critical analysis of the Dutch financing system of hospital health care

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A critical analysis of the Dutch financing system of hospital

health care

Master of Science in Business Administration Specialisation: Organization and Management Control

University of Groningen Faculty of Economics and Business

March, 2013

Author: M. Delleman Student number: S1705563 First supervisor: Dr. B. Crom Second supervisor: Prof. Dr. H.J. Ter Bogt

Word count: 23,334

ABSTRACT

There has been a trend of increasing health care costs and the government has experienced difficulty in achieving costs control in the Dutch hospital health care market without jeopardizing the quality and accessibility of hospital health care. This literature study finds that the regulated market system is the best financing system to overcome this management control problem. Nevertheless, the regulated market system should be improved. First, sustainable contracts should align the goals of all stakeholders. Second, consumers should be made more cost conscious. Third, specialized medical care should be centralized in order to increase the quality of health care.

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Preface

Dear reader,

When you read this, you are at the beginning of my master thesis. I have very much enjoyed writing this master thesis. I think that the topic is very interesting and current. The writing of my master thesis has been one of the most difficult tasks of the study Business Administration. The journey of writing my master thesis has been very informative. Hopefully, I will be able to use my new obtained skills in practice in the future.

I would like to thank several people. First of all, I would like to thank my supervisors, Crom and Ter Bogt. They have provided me with helpful feedback and comments. Therefore, they have enabled me to write this master thesis. Second, I would like to thank Rene Delleman. He helped me by explaining several more practical issues. Last but not least, I would like to thank my girlfriend, Joyce. She has always supported me. This has helped me to stay positive when I encountered difficulties during the period of writing my master thesis.

I hope that you will enjoy reading this master thesis and that it provides several useful new insights.

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Management summary

The government has tried for many years and is still trying to contain the costs of health care. There has been a trend of increasing health care costs and the government has experienced difficulty in achieving costs control in the hospital health care market without jeopardizing the quality and accessibility of hospital health care. If the health care costs keep growing as fast as they do now, the costs of health care are likely to be over one third of the gross domestic product in 2040. (RIVM, 2010a; SiRM, 2012) The hospitals and the health care insurers are the institutions that need to be motivated by the minister of health care to accomplish the goals of high quality health care with good accessibility and the goal of cost containment at the same time. This literature study analyses what financing system has the best chance to achieve the goals of the government. Articles from academic journals, articles from professional journals and books are used. Moreover, articles from consultancy firms and government institutions are included. The number of citations is the most important selection criteria for including literature. Based on the literature, this study provides an answer to the management control problem.

There are five factors that have contributed to the increasing health care costs of hospitals. Those factors are an aging population, new technologies, the Baumol effect, volume growth and a changing financing system. The first four factors are much more predictable and less radical than the changes of the financing system. Therefore, this study has focused on the changes of the financing system.

This study answers the following research question:

What is the best financing system to control the increasing health care costs in the Netherlands without jeopardizing the accessibility and quality of health care that is provided by Dutch hospitals?

In the Netherlands, the government has applied three types of financing systems of health care. From 1939 to 1982 an output costing system was applied. From 1983 to

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1999 a budgeting system was applied. From 2000 until now a regulated market system has been applied. The goal of the government is to contain the hospital health care costs in the Netherlands without jeopardizing the accessibility and quality of health care that is provided by Dutch hospitals. The regulated market system has succeeded in improving the physical and financial accessibility of hospital health care. Moreover, the efficiency has increased. Until now, the regulated market system has not led to cost containment of hospital health care. Several researchers claimed that in order to achieve cost containment the regulated market system should be adapted and improved in order to reduce market failure. The aim of the recommendations made in this study is to achieve cost containment in hospital health care without losing the strengths of the regulated market competition. Visser et al. (2012) and the SiRM (2012) proposed that cost containment can be achieved by shifting the focus from efficiency towards the quality of hospital health care.

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2012) Third, specialised medical care should be centralized to increase the quality with the help of the learning effect. Hospitals and doctors that perform a specific operation more often, learn the best way to perform the operation. This will decrease complications, decrease the number of patients returning and increase efficiency. (NZA, 2008; Visser et al., 2012) Therefore, the government should link the compensation for hospital health care to clear quality conditions. This motivates hospitals to centralize specialised hospital health care.

When these recommendations are implemented the quality of health care is unlikely to decrease, because the focus is on quality. The accessibility of health care is not likely to decrease, because these recommendations are focused on reducing the excessive production of health care and making consumers more cost conscious. Therefore, when these recommendations are implemented, the government can contain the costs of hospital health care without jeopardizing the accessibility and quality of hospital health care.

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1. Introduction

The financing of health care has become very important in the Netherlands. The need for solidarity between rich and poor and young and old has increased further and further. (CPB, 2012) The RIVM (2010a) stated that, with the current growth trend in the health care sector, there will be a costs growth of 4% to 5% each year, excluding future price changes. When the growth rate keeps growing at such a pace, the health care costs will be over one third of the gross domestic product (GDP) in 2040. (RIVM, 2010a; SiRM, 2012) Therefore, the government has tried for years and is still trying to contain the costs of health care. Until now, the government has not achieved cost containment without jeopardizing the accessibility and quality of hospital health care.

Canoy et al. (2011) claimed that the total health care costs of one inhabitant of the Netherlands have been, on average, 280.000 euros. The earnings have been estimated on 450.000 euros, on average, in a lifetime. The value of the earnings is the estimated value of the additional years that a person can live in good health due to our health care system. (Pomp, 2010) Therefore, it is questionable if other government investments have had equal or higher returns. However, the returns are non-monetary. The government puts a maximum on health care costs in the ‘Budgettair Kader Zorg’. They do this to ensure the sustainability of the long term government finances. In this way they can make sure that enough funds remain to finance other government expenditures. The increasing hospital health care costs are a problem for the government, health care insurers, hospitals and consumers. A description of these stakeholders is given in appendix A. It is in the best interest of all stakeholders that the right course of action is taken.

