Health Policy, 11 (1989) 257-276 Elsevier

HPE 00270

Hospital budgeting in Holland: aspects, trends and effects

J.A.M. Maarse

Department for Health Care Policy Analysis, Faculty of Health Sciences, State University of Limburg, Maastricht, The Netherlands

Accepted 25 February 1989

Summary

Global hospital budgeting was introduced in 1983 in Holland; it was expected to be a much more effective instrument to cost containment than classic retrospective output reimbursement. Several underlying assumptions of hospital budgeting are discussed: it will encourage hospitals to improve efficiency; it will have no negative impact upon the quality of health care; it restores hospital autonomy to some ex- tent; hospital managers are capable to implement more efficiency. Attention is also paid to the design of external budgeting and its implications for the link between planning and budgeting as well as the relationship between hospitals and insurers. The second part deals with several effects of hospital budgeting. There are indica- tions that hospital budgeting is effective from a cost containment perspective; it goes along with a decrease in hospital production; it also affects the organization and policy-making of hospitals as well as the publioprivate mix in health care. A gen- eral conclusion is that the effects of hospital budgeting far exceed the effects for cost containment.

Hospital budgeting; Cost containment; Policy making; Organization; Public-private mix

1. Introduction

Within a time period of about 10 years Dutch health care policy has evolved from a policy of growth to a policy of cost containment and cutbacks. The health care sector is presently, like many other sectors of public policy, being confronted with

Address for correspondence: Professor J .A.M. Maarse. Rijksuniversiteit Limburg, Faculteit Gezond- heidswetenschappen, Posthus 616, hZO0 MD Maastricht, The Netherlands.

(IlhX-X510/89/$03.50 @ 1989 Elsevier Science Publishers B.V. (Biomedical Division)

258

tight budget constraints. As a direct consequence, health care politics is increas- ingly characterized by deep conflicts between the various stake-holders in the health care industry such as the government, the medical profession, the hospital sector and the insurers.

Until now, the introduction of hospital budgeting in 1983 constituted one of the most important instruments in cost containment. This paper presents an analysis of the Dutch version of hospital budgeting. Attention will be paid to some aspects and trends in the budgeting system. Moreover, some effects of hospital budgeting will be discussed. Four categories of effects are selected: effects upon cost con- tainment, effects upon the delivery of health care, effects upon hospital policy- making and organization and finally, effects upon the public-private mix in health care. Our main conclusion will be that the consequences of the introduction of hospital budgeting includes much more than just cost containment.

2. From retrospective output reimbursement to prospective global budgeting

The introduction of hospital budgeting in 1983 meant a radical change in the fi- nancial regime for hospitals. Hospital budgeting had to replace the old system of retrospective output reimbursement which had been quite attractive from the viewpoint of hospitals. Output reimbursement basically meant that hospitals were automatically reimbursed for each medical action and that budgetary deficits of hospitals could be solved by retrospective (temporary) increases of inpatient per diem charges.

The reimbursement of hospitals was an open-ended arrangement. Each medical production generated its own revenues. Hospitals had an interest in a high pro- duction of inpatient days. Whether this production was necessary from a medical point of view, was a second order problem. if at all. Hospital boards could even incite their medical staff to keep the beds occupied. The interests of the medical professionals (most of them paid on a fee-for-service basis) were basically con- gruent with those of hospital management. Both parties had a vested interest in growth which could easily be defended as necessary for the quality of medical care.

It hardly needs explaining that this financial arrangement was highly unattrac- tive from a cost-containment perspective. Hospitals had no real interest in cost containment [l]. Incentives to increase clinical and non-clinical efficiency were ab- sent. It seems fair to conclude that retrospective output reimbursement has con- tributed to the cost explosion in the hospital sector.

Cost containment in health care has been a growth policy issue from about 1975. Because of its great share in the total volume of health care expenditures (about 60%), it was clear that the hospital sector had to make a substantial contribution to cost containment and cutbacks. Initially, this goal was strived for by two com- plementary strategies. The first strategy focused upon the supply-side of the health care system and included attempts at a considerable strengthening of public reg- ulation of health care facilities. Various policy instruments were introduced for the

improvement and extension of the planning process. This strategy particularly rested upon the theory of supply-induced demand. According to this theory, an effective control of the supply of health care facilities was considered as an essential pre- requisite for cost containment. The second strategy involved a more restrictive rate- setting. Both strategies had as a common characteristic that they fuelled a cen- tralization process in health care. It was thought that the public-private mix had to change in favor of the government at the expense of the traditional strong po- sition of the non-public (corporatist) agencies in the health care sector. Thus, cost containment and centralization went hand in hand.

Both strategies appeared less effective than was hoped for. Planning was per- haps effective in preventing a further excessive growth of care facilities, but it cer- tainly failed in reducing the volume of care facilities. The disappointing effects of the public programs for reductions in the number of hospital beds underscore this planning failure. Restrictive rate-setting also failed as an antidote to growing costs in retrospective output reimbursement. Hospitals complained about the detailed monitoring which threatened their autonomy.

