ANNEXE 5

1. ANNEXE 5

2. Germany: example of the public-private mixHOPE-AIM-Conference „Private or Public Hospital? Which choice for health insurance tomorrow?“Speaker: Ralf-Matthias Heyder, German Hospital FederationDate: January 21st 2005

3. Definitions and concepts In Germany there are three different types of ownership: public, private for profit and pivate non-profit Public Private non-profit Private for profit General hospitals, usually owned by a municipality (city, rural district/county) 34 university hospitals, usually state-owned („Bundesland“, i.e. Bavaria, Saxony …) General hospitals, usually owned by churches or welfare associations 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

4. 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 for • profit 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

5. In order to facilitate „private“ management tools privatization in the narrow sense is one of several possibilities for public hospitals 100 % Privately owned shares Publicly owned shares 50 % 0 % Minority shareholding Majority shareholding Change of legal form (reorganization) Management contract 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 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 Private ownership (privatization in the narrow sense)

6. 2. Ownership in the hospital sector – facts and trends Large hospitals tend to be publicly owned while private investors tend to focus on smaller hospitals – this is currently changing • Number of beds 2002 (total 548,000) • Number of hospitals 2002 (total 2,221) Private non-profit hospitals Private non-profit hospitals 877 (39,5 %) 201,000 (36,7 %) 298,000 (54,4%) 527 (23,7 %) 817 (36,8 %) 49,000 (8,9%) Private for-profit hospitals Private for-profit hospitals Public hospitals (including 34 university hospitals) Public hospitals (including 34 university hospitals) Source: Federal Bureau of Statistics, „Grunddaten der Krankenhäuser und Vorsorge- oder Rehabilitationseinrichtungen 2002“, all hospitals included

7. The share of public hospitals is declining while the share of private hospitals is rising • Number of hospitals over time (psychiatric hospitals excluded) - 9,6 % • Total: 1995 • Total: 2207 Private for profit 321 + 45,8 % 468 Private non-profit 843 - 4,6 % 804 Public 1043 - 30,7 % 723 Source: DKG, „Zahlen, Daten, Fakten 2003“, p. 16, psychiatric hospitals are excluded

8. The state is pulling out of the hospital sector – hospital manage-ment becomes increasingly independent from direct state control • Number of beds over time (in thousand, psychiatric hospitals excluded) - 16,4 % • Total: 516 • Total: 617 23 Private for profit + 78,3 % 41 207 Private non-profit - 4,3 % 198 Public 387 - 28,4 % 277 Source: DKG, „Zahlen, Daten, Fakten 2003“, p. 16, psychiatric hospitals are excluded

9. In East Germany private for profit and public ownership is more prevalent than in West Germany • Percentage of beds, East and West Germany, 2002 Private for profit 6,4 17,9 Private non-profit 18,4 41,7 63,7 51,9 Public Source: Federal Bureau of Statistics, „Grunddaten der Krankenhäuser und Vorsorge- oder Rehabilitationseinrichtungen 2002“, psychiatric hospitals are excluded

10. 3. Causes for hospital privatization There are two reasons for hospital privatization in Germany – German reunification and increasing pressure for rationalization Pressure for rationalization (is a more important factor now) Reunification (imprtant factor in the past) Rise to a large extent due to public hospital sales in East Germany after reunification Changes in the system of hospital financing Increasing pressure for rationalization • Reasons: • East German hospitals did not have to accumulate reserves for pensions • East German municipalities had no experience with managing hospitals 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

11. In Germany the hospital sector is subject to the principle of „dual financing“ Dual Financing Running costs Investment costs Respective state governements Health insurance funds Financing institution Hospital applies for investment subsidies; after negotiations the state authorities decide how much and when money will be made available (state investment programme) 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) Procedure

12. In 1993 annual increases in hospital remuneration were limited to the annual growth rate of collected health insurance fees Introduction of individual budget caps per hospital • Principle of full cost cover • Capped budgets per hospital Present 1993 Before 1993 After 1993 All expenditures had to be financed by the social health insurance funds No deficits possible 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

