predominantlycost-expanding (and provider income-increasing)technological innovations. Provincial ministriesof health are developing new policies intended toresult in more appropriate placement of large seg-ments of traditional hospital populations. Theyshow every intention of becoming more ratherthan less stingy with hospital funding, even as thehospital sector raises alarm bells about waitinglists for high-technology interventions, decayingfacilities, and declining quality of care.

One outcome that seems relatively predictableis that private (and increasingly creative) sourcesof funding will become ever more important out-lets for hospitals, at least as means to raise fundsfor capital projects. Just how hospitals will fundassociated operating costs remains an interestingquestion. Yet human ingenuity knows no boundswhen there are incomes at stake, and the tempta-tion for ministries to cost-shift back to patients bygiving hospitals more rope may be overwhelming.Canada’s overall health care cost control recordwill stand or fall on the tenacity and perseveranceof its provincial ministries of health in dealingwith the issue of hospital financing.

REFERENCES1. Alberta Health, Acute Care Funding Plan

Newsletter, vols. 1 and 2 (Edmonton: AlbertaHealth, 1991).

2. Auditor General of British Columbia, Com-prehensive Audit of Hospital Programs (Vic-toria: Province of B.C. Legislative Assembly,1989).

3. Barer, M.L., Community Health Centres andHospital Costs in Ontario, Occasional Paper13 (Toronto: Ontario Economic Council,1981).

4. Barer, M.L., “Case Mix Adjustment in Hospi-tal Cost Analysis: Information Theory Revis-ited,” Journal of Health Economics 1:53-80,1982.

5. Barer, M.L. and Evans, R.G., “Hospital Costsover Time: Approaches to Price Deflation andOutput Standardization,” unpublished mi-meo, Vancouver, University of British Co-lumbia, Division of Health Services Researchand Development, 1980.

6. Barer, M.L. and Evans, R.G., “Riding Northon a South-Bound Horse? Expenditures,Prices, Utilization and Incomes in the Cana-dian Health Care System,” R.G. Evans andG.L. Stoddart (eds.) Medicare at Maturity:Achievements, Lessons and Challenges (Cal-gary: University of Calgary Press, 1986).

7. Barer, M.L. and Evans R.G., “Reflections onthe Financing of Hospital Capital: A Cana-


dian Perspective,” HPRU Paper 90:17D, Van-couver, Health Policy Research Unit, Divi-sion of Health Services Research and Devel-opment, University of British Columbia, 1990.

8. Bayne, L. and Walker, M., “Capital Equip-ment Acquisition: A Discussion Paper,” Van-couver, Stevenson Kellogg Ernst and Whin-ney, 1989.

9. Botz, C.K., “Principles for Funding on a CaseMix Basis: Construction of Case Weights(RIWs),” Healthcare Management Forum4(4):22-32, 1991.

10. British Columbia Ministry of Health, person-al communication, March 1993.

11. British Columbia, New Directions for aHealthy British Columbia, Ministry of Healthand Ministry Responsible for Seniors, 1993.

12. British Columbia Royal Commission onHealth Care and Costs, Closer to Home (Vic-toria: Crown Publications Inc., 1991).

13. Canadian Hospital Association, CanadianHospital Directory 1992-1993 (Ottawa: Ca-nadian Hospital Association, 1992).

14. Contandriopoulos, A.P., “Prospective Budg-eting of Hospital Costs and Related Mea-sures: the Evidence from the Canadian Prov-inces,” paper presented at InternationalSymposium 1988, controlling cost whilemaintaining health: the experience of Canada,the United States of America, and the FederalRepublic of Germany with alternate cost-con-tainment strategies, Bonn, June 27-28, 1988.

15. Deber, R.B., Thompson, G.G., and Leatt, P.,“Technology Acquisition in Canada: Controlin a Regulated Market,” International Jour-nal of Technology Assessment in Health Care4:185-206, 1988.

16. Department of Finance, Economic ReferenceTables (Ottawa, 1992).

17. Detsky, A.S., Stacey, S.R., and Bombardier,C., “The Effectiveness of a Regulatory Strate-gy in Containing Hospital Costs,” New Eng-land Journal of Medicine 309:151-159, 1983.

18. Evans, R.G., Strained Mercy: The Economicsof Canadian Health Care (Toronto: Butter-worths, 1984).

19. Evans, R.G. and Walker, H.D., “InformationTheory and the Analysis of Hospital CostStructure,” Canadian Journal of Economics5:398-418, 1972.

20. Fraser, R.D., “Vital Statistics and Health,”Historical Statistics of Canada, F.H. Leacy(ed.) (Ottawa: Statistics Canada with the So-cial Science Federation of Canada, 1983).

21. Glaser, W.A., Paying the Hospital: The Orga-nization, Dynamics, And Effects of DifferingFinancial Arrangements (San Francisco, CA:Jossey-Bass Publishers, 1987).

22. Greater Vancouver Regional Hospital Dis-trict, Fact Book 1993 (Vancouver: GVRHD,1993).

23. Greenaway-Coates, A., “Development of theHospital Performance Index,” technical briefprepared for the ACFP (Kingston: Case MixResearch, Queen’s University, 1990).

24. Haazen, D.S., “Redefining the Globe: RecentChanges in the Financing of British ColumbiaHospitals,” R. Deber and G. Thompson (eds.)Restructuring Canada’s Health Services Sys-tem: How Do We Get There from Here? (To-ronto: University of Toronto Press, 1992).

25. Health and Welfare Canada, National HealthExpenditures in Canada (Ottawa: HWC,1979; n.d., 1984).

26. Health and Welfare Canada, “Health Expen-ditures in Canada,” fact sheets, Ottawa,Policy, Planning and Information Branch,1992.

27. Health Canada, Policy and ConsultationBranch, Health Policy Division, NationalHealth Expenditures in Canada 1975-1993(Ottawa: Health Canada, 1994).

28. Jacobs, P., Hall, E.M., Lave, J.R., and Glen-dening, M., “Alberta’s Acute Care FundingProject,” Healthcare Management Forum5(3):4-11, 1992.

29. Kenny, S.R., personal communication, Jan.1993.

30. Lance, J.M., personal communication, Jan.1993.

31. Lave, J.R., Jacobs, P., and Markel, F., “Ontario’s Hospital Transitional Funding Ini-


tiative: An Overview and Assessment,”Healthcare Management Forum 4(4):3-11,1991.

32. Lave, J.R., Jacobs, P., and Markel, F., “Transi-tional Funding: Changing Ontario’s GlobalBudgeting System,” Health Care FinancingReview 13(3):77-84, 1992.

33. Manitoba Health, Quality Health for Manito-bans: The Action Plan (Winnipeg: ManitobaHealth, 1992a).

34. Manitoba Health, Letter from F. DeCock toBoard Chairs of all hospitals and health carefacilities, May 20, 1992b.

35. Pink, G.H., “Hospital Operating Funding inOntario, Canada,” paper prepared for theSymposium on Global Budgeting and HealthCare Financing in New York State, Albany,N.Y., Jan. 13, 1993.

36. Pink, G.H., personal communication, March1993.

37. Pink, G.H., Deber, R.B., Lavoie, J.N., and

Aserlind, E., “Innovative Fund Raising: TheSt. Michael’s Hospital Health Centre,” finalreport, project no. 6606-3989-HT, NationalHealth Research and Development Program,Health and Welfare Canada, 1989.

38. Pink, G.H., Deber, R.B., Lavoie, J.N., andAserlind, E., “Innovative Revenue Genera-tion,” Health Management Forum 12:33-41,1991.

39. Smith, K., Capital Funding of Canada’s Hos-pitals (Ottawa: Canadian Hospital Associa-tion, 1990).

40. Statistics Canada, Hospital Annual Statistics,Publication number 82,-003S, suppl. #20(formerly publication number 82-232) (Otta-wa: Statistics Canada, various years).

41. Taylor, M., Health Insurance and CanadianPublic Policy (Montreal: McGill-Queen’sUniversity Press, 1978).

42. Thompson, C., “Hospital Capital Funding inCanada,” Dimensions 65(8):15-18, 1988.

HospitalFinancing

in England 3by Alastair M. Gray and Charles Normand

ntroduced in 1948 by the Labor Party, Britain’s NationalHealth Service (NHS) is based on the principle that everyoneis entitled to any kind of medical treatment for any condition,free of charge. The NHS is not insurance-based but is funded

almost exclusively from general tax revenues. The aggregateNHS budget is fixed every year, based on the previous year’sbudget and adjusted for inflation estimates and the population’sestimated health care needs. The Department of Health allocatesthe aggregate NHS budget for hospital care to regional and dis-trict health authorities who, under the traditional system, were re-sponsible for providing and paying for hospital services; FamilyPractitioner Committees are responsible for providing primarycare for several district populations and receive funding directlyfrom the Department of Health. The third component of the NHSis the personal social services category. Local governments re-ceive payments from district health authorities to provide com-munity-based services, including nursing home care, home carefor the elderly, and other support services.

The United Kingdom’s centralized, mostly public, compre-hensive health care system was a pioneer of national health care.Currently, however, the NHS is undergoing an important programof reforms, principally announced in the government’s 1989White Paper entitled Working for Patients and enacted as legisla-tion in the NHS and Community Care Act of 1990 (7). The UnitedKingdom’s comprehensive health care reform program, based onconcepts of “managed competition,” will result in the most sig-nificant changes to the NHS since its creation more than 40 yearsago (10). The main elements of the reforms are as follows:■ the introduction of contractual funding designed to separate the

provider and purchasing roles for health services withinI 43


NHS to encourage efficiency through “man-aged competition” among both public and pri-vate providers, and

■ increased consumer choice of providers andservices.

These changes, which became effective April1, 1991, will substantially affect the way that hos-pitals conduct their business. Although the Britishgovernment will continue to play a key role inhealth care planning, financing, management, andlimiting of the aggregate amount of funds avail-able for health services, the distribution of thesefunds among regions and among hospitals maychange dramatically. The locus of hospital deci-sionmaking will also shift from local governmententities to individual hospital managers.

The NHS is currently divided into three distinctcomponents: one for hospital care (which includesinpatient and hospital outpatient care), one for pri-mary care, and the third for community/social ser-vices and long-term care. In the hospital sector,there are 14 regional health authorities (RHAs)that are each responsible for four to five millionpeople. Every RHA is divided into approximately15 district health authorities (DHAs), which areeach responsible for around 260,000 people and 4to 5 hospitals. The aggregate hospital sector has acash-limited budget that (even under the reforms)is allocated to the RHAs according to a formulathat takes into account the age and mortality ratesof the particular population it is to cover. In turn,RHA budgets are allocated to DHAs.

Previously, the responsibility for both the fund-ing and provision of hospital services rested withthe approximately 190 DHAs. The responsibilityfor strategic management and coordination of ser-vices resided with the higher administrative layerof the RHAs. However, under the reformed sys-tem, DHAs now have the central functions ofassessing the health of their resident population,

determining the population’s health care needs,and purchasing services appropriate to thoseneeds. 1 Thus, DHAs now mainly fund hospitalservices, while the provision of services is com-petitively determined. The nature of the reformsas they affect the hospital sector are described inmore detail in the rest of this chapter.

STRUCTURE OF THE HOSPITAL SECTORThe public (NHS) and independent (private vol-untary and for-profit) hospital sectors coexist inEngland. In 1990, there were approximately115,000 acute care beds available in NHS publichospitals, comprising almost nine-tenths of allavailable acute care beds. Prior to the reforms,public hospitals were both owned and operated byDHAs; however, the structure of the public hospi-tal sector was changed substantially by the re-forms. DHAs may continue to manage hospitalsas directly managed units (DMUs), but NHS hos-pitals are encouraged to become self-managingNHS Trusts independent of the DHAs.

The first wave of NHS Trusts, involving 57hospitals and units, became operational on April1, 1991, and a further 99 hospitals and units be-came Trusts on April 1, 1992. Following the thirdwave, which became operational on April 1,1993,approximately two-thirds of NHS hospital pro-vider units in England are estimated to have Truststatus. 2

In the future, NHS Trusts will compete withprivate providers of hospital services by negotiat-ing contracts or service agreements with DHAs.(Currently, such contracts include both hospitaloutpatient and inpatient services; however, in thefuture, separate contracts for inpatient and ambu-latory care may be negotiated). DHAs will pur-chase care from NHS hospitals, private hospitals,or the self-governing Trusts. The Trusts will also

1 A number of DHAs have entered into formal or informal agreements with other DHAs to jointly negotiate contracts and purchase services,which has resulted in approximately 80 to 90 purchasers within the NHS.

2 As of April 1995, all but a few percent of hospital provider units have Trust status.

Chapter 3 Hospital Financing in England 145

be able to contract with general practitioners toprovide hospital services to their patients, as wellas with other self-governing hospitals and privateinsurers (10).

The entire population, both publicly and pri-vately insured, is entitled to treatment in NHShospitals. Inpatient access for nonemergency careis mainly through referral from a general practitio-ner. In principle, access is based on need and is ra-tioned in part through waiting lists for consulta-tions and treatment.

The independent sector plays a relatively smallrole in England’s hospital sector, with 10,906 bedsin acute care medical and surgical hospitals (8.7percent of total acute care beds). In addition,approximately 3,000 beds within NHS hospitalsare authorized as “pay beds” for the treatment ofprivate patients. (These beds have only about a 30percent average rate of occupancy by private pa-tients.) Private ownership of hospital facilities, al-though small now, is increasingly playing a largerpart in the British system. Between 1978 and1988, the number of beds in private hospitals in-creased by 50 percent ( 10). Traditionally, most in-dependent hospitals have been nonprofit. The re-cent expansion in private beds, however, has beenalmost entirely in for-profit hospitals, most ofwhich are subsidiaries of U.S. companies. Privatemedical care plays an essentially complementaryrole to NHS services, offering a choice of physi-cians, avoidance of waiting periods for electivesurgery, and higher standards of comfort and pri-vacy than the NHS (16).

Access to private hospitals depends on the pa-tient’s ability to pay through private insurance orout-of-pocket. Most of the private sector’s case-load is limited to elective surgery (e.g., hernia re-pair, varicose vein surgery). A 1986 survey indi-cated that private patients accounted for 16.7percent of elective surgery in England and Wales,with the proportion varying considerably amongregions.

The public and independent hospital sectors inEngland coexist and are also interrelated in sever-al ways:

Most private hospital services are delivered byNHS consultants, who are hospital-based se-nior specialists. All full-time NHS consultantsare permitted to earn up to 10 percent of theirgross income from private practice. Consul-tants can also enter into contracts with the NHSthat enable them to devote a greater proportionof their time to private practice. Approximately12,000 of the 15,170 consultant-grade staff inNHS hospitals undertake some private prac-tice.As noted previously, some private treatment iscarried out in NHS hospitals through NHS paybeds. In 1989, the NHS earned 99 million poundsfrom private treatment.3 This amount may in-crease in the future, since the requirement toobtain authorization from the Secretary of Statefor Health for pay beds was removed in the1990 health reform legislation.The NHS and private sectors are allowed to en-ter into partnerships. For example, a privatepartner might be given a lease on an NHS siteto undertake a capital investment or might begiven a contract to manage an NHS facility.Only a few such arrangements exist at present.NHS patients may be treated in private hospi-tals if their purchasing authority agrees to payfor treatment, although the volume of suchcases is currently low.

PHYSICIANSIn 1990 there were 15,170 senior hospital doctors(consultants) in England and 32,848 other hospi-tal medical staff. Hospital consultants have thechoice of taking a full-time or part-time positionwith the NHS. If they choose part-time, they areallowed to perform as many private sector ser-vices as they like. If they choose full-time, how-

3 The exchange rate in January 1994 was approximately $U.S. 1.48 to l.00 pound.


ever, their private practice is limited to 10 percentof their NHS salary (10).

Hospital doctors are paid for the delivery ofhospital services through nationally negotiatedsalary scales. 4 Since 1960, salaries have beenbased on the annual report of the independent Re-view Body on Doctors’ and Dentists’ Remunera-tion, which takes evidence from medical and den-tal representatives, the Department of Health, andother interested parties. The Review Body’s rec-ommendations are subject to governmental ap-proval; they have never been rejected, althoughthey have been deferred or modified.