Cost containment policy rather suddenly changed in 1983. The attempts at a more effective public regulation of health care facilities were still continued. But the re- gime of retrospective output reimbursement was radically abolished and replaced by a new regime which can be characterized as prospective global budgeting. This new financial arrangement means that each hospital gets yearly imposed a pro- spective budget limit (the so-called acceptable costs) which can be interpreted as the hospital budget for the next year. This budget covers with some exceptions all hospital costs. Beyond the budget limit. medical production no longer generates additional revenues. A positive difference between the budget limit and expend- itures remains available for the hospital, a negative difference must be covered by

Revenues costs

Fig. 1 Output reimbursement versus hospital budgeting

260

the hospital itself. Retrospective budget adjustments are no longer allowed. The difference between the old and new financial regime is clearly demonstrated in Fig. 1. Fig. 1 clearly demonstrates why the introduction of hospital budgeting meant a radical change in hospital finance. It is a deliberate attempt to break the deeply- rooted culture of revenue-thinking in hospital care. It attempts to replace this cul- ture by a new culture of cost-consciousness. And it introduces an element of in- centives and risks in hospital management [2].

The Dutch version of hospital budgeting is global budgeting which differs from itemized budgeting. Itemized budgeting is for instance practised in the United States under Medicare. A hospital receives a previously fixed budget for each diagnosis- related group. Under itemized budgeting, a hospital budget still depends upon hospital production which is no longer the case under global budgeting. A hospital receives a global budget for all its activities [3]. As will be seen in Section 4, this does not imply that the demand for health care and the case-mix have become ir- relevant in determining a hospital budget. It serves as one of the parameters in the process of external budgeting.

The introduction of hospital budgeting should not automatically be identified with cutbacks. Compared with output reimbursement, hospital budgeting certainly im- proves the possibilities for implementing cutbacks in hospital expenditures. Its in- troduction has already been used several times by the government to impose cut- backs. Therefore, it is not surprising that many hospital managers consider hospital budgeting and cutbacks as the same thing. Nevertheless, cutbacks are not a nec- essary element of hospital budgeting.

3. Assumptions

In modern policy analysis much attention is paid to the assumptions underlying policy instruments. This raises the question of the underlying assumptions of hos- pital budgeting. We shall briefly discuss 5 important assumptions [4].

A first assumption is that hospital budgeting will encourage hospitals to improve their efficiency. The abolishment of output reimbursement and the introduction of a prospective hospital budget induce a better balancing of the costs and benefits of alternative decision options, both at the clinical and the non-clinical level. Built- in incentives and risks are also assumed to improve hospital efficiency.

This first assumption includes a second one: hospital care is characterized by great inefficiency. This is caused mainly by the absence of a necessity to balance costs and benefits under a retrospective output reimbursement scheme.

The inefficiency assumption paves the way to a third one. Contrary to what many doctors and hospital managers may argue, it is held that hospital budgeting will not affect the quality of care. The same quality level can be obtained with lesser means. Perhaps, hospital budgeting will even improve quality of care by encour- aging prevention of over-care.

As a fourth assumption, hospital budgeting requires a sufficient level of hospital autonomy. This is easy to understand. Hospital budgeting serves as an instrument

to improve clinical and non-clinical efficiency in hospitals. But that is only possible if hospitals have a choice between alternatives. They must for instance be able to substitute personnel for capita1 or vice versa.

This fourth assumption leads us to the second major goal of hospital budgeting. Hospital budgeting was not only intended as an instrument to achieve cost con tainment in hospital care but should also restore hospital autonomy. Thus, the in troduction of hospital budgeting included the relaxation of various public regula- tions of hospital finance. The former Junior Minister for Health Care has even argued that this element of deregulation was an important argument for the Na- tional Hospital Council to accept hospital budgeting. The growing jungle of reg- ulations had almost destroyed hospital autonomy. Hospitals suffered from detailed monitoring and scrutiny.

Hospital budgeting should increase hospital efficiency. This implies another as- sumption: hospital boards and managers should be capable of implementing more efficiency, for they bear the final responsibility for all hospital results. This fifth assumption has received much attention in discussions about hospital budgeting. Many observers have argued that the power position of a hospital board should not be exaggerated compared to that of the medical profession. Hospitals are characterized by a de facto highly decentralized structure. In the words of Mintz- berg. they can be conceptualized as professional bureaucracies which do not rely on the authority of a hierarchical nature - the power of the hospital manager - but on the authority of a professional nature - the power of expertise of the medical profession [5]. Consequently, the empirical validity of this fifth assumption is held doubtful.

These doubts are also fostered by the rather restrictive scope of hospital budg- eting. According to the current design of hospital budgeting, the fees of the med- ical professionals who work on a fee-for-service basis (still the majority) are not included in the hospital budget, because the medical specialists are strongly op- posed to inclusion of their fees in hospital budgets. This design of budgeting ham- pers hospital management. According to health economic theories medical spe- cialists show a natural proclivity to maximize medical services in order to maximize their income. These services also induce costs which must be covered by the hor- pita1 budget. Thus, the design of hospital budgeting does not provide for an in- centive to the medical profession to reduce the volume of medical care. It is ar- gued that this missing link seriously reduces the capability of hospital management to improve clinical efficiency. Therefore, management will primarily focus upon improving non-clinical efficiency (for instance food, laundry, cleaning).

