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ANNEXE 5

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Germany: example of the public-private mix

HOPE-AIM-Conference „Private or Public Hospital? Which choice for health insurance tomorrow?“

Speaker: Ralf-Matthias Heyder, German Hospital FederationDate: January 21st 2005

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In Germany there are three different types of ownership: public, private for profit and pivate non-profit

Public

General hospitals, usually owned by a municipality (city, rural district/county)

34 university hospitals, usually state-owned („Bundesland“, i.e. Bavaria, Saxony …)

Private non-profit

General hospitals, usually owned by churches or welfare associations

Private for profit

General hospitals, owned by private companies

These private companies are in turn owned by stockholders, private insurance funds or other big private investors

There is one private university hospital. For several university hospitals privatisation is currently being discussed

1. Definitions and concepts

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The term „privatization“ carries two meanings – it either refers to a change in ownership or to the use of specific management tools

Meaning 1 („Wider sense“):Introduction of management tools commonly associated with the private sector

Privatization

Meaning 2 („Narrow sense“):Change from public to private forprofit ownership

i.e.: a municipality sells its hospital to a private investor

i.e.: outsourcing, process optimization, financial controlling/cost control, specialization, group purchasing, standardization, benchmarking, …

these management tools can be employed independently of the kind of hospital ownership

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In order to facilitate „private“ management tools privatization in the narrow sense is one of several possibilities for public hospitals

Change of legal form (reorganization)

Management contract

Minority shareholding

Majority shareholding

Many municipalities choose to adopt legal forms that were previously mainly used by private companies (i.e. limited corporations)

This change of legal form usually goes along with organi-zational changes

Management is taken over by a private company

The private management obtains extensive authority and decision-making power

The municipality retains ownership

Public companies acquire hospital shares but do not get full managerial control

Public companies acquire more than 50 percent of hospital shares and acquire full managerial control

0 %

100 %

Publicly owned sharesPrivately owned shares

50 %

Private ownership (privatization in the narrow sense)

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Large hospitals tend to be publicly owned while private investors tend to focus on smaller hospitals – this is currently changing

298,000 (54,4%)

201,000 (36,7 %)

49,000 (8,9%)

Public hospitals (including 34 university hospitals)

Private non-profit hospitals

Private for-profit hospitals

Number of hospitals 2002 (total 2,221)

Source: Federal Bureau of Statistics, „Grunddaten der Krankenhäuser und Vorsorge- oder Rehabilitationseinrichtungen 2002“, all hospitals included

Number of beds 2002 (total 548,000)

817 (36,8 %)

877 (39,5 %)

527 (23,7 %)

Public hospitals (including 34 university hospitals)

Private non-profit hospitals

Private for-profit hospitals

2. Ownership in the hospital sector – facts and trends

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0

500

1000

1500

2000

2500

1990 2001

- 9,6 %

The share of public hospitals is declining while the share of private hospitals is rising

Public

723

Private non-profit

804

Private for profit

468

1043

843

321

Total: 1995Total: 2207

Number of hospitals over time (psychiatric hospitals excluded)

+ 45,8 %

- 4,6 %

- 30,7 %

Source: DKG, „Zahlen, Daten, Fakten 2003“, p. 16, psychiatric hospitals are excluded

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The state is pulling out of the hospital sector – hospital manage-ment becomes increasingly independent from direct state control

0

100

200

300

400

500

600

700

1990 2001

Th

ou

sa

nd

Public277

Private non-profit

198

Private for profit

41

387

207

23

Total: 516Total: 617

Number of beds over time (in thousand, psychiatric hospitals excluded)

- 16,4 %

+ 78,3 %

- 4,3 %

- 28,4 %

Source: DKG, „Zahlen, Daten, Fakten 2003“, p. 16, psychiatric hospitals are excluded

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In East Germany private for profit and public ownership is more prevalent than in West Germany

0

20

40

60

80

100

West East

Public 63,7

Private non-profit

18,4

Private for profit 17,9

51,9

41,7

6,4

Percentage of beds, East and West Germany, 2002

Source: Federal Bureau of Statistics, „Grunddaten der Krankenhäuser und Vorsorge- oder Rehabilitationseinrichtungen 2002“, psychiatric hospitals are excluded

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There are two reasons for hospital privatization in Germany – German reunification and increasing pressure for rationalization

Reunification (imprtant factor in the past)

Rise to a large extent due to public hospital sales in East Germany after reunification

Pressure for rationalization (is a more important factor now)

Changes in the system of hospital financing

Reasons:• East German hospitals did not have

to accumulate reserves for pensions• East German municipalities had no

experience with managing hospitals

Increasing pressure for rationalization

Extent of privatization depends on the ability of public hospitals to deal with increasing pressure for rationalization

Predictions regarding the extent of privatization of public hospitals are not possible

3. Causes for hospital privatization

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In Germany the hospital sector is subject to the principle of „dual financing“

Investment costs Running costs

Financing institution

Procedure

Respective state governements

Hospital applies for investment subsidies; after negotiations the state authorities decide how much and when money will be made available (state investment programme)

Health insurance funds

Hospitals bill provided services to health insurance funds; the amount billed may not include investment costs; the maximum amount billed per year may not exceed a certain amount (hospital budget)

