Capping, free rides, and future trends.

This is a post in honor of the elections in Israel this week, where the health care issue is one that has not seen a lot of attention.  As I summarize here, it must eventually rise on the public agenda.

I gained an unexpected appreciation for the US system of hospital payments recently while in Israel.  While one can argue about whether the rates set by Medicare are reasonably compensatory to hospitals, any concerns you might have on that front are rendered unsubstantial compared to the Israeli system.

Here's how it works.  Israel has universal health coverage for its citizens funded through the tax system.  Health services are administered and delivered by four health maintenance organizations (health plans), which compete among themselves for consumers.  The HMOs are essentially primary care and multi-specialty practices, although they own some hospitals, too.  Most of the hospitals, though, are owned by the government.  There are just a few private hospitals, akin to our non-profit institutions, but they are very important in the health care delivery system.  When the health plans need to refer patients to hospitals, they are obligated to pay fees for the services rendered.  There is a nationally established fee schedule for those services, but the actual payments are lower, based on contract negotiations among the parties.  That's the easy part.  Now, we turn to the capping system.

As summarized in this report by the European Observatory on Health Systems and Policies in 2009, the HMOs became concerned that hospitals were inappropriately increasing volume and therefore also their expenses. "The health plans pointed out that . . . their revenues would be determined largely by the Government, with little room for their own input. They also argued that, with little control over their revenue, they needed some protection from potential expenditure increases. Thus the cap sought to advance two main objectives: reducing the growth in hospital utilization by removing incentives, and reducing the health plans’ expenditure for services above the cap."

Each year a revenue cap is set by the Government for each hospital vis-à-vis each health plan. The cap is based on a three-year average of costs, reduced by a few percent.  After a certain volume of patients have been seen and costs have been incurred, the rate paid to the hospital drops by 70%--yes 70%, to 30% of the initial rate.  When the volume of services provided by the hospital exceeds 113% of the base, the rate paid to the hospital rises to 65% of the cap.  The intermediate step in the schedule has been nicknamed the "honey trap."

When a hospital is in the honey trap, its revenues can be insufficient to cover the incremental cost of patient care, much less fully allocated costs.  So, it is not unusual for hospitals to run a deficit.  When a government hospital runs a deficit, though, the amount is made up by the government.  When an HMO-owned hospital runs a deficit, there are also ways to shift or acquire government provided funds to cover the shortfall.  In contrast, when a non-profit hospital runs a deficit, it must turn to internal financial reserves and/or donors to break even for the year.

This latter point has given the government a free ride for the hundreds of thousands of patients seen by the non-profit hospitals.  It could establish a rate schedule that systematically caused a shortfall in those hospitals' revenues, knowing that it could rely on philanthropy (mostly from outside the country) to make up the difference.

This and other government policies account for the fact that Israel spends about 7.9% of GDP on health care, about 2% below other countries in the OECD, including the UK, which has a similar universal health care policy.  But even that difference disguises the fact that the government share of expenditures Israel is a much lower percentage than that of the UK, as you can see below.  It is supplemented by payments made to private insurance companies who provide access to physicians and hospitals outside those paid by the regular governmental rate system.

It is unlikely that this system of artificial constraints on government health care revenues can persist.  Israel faces the same demographic and technological changes occurring in the delivery of care as other developed countries.  The fountain of philanthropy from the US and elsewhere that has supported the non-profits can no longer be expected to flow to the same degree.  Relying on the private sector to supplement the government plan with ever more extensive and expensive private insurance will render those companies uncompetitive in the world marketplace, just when they are already facing diminished market opportunities.

As I have said before:

My prediction, therefore, is (with some minor ups and downs) a gradually increasing percentage of national budgets devoted to health care.  The demographics will drive this--older people living longer; Baby Boomers reaching the age of hospitalization, combined with a sense of entitlement about serving their aches and injuries; and a younger generation that is sedentary and overweight.  The body politic will allow this increase in national health care budgets to happen because it is just too hard to take things away from the voters.