All consultants are also eligible to obtain dis-tinction awards that supplement their basic sala-ries. The number and value of awards is fixed bythe Review Body; recommendations concerningdistinction awards come primarily from the medi-cal profession. Approximately one-third of allhospital consultants hold a distinction award. Asnoted earlier, consultants may also obtain con-tracts that allow them to devote part of their timeto private practice.

Consultants’ contracts are held by regionalhealth authorities, which also administer the pay-ment of distinction awards. Other hospital medi-cal staff are employed by district health authoritiesor DMUs, or, if they work in an NHS Trust, by theTrust.

Following the NHS reforms, hospitals can alterthe pay and conditions of the staff they employ, in-cluding the medical staff. There is little evidenceso far, however, that hospitals have deviated toany great extent from national salary scales, al-though many Trust hospitals are currently makingplans to do so. Little change is expected before1995.

Very few medical staff work on a full-time basisin private hospitals. Most physicians are NHSconsultants who devote part of their time to pri-vate practice. Medical staff in the private sectorare predominantly paid on a fee-for-service basis.There are no statutory controls on fee levels, al-

though the British Medical Association recom-mends fee scales, and some insurers will reim-burse patients for fees only up to a certain amount.The basis for setting fees is the subject of a currentinvestigation by the Monopolies and MergersCommission, which is concerned that there is toolittle price competition for private medical ser-vices.

General practitioners (GPs) working in thecommunity are self-employed. They contract withthe NHS to provide services to NHS patients.Each British citizen enrolls with a GP, who is thepatient’s first point of contact with the health sys-tem. GPs determine when a patient will see a hos-pital-based consultant. They are paid under amixed payment system with four elements:

annual cavitation payments for each patient onthe GP’s list, weighted according to age;fees for some services (e.g., treating temporaryresidents or making night visits);a basic practice allowance to cover practice ex-penses; andpayments for attaining certain targets, such ascervical screening or infant immunization rates.

The recent health reforms also introduced somemajor changes to GP practices. Because generalpractitioners are the main source of nonemergen-cy referrals to NHS hospitals, reforms to theframework within which general practitionerswork also affect hospitals. Under the reforms,larger GP practices have been given the option tobecome “fundholding” practices. These practicesare allocated funds per enrolled citizen by their re-spective RHA to purchase nonemergency hospitalservices and community health services for theirpatients. They can purchase hospital services frompublic or private hospitals, which compete for thepatients of these GPs. In theory, money followspatients to the most efficient providers of care.

In turn, because GPs receive more money foreach additional patient they sign up, they will be

4 The pay of junior hospital doctors is determined primarily by national salary scales, supplemented in most posts by payments related to

their hours of employment above a standard working week.


encouraged to compete for patients. GP fundhold-ing aims to bring the purchasing of health servicescloser to the patient, with the GP negotiating con-tracts with providers based on the needs of pa-tients. GP fundholding also aims to make GPsmore conscious of the cost of services and to putpressure on providers to increase efficiency. It isalso hoped that GPs will provide more servicesthemselves, better coordinate services provided topatients, and reduce referrals of straightforwardcases to hospitals.

The first wave of 306 GP fundholding prac-tices, covering approximately 7.5 percent of thepopulation, became operational on April 1, 1991.The number of GPs choosing to become fund-holders has increased steadily, and perhaps 40 per-cent of England’s population is now enrolled (1 1).Yet because only a limited range of treatments isfinanced through the fundholding scheme, mostservices are still purchased by DHAs, even for thepatients of fundholding GPs.

HM Treasury

Department of Health

Regional Health Authority

District Health Authority

I Hospital IHOSPITAL OPERATING COSTS

SOURCE: A. Gray and C. Normand, 1994

❚ Financing ModelThe prevailing approach to financing hospital op-erating expenses in England has been via the Na-tional Health Service. The NHS is funded primari-ly through general tax revenues allocated to it aspart of the central government’s expenditure plansfor its entire budget. NHS-owned (public) hospi-tals are funded mainly through NHS payments.The recent reforms make no changes to the basicflow of funds from the central government to hos-pitals, which follows the route shown in figure3-1. However, the reforms affect the relationshipbetween the NHS and hospitals. Following there-forms, funds move from a district health authorityto a hospital on the basis of contracts for servicesrather than as direct funding. This process is de-scribed in further detail below.

Nationally, the Department of Health repre-sents the NHS in an annual process by which thecentral government makes its expenditure plansfor the following three years. All major spendingdepartments and the Treasury are involved.

Spending plans are published each January in agovernment White Paper on public expendituresentitled The Government’s Expenditure Plans.The plans set forth total cash limits for each mainspending program. For the NHS, the main pro-grams are hospital and community health services(HCHS) and Family Health Services, which in-clude primary care provided by general practitio-ners, dentists, opticians, and pharmacists. (Hospi-tal and community health services include homenursing and ambulance services [16]). Separatecash limits are established for operating expendi-tures and capital expenditures.

The Department of Health divides its cash al-location among the 14 RHAs on the basis of an al-location formula. The formula is based on eachRHA’s population, weighted for age and morbid-ity, measured in terms of standardized mortalityratios. An RHA’s block allocation covers mostareas of service provision, but some specific ser-vices (e.g., research, teaching, the prevention and


treatment of HIV and AIDS) are funded separatelyby means of other allocation formulas. RHAs thendistribute most of their allocations to the 190DHAs, retaining a small proportion for spendingat the regional level. Prior to the reforms, DHAswere allocated resources primarily on the basis ofthe hospital services they provided, with some ad-justments to allow for flows of patients acrossDHA boundaries. Following the reforms, DHAshave been funded on the basis of their population,similar to the RHA formula, weighted for age dis-tributions and morbidity patterns.

Although the initial allocation to the Depart-ment of Health limits the aggregate amount ofmoney available to fund hospital and communityhealth services, there is no formal guidance as tothe exact proportion that each RHA should devoteto hospital services from its cash allocation. Simi-larly, DHAs have freedom in dividing their blockallocation among different types of health ser-vices. This process determines an aggregateamount available for hospital services, and pur-chasers (e.g., DHAs) are constrained to stay with-in their total allocation. The cash-limited systemat the national level ensures that it is not possibleto exceed aggregate expenditure limits.

Prior to the United Kingdom’s recent health re-forms, hospitals received global budgets basedmainly on historical costs (16). Following the re-forms, however, the operating costs of an individ-ual NHS hospital—be it a Trust or a directly man-aged unit—have been determined by the contractsit negotiates with purchasers for specific services.In other words, there are no longer prospectivelyfixed budgets for individual hospitals. Under thereformed system, it is anticipated that hospitalsthat are successful in making contracts with pur-chasers will expand and that hospitals that fail to

make or maintain contracts with purchasers willreduce their capacity or close.

Private hospitals, consisting of independenthospitals and hospitals owned by private healthinsurers, are currently funded primarily throughprivate health insurance payments. The NHS re-forms envisage that the NHS and private sectorswill become more interrelated, with private hospi-tals competing with NHS Trusts and directly man-aged NHS hospitals for contracts from purchasers.

❚ Sources of FundingNHS hospital services are financed mainlythrough general tax revenues and through a por-tion of national insurance contributions. In the1990-91 fiscal year, 94.1 percent of total revenuescame from those sources, with general taxation(from the Consolidated Fund) contributing 79.2percent and the NHS element of national insur-ance contributions accounting for 14.9 percent.The remaining 5.9 percent of NHS hospital reve-nues came from charges to patients for specificcourses of treatment, appliances, amenity beds,and other private charges (4.2 percent), along withmiscellaneous income (1.7 percent) mainly fromthe sale of capital assets (e.g., land).

Prior to the reforms, hospitals funded their op-erating costs through prospectively determinedbudgets established by their respective DHA. Un-der the reformed health system, the operatingcosts of NHS Trusts and DMUs are financed viacontracts with public and private purchasers.Trust hospitals have a statutory duty to operatewithin the income they obtain from these con-tracts; DHAs have the same duty with respect toother NHS hospitals.5 Contracts may be of threedifferent types: block, cost and volume, and costper case, as described below:

5 A system of financial audit ensures that expenditures accord with contracts and rules. Trusts are obliged to submit audited accounts annual-ly at a public meeting. External audit of NHS expenditures is the responsibility of the Audit Commission, an independent body funded by auditfees, which appoints auditors to examine the accounts and financial systems of purchaser and provider units in the NHS. In extreme circum-stances the Secretary of State for Health has the authority to appoint commissioners to take over the running of any unit within the NHS that is inbreach of cash limits or contracts, but there are no recorded instances of this.


With block contracts, the purchasing health au-thority pays an annual amount in installmentsto the providing hospital unit for access to aspecified set and volume of services, especiallyfor urgent and emergency cases requiring im-mediate treatment.With cost and volume contracts, purchasers paya providing hospital a fixed sum for a baselinenumber of treatment episodes or cases, thusgiving the purchaser some security; any addi-tional cases treated are paid for on a cost-per-case basis.With cost-per-case contracts, purchasers pay aspecified price for a particular case. These con-tracts occur most frequently when a purchaserdoes not have routine contact with a particularhospital; such cases are called extra contractualreferrals (ECRs).

Approximately 80 percent of private revenuesfor acute care hospital services comes from pri-vate insurance, mainly through fee-for-servicepayments. Private insurers covered about 12.5percent of the United Kingdom’s population in1991; the remaining 20 percent of revenues comesfrom direct patient payments. (Private hospitalrevenues from contracts to treat NHS patients areat present very small.)

❚ Bulk Purchases of Pharmaceuticals andSupplies

Before the NHS reforms, most regional health au-thorities had established regional distribution cen-ters that purchased pharmaceuticals and supplieson behalf of district health authorities. In October1991, a new NHS Supplies Agency was estab-lished that assumed national responsibility forNHS supplies. All regional supplies staff havebeen transferred to this agency, which is struc-tured around six geographical divisions. Purchas-ing is intended to occur through the best priced lo-cal source except where bulk purchasing has thepotential to realize major savings. (The previousmore centralized system was criticized becauseroutine items were often available locally at lowerprices, but hospitals could not take advantage of

the lower prices because they were required to buyfrom the regionally centralized system.)

A national purchasing unit within the NHSSupplies Agency is responsible for developingand maintaining a limited list of products thatshould be purchased only via national NHS con-tracts. Typical products covered by national con-tracts include surgical gloves, batteries, and medi-cal gases. The NHS Supplies Agency oftennegotiates a national unit price for such products,and the provider units draw off supplies under thiscentral contract rather than receiving them via theAgency; therefore, it is not possible to estimate ac-curately the volume of pharmaceuticals and othersupplies covered by bulk contracts.

❚ Operating ExpendituresThe 1989-90 fiscal year is the most recent year forwhich accurate data on NHS acute care hospitaloperating expenditures are available. Operatingexpenditures for NHS acute hospital services to-taled S6,112 million in that year(8). This is equiv-alent to 42.8 percent of the NHS’s operating ex-penditures for all hospital care, 28.9 percent oftotal NHS expenditures (which equaled 21,102million pounds in the 1989-90 year), and 1.2 percent ofGDP (which equaled 511,413 million pounds in currentmarket prices in calendar year 1989) (l). Hospitalexpenditures rose by about 19 percent between the1989-90 and 1991-92 periods in nominal terms(i.e., not adjusted for general inflation), and by 2.5percent in real terms (i.e., after adjustment forinflation) (15).

Expenditures for private sector, acute care hos-pital services in the United Kingdom were esti-mated at l,217 million pounds in 1989 (12). This figureincludes expenditures for independent, psychiat-ric, and substance dependency hospitals. Exclud-ing the latter group, this is equivalent to approxi-mately 90 percent of all private sector hospitalexpenditures, 45.6 percent of all private sectorhospital and residential home expenditures, and18.6 percent of total private sector health expendi-tures using abroad definition that includes privatehospital and residential care, clinics, alternative


medicine, and nonprescription medicines. Privatesector, acute care hospital expenditures in 1989were equivalent to 0.2 percent of GDP.

Hospital-based doctors’ remuneration is in-cluded in estimates of U.K. hospital expenditures.In the 1989-90 fiscal year, the salaries and wagesof all medical staff employed by regional and dis-trict health authorities (in NHS hospitals of alltypes) was 1,437 million pounds. (No breakdown of ex-penditures for medical staff is available by type ofhospital.) This equaled 11.3 percent of hospitalexpenditures, 6.8 percent of total health expendi-tures, and 0.28 percent of GDP.

HOSPITAL CAPITAL COSTS

❚ Relationship of Operating and Capitalcosts

Prior to the recent NHS reforms, depreciation andthe opportunity costs of using capital assets werenot explicitly accounted for in NHS accounts.Most of the facilities used to provide hospital ser-vices were owned and operated by the NHS. Norent for the use of facilities or capital was paid, andthe opportunity costs of using the capital were notcalculated. Capital was considered an expenseonly in terms of the costs initially incurred to buythe capital; the NHS’s cost of using its money topurchase hospital capital instead of paying forother services or supplies was not considered. Inplanning health services, there was no incentiveeither to use existing capital resources efficientlyor to dispose of the surplus. The goal of reformingcapital financing was to introduce such incentives.

Beginning on April 1,1991, schemes for charg-ing for hospitals’ use of capital assets are beingintroduced gradually.6 In the early stages theintroduction of capital charges has been simply abookkeeping exercise. Contracts with purchasersof hospital services include a charge for the use ofcapital, which is taken from the hospital. Real in-centives to use capital efficiently are likely to be

introduced shortly; hospitals using buildings andequipment more efficiently will be able to chargelower prices to purchasers of hospital services andobtain more contracts.

Directly managed units must reflect the cost ofusing assets in capital charges, which consist ofdepreciation and an interest charge representing arate of return on the current value of assets. De-preciation is not provided for land assets. The rateof return on the value of assets is set by the Trea-sury, currently at 6 percent. Interest charges areapplied to land and other assets used to providehealth care services.

NHS Trusts do not pay capital charges as such;however, they are required to provide for depreci-ation on the same basis as DMUs. They must alsosatisfy an annual target rate of return on the currentvalue of their assets, which is set at 6 percent sothat contract prices for the purchase of hospitalservices are not distorted between Trusts andDMUs.

The cash flows generated by capital chargesand Trust capital provisions typically do not leavethe NHS. The goal is to levy from hospitals de-preciation costs and the opportunity cost of fundstied up in hospital capital stock so that more accu-rate price signals are conveyed to purchasers andproviders. The rather complicated accountingmechanism also aims to create a level playingfield for providers within the public sector and be-tween the public and private sectors, giving equalopportunities for all types of hospitals to win con-tracts.

❚ Financing Model and Source of FundingNHS hospital capital expenditures are currentlyfunded in the same way as NHS operating expen-ditures: from general tax revenues, the NHS com-ponent of national insurance contributions, andincome from NHS service charges and other mis-cellaneous sources. Aggregate capital and operat-ing budgets are subject to separate negotiations in

6 Capital assets are defined as buildings, land, or equipment valued in excess of l ,000 pounds. Beginning on April 1, 1993, this threshold wasraised to 5,000 pounds.

9a&Mm


the annual public expenditure system. The De-partment of Health and the Treasury are the mainparties to the negotiations.

Once an aggregate capital expenditure limit hasbeen agreed upon, the Department of Health allo-cates it to the RHAs according to a formula similarto that governing allocations of operating funds,based on the size, age, and health distributions ofthe resident population. RHAs then allocate capi-tal resources to the DHAs. DHAs directly controlcapital expenditures associated with minor build-ing projects, but RHAs control major capitalschemes, such as the construction of new hospitals.

As the NHS reforms are implemented, how-ever, hospitals will increasingly be allowed togenerate their own capital funds, which will thenaccount for a larger proportion of total capitalspending. Hospitals will also have more controlover their capital investment plans. Purchaserswill not influence the pattern of capital investmentdirectly but rather indirectly through the servicesfor which they contract.