Dual Financing

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In 1993 annual increases in hospital remuneration were limited to the annual growth rate of collected health insurance fees

Principle of full cost cover

Introduction of individual budget caps per hospital

Capped budgets per hospital

1993 Present

Before 1993

All expenditures had to be financed by the social health insurance funds

No deficits possible

After 1993

Yearly increases in the remuneration of individual hospitals have been tied to the increases in the amount of health insurance fees the funds collected

Deficits possible

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Hospital

Cost increases

Budget increases

Since 1993 costs rise faster than individual hospital budgets – the pressure for rationalization is continually increasing

Pressure for rationalization

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In 2003 Germany has introduced a DRG-system for remuneration – the pressure for rationalization has increased even more

Characteristics of the DRG-System

Remuneration is connected to individual case characteristics

Level of remuneration depends on the average resources needed for the treatment of specific diagnosis

Remuneration is based on average prices

Prices of individual DRGs are calculated from cost data of a representative sample of hospitals

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Incentive to minimize costs per case in order to maximize return per case

2.

Pressure for rationalization

Hospital

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The pressure for rationalization requires the use of modern management tools and investments into modern infrastructure

use of modern management tools and methods commonly associated with the private sector („privatization in the wider sense“)

Pressure for rationalization

investments into modern infrastructure

requires

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Insufficient state funding in past years has resulted in a buildup of necessary investments amounting to at least 27 billion Euro

Investment ratio

- 38,8%

Year Ratio

1991

1998

8,5 %

5,2 %

Source: RWI, „Das Krankenhaus, Basel II und der Investitionsstau“, Heft 13, p. 15-22

Assumption

Minimum investment ratio for sustainable hospital financing is 10 percent

Estimated buildup

The estimated buildup of necessary hospital investments amounts to 27 billion Euro

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Private companies have competitive advantages regarding the use of modern management tools and the financing of investments

Needs

Preconditions

Competitive situation

Use of modern management

Access to know-how

Investments

Access to private capital market

Commitment to rationalization

Public hospitals often do not have the required know-how and therefore depend on input from private companies

Due to the lack of state financing and their access to the private equity market private companies have a competitive advantage

Public ownership can imply the involvement of political bodies in hospital management

Conflicting goals, complex decision-making process, lacking commitment to rationalization

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Collective wage agreements and public procurement laws are competitive disadvantages for public hospitals

Public sector collective wage agreements

• Compensation depends on age → difficult to take merit into account

• Compensation for low-qualified labor is too high while compensation for highly qualified labor is too low

• Insufficient accounting for new job descriptions and job patterns

Public sector collective wage agreements inhibit flexibility

Public procurement laws

For publicly owned comapanies the law requests specific procurement procedures (calls for tender)

But: Up to 70 percent of hospitals costs are labor costs → need for flexible wage policies

Time consuming, limited power to negotiate for lower prices

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Municipalities are increasingly unwilling to finance their hospitals` deficit – sales of public hospitals to private investors increase

Growing deficits

Due to budget constraints municipalities are increasingly unwilling or unable to finance their hospitals` deficits

Municipalities sell their hospitals to private investors („privatization in the narrow sense“)

Some public hospitals do not realize sufficient gains from rationalization

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Several factors contribute to the privatization trend – despite this trend many public hospitals successfully compete in the market

Need for investments

Management know-how

Public procurement laws

Collective wage agreements

Tight municipal budgets

Decision-making

Privatization trend

This trend is not an automatism – many public hospitals are very successful in the German hospital market

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A number of factors are limiting the potential for privatization in the German hospital market

Success of public hospitals

Availability of private capital

Potential profitability of individual hospital locations

The role of the private non-profit owners

Limits of privatization

4. Limits of privatization

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Not all hospital locations have the potential to generate profits, but they are necessary for sufficient healthcare provision

Private companies will not operate these hospitals

Each state („Bundesland“) is obligated to provide an equal standard of healthcare for all citizens – therefore these hospitals are needed

The state has a responsibility to finance hospitals that otherwise would not be operated

Some hospital locations do not have the potential to generate profits (i.e. rural areas with small numbers of cases)

but

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The private non-profit sector has been very stable – so far sales of private non-profit hospitals to private for profit investors are rare

0

100

200

300

400

500

600

700

1990 2001

Th

ou

sa

nd

Public277

Private non-profit

198

Private for profit

41

387

207

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Total: 516Total: 617

Number of beds over time (in thousand, psychiatric hospitals excluded)

- 16,4 %

+ 78,3 %

- 4,3 %

- 28,4 %

Source: DKG, „Zahlen, Daten, Fakten 2003“, p. 16, psychiatric hospitals are excluded

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Due to the factors that limit hospital privatisation it is impossible to predict the structure of hospital ownership in ten years

0

100

200

300

400

500

600

700

1990 2001 2015

Th

ou

sa

nd

Public

277

Private non-profit

198

Private for-profit

41

387

207

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Total: 516Total: 617

Number of beds over time (in thousands, psychiatric hospitals excluded)

- 16,4 %

+ 78,3 %

- 4,3 %

- 28,4 %

Source: DKG, „Zahlen, Daten, Fakten 2003“, p. 16, psychiatric hospitals are excluded

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