Some observers have pointed out that the current restrictive scope of hospital budgeting cannot be maintained in future. According to the recent Dekker Re- port, which offers several proposals for a fundamental reorganisation of the Dutch health care system (more competition, less planning), all costs of medical activities should be included in the hospital budget. The present restricted scope of hospital budgeting threatens the necessity of what is called ‘integrative hospital manage- ment’ [6].

262

4. External budgeting

Hospital budgeting is a simple idea that is difficult to be put into practice. A complex problem is how to determine hospital budgets. Which criteria should be selected here? This is the so-called problem of external budgeting (internal budg- eting refers to the allocation of the hospital budget to the various hospital units). External budgeting is certainly not a purely technical problem only to be dealt with by technocrats. The selection of the criteria depends upon the concepts of an ef- ficient and equitable allocation. In other words, external budgeting is essentially a political problem.

An analysis of the design and development of external budgeting in Holland re- veals several interesting aspects. This design has already undergone two basic changes since it was introduced in 1983. Though each new design can be inter- preted as an improvement of the old version, all these changes created much un- certainty. This is an inevitable disadvantage of rapid change.

Pragmatism dominated in the very beginning of hospital budgeting. For purely practical reasons, the level of expenditure of each hospital in 1982 was chosen as the budget-base for 1983. This budget was to some extent adapted for price changes, cutbacks, and so on. Pragmatism had its price of course. History became the norm. Hospitals which (accidentally) had had a relatively low level of expenditures in 1982 were punished for that low level and hospitals with (accidentally) a relatively high level of expenditures rewarded. This problem has been described as the problem of ‘the good and the bad guys’. It was broadly considered as a fundamental in- equity in hospital budgeting.

A first step to solve this problem was made in 1985. This was done by intro- ducing a distinction between fixed and variable hospital costs. Two capacity (in- put) parameters, the number of beds and specialist units for clinical and ambula- tory care (for instance obstetrics, cardiology, pulmonology, surgery), were selected to determine the fixed part of a hospital budget. Production (output) parameters such as the number of admission and patient days were introduced to determine the variable part of the budget. The values of these parameters had to be nego- tiated between the insurers and the hospital board. This new arrangement for ex- ternal budgeting only covered personnel costs.

A second major revision of the external budgeting system has started in 1988. The new system is called functional budgeting. It covers not only personnel costs but also all other hospital costs (integral budgeting). The major goal of functional budgeting is to realize more equity in the process of external budgeting. In order to achieve that goal, hospitals receive the same budget for the same function. This is to some extent a painful process, for analyses have shown that functional bud- geting produces large reallocation effects between hospitals. About 17.8% of all hospitals will lose 8% or more of their current budget, while 17.1% will receive budget increases of 8% or even more. Such reallocation effects inevitably create administrative, and, in the case of the losers, budgetary problems. Therefore, the introduction of functional budgeting occurs gradually. But even such a gradual in- troduction will not prevent increasing political discussions about the acceptability

and feasibility of the reallocation effects of functional budgeting. Three kinds of parameters are used in functional budgeting for determining a

hospital budget: a. Hospital adherence (the number of persons being served by a hospital) as a pa-

rameter for the fixed part of hospital costs. About 25% of the national budget for hospitals is allocated according to adherence.

b. Approved hospital capacity as a parameter for the semi-variable part of hospital costs. About 35% of the national budget for hospitals is allocated according to capacity.

c. Production agreements between hospitals and insurers as a parameter for the variable part of hospital costs. About 40% of the national budget for hospitals is allocated according to production agreements. The introduction of hospital adherence as a parameter in external budgeting is

a completely new element in hospital budgeting with potentially far-reaching con- sequences for the relationship between hospitals and their environment. It will foster hospital competition for patients, particularly in urban areas where many hospitals are concentrated. In order to safeguard or extend the inflow of patients. a hospital may for instance attempt to intensify its relationships with ambulatory care in its environment (general practitioners, home care, and so on). One should also not forget here, that hospitals have been moved into a rather defensive po- sition and in that context may consider ambulatory care as an interesting market for their survival strategy [7].

Two input parameters are used for hospital capacity, namely the number of hos- pital beds and the number of specialist units for clinical and ambulatory care (for each unit a charge has been determined). But compared with the old system, the relative weight of specialist units is considerably increased at the expense of the weight of hospital beds. Consequently, a reduction of hospital beds has lost much of its attraction as a cutback instrument. A reduction of the number of specialist units proves to be a much more promising strategy.