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system of health care. Therefore, they are considered to be less important for this study and are stated briefly in the introduction. The most important other factors or trends that have been mentioned in the literature are discussed below and listed in table 1. Table 1. Trends that have contributed to increasing costs of health care

Factor: Statements:

1. Aging population - An increased life expectancy has contributed to increasing costs of health care. (Crom, 2005; ZIP, 2009)

- Influence has been relatively small. (RIVM, 2010a)

- The costs are usually overestimated. (Polder, Barendregt & Van Oers, 2006) - Especially a problem of the future. (ZIP, 2009; NZA, 2012)

2. New technologies - New Technologies have led to more demand and higher costs of health care. (Polder et al., 1997; Crom, 2005; ZIP, 2009; Getzen, 2010)

3. Baumol effect - The labour productivity in health care has not grown as quick as in other industries. Therefore, the relative wages have increased and health care costs per product have increased. (RIVM, 2010a)

4. Volume growth - Volume growth has been the most important reason for increasing health care costs. (Canoy et al., 2011; RIVM, 2010a; RIVM, 2010b)

- Volume growth is a result from patients that return more often for retreatment and new diseases. (Canoy et al., 2011)

5. Changing financing

system of health care - This factor has been less predictable. Therefore, it is critically analysed in this paper. Table 1 shows the trends that have been contributing to the increasing costs of health care. Those factors are the aging population, new technologies, the Baumol effect and volume growth. The fifth factor, the changing financial system of health care, is discussed in more detail in this study.

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Second, several researchers (Polder et al., 1997; Crom, 2005; ZIP, 2009; Getzen, 2010) claimed that the advancing technology has been important in explaining the increasing costs of health care. Polder et al. (1997) mentioned three reasons why new technologies may have increased the costs. First of all, ‘half-way technologies’ did not cure the patient but they have prolonged the life time of the patients. Second, because new operating technologies were no longer a heavy burden for patients they were more likely to be treated. Third, the average number of treatments per person has increased. The ZIP (2009) found that new technologies have led to a higher demand for health care. New technologies have enabled hospitals to cure more complex diseases, which were more expensive in general.

Third, the RIVM (2010a) claimed that the Baumol effect has occurred in health care. The labour productivity in health care has not been able to grow as quickly as in other industries. As a consequence, the pressure on wages has increased and in order to prevent the employees in the health care from leaving the wages have increased as well. This has resulted in increasing health care costs per product, when benchmarked against other industries.

Fourth, several studies concluded that volume growth has been the most important reason for increasing health care costs. (Canoy et al., 2011; RIVM, 2010a; RIVM, 2010b) Canoy et al. (2011) argued that this was because of new diseases that have been discovered and patients returning more often for retreatment. The RIVM (2010b) found in 2010 that the volume of health care has grown with 4.2%, on a yearly basis, since 2002. They concluded that although prices in the B-segment have only increased moderately, the volume growth has led to higher total health care expenditures.

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increasing health care costs they have also increased the importance of choosing the correct financing system of health care in order to control the costs of health care.

This study critically analyses the costs of health care. The focus of this research is restricted to the health care that is provided by hospitals. When the costs of the financing system are examined it is important to consider quality and accessibility as well, because changes in one factor influence the other factors. (Sauter, 2009) The Dutch health care financing system has changed from an output costing system, to a budgeting system and today it is more focused on market competition. The effects of these changes on the costs, quality and accessibility of hospital health care are analysed with the help of several microeconomic theories. Next, the best financing system of health care is identified to achieve cost containment without jeopardizing the accessibility and quality of hospital health care. Moreover, recommendations are made on how to improve the system and how to reduce the shortcomings that are caused by market failure or government failure. In the past, the government has experienced severe problems when they tried to achieve cost containment. The minister of health care can use the recommendations, which are provided in this research, to achieve cost containment without jeopardizing the accessibility and quality of hospital health care. Therefore, this study provides an answer to the management control problem of the minister of health care.

This paper contributes to the existing literature in several ways. First, it analyses the influences of the Dutch health care financing systems on costs, quality and accessibility of hospital health care. Second, this paper gives conclusions on which system is the best financing system for the Netherlands in the future. Third, it provides several parameters that the government can use to control the costs of hospital health care. Fourth, recommendations are given to decrease the sources of market and non-market failure. These recommendations can help to achieve the goal of cost containment without jeopardizing the quality and accessibility of hospital health care.

Chapter 2 provides the main research question and explains the research methodology. Chapter 3 states the changes in the financing of the Dutch hospital health care system from 1939 to 2012. Chapter 4 shows the effects of the changes in the Dutch system of

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2. Methodology

In this chapter the management control problem is explained and the main research question is presented. Moreover, the data collection methods and selection criteria are presented.

2.1. Research question

In this study, the minister of health care in the government is the manager with a management control problem. There has been a trend of increasing health care costs and the government has experienced difficulty in achieving costs control in the health care market without jeopardizing the quality and accessibility of hospital health care. The hospital and the health care insurer are the institutions that need to be motivated to accomplish the goals of high quality health care with good accessibility and the goal of cost containment at the same time. The goal of this study is to provide the government with an advice on how to slow down the increasing costs of health care without jeopardizing the accessibility and quality of hospital health care. The scope of this study is limited to the Dutch hospital health care, because there are different factors that have to be taken into account for each type of health care.

By critically analysing the success of different types of financing systems on the costs, quality and accessibility of health care for the hospital care, this study identifies the best financing system. Moreover, this study provides several recommendations to improve the selected financing system. In this way this study helps to achieve the management control objectives of the government in the Dutch health care. This study answers the following research question:

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2.2. Data collection method

In order to answer the main research question, this research analyses, based on the literature, what financing system has the best chance to achieve the goals of the government. This study is a literature review and is therefore solely based on literature that is published until now.

Three main literature collection methods are used: 1) Search engines

Mainly the Business Source Premier and the Google Scholar search engines are used to find academic literature.

2) The snowball method

With the help of top journals or articles written by researchers that have many citations, or have published many articles in the topic of research, their references are used to find good articles and afterwards the reference list of these new articles are used to find new good articles. Therefore the set of articles expands like a snowball. (Hart, 2001)

3) Books

The process of searching for relevant articles and books is performed by using combinations of the following words. Combinations are made to find relevant articles in search engines. These words are used in both the Dutch and the English language in order to find the best Dutch and English articles or books.