❚ Determining Capital RequirementsThe process of capital investment is detailed in thecodes of practice prepared by the Department ofHealth. These codes specify procedures for plan-ning, option appraisal, tendering, project manage-ment, and financial control. They also specify pro-cedures for the sale and resale of plant, equipment,and other capital assets. Policies for projects car-ried out over several years are no different in prin-ciple from those governing single-year projects.Once an investment appraisal has been undertakenand a capital expenditure plan is produced by thehospital, and once any necessary authorizationfrom the RHA, NHS management executive, and/or Treasury has been obtained, the capital require-ments of the project are incorporated into the hos-pital’s current and future plans. In the case ofmultiyear projects, it is likely that capital require-ments will have first claim on the capital budgetonce the project is under way.

DMUs are not allowed to raise private funds forthe purchase of building capital or equipment, al-

though they may accept donations of equipment(e.g., equipment purchased by a charity). Charit-ably donated assets need not be included in thecapital charging procedure.

NHS Trusts are allowed to finance their capitalrequirements from internally generated income,including contract income and income from thesales of assets, and from external borrowing. Ex-ternal borrowing is subject to external financinglimits (EFLs), which are cash limits set by the De-partment of Health following negotiations withthe Treasury. An EFL is set globally and for eachTrust and may be positive (i.e., the allowable capi-tal spending limit is in excess of the Trust’s inter-nally generated capital funds), neutral, or negative(i.e., the allowable agreed capital spending limit isless than internally generated capital funds). Trusthospitals are required to provide evidence thatthey are likely to win enough purchasing contractsto cover the costs of major capital schemes.

All capital investment projects by NHS Trustsor DMUs will continue to require external autho-rization under the reformed health system if theyexceed certain limits. At present, a Trust must ob-tain approval from a regional office of the NHSmanagement executive for any capital project inexcess of 1 million pounds, approval from the nationaloffice of the NHS management executive for anycapital project in excess of 10 million pounds, and ap-proval from the Treasury for any project in excessof 15 million pounds. In addition, RHAs have their ownlimits above which national authorization is re-quired, varying from approximately pounds 1 to 5 mil-lion.

Private sector hospital investment in land,buildings, or equipment is not subject to govern-ment control. No mechanism exists to preventreplications of the provision of services or equip-ment by the public and private sectors. Contract-ing between these sectors for services is encour-aged by the purchaser/provider split introduced inthe NHS reforms. In addition, public and privatesectors may enter into formal partnerships involv-ing capital schemes, leases, or shared access tocapital.


❚ Capital ExpendituresIn the 1989-90 fiscal year, total capital expendi-tures for all hospital and community health ser-vices equaled l,299 million pounds.7 The Department ofHealth suggests that it would not be unreasonableto assume that this was apportioned roughly inline with the breakdown of operating expendi-tures. This would suggest that acute care hospitalcapital expenditures totaled 556 million pounds, equiva-lent to 4.28 percent of total hospital expenditures,2.6 percent of national health expenditures, and0.11 percent of GDP.

Of the aggregate capital expenditures for hospi-tal and community health services in 1989-90,58percent was for buildings and engineering works,2.5 percent for vehicles, 12.1 percent for equipmentand furniture, and 27.4 percent for other items.

Aggregate capital spending is controlled by thenationally cash-limited system and by internaland external auditing, similar to operating expen-ditures. Historically, capital funds have been par-ticularly subject to modification in light of pre-vailing macroeconomic and political factors. Forinstance, capital funds ran at very low levels in the1950s and fell substantially during the later 1970s,causing the House of Commons Public Expendi-ture Committee to express concern at the overallbalance between capital and operating funds.

HOSPITAL INDICATORS AND TRENDSIn fiscal year 1990-91 there were approximately115,000 acute care beds available in the NHS pro-viding 5.8 million inpatient episodes. The averagelength of stay was 6.3 days, lower than in theUnited States, and the average occupancy rate ofhospitals was quite high (at least as compared withthe United States) at 87 percent. NHS acute carehospitals dealt with 1.2 million day cases, 7.5 mil-lion new outpatient visits, and 11.2 million acci-dent and emergency visits.

In the private sector, there was a total of 10,906beds in acute care medical and surgical hospitalsin 1990. The average occupancy rate was lower

than in NHS hospitals and more closely matchedthe average occupancy rate of U.S. hospitals atapproximately 60 percent. The average rate of oc-cupancy of the 3,000 pay beds within NHS hospi-tals by private patients is about 30 percent.

FUTURE DIRECTIONSThe greatest achievement of the NHS has prob-ably been to provide universal access to medicalcare, mainly based on need, at a low cost ascompared with other OECD countries. This hasbeen achieved at a price, however, in terms ofsome poor facilities, delay in obtaining access tononemergency care, and some political unpopu-larity.

Control over health service expenditurescomes from the nearly complete cash limitationsof the system and various controls on access (inparticular, gatekeeping practices by general prac-titioners). The NHS experience suggests thatavoidance of rapid growth in health care costs re-quires overall control of budgets. It also may helpto have a large share of services provided by pro-fessionals paid salaries or via cavitation. It is inter-esting that the NHS reforms did not change thesefeatures, which are often associated with effectivecost containment. Competition between providersmay lead to greater efficiency and lower costs, butthere is no evidence yet that this has occurred.

The extensive review of Britain’s NationalHealth Service and the resulting reforms followeda heated public debate about the level of fundingfor health care. No significant change was made,however, to the main source of funds, and no addi-tional spending was introduced as a direct result ofthe reforms. Instead, the reforms primarily re-structured the internal configuration of the Britishhealth system by introducing “internal markets”for health care services.

The main elements of these reforms affectinghospitals include the following:

■ the introduction of contractual funding thatseparated the provider and purchasing roles for

7 No information on capital expenditures is available by type of hospital.


health services within the NHS, designed to en-courage efficiency through “managed competi-tion” among providers;the introduction of GP fundholding practicesdesigned to increase the efficiency and qualityof care;the ability of purchasers, especially DHAs, tochoose from a wide range of providers, therebyenhancing competition and consumer choice;anda broader accounting of capital costs to encour-age hospitals to use capital more efficiently.

It is difficult at this early stage to evaluate thechanges in detail, as many are in the early stages ofimplementation and data are scarce. In addition,the government has done little to encourage sys-tematic evaluation of the reforms. There are rea-sons to expect some important benefits from thechanges, however. Introducing an awareness ofcapital costs is likely to improve the efficiencywith which assets are used. Separating purchasersfrom providers potentially allows health authori-ties to concentrate on the health care needs of theirpopulations instead of simply on running facili-ties. However, the small amount of available evi-dence shows little progress in purchasing forhealth gain (i.e., purchasing packages of healthservices that have been or can be shown to maxi-mize effects on the population’s health), and pat-terns of service delivery still largely reflect histor-ical patterns.

The early experience with Trust hospitals hasbeen mixed. Financial controls have sometimesbeen inadequate, and it is not yet clear what willhappen if Trusts fail to generate sufficient incometo stay in business. There is some evidence of im-proved efficiency in the provision of services byTrust hospitals, but also some evidence that mea-sured improvements largely reflect changes in therecording of work rather than in the actual vol-umes of services delivered. The need for a goodsystem of workload classification of has becomeapparent.

The health reforms appear to have led to an in-crease in the costs of managing the NHS, althoughno accurate data on this phenomenon exist. It canbe argued that the pre-reform NHS devoted inade-quate resources to management and that possibleincreases can be justified on the grounds of moreefficient services. It is not yet clear, however,whether the additional costs of administration canbe justified.

The reforms have re-ignited the debate on equi-ty and access to care. Patients whose GP is a fund-holder have apparently been able to obtain morerapid access to services at the expense of other pa-tients. There is little doubt that some unequal ac-cess has resulted. Yet the move to funding popula-tions according to their size, age, sex distributions,and morbidity patterns is moving resources awayfrom historically overfunded regions and districtsand toward those that have been underfunded.

The process of setting priorities for access tohealth care is increasingly visible following thereforms. Purchasers have a duty to buy services tomeet the needs of their communities to the great-est extent possible. This has helped reveal the pau-city of evidence available on health care needs,and some of the more visible signs of rationinghave been controversial. Any system of healthcare that gives access to all, free or nearly free atthe point of use, and that aims to control overallexpenditures, needs explicit rationing for someservices.

Overall, the NHS reforms attempt to increaseaccountability, introduce certain market incen-tives, and increase efficiency and patient choice. Itis perhaps more interesting to note the features ofthe former system that have not been changed thanthose that have been reformed. General revenue fi-nancing of health care, free and universal access toservices, and a range of cost-controlling featureshave been maintained in the United Kingdom’scurrent health care system.


REFERENCES1. Central Statistical Office, Annual Abstract

of Statistics (London: HMSO, 1992).2. Department of Health, NHS Consultants:

Appointments, Contracts and DistinctionAwards, Working Paper No. 7, Working forPatients (London: HMSO, 1989).

3. Department of Health, Capital Charges,Working Paper No. 5, Working for Pa-tients (London: HMSO, 1989).

4. Department of Health, Funding and Con-tracts for Hospital Service, Working Pa-per No. 2, Working for Patients (London:HMSO, 1989).

5. Department of Health, Practice Budgetsfor General Medical Practitioners, Work-ing Paper No. 3, Working for Patients(London: HMSO, 1989).

6. Department of Health, Self-GoverningHospitals, Working Paper No. 1, Workingfor Patients (London: HMSO, 1989).

7. Department of Health, Working for Pa-tients, Cm 555 (London: HMSO, 1989).

8. Department of Health, The Government’sExpenditure Plans, 1992-93 to 1994-95,Cm 1913 (London: HMSO, 1992).

9. Department of Health, Health and Per-sonal Social Service Statistics (London:HMSO, 1992).

10. Graig, L.A., Health of Nations: An In-ternational Perspective on U.S. HealthCare Reform (Washington, DC: WyattCo., 1991).

11. James, J.H., “Reforming the British Na-tional Health Service: ImplementationProblems in London,” Journal of HealthPolitics, Policy and Law 20(1):191-210,1995.

12. Laing’s Review of Private Health Care(London: Laing and Buisson 1991).

13. National Association of Health Authori-ties and Trusts, NHS Handbook, 7th ed.(London: NAHAT/Macmillan, 1991).

14. National Health Service, ManagementExecutive Health Service Indicators, July1992.

15. Office of Health Economics, Compen-dium of Health Statistics (London: OHE,1992).

16. Organisation for Economic Cooperationand Development, The Reform of HealthCare: A Comparative Analysis of SevenOECD Countries (Paris: OECD, 1992).

HospitalFinancingin France

by Marie-José Sourty-Le Guellec

he French health care system is arguably the most compli-cated of the European (and Canadian) systems describedin this report. Its system includes universal, compulsorysocial insurance, significant patient cost-sharing, and sup-

plementary insurance on the financing side, and public providerscombined with a sizable number of private providers on the sup-ply side. Overlaying both the public and private sectors are stronggovernmental controls at all levels of government (11).

Almost the entire population (99 percent) is covered by thestatutory health insurance scheme, which is part of France’s so-cial security system. Statutory health insurance expenditures ac-count for over 70 percent of national health expenditures inFrance. The scheme is administered by social security sicknessfunds (Assurance Maladie de la Sécurité Sociale). A person’s oc-cupation generally determines membership in a particular fund.There is one large fund for salaried workers (CNAMTS), whichaccounts for nearly 80 percent of the compulsorily insured andabout 15 smaller funds cover other workers. The government pro-vides insurance for low income people. Contributions for sick-ness fund insurance are income-related and shared by employersand employees or paid directly to the relevant fund by nonsalariedor self-employed individuals (11).

Social insurance provides both cash benefits (e.g., sick pay)and benefits in kind (e.g., ambulatory care, hospital care). De-pending on the patient’s financial circumstances, the patient maybe required to pay coinsurance or copayment amounts; forinstance, patients may have to pay 20 percent of the cost of hospi-tal services (the ticket modérateur) and a daily flat rate contribu-

| 55


tion that is currently 50 francs.1 Employers some-times provide supplementary insurance for theiremployees through mutual fund organizations(mutuelles) to cover patient cost-sharing amountsand a few benefits not covered by the social insur-ance scheme. Individuals may also purchase pri-vate supplementary insurance. Mutuelles and pri-vate insurance payments account for about 8percent of national health expenditures.

France’s sickness funds are quasi-autonomous,non-governmental organizations; there are na-tional, regional, and local organizations of thesefunds. They are subject to national and local man-agement by employer associations and tradeunions. They are also closely regulated by the cen-tral government; in particular, contribution rates,fee schedules, and pharmaceutical prices are con-trolled by the central government (11).

Patients can consult any medical practitionerfor primary care, and can choose to go to either apublic or private hospital. Money follows the pa-tient in the case of private hospitals, but publichospitals are subject to prospectively fixed budg-ets. Compared with the other European countriesin this study and Canada, French patients have rel-atively large cost-sharing requirements. Patientout-of-pocket payments currently account forabout 17 percent of national health expenditures;however, cost-sharing for hospital services is fair-ly small with only about 4 percent of hospital ex-penditures financed directly by patients (1 1).

Similar to many other countries, the contain-ment of health expenditures is a major concern inFrance. Hospital care represents half of nationalhealth expenditures, making the hospital sector aprimary target of France’s cost-containment ef-forts. Recent reforms have concentrated on effec-tively controlling sickness fund insurance pay-ments to private hospitals by extendinggovernmental regulation over that sector, and bycreating a new balance between the private andpublic sectors to harmonize their development

within an overall program designed to controlhealth spending. Also similar to many other coun-tries, France’s health reforms are moving in thedirection of making individual hospital budgetsbased more on each hospital’s level of activity andless on historical costs.

STRUCTURE OF THE HOSPITAL SECTORFrance has a mixture of public, private nonprofit,and private for-profit hospitals. Public hospitalstend to be large and well equipped; private hospi-tals tend to be smaller and to specialize in electivesurgery, obstetrics, or long-term care. In 1990there were 1,072 public institutions; they consti-tuted only 28 percent of all French hospitals, butprovided almost two-thirds of total hospital beds,hospital days, and inpatient admissions (tables4-1 and 4-2). By law, a public institution is a cor-porate body governed by public law and is respon-sible for providing a specific public service. Pub-lic institutions have full legal status, their ownassets and resources, and full legal autonomy.They are, however, subject to various forms ofpublic supervision and financial control. Publichospitals cannot waive their obligations, definedin the Act of December 31, 1970, to:

■

■

■

provide diagnosis, treatment, and (in particu-lar) emergency care to their patients and thosereferred to them, including necessary inpatientcare;contribute to the training of medical and para-medical (nonmedical) staff; andparticipate in medical and pharmaceutical re-search and health education.

In 1989 the private hospital sector included2,721 institutions, constituting 72 percent of allhospitals but accounting for only one-third of thetotal hospital beds, patient days, and inpatient ad-missions in France in that year (tables 4-1 and4-2). The private sector is divided into a privatefor-profit or commercial sector with 1,515 institu-

1The exchange rate in January 1994 was approximately $USO.17 to F1 .00.

Chapter 4 Hospital Financing in France I 57

Category of hospital Percent of total hospitals Percent of beds

Public 28 65Nonprofit, PSPH 12 11Private nonprofit, non-PSPH 19 5Private for-c) refit 40 19a Data for public hospitals are for 1990; data for private hospitals are for 1989.

SOURCES: Documents Statistiques, “Les Etablissements d’Hospitalisation Privee en 1989,” Enquete EHP 1989, SESI no. 121,Juillet 1991, Documents Statistiques, “Les Hopitaux Publics en 1990, Resuitats H80, ” SESI no. 154, Septembre 1992

tions and a private nonprofit sector with 1,206institutions. For-profit hospitals are privatelyfunded and subject to the rules of commercial andcivil law. Private nonprofit hospitals are run byvoluntary organizations, religious orders, em-ployee representatives, mutual fund associations,and social security funds. They are similar to pub-lic institutions in that they do not attempt to maxi-mize profits, and their surplus revenues are in-vested to further their health care objectives.