13. Since 1993 costs rise faster than individual hospital budgets – the pressure for rationalization is continually increasing Cost increases Hospital Pressure for rationalization Budget increases

14. In 2003 Germany has introduced a DRG-system for remuneration – the pressure for rationalization has increased even more Pressure for rationalization Characteristics of the DRG-System Remuneration is based on average prices Prices of individual DRGs are calculated from cost data of a representative sample of hospitals 1. Remuneration is connected to individual case characteristics Level of remuneration depends on the average resources needed for the treatment of specific diagnosis Hospital Incentive to minimize costs per case in order to maximize return per case 2.

15. 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 requires • investments into modern • infrastructure

16. Insufficient state funding in past years has resulted in a buildup of necessary investments amounting to at least 27 billion Euro • Investment ratio • Estimated buildup • Assumption Ratio Year The estimated buildup of necessary hospital investments amounts to 27 billion Euro Minimum investment ratio for sustainable hospital financing is 10 percent 1991 8,5 % - 38,8% 1998 5,2 % Source: RWI, „Das Krankenhaus, Basel II und der Investitionsstau“, Heft 13, p. 15-22

17. Private companies have competitive advantages regarding the use of modern management tools and the financing of investments Investments Use of modern management Needs Access to private capital market Commitment to rationalization Access to know-how Preconditions 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 Competitive situation Public hospitals often do not have the required know-how and therefore depend on input from private companies Conflicting goals, complex decision-making process, lacking commitment to rationalization

18. Collective wage agreements and public procurement laws are competitive disadvantages for public hospitals Public procurement laws Public sector collective wage agreements For publicly owned comapanies the law requests specific procurement procedures (calls for tender) • 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 Time consuming, limited power to negotiate for lower prices Public sector collective wage agreements inhibit flexibility But: Up to 70 percent of hospitals costs are labor costs → need for flexible wage policies

19. Municipalities are increasingly unwilling to finance their hospitals` deficit – sales of public hospitals to private investors increase Some public hospitals do not realize sufficient gains from rationalization Due to budget constraints municipalities are increasingly unwilling or unable to finance their hospitals` deficits Growing deficits Municipalities sell their hospitals to private investors („privatization in the narrow sense“)

20. Several factors contribute to the privatization trend – despite this trend many public hospitals successfully compete in the market Public procurement laws Need for investments Collective wage agreements This trend is not an automatism – many public hospitals are very successful in the German hospital market Privatization trend Tight municipal budgets Management know-how Decision-making

21. 4. Limits of privatization A number of factors are limiting the potential for privatization in the German hospital market Success of public hospitals Potential profitabilityof individual hospital locations Limits of privatization Availability of private capital The role of the private non-profit owners

22. Not all hospital locations have the potential to generate profits, but they are necessary for sufficient healthcare provision Some hospital locations do not have the potential to generate profits (i.e. rural areas with small numbers of cases) Each state („Bundesland“) is obligated to provide an equal standard of healthcare for all citizens – therefore these hospitals are needed Private companies will not operate these hospitals but The state has a responsibility to finance hospitals that otherwise would not be operated

23. The private non-profit sector has been very stable – so far sales of private non-profit hospitals to private for profit investors are rare • Number of beds over time (in thousand, psychiatric hospitals excluded) - 16,4 % • Total: 516 • Total: 617 23 Private for profit + 78,3 % 41 207 Private non-profit - 4,3 % 198 Public 387 - 28,4 % 277 Source: DKG, „Zahlen, Daten, Fakten 2003“, p. 16, psychiatric hospitals are excluded

24. Due to the factors that limit hospital privatisation it is impossible to predict the structure of hospital ownership in ten years • Number of beds over time (in thousands, psychiatric hospitals excluded) - 16,4 % • Total: 617 • Total: 516 Private for-profit 23 + 78,3 % 41 Private non-profit 207 - 4,3 % ? 198 Public 387 - 28,4 % 277 Source: DKG, „Zahlen, Daten, Fakten 2003“, p. 16, psychiatric hospitals are excluded