INCORPORATION OF PUBLIC HOSPITALS: A “SILVER BULLET” AGAINST
OVERCAPACITY, MANAGERIAL BOTTLENECKS AND RESOURCE
CONSTRAINTS?
CASE STUDIES FROM AUSTRIA AND ESTONIA.
Armin H. Fidler1, Reinhard R. Haslinger 2, Maria M. Hofmarcher3, Maris Jesse4 and Toomas Palu5
October 2005
1
Health Sector Manager, Europe and Central Asia Region, The World Bank
Consultant, Human Development Network, Europe and Central Asia Region, The World Bank
3
Senior Health Economist, OECD, Paris
4
Senior Health Specialist, Europe and Central Asia Region, The World Bank
5
Senior Health Specialist, East Asia and Pacific Region, The World Bank
2
2
ABSTRACT
This paper presents a new approach for incorporating public hospitals by contrasting the experience from
an “old” EU country (Austria) with a new EU member state (Estonia). In the EU (including the new
member states) hospital overcapacity is a serious problem, from a technical, fiscal and political perspective.
Few countries have succeeded in establishing an appropriate framework for resource management and for
guaranteeing long-term financial viability of their hospital network. Many countries are in search of
effective policies for improved hospital management and more cost-effective resource use in the health
sector. Over the past decade, experiences in Austria and Estonia have emerged as innovative examples
which may provide lessons for other EU countries and beyond. This paper describes the evolution of
public hospitals from public budgetary units and public management to incorporated autonomous
organizations under private corporate law, resulting in a contractual relationship between (public) owners
and private hospital management. Outdated and inefficient public sector structures were replaced by more
agile corporate management. The arrangement allows for investments, operating costs and budgeting
according to strategic business goals as opposed to political “fiat”. Shielding hospitals from local political
influence is an important aspect of this concept. Horizontal integration through networking of public
hospitals and introducing private management helps create a new corporate culture, allowing for more
flexibility to achieve efficiencies through downsizing and economies of scale. Based on contracts the new
balance between ownership and managerial functions create strong incentives for a more business-like,
results-oriented and consumer-friendly management. This was achieved both in Austria and Estonia in a
politically sensitive way, adopting a long-term vision and by protecting the interests of hospital owners and
staff.
KEYWORDS
Health service delivery, hospital, public hospital, hospital reform, incorporation, corporatization,
privatization, autonomization, organization, organizational reform, institution, innovation, performance,
management, governance, new public sector management, public sector
ACKNOWLEDGEMENTS
The authors are grateful for comments, insights and other intellectual contributions provided by Harald
Maikisch, Engelbert Theurl, Silvia Oechsner, Heinrich Birner, Jutta Koenig, Harald Geck, Harald
Weissenböck, Harald Maier, Franz Sonnberger and Josef Kastl.
DISCLAIMER
The findings, interpretations and conclusions expressed in the paper are entirely those of the authors and do
not represent the views of the World Bank, its Executive Directors, or the countries they represent.
CORRESPONDENCE DETAILS
Armin Fidler, Europe and Central Asia Region, The World Bank, 1818 H Street NW, Washington DC,
20433, USA; Mail Stop H7-700; Phone: (202) 473 0162; Fax: (202) 477 0574; Email:
afidler@worldbank.org; Web: www.worldbank.org
3
INTRODUCTION
Advances in medical technology, less invasive surgical procedures and effective new drugs have
dramatically reduced the need for long hospital stays. New incentives in management and in resource
allocation, such as prospective payment systems (DRGs 6) have reduced the average length of stay (ALOS)
and engendered efficiency gains, but have done little to address the problem of overcapacity in most
hospital markets. Nevertheless, the number of inpatient care beds has declined over the last decades across
Europe, indicating higher productivity measured by declines in the average length of stay and by increases
in patient turn-over rates. Further pressure to contain costs in the face of limited resources and the everincreasing demand for cutting-edge health care services is forcing countries to look for innovative ideas to
right-size the hospital sector, which accounts for the lion’s share of health expenditures in most countries.
