European health care finance still in crisis, but opportunities seen

In 1996, many European medical device companies suffered poor sales and falling profits. The difficulties arising from uncertainties about health care reforms in most European countries were often exacerbated by excessive reliance on domestic markets. Companies are being forced to review their operations and to look afresh at opportunities which continue to arise, but which may be in new and unexpected areas.

Examples of such opportunities in the European health care market:

* Sales to the physician's office sector in Germany will improve.

* Substantial capital expenditures to equip new French hospitals will arise.

* Accreditation reviews of French hospitals will produce needs for equipment replacement.

* Smart card applications for French patient dossiers will create many new opportunities.

* Increasing numbers of pay-beds in Italian hospitals will create needs to upgrade those facilities.

* New Spanish health centers will need equipping.

* British hospitals will boost day-case capacity and ambulatory surgery throughput.

* British physicians increasingly include minor surgery and diagnostic testing in their activities.

Table 1 on page 82 presents an overview of health care expenditures in five major European countries in 1995.

Reform battle continues in Germany

When Horst Seehofer was made German Federal Minister of Health in 1992, large-scale health care reform already was planned. Few thought, however, that by 1997 the battle would still be only half-won. A cumbersome legislative system, a division of responsibilities among health insurance organizations (Krankenkassen), federal and regional governments, and outright opposition from politicians and professional and trade organizations all have slowed progress and made compromise inevitable.

A consequence of government efforts to raise the standards of the health care system in the former East Germany and the impact of the added number of inhabitants [TABULAR DATA FOR TABLE 1 OMITTED] receiving welfare benefits (both East German citizens and German-origin immigrants from other parts of Eastern Europe) has been an increase of about 11% in health and welfare spending in 1992/1993.

By 1993, total costs at $267 billion were more than 14% of gross domestic product (GDP), but it should be remembered that this included $72 billion on generous rehabilitation and "cure" facilities in spa-type hospitals and convalescent centers. The future for these facilities is uncertain, since they are among the sectors targeted for cuts by the federal government.

An essential part of German federal government's plans to lower employers' non-wage costs (pension and health care costs, accident insurance, etc.) from the pre sent average 40.8% of salaries to below 40% by the year 2000 is to legislate for cuts in health care spending. The government's third-stage health care reforms were rejected by the Bundesrat (upper house) in September last year, and as a result the German government has repackaged its proposals into three separate bills in such a way that the Bundesrat approval is no longer required, and the bills can be passed using the government's majority in the Bundestag (lower house). Even then, however, the Bundesrat will be able to delay the new bills.

The first of the three new bills, the Beitragsentlastungsgesetz, which was just an emergency cost-cutting measure to hold the situation, was duly passed in September 1996. The second bill, Neuordnungsgesetz 1 (NOG1), was approved by the Bundestag in November. The Bundesrat, as expected, has raised objections and NOG1 has been passed to the mediations committee. NOG1 will force any KrankenKassen which increase their contribution rates from companies to raise at the same time the amount their insured members pay in part-payment. At the same time, insured members would have the right to change membership from one Krankenkasse to another immediately, rather than at the end of each insurance year as at present.

The third bill, Neuordnungsgesetz 2 (NOG2), is under review by the Bundestag and is not likely to be passed until May at the earliest. Almost a third of public health expenditure is on the hospital system, making improved hospital efficiency an essential factor in the reform process. Efforts by the federal government to control hospital expenditures have not proven to be very successful, so that buck is now to be passed to the Krankenkassen and the hospital associations. NOG2 will require the two groups to set and supervise annual hospital budgets for 1998 onward, with any increases limited to the annual rise in the average basic wage. Hospitals which exceed budgeted levels of procedures will be reimbursed for the excess at a reduced level. Responsibility for monitoring diagnosis-related group (DRG) listings and reimbursements, as well as decisions on new DRGs, also will be transferred to the Krankenkassen and hospital associations under NOG2.

As an interim measure, hospital budget increases in western Germany for 1997 may only rise by 1.3% and for eastern Germany by 2.3%. Over the past five years, the number of hospitals in Germany has fallen by 5% to about 2,300. The number of beds has been reduced by 10% over the same period, to slightly more than 600,000.

There are in Germany 110,000 physicians working outside the hospital sector, or 1.35 per 1,000 population. The government in 1993 put into place restrictions on numbers of new entries into private practice, and even tighter controls will be imposed in 1999, when an age limit of 68 will also be imposed. In Germany virtually all outpatient and ambulatory procedures are carried out by physicians in private practice. With an effective monopoly on outpatient treatment, physicians have had a substantial incentive to provide a wide range of specialist treatment. German physicians therefore usually have large and comprehensively equipped consulting suites, and have increasingly turned to partnerships or group surgeries in preference to single-physician practices. Efforts by the German Ministry of Health to encourage wider use of alternate-site and hospital outpatient care have been unsuccessful, with less than 1% of surgical procedures carried out by hospitals on an ambulatory basis. About 68% of all procedures are in hospitals on an inpatient basis, with 31% in physician surgeries.

