Trends of Financing and Production of Healthcare in EU

Eero Linnakko, Deputy Team Leader

1. Different models - same principles

In Europe the politically dominant view has considered most of healthcare as a social good, which every member of society is morally entitled regardless of the individual's ability to pay for it. The consumption of healthcare services in Europe, therefore, rest on solidarity and collective finance and subsidies. Within that common view there exist two main healthcare models. The first is the public mandatory social insurance model, often referred as a German (Bismarck) model. The second model is the tax based one, referred as Nordic or British (Beveridge) model. In both these types, however, we can see mixed supplementary provisions of different kinds, for example, there may be varying levels of supplementary, voluntary contributions in both systems. Six of the old EU member states use the social insurance model. This is common in the central part of Europe, while the nine taxation-based systems tend to be found more in the periphery of Europe.

A healthcare system, its governance and finance are always the results of existing traditions, social values, medical technologies and economic constraints of the society the system serves. Therefore, the actual healthcare systems diverge in EU countries. Each country has acting according to its own habits and a universal European health care system, therefore, does not exist. Despite all the differences between health care systems, all governments of the countries of the European Union are, constitutionally or otherwise formulated, obliged to do take care of their citizens' health and therefore citizens have high expectations in this respect.

In the healthcare system development all European countries (contrary to the USA), have been following very much the same principles when developing the welfare state. These principles include:

• Universal coverage of the population trough compulsory participation
• Comprehensiveness of principal benefits
• Contributions based on incomes, rather than individual insurance purchase
• Cost control trough administrative mechanism, including binding fee schedule, global budgets, and limitations on investments.

Because of above principles the healthcare systems in Europe consume lot of public means leading into the situation where the additional public money for healthcare has become short. Now governments, local authorities, insurance companies and patient's are, increasingly critically asking how the healthcare systems are using their resources and what are the outcomes they provide. On the same time, the governments have introduced strict financial regulation. The general intention in Europe is to limit the growth or even reduce the level of healthcare expenditures. This development is part of the common restructuring of healthcare systems in all European countries.

2. Where are we
2.1 Structures and Processes

In the last part of the 19th century and the first part of 20th century - regardless of ownership of the healthcare facilities- the healthcare providers were independent and isolated institutions governed and financed by the state or charity organisations. Even within hospitals there often was a separate and isolated structure that, evidently, reflected the fear of infectious diseases. Because of the lack of effective medication the patients and hospital were isolated from the society and from each others.

After the effective antibiotics, the case mix of healthcare system changed. Instead of infectious diseases and emergency surgical patients, hospitals increasingly treated cardiovascular problems, cancers and elective surgery patients. On the same time, the planning principles of healthcare production changed when we copied the model of industrial mass production. Bigger or at least more specialised was better. The growing size and division of labour dominated the development on 20th century.

Generalist became specialists, knowing more on less and needing more sophisticated devices for diagnostics and treatment. This development led to concentration of resources into the big units. The structure of the system was very much functionally and quantity (output) oriented. As a result, specialised and efficient services were first time in the history available for most of the citizen of Europe. New medical victories were constantly gained in the battle against the diseases and ill health.

New medical technologies and techniques led to significant increase in treatment opportunities and patient friendly treatment methods. These methods increased the demand of services but reduced average length of stay in acute care. Hospital productivity increased and the acute hospital beds were used more intensively: hospitals were treating more and older patients but with increasingly costly technologies, facilities, equipment's, staff and drugs.

Functional specialisation and related segregation of the parts, however, caused problems in communication. Lot of controversy caused, also, that the mass-production model did not genuinely reflect the core values within the healthcare when the basic value is the patient orientation and individual care. That type of care was and still is provided in small mainly local community oriented hospitals but not always with good technical skills.

Today a greater emphasis in most European countries is placed on prevention, health education and health promotion than on "cure". Also, primary and community care will be looked upon increasingly as a more efficient and effective alternative to some existing forms of hospital treatment. This is not, however, to say that hospital care is not needed. It only will be organised and produced differently.

The result has been a pressure to reduce the number of "expensive" acute beds in hospitals and to use alternatives, for example, other residential institutions, community and primary-care to response the chancing demography in most European countries. Long term care is increasingly provided in residential institutions and community and primary care settings. Therefore, many small acute hospitals were handed over to the community care. Some of them were even closed

The new healthcare model, ones again, has been copied from the industry. This is not, however, because the production philosophy of the healthcare is finally approaching the industrial one but vice versa. The production philosophy of the manufacturing- and service industry today reflects the same principles, which are or at least should be typical for healthcare.