The values for both capacity parameters are determined in the planning process. This implies a close connection between the planning and budgeting circuit. The planning circuit with a prominent role for regional authorities deals with hospital capacities which are used as a parameter in the budgeting circuit. Under the re- gime of functional budgeting, about 35% of the national budget for hospitals is allocated according to the approved hospital capacity. Thus, budgeting follows planning to a substantial extent (though the relative weight of hospital capacity is declining compared to the old scheme for external budgeting). This also means that the chances of an effective cost containment policy do not only depend upon the budgeting process, but also upon the planning process. Insofar as planning does not yield an effective control of hospital capacity, the cost containment effects of hospital budgeting are inevitably limited.

Production agreements between hospitals and insurers serve as a parameter for the variable part of hospital costs. The values of these parameters are not estab- lished at the central level but negotiated between the hospital board and the in- surers (sick-funds, private insurers) at the local level. The importance of this ‘local

264

negotiating process’ is increasing. Under the present regime of functional budg- eting, about 40% of the national budget is available for production agreements be- tween hospitals and insurers.

The introduction of a local negotiating-element in hospital budgeting has several consequences. It opens the possibility to benefit from the advantages of decen- tralized decision making. By making adequate agreements about production lev- els, one can take into account specific local aspects of the health care system as well as of the quantitative and qualitative aspects of developments in health care demand. But there is also a danger that medical production is fuelled again. Since decisions on hospital production are so vital for a hospital, it will have an interest in a high production level. Much depends upon the power balance between hos- pitals and insurers. Will the insurers really develop themselves as an effective counteracting power to hospitals as is intended?

According to the textbooks, budgeting includes more than a sheer transfer of money between two or more parties. It also involves an agreement upon a plan of action. A budget can be considered as the translation of such a plan into financial resources. Or, as Wickings has put it: ‘A budget is a financial statement of re- sources to carry out a plan’ [8]. This does not only hold for internal budgeting, but also for external budgeting.

Current hospital budgeting is still far away from such a concept. Agreements about a plan of action between hospital management and insurers are by and large absent. Hospitals still have great difficulties in developing (strategic) hospital plans. Consequently, budgeting only implies a financial task for the hospital: ‘do not ex- ceed your budget!’ or ‘do the same as last year but with lesser means!’ Such a start can only be approved as a first step (which is always difficult) and perhaps as an emergency measure to keep hospital costs within predetermined limits. It always takes time to adapt to the new situation. But in the long run, hospital budgeting will inevitably fail if a one-sided financial orientation continues to play a dominant role in external budgeting. The development of hospital plans is of strategic im- portance in order to get more value for money. Sheer cost-thinking induced by hospital budgeting will ultimately be as fatal as the old sheer revenue-thinking!

5. Does hospital budgeting contribute to cost containment?

Hospital budgeting has been introduced as a policy instrument for cost contain- ment. This raises the following question: to what extent does hospital budgeting contribute the cost containment? Or in other words: is hospital budgeting effective with regard to cost containment?

The answer to this question is far from easy. The study of the effectiveness of policy instruments is always complicated by methodological problems [9]. Two problems are particularly difficult to solve. The first one concerns the problem of causality: how do we know for sure that certain changes in hospital costs are really caused by the introduction of hospital budgeting? For hospital costs are affected by many factors, for instance the inflation rate, the demand for medical care, the

180

Ill&X

160 Nominal costs -

140 -

120 - Real costs

100 -

80 I I I I , Year- 74 76 78 80

Source: National Office for Statistics

Fig. 2 Index of hospital expenditures.

82 64 66

flexibility of care facilities or the introduction of new medical technologies. The effects of these factors cannot easily be disentangled. The second methodological problem concerns the difference between gross and net outcome effects. If hos- pital budgeting would simultaneously produce cost reductions in the hospital sec- tor and cost increases in other health care sectors, then it would be misleading not to take account of these increases in determining the cost containment effect of hospital budgeting. Unfortunately, we are not able to present here a satisfying so- lution for both problems. Our analysis must be preliminary. Fig. 2 presents the general trend in hospital costs since 1976. It clearly shows a rapid increase of hos-

82 83 84 85 86 87

Source: FOGM 1987-1988

Fig. 3 Effectiveness of hospital budgeting.

266

pita1 costs since 1976. However, the figure also makes clear that the marginal cost increases have been declining. Nominal cost increases were minimal since 1982. Real cost increases have even appeared to be negative since 1983. This is for the first time since World War II.

Fig. 2 suggests that hospital budgeting may have been effective, but it does not allow any definite conclusions. For a better judgement, actual annual levels of hospital costs should be compared with the prospective budget limits. This has been done in Fig. 3.

Comparison of the actual cost trend with the budget limits clearly offers an ar- gument for the effectiveness of hospital budgeting with regard to cost contain- ment. The actual costs remain far below the budget limits. Hospitals even seem to have created some budgetary reserves.

The above is an analysis at the macro-level (high aggregation level). It does not allow conclusions for separate hospitals. Recent analyses have indicated an explo- sive growth of the number of hospitals with a negative financial result (from 8 in 1984 to 54 in 1985). Unfortunately, these analyses do not tell us anything about the quality of hospital management. Can the bad results be explained by the in- troduction of budgeting, or by bad hospital management that is not capable to cope with this new financial arrangement? Moreover, it is unclear to what extent the category of problem hospitals coincides with the ‘good guys’ which had a relatively low level of expenditure in 1982.