The imposition of restrictions on many procedure reimbursements and payments on a DRG basis, irrespective of actual costs incurred, am said to be creating financial problems for many German physicians in private practice. According to a recent report in Aerzte Zeitung, the physicians' daily newspaper, 25% to 30% of physician practices am facing bankruptcy as fluctuations in income arising from frequent legislative changes and heavy financial outlays on newer and better technology take their toll. Relief may be at hand, however, since agreement has been reached in the NOG2 discussions that the KrankenKassen and physician organizations should negotiate recommended prices for physician fees and that existing maximum limits should be removed.

Cost-cutting in France has limited effect

France has one of the highest levels of health care spending in Europe - almost 10% of GDP, at $152 billion in 1995. Although the French government exercises considerable regulatory control in both the public and private sectors, with 21 health regions and 90 health districts, expenditure limitation continues to be a problem. In the early 1990s, health expenditure was increasing at an annual rate of more than 6%.

Earlier cost-containment programs in 1993 and 1994 initially produced sharp falls in expenditure growth rates, particularly in ambulatory cam and clinical laboratory expenditures. By 1995, the growth rate was back to more than 4% because of over-budget spending by physicians and public hospitals. As a result, additional cost-containment measures were enacted which included sanctions against physicians who overspent their budgets and the creation of a regional network of agencies to control hospital funding.

In France, health care services are funded primarily by a national health insurance plan based on occupational funds which cover more than 95% of the population. Although financed by contributions from employers and employees, the main public health insurance fund, Caisse Nationale d'Assurance Maladie (CNAM), had deficits in 1995 and 1996 of about $ 6.1 billion and $8.8 billion, despite emergency measures. In the longer term, the government is planning to change the system of health insurance funding by replacing employee health contribution to occupational funds (such as CNAM) with a new tax (deductible from income at source) known as the universal health charge, Cotisation Maladie Universelle (CMU). Although precise details are not yet available it is likely that the CMU tax will apply not only to salaries, but also to pensions and investment income. The new tax is to be introduced over a period of five years, and its imposition will clearly affect the role of existing health insurance funds. It is likely to reduce their importance and to move further toward increased state control over health funding.

In the public sector, there is a major drive to rationalize resources. There is a steady flow of projects (Table 2) to build new modern hospital units, each designed to replace smaller, outdated facilities. Many of the projects [TABULAR DATA FOR TABLE 2 OMITTED] include plans to expand ambulatory surgery and other alternatives to full hospitalization, a sector in which French public hospitals are relatively underdeveloped.

In addition, the hospital reform program now under way is aimed at funding and administration improvements in both public and private hospital services. Each region in France has established a plan to maximize existing resources and to set future development criteria. Hospitals will negotiate with their regional hospital agency a 3-year to 5-year contract, which will replace existing global budgets. These regional agencies are scheduled to be up and running by mid-1997. Anew system of accreditation for public and private hospitals will be operated by the Agence Nationale d'Accreditation et d'Valuation en Sant (ANAES). ANAES will be charged with assessing the quality of care provided by general physicians and with encouraging greater cooperation between hospitals and physicians in general practice.

Strikes which crippled France at the end of 1995 continued into 1996, with one-day actions in April and October; another occurred this April. Two of the four physicians' unions are still holding out for the removal of one-off payments to a control fund intended to help finance the computerization of physicians' offices and to supplement physicians' earlier retirement. In a project aimed at cutting excessive prescribing of drugs and diagnostic testing, annual spending targets were introduced last year for physicians. Additionally, all insured Frenchmen have now been issued a new- style medical dossier (carnet de sante) held by the physician of the patient's choice, who provides appointment cards to be presented to other physicians or specialists. The aim again is to control expenditures and encourage referral rather than direct contact with specialists and duplication of diagnostic testing, etc. Vitale "smart" cards will replace the carnets de sante and are now being introduced. The initial Vitale cards will hold only administrative details, but beginning next year, all new cards issued will hold the patient's full medical dossier. The target is for all 43 million social security beneficiaries in France to have fully operational cards by the end of the decade.

In Italy, reforms are succeeding

Although the Italian health service, Servizia Sanitario Nazionale (SSN), was set up in 1979 with Britain's National Health Service as a role model, it has developed somewhat differently. Reforms which have been implemented over the past five or six years have featured various cost-limiting measures. Central to the reforms has been the intention of central government to restrict its funding of health care to a minimum level of guaranteed needs, leaving the regions to raise their own finances if they wish to increase their budgetary resources in order to provide a higher standard of care.

There are in Italy 21 health care regions and 225 district authorities (unitarie sanitarie locali, or USLs), as well as 50 new hospital "trusts" similar to those in NHS, with separate budgetary responsibilities. The high degree of autonomy granted to the regional authorities in terms of policy and expenditure means that there can be considerable variations in regional systems.

The new hospital reimbursement system introduced in 1995 operates similarly to American DRGs, with payments based on the type of treatment, rather than the length of patient stay. In addition, most public hospitals have now added a proportion of private "pay beds." In mid-1996, the Ministry of Health issued a draft decree setting new lower tariff levels for outpatient procedures, including diagnostic examinations.