Private institutions are managed by individualsor a legal entity. They make many of their ownmanagement and investment decisions, and theirservices are governed mainly by market forces, al-though they are subject to certain governmentconstraints. Fees charged by private institutionsare controlled and subject to formal agreements.Increases in the number of beds and high-costequipment are controlled by the health map (cartesanitaire), described later, and require formal au-

Public PSPH Public and PSPH

Hospital days Hospital days Hospital daysBeds (in 1,000s) Beds (in 1,000s) Beds (in 1,000s)

Medicine 105,393 29,243 13,879 3,918 119,272 33,161Surgery 61,282 14,827 8,986 2,315 70,268 17,142Obstetrics/gynecology 17,337 4,101 1,393 356 18,730 4,458Medium-stay 42,127 11,943 19,921 5,386 62,048 17,329Long-stay 63,711 22,289 1,877 638 65,588 22,927Psychiatry 68,600 18,669 12,733 3,921 81,333 22,590

Total 358,450 101,071 58,789 16,535 417,239 117,607

Private for-profit Private nonprofit Total private

Hospital days Hospital days Hospital daysBeds (in 1,000s) Beds (in 1,000s) Beds (in 1 ,000s)

Medicine 14,753 2,039 3,943 1,242 18,696 3,282Surgery 50,820 17,123 4,675 1,484 55,495 18,607Obstetrics/gynecology 10,083 3,084 882 254 10,965 3,338Medium-stay 18,123 5,646 15,672 4,525 33,795 10,171Long-stay 436 140 2,037 722 2,473 862Psychiatry 13,405 4$767 1,960 637 15,365 5,404

Total 107,620 32,800 29,169 8,865 136,789 41,664a Data for public hospitals are for 1990; data for private hospitals are for 1989.

SOURCES: Documents Statistiques, “Les Etablissements d’Hospitalisation Privee en 1989, ” Enquete EHP 1989, SESI no 121, Juillet 1991, Docu-ments Statistiques, “Les Hopitaux Publics en 1990, Resultats H80, ” SESI no. 154, Septembre 1992.


theorization. Additionally, the medical activities ofprivate hospitals are supervised by the sickness in-surance funds’ medical officers.

Private institutions are allowed to participate inthe public sector, although to date only some ofFrance’s private nonprofit hospitals (467 in 1988)have asked to be incorporated into the public hos-pital service. These hospitals, called PSPH hospi-tals, are governed by rules similar to those for pub-lic hospitals. There are thus two general categoriesof hospitals in France: public and PSPH hospitals,and private institutions that do not participate inthe public hospital sector.

Financing methods and operating arrange-ments vary greatly between the public and privatehospital sectors. Public and PSPH hospitals aregoverned by the principles of public accounting,whereas private for-profit hospitals are commer-cial undertakings that attempt to maximize theirsurplus revenues. Reform legislation passed inJuly 1991 and currently being implemented is de-signed to create a new balance between the privateand public sectors and to harmonize their develop-ment within an overall program to control healthexpenditures. The reforms formally recognizethat public and private hospitals perform the samebasic functions. In the future, the two categories ofhospitals will share equal responsibility for ensur-ing public health through common provisions thataffect all types of hospitals. Furthermore, the re-forms seek to strengthen and encourage coopera-tion between public and private hospitals (5).

At present, a statutorily insured patient inFrance can go to either a public or private hospital,although in practice the decision is usually madeby the patient’s physician. When the choice is apersonal one, it tends to reflect the hospital’s geo-graphical proximity, its reputation, or other per-sonal preferences. Under the 1991 reforms, pa-tients’ freedom to choose a physician or hospitalbecame an even more integral part of the healthcare system in France than it was under previoushealth care legislation.

Many hospitals in France have short-, me-dium-, and long-stay beds as well as psychiatricbeds. It is difficult, if not impossible, to determinethe proportion of hospital care in France that is de-voted to short-term acute care treatment; there-fore, this chapter deals with the French hospitalsector as a whole. Purely residential institutions,such as nursing homes, are excluded from datacited herein, however.

PHYSICIANSIn public and PSPH hospitals, the medical staff in-cludes residents or interns, who are physicians intraining, and hospital practitioners, who are full-time or part-time with a salaried established post(titulaire) or a salaried, nonestablished post (non-titulaire). Table 4-3 provides a breakdown of hos-pital physicians in private and public hospitals in1989 and 1990. The central government controlsthe growth of salaries and the number of hospitalstaff in public hospitals.

Public PSPH Private for-profit Private nonprofit Total

Salaried practitioners Full-timePart-time

Nonsalaried practitioners Full-timePart-timeOccasional

Salaried residents Full-timePart-time

Nonsalaried residents Full-timePart-time

27,913 2,61439,962 4,250

32762590

22,019 1,655233

22

596851

8,88322,15112,976

248328

15164

5252,047

4951,9121,496

2369011

8

31,67547,1109,410

24,82515,06224,158

65148

172a Data for public hospitals are for 1990; data for private hospitals are for 1989.SOURCES: Documents Statistiques, “Les Etablissements d’Hospitalisation Privee en 1989,” Enquete EHP 1989, SESI no. 121, Juillet 1991; Docu-ments Statistiques, “Les Hopitaux Publics en 1990, Resultats H80,” SESI no. 154, Septembre 1992.

Chapter 4 Hospital Financing in France | 59

In certain circumstances hospital physiciansare authorized to treat private patients in publichospitals through consultations or the use of pub-lic service beds for private patients. In such casesthe physician receives a fee from the patient,which may be reimbursed by the patient’s insur-ance company. Income from private fees may notexceed 30 percent of a physician’s total incomeand the number of beds that can be used for privatepatients may not exceed 8 percent of all public ser-vice beds.

Public hospital physicians often confer with of-fice-based private practice physicians (médecinslibérals). Whether or not payment for the con-sultation is included in the hospital’s global al-location of funds (discussed further below) de-pends on the regularity of the consults. Anyphysician in an office-based practice may be con-sulted on an occasional basis by a hospital physi-cian. Payment is rendered according to the serviceor consultation performed and falls outside thehospital’s global allocation. Hospitals regularlycall on some physicians in private practice (calledaffiliated practice physicians) who are paid a feeper service provided. These fees are included inthe hospital global allocation.

There are no salaried physicians in rural hospi-tals and any private physician may consult theresubject to authorization. In these cases the physi-cian may ask patients who are not covered by sick-ness funds to pay an agreed-upon fee. For patientswith sickness fund coverage, the physician mayclaim 85 percent of the local daily charge per day;for patients qualifying for social assistance, thephysician is paid 50 percent of the departmentalmedical assistance charge. In these two cases thehospital retains 10 percent of fees received.

In certain circumstances nonsalaried physi-cians operate clinics in public institutions. Theyare paid on a fee-for-service basis; the level of feesis agreed upon directly with the patient. Physi-cians pay 10 percent of their fee income to the hos-pital, which uses the proceeds for improving theirstock of medical equipment.

Thus, in public or PSPH hospitals, most pay-ments to medical staff are included in the operat-ing section of the budget and are taken into ac-

count in determining the hospital’s globalallocation. Exceptions to this are fees paid to phy-sicians practicing in rural hospitals and in hospitalclinics, and fees received by hospital physicians aspart of their private practice.

In private for-profit hospitals, physicians arenearly always paid on a fee-for-service basis andpatients are reimbursed by their insurance compa-nies. Nevertheless, an increasing number of pri-vate institutions are taking the opportunity to in-vest in staff (particularly medical staff) by offeringthe best-trained personnel attractive remunerationpackages, particularly in comparison with whatthe public sector can offer. Physicians’ fees in pri-vate hospitals are set according to a national feeschedule, but their incomes, other staff incomes,and the number of staff hired are not regulated bygovernment.


❚ Financing ModelThere are two distinct methods of financing hospi-tal operating costs in France. Public and PSPHhospitals are paid largely through a prospectivelyfixed budget. Private non-PSPH institutions arepaid a daily (per diem) rate for their services; inpa-tient physician and ancillary services are paid foron a fee-for-service basis.

Public HospitalsSince 1984-85, public and PSPH hospitals havebeen subject to a global allocation scheme estab-lished by the prefect of the district in which theyare located and determined within the frameworkof federal guidelines. The global allocationscheme replaced a system of controlled rates of in-crease in per diem prices for public and PSPH hos-pitals (11). Under the new scheme each hospitalreceives an annual global allocation to cover theportion of its costs that is paid for by the sicknessfunds. Hospitals also charge daily rates (tarifsjournaliers de présentations) to cover that part ofa hospital stay not provided for in the global al-location. Daily charges are established for severalpurposes. Federal and local governments pay adaily charge for patients on social assistance. The


daily charge is also used to determine patient cost-sharing amounts for patient copayments (ticketmoderateur) and daily flat-rate payments (paid ei-ther by the patient or by a supplementary insur-ance company), and it constitutes the charge forpatients who have no insurance coverage.

Hospital BudgetsThe hospital budget sets forth estimated expendi-tures and revenues for the coming year. This budg-et, like that of any public administrative institu-tion, must conform to certain public accountingprinciples. It has two sections, as described below:

The operating section deals with current activi-ties, including the day-to-day running of thehospital and financial management.The investment section deals with operationsleading to an increase in durable capital assetsrequiring depreciation (other than stocks), suchas permanent capital, real estate and tangibleproperty, stocks and securities, deposits andsureties, and physical supplies.

Expenditures that require authorizations for theoperating section of the budget are divided intothree groups:

1.

2.3.

is

1.2.

3.

4.

5.6.

7.

expenditures relating to the external purchaseof goods and services,staff or personnel-related expenditures, andall other types of expenditures.

A public or PSPH hospital’s operating revenuederived from the following sources:

the global allocation described below;income from services (e.g., via daily ratecharges or fees);grants, donations, and legacies to be used foroperating purposes;other surplus income unrelated to operationalactivities;income from reserves;the value of liabilities reduced by expire orlapse; andthe value of any repairs undertaken or surplusproduced by the institution itself (e.g., pharma-ceutical products made by the hospital’s labora-tory).

Appended BudgetsCurrent expenditures on certain activities and ser-vices (e.g., blood transfusion centers, mobileemergency services, data processing centers)must be included in appended budgets. Operatingcosts are funded from both general and appendedbudgets.

Authorized expenditures for the coming yearmust take into consideration the average rate-of-increase guidelines established by the central gov-ernment’s ministries of the economy, budget,health, and social security. The average rate of in-crease for hospital expenditures is based on gener-al economic trends—in particular, forecastedchanges in prices and wages—and on nationalhealth and social policies. The guideline rate was4.2 percent in 1990.

Determination of the Global AllocationAlthough a hospital receives a small amount ofrevenues in addition to the global allocation anddaily charges, these two elements are essential toa hospital’s ability to provide services. The globalallocation is designed to provide enough funds tocover that part of the hospital’s expenses that willbe paid for by the sickness insurance funds. It rep-resents the difference between total operatingcosts as set forth in the authorized general and ap-pended budgets and expected hospital revenuesother than the global allocation itself, so as to en-sure that the hospital’s budget will be balanced af-ter taking into account surpluses or deficits fromprevious years. Annual increases in a hospital’sglobal allocation are based on the federal guide-line rate of increase and the hospital’s forecastedlevel of activity.

Patient copayment and daily flat-rate contribu-tions, repayments by mutual fund associationsand private insurance companies for their mem-bers’ expenses, and payments for patients coveredby medical or social assistance are not included inthe global allocation; they are billed according tothe daily service charges established for individu-al patients.

The global allocation covers costs relating toinpatient care, day and night care in the hospital,


outpatient care,2 psychiatric care, legal abortions,mobile emergency care units, and long-term careinstitutions for the elderly.

Determination of Daily ChargesThe partial nature of the global allocation makesit necessary to establish a system of charges (tar-iffs) to recover expenses not paid for through theglobal allocation. Daily service charges determinethe amounts to be paid by federal or local govern-ments, patients, or any organization providingsupplementary coverage. Daily service chargesare calculated for different types of services by di-viding the estimated total costs of each type of ser-vice by the estimated number of patient days foreach type, after adjusting costs for offsetting re-ceipts and for any previous year’s surplus or defi-cit that has been carried forward.3

Service charges are calculated for inpatient care(including specialist and nonspecialist services,services relating to expensive specialties, and me-dium- and long-term services), day and night care,and home care services. There are also three pos-sible short-term charges for medicine, surgery,and expensive specialties. Because individualhospitals have different budget levels and esti-mated numbers of patient days for various types ofservices, daily service charges vary by hospital. Incontrast, flat-rate charges for outpatient care andfor legal abortions apply uniformly throughoutFrance. Box 4-1 describes the different parties in-volved in hospital management and supervision,and offers more details on the determination ofglobal allocations and daily rates.

Budget AdjustmentsExcept in the case of a budget revision, the globalallocation is paid on the basis of the amount ini-tially provided for, regardless of the hospital’s ac-tual level of activity. If the number of patient daysis lower than estimated, the hospital’s income (in-sofar as it relates to its global allocation) remainsunaltered.

If a hospital can show that there has been a sig-nificant and unforeseen change in its financial cir-cumstances or medical activity leading to a sub-stantial increase in the hospital’s costs during thecurrent year, changes to the budget (e.g., an in-crease in authorized revenues to meet higher-than-anticipated expenses) may be approved. Addi-tionally, in urgent cases the hospital’s directormay transfer appropriations between the first twogroups of authorized expenditures in the generalbudget and the appended budgets during a finan-cial year. These transfers may not, however, in-crease or reduce authorized expenditures withinthese groups by more than 10 percent, reduce ap-propriations designed to cover unavoidable costs(e.g., social security contributions or taxes), orcommit the institution to expenditures beyond thecurrent financial year.

End-of-year surpluses in the hospital’s admin-istrative account resulting from more efficientmanagement (e.g., expenses are less than fore-casted for the same or higher level of service deliv-ery) are assigned to a compensation reserve ac-count. Such reserves may be used to coversubsequent years’ deficits or assigned to anotherreserve account that can be used to finance opera-tions or investments that do not increase operating

2Actually, only part of the cost of outpatient care is taken into account in calculating the global allocation. In particular, the allocation relat-ing to this area covers the cost of supplying drugs for which the sickness insurance funds are statutorily responsible. It is estimated that on aver-age, 50 percent of outpatient costs are covered by the global allocation. The remainder has to be covered by the patient through a copayment orby a third-party payer other than the patient’s sickness fund.

3An excerpt from the decree of Aug. 11, 1983, section 32, states specifically that “[t]he estimated cost price shall be equal to total operatingexpenditures, comprising:

a) direct costs, that is the costs of services belonging to a particular category of charges, excluding the cost of medical treatment, goodsand other medical services;

b) the cost of medical treatment, goods and services on the basis of their purchase price or, failing that, of their cost price;c) other costs included in the operating section of the general budget which are not covered by their own resources, divided among the

different categories of charges in proportion to the estimated number of days for each category;d) where appropriate, that part of the previous financial year’s deficit which has been carried forward.”


Hospitals are managed by a board made up of locally elected representatives (of which the mayor of

the municipality concerned is the chairperson), representatives of the social security system, represen-tatives of the hospital’s medical and nonmedical staff, and a director who is responsible for implement-ing the policies developed by the board and approved by representatives of the State. The board’s

director also authorizes expenditures and issues revenue orders, appoints nonmedical staff, and is thehospital’s legal representative.

The supervisory role exercised by public authorities in the budget-making process places strict lim-its on the degree of managerial autonomy enjoyed by public and affiliated hospitals. Administrative su-

pervision of public and PSPH hospitals operates at every level:■ at the national level through the Hospital Department of the Ministry of Health;■ at the regional level through the prefect of the region (appointed by the government), assisted by the

regional Department for Health and Social Services (DRASS); and■ at the district level through the prefect of the district (also appointed), assisted by the district Depart-

ment for Health and Social Services (DDASS).

The social security system, which is the principal source of funds for hospitals, has no formal super-visory responsibilities but only the right of oversight. Its role has been strengthened over time, however.Social security sickness funds have contributed to the development of hospital policy at the nationaland local levels through representation on various associations and through their significant oversightrights for financial and medical matters. Additionally, supervisory authorities must consult representa-tives of sickness funds when drawing up hospital budgets. Furthermore, at the request of the sicknessfunds, hospital directors must submit quarterly expenditure commitment statements and provide in-formation on staffing. The sickness funds also partially supervise medical decisions, which can meanthat a sickness fund would refuse to pay the cost of treatment or would modify the financial terms of ahospital admission that it deemed unjustified or inappropriate. The sickness funds monitor all hospitalmedical activities but (except with regard to nonpayment of services) exercise a passive form of super-vision, as the funds’ concerns are not backed up by any sanctions (3).