What dominates the development in different industries today is the client and quality orientation. Instead of mass-production the manufacturers and service providers increasingly try to take in to the consideration the individual needs of the client. This is exactly the same what healthcare professionals say they are doing with their patients. Consequently, in healthcare we are moving from quantity to quality orientation. Instead of structures and quantities we are concentrating on processes and quality of care. Quality control and improvement mechanisms- auditing, certification, Total Quality Management (TQM) and Continuous Quality Improvement (CQI)- will get even greater prominence when money is getting shorter. These quality tools play a significant role today when we are restructuring and re-engineering the healthcare systems. Integration of care and cure around the patient and his problem take place within the whole healthcare system and not only within the single hospital. That we now call as a seamless-care model.

2.2 Expenditures and Financing

Until end of the 1980's hospital financing in EU commonly based on global and even open ended budgets only derived from the structure and past history of the healthcare system. In most European countries healthcare providers operated under strict budgetary constraints. Hospital budgets were generally historical and resource based and, therefore, rigid and incremental. The expenditures were divided between the financing bodies according to the bed-days and number of outpatient visits. The budgets were usually on the hospital level only and no division of budgets amongst the specialities was made and internal costs of services were often unknown. Only in three EU countries budgets were regarded as financial plans (UK, Belgium and the Netherlands). However, the importance of the budget as a sole economic management instrument is decreasing in most EU member states

The total amount of the money we spend to the healthcare was not questioned and healthcare spending in almost all European countries increased until the beginning of 90's. Then during the common economic stagnation the provision of healthcare and financing, no mater if being based on social insurance or taxation, was put under scrutiny of a kind that, for some, questions the very foundations or ethos of the welfare state and the solidarity as an essential mean of health care provision.

In all EU countries hospitals consume more than half the health expenditures. The share varies from 50% to 75%. Nevertheless, the definition, functions and service mix of hospitals are not the same, which make it difficult to interpret the true meaning of these differences. For example the hospital budgets in Belgium, Luxembourg and France (in private hospitals) do not include physicians' salaries. In Sweden general hospitals treat also long term patients.

More than 70 per cent of hospitals in Europe are owned by some sort of a public authority whatever is the financing model. In all EU member states the central government finances hospitals, but the proportion of that finance varies greatly. The lowest is about 5% in the Netherlands and the largest nearly 100% in United Kingdom and Portugal. In all Nordic countries the local governments pay hospital services and for that they have the right to levy taxes

Today primary care physicians (GP) and physician offices, at least in tax based systems, are increasingly getting their incomes based on the pure capitation principle or mixed with fee-for-service and salary elements. Also fixed salary is common. This means that the providers will get their pay based on the number of the people they serves. Often the payment is weighted according to the age, sex and known morbidity differences of the catchments population i.e. those units who serves populations with greater (expected) need of services will get more incomes from the financing body.

The traditional financing model of recurrent expenditures of hospitals based on budget or only the number of bed days has become inapplicable. Instead, the case complexity based financing is now adopted in almost all of the EU countries. The independent purchaser wants to know what kind of services he is getting from providers. Consequently, economic responsibility and accountability are now on the departmental level, all costs are calculated and hospitals are increasingly managed as a firm.

Public and private hospitals are increasingly contracting with independent financing bodies whether or not their financing is based on taxation or insurance premiums. The purchaser provider split is common also in countries where taxes are the main source of hospital incomes. The split is fully present in seven EU countries, partially in two and does not exist in four. The evident aim of the split is to use quasi markets to improve the efficiency.

In thirteen old member states different service definitions and groups (like Diagnostic Related Groups) are already being used both in determining, financing and in describing the services delivered. The variation of definitions is considerable. Variants of DRGs from the USA are in use in the Nordic countries, Germany, France, Portugal, Belgium, Spain, Italy and Ireland. Similar systems based on national development work are in use or under development in the United Kingdom (Health Related Groups), Austria and in the Netherlands.

Fee-for-service type of outpatient visit groupings are in use only in some member states in private policlinics and hospital. These service definitions, however, are becoming more important, when different forms of day hospitalisations increase. Some countries are still using more traditional billing instruments such as number of outpatient visit.