This is even a bigger problem for the new EU member states from the former socialist bloc that have
inherited double the hospital capacity compared to the West, but less than a quarter of the resources that
OECD countries are spending to support it. Entry into the EU and the need to comply with Maastricht
Macroeconomic Stability Pact criteria is putting pressure on transition economies and create the need for
health systems modernization, including hospital reforms. However, the reform path is plastered with
formidable obstacles. The biggest stumbling block is the political economy of hospital reform. Such
reforms are highly sensitive political issues, health being an important concern for consumers and voters.
Furthermore, hospitals are typically large employers, and traditionally enjoy the lobbying power and
political influence of the medical profession. The resulting political debate often ends in stalemate and
stagnation. Some countries, however, have shown encouraging progress in designing and implementing
reforms of health service delivery despite such obstacles. Successful reforms include the incorporation of
hospitals, horizontal integration and the use of private sector management while maintaining strong public
oversight and continued public ownership of assets.
We take a closer look at a decade of experiences in Austria and Estonia in re-structuring and re-organizing
hospital care. The paper poses the question whether the combination of incorporation and market
incentives combined with public ownership has the potential to introduce more cost-efficient and flexible
management of hospitals while offering at the same time a politically acceptable solution to stakeholders.
Austria and Estonia, represent the typical context of an “old” and a “new” EU member state, respectively.
Over the past decade in both countries the hospital sectors have undergone fundamental restructuring and
continue to face further organizational changes in order to reduce costs, achieve efficiencies and improve
service quality. In Austria, the primary focus was horizontal integration through the establishment of
hospital holding companies in most of the nine states, allowing participating hospitals a limited degree of
independence. In Estonia, all hospitals (public or private) are incorporated under a company or foundation
(trust) law and several hospitals were merged into larger integrated organizations. The paper will describe
in each country the pre-incorporation situation and the principal reasons for change. This will be followed
by a more detailed discussion of the evidence available for each model.
Results from qualitative research including interviews with stakeholders and hospital managers as well as
quantitative data highlighting changes over time help understand the characteristics and potentials of the
two models. The use of control groups or the comparison of single variables was not practical or
applicable. External factors such as the introduction of DRG systems in both countries have had their
independent share in changing hospital performance.
BACKGROUND – HOSPITAL BEHAVIOR AND ORGANIZATIONAL REFORM
Hospital behavior is covered extensively in the literature. In the first generation of models in the literature,
hospitals are considered as organic entities whereas the central focus of this group of models is the
systematic and balanced integration of both quality and the quantity of services provided (Newhouse 1970,
Lee 1971, Feldstein 1971). The central implication of the model of Newhouse (1970) is that hospitals may
6
Diagnosis Related Groups
4
tend to provide “too much” quality: if competition in the hospital market is monopolistic, hospitals
purchase too many devices and too many services will be provided. The second type of model considers
hospital behavior as a result of the interaction between different groups of decision makers (Harris 1977):
Doctors are treating patients and they need management to provide them with the appropriate scope and
quality of resources. The independence of both groups is important as the trust relation between patient
and doctors requires that doctors do not ration service provision. Generally doctors avoid rationing and
thus demand more resources. Consequently they may have an incentive to work on the capacity limit in
order to add more resources, which in turn may also lead to a bias towards “too much” quality. Thus, in
many developed countries health technology assessment is used and capacity and equipment plans exist to
support hospital management to right-size inputs. Even if optimal capacity plans exist, the quality bias may
prevail as politicians may derive utility from expensive, high quality care and generous equipment
provision, because they can capitalize this politically from their constituency.
Having excessive resource inputs as a presupposition for hospital behavior raises the question whether
hospitals’ traditional organizational structure or ownership model can function as an incentive for steering
hospital behavior towards improved incentives and encourage cost-efficient management of resources. A
second question is which model features strong incentives to allow both, financially sustainable hospital
care and at the same time comprehensive service provision at the highest level of quality.
The literature on organizational structures of hospital markets suggests a predominance of nonprofit
organizations, irrespective whether institutions are state owned or owned by a private providers such as
religious orders. Among the reasons for this predominance is asymmetric information in the health care
market, where consumers are generally not able to judge the quality of service provision and thus tend to be
more trusting in non-profit than for-profit entities (Arrow 1963, Dranove, Shatterthwaite 2000). Other
reasons include the supposition that nonprofit hospitals are likely to be a more efficient instrument for the
provision of public goods (Frank, Salkever 1994, Weisbrod 1989 in Feldstein 1999). Generally, the
literature suggests that non-profit organizations are the response to the combination of both, market and
government failures, which are particularly pronounced in health care markets (Badelt 1997, Sloan 2000).