Financial monitoring of hospitals is the responsibility of the district Department for Health and SocialServices; the social security funds, which receive the quarterly expenditure statements; and the hospitalaccountant (an official of the public treasury service) who ensures that spending commitments complywith relevant legislation and regulations and that the necessary appropriations have been made.

costs in subsequent years. Priority is given to fi- account. If the reserve is not sufficient, the deficitnancing services that have contributed to the sur-plus. Surpluses that do not result from improvedmanagement (e.g., if services are lower than fore-casted levels or the surplus arises from dailycharges or outpatient care) are transferred to acompensation reserve account to cover operatingcosts in future years.

Any deficits in the administrative account arecovered by drawing on the compensation reserve

amount is figured into the budget of two years lat-er or can be spread over the following two finan-cial years by adding it to the hospital’s operatingcosts.

Sickness Fund PaymentsEach sickness insurance fund in a given hospital’scatchment area pays the so-called pivot fund (ormain fund in the area) its share of the hospital’s

Chapter 4 Hospital Financing in France 163

The budgetary process is relatively long, reflecting the desires of various categories of hospital staff

to be involved in the hospital’s planning and the strict supervision exercised by external authorities. Thedirector or director-general of the hospital is responsible for preparing and submitting budget propos-als, taking account of the previous and current years’ activities. Assisted by hospital departments, thedirector determines the level of expenditure that is essential for the hospital’s operations. The draftbudget is then submitted to a joint consultative committee and a medical staff committee for comment.Budget proposals are adopted by the hospital’s board (conseil d’administration), which must express aformal opinion on the director’s figures. Budget proposals are then sent to administrative authorities andthe regional sickness insurance fund for salaried employees, where they are available for comment.

Hospital budgets, global allocations, and daily service charges are determined by administrative

supervisory authorities by January 1 of the relevant year. With the exception of the Paris hospital service(responsibility for which devolves on the Minister of Health), the prefect of the district is responsible forestablishing global allocations for the district’s public hospitals. This responsibility also involves a criti-cal response to hospitals’ budget proposals to ensure that each institution can meet its obligations. Theprefect is empowered to increase income and expenditure estimates for hospitals whose estimates itconsiders too low and to remove or reduce items that it considers unnecessary or too high—taking ac-count of local heath care needs and the federal guideline rate for average increases in hospital expen-ditures (4). Prefects’ decisions are made only after consultations with the social security funds. Theopinions of the social security funds and the medical supervisory bodies are recorded by the regionalsickness insurance fund.

The district prefect notifies the hospital, the regional sickness fund for salaried employees, and thefund responsible for paying the global allocation (the “pivot” fund) or main sickness insurance fund inthe area) regarding the final determination of daily service charges and the global allocation, togetherwith the hospital’s approved budget.

The hospital’s director is the principal authorizing officer for the budget and maintains a formal re-

cord of expenditures. The director submits quarterly accounts (upon request) to the prefect. At the endof each quarter, the director also submits a chart a to the prefect showing the current number of hospi-tal staff.

global allocation.4 At the end of the financial year, locations must reach a unanimous decision on thethe national sickness insurance fund for salariedemployees draws up a statement of contributionsrequired from each fund based on the number ofdays provided to the fund’s members (weightedaccording to coefficients that account for the dif-ferent daily costs of hospital care provided, whichare determined by a joint ministerial order). Be-fore June 1 of the following budget year, a com-mittee for the apportionment of hospital global al-

final contribution from each sickness fund, takinginto account the statement drawn up by the nation-al sickness insurance fund (8).

Recent ReformsAlthough the 1991 health reforms did not alter thebasic method of global allocations, major changesto the budgetary process were introduced. Underthis legislation (whose implementing regulations

4 Under the 1991 reform legislation, the pivot sickness fund makes an initial payment of 60 percent of the global allocation to the hospital on

the twenty-fifth day of the month, then 15 percent on the fifth of the following month, and the balance on the fifteenth day of the followingmonth.


were unpublished as of this writing), the budget-ary process will start earlier in the year, budget ne-gotiations will be faster and more streamlined,management will be more flexible, and the hospi-tal board will have more autonomy particularlywith regard to day-to-day matters (e.g., staffing,loans, internal organization), which will no longerbe subject to the district prefect’s prior approval.There will be closer cooperation between the au-thorizing officer and the accounting officer. Newprovisions will also be made for the investment ofand return on funds. Moreover, it will be possibleto revise a hospital’s global allocation in thecourse of a financial year to reflect changes in thecurrent volume of services provided as long as itis related to greater patient needs.

Another important innovation included in the1991 reforms and currently being experimentedwith in several hospitals is the determination ofcharges based on the identification of homoge-neous patient groups (groupes homogénes de mal-ades), which are in turn based on U.S. diagnosis-related groups (DRGs) (5).

Private HospitalsPrivate for-profit and nonprofit institutions thatdo not participate in the public hospital sector op-erate on a fee-for-service basis, although fees areusually regulated by the central government’shealth ministry. An agreement between hospitalsand their regional sickness funds fixes the amountof money that the funds will reimburse patients inthe coming year. Private hospitals accept a certainnumber of service obligations (inpatient days andhospital admissions) to sickness fund patients inexchange for guaranteed reimbursement from thefunds. If a private hospital has a surplus when itcloses its accounts, it is free to distribute that sur-plus to shareholders or to reinvest the surplusfunds. If it has an operating loss, the social securi-ty fund does not become involved in any way tocover the deficit.5

Daily Rates and FeesPrivate hospitals’ payments are based on nego-tiated daily rates that comprise a charge for hotel-type services and nonmedical personnel services(e.g., nurses, social workers, therapists), fees foroperating and delivery room services, pharmaceu-tical fees, and fees for physician services. Patientsusually pay physicians’ fees directly and are thenpartially reimbursed by their sickness fund. In thepast physicians have been paid separately from thehospital’s charges, but physician payment is in-creasingly being included in the same schedule asthe costs for a hospital stay. One advantage offolding in physician payments is that all paymentsmade by the sickness fund for a patient’s hospitalstay are included in a single document that pro-vides the fund with an overview of total hospitalcosts.

Physicians’ services are reimbursed accordingto a national fee schedule classified as K, Kc, B,and Z (for diagnostic activities, surgery, biologi-cal analyses, and imaging, respectively). One K isworth approximately 12 francs, and one Kc isworth about 13 francs. Reimbursement for physi-cian or surgeon services is supplemented by an op-erating or delivery room fee (FSO) paid to the hos-pital. The FSO varies according to region andcategory of hospital and by levels of K.

Private hospital per diem rates for hotel-typeand non-medical staff services are based on a clas-sification of the hospital’s specialty and qualityranking. Since 1973 the classification system hasassigned points to an individual hospital for eachof the following five areas (in order of signifi-cance for rate setting):

1. medical services,2. nonmedical staffing,3. technical equipment,4. hotel facilities, or5. a combination thereof.

Depending on the total number of points ob-tained, a hospital is classified as A, B, C, D, or E,

5 The agreement setting forth the responsibilities of all the parties concerned was drawn up by the Ministry of Health between 1975 and 1978and approved by the Ministry in 1978.


each of which has a particular set of rates per spe-cialty. The classification is decided by the regionalprefect after consultation with a joint committeethat includes representatives of sickness funds andhealth care providers.

A total of 800 points is required for category Aclassification, which indicates consistently highperformance; rates fall as a hospital’s classifica-tion moves from category A to E. Hospitals andclinics classified within each category have thesame level of rates wherever they are located in theregion. Hospitals have an incentive to invest intechnologies, equipment, and staff to improvetheir ranking to receive higher per diem rates. Theprocess of ranking hospitals is fairly rapid, and ahospital may even have its ranking changed retro-spectively. For several years, per diem rates havebeen regulated and subject to authorized annualincreases, expressed in either absolute amounts orpercentage terms.

Operating room fees are directly linked to ahospital’s rate category. Similarly, the pharmaceu-tical fee, formerly based on actual costs, is nowbecoming more uniform. Charges and fees arethus subject to limits and linked to the number ofinpatient days delivered by the hospital. There arealso government controls on the number of admis-sions and on the number of authorized beds in pri-vate hospitals.

Despite these measures to limit private hospitalrates and the number of services, the total volumeof medical services provided by private hospitalshas not been brought under control. In response,the regional sickness funds require private hospi-tals to supply information on their activities fromwhich averages and comparisons among hospitalsare made. Hospital profiles are also drawn up toidentify potential abuses. These profiles serveonly as indicators of service provision, however,and are not used as instruments for setting limitsor preventing abuses.

As an additional monitoring tool, regularchecks of hospital practices are conducted to pre-vent bad practices. If any are identified, a prelimi-nary letter is sent to the director of the hospitalasking for remedial action. If the problem is seri-ous or has occurred before, the hospital’s manager

is required to make the hospital’s case before acommittee of administrators of the regional sick-ness funds. A warning or reprimand may be sentor, after a complex review procedure, the hospi-tal’s classification may be downgraded. The ulti-mate sanction (for which there must be seriousgrounds) is abrogation of the sickness funds’agreement; costs are no longer paid in advance,and the daily charge is paid at three-quarters of theprevious level. Although not applied frequently,these sanctions have had some effect (17).

SupervisionA group of sickness fund physicians supervisesagreements between private hospitals and sick-ness funds that pertain to private hospital staffinglevels, current pharmaceutical regulations, stan-dards for operating rooms, and standards regard-ing the size of patient rooms. A compulsory annu-al statistical survey of private hospitals must alsobe provided to regional sickness fund organiza-tions, making it possible to identify any possibleproblems in a range of areas. The standards andadherence to them have a direct effect on chargesfor services.

Health ReformsAlthough the 1991 health reform act initially re-tains the principle of fees and rates for private hos-pital services, the legal framework and the finan-cial basis of for-profit institutions have beenaltered. The tripartite system, involving the state,sickness funds, and hospitals, may gradually be-come the norm in the private sector as it has al-ready been for some time in the public sector. Thestate could become involved in contractual rela-tions regarding the volume of services that havehitherto been the concern only of hospitals andsickness funds.

There are no plans at this time to introduce aglobal allocation scheme for the private sector.Instead, there is a global ceiling on private hospi-tal expenditures by the sickness funds, subject to aguideline rate of annual increase in this ceilingagreed on between the state and the other twotraditional partners in the private hospital sector.


Public and PSPH Private Total

Percentage of Percentage oftotal public total private Percentageand PSPH hospital of total

Million operating Million operating Million operatingSource francs expenses francs expenses francs expenses

Sickness insurance funds 179,778 90.0 52,886 83.4 232,664 88,5Individuals and private insurance 13,116 6.6 7,848 12.4 20,964 8.0Mutual fund associations 3,023 1.5 2,329 3.7 5,352 2.0Federal or local authorities 3,508 1.8 342 0.5 3,850 1.5

Total expenses 199,425 63,405 262,830

SOURCE: Centre de Recherche d’Etude et de Documentation en Economic de la Sante (CREDES) Programme Eco-Sante, 1990 and 1991.

This ceiling is allocated among regions and bymonth and may not be exceeded.

The 1991 legislation requires that private insti-tutions analyze their activities, develop an assess-ment policy, and implement information systems(similar to programmed medical des systemesd’Information, or PMSI). It also makes the sub-mission of annual forecasts of activity to the sick-ness funds a precondition for setting rates or forconcluding rate agreements. The implementationof a cost accounting system and a medical in-formation system were intended to lead to a DRG-type of charge system by the end of 1993. An ex-periment using this new approach was introducedin obstetrics-gynecology units and in volunteerinstitutions for other specialties beginning on July1, 1992 (5).

❚ Sources of FundsThe social security sickness funds pay for thelion’s share of hospital care in France; they funded90 percent of public and PSPH hospital operatingexpenses and over 83 percent of private hospitaloperating costs in 1991 (table 4-4). Private insur-ance, mutual fund associations, and individualout-of-pocket payments accounted for a fairlysmall share of hospital costs ( 10 percent), even forprivate hospitals (16.1 percent). These figuresreflect sickness fund patients’ freedom to choose

either a public or a private hospital, and private in-surers’ and mutual fund associations’ minor rolesin the French health care system of mainly provid-ing supplementary insurance.

The relatively small part that private hospitalshave in France’s system is reflected by their shareof total hospital expenditures. In 1991, three-fourths of all hospital spending was for care pro-vided in public and PSPH hospitals; the otherfourth was for private hospital care (table 4-4).

Federal and local authorities pay hospitaliza-tion costs for patients who receive state medical orsocial assistance. These payments, financedthrough general revenues, funded 1.5 percent ofhospital expenses in 1991 (table 4-4). (Foreign pa-tients who are not residents of France must paytheir own hospital bills although there are interna-tional agreements between France and certaincountries allowing payments to be made throughofficial channels.)

❚ Allocation of Operating Funds

Public HospitalsPublic hospital operating costs were F139 billionin 1988, representing 87.8 percent of aggregatehospital expenditures (which includes capital ex-penditures) (table 4-5). The largest single item(F90.1 billion, or 65 percent of operating costs)


Million Percentage Million PercentageOperating costs francs of total Operating revenues francs of total

StaffPharmaceuticals, medical

servicesHotel facilitiesRepairs, maintenanceGeneral managementMortgagesOther

Total

90,14012,792

8,4733,7533,4902,737

17,451

138,836

64.9 Global allocation9.2 Service charges

6.1 Daily flat rate contributions2,7 Outpatient care2.5 Donations, contributions2.0 Sales of products

12,6 Other

Total

118,074 81.09,631 6.6

1,877 1.32,543 1.7

219 0.2469 0.3

13,121 9.0

145,934

SOURCES: Ministere de l’Economie des Finances et du Budqet, Direction de la Comptabilite Publique, Les Finances du Secteur Public Local, Hopi-taux Publics 1983-1988.

was for hospital staffing costs. (It is not possibleto distinguish between medical and nonmedicalpersonnel costs.) Expenses for pharmaceuticalsand medical services accounted for 9 percent ofhospital operating costs in 1988; hotel-type ser-vices made up 6.1 percent, repairs and mainte-nance 2.7 percent, and management and transport2.5 percent (table 4-5).

Public hospital operating revenues were nearlyF146 billion in 1988, of which the global alloca-tion represented 81 percent, total daily servicecharges accounted for 6.6 percent, total daily flat-rate contributions were 1.3 percent, and outpatientcare charges accounted for 1.7 percent of hospitaloperating income (table 4-5) (10).

Private HospitalsIn contrast to public and PSPH hospitals, there areno systematic statistics on the revenues or costs ofprivate institutions. A 1985 study by the Centred’Etudes des Couts et des Revenus (CERC) esti-mated the operating costs of private hospitals andclinics in 1980 at F11.7 billion. Fifty-five percentof this was spent on staff; 17.4 percent on pur-chases; 17.2 percent on repairs, supplies, and ex-ternal services; 4 percent on depreciation and pro-visions; 2.3 percent and 6.4 percent on other costs(l).

❚ Operating ExpendituresTotal hospital operating expenditures (which in-clude both operating and capital spending) wereF263 billion in 1991, equaling 3.9 percent of thegross domestic product (GDP) and 40.7 percent ofnational health expenditures (NHE). Hospitals’share of NHE has fallen over the past decade,which was 44.9 percent in 1980, but hospital ex-penditures as a share of GDP have increased, start-ing at 3.6 percent in 1980. These trends indicatethat health care spending in France has comman-ded a greater share of the country’s financial re-sources over the past decade, although the hospitalsector has contributed less to this trend than haveother sectors of France’s health care system.

Approximately three-fourths of aggregate hos-pital outlays went to public and PSPH hospitals in1991—slightly less than in 1980, when the publicsector accounted for 78 percent of hospital spend-ing (2).

HOSPITAL CAPITAL COSTSLocated as they are in a rapidly changing sectorthat is strongly affected by technological progress,and faced with growing patient demands for thelatest technology and more patient amenities, allhospitals are increasingly sensitive to competitionand have strong incentives to invest. In contrast to


the private sector, public and PSPH hospital in-vestments are subject to certain financialconstraints, although they also benefit from spe-cial public assistance.