The central government, regional and local authorities or health insurers still regulate the health care investment expenditures in most EU countries. Government subsidies may be available only for certain new major investments, which are generally based on national or regional plans and which hospitals must justify by a business plan. However, minor capital costs and expenditures are increasingly included into the service prices. Only in the Netherlands the government does not regulate hospital investments and the owners of the facility finance them based on economic reasoning.

Staff development is strongly regulated in most member states by numbers, structures and salary expenditure in budget. This principle applies whatever the form of financing or ownership of healthcare providers. The motivation for a strong regulation is evidently a will to control the overall public spending on health and, in particular, hospital services making hospital financing an instrument of government fiscal policy. This however, may effectively undermine the other incentives to increase the efficiency and productivity.

Teaching and research (T&R) are generally considered to be an important human capital investments produced by the health service system itself. Therefore, the financing bodies should finance it separately. It is no more possible to hide it into the service prices without violating the ability of teaching hospitals to compete with other providers. In some countries the funding of T&R is, therefore, based on indicators describing the teaching and research outcomes. Mostly, however, T&R allocation is only a separate line in the government budget or, still, only implicitly included in global budgets.

While private contributions (direct "out of pocket" or co-payments and private health insurance schemes) still account for a relatively small proportion of hospital incomes, this share is now growing. The highest figure is now found in Finland, France and Italy where the patient fees covers about 8-10% of provider incomes when the average in EU is about 3 - 4%. Patient fees do not (jet) exist in the UK, Denmark and Spain.

Because of limited availability of public finance private financing initiatives within the public sector, stricter control of hospital recurrent and investment expenditures and budgetary efficiency will become even more prominent in future as today.

3. Where are we heading
3.1. Structures and processes

Within the health care systems the strategic planning cycle is long. If we ask, where the European healthcare systems are heading within next 20 years, the answer, obviously, is not easy to give. The constantly tight budgets, staff constraints and medical and IT technology will be the main factors of the future change. Evidently the change will be incremental rather than revolutionary. The foundation of this vision is the extensive use of information technology and the results of new bio-medical and clinical research. Information super highway, multimedia, artificial intelligence, telemedicine and robotics together with new medical innovations will offer new solutions. Ones again the existing new technology will reshape the structure and functions of healthcare actors maybe more radically than ever before.

The factors behind of the vision are both internal and external. First the technology already exists. Secondly, healthcare is information intensive and technical, based on documentation, images, test result and consultations already. However, the basic care of the patients will be local and sensitive. The new technology will help us to integrate these two contradicting aims. Consequently, the new technology only supports the existing basic paradigms of care and cure. Thirdly, the new model will be also cheaper because the more efficient use of scare human resources. Finally, it will be more quality oriented.

There will be a tension between the trends to decentralise and, in so doing, improve access to healthcare and to centralise treatments into the 'centres of excellence' when searching for greater cost-efficiency and better quality. The solution for that may be that the middle size specialised hospitals finally disappear. The specialised care will be concentrated in big hospital because the economic of scale and scope or small specialised units only having one or two service lines (day surgery). Local small hospitals we will have also in future but providing only very basic care.

The trend in ownership of public hospitals, formerly owned by the central or local governments is towards the regional bodies, like hospital trusts, hospital districts or county councils or private owners. The relative share of now dominant public provision of hospital services is evidently decreasing, but also the private hospitals seek benefits out of consolidation and mergers when establishing private hospital consortiums

The old centralised, large scale bureaucratic model of specialised hospital care, we copied from manufacturing industry and public administration in 20's and 30's evidently disappears. Physically at least, traditional multipurpose hospitals may disappear and hospitals are becoming "mental" or, merely, "virtual" by nature. So, in future, the buildings, beds, hierarchical structures and prestige based on size of the institutions will no be relevant or important features of healthcare system.

As far as hospital non-clinical and even some clinical support services are concerned, the trend is increasingly towards outsourcing and networking. New hospital consortia are often geographical monopolies. Single payers face the single providers equalising the negotiation power in contracting but, on the same time, aggravate the use of present models of competition between hospitals.

Highly but differently skilled health care workers are offering solutions to the problems of patients.
The skills and knowledge of health care professionals and how they best use these skills for the benefit of patients are the most essential features of the health care system in future that demands constant investments for both training and research.

Most of the patients will be cared and treated near their homes or even in the home. This confirms the physical separation of three essential parts of treatment - diagnostics, cure and care. They will be produced separately in different locations but co-ordinated by physicians behaving as agents of the patient. For example, small clinical laboratories evidently disappear and laboratory diagnostic is produced in big highly automated units seeking even international markets. Images will be taken locally, stored regionally in electronic storages and maybe read globally.