However, a non-profit status may also be restrictive and lead to waste of resources because decision makers
without a profit motive have little incentives to produce at minimal cost.
Throughout the world governments are reassessing the role of the public sector for sustainable health
service delivery and hospital management. Some successful approaches include organizational reforms
that try to build in market forces. Because of the danger of market failures, governments are generally
reluctant push for full privatization but want to reap the benefits of private sector behavior within public
hospitals. An other option is the incorporation of hospitals discussed in Preker (2003), Jakab (2002),
Rethelyi (2002), Eid (2001) and McKee (2001) a concept ranging from increased management autonomy or
autonomization to full privatization. Expected to minimize the impact of the inherent quality bias in
hospital service provision, the incorporation of public hospitals has been on the health policy agenda in
many countries (Strehl 2002). It is an attempt to combat government and market failures and to promote
rational decision-making in hospital service provision through contractual incentives.
The central idea of incorporation is to remove public hospitals as budgetary units from the public domain
and transform them into more independent entities responsible for their performance. As opposed to
material privatization, formally privatized or incorporated hospitals include organizations which are still
owned by public authorities but run by private entities (Strehl 2003). The arrangement is similar to private
business practices, where resources, investments in personnel, operating costs, budget and goals are
planned according to strategic business goals, as opposed to political ”fiat”. Independence from local
political influence is an ultimate goal of this concept.
In doing so hospitals are removed from public administration and incorporated under private law. The
government remains as the one and only shareholder and is represented by a supervisory board that ensures
the compliance with its strategic goals such as comprehensive provision of services and universal access to
health care as well as cost-efficient management. Furthermore, the administrative function is transferred
into a corporate management function which enjoys a large degree of independence and flexibility in
managing available capacities and resources as well as exploiting economies of scale. This contractual
5
relationship and the balancing between the ownership and the managerial function create strong incentives
for a cost-conscious management. It incorporates both market forces of the private sector as well as
compliance with a public mandate into one service delivery function. Moreover, it was envisioned that this
concept would help create a new corporate culture, allowing for enhanced managerial flexibility, a large
degree of autonomy as well as efficiencies and economies of scale.
AUSTRIA
In Austria, a federal master plan prepared by the Federal Austrian Health Institute (ÖBIG7) and introduced
by ministerial decree by the Federal Ministry of Health and Women’s Affairs provides a general framework
for the provision of medical care. However, ultimately responsible for the provision of health care are
Austria’s nine State governments. This responsibility includes the financing and provision of hospital care
and has been a great challenge in the past two decades as the performance of Austrian hospitals has greatly
changed. Structural deficits as well as extremely high expenditures on inpatient services led to the change
from an input-based financing system, based on bed numbers and length of stay to an output-based
prospective payment system in 19978 (LKF9 – Austrian DRGs). The introduction of the new system as
well as advances in medical technology created a situation where hospitals faced a decline in the rates of
average length of stay (ALOS) from 7.2 days in 1995 to 6 days in 2003, in turn leading to an oversupply of
beds and facilities. In addition, Austria joined the European Monetary Union during this very period which
required the consolidation of budgets and the compatibility with the economic indicators of the Maastricht
Criteria.
Fig. 1. Average Length of Stay,
Austrian Hospitals
Source: Ministry of Health, Austria
6,9
6,7
6,74
6,59
6,5
6,45
6,31
6,3
6,1
6,19
6,08
5,9
1997
1998
1999
2000
2001
2002
5,97
2003
This new reality and a dramatically changing environment advanced the need for more flexibility in
managing resources. Reforms intended to move away from pure public administration of hospitals but to
use market incentives and to establish an enterprise culture that follows modern management principles.
For that reason the idea of hospital holding companies or hospital management organizations was
introduced starting in the early 1980ies. By now, hospital holding organizations10 have evolved in the
majority of the nine Austrian States and are currently responsible for the administration of around 50
7
Österreichisches Bundesinstitut für Gesundheitswesen
Currently 874 DRGs are being reimbursed including intensive care service delivery and psychiatric care.
45 percent of those are reimbursed on a fee for service basis (Medinische Einzelleistungen) und 55 percent
on DRGs. In the course of time credit points allocated to individual hospitals have been re-weighted
towards hospitals with higher specialization.