Reimbursement levels for many procedures, including amniocentesis and CT scans, for example, are to be heavily cut. Even when the new tariffs are finalized, the regions can still reduce them by up to 20%, or even introduce higher tariffs if justified by local costs.

Patient part-payments may also be increased again, especially for specialist consultations, which usually include diagnostic procedures.

When the Italian health service was set up, charitable and commercially operated hospitals were not included. This meant that in some areas there was a shortage of facilities, and this situation led to a "contracted services" process whereby private hospitals became "convenzionati," or classified hospitals, which are integral to overall needs of the SSN, providing additional facilities when needed. Although the number of hospitals and health care institutions is virtually static at about 1,900, this is largely because of shortages of capital. In 1995, there were 143 new hospitals either planned or partially built, with most already several years late on their completion dates. Many of these were clearly pork-barrel projects and their future is in some doubt.

In a recent interview, Health Minister Elio Guzzanti put the number of physicians in Italy as 308,000, a figure which he described as 100,000 too many. Unlimited access to medical schools in Italy is continuing to contribute to the surplus. One recent estimate suggested that there will be 420,000 qualified physicians in Italy by the year 2000. Guzzanti has called for a 20% reduction in the enrollment of medical students as a result. General physicians working within the SSN are paid according to the number of patients, up to a maximum of 1,500, but they can also practice privately.

Decentralization in Spain brings its problems

The decentralization of the Spanish health care system to the regions, and a large number of different hospital operators, means that the market is both fragmented and regionalized.

Over the past nine years, there have been significant changes in the way in which Spanish health care expenditure is financed. The former system of social security funding (40% employer, 60% employee) has been largely replaced by financing from general taxation. Today, social security contributions only provide about 25% of public health care funding, compared to 75% centrally funded.

According to the General Health Law of 1986, Spain is organized into 17 autonomous regions, each of which is supposed to control its own health services. Only seven have actually implemented that plan, with the remaining 10 regions still under the control of INSALUD, the executive branch of the Spanish Ministry of Health. Government plans call for all 17 regions to be self-managing by the end of the decade.

In general, those regions that have taken responsibility for the running of their health services appear to be setting the pace in terms of cutting hospital waiting lists and improving service productivity. Major concerns are being expressed by FENIN, the Spanish medical industry association, over continuing long delays in payments to medical device suppliers. In spite of the 1995 Contracts Law, which laid down a maximum permissable 60 days for payment, the average over all of Spain last year was 245 days, with the Andalucia region's average running at more than 500 days. It remains to be seen how the government will propose payment of an estimated $1.5 billion debt as of year-end 1996.

In Spain, hospitals may be controlled by the national health service, regional governments, city authorities, religious organizations or commercial, for-profit groups. The commercial sector is expanding as the number of people with private insurance increases. It also will benefit from plans by the health ministry to contract out some public health services. In Catalonia, where private hospital care is most developed, this already is commonplace. In Barcelona, 21 private medical centers have formed an association, Barcelona Centro Medico, which is successfully offering high-quality medical services to a worldwide clientele.

In recent years Spain has built up a comprehensive health center network, with each center serving a population of about 20,000. Each center is staffed by a full-time primary-care team of general physicians, nurses and pediatricians, with their own laboratory and radiological facilities. As well as providing primary health care, these centers provide post-natal care, family planning and cervical cytology screening. A major function of these health centers is to act as gatekeepers to hospitals.

Elections created uncertainties in U.K.

A general election was scheduled for May 1 in the United Kingdom. It was widely expected from polls that the country was ready for a change of government. From Labour Party pronouncements, it appears that a majority [TABULAR DATA FOR TABLE 3 OMITTED] of the health care reforms of the past five years will remain fundamentally intact. Many of that party's proposed changes appear to be largely cosmetic, with few alterations likely in actual day-to-day impact.

The National Health Service (NHS) budget has increased by about 3% for 1996-97, in line with projected inflation. Control over NHS services is through 100 unitary health authorities, which are responsible for both hospital, clinic and physician services. These authorities are under instructions to achieve 3% savings in efficiency improvements each year, but in many cases, it is doubtful whether that is realistic.

There are about 1,400 NHS hospitals and 227 private hospitals in Britain. Since the introduction of National Health Service reforms in 1990, 304 NHS hospitals have been closed and the number of available hospital beds reduced by 10%. Day surgery has grown rapidly in importance and now constitutes more than 30% of surgical procedures. Many NHS hospitals are developing dedicated pay-bed units which compete with private sector hospitals. In 1996, the NHS became the private-sector market leader, with a 16% share of the nationwide commercial acute-care sector, which was valued at $2.4 billion.

General physicians have been encouraged to become more cognizant of real costs of services by the introduction for those physicians with larger practices of GP Fundholder status. Fundholders manage their own budgets to obtain services such as elective surgery, outpatient and specialist nursing services. More than half of U.K. physicians are now fundholders, with numbers still increasing. General physicians also are being encouraged to widen the scope of their services to include facilities for minor surgery and for simpler diagnostic testing. Between 1990 and 1994, the number of GPs offering minor surgery increased by 21% to 21,000.

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