The private sector is facing increasing competi-tion, and its level of required investment is be-coming more and more onerous; thus hospitals inthis sector find it necessary to seek new investors.Few figures are available on private sector hospi-tal investment, and most of the information in thissection relates only to the capital investments ofpublic and PSPH hospitals. Where appropriate,legislation concerning the investment process andcurrent trends are discussed.

❚ Relationship of Capital and Operatingcosts

In 1988 the aggregate budget for French publichospitals was approximately Fbillion158, whichrepresented the purchase of goods and services.These costs may be either operating or investmentcosts, as follows:

■

■

The operating section of the budget includes allconsumable goods and services that are short-term; such expenditures relate to day-to-daysupplies and to upkeep and maintenance.The investment section includes expendituresthat are intended either to maintain a capitalgood beyond its budgeted life or to purchasenew capital (3).

The investment section regularly receivestransfers from the operating budget through provi-sions and depreciation accounts. Such accountsrepresent the depreciation of assets with a view toreplacing them; depreciation is recorded as an in-come item in the investment section and as a costitem in the operating section. Depreciation costsare taken into account in determining the globalallocation and daily service charges.

Private for-profit hospitals and certain privatenonprofit institutions, even if they participate inthe public hospital service, are not entitled to di-rect reimbursement of depreciation costs becausethe government is concerned about preventing theaccumulation of private wealth at the expense of

the sick. Such institutions may, however, receive aremuneration equivalent to 3 percent of their capi-tal (based on the nonamortized value of their as-sets, where necessary after revaluation). In addi-tion, fixed assets in such institutions are almostnever the property of the hospital but are rented.The depreciation of these assets is included in therent, which is an operating cost.

Hospitals that receive a global allocation are al-lowed to include interest payments on investmentloans as part of their operating costs. This optiondoes not extend to the repayment of loan princi-pals, which are included in the investment sectionof their budgets.

Another way in which operating and capitalcosts are related in French public and PSPH hospi-tals is through the allocation of operating fund sur-pluses. Under certain circumstances (discussedabove), surpluses in the operating section can beused to finance investments that are not expectedto increase operating costs in ensuing years.Moreover, any surplus in the appended budget isallocated to the purchase of equipment for hospi-tals (e.g., blood transfusion centers or computercenters), to other hospital capital investment, or toreduce operating costs in succeeding years.

The impact of capital costs on future operatingcosts is determined informally. Some hospitalboards draw up program budgets as a means of im-proving quality of forecasting and planning, andassisting management by highlighting the overallimpact of an activity in operational and invest-ment terms. Activities examined may cover ener-gy saving programs, computerization and majorequipment, or hospital buildings.

❚ Capital Financing ModeIInvestments in new construction, new major med-ical equipment, or replacement equipment in thepublic sector can be financed by depreciation (ap-plied to tangible assets such as hospital plant andequipment) or amortization (applied to intangibleassets such as insurance policies). In the hospitalsector, however, this is inadequate due to the rateof technological innovation, and other fundingsources are often required.


Expenditures 1975 1986 1988 Percentage of 1988 total

Direct expenditures 3,722 8,842 13,456 69.9Tangible assets 812 4,059 5,723 29.7Real estate investments 169 434 3,171 16,5Construction 2,741 4,349 4,562 23.7

Indirect expenditures 884 3,464 5,801 30.1

Total expenditures 4,606 12,306 19,257 100.0

Income 1975 1986 1988 Percentage of 1988 total

Subsidies, grants 985 1,707 1,583 7.6Loans 2,533 3,521 4,545 21.8Depreciation 1,513 6,989 7,702 36.9Fixed assets 4,181 20.0Other income 244 946 2,845 13.6

Total income 5,275 13,163 20,856 100.0

SOURCES: Ministere de l’Economie des Finances et du Budget, Direction de la Comptabilite Publique, Les Finances du Secteur Public Local, Hopi-taux Publics 1983-1988.

Self-FinancingHospitals obtain some of their funds from internalsources, such as the sale of real estate and tangibleassets (a fairly unimportant source) and depreci-ation, which accounted for 37 percent of hospi-tals’ investment funds in 1988 (table 4-6). Sincethe mid- 1980s, depreciation funds have increasedin importance because of trends in the structure ofinvestments and thus their patterns of depreci-ation. The decline in the acquisition of land andbuildings and of repairs with a long (often 30years) depreciation period and the increase in tan-gible acquisitions with a short (around 5 years) de-preciation life has significantly increased depreci-ation income and thus the level of self-financing.

SubsidiesHospitals obtain a portion of their investmentfunds from several external sources that may befree or may incur a cost. State subsidies—whichnormally vary between 5 and 40 percent of a hos-pital’s investment funds, depending on the institu-tion’s capacity for self-financing-and subsidiesfrom local authorities are free. More than half thesubsidies received by hospitals come from the

state. Of local authority funding, the regions arethe most important source of assistance, followedby the districts and municipalities (communes). In1988, subsidies accounted for 7.6 percent of ag-gregate investment income (table 4-6).

LoansThe sickness funds have been authorized to make

interest-free loans to hospitals, which are requiredto repay only the principal amount. For loans thatincur a cost, hospitals normally call on banks forpublic authorities (Caisse des Depots et Con-signations and the Caisse d’Aide a l’Equipementdes Collectivites Locales). Hospitals may alsoborrow from other banks or even, with ministerialapproval, from the financial market (i.e., deben-ture loans). Such loans represented 21.8 percent ofaggregate investment income in 1988 (table 4-6)(3).

Today, state subsidies and sickness insurancefund loans play less of a role in hospital invest-ment financing than they have in the past. Hospi-tals’ own resources now constitute a key elementof their capital finances. They even appear to begaining in importance, given a slight trend toward


a reduced level of debt and a refocusing of invest-ment; that is, investment now seems to be gearedtoward the acquisition of biomedical equipment,which in turn generates a higher level of depreci-ation. If sufficiently short periods of depreciationare allowed, a high level of debt generates consid-erable resources for investment. In fact, hospitalsthat have borrowed at high rates have not beenpenalized at all; rather, they have benefited from abudgetary bonus, as the financial costs associatedwith a high level of depreciation form part of thebase from which the initial budget is calculated(9).

Financing from loans is restricted to 60 percentof the estimated cost of an investment. Institutionsare required to meet the other 40 percent of thecost (as well as any associated additional operat-ing costs) from their own financial resources. Tohelp cover such costs, hospitals sometimes re-ceive an additional allocation over and above thefederal guideline rate for updates to global alloca-tions, although experience shows that this doesnot occur often. Other internal sources include theuse of surpluses arising from improved manage-ment. In contrast to the private sector, such deci-sions are subject to the approval of supervisory au-thorities (17).

Private HospitalsPrivate hospitals (often called clinics) are free touse their profits for investment or to redistributethem to shareholders. Private for-profit clinicshave traditionally been owned by physicians. Ithas become increasingly difficult, however, forclinics to finance investments in new major equip-ment from their own resources, which they needto keep up with technological progress and the de-mands of competition (14). Clinics face a difficultproblem of finding outside investors mainly be-cause in most cases there is no guarantee that theinvestment will be profitable. In recent years this“crisis” in the private sector has resulted in a trans-formation of the structure of such hospitals, whichare increasingly passing from the status of a fami-ly business to that of a limited company belongingto a major financial group. Large French compa-

nies (e.g., Paribas, Suez, Lyonnaise des Eaux) andforeign companies have invested in chains of clin-ics in search of profits (17).

Determining Capital RequirementsThe entire French health care system (both publicand private health institutions) is subject to formalhealth sector planning (15). In general, public hos-pitals are subject to the provision of public lawthat governs public works and the placing of pub-lic work contracts. Commercial institutions mustoperating according to private law, which allowsthem to determine their own investment proce-dures within the limits of the law. Health care leg-islation in 1970, however, stipulated that repairprograms and projects relating to the creation, ex-tension, or transformation of public and privatehospitals would be subject to authorization ar-rangements. Authorization is forthcoming only ifa scheme complies with the health map (carte sa-nitaire).

Health MapsThe foundation for health sector planning inFrance is the health map. The health map formsthe reference point for public authorities in all de-cisions relating to the level of public and privatehospital construction of new buildings, additionsof hospital beds, or the acquisition of major medi-cal equipment (15). It is based on a recognitionthat the private sector must operate alongside thepublic sector, as the latter is unable to meet allpublic health care needs. The aim is to meet thoseneeds satisfactorily at the lowest cost by a rationalallocation of capital resources.

The health map, drawn up by the Ministry ofHealth after consultation with regional and na-tional health resources committees (12) was de-signed to meet three objectives: 1) to control therapid growth of the hospital sector, 2) to correct re-gional disparities, and 3) to coordinate public andprivate sector development. To accomplish theseaims, the health map establishes the boundaries ofhealth sectors and regions. Each health sector is ageographical area of about 30,000 to 40,000 in-habitants centered on a hospital with a certain


minimum level of technical facilities. There arecurrently 21 regions divided into 284 health sec-tors. The health map also establishes the nature,extent, and location of health facilities of nationalimportance or designed to serve several health re-gions. For each type of facility, the health map forthe particular sector or region concerned specifiesthe buildings and major items of required equip-ment. Plans are detailed after an analysis of localand regional needs. The health map also includesan inventory of existing or authorized buildingsand a continuously updated record of major itemsof medical equipment.

Each region draws up its health map in light ofdirectives issued by the Ministry of Health. Thework is then submitted for review to sector and re-gional hospital groups and the regional committeefor health and social resources. This is followedby an examination of the health map at the federallevel. The Ministry then adopts the provisions ofeach map after seeking the opinion of the nationalcommittee for health and social resources.

This approach, it should be noted, is very broadand general with indicators of need established formajor areas of activity (e.g., medicine, surgery,obstetrics-gynecology, medium stays). It is notbased on epidemiological or population-baseddata (2,4).

The Act of December 31, 1970, requires allpublic and private institutions to secure authoriza-tion from the administrative authorities for newbuildings or extensions of existing ones with com-pulsory reference to the health map. (The map’sindicators of beds per specialty represent ceilingsthat may not be exceeded.) The Act also makes itobligatory to obtain prior approval for conver-sions of hospital facilities, the merging of hospi-tals, or the installation of major medical equip-ment.

The prefect is responsible for issuing authoriza-tions after consulting the Regional Health and So-cial Resources Committee, except in the case ofdecisions of national importance; these are the re-sponsibility of the Health Minister of the centralgovernment after consultation with the NationalHealth and Social Resources Committee.

ReformsThe reforms initiated by the 1991 legislationmaintain the health map but substantially broadenits scope with the addition of a new document: thehealth organization scheme. Both the maps andthe schemes are to be drawn up on the basis of themeasurement of needs in the population and theirchanges, with regard to demographic data andtechnical progress in medicine, following a quan-titative and qualitative analysis of existing careprovision.

In carrying out this task, the ministers responsi-ble for health and social security (in the case of na-tional and inter-regional maps and schemes) andthe regional prefects (in the case of their regionaland sub-regional equivalents) will be assisted byhealth organization committees at national and re-gional levels. To reflect the need for assessment,each regional health organization committee willhave a committee on regional medical assess-ments of hospitals.

The scope of health planning has been broad-ened by the health organization scheme to gradu-ally break down the boundaries between inpatienthospital care and outpatient ambulatory care andto develop plans to rationally diffuse particularlyexpensive or sensitive medical activities associatedwith ambulatory care. The legislation is con-cerned with the type of care provided, not with thephysical structure of the buildings or the legalcontext in which the care takes place. Alternativesto hospitals are taken into account (particularlyambulatory surgery) by establishing an equiva-lence between hospital beds and the number ofplaces providing alternatives to hospital care.

Under the new legislation, public hospitals arealso authorized to collaborate with public and pri-vate legal bodies, including those at the interna-tional level. In connection with these activities,they may sign agreements and participate in inter-hospital syndicates and public and financial con-sortia. The creation of such consortia enableshealth institutions to pool their operational or in-vestment resources to undertake activities thattheir individual resources would not allow. To


achieve greater uniformity of the two hospital sec-tors, the new legislation also provides for all careinstitutions and providers to be subject to the sameauthorization arrangements. The overall aim is tosimplify and decentralize the administrative pro-cedures for securing capital investment authoriza-tions.

The reforms also introduce a hospital planwhich sets out (particularly in the context of themedical plan) each institution’s objectives withregard to medical and nursing atmospheres, socialpolicy, training, management, and informationsystems. The plan, which must be compatiblewith the objectives of the health organizationscheme, identifies all the resources in terms ofbuildings, staff, and equipment that the hospitalrequires to achieve its objectives. It is developedfor a period of up to five years (5).

Traditional Public Hospital Investments (16)In any major hospital and even those of averagesize, new buildings and expansion of existing fa-cilities form part of an overall medium-term (10-to 15-year) program. Three types of projects maybe identified: 1) those of national significance, forwhich the ministry is responsible; 2) capital proj-ects that are unique to a region and for which theregional prefect is responsible; and 3) capital proj-ects that are the responsibility of the district pre-fect, who gives approval in view of the overall re-sources allocated to each district.

Because most investments are carried out withstate assistance, investment priorities are spelledout in the national economic and social develop-ment plans, which effectively determine the al-location of financial resources set aside for the dif-ferent sectors of public investment. Receipt ofstate subsidies for new capital investment is con-tingent on the proposed investments’ inclusion inthe plan.

Any building and major medical equipment in-vestment project must pass through several stages(e.g., purchase of a site, initial preliminary design,final proposal) each of which must be approved bythe hospital board after they have been consideredby the hospital’s medical staff committee and the

joint technical committee. Each stage is subject tofinal approval by the supervisory authority.

The financial appraisal of the project is accom-panied by a financing scheme. The financingrules are as follows:When state funding is provided, it is alwaysequal to 40 percent of the capital expenditurequalifying for subsidy.Local authorities may also contribute to this as-sistance, bringing the rate of subsidy above 40percent.The balance is met by the hospital from its ownresources, by loans from the Caisse des Depotset Consignations or the Caisse ‘Aide a l’Equip -ment des Collectives Locales. In the case of in-vestments that do not receive state funding, theproportion of the cost met from borrowing maynot exceed 60 percent.

The different categories of equipment and ma-terials subject to approval are care units equip-ment, ancillary care and technical medical equip-ment, and equipment for general services.

In 1974 a national center for hospital equip-ment (CNEH) was established that reports to theMinistry of Health. It has responsibility for con-sidering problems associated with the functioningof hospitals. The rules governing the financing ofthe provision of medical equipment are the sameas those relating to the building process.

Under the new legislation the supervisory au-thority will monitor only the legality of contractsentered into by hospital directors. Such contractswill come into force as soon as they are receivedby the prefect’s office.

Private Hospital InvestmentOnce a private hospital decides to adopt newtechnologies, provide new services, or expand itshospital beds, it can acquire the necessary physi-cal and staff resources and place them at their pa-tient’s disposal, thus putting them to profitableuse more quickly than the public sector. Privatehospitals can also more quickly provide the re-sources required to meet an existing need. If an in-vestment turns out to be profitable after the facili-


ties are in place, they can be adjusted to a certainextent by the constant redeployment of resources(particularly of staff), as there are few statutoryconstraints. Private hospitals face no major im-pediments to increasing and modernizing their fa-cilities as soon as a decision has been made (17).

❚ Capital ExpendituresCapital expenditures do not correspond to a singleyear’s costs and may figure into the calculation ofmore than just one year’s global allocation andcharges. In 1988, capital expenditures of publichospitals equaled F19.3 billion, or 12.2 percent ofaggregate hospital expenditures. This represents amore than threefold increase over 1975. (Expendi-tures for different capital investments are given intable 4-6.) Since 1975 the structure of direct in-vestment expenditure has changed, with the pro-portion funding real estate investments (e.g.,construction of new hospital wings) falling from78.2 percent in 1975 to 57.5 percent in 1988.There has been an equivalent rise in investment inother capital assets.