9
Leistungsorientierte Krankenanstaltenfinanzierung
10
The creation of hospital holdings in Austria corresponds to formal privatization. As opposed to material
privatization, formally privatized hospitals include organizations, which are still owned by public
authorities but run by a private entities (Strehl R.: Privatisierungswelle im deutschen Krankenhauswesen?,
in: Arnold M., Klauber J., Schnellschmidt H. (Hrsg.): Krankenhaus-Report 2002, Schwerpunkt:
Krankenhaus im Wettbewerb, 2003, S. 113-129)
8
6
percent of all hospital beds (Hofmarcher et al. 2001). The second largest group of hospital owners includes
religious orders that largely follow a similar practice as the inpatient services of religious order hospitals
are fully integrated and funded by the same public financing scheme. Regional governments also cover
deficits accrued in these hospitals. For that reason, non-profit hospitals of religious orders are regarded to
be public hospitals. Together with the hospitals owned by the government they make up the vast majority
of hospitals in Austria.
The innovative concept of incorporation in holding structures was based on the idea of creating a
contractual relationship between State governments and hospital management. It requires the removal of
all publicly owned hospitals from the public administration and their incorporation in a holding
organization fully owned by the State government but managed by privately employed professional
hospital managers (Theurl 2004). Holding companies are established under Austrian corporate law and
feature just like any other business corporation a board of directors, which represents the owner(s) and
oversees management. All assets of the hospitals such as medical equipment, facilities and infrastructure
were transferred into this new corporation (Oechsner 2004).
Independence from local political influence was ultimately necessary and one of the goals of incorporation.
This not only puts hospital matters at arms-length from local politics but ensures the integration of
administrative regulations and responsibilities in one hand. Before the creation of holding companies
various departments of the state government were responsible for different hospital matters such as
infrastructure, human resources etc.
For profit management was never a goal for the creation of holding organizations. Rather it was expected
that more flexibility and autonomy would put hospital management in a better position to manage resources
and to achieve efficiency gains from economies of scale. This includes the “right-sizing” of infrastructure,
the consolidation of medical departments and specialties and strict adherence to the Austrian Hospital
Master Plan with regard to investment in high-end equipment. Holding organizations were founded as nonfor-profit entities, with a binding mandate to provide comprehensive secondary health care for the
population and to meet high quality standards by ensuring financial sustainability at the same time. The
regional government as owner of the holding company still assumes the residual liability for any debts the
holding may incur.
The first hospital holding was founded in the Austrian State of Vorarlberg, in 1979. 11 The establishment of
the Krankenhausbetriebsgesellschaft – KHBG (hospital operating company) was facilitated by the fact that
most municipal hospital owners were in deep debt and were not keen to maintain ownership of their local
hospital which was seen more and more as a large liability for the municipality. The KHBG is now the
largest provider of health care in the State of Vorarlberg and has a market share of 84%, serving around
450.000 people in a geographical area of around 2600 km2. The KHBG is legally owned by the
Government of Vorarlberg (96%) and the towns (and former hospital owners) of Feldkirch, Bludenz,
Bregenz and Hohenems (each of them 1%, which secures them a seat on the board). It manages five public
hospitals with around 1700 hospital beds at eight different locations. With a total of about 3100 employees,
it is the largest employer in Vorarlberg (KHBG Annual Report 2002). The various centralized services
such as IT services are based in the LKH12 Feldkirch, which is Vorarlberg’s largest hospital (677 beds,
1500 employees) and the State’s only tertiary facility, affiliated with the University clinic of Innsbruck as a
teaching facility. Focusing on its core competencies, the KHBG encourages the outsourcing of ancillary
services such as facility management, laundry, and consumer services such as restaurants, banking, and
shops, maintenance services (medical equipment and general maintenance) and partly IT services. In
addition, there are plans to convert central sterilization services into a public- private partnership project
(Maikisch 2004). Three hospital sites were closed over a 10 year time period, their beds eliminated and
their technical capacity merged into more specialized sites.
This first hospital holding project turned out to be politically viable and economically successful, as
acknowledged in 1992 by the Court of Accounts, Austria’s supreme auditing authority. Over the past
11
12
Krankenhaus- Betriebsgesellschaft m.b.H.