Dutch, Netherlands, health care, system, competition, markets, governments, budgeting, reforms, regulated competition, regulation, quality, accessibility and costs.

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According to Hart (2001), these journals seldom publish original research. However, they do publish more popularized versions of original research. He also argued that the arguments behind those papers are less substantiated. Therefore, this study does not rely blindly on the information presented in those articles and if possible these articles are supplemented with other articles.

Preferably articles and books that have more than ten citations are used. In general, more citations provide more credibility to the article or book. When the cited article or book provides more reliable information it will also improve the reliability of the statements in this research. More citations are preferred, but the number of articles is drastically reduced when the minimum of ten citations is increased. Also, when selecting articles it is considered to be positive when the author is a leading author in his or her field. It is regarded as positive when the author has published many articles in the field of interest. When the author has published several articles, in this case three articles or more, and has at least ten citations for each or several articles, the author is considered to be a leading author in the field of interest. If possible, articles are selected from top journals in the top journal list that is presented in appendix B.

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3. Changes in the Dutch health care system from 1939 to 2012

The Dutch health care system has experienced a series of incremental changes. According to Helderman et al. (2005), there has been an absence of radical changes. However, the NZA (2012) claimed that a changing financing system of the health care sector has significantly influenced the costs and accessibility of hospital health care over time. These changes to the system may have been a possible cause of the health care costs increasing to levels as high as they are today. Therefore, the changes in the health care system are listed in this chapter. During the period of the output costing system government regulation was limited. (Lapre, 1988) The budgeting system was characterized by more government regulations. The Diagnose Behandel Combinatie (DBC) and DBC On the road to Transparency (DOT) systems were based on costing based on product prices. Therefore, DBC and DOT were more closely related to a regulated market competition.

3.1. Output costing system (1939-1982)

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3.2. Budgeting system (1983-1999)

In the period of budgeting there was external budgeting from 1983 to 1987. Afterwards the functional budgeting system was introduced. The functional budgeting system was introduced to increase the congruence between the budgets and hospital functions. Moreover, unlike the external budgeting system, the functional budgeting system had no historical component. This meant that in the functional budgeting system the budgets were no longer based on the budgets of previous years. Next, both budgeting systems are described in more detail.

3.2.1. External budgeting (1983-1987)

Financing with budgets was a result of the discussion about the costs of health care in the 1970s. It became more and more important for the government to tackle the trend of increasing health care costs. The tariffs and the actual costs were evaluated stricter. In 1983 external budgeting was introduced. From that moment on, hospitals received a fixed budget. Hospitals had to finance all expenditures out of this budget. The budget was agreed up on in advance and when the budget was not sufficient to finance all expenditures, alterations could only be made when strict conditions were met. (Groot & Van Helden, 2003) These changes meant that the open ended output costing system was replaced by a closed ended budgeting system. The external budget had no perverse incentive to increase the volume of health care, because the external budgeting system did result in a loss for the hospital when the hospital had a higher actual than normal utilisation rate and a profit when the actual utilisation rate was lower than the normal utilisation rate. (Groot & Van Helden, 2003)

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In 1983 and 1984 budgets were calculated based on historical costs. In 1985 the Bredero system was introduced in order to increase the congruence between the hospital budgets and the hospital cost structure. The Bredero budgeting system had three components. The first component was based on the capacity. The second component was based on the production. The last component was based on the location. (Groot & Van Helden, 2003) The production was decided in agreements between hospitals and health care insurers. In this way the insurers of health care influenced the production of hospitals. However, the macro budget was set by the government in the ‘Budgettair Kader Zorg’. Only 30% of the hospital costs were financed based on these components, because the Bredero system did only encompass the salaries of the nursing, administrative and civil services departments. The other 70% of hospital costs were still financed based on historical costs. (Groot & Van Helden, 2003) Because 70% of the hospitals costs were still financed based on historical costs the issue of a lack of congruence between hospital functions and the budgets was still not solved. (SCP & IPSE, 2011)

3.2.2. Functional budgeting (1988-1999)

From 1988 until 2005 the health care sector was financed with functional budgets. However, the period that the functional budgeting system was in fact a tight budgeting control system lasted until 1999. In 2000, the ‘Boter-bij-de-vis-regeling’ was introduced, which has been considered by many researchers (Schut, 2003; Pomp, 2010) as the start of an increased focus on market competition. The functional budgets were an attempt to increase the congruence between the hospital functions and the budgets. The functional budgeting system had no historical component. The functional budgets consisted of four components. The first component was based on the availability of patients. The second component was based on the capacity. The third component was based on the location. The last component was based on the production. (SCP & IPSE, 2011)

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2) Reduce the overhead costs of hospitals by simplifying the financing of hospitals. 3) Provide the possibility for individual institutions to utilize opportunities by

keeping the financial system flexible.

4) Budgeting should lead to compensation for real costs.

5) The system should reinforce efficiency instead of inefficient behaviour. 6) The system should encourage efficient production.

The pressure on the system of functional budgets increased over time. Crom (2005) stated four reasons. First, technological improvements led to additional costs. Second, the population was aging, because the average life time expectancy increased. This resulted in an increased the demand for health care. Third, patients demanded more health care, because they claimed to be entitled to medical care, even when not operating was a better decision. Fourth, there was a shortage of personnel. Good personnel had become more expensive and scarce over time. Canoy et al. (2011) did agree with Crom (2005) that due to an aging population and new technological improvements the pressure to abandon the budgeting system did increase over time. Those factors were no consequences of the financing system itself. The government was counting on the hospitals to fix the consequences of the budget cuts and the increasing costs of health care by increasing the focus on efficiency and market forces. (Crom, 2005)

3.3. Regulated market competition (2000-now)

In 2000 the ‘boter-bij-de-vis-regeling’ was introduced. Hospitals received additional resources to reduce their waiting lists. As a consequence of the loosening of the supply regulation and budgetary control policies, the health care costs grew rapidly. Therefore, the government was motivated to speed up the introduction of a new health care reform. Schut and Van de Ven (2005) claimed that centrally managed supply and budgetary controls were no longer an option, due to legal and political reasons. Legally, such a system would probably be in violation of a Dutch court decision that was made in 1999, because supply constraints did not comply with the social health insurance legislation. Politically, such a system would also not be a very attractive option because

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there was much dissatisfaction about quantity rationing and long waiting lists. The functional budgets were introduced to make the budgets more stable and to improve the pricing of hospital health care. However, the functional budgeting system still had no direct link between actual costs and cost prices. Therefore, the DBC system was introduced. This system improved the congruence between actual costs and cost prices. Since 2012, the DBC system has evolved in DOT, which stands for DBC on the road to transparency. Next, both systems are explained in more detail.