Total investment income in 1988 was F20.9billion (shown by funding source in table 4-6).This amount represents a corresponding threefoldincrease in investment income over 1975. Overthe last decade, the proportion of capital expendi-tures paid for from internal funds has tended to in-crease, while the proportion met by grants, and es-pecially by loans, has declined (table 4-6) (13).

FUTURE DIRECTIONSThe containment of health expenditures is a majorconcern in France. The costs of hospital care rep-resent half of national health expenditures, mak-ing the hospital sector a primary target of France’scost containment efforts. The hospital sector hasalways expanded without much control, and itsevolution has been marked by the constant needfor an urgent response to perpetually growing de-mand. The urgent nature of hospital care has oftentaken precedence over economic rules of efficien-cy and better management. Prior to 1971, hospi-tals would present their bills to the sickness insur-ance funds after having satisfactorily treated

patients. The funds would not hesitate to pay theirshare of expenses, and little attention was given todetailed analyses of hospital bills. Only in the1970s did national economic conditions demandcloser scrutiny of the economics of hospital care.By the end of the 1970s, containment of hospitalcosts had become a high-priority issue and the pri-mary goal of all reforms aimed at reducing healthexpenditures since then.

Understandably, it is the public hospital sectorthat has been most influenced by cost-contain-ment reforms. In 1983, prospective budgeting be-came the standard in this sector. Its purpose was tocontrol spending by imposing guideline growthrates for hospital spending. However, the deter-mination of budgets across hospitals takes no con-sideration of changes in activity or volume of ser-vices demanded from individual hospitals butmerely applies a predetermined increase rate (thefederal guideline rate) to the previous year’s budg-et. Budgets are based on historical levels of expen-diture, and rates of increase are determined cen-trally, with little scope for local deviation (11).

The medical program information system(PMSI) was created to achieve a financing systemmore reflective of an individual hospital’s activityand to encourage continuous evaluation. This pro-gram systematically produces a standardized dis-charge form at the completion of each patient’shospital stay and enters the form’s data into a pa-tient database. The system allows for detailedanalysis of hospital activity to enable compari-sons of patient volume among departments or hos-pitals and to detect morbidity trends. The PMSIwas implemented as an initial move toward devel-oping a DRG-type system of homogeneous pa-tient groups and incorporating this classificationsystem into the hospital financing scheme. Imple-mentation of the PMSI is proving to be complexand involved, however, and the full achievementof a DRG-based system in France remains a long-term objective.

A large gap still exists between the public andprivate hospital sectors in France. The allocationof funds to each sector is based on different mech-anisms, and despite the sickness insurance funds’increasing control over the private sector, cost


containment efforts for this sector have not beenvery successful. A serious shortcoming of thepresent financing scheme is that private institu-tions have an incentive to increase the number ofmedical procedures to compensate for rigidly im-posed fees and daily rates.

The 1991 health reform legislation in France isdesigned to extend government control over theprivate sector and to narrow the gap between thepublic and private sectors. The legislation rede-fines hospitals according to general guidelines,thus providing the private sector with the same“public interest” mission as the public sector. Thereform also emphasizes the complementary roleof the public and private sectors. Private hospitalsare not yet paid through a global allocationscheme, but growth in expenditures for privatehospital services are capped under the reforms.Additionally, the PMSI is planned to be extendedto the private sector, and current experimentationwith a DRG-type system is in place for some spe-cial services. Now that the philosophy underlyingthe DRG system is being tested in the public hos-pital sector, a relatively smoother implementationof the DRG system in the private sector is likely.

Implementation of the necessary structural ar-rangements to achieve the objectives of recent re-forms will be a long-term task. Both private andpublic hospitals face new obligations, includingmaintaining medical records that are readily avail-able for consultation by the patient or the patient’sphysician, evaluating professional practice, reor-ganizing health care, analyzing service activity,and implementing information systems that docu-ment different conditions and modes of care andtreatment (5).

REFERENCES1. Centre d’Etudes des Coûts et des Revenus

(CERC), “L’Hospitalisation en France, 3èmepartie,” Hospitalisation Nouvelle, No. 137,Février 1985.

2. Centre de Recherche d’Etude et de Documen-tation en Economie de la Santé (CREDES),Programme Eco-Santé, 1990 and 1991.

3. Clément, J.M., Memento de Droit Hospitali-er, 3e édition (Paris: Berger-Levrault, 1992).

4. Coudurier, P., Dotation Globale et Prix deJourneé (Paris: Berger-Levrault, 1988).

5. Couty, E., Hôpitaux et Cliniques: Les Ré-formes Hospitalières (Paris: Berger-Levrault,1993).

6. Documents Statistiques, “Les Etablissementsd’Hospitalisation Privée en 1989,” EnquêteEHP 1989, SESI no. 121, Juillet 1991.

7. Documents Statistiques, “Les Hôpitaux Pub-lics en 1990, Résultats H80,” SESI no. 154,Septembre 1992.

8. Dusart, E., Le Budget Global à l’Hôpital (Par-is: Editions ESF, 1987).

9. “Investissement Hospitalier,” InformationsHospitalières No. 30- 31, Avril-Mai 1991.

10. Ministère de l’Economie des Finances et duBudget, Direction de la Comptabilité Publi-que, Les Finances du Secteur Public Local,Hôpitaux Publics 1983-1988.

11. Organisation for Economic Cooperation andDevelopment, The Reform of Health Care: AComparative Analysis of Seven OECD Coun-tries (Paris: OECD, 1992).

12. Peigné, F., Notre Système Hospitalier et SonAvenir, ENSP éditeur, 1991.

13. Pizzo-Ferrato, C., “L’Évolution des Inves-tissements Hospitaliers,” Gestions Hospital-ières 307, Juin-Juillet 1991.

14. Poindron, P.Y., “Qu’est-ce qui fait courir lesinvestisseurs?,” Espace Social Européen10-26:20-24, 1990.

15. Reinhardt, U.E., “Financing the Hospital:The Experience Abroad,” contractor reportprepared for the Office of the Assistant Secre-tary for Planning and Evaluation, Departmentof Health and Human Services, Washington,DC, July, 1984.

16. Tordeux, “Législation Hospitalère, tomes 1 et2,” Rennes, ENSP, Juillet 1986.

17. Toullalan, M., “Analyse Comparative desModalités de Fonctionnement des Établisse-ments Sanitaires Publics et Privés à but Lu-cratif,” Revue Hospitalière de France3:328-351, Mai-Juin 1991.

HospitalFinancingin France

by Marie-José Sourty-Le Guellec

he French health care system is arguably the most compli-cated of the European (and Canadian) systems describedin this report. Its system includes universal, compulsorysocial insurance, significant patient cost-sharing, and sup-

plementary insurance on the financing side, and public providerscombined with a sizable number of private providers on the sup-ply side. Overlaying both the public and private sectors are stronggovernmental controls at all levels of government (11).

Almost the entire population (99 percent) is covered by thestatutory health insurance scheme, which is part of France’s so-cial security system. Statutory health insurance expenditures ac-count for over 70 percent of national health expenditures inFrance. The scheme is administered by social security sicknessfunds (Assurance Maladie de la Sécurité Sociale). A person’s oc-cupation generally determines membership in a particular fund.There is one large fund for salaried workers (CNAMTS), whichaccounts for nearly 80 percent of the compulsorily insured andabout 15 smaller funds cover other workers. The government pro-vides insurance for low income people. Contributions for sick-ness fund insurance are income-related and shared by employersand employees or paid directly to the relevant fund by nonsalariedor self-employed individuals (11).

Social insurance provides both cash benefits (e.g., sick pay)and benefits in kind (e.g., ambulatory care, hospital care). De-pending on the patient’s financial circumstances, the patient maybe required to pay coinsurance or copayment amounts; forinstance, patients may have to pay 20 percent of the cost of hospi-tal services (the ticket modérateur) and a daily flat rate contribu-

| 55


tion that is currently 50 francs.1 Employers some-times provide supplementary insurance for theiremployees through mutual fund organizations(mutuelles) to cover patient cost-sharing amountsand a few benefits not covered by the social insur-ance scheme. Individuals may also purchase pri-vate supplementary insurance. Mutuelles and pri-vate insurance payments account for about 8percent of national health expenditures.

France’s sickness funds are quasi-autonomous,non-governmental organizations; there are na-tional, regional, and local organizations of thesefunds. They are subject to national and local man-agement by employer associations and tradeunions. They are also closely regulated by the cen-tral government; in particular, contribution rates,fee schedules, and pharmaceutical prices are con-trolled by the central government (11).

Patients can consult any medical practitionerfor primary care, and can choose to go to either apublic or private hospital. Money follows the pa-tient in the case of private hospitals, but publichospitals are subject to prospectively fixed budg-ets. Compared with the other European countriesin this study and Canada, French patients have rel-atively large cost-sharing requirements. Patientout-of-pocket payments currently account forabout 17 percent of national health expenditures;however, cost-sharing for hospital services is fair-ly small with only about 4 percent of hospital ex-penditures financed directly by patients (1 1).

Similar to many other countries, the contain-ment of health expenditures is a major concern inFrance. Hospital care represents half of nationalhealth expenditures, making the hospital sector aprimary target of France’s cost-containment ef-forts. Recent reforms have concentrated on effec-tively controlling sickness fund insurance pay-ments to private hospitals by extendinggovernmental regulation over that sector, and bycreating a new balance between the private andpublic sectors to harmonize their development

within an overall program designed to controlhealth spending. Also similar to many other coun-tries, France’s health reforms are moving in thedirection of making individual hospital budgetsbased more on each hospital’s level of activity andless on historical costs.

STRUCTURE OF THE HOSPITAL SECTORFrance has a mixture of public, private nonprofit,and private for-profit hospitals. Public hospitalstend to be large and well equipped; private hospi-tals tend to be smaller and to specialize in electivesurgery, obstetrics, or long-term care. In 1990there were 1,072 public institutions; they consti-tuted only 28 percent of all French hospitals, butprovided almost two-thirds of total hospital beds,hospital days, and inpatient admissions (tables4-1 and 4-2). By law, a public institution is a cor-porate body governed by public law and is respon-sible for providing a specific public service. Pub-lic institutions have full legal status, their ownassets and resources, and full legal autonomy.They are, however, subject to various forms ofpublic supervision and financial control. Publichospitals cannot waive their obligations, definedin the Act of December 31, 1970, to:

■

■

■

provide diagnosis, treatment, and (in particu-lar) emergency care to their patients and thosereferred to them, including necessary inpatientcare;contribute to the training of medical and para-medical (nonmedical) staff; andparticipate in medical and pharmaceutical re-search and health education.

In 1989 the private hospital sector included2,721 institutions, constituting 72 percent of allhospitals but accounting for only one-third of thetotal hospital beds, patient days, and inpatient ad-missions in France in that year (tables 4-1 and4-2). The private sector is divided into a privatefor-profit or commercial sector with 1,515 institu-

1The exchange rate in January 1994 was approximately $USO.17 to F1 .00.

Chapter 4 Hospital Financing in France I 57

Category of hospital Percent of total hospitals Percent of beds

Public 28 65Nonprofit, PSPH 12 11Private nonprofit, non-PSPH 19 5Private for-c) refit 40 19a Data for public hospitals are for 1990; data for private hospitals are for 1989.

SOURCES: Documents Statistiques, “Les Etablissements d’Hospitalisation Privee en 1989,” Enquete EHP 1989, SESI no. 121,Juillet 1991, Documents Statistiques, “Les Hopitaux Publics en 1990, Resuitats H80, ” SESI no. 154, Septembre 1992

tions and a private nonprofit sector with 1,206institutions. For-profit hospitals are privatelyfunded and subject to the rules of commercial andcivil law. Private nonprofit hospitals are run byvoluntary organizations, religious orders, em-ployee representatives, mutual fund associations,and social security funds. They are similar to pub-lic institutions in that they do not attempt to maxi-mize profits, and their surplus revenues are in-vested to further their health care objectives.

Private institutions are managed by individualsor a legal entity. They make many of their ownmanagement and investment decisions, and theirservices are governed mainly by market forces, al-though they are subject to certain governmentconstraints. Fees charged by private institutionsare controlled and subject to formal agreements.Increases in the number of beds and high-costequipment are controlled by the health map (cartesanitaire), described later, and require formal au-

Public PSPH Public and PSPH

Hospital days Hospital days Hospital daysBeds (in 1,000s) Beds (in 1,000s) Beds (in 1,000s)

Medicine 105,393 29,243 13,879 3,918 119,272 33,161Surgery 61,282 14,827 8,986 2,315 70,268 17,142Obstetrics/gynecology 17,337 4,101 1,393 356 18,730 4,458Medium-stay 42,127 11,943 19,921 5,386 62,048 17,329Long-stay 63,711 22,289 1,877 638 65,588 22,927Psychiatry 68,600 18,669 12,733 3,921 81,333 22,590

Total 358,450 101,071 58,789 16,535 417,239 117,607

Private for-profit Private nonprofit Total private

Hospital days Hospital days Hospital daysBeds (in 1,000s) Beds (in 1,000s) Beds (in 1 ,000s)

Medicine 14,753 2,039 3,943 1,242 18,696 3,282Surgery 50,820 17,123 4,675 1,484 55,495 18,607Obstetrics/gynecology 10,083 3,084 882 254 10,965 3,338Medium-stay 18,123 5,646 15,672 4,525 33,795 10,171Long-stay 436 140 2,037 722 2,473 862Psychiatry 13,405 4$767 1,960 637 15,365 5,404

Total 107,620 32,800 29,169 8,865 136,789 41,664a Data for public hospitals are for 1990; data for private hospitals are for 1989.

SOURCES: Documents Statistiques, “Les Etablissements d’Hospitalisation Privee en 1989, ” Enquete EHP 1989, SESI no 121, Juillet 1991, Docu-ments Statistiques, “Les Hopitaux Publics en 1990, Resultats H80, ” SESI no. 154, Septembre 1992.


theorization. Additionally, the medical activities ofprivate hospitals are supervised by the sickness in-surance funds’ medical officers.

Private institutions are allowed to participate inthe public sector, although to date only some ofFrance’s private nonprofit hospitals (467 in 1988)have asked to be incorporated into the public hos-pital service. These hospitals, called PSPH hospi-tals, are governed by rules similar to those for pub-lic hospitals. There are thus two general categoriesof hospitals in France: public and PSPH hospitals,and private institutions that do not participate inthe public hospital sector.

Financing methods and operating arrange-ments vary greatly between the public and privatehospital sectors. Public and PSPH hospitals aregoverned by the principles of public accounting,whereas private for-profit hospitals are commer-cial undertakings that attempt to maximize theirsurplus revenues. Reform legislation passed inJuly 1991 and currently being implemented is de-signed to create a new balance between the privateand public sectors and to harmonize their develop-ment within an overall program to control healthexpenditures. The reforms formally recognizethat public and private hospitals perform the samebasic functions. In the future, the two categories ofhospitals will share equal responsibility for ensur-ing public health through common provisions thataffect all types of hospitals. Furthermore, the re-forms seek to strengthen and encourage coopera-tion between public and private hospitals (5).

At present, a statutorily insured patient inFrance can go to either a public or private hospital,although in practice the decision is usually madeby the patient’s physician. When the choice is apersonal one, it tends to reflect the hospital’s geo-graphical proximity, its reputation, or other per-sonal preferences. Under the 1991 reforms, pa-tients’ freedom to choose a physician or hospitalbecame an even more integral part of the healthcare system in France than it was under previoushealth care legislation.

Many hospitals in France have short-, me-dium-, and long-stay beds as well as psychiatricbeds. It is difficult, if not impossible, to determinethe proportion of hospital care in France that is de-voted to short-term acute care treatment; there-fore, this chapter deals with the French hospitalsector as a whole. Purely residential institutions,such as nursing homes, are excluded from datacited herein, however.

PHYSICIANSIn public and PSPH hospitals, the medical staff in-cludes residents or interns, who are physicians intraining, and hospital practitioners, who are full-time or part-time with a salaried established post(titulaire) or a salaried, nonestablished post (non-titulaire). Table 4-3 provides a breakdown of hos-pital physicians in private and public hospitals in1989 and 1990. The central government controlsthe growth of salaries and the number of hospitalstaff in public hospitals.