Landeskrankenhaus (State Hospital)
7
decade the same concept became the key model for hospital restructuring in Austria, by transferring
hospitals ownership from local governments and private operators (largely religious orders) into an
independent holding organization. Since then, seven of the nine Austrian States have established holding
organizations to generate efficiency gains in the hospital sector. (Maikisch 2004).
In Upper Austria with the size of around 12.000 km2 and a population of around 1,4 million (2001) among
Austria’s largest states, the newly established holding covered 12 public hospitals until then owned by the
State Government. Established in 2002 as a holding corporation 13, the GESPAG14 has a market share of
around 50% and is with around 8.500 employees Upper Austria’s largest health care provider. It runs 12
hospitals at 16 different locations; 9 of those are general public hospitals and three are mono-profile,
specialized hospitals. The creation of this holding led to several changes in structure and capacity of the
Upper Austrian hospital landscape. Mirroring the experience in other states, some hospitals of the network
will be closed and beds partially transferred to more appropriate sites, resulting in improved efficiency and
substantial cost reduction, especially of management costs. In 2005 two more hospitals, will have merged
into the holding and will contribute to the network’s specialized internal medicine and psychosomatic
medicine services (Geck et al. 2004).
Qualitative research has shown that the incorporation in a holding structure has allowed for faster decision
making and more managerial flexibility. Compared to stand-alone hospitals, resources can be managed in a
more efficient way, leading to synergies, economies of scale and risk-sharing of large capital investments
for medical equipment. In addition, individual hospitals in the same geographical area specialize in certain
areas to avoid redundancy and overlapping, resulting in reduced overall costs (Kastl 2004). In some states,
such as in the case of Styria, the networking was preceded by elaborate hospital master plans, factoring in
variables such as emerging burden of disease as well as future trends in epidemiology and demography. In
addition, the master plan recognized international evidence that in some specialties a minimum service
volume must be observed to comply with international quality standards. This led to the merging of
specialties and transfer of staff to generate centers of excellence for certain medical specialties.
The newly created holding companies have few employees of their own, in most cases only its management
board. Hospital employees, such as nurses and doctors are contracted under state employment law.
Earlier, the civil servant status of hospital employees which included special rights such as flexible working
hours and protection from lay-offs was abolished and for newly hired staff replaced by employment
regulations similar to ones under private law. Still, employment policies were some of the most sensitive
concerns in the transformation process as hospital employees are formally employed under state law but
required to report to management of a private holding corporation. For that reason hospital employees
employed under state laws are contractually transferred to the holding company by means of a special law.
This arrangement gives the holding company similar rights like a private employer, including hiring and
firing. Additionally, it assures that only one type of employment contract is in place. Compensation
schemes are exclusively based on the employment law of the state government. As a result, staff selection
and hiring procedures are much shorter and more flexible, as they are at arms-length from political
influence and are directly processed by the holding company. Time consuming selection procedures that
had to be approved by local and state governments can now be avoided and hospital directors can
independently select doctors, nurses and other staff. However, managerial selection needs to be cleared by
senior management of the holding company (Oechsner 2004).
13
14
Aktiengesellschaft
Oberösterreichische Gesundheits- und Spitals-AG
8
Fig. 2. Yearly Cost Increase, Austrian
Hospitals
Source: Ministry of Health, Austria
9,5
9,05
%
7,5
5,5
5,23
4,1
3,5
4,38 4,27
3,65
2,84
1,79
19
94
19
95
19
96
19
97
19
98
19
99
20
00
20
01
20
02
20
03
1,5
2,31
3,11
Performance: Available data thus far demonstrate that Austria’s restructured hospital sector has achieved
stated performance goals. Recent analysis shows that the incorporation of hospitals15 together with other
reforms such as new payment systems resulted in improved resources management, better service quality
and reduced costs. Compared to 1994 when hospitals were still part of a large public bureaucracy annual
cost increase reached unsustainable dimensions (9,05% in 1994). In recent years this annual increase was
successfully contained at a much lower levels (3.65% in 2003). This could largely be attributed to a
changed incentive structure after incorporation, economies of scale and improved internal cooperation
within the holding structure.