3.3.1. Functional budgets and the ‘boter-bij-de-vis-regeling’ (2000-2005)

In 2000, the so called ‘Boter-bij-de-vis-regeling’ was introduced. This arrangement basically meant that the functional budgeting system was partially abandoned. Specialists in hospitals received an additional compensation for each product on top of their budgeted amount of compensation. (SCP & IPSE, 2011; De Kam, Koopmans & Wellink, 2011) The influence of health care insurers was reduced, because the agreements on the production became less important. The tight control by the government was loosened. (SCP & IPSE, 2011) According to Schut (2003), this meant that the open ended financing was established again, because the maximum on the earnings of hospitals was abandoned. The ‘boter-bij-de-vis-regeling’ succeeded in reducing a part of the waiting lists.

3.3.2. DBC (2006-2011)

A DBC included ‘all achievements of a health institution and medical specialist that were a result from the health care that a patient needed from the medical specialist in the health institution.’ Therefore, a DBC included all activities from the first consult or inspection at the start until the last part of the diagnostic or treatment activity.

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choice of health care services. This was supposed to result in more competition and increase the quality of hospital health care. Moreover, it was supposed to make the allocation of financial resources more efficient. (Van der Voort & Kerpershoek, 2010) The role of competition between health care insurers became more important. The competition for potential consumers motivated health care insurers to look for high quality and cost effective medical treatment. (Schut, 1995a) Health care was divided in two segments. The first group, the A-segment, comprised of 90% of the total turnover. The A-segment remained under the old functional budgeting system. The prices in the A- segment remained fixed and the volume remained variable. The second group, the B- segment, initially comprised of the other 10% of total turnover and was priced in a contract between the hospital and the health care insurer. There were no legal limitations on the volumes or prices decided in the negotiation. (Canoy et al., 2011) The goals of the instalment of the DBC system were very similar to the goals of the functional budgeting system. However, the government argued that the DBC did a better job in achieving the following goals. (Crom, 2005)

1) Providing an adequate reward for the provided care. 2) Encouraging efficient production.

3) Better alignment of the wishes of consumers and the resources of health care. 4) Stimulating efficiency and the improvement of quality.

5) Capacity planning and allocation of resources.

The role of the health care insurer became more important. It was important that health care insurers knew which hospitals were good performers and which did perform badly. The health care insurer needed this information to direct their consumers towards the hospitals with the best cost to quality ratio for the individual consumer. (NZA, 2012)

3.3.3. DOT (2012-now)

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Therefore, DOT’s are easier to recognize in medical terms. This makes negotiations between hospitals and health insurers easier. (Canoy et al., 2011) The importance of the role of the health care insurer did increase again. The hospital budgets were completely abandoned. From that moment on, hospitals and health care insurers had to negotiate about all purchasing conditions of hospital health care in the A-segment and B-segment. Since 2012, lump sum or maximum agreements have put a limit on the volume growth of hospital health care. (NZA, 2012) In 2006 the B-segment started with only 10% of total turnover. In 2012, 70% of the health care products were negotiable. Figure 1 shows the increase in the percentage of the B-segment and the decrease in the percentage for the A-segment over time.

Figure 1. Percentage of hospital health care products in the A-segment and B-segment

Percentage for each segment

100% 80% Percentage 60% 40% B A 20% 0% 2006 2007 2008 2009 2010 2011 2012 Year

Figure 1 shows the percentage of hospital health care products in the A-segment and B-segment in each year since the introduction of the B-segment in 2006. Before 2006 there were no segments.

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The DOT system has improved the enforceability of the old DBC system. First, it has reduced the number of conflicting rules, because rules on registration and declaration have been integrated. Second, the number of billable products has been reduced from approximately 30,000 DBC products to approximately 4,000 DOT products. (NZA, 2011) However, the NZA (2011) claimed that there were risks when introducing the DOT system. The turnover of hospitals was likely to decrease, because the prices in the DOT system were expected to be more congruent with cost prices. However, they acknowledged that this effect was not a result of the DOT system but a result of the change from a budgeting system to a regulated market competition. The NZA (2011) argued that hospitals were supposed to come up with a solution for themselves by negotiating with health care insurers in the B-segment. Moreover, hospitals have been compensated by the government. In 2012 hospitals received up to 95% of their loss in turnover and 70% in 2013. (NZA, 2011)

3.4. Periods

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the ‘boter-bij-de-vis-regeling’ as the mark between the periods of financing with budgets and the managed market competition period. Although, they admitted that the changes in the legislations already started in 1999 and were spread out during several years. In this paper, the first period of output financing lasts until 1982. In this year the output costing system ended. The period of budgeting started in 1983 and lasted until 1999. The third period started in 2000 and has not ended. This period has been characterized by the introduction of regulated market competition.

Figure 2. Overview of the changes in the system and the three main periods

Figure 2 shows the three periods and the changes that were discussed in this chapter. The numbers in the middle are the numbers of the years from 1972 until 2012. The years from 1939 to 1972 are not included, because in those years there was also an output costing system.

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4. Evaluation of the system changes

In this study three factors are considered to be very important by the public when evaluating the financing system of hospital health care. When the costs of the financing system are examined it is important to consider quality and accessibility as well. It is logical that less costly health care can result in lower quality and less accessible health care. Moreover, a higher quality of health care may result in worse accessibility of health care due to the centralization of services. (Sauter, 2009) Maarse (1989) agreed with Sauter (2009) and argued that the effects of hospital budgeting should not only be evaluated on costs but also on the effects on the health care itself.

