Press Release: The Acute Care Hospitalization System in Israel- From a Vision of Decentralization to a Centralized and Out-of-Control Reality

Embargo until Thursday (15 August) 6:00 AM

The full publication in Hebrew is available here

The acute care hospitalization system in Israel is in a state of crisis, due to large gaps between the system’s needs and the public resources allocated to meet those needs, and due to the deepening involvement of the State in the system’s day-to-day management, which goes against the spirit of the National Health Insurance Law.

The second part of the Taub Center study on the healthcare system in Israel conducted by Professor Dov Chernichovsky and Roi Kfir, which is published today, deals with the regulation of the hospitalization system and government involvement in it. The researchers conclude that the deficiencies in the regulation and the over involvement of the State, impact negatively on the efficient use of resources and public accessibility to them.

These deficiencies cast doubt on the value of investment in additional hospital beds, budget, and implementation of special programs led by the State (like the program to shorten waiting times), as long as these deficiencies have not been addressed.

“Public hospitals” should be defined to ensure that accessible and equal services are available as specified by law

The 1994 National Health Insurance Law (the Law) does not define what constitutes a public hospital for the provision of entitled care to residents. As is the practice, such a hospital – even if not owned by the State – could be required to provide such care from its own, non-public, resources. Obligating hospitals to supply entitled care without securing appropriated funding gives the State power over non-proprietary budgets, including moneys that the hospital does not know with certainty that it will receive.

This can lead to a situations, contrary to the stipulation of the Law, where some residents may not be able to receive hospitalization services, or where these services may be less available than to residents in other locations.

The researchers suggest defining a public hospital in the context of provision of entitled care according to the Law, irrespective of hospital ownership or its incorporated status, according to three criteria:

  1. Normative test: according to which the hospital will offer all of entitled services (including elective treatments) to the public equally, in accordance with the National Health Insurance Law;
  2. Performance test: according to which the hospital operates public services like national centers of excellence, emergency and urgent care service departments, research and teaching units and their like;
  3. Economic test: according to which the majority of hospital income comes from service provision to the national service basket – that is, from the sale of services to the health funds in the framework of the National Health Insurance Law.

Public hospital financing for the provision of services required by the Law will be provided through funds stipulated by the Law, and, in addition, extra funding will be allocated through targeted funding for additional activities such as emergency care, research training, etc.

Use of the capping mechanism has achieved quantitative expansion rather than the desired restraint

In order to ensure universal and egalitarian availability of hospital services that are efficient and sustainable, some involvement of the State is required in the hospitalization market. The State regulates the number of beds and the price of hospital services in order to overcome market failures inherent in the system that may lead to “excessive hospitalizations,” which may place an unjustified financial burden on the public.

To this end, the government has put in place a “capping mechanism.” This mechanism sets a ceiling on the number of hospitalization days that each public hospital supplies to a sickness fund (not effective for services secured by Clalit Health Services (fund) through its own hospitals); above this limit, health funds pay hospitals about a third of the set price for each additional hospitalization day.

This is to deter hospitals from extending service beyond what is necessary. In practice, though, this system forces the government to increase its involvement in setting the number of hospitalization days that each hospital must supply to the health funds, and to be in control of the performance data for each institution in a dynamic environment subject to rapid technological change.

This has been an onerous task. Indeed, the capping mechanism has gotten out of control.

Due to the high fixed cost component of hospitalization, hospitals prefer rendering service even at a low marginal cost in order to more fully utilize their existing facilities or infrastructure.

The sickness funds became accustomed to these low prices and their demand for hospitalization services grew, including at the expense of community care, so, in the long-run, the State ultimately subsidizes the losses borne by the hospitals from the low prices that do not cover fixed cost.

The mechanism, which was meant to be marginal and temporary, has become the norm. Simultaneously, state subsidies to both hospitals and sickness funds increased, contrary to the spirit of the Law.

Indeed, for the period with complete data, 2002-2013, hospital outputs have increased, partially for technological reasons, faster than determined by capping regulation: the quantitative norm that was set was a growth of 8%, while, in practice, hospital outputs have grown by 28%.

The mechanism has thus created a number of distortions in the system: the weakening of relative prices as a signal for priorities within the system (for instance, provision of a specific service in a hospital instead of in the community, or supplying one treatment instead of an alternate treatment using the same infrastructure and manpower); difficulties in identifying the source of deficits and a weakening of budgetary supervision; creating a dependency of the sickness funds on reduced prices and the financing of deficits of hospitalization services directly from the state budget, aside from the budget allotted by the Law; and, encouragement of private medicine at the expense of the public system, since the low prices make it difficult for the hospitals to compete against the private facilities that employ the same physicians in the afternoon hours.