Signals stemming from the newly introduced prospective payment mechanism (DRG) and advances in
medical technology resulted in a significant reduction in average length of stay (ALOS). Data show a
continuous downwards trend and a dramatically reduced need for bed capacity. In 1997 average length of
stay was over 7 days, it dropped until 2003 to under 6 days with continued downward tendencies. The
combined elements of hospital reform exposed overcapacities and increased political pressure to reduce
fixed costs.
Downsizing or closure of hospitals remains a politically charged and highly sensitive issue. Nevertheless,
data from the Austrian Ministry of Health show a significant reduction of bed capacity of over 8% between
1997 and 2003. After the introduction of the holding company concept, the Austrian hospital sector has
demonstrated to be more flexible after restructuring and better prepared to adapt to a changing business
environment. At the same time there is evidence that the sector has improved financial sustainability while
achieving one of Europe’s highest patient satisfaction rates (In the EU Commission Patient Satisfaction
Survey 1999a, Austria came in second behind Finland in the EU).
15
This is also true for the hospitals owned by religious orders. Orders have followed similar practices and
do not manage hospitals any longer on their own but feature similar non-profit hospital management
organizations.
9
Fig. 3. Inpatient Bed Capacity, Austria
~8% Reduction between 1997 and 2003
Source: Ministry of Health, Austria
54000
-1,18%
53000
-1,84%
52000
-1,51%
51000
-1,30%
--0,92%
50000
49000
1997
1998
1999
2000
2001
-0,69%
-1,19%
2002
2003
Fig. 4. Patient Satisfaction, Austria
Source: Eurostat (European Commission) and Dietmar Mueller, 1999
Finland
29,0
49,0
Austria
34,8
Netherlands
7,9
France
61,8
11,0
Belgium
48,7
9,9
Great Britain
in percent
35,8
46,4
13,1
Denmark
36,2
14,1
Sweden
34,1
13,3
Luxembourg
32,6
12,9
Germany
36,8
10,8
32,4
Spain
25,6
Ireland
18,8
Italy
13,6
Greece
8,6
Portugal
5,1
EU-15
9,2
0
32,1
10
20
very satisfied
satisfied
30
40
50
60
70
80
ESTONIA
Estonia established a market economy in 1991, after 50 years of socialism, but inherited a significant
overcapacity of hospital bed stock stemming from Soviet times. To serve a population of 1.4 million,
Estonia had 120 hospitals with more than 17,000 beds. By 1996, the number of hospitals had declined to
78, mainly through administrative closures of small rural hospitals that did not meet the new licensing
requirements. The number of hospitals in bigger urban areas remained almost unchanged. However,
hospitals had been given semi-autonomous status granting management full employer rights, including
hiring-and firing of personnel. All medical staff lost its civil service status and began to work under private
labor regulations starting in 1992.
Due to new medical technologies, improved financial incentives and pressure from the Estonian Health
Insurance Fund average length of stay (ALOS) decreased in the Estonian hospital sector by 30% from 1993
10
to 1998. The number of hospital beds decreased by 20% during the same period. However, the reduction
of overall hospital bed capacity was not as significant as the reduction of ALOS, the reason why acute bed
occupancy remained below 70% in 1999. Several attempts by the Ministry of Social Affairs and the
municipality of Tallinn to consolidate services in some hospitals, to achieve more efficiency and to vacate
remaining buildings failed, due to provider resistance supported by negative media coverage. Inefficiencies
in the hospital sector in urban areas increased over the years and became even more acute during the
1998/1999 economic down-turn.
Fig. 5. Average Length of Stay, Estonia
Source: own research
17,0
15,0
15,4
13,0
11,0
9,9
9,0
8,7
8,5
8,2
7,0
1993
1999
2001
2002
2003
A new approach to increase efficiency in the hospital sector was formulated by the Estonian Government in
1999 and included the development of a long-term national hospital master plan; the provision of
autonomous legal status for hospitals, including management rights and responsibilities conducive for costeffective management decision-making; and the exposure of hospitals to appropriate financial incentives to
reward efficiency.
During 1999-2000, the “National Hospital Master Plan 2015” was developed, which featured a vision for
hospital capacity needs in the year 2015. To avoid conflicts of interest and local biases, an international
consultant team was contracted through an international tender process. Criteria used for planning hospital
capacity included sufficient population pools to support minimum service volume for quality and
efficiency, development of medical technology, demographic and epidemiological projections and a
requirement that a hospital should not be further away than 60 minutes travel time by car (70 km). This
master planning exercise resulted in a proposed future hospital configuration of 13 hospitals by 2015
(instead of 78 in 1999) including two university level teaching hospitals, four multi-profile sub-regional
central hospitals and 7 county hospitals.