The first factor that is considered is the costs of hospital health care. Chernew (2009) defined that health care does remain affordable as long as the total income minus the spending on health care does not decrease. Most studies (Schut, 1995a; Schut, 2003; OECD, 2012) have denoted this in terms of the percentage of the gross domestic product (GDP) that is spent on health care. It should be noted that this includes the costs for both the ZFW and AWBZ. Therefore, changes in the percentage of GDP spent on health care are not automatically caused by hospital costs.

The second factor is the quality of hospital health care. There are very diverse definitions of the quality of health care. The European Health Consumer Index (EHCI) 2012 evaluated the quality of health care in five categories: patient rights and information, outcomes, the completeness of services, accessibility and pharmacy. (NVZ, 2012) Unfortunately it is very difficult to compare these aspects of quality between periods. First, the EHCI has only been published since 2006. Second, there has been made limited progress in the area of quality and outcome measurement. Performance measurement, quality control and quality improvement has been left to different professional groups. Third, the decentralised performance control system has resulted in a lack of comparable data on a national and regional level. (Schut & Van de Ven, 2005) Therefore, no comparison on health care quality across periods can be made. However, when available, information on the effects and expected effects of the different financing systems on quality is presented. Especially in the period of output costing and the

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budgeting system there is a lack of information. The presented findings are based on statements and calculations of authors about the quality of health care. The authors that wrote about the output costing and budgeting period did mention quality, but they did not provide calculations or actual numbers. In the period of regulated market competition the focus is on the five categories of the EHCI health consumer index.

The third factor is the accessibility of hospital health care. According to Arrow (1963), a lot of individuals care about the health of other people. Therefore, accessibility is perceived to be important. According to the RIVM (2002) access to care means: ‘people, who need care, can access care in a timely manner and without great barriers’. The accessibility is amongst other things influenced by the costs, distance and waiting lists. (RIVM, 2008) The findings in this study are based on statements of authors about the accessibility of health care. The accessibility of health care is evaluated based on the physical access and the financial access of health care. There is good physical access to health care when there is no rationing on price and no binding demand constraints. There is good physical access to health care when there is no rationing by quantity and no binding supply constraints. (Schut & Van de Ven, 2005) Physical access is based on the distance, timeliness and the length of waiting lists. Financial access is measured on the degree to which health care is affordable for consumers. (RIVM, 2008)

In the following paragraphs the output costing system, budgeting system and the regulated market competition system are evaluated on their effects on the costs, quality and accessibility of hospital health care.

4.1. Output costing system (1939-1982)

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% of G D P 1960 1961 1962 1963 1964 1965 1966 1967 1968 1969 1970 1971 1972 1973 1974 1975 1976 1977 1978 1979 1980 1981 1982

to support the health care policy making started in the 1970s. Therefore, the evaluation of the first period is mainly focused on the period from the early 1970s to 1982.

4.1.1. Costs

Figure 3. Percentage of the GDP spent on health care from 1960 to 1982

Health care expenditure (% GDP) 10 8 6 4 2 0 Year

Figure 3 shows the percentage of the gross domestic product (GDP) per year that was spent on health care. The percentage of GDP spent on health care has increased from 3.8% in 1960 to 7.8% in 1982. Source: OECD health data (2012) and Schut (2003)

In the period of output costing the costs of the health care increased rapidly. Figure 3 shows that the costs of health care were 3.8% of the gross domestic product (GDP) in 1960. This percentage did increase to 7.8% of GDP in 1982. (Schut, 2003; OECD, 2012) This was caused by the structure of the tariff financing. Until 1982 hospitals were financed based on the number of patient days. This output financing system did not put a limit to production. A higher than normal production resulted in above average earnings for hospitals. (Janssen et al., 2003; Groot & Van Helden, 2003) The growth of medical production automatically increased the revenues and hospital managers did not worry about the increasing volume of hospital health care. (Maarse, 1989) Therefore, there was a perverse incentive to increase the volume of health care in this system even when no additional health care was needed. (Verschure, 1977; Lapre, 1988) Schut and Van de Ven (2005) argued that the introduction and expansion of the social health insurance removed the demand constraint. Moreover, there were no supply constraints, because health care insurers had to close mandatory contracts with any willing and

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licensed health care provider. Also, health care insurers were fully compensated for their health care expenses. Therefore, the costs of health care grew rapidly. (Schut & Van de Ven, 2005) According to Schut (2003), the lack of an incentive for efficient use of resources and an incentive for hospitals to increase production led to an enormous growth of hospital health care and costs of health care in the period from 1960 to 1980. The insurance premiums were automatically increased with the continuously growing levels of health care. (Lapre, 1988) Lapre (1988) stated that the economic growth made it possible to come up with an adequate source of finance. However, in the early 1970s the increasing hospital health care costs became a political problem, because of the economic recession. Due to the increasing necessity for cost containment the role of the government increased. (Schut, 1995b)

4.1.2. Quality of health care

Until the 1970s the main goal of the government was to promote public health by guaranteeing a minimum level of quality by a professional licensure. (Schut & Van de Ven, 2005) Schut and Van de Ven (2005) did not provide information on to what extend this policy was successful in guaranteeing a good quality of hospital health care. Other authors that wrote about the period of output costing focused on the costs and accessibility of health care. Also, there was no mentioning of a clear break in the trend when the output costing system was introduced or phased out. This may indicate that the quality of health care was not very important during the period of output costing.

4.1.3. Accessibility of health care

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for long term and mental health care. The AWBZ was compulsory for the entire population. The ZFW was restricted to approximately two-thirds of the population. However, because the high incomes could afford private health insurance the AWBZ and ZFW were sufficient to guarantee universal access health care. (Glaser, 1993; Schut & Van de Ven, 2005) The ZFW and AWBZ eliminated the financial barriers for access to health care. (Schut, 2003) Lapre (1988) stated that there was in principle universal access to all branches of health care, irrespective of a person’s income, social status, age or race. Physical accessibility was good, because the volume of production was increased constantly in order to create more revenues.