Public PSPH Private for-profit Private nonprofit Total

Salaried practitioners Full-timePart-time

Nonsalaried practitioners Full-timePart-timeOccasional

Salaried residents Full-timePart-time

Nonsalaried residents Full-timePart-time

27,913 2,61439,962 4,250

32762590

22,019 1,655233

22

596851

8,88322,15112,976

248328

15164

5252,047

4951,9121,496

2369011

8

31,67547,1109,410

24,82515,06224,158

65148

172a Data for public hospitals are for 1990; data for private hospitals are for 1989.SOURCES: Documents Statistiques, “Les Etablissements d’Hospitalisation Privee en 1989,” Enquete EHP 1989, SESI no. 121, Juillet 1991; Docu-ments Statistiques, “Les Hopitaux Publics en 1990, Resultats H80,” SESI no. 154, Septembre 1992.


In certain circumstances hospital physiciansare authorized to treat private patients in publichospitals through consultations or the use of pub-lic service beds for private patients. In such casesthe physician receives a fee from the patient,which may be reimbursed by the patient’s insur-ance company. Income from private fees may notexceed 30 percent of a physician’s total incomeand the number of beds that can be used for privatepatients may not exceed 8 percent of all public ser-vice beds.

Public hospital physicians often confer with of-fice-based private practice physicians (médecinslibérals). Whether or not payment for the con-sultation is included in the hospital’s global al-location of funds (discussed further below) de-pends on the regularity of the consults. Anyphysician in an office-based practice may be con-sulted on an occasional basis by a hospital physi-cian. Payment is rendered according to the serviceor consultation performed and falls outside thehospital’s global allocation. Hospitals regularlycall on some physicians in private practice (calledaffiliated practice physicians) who are paid a feeper service provided. These fees are included inthe hospital global allocation.

There are no salaried physicians in rural hospi-tals and any private physician may consult theresubject to authorization. In these cases the physi-cian may ask patients who are not covered by sick-ness funds to pay an agreed-upon fee. For patientswith sickness fund coverage, the physician mayclaim 85 percent of the local daily charge per day;for patients qualifying for social assistance, thephysician is paid 50 percent of the departmentalmedical assistance charge. In these two cases thehospital retains 10 percent of fees received.

In certain circumstances nonsalaried physi-cians operate clinics in public institutions. Theyare paid on a fee-for-service basis; the level of feesis agreed upon directly with the patient. Physi-cians pay 10 percent of their fee income to the hos-pital, which uses the proceeds for improving theirstock of medical equipment.

Thus, in public or PSPH hospitals, most pay-ments to medical staff are included in the operat-ing section of the budget and are taken into ac-

count in determining the hospital’s globalallocation. Exceptions to this are fees paid to phy-sicians practicing in rural hospitals and in hospitalclinics, and fees received by hospital physicians aspart of their private practice.

In private for-profit hospitals, physicians arenearly always paid on a fee-for-service basis andpatients are reimbursed by their insurance compa-nies. Nevertheless, an increasing number of pri-vate institutions are taking the opportunity to in-vest in staff (particularly medical staff) by offeringthe best-trained personnel attractive remunerationpackages, particularly in comparison with whatthe public sector can offer. Physicians’ fees in pri-vate hospitals are set according to a national feeschedule, but their incomes, other staff incomes,and the number of staff hired are not regulated bygovernment.


❚ Financing ModelThere are two distinct methods of financing hospi-tal operating costs in France. Public and PSPHhospitals are paid largely through a prospectivelyfixed budget. Private non-PSPH institutions arepaid a daily (per diem) rate for their services; inpa-tient physician and ancillary services are paid foron a fee-for-service basis.

Public HospitalsSince 1984-85, public and PSPH hospitals havebeen subject to a global allocation scheme estab-lished by the prefect of the district in which theyare located and determined within the frameworkof federal guidelines. The global allocationscheme replaced a system of controlled rates of in-crease in per diem prices for public and PSPH hos-pitals (11). Under the new scheme each hospitalreceives an annual global allocation to cover theportion of its costs that is paid for by the sicknessfunds. Hospitals also charge daily rates (tarifsjournaliers de présentations) to cover that part ofa hospital stay not provided for in the global al-location. Daily charges are established for severalpurposes. Federal and local governments pay adaily charge for patients on social assistance. The


daily charge is also used to determine patient cost-sharing amounts for patient copayments (ticketmoderateur) and daily flat-rate payments (paid ei-ther by the patient or by a supplementary insur-ance company), and it constitutes the charge forpatients who have no insurance coverage.

Hospital BudgetsThe hospital budget sets forth estimated expendi-tures and revenues for the coming year. This budg-et, like that of any public administrative institu-tion, must conform to certain public accountingprinciples. It has two sections, as described below:

The operating section deals with current activi-ties, including the day-to-day running of thehospital and financial management.The investment section deals with operationsleading to an increase in durable capital assetsrequiring depreciation (other than stocks), suchas permanent capital, real estate and tangibleproperty, stocks and securities, deposits andsureties, and physical supplies.

Expenditures that require authorizations for theoperating section of the budget are divided intothree groups:

1.

2.3.

is

1.2.

3.

4.

5.6.

7.

expenditures relating to the external purchaseof goods and services,staff or personnel-related expenditures, andall other types of expenditures.

A public or PSPH hospital’s operating revenuederived from the following sources:

the global allocation described below;income from services (e.g., via daily ratecharges or fees);grants, donations, and legacies to be used foroperating purposes;other surplus income unrelated to operationalactivities;income from reserves;the value of liabilities reduced by expire orlapse; andthe value of any repairs undertaken or surplusproduced by the institution itself (e.g., pharma-ceutical products made by the hospital’s labora-tory).

Appended BudgetsCurrent expenditures on certain activities and ser-vices (e.g., blood transfusion centers, mobileemergency services, data processing centers)must be included in appended budgets. Operatingcosts are funded from both general and appendedbudgets.

Authorized expenditures for the coming yearmust take into consideration the average rate-of-increase guidelines established by the central gov-ernment’s ministries of the economy, budget,health, and social security. The average rate of in-crease for hospital expenditures is based on gener-al economic trends—in particular, forecastedchanges in prices and wages—and on nationalhealth and social policies. The guideline rate was4.2 percent in 1990.

Determination of the Global AllocationAlthough a hospital receives a small amount ofrevenues in addition to the global allocation anddaily charges, these two elements are essential toa hospital’s ability to provide services. The globalallocation is designed to provide enough funds tocover that part of the hospital’s expenses that willbe paid for by the sickness insurance funds. It rep-resents the difference between total operatingcosts as set forth in the authorized general and ap-pended budgets and expected hospital revenuesother than the global allocation itself, so as to en-sure that the hospital’s budget will be balanced af-ter taking into account surpluses or deficits fromprevious years. Annual increases in a hospital’sglobal allocation are based on the federal guide-line rate of increase and the hospital’s forecastedlevel of activity.

Patient copayment and daily flat-rate contribu-tions, repayments by mutual fund associationsand private insurance companies for their mem-bers’ expenses, and payments for patients coveredby medical or social assistance are not included inthe global allocation; they are billed according tothe daily service charges established for individu-al patients.

The global allocation covers costs relating toinpatient care, day and night care in the hospital,


outpatient care,2 psychiatric care, legal abortions,mobile emergency care units, and long-term careinstitutions for the elderly.

Determination of Daily ChargesThe partial nature of the global allocation makesit necessary to establish a system of charges (tar-iffs) to recover expenses not paid for through theglobal allocation. Daily service charges determinethe amounts to be paid by federal or local govern-ments, patients, or any organization providingsupplementary coverage. Daily service chargesare calculated for different types of services by di-viding the estimated total costs of each type of ser-vice by the estimated number of patient days foreach type, after adjusting costs for offsetting re-ceipts and for any previous year’s surplus or defi-cit that has been carried forward.3

Service charges are calculated for inpatient care(including specialist and nonspecialist services,services relating to expensive specialties, and me-dium- and long-term services), day and night care,and home care services. There are also three pos-sible short-term charges for medicine, surgery,and expensive specialties. Because individualhospitals have different budget levels and esti-mated numbers of patient days for various types ofservices, daily service charges vary by hospital. Incontrast, flat-rate charges for outpatient care andfor legal abortions apply uniformly throughoutFrance. Box 4-1 describes the different parties in-volved in hospital management and supervision,and offers more details on the determination ofglobal allocations and daily rates.

Budget AdjustmentsExcept in the case of a budget revision, the globalallocation is paid on the basis of the amount ini-tially provided for, regardless of the hospital’s ac-tual level of activity. If the number of patient daysis lower than estimated, the hospital’s income (in-sofar as it relates to its global allocation) remainsunaltered.

If a hospital can show that there has been a sig-nificant and unforeseen change in its financial cir-cumstances or medical activity leading to a sub-stantial increase in the hospital’s costs during thecurrent year, changes to the budget (e.g., an in-crease in authorized revenues to meet higher-than-anticipated expenses) may be approved. Addi-tionally, in urgent cases the hospital’s directormay transfer appropriations between the first twogroups of authorized expenditures in the generalbudget and the appended budgets during a finan-cial year. These transfers may not, however, in-crease or reduce authorized expenditures withinthese groups by more than 10 percent, reduce ap-propriations designed to cover unavoidable costs(e.g., social security contributions or taxes), orcommit the institution to expenditures beyond thecurrent financial year.

End-of-year surpluses in the hospital’s admin-istrative account resulting from more efficientmanagement (e.g., expenses are less than fore-casted for the same or higher level of service deliv-ery) are assigned to a compensation reserve ac-count. Such reserves may be used to coversubsequent years’ deficits or assigned to anotherreserve account that can be used to finance opera-tions or investments that do not increase operating

2Actually, only part of the cost of outpatient care is taken into account in calculating the global allocation. In particular, the allocation relat-ing to this area covers the cost of supplying drugs for which the sickness insurance funds are statutorily responsible. It is estimated that on aver-age, 50 percent of outpatient costs are covered by the global allocation. The remainder has to be covered by the patient through a copayment orby a third-party payer other than the patient’s sickness fund.

3An excerpt from the decree of Aug. 11, 1983, section 32, states specifically that “[t]he estimated cost price shall be equal to total operatingexpenditures, comprising:

a) direct costs, that is the costs of services belonging to a particular category of charges, excluding the cost of medical treatment, goodsand other medical services;

b) the cost of medical treatment, goods and services on the basis of their purchase price or, failing that, of their cost price;c) other costs included in the operating section of the general budget which are not covered by their own resources, divided among the

different categories of charges in proportion to the estimated number of days for each category;d) where appropriate, that part of the previous financial year’s deficit which has been carried forward.”


Hospitals are managed by a board made up of locally elected representatives (of which the mayor of

the municipality concerned is the chairperson), representatives of the social security system, represen-tatives of the hospital’s medical and nonmedical staff, and a director who is responsible for implement-ing the policies developed by the board and approved by representatives of the State. The board’s

director also authorizes expenditures and issues revenue orders, appoints nonmedical staff, and is thehospital’s legal representative.

The supervisory role exercised by public authorities in the budget-making process places strict lim-its on the degree of managerial autonomy enjoyed by public and affiliated hospitals. Administrative su-

pervision of public and PSPH hospitals operates at every level:■ at the national level through the Hospital Department of the Ministry of Health;■ at the regional level through the prefect of the region (appointed by the government), assisted by the

regional Department for Health and Social Services (DRASS); and■ at the district level through the prefect of the district (also appointed), assisted by the district Depart-

ment for Health and Social Services (DDASS).

The social security system, which is the principal source of funds for hospitals, has no formal super-visory responsibilities but only the right of oversight. Its role has been strengthened over time, however.Social security sickness funds have contributed to the development of hospital policy at the nationaland local levels through representation on various associations and through their significant oversightrights for financial and medical matters. Additionally, supervisory authorities must consult representa-tives of sickness funds when drawing up hospital budgets. Furthermore, at the request of the sicknessfunds, hospital directors must submit quarterly expenditure commitment statements and provide in-formation on staffing. The sickness funds also partially supervise medical decisions, which can meanthat a sickness fund would refuse to pay the cost of treatment or would modify the financial terms of ahospital admission that it deemed unjustified or inappropriate. The sickness funds monitor all hospitalmedical activities but (except with regard to nonpayment of services) exercise a passive form of super-vision, as the funds’ concerns are not backed up by any sanctions (3).

Financial monitoring of hospitals is the responsibility of the district Department for Health and SocialServices; the social security funds, which receive the quarterly expenditure statements; and the hospitalaccountant (an official of the public treasury service) who ensures that spending commitments complywith relevant legislation and regulations and that the necessary appropriations have been made.

costs in subsequent years. Priority is given to fi- account. If the reserve is not sufficient, the deficitnancing services that have contributed to the sur-plus. Surpluses that do not result from improvedmanagement (e.g., if services are lower than fore-casted levels or the surplus arises from dailycharges or outpatient care) are transferred to acompensation reserve account to cover operatingcosts in future years.

Any deficits in the administrative account arecovered by drawing on the compensation reserve

amount is figured into the budget of two years lat-er or can be spread over the following two finan-cial years by adding it to the hospital’s operatingcosts.

Sickness Fund PaymentsEach sickness insurance fund in a given hospital’scatchment area pays the so-called pivot fund (ormain fund in the area) its share of the hospital’s


The budgetary process is relatively long, reflecting the desires of various categories of hospital staff

to be involved in the hospital’s planning and the strict supervision exercised by external authorities. Thedirector or director-general of the hospital is responsible for preparing and submitting budget propos-als, taking account of the previous and current years’ activities. Assisted by hospital departments, thedirector determines the level of expenditure that is essential for the hospital’s operations. The draftbudget is then submitted to a joint consultative committee and a medical staff committee for comment.Budget proposals are adopted by the hospital’s board (conseil d’administration), which must express aformal opinion on the director’s figures. Budget proposals are then sent to administrative authorities andthe regional sickness insurance fund for salaried employees, where they are available for comment.

Hospital budgets, global allocations, and daily service charges are determined by administrative

supervisory authorities by January 1 of the relevant year. With the exception of the Paris hospital service(responsibility for which devolves on the Minister of Health), the prefect of the district is responsible forestablishing global allocations for the district’s public hospitals. This responsibility also involves a criti-cal response to hospitals’ budget proposals to ensure that each institution can meet its obligations. Theprefect is empowered to increase income and expenditure estimates for hospitals whose estimates itconsiders too low and to remove or reduce items that it considers unnecessary or too high—taking ac-count of local heath care needs and the federal guideline rate for average increases in hospital expen-ditures (4). Prefects’ decisions are made only after consultations with the social security funds. Theopinions of the social security funds and the medical supervisory bodies are recorded by the regionalsickness insurance fund.

The district prefect notifies the hospital, the regional sickness fund for salaried employees, and thefund responsible for paying the global allocation (the “pivot” fund) or main sickness insurance fund inthe area) regarding the final determination of daily service charges and the global allocation, togetherwith the hospital’s approved budget.

The hospital’s director is the principal authorizing officer for the budget and maintains a formal re-

cord of expenditures. The director submits quarterly accounts (upon request) to the prefect. At the endof each quarter, the director also submits a chart a to the prefect showing the current number of hospi-tal staff.

global allocation.4 At the end of the financial year, locations must reach a unanimous decision on thethe national sickness insurance fund for salariedemployees draws up a statement of contributionsrequired from each fund based on the number ofdays provided to the fund’s members (weightedaccording to coefficients that account for the dif-ferent daily costs of hospital care provided, whichare determined by a joint ministerial order). Be-fore June 1 of the following budget year, a com-mittee for the apportionment of hospital global al-

final contribution from each sickness fund, takinginto account the statement drawn up by the nation-al sickness insurance fund (8).

Recent ReformsAlthough the 1991 health reforms did not alter thebasic method of global allocations, major changesto the budgetary process were introduced. Underthis legislation (whose implementing regulations

4 Under the 1991 reform legislation, the pivot sickness fund makes an initial payment of 60 percent of the global allocation to the hospital on

the twenty-fifth day of the month, then 15 percent on the fifth of the following month, and the balance on the fifteenth day of the followingmonth.