The Government endorsed the proposal of such master plan in 2003, but included several changes after a
series of political negotiations. The target of only 13 hospitals as overall number of acute hospitals
proposed by the consultant team was changed to a total of 21 acute hospitals including three regional
hospitals with tertiary care (catchment population: 600,000 – 800,000), four central hospitals (catchment
population: 100,000 – 150,000), 11 county hospitals (catchment population: 10,000 – 50,000), and in
addition three local hospitals with smaller catchment areas. This plan included the proposition to turn
many of the remaining hospitals into long-term care providers.
At the same time, new regulations for health care organizations were established under the 2001 Health
Care Services Organization Act which required all public hospitals in Estonia to be incorporated under
private law as foundations (trusts) or joint-stock companies by 2003. This led to a situation where hospitals
remain in the public sector but are being run as companies according to private law, granting them full
managerial rights over assets, full residual claimant status and access to financial markets. Supervisory
boards govern newly established public hospital companies through supervisory boards for which members
are appointed by the owners (joint-stock company model) or founders (foundation model). The owners or
founders are the central government, local governments, other public bodies (e.g. university) or a
11
combination of the above. Subsequently, the board appointments reflect to large extent current political
preferences.
The legal transition of hospitals into either trusts or joint-stock companies allowed for the implementation
of the Hospital Master Plan 2015 and resulted in several mergers of individual hospitals. In the period from
1999 to 2001, 41 hospitals and outpatient clinics in urban areas were merged into six networks. During this
process management teams and supervisory boards were created and given operational responsibilities
within the merged hospitals. The newly appointed hospital management teams were expected to realize
efficiencies from economies of scale and to free hospitals from fixed costs by further restructuring
buildings and bed capacity. Four of the networks were able to restructure their services and close seven
facilities. The number of beds decreased in all merged hospitals, while bed occupancy increased to 7080%.
Hospitals, Beds (in 100)
Fig. 6. Reduction of Capacity, Hospitals and Beds
Source: own research
140,0
14380
120,0
115
1993-2001
Hospitals ~33%
Beds ~ 36%
10360
100,0
9160
80,0
78
60,0
8020
51
50
40,0
1993
1999
2001
Table 1: Performance indicators, Estonian hospitals.
National statistics* North-Estonia
Regional Hospital
2002
8450
67
Change
from
2000
n.a.
12%
-10%
-1.5%
-7%
2003
Change
from
2000
-3
0%
-19%
10%
22%
2002
2003
Tartu
University
Hospital Trust
Children Hospital
Trust, Tallinn
2003
2003
Change
from
2000
-4
-28%
-10%
16%
-1%
Change
from
2000
-2
-30%
-12%
20%
-7%
No of buildings
n.a.
12
15
2
No of beds
8248
1472
929
241
ALOS
8.5
9.3
6.6
5.3
Bed occupancy
65%
77%
81%
75%
No of
261.3
40.6
41.5
12.2
hospitalizations
(in .000)
Annual turnover
181.5
31%
45.3
62%
50.8
44%
8.8
6%
(mill €)
**
Source: Ministry of Social Affairs, Medical Statistics, Estonia, 2004.
Source*: National Statistics, Ministry of Social Affairs, Estonia, 2004
Source**: Total hospital sector revenue (HP.1). Estonian National Health Accounts, 2000 and 2003.
In the capital Tallinn, the Children’s Hospital Trust was created by merging two pediatric hospitals and a
policlinic, a total of four hospital and ambulatory buildings in three different locations. Only two years
after the merger, two buildings were vacated. Also, there was a significant reduction in numbers of
administrative personnel. The merger, including the closure of infrastructure was widely accepted by
patients as well as staff. An information campaign addressed the efficiency and quality gains from
downsizing and created the necessary knowledge and understanding. Additionally, staff was actively
involved in the restructuring process and widely consulted on interior design for refurbished departments.