Summarizing, it can be provisionally concluded that hospital budgeting has been effective so far. The budget limits are not exceeded. Of course, the government has immediately qualified hospital budgeting as a great policy success. But some doubts must be raised here. First, the earlier methodological problems should not be forgotten. For more definite conclusions further analyses are required. Second, what can be said about the choice of the budget limits? It makes a great difference whether these limits are tight or wide. In the case of wide limits, effectiveness is much more probable than in the case of tight constraints. Thus, one should also study the political decision-making about the settlement of hospital budget limits.

Finally, hospital budgeting has also been producing a rather paradoxical result, namely a rise in per diem inpatient charges. This paradox requires some expla- nation. The introduction of hospital budgeting did not put an end to the classic payment of per diem charges. It only meant that the sum of these charges should not exceed the budget limit of a hospital. At the same time, however, each hos- pital is entitled to receive its total budget. If the number of patient days is declin- ing (see next section) and consequently, the product of patient days and per diem charges drops behind the budget limit, then budgetary shortages are automatically developing which must be compensated for by temporary increases of per diem charges in later years.

Admissions per capita

74 76 78 80 82 84 86

Source: FOGM

Fig. 4 Index of hospital admissions

6. Effects upon health care

An analysis of the effects of hospital budgeting should not be restricted to cosr containment effects. That would be too narrow a perspective. Attention should also be paid to the effects upon health care itself. This is an important research theme, because it is not generally accepted that hospital budgeting will not impair the quality of health care. Hospital budgeting is identified with underfunding and un- derservicing.

Unfortunately, empirical research into the health care effects of hospital budg.-

80, Ii I

. , . , . , . , . , . ,- Year 74 76 78 80 82 84 86 88

Source: FOGM

Fig. 5 Index of patient days

268

74 76 78 80 82 84 86 88

Source: FOGM

Fig. 6 Trend in length of hospital stay.

eting is rather underdeveloped in Holland. The situation is quite different from that in the United States where many studies are being conducted of the various effects of the introduction of the Prospective Payment System in Medicare. Con- gress has even established a Prospective Payment Assessment Commission which annually reports to Congress about these effects. Nevertheless, a preliminary anal- ysis of some health care effects of hospital budgeting will be presented here.

Let us start with the effect upon hospital admissions. Theory predicts a drop in admissions. Fig. 4 clearly confirms this hypothesis. Hospital admissions (per cap- ita) have been dropping after the introduction of hospital budgeting. Fig. 5 shows

74 76 78 80 82 84

Source: FOGM

Fig. 7 Index of ambulatory care.

ILU -

110 -

100 -

74 76 78 80 a2 a4 a6 aa

Source: National Hospital Institute: Medical Production Statistics

Fig. 8 Index of clinical service intensity.

the effects upon the total volume of patient days. It is expected that this will be reduced because of its contribution to cost containment. The figure allows for two conclusions. First, it can be concluded that the volume of patient days was already dropping before the introduction of hospital budgeting in 1983. Second, the figure also shows that hospital budgeting seems to have an accelerating effect upon the reduction of patient days.

Theory also predicts a drop in the duration of hospital stay. This hypothesis can- not be confirmed. Fig. 6 illustrates that hospital stay has been gradually declining for a long period of time. Further analyses have shown that this decline is char= acteristic for all medical specialties and types of diagnosis.

Does hospital budgeting induce an accelerated growth of ambulatory care’.’ Again, this hypothesis cannot be confirmed. An accelerated growth is not occur- ring, as Fig. 7 depicts.

Finally, we shall pay some attention to the effects upon clinical service intensity. defined as the number of services per admission, and ambulatory service intensity. defined as the number of services per ambulatory visit. Distinction is made be- tween 4 different categories of services: X-ray research. surgical operations, func- tional research and laboratory research.

Fig. 8 (clinical service intensity) shows a rather differentiated picture, but the dominating trend is that the times of big growth have been over since the intro-

270

180

160 -

140 -

120 -

100 -

P Functions

Laboratory tests

801 - i - I - I - I - I - ~Yeari 74 76 78 80 82 84 86 88

Source: National Hospital Institute: Medical Production Statistics

Fig. 9 Index of ambulatory service intensity.

duction of hospital budgeting. Fig. 9 (ambulatory service intensity) presents a much less clear picture. Some categories (X-ray and laboratory research) show a stabi- lization trend, but this trend started long before the introduction of hospital budg- eting. Surgical operations and functional research are still increasing. Further re- search must reveal whether this increase in service intensity is correlating with the stabilization trend in clinical service intensity.