4.1.4. Conclusion

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% of G D P 4.2. Budgeting system (1983-1999)

In 1983 a budgeting system was introduced. The budgeting system resulted in regulation on prices, budgeting and rationing. The main goal of the new financing system was to guarantee equal access to health care and keeping down the costs at the same time. (Schut & Van de Ven, 2005)

4.2.1. Costs

Schut and Van de Ven (2005) examined the goals and effects of the period lasting from 1980 to 2000. Which is almost the same period as the period that is typified as the period with a budgeting system in this study. Schut and Van de Ven (2005) claimed that on the one hand, supply and price control policies were pretty successful in containing the costs of health care. On the other hand, when the end of the budgeting period came closer the quantity rationing led to worse physical access of hospital health care services. Moreover, the financial access of health care was jeopardized, because of an increasing amount of private clinics that offered health care only to consumers that could afford it.

Health care expenditure (% GDP) 10

8

6

1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999

Year

Figure 4 shows the percentage of the gross domestic product (GDP) spent on health care per year from 1983 to 1999. The percentage of GDP spent on health care did remain, roughly speaking, constant with 8%.

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Figure 4 shows that the budgeting system for hospitals, which was introduced in 1983, was initially accompanied by a decrease of the proportion of GDP spent on health care. According to Schut and Van de Ven (2005), the introduction of the budgeting system for hospitals was responsible for the decrease, because the hospital outlays in the health care expenditure substantially decreased. The findings of Groot (1999) and Groot and Van Helden (2003) were in agreement with Schut and Van de Ven (2005). They claimed that after the introduction of external budgets in 1983 there was a clear decrease of hospitals costs. The SCP (1998) analysed the trend of hospital health care costs in the period from 1972 to 1997. He concluded that the hospital budgeting had a significant negative effect on the health care costs. Moreover, he argued that without a budgeting system for hospitals the health care costs would have increased. He also found that the share of hospital costs in the total health care costs decreased from 35% in 1982 to 32% in 1989. According to Schut (2003) this was partially caused by the introduction of the budgeting system and cuts in the salaries of personnel in 1984. Thereafter, the replacement of the completely fixed budgeting system by a partly variable budget in 1988 moderated the cost reducing effect of the budgeting system. The introduction of the functional budgets made larger parts variable and therefore the costs of health care did increase again. In 1997, the second ‘Cabinet Paars’ set the maximum volume growth level of health care to a higher level. Moreover, they tried to reduce the waiting lists. As a consequence, the costs of health care did increase after 1997. (Groot & Van Helden, 2003) Schut (1995a, 2003) concluded that in the whole period from 1980 to 2000 the health care expenditures remained, roughly speaking, constant with 8% of GDP.

In the period from 1980 to 2000 there was a slowdown of the increase in life expectancy in the Netherlands as opposed to other countries. (RVZ, 2011) Maarse (1989) claimed that hospital budgeting has no negative influence on the quality of health care in general. He did not back this statement up with arguments. However, he argued that budgets can overcome inefficiency and help in encouraging hospitals to achieve the same quality of health care with fewer resources. Moreover, it may reduce excessive production of

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health care. There is no data available on the quality of hospital health care at the national level for the period of budgeting.

In the 1980s the health care costs increased. Moreover, the differentiation of premiums increased. High-risk consumers needed more health care. Therefore, they were more expensive to health care insurers. As a result, health care insurers wanted to be compensated for the increased risk. High-risk groups had to pay a higher premium for their health care insurance. This led to a decrease in the financial accessibility of health care for high-risk groups. However, the Health Insurance Access act (WTZ), which was introduced in 1986, obligated all private health insurers to offer a standardised policy. The standard premium for high-risk groups was set by the government. The health care insurers were compensated from a pool of cross-subsidies that was financed by the privately insured. (Schut & Van de Ven, 2005) In this way access to health care for high- risk groups was safeguarded.

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Therefore, it was not attractive for hospitals to reduce the waiting lists. (Schut, 2003) Kenis (2006) concluded that the Dutch policies to reduce waiting lists were based on unrealistic expectations about the behaviour of organisations and people. Therefore, these policies were likely to be ineffective in reducing waiting lists.

4.2.4. Conclusion

Schut (1995a; 2003) found that in the whole period from 1980 to 2000 the GDP spent on health care expenditures remained, roughly speaking, constant with 8%. The OECD data (2012) paint a similar picture. The OECD data showed that in 1983 7.7% of GDP was spent on health care. In 1999 this percentage was 8.1% of GDP. Maarse (1989) claimed that hospital budgeting was an effective mechanism for cost containment, because the actual annual level of hospital costs from 1983 until 1986 remained far below the budget limits. However, due to the cost containment strategy the waiting lists increased rapidly. The actual waiting times exceeded the maximum waiting times by far. Therefore, the growing waiting lists resulted in a growth of privately funded health care. As a result, equal physical access and financial access of health care were jeopardised. (Schut & Van de Ven, 2005) Maarse (1989) argued that hospital budgeting had no negative influence on quality of health care in general. He claimed that budgets encourage hospitals to achieve the same quality with lesser means. Moreover, budgets may prevent excessive production of health care. Again, there is no information available at the national level about the quality of health care during this period. Therefore, no conclusions can be drawn about the effects of the budgeting system on the quality of hospital health care.

4.3. Regulated market competition (2000-now)

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% of G D P

insurers of health care. (Helderman et al., 2005) The health care policy started to focus more on market competition and efficiency.

4.3.1. Costs

Health care expenditure (% GDP) 14 12 10 8 6 4 2 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Year

Figure 5 shows the percentage of the gross domestic product (GDP) spent on health care. The percentage of GDP spent on health care has increased from 8% in 2000 to 12% in 2010.