Hospitals will adopt the matrix type organisation where care of the patient is considered to be a project and, therefore, managed like a project. Services will be integrated over organisations along the service lines. Integrated co-operative service provision networks are more important than single hospitals. Maybe the sharp differences between health care professions also disappear or, at least, diminish. Team work and production cells around the problem of patients will become the most important factors of care and cure.

The service production processes within health care will be organised to be lean, where all kind of waste of resources is minimised. There will be specialised consultant units only selling their experience and advises to the other physicians through the communication networks (telemedicine). This new business can be international; the information will move extensively and the patients and professionals minimally. Increasingly specialised health services are produced on the markets or the market like situations. Services are defined and priced and traded by different special agents within health care system. Provision structures are at least regional but, obviously, some parts of the services and service patterns and concepts (care guidelines) will be traded in world-wide scale.

3.2. Expenditures and Financing

Because health care is a labour intensive industry the total cost care will evidently grow also in future independently of any cost containment effort. Even if it is possible to get some productivity gain in curative area of healthcare these gains are more difficult or impossible to achieve on the area of care especially on the area of long term care. This area will grow relatively faster because of the rabidly ageing population.

As far as the insurance-based systems are concerned noting indicates any significant movements towards a tax-based system except Spain, where the dominance of compulsory (and statutory) public insurance is decreasing and the state taxation element increasing. Otherwise, in countries like Belgium, France, Germany and the Netherlands, the future may hold more of the same with possible adjustments being sought between compulsory public, compulsory private and voluntary private contributions. Of the respondents in this category only Greece has indicated that personal out of pocket contributions for hospital care were likely to increase.

In those countries characterised by an essentially tax-based system there might be a general move towards an increasing share of insurance contribution, be this of the mandatory public kind (for example, Greece) or voluntary private (for example Finland, Ireland, Portugal, UK). There may be opportunities and willingness to switch to insurance contributions and greater co-payments and patient fees. This will reduce the burden on the public finance but, consequently, increasing it on patients

Since the share of elderly people will substantially increase in the coming decades, one may, apart from the financial problems regarding old age benefits, expect problems regarding the related health care costs.

4. Conclusion

There still today are many differences within and between the healthcare systems of EU member states and it is still a matter for individual governments within their own national competencies to seek different solutions (subsidiarity principle). There are, however, some promising new common technologies that we can use to solve our healthcare problems. That will not be easy. The existing structures and mind sets are difficult to change because it raises justified fear that ones position is changing to be worse as it is today. That fear we have to overcome to find the ways to improve the health services for the future in EU.

Also the European Commission shows an increasing interest to take the lead in establishing a framework to compare the practical functioning of health care systems within EU countries. As for the European Union, political considerations, practical regulations, and rulings of the European Court of Justice may marginalise the subsidiarity principle and convergence of health care systems of the EU member states in future.

In a world where patient expectations are rising rapidly and people are increasingly looking for health services which offer greater personal choice in health services, it may not be acceptable or equitable to meet all of these additional demands through public financing. This makes controlling the developments within health care a delicate and difficult political affair for any government. The other difficulty is that health care has an enormous number of different interested parties, which all want the developments going their way (healthcare institutions, different professions, governments, insurers, industries related to healthcare, individuals and pressure groups).

An imbalance has developed between the availability of public finance and the potential for services with positive health outcomes. In insurance-based systems there is unlikely to be a significant shift in the method and principle of funding. The position in the tax-based systems is different in that there are opportunities to switch to insurance contributions of which private compulsory or voluntary contributions may take an increasingly large share, thus reducing the burden on the state but, consequently, increasing it on individuals. Therefore there is a need to explicitly specify the subset of health-care goods and services that are to be treated as purely social goods to which everyone in Europe should be guaranteed access as a moral right. However, the distributive ethic for health care is usually considered too delicate a topic for open debate in the political arena.

Evidently the basic package of services will be provided for all citizens in Europe with public money but some services, now provided within public system, may move in private settings. The difficult and never ending task of politicians will be to define what services should be retained in that basic package. On the same time, the governments will have difficulties to maintain the control of total healthcare expenditures because of increasing private activity in production and financing. Governments can only control the share of public finance. More private finance may, however, in long run, undermine the whole idea of solidarity because of a vicious circle of successive increases in private and decreases in public finance.