As already stated, our empirical results are preliminary. It should not be for- gotten that hospital budgeting is a rather new policy instrument. It may take some time before its outcomes are crystallized. Moreover, much additional research is needed. The aggregation level in analysis should be lowered to prevent loss of im- portant information. Thus, more detailed studies, for instance for specific cate- gories of diagnostic/therapeutic activities, should be conducted. Other interesting parameters are possible such as the effects upon the diffusion of medical technol- ogy, the balance between labor and capital within hospitals or the effects upon the broader supply of health care.

7. Effects on policy-making and organization of hospitals

The introduction of hospital budgeting can be interpreted as an important change in the environment of hospitals. Hospital budgeting adds to the external pressure upon hospitals. The environment of these institutions has lost its relative stability and is getting more turbulent. This turbulence is, of course, not only caused by hospital budgeting; it is the result of many factors such as the current public pro- grams for reductions of hospital capacity, the continuing conflicts about the pay- ment of medical specialists and the current decision-making about a fundamental change of the Dutch health care system (less planning, more competition).

Contingency theory predicts that organizations will change their internal struc- ture in order to adapt to important changes in their environment. An analysis of the actual discussion about hospital management shows a general conviction that hospitals are not well adapted to the introduction of hospital budgeting and that structural changes in their organization are necessary if not inevitable. The same situation occurred in the United States after the introduction of the Prospective Payment System under Medicare. Commenting on this introduction McMahon ar- gued: ‘Without adapting the hospital’s organizational structure to the shift in fiscal orientation, the institution may fail’ [lo].

Changes are apparently necessary. But to what extent do they really occur? What is the pace of the organization transformation process? Unfortunately, we can only speculate about the answers to these questions. Systematic empirical research is almost lacking, only impressions exist. These impressions suggest that hospital budgeting has launched a process of organizational change. Some observers even consider this change as the most important effect of hospital budgeting. At the same time, however, the pace of organizational change seems to be low [ll].

Three aspects of the process of organizational change will be discussed here: the development of strategic policy-making, the aspect of information and finally, the aspect of integration.

Strategic policy-making

Until recently, hospital policy-making was rather underdeveloped. This situa- tion can be explained as a direct consequence of the very absence of budgetary scarcity. Strategic policy-making was not really required. Each growth of medical production automatically generated more revenues. If the hospital beds were suf- ficiently occupied, budgetary problems could be rather easily avoided. Hospital managers did not worry about the ever-increasing level of medical production. Ex-. tensions of the medical staff or the medical functions of hospitals were not coun- terbalanced by serious cost considerations, for each extension meant an improve- ment of the quality of medical care and created its own revenues. The interests of hospital managers and medical staff were basically identical.

The introduction of hospital budgeting has radically changed this situation. A passive hospital policy does not any longer suffice. Hospitals must choose for ac- tive policy-making with serious attention for themes as the mix of its medical func-

272

tions, the volume of medical production and the relationship between hospital, ambulatory and home care. Budget limits require policy choices. These choices will certainly become more important in the interactions between hospitals and insur- ers.

The establishment of numerous ad hoc or more permanent internal commissions for the development of hospital, medical, nursing and other kinds of plans and programs suggests that important changes in the direction of strategic policy-mak- ing are occurring. But one should be careful with conclusions. Many so-called stra- tegic hospital plans still bear the mark of a sheer enumeration of wishes. Clear priorities are lacking. Hospitals experience great difficulties in formulating stra- tegic plans.

This point brings us to the aspect of internal budgeting: the allocation of the hospital budget to the various units of the hospital. Internal budgeting constitutes an important part of hospital policy. A distinction can be made between two models, the control and the policy model [12]. The control model is characterized by a rather incremental budgeting procedure. Each unit gets somewhat more or less than the year before. The spending of that budget is a lower order problem. It is implicitly assumed that a unit will produce somewhat more or less of the same. In the policy model, the budget of a hospital unit works as the translation of the plan of that unit into financial resources. Managers and units do not only negotiate about a budget, but also about tasks and responsibilities. Thus, the policy model is more like zero-base budgeting than the control model. From a normative point of view, hospital budgeting presupposes a transition from the control model to the policy model. Our hypothesis, however, is that the control model still dominates. This hypothesis can be supported by the following factors. First, hospitals had al- most no experience in internal budgeting. Second, hospital budgeting meant a rad- ical change in the financial arrangement of hospitals. Third, there were great un- certainties about the exact budget volume because of delays in the definite determination of hospital budgets. All these factors invoked a careful budgeting strategy.

Management information systems

A second important aspect of organizational change in hospitals concerns the introduction of management information systems. The necessity of an adequate management information system is generally stressed. Strategic hospital policy making and effective cost containment require adequate information which is ti- mely available. However, such information systems do not exist on a large scale.

Under the old regime of retrospective reimbursement, the need of information was restricted [13]. Information about total costs and the level of medical produc- tion was sufficient. This information had primarily a recording character. The in- troduction of hospital budgeting requires not only recording information but also steering information which gives hospital managers and medical staff a better in- sight in to the (future) costs and revenues of the various cost/revenue centers of the hospital. Also more information is needed about medical decision-making and

trends in the case-mix. Such information can be considered as a prerequisite for strategic discussions between hospital managers and medical staffs about the ma- cro- and micro-allocation of scarce budgetary resources.