Also, savings of fixed costs were re-directed to increase salaries of medical personnel. For other mergers
12
such as the North Estonia Regional Hospital a different approach was chosen. Unlike the Children’s
Hospital Trust this merger process was prepared by a relatively small group at the central level. This
approach lead to a lack of communication trust between hospital staff and the management board and
resulted in negative media attention.
Overall, the Estonian model of incorporating public hospitals and merging several individual facilities into
larger legal entities helped to implement politically and administratively challenging hospital reforms. The
transfer of administrative decisions from publicly elected officials to corporate management has allowed
for a significant restructuring of services and efficiency gains. This includes efforts to meet salaryexpectations of medical personnel, to increase quality of health care services and infrastructure while
stabilizing public hospital expenditures at the same time.
However, during the reform process it became also clear that too little attention was paid to better define
roles and functions of hospital supervisory boards. In several cases, Government and municipalities in their
role as owners failed to state clear objectives and terms of reference for these boards and expected in turn
the board to define its own responsibilities. This led to a situation where boards focused largely on
financial issues and financial sustainability only. This was essential during the first few years after the
mergers, however, at a more stable stage, owners and their representatives in the supervisory boards should
address wider interests including those of patients and the community.
CONCLUSION
The experience in Austria and Estonia demonstrates that the incorporation of hospitals and horizontal
integration through the creation of holding companies or hospital networks is a viable tool to combine
market incentives for management while maintaining public ownership, and at the same time achieving
efficiency gains. The hospital sector is the largest expenditure category in any health system; cost
escalation and user dissatisfaction with the quality of services are common features in many countries.
Incorporation aims at expanding autonomy and decision rights with the ultimate goal to shift control (over
inputs and outputs) from a public supervising agency to the hospital itself. Incorporation also intends to
make hospitals earn revenue under market conditions as opposed to rely only on public budget allocation.
The independence of an incorporated hospital holding or network not only allows for more flexibility for its
management but also compels managers to focus on the financial liability of their institutions.
Both, Austria and Estonia, can be considered success stories when it comes to putting the hospital sector on
a more sustainable footing. Both countries developed hospital master plans that provide the framework for
the planning of hospital services. Both countries have separated health services financing from provision,
introduced contracting and put in place financial incentives for hospitals that reward efficient service
provision, maximizing the potential of prospective payment systems (DRGs). Both countries have
essentially incorporated public hospitals by re-establishing them under private law, but preserving public
ownership. This concept has provided a framework where public hospitals are run as business entities,
management is empowered to ensure good clinical practice and efficient financial performance. And it has
put hospital management issues at arms lengths from political influence. As a consequence, both countries
have used hospital incorporation as an instrument to realize efficiency gains in accordance to a long-term
facilities master plan. The key principle was to network individual hospitals, achieve horizontal
integration, downsizing of excess capacity, in line with efficiency and quality objectives. Experience in
both countries demonstrated that management changes inside those newly established hospital networks led
to optimization of staffing and resource management. Interestingly, both country cases, while considered
national best practice, have received little international attention thus far.
A number of other countries in Central and Eastern Europe (including some of the new EU member states)
and some countries of the former Soviet Union (FSU) are considering introducing hospital autonomy,
networks and hospital mergers as a measure to optimize performance in the hospital sector. In 2004,
Armenia began to implement a hospital services master plan in the capital city of Yerevan where a
population of 1.2 million has been historically served by 43 hospitals. The basic elements of the reform are
similar to the one featured in Austria and Estonia: A rational master plan was developed; financing and
13
provision of care were separated; and public hospitals have been incorporated under corporate law. The
first step merged 37 public hospitals and policlinics into 10 newly incorporated public hospital joint-stock
companies. The selected hospital merger groupings contain a significant proportion of the multi-profile
hospitals. There is a significant potential for initial fixed cost reduction from downsizing the existing
network. Remaining facilities would feature higher utilization, improved efficiency and would be quality
health care providers for Yerevan. Until now, four pilot project mergers representing about 25 percent of
total hospital bed capacity in Yerevan were selected and two are ready for implementation. The hospitals
will have a chief executive supported by a management team. The new networks will feature improved
governance and management arrangements, new financial management systems and accounting practices;
consolidated budgets (private and public revenues); strategic development and performance plans for
executive management; publication of annual reports; and independent audits. Armenia would be the first
country where hospital incorporation would be put to a test in a low income, non EU country featuring a
highly resource constrained health sector.
14
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