The National Program for Shortening Waiting Times has brought about the financing of private services by taxpayers

In addition to implementation of the capping mechanism – and, to a large extent, due to it – beginning in 2017, the Ministry of Health has implemented a program to shorten waiting times in the public hospitals.

This was done to contend with the ability to shorten waiting times and choose one’s surgeon (usually the same surgeon as in the public institution) in the private health care system, with the surgeon and hospital receiving higher prices than the cap mechanism would allow in the public system. In this framework, the State transfers an earmarked budget of some NIS 900 million to the sickness funds annually in addition to the service basket budget, with the additional funds earmarked as incentive payments to the medical staff.

In addition, beginning in 2018, a 6 month cooling-off period for physicians was mandated, preventing physicians from referring their patients in the public health system to their private practices.

As in the case of the capping mechanism, though, this program also involves the State in reporting and supervision tasks at an unreasonable level. In order to avoid the bureaucracy, sickness funds used the designated moneys from the public system to perform surgeries in private facilities and hospitals that allowed physician choice, utilizing the mechanism of supplementary private insurance.

In this manner, the program to shorten waiting times in the public facilities ended up financing surgeries in private facilities at the expense of tax payers.  Public facilities remained in a relatively weakened position vis-a-vis private institutions in competing for the services provided ‘after hours’ by the same physicians employed in the public facilities.

An inefficient system

According to the research findings, there was an increase of about 20% in productivity (2002-2013) in the creation of services for the basket of hospitalization services. It would be expected that this increase would allow the system and hospitals to improve their financial performance and possibly also that of the health funds, and to also improve the availability of hospitalization services to the public.

Hospital and health fund deficits, though, grew, and public services remained lacking as evidenced by the need for a program to shorten waiting times. This means that the regulation policies – primarily the capping mechanism and the public-private mix – have resulted in systemic inefficiencies – including undue shift of elective services from the public to the private system – that have harmed every aspect of the public system’s financing and services.

“The State has set as its goal to restrain the supply of services in order to ensure funding of entitled care, has implemented a mechanism of low prices that obligated its greater intervention, and has required an acknowledgement of the deficits that now require it to encourage more service rather than to restrain them,” says Professor Dov Chernichovsky. “The State created a complicated bureaucratic mechanisms rather than make reasonable improvements to the regulatory mechanism and lessen its involvement in the system.”

The researchers raise several possible steps to address the existing distortions in the system:

  • Divest ownership and management of hospitals by the State in order to allow it to properly regulate the system and ensure availability of resources.
  • Clearly define “Public hospitals.”
  • Eliminate the capping mechanism and the program to shorten waiting times, and create a transparent framework that includes pricing calculations that accurately reflect the costs of supplying the service basket, both in and of themselves and relative to the costs of alternatives in the community.
  • Direct financing of cost components specific to public hospitals, like emergency services, national excellence centers, teaching, research, emergency systems, and the like, that are not included in the health basket.
  • Develop a mechanism that will allow physician choice in the public system, as in the private system.
  • Adopting a pricing mechanism to share risk and to direct capacities similar to those used in other countries – mechanisms such as the DRG system (Diagnostic Related Groupings), like the differential pricing mechanism that the government is developing. This will allow health funds and hospitals to come to arrangements without government over involvement. The only thing the government needs to ensure is that there is no harm to the service users.

In conclusion, Professor Dov Chernichovsky says, “the planning and supply of services should be decentralized by giving autonomy to the competing agencies – sickness funds and hospitals – with minimal State supervision, to regulate the status of public hospitals and to get the government out of the business of hospital ownership and management, and to reduce over-involvement in the system, as is accepted in the rest of the developed world.”

The Taub Center for Social Policy Studies in Israel is an independent, non-partisan socioeconomic research institute. The Center provides decision makers and the public with research and findings on some of the most critical issues facing Israel in the areas of education, health, welfare, labor markets and economic policy in order to impact the decision-making process in Israel and to advance the well-being of all Israelis.

For details, or to arrange an interview, please contact Anat Sella-Koren, Director of Marketing, Communications and Government Relations at the Taub Center for Social Policy Studies in Israel: 050-690-9749.