Analyses of hospital information systems indicate that many of these systems are both conceptually and technically outmoded. Moreover, hospitals have already made large investments in computers and information systems. It is an open ques- tion to what extent they are able and willing to do new large investments at short notice.

Integration

The final aspect to be discussed here pertains to the relationship between med- ical decision-making by the medical profession on the one hand and strategic de- cision-making of hospital management on the other hand. Under the old regime of retrospective reimbursement, this integration hardly appeared to be a serious problem. That was not surprising because of the principal congruence of interests between hospital managers and the medical profession. Both parties considered medical production and institutional growth as favorable. There existed no effec- tive budget limits. Costs could be easily charged to the insurers. Growth was pos- tulated to be necessary to keep in step with rapid technological developments. This integration was at the same time one-sided. One could speak of a unilateral in- tegration with a dominating position for the medical profession. This unilateral as pect is underscored in the following statement of a hospital manager: all that is done by the medical profession is important to us and it is still an exception if the hospital board does not accept the wishes and proposals of the medical profession” ]141.

This kind of unilateral integration is typical for what Mintzberg has called professional bureaucracies. A hospital is such a kind of bureaucracy. It is char- acterized by a great autonomy of the professionals in the production process and, as a logical consequence, a rather weak position for the management. The profes- sionals dominate policy-making. The general organization of a hospital is far from hierarchical.

Unilateral integration no longer suffices under hospital budgeting. Budgeting rests upon the assumption that hospital managers are capable of steering and control- ling hospital activities in such a way that the costs do not exceed prospective lim- its. This presupposes an increasing mutual dependency between managers and the medical profession. Hospital integration must become bilateral, or in the termi- nology of Scott: ‘Hospitals must develop from autonomous professional organi- zations to conjoin professional organization with a strong accent upon collective responsibility or partnership’ [ 151.

Integration of the medical profession in hospital policymaking constitutes a pre- requisite for the success of budgeting. Medical specialists primarily determine what is actually happening in a hospital. Hospital output and hospital costs are strongly dependent upon their activities. Without their support, each attempt at structural change is doomed to fail (71.

274

Mutual integration is easier said than done. The medical profession did not re- ceive hospital budgeting with much enthusiasm. Budgeting will essentially lead to an erosion of their autonomous position. All proposals to include their fees in the hospital budget are still rejected. Moreover, one should not forget that the inte- gration process does not take place in a vacuum, but in a political context of cut- backs, reductions, conflicts about fees and more generally, an increasing distrust against public policy in the field of health care.

These factors explain why the pace of the integration process is slow. But change is inevitable. Active participation of the medical profession in hospital policy-mak- ing is growing. The Union of the Medical Specialists stresses the development of management capabilities for their members and organizes management courses. A part of the medical profession is already complaining about the time that must be spent on what they call ‘bureaucratic affairs’.

8. Hospital budgeting and the public-private mix

Hospital budgeting also induces changes in the public-private mix, that is the distribution of tasks and responsibilities between public and non-public agencies in the health care sector. Some of these changes will be discussed here briefly.

The attempts to accomplish effective cost containment have led to fundamental changes in the public-private mix in health care. Traditionally health care was seen primarily as the domain of the non-public sector in society. Because of a strong corporatist tradition, primary responsibility rested with non-public agencies. Ac- cordingly, the government defined its own role rather restrictively. The extensive regulation of health insurance constituted a major exception here.

During the last decade it was thought that cost containment required a much more prominent role for the government. As was already discussed in Section 2, the shift from restraint to involvement caused a rapid increase of public regula- tion. Planning became an important public instrument to control the supply-side of the health care ‘market’. Changes in the public-private mix were also at stake with regard to rate-setting. The old Hospital Rate-Setting Act was replaced by the Health Care Rate-Setting Act. The objectives of this replacement were extension of the domain of rate-setting and the creation of more effective instruments for the government to intervene in the process of rate-setting.

To what extent has the introduction of hospital budgeting changed the pub- lic-private mix? Has it reinforced the ongoing process of more public involvement or does it contribute to a development in the opposite direction? Hospital budg- eting was primarily introduced to improve hospital efficiency. This improvement required the relaxation of various public regulations in order to restore hospital autonomy (see Section 3). Though the actual impact of this relaxation must still be considered as unknown, it is clear that hospital budgeting neatly fits in the gen- eral attempts of the government at more decentralization and deregulation. Thus, it could be argued that hospital budgeting means a change in the public-private mix at the expense of the public part. However, this conclusion is premature and

even too simple. Premature, because the real decentralizing impact of hospital budgeting is still unknown. Too simple, because hospital budgeting implies more than a simple transfer of decision making power from the central level to the hos- pital level. The essence of (hospital) budgeting lies in its non-zero sum character. The reduction in public regulations to restore hospital autonomy coincides with the deliberate creation of a new public regulation, in casu the budget limit! (Hospital) budgeting must be understood as an ingenious mix of decentralization and cen- tralization in one policy instrument.

