Federalism and the 'new politics' of hospital financing.

VerfasserBohm, Katharina

1 Federalism and Health Care Reforms

In comparative welfare state literature there is consensus that federalism hinders welfare state expansion (Obinger et al. 2005: 3). There is empirical evidence that social policy spending is lower in federal states than in unitary states (e.g. Castles 1999; Huber et al. 1993) and that welfare state development was delayed by federalism (Kittel et al. 2000). Newer research focusing on institutional aspects of federal welfare states to explain the relationship between federalism and low welfare spending draws a more sophisticated picture. Federalism was a major barrier in the phase of welfare state consolidation in federal nation-states where democracy was established at an early stage, but not in federal nation-states where welfare state consolidation preceded democratic consolidation. In the latter, social policy evolved at the national level from the beginning, whereas in the former, social policy was initially the concern of the constituent states, and the bottom-up evolution of the welfare state was hindered by political structures that produced veto points and limits on the possible course of action (Leibfried et al. 2005: 318ff). Given this important role of federalism in the early days of the welfare state, the question arises whether the "silver age" is equally influenced by federalism. In the literature there is no consensus as to whether federal institutions boost or impede welfare state transformation. The veto player theory would suggest that fragmented interests block reforms and so preserve the status quo. Comparative research findings support this thesis but "as in the era of the 'old polities', much depends on context, including country-specific institutional settings, policy structures and actor constellations." (Leibfried et al. 2005: 332)

Veto player theory has been prominent in explaining the slowness of reform in German health policy (e.g. Rosewitz/Webber 1990; Webber 1988, 1989). Beside corporatist actors and interest groups, the federal council, the Bundesrat, has been identified as a relevant veto player in health policy. Because most health legislation affects the administrative responsibility of the Lander in some way, health reforms usually need approval by the Bundesrat. But the Bundesrat does not always use its veto power, and if it does, decisions are often taken irrespective of party-political majorities (Bandelow 2006: 170). Beside this general reform approach, the influence of federal institutions on health care system restructuring has rarely been researched. (1) Analyzing this interaction the other way round, Gerlinger (2008) concludes that the implementation of competitive governance instruments in health care regulation has changed the relationship between national and state governments. To function optimally, he argues, competition needs a level playing field which must be organized centrally. Therefore regulatory power is centralized and the influence of the states on health policy decreases (ibid: 256).

In the hospital sector competition mechanisms were established through the implementation of a performance-oriented and case-based reimbursement system. The states have blocked other instruments which foster competition, like selective contracting, or weaken the influence of the states, like monistic financing. They bear the ultimate responsibility for adequate supply of hospital care and therefore try to hinder any reform that might make it harder for them to meet this obligation. (2) Thus the states have prevented any regulatory changes in hospital planning and investment. Hospital reimbursement, however, is decided at the national level. (3) In pursuit of lower insurance contributions, central government has transformed hospital reimbursement through competitive measures over the past fifteen years. This complex nexus of responsibility and heterogeneous interests has produced two different systems within hospital sector regulation. Originally designed to complement each other, hospital reimbursement now contradicts hospital investment financing and planning, and vice versa. Together with other processes that challenge the old system of hospital planning and investment financing, this contradiction endangers adequate supply in the long run.

I begin by describing how the historical compromise behind the Hospital Financing Act (KHG) (4), the foundation of hospital regulation, was arrived at. It is a good example of the way federalism can hinder welfare expansion and how federal mechanisms can be overcome. Then I give a short outline of the transformation process of hospital reimbursement, explain the--at least formally--unchanged system of health care planning and investment financing, and describe some examples of failed reforms. In a second step I show how the two systems--reimbursement and planning--have come into conflict and identify processes that, irrespective of changes to the reimbursement system, challenge the old system of hospital planning and investment financing. Finally, I present the attempts by national and state governments to mitigate the contradictions between the two systems, discuss more comprehensive reform approaches, and draw conclusions.

2 The Hospital Financing Act--A Historical Compromise

After the Second World War hospital care was in crisis: many hospitals had been destroyed or damaged, and suffered from long-lasting underfunding. The fees paid by statutory health insurance were insufficient to cover costs, and providers, generally municipalities and non-profit organizations, had to bear the losses. As a result, hospital infrastructure was inadequate and supply did not meet demand (Simon 2000: 43ff.; Tuschen/Quaas 1996: 4).

In the 1950s, there was consensus among political actors that hospitals needed more funding, but opinions about how to achieve this differed widely. The federal government, in charge of regulating statutory health insurance, held that it was the responsibility of the state to provide hospital care and therefore the states had to finance part of hospital costs to keep contributions low. This opinion was shared by sickness funds (Jung 1985:40). On the other hand, states and municipalities (both hospital-owners) favored monistic financing through health insurance with fees sufficient to cover full costs. But neither side had the power to enforce its favored solution. The Basic Law did not grant the federal government legislative competence; hospital regulation was the exclusive domain of the states. However, in 1954 the federal government enacted a regulation covering hospital charges (PflVO 1954) (5) using authority based on economic law. This regulation lay down that fees must not be cost-covering. The principle that federal law overrides state law meant that the states were barred from enacting any regulation that would have counteracted this regulation. Diverging interests of different states and federal ministries hindered alternative solutions (Simon 2000: 66--67).

This muddle lasted nearly twenty years, before multiple changes in the social, economic and political environment made reform possible. Firstly, an economic upturn in the late 1960s caused taxes and sickness fund revenues to rise. Secondly, a growing desire for reforms among the population increased the priority of improving hospital care. And thirdly, Christian democrats and social democrats formed a grand coalition between 1966 and 1969, followed by a coalition of social democrats and free democrats (Simon 2000: 69-70). The grand coalition held sufficient majorities in both the Bundestag and the Bundesrat to change the Basic Law and was therefore able to shift responsibilities between the national and state levels. These changes enabled the federal government to co-finance state funding from the federal budget (Art. 91a, 104 GG) and gave federal government authority to regulate aspects of ?the economic viability of hospitals and the regulation of hospital charges" (Art. 74 No. 19a GG) (Jung 1985: 41). Whereas these reforms were possible, the grand coalition could not agree upon a hospital reform act because, unlike the social democrats, the Christian democrats did not want national government to take a share in hospital financing and could not accept cost-covering fees. Not until the new government coalition in 1970 conceded to these demands by the states was it possible to tackle hospital finance reform. After some discussion about the national share of investment financing and a promise to respect the states' autonomy in hospital planning, consensus was reached in the conciliation committee in 1972 and the Hospital Financing Act came into force just before the economic downturn of 1974 (Simon 2000: 71-72).

In the end, the state's responsibility for financing was implemented through the dual financing system where investment costs were covered jointly by central government and the states, and only hospital running costs had to be paid by insurers and patients. The Hospital Financing Act also established the statutory responsibility of the states for ensuring hospital capacity, and gave them an instrument with which to accomplish this, in the form of the hospital plan.

3 Reform and Structural Continuity in Hospital Funding

3.1 Reimbursement Reforms

Until 1993 the level of payment for hospital treatment was set in negotiations between each hospital and the sickness funds, following the principle of cost-coverage: on the basis of the hospital's cost and service structure a prospective budget was negotiated at a level sufficient to cover the operating costs of a properly managed, efficient hospital. Per diem rates were set at the same level for all treatment days regardless of what care or treatment was actually provided. (6) Despite the principle of cost-coverage hospitals still had the possibility of making a surplus or loss, because the sickness funds reimbursed only the agreed rates rather than the...

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