Source: OECD health data (2012)

The introduction of the open ended financing of health care led to an increase in health care costs. The proportion of GDP spent on health care costs has remained approximately 8% from 1980 to 2000. Thereafter, it quickly increased to almost 9% of GDP in 2002 as a result of the ‘boter-bij-de-vis-regeling’. The ‘boter-bij-de-vis-regeling’ did create an incentive for increasing the production, but it did not provide for incentives to increase efficiency. (Schut, 2003) Figure 5 shows that the percentage of the GDP that was spent on health care did increase from 8% in 2000 to 12% in 2010. (OECD, 2012)

The RIVM (2010b) claimed that the increase in health care costs was caused by an increase in the volume of health care. They found that the volume of hospital health care that was provided has grown with 4.2% on a yearly basis from 2002 until 2010. This was a result of the growth of clinical hospitalisations and the number of day admissions, with 3% and 10% respectively. They did not explain the underlying reasons. Possible

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reasons may be the aging population, new technologies and a changing financing system of health care. The RIVM (2010b) concluded that although the prices in the B-segment did only increase moderately, the volume growth has led to higher total expenditures. Canoy et al. (2011) argued that since the introduction of the DBC in 2006, the prices in the B-segment, which were agreed upon by negotiations between insurers and hospitals, did increase more slowly than the prices in the A-segment. However, they noted that the products in the B-segment were more stable and more common. Therefore, a more stable pricing was expected. The volume was agreed up on in the negotiation. Since 2012, lump sum or maximum agreements have put a limit on the volume growth. (NZA, 2012)

Dutch hospitals scored very well on quality when compared to hospitals in other European countries in the European Health Consumer Index (EHCI) 2012. Hospitals were evaluated in 5 categories: patient rights and information, outcomes, the completeness of services, accessibility and pharmacy. The Netherlands scored 87% of all points and scored well in all categories. Moreover, the scores have improved over time in recent years. (NVZ, 2012) The RIVM (2010b) concluded that a review of the quality of health care did not show a clear break in the trend. They also claimed that the quality was good and not strikingly different from the countries surrounding the Netherlands.

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The RIVM (2010b) found that 85% of their respondents had no problems accessing health care. They reviewed the accessibility of health care in several categories. First, they concluded that the financial accessibility of the Dutch hospital health care system was good. Important for the financial accessibility was the compulsory insurance policy, a health care allowance and the relatively low own contributions. Second, they concluded that the geographical accessibility was very good. Third, they found that the Dutch health care system scored moderately on the timeliness of health care. Waiting lists and data on waiting lists were not organized as was intended. However, since 2008 the government has tried to improve this by obligating hospitals to report monthly on waiting times according to a uniform definition. (The RIVM, 2010b)

4.3.4. Conclusion

The percentage of GDP spent on health care did increase from approximately 8% in 2000 to 12% in 2010. (OECD, 2012) According to Helderman et al. (2005), the market oriented policy has addressed the goal of increasing efficiency and more consumer orientation. However, it has not addressed the goal of macro cost containment until now. Rosenau and Lako (2008) evaluated the first two years of the new DBC system that was introduced in 2006. They found that drastic health care cost reductions should not be expected, at least in the short term, when a system of regulated competition is introduced. It takes time for consumers to adjust to the new system, because it cannot be expected that they behave exactly as economic models predict. Consumers did not purchase their health care insurance as critically as they were expected to. As a result, health care insurers had a smaller incentive to purchase health care from hospitals with a good price to quality ratio. Therefore, the allocation of resources was not optimal. For those reasons, the DBC system did not accomplish the goal of decreasing or slowing down the increasing costs of health care.

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system based on performance costing was an important condition for increasing the efficiency, because health care insurers were motivated to direct consumers to the most efficient hospitals. However, it was not a guarantee for cost containment because the achievement of cost containment in the B-segment has depended, to a large extent, on the negotiations between hospitals and health care providers on volumes and prices of health care. These negotiations have depended on the local or regional distribution of power between hospitals and health care insurers. (Canoy et al., 2011) It can be concluded that the goal of cost containment is not yet accomplished.

The RIVM (2010b) found that 85% of their respondents did not have problems with accessing health care. They reviewed the accessibility of health care in several categories. First, they concluded that the financial accessibility to the Dutch health care system was good, because there was a compulsory insurance policy, a health care allowance and relatively low own contributions. Second, they concluded that the geographical accessibility was very good. Third, they found that the Dutch health care system scores moderately on the extent of health care that was provided on time.

Dutch hospitals scored very well on quality, when compared to hospitals in other European countries, in the European Health Consumer Index (EHCI) 2012. However, the RIVM (2010b) concluded that a review of the quality of health care did not show a clear break in the trend. Moreover, the quality cannot be compared to the previous periods because in those years no data on the quality of hospital health care was available on the national level.

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5. Financing systems of health care in a theoretical perspective

Chapter 5 provides a continuum with government regulation on the one end and complete market competition on the other end. In practice these two extremes do not appear, because both ideal types have serious shortcomings. Therefore, the best combination of these two extreme types needs to be chosen. (Wolf, 1993) Moreover, the conditions for each system need to be satisfied. The theoretical advantages and disadvantages of a focus on government regulation or market competition are explained. Also, the differences between a normal market and the hospital health care market are stated. The government has always been important in the hospital health care market. In practice the government can influence several parameters to contain the costs of hospital health care. These mechanisms are explained with the help of several microeconomic theories.

5.1. Between government regulation and market competition

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Mierlo (2001) claimed that such a trade-off should be solely based on effectivity and efficiency instead of idealistic reasons for a preference for markets or governments. The Dutch situation showed that in practice the financing system was indeed not solely based on markets or governments. The output costing system was characterized by very few government regulations. (Lapre, 1988) The budgeting system was characterized by considerable control by the government. The DBC and DOT systems were more closely related to competition in markets.

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5.2. Market failure versus non-market failure

According to Cassidy (2009), when all idealistic conditions are met for each system, both government regulation and market competition should lead to the same result. Under these conditions both systems produce equal products that are produced in a similar way against equal prices. The CPB (2003) claimed that when the government has all relevant information, a planned system results in an equal or even higher standard of living. When it is assumed that the government has all information, a planned system leads to better results than a system of market competition, because the government can take into account external effects. (CPB, 2003; Crom, 2010) These external effects are advantages or disadvantages of economic decisions for individuals that are not involved in the economic decision. (Ter Bogt, 1998) Moreover, the government is able to reduce all waste and only firms and institutions that produce the most efficient are used for production. (CPB, 2003) In reality, it is known that the government is not able to obtain all information. Therefore, the government is not able to install and enforce such an effective planned system.