The design of external budgeting also makes clear that drawing conclusions about changes in the public-private mix affected by hospital budgeting are not easy. On the one hand, government plays a major role in external budgeting because of their share in the planning process. On the other hand, hospitals and insurers also play a prominent role in external budgeting. They should agree on annual hospital pro- duction. This can be interpreted as a shift away from too much public regulation and a restoration of old corporatist traditions in the health care sector.

What could be the role of hospital budgeting in a more market-oriented health care system? During the last years, ‘marketeers’ are gaining influence in political discussions and decision making about health care. The old belief in the value of more public interference in health care is questioned and replaced by ‘moderate market thinking’ which means that wherever possible public planning and regu- lation should be lessened in favor of the dynamics of the market competition. The landmark of this development in the direction of ‘managed competition’ is the so- called Dekker Report, published in 1987. This report contained many proposals for a fundamental change in the health care system. The core of the report con- cerned a fundamental change in the public-private mix. Market competition, de- regulation, flexibility are some of the slogans of new policy thinking in health care.

It is too early to draw conclusions about the definite impact of this new policy belief. History makes clear that the implementation of fundamental changes in health care is always difficult. Yet, the question is raised to what extent hospital budgeting can be considered as a step in the direction of more marketing and less planning. Although the introduction of hospital budgeting took place in a period of extension of public involvement in health care, it can be argued that this intro- duction is also an important step toward more market competition. If market com- petition becomes reality, insurers and hospitals will have to settle contracts about a certain volume of health care for a prospective budget. Thus, markets require budgeting, not retrospective reimbursement. The current hospital budgeting offers the hospital an excellent opportunity to get accustomed to market competition. At the same time however, it should be stressed that hospital budgeting under market conditions is different from the current system. At present, hospital budgeting does not include price competition between hospitals. Approved hospital capacities and production agreements are ‘simply’ multiplied by the corresponding rates, uni formly settled at the national level.

276

9. Conclusion

In this paper we have discussed several aspects of hospital budgeting. Particular attention was paid to the effects of hospital budgeting. Our analysis shows that one should not only pay attention to the cost-containment effects and the effects upon health care. Hospital budgeting also affects the organization and decision-making processes of hospitals and the public-private mix. The totality of these effects sug- gests that the introduction of hospital budgeting in 1983 goes along with a number of structural effects that far exceed the short-term consequences for cost contain- ment.

References

la Joskow, P.L., Controlling hospital costs, MIT Press, Cambridge, MA, 1984. lb Beske, F., Delesie, L., Rutten, F. and Zollner, H. (Eds), Hospital Financing Systems, Schmidt

und Klaunig, Kiel, 1987. 2a Groot, L.M.J., Budgettering: een kerrpunt, Van Gorcum, Assen, 1985. 2b Van Montfort, A.P.W.P. and Schaaf, J.H., Budgettering and management in ziekenhuizen. In

9

10

11

12

13

14 1.5

16

Peters, J.H.. De Bruijn, W.K., De Cock, G.J.M. and Kleemans, C.H.M. (Eds.), Management in de Gezondheidszorg, Bohn, Scheltema & Holkema, Utrecht 1987. Glaser, W.A., Paying the Hospital, Jossey Bass, San Francisco 1987. Bauer, K.G., Hospital rate-setting - This way to salvation? In M. Zubkoff, I.E. Raskin and R.S. Hanft (Eds.). Hospital Cost Containment, Prodist, New York, 1978. Mintzberg, H., The Structuring of Organizations, Prentice-Hall, Englewood Cliffs, 1979. Dekker Report, Bereidheid tot Verandering, Staatsuitgeverij, Den Haag, 1987. Sheldon, A., Managing Doctors, Dow-Jones-Irwin, Homewood, IL, 1986. Wickings, H.I., Experiments with clinical budgeting in the British NHS. In G. Schrijvers (Ed.), Ziekenhuis en Budget: Nederland, Amerika, Engeland en Zweden, Tijdstroom, Lochem, 1982, pp. 171-202. Rossi, P.H., Freeman, H.E. and Wright, S.R., Evaluation: a Systematic Approach, Sage, Beverly Hills, 1979. McMahon, L.F., Fetter, R.B., Freeman, J.L. and Thompson, J.D., Hospital matrix management and DRG-based prospective payment, In Hospital & Health Services Administration (winter 1986) 62-74. Nationaal Ziekenhuisinstituut, De Resultaten van een Experiment met Budgettering in Vier Alge- mene Ziekenhuizen, Utrecht, 1986. Boekholdt, M.G. and Machielsen, J.A., Budgetteren in ziekenhuizen: een complex probleem, Het Ziekenhuis, 6 (1983). Groot, L.M.J., Incentives for cost-effective behavior: a Dutch experience, paper for Third Sym- posium on Health and Economics, Antwerpen, 1985. Mur-Veeman, I.M. Ziekenhuisbeleid, Oss, 1982. Scott, W.R., Making professional work: three models of control for health organizations, Health Services Research (1982). See Sheldon, Managing doctors.