Market competition does use decentralized knowledge that is not available at the more centralized governmental level. The main advantage of market competition is that it uses individual preferences, capacities and skills better. (CPB, 2003) The CPB (2003) concluded that in most markets market competition was indeed good for the general quality of life. According to Schut (1995a), competition can indeed improve the efficiency of resource allocation with the help of the purchasing power of health care insurers. However, the effects on cost containment depend on the local or regional distribution of power between hospitals and health care insurers.

Wolf (1993) made a distinction between market failure, which are shortcomings of market competition, and non-market failure, which are shortcomings of intervention by the government. According to Van Mierlo (2001), there are five conditions that need to be satisfied for a market to lead to optimal allocative efficiency, which results in an optimisation of social welfare:

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2) There is no market power for consumers or providers and there are sufficient consumers and providers.

3) There is complete transparency.

4) There are homogeneous consumer preferences.

5) There are no economies of scale, external effects or collective goods.

When these conditions are not satisfied market failure occurs and market intervention by the government may be needed. (Van Mierlo, 2001; Crom, 2010) Crom (2010) emphasized that there must be social importance for government intervention.

There are limitations of government intervention as well. Wolf (1993) listed four possible errors in the processes of non-markets.

1) When there is a disjunction between costs and revenues. Inefficiencies are encouraged when this link is missing. More resources may be used to produce the given output. This results in redundant and rising costs.

2) When there are private or organisational goals that lead to a separation between narrow bureaucratic interests and the broader social interests. When this is true, the survival of the market organisation is likely to be jeopardized by the response of other stakeholders.

3) Externalities from unexpected outcomes of government intervention may harm performance in another area. Governments often use rough instruments to intervene in markets. The consequences of using these instruments are far- reaching and difficult to forecast. Therefore, negative external effects may arise for people that are not included in the original economic decision.

4) Market forces often lead to a distribution of resources based on power and privilege. This may provide opportunities for inequity and abuse of power.

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The CPB (2003) claimed that governments can be helpful by influencing the decisions of the market parties in the direction of the socially desired action. Wolf (1993) agreed with the CPB that the government can help in improving and extending the functioning of markets. In this way sources of market failure can be overcome. The CPB (2003) claimed that the government has three important roles in facilitating the achievement of the socially desired action in normal markets. First, the government needs to make sure that there is a level playing field and competition is not hindered by competition reducing behaviour. Second, the government should intervene when market failure does occur. The government should take corrective actions to stimulate positive external effects and reduce negative external effects. Again, the government should minimize the sum of the costs of market failure and non-market failure. Third, the government should not consider political preferences for reallocation. An intervention of the government may lead to more efficient use of resources, but it may not correspond to the political preferences for reallocation of wealth at the same time. Additional legislation may correct this.

5.3. The health care market is not a normal market

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asymmetry between the hospital and the consumers. A study by Pauly and Satterthwaite (1981) has proven that less information asymmetry leads to lower prices.

The CPB (2003) agreed with Dravone and Satterthwaite (2000) and Groot and Krabbe- Alkemade (2010) that the healthcare market is not a normal market. There are four characteristics that make the health care market special. Each of those characteristics does occur in other markets, but in health care they all occur at the same time. Therefore, it is important to take into account these differences. Moreover, steering by the government is needed. First, a minimum level of health care is essential. In other markets the purchase of a product or service can be important, but it is usually not life threatening. Second, performing the wrong operation or treatment has much more severe negative consequences than buying the wrong product. Third, moral hazard can occur, because patients do not pay all costs of health care. Due to the role of the health care insurers patients become less cost conscious. As a consequence, cost effective health care is not stimulated. Fourth, there are many cases of insufficient information. Therefore, the patient or the health care insurer is not able to decide on the right medical actions.

The degree to which a market system succeeds in achieving the goals of cost containment and the improvement of quality and accessibility of hospital health care depends on the way market parties operate. Moreover, the extent to which information asymmetry can be reduced is important. (Groot & Krabbe-Alkemade, 2010) The CPB (2003) claimed that the advantages of market competition do also apply for the health care sector. However, they claimed that the differences between a normal market and the health care market need to be dealt with. Otherwise, a complete market competition in health care will result in increasing costs. Complete competition between hospitals may lead to an increasing importance of the opinion of patients. This is expected to lead to an increase of non-cost efficient health care, because patients are not cost conscious. Another negative consequence may be the loss of quality. Because consumers and health care insurers find it difficult to measure all aspects of quality, it might be attractive for the hospital to reduce the quality of these aspects. Moreover, in a complete market competition risk selection by health care insurers does appear. It is attractive for health care insurers to attract consumers that are expected to use less health care and to scare

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off major consumers of health care. Schut (1995a) did agree with the CPB (2003) that unregulated competition in health care markets results in welfare reducing phenomena, because of information asymmetries between health care providers, health care insurers and consumers. Therefore, they argued that competition in health care does only work when the competition is regulated properly. The government should put demands on the behaviour of market parties and increase the availability of information and transparency. Only when this is done properly market competition in health care leads to the desired goals without being outweighed by negative side effects. (CPB, 2003) The system that was advocated by the CPB (2003) is called a system of regulated market competition. It is focused on market competition but it is also influenced by government regulation. Enthoven (1988) was the first researcher that proposed a system of regulated market competition in health care. This system is able to deal with agency and externality problems. (Schut, 1995a) In such a system hospitals on the demand side, contract with competing health care plans. Enthoven (1988) stated that in order to overcome the tendency of the market to fail, the process should be adjusted continuously. Enthoven (1988) argued that without rules and active management of sponsors, health plans could pursue profits and use competitive strategies that hinder efficiency. The main principle of managed competition is the use of tools to structure cost conscious consumer choice in such a way that they pick their health plan to pursue cost efficiency in health care. Schut (1995a) emphasized that regulated market competition implies reregulation instead of deregulation. The government should promote an incentive structure that steers the competition in a welfare-enhancing direction.

5.4. Parameters to control the costs of hospital health care

critical analysis of the Dutch financing system of hospital health care

A critical analysis of the Dutch financing system of hospital

health care

ABSTRACT

Preface

Table of contents

Management summary

1.

Introduction

2.

Methodology

3.

Changes in the Dutch health care system from 1939 to 2012

4.

Evaluation of the system changes

5.

Financing systems of health care in a theoretical perspective