Failures of the hospital financing system of the Federal Republic of Germany and reform proposals.

This paper deals with an economic analysis of the present hospital financing system of the Federal Republic of Germany. In the first section normative criteria for the evaluation of hospital systems are established. The most important objectives are: a medically appropriate hospital care, an efficient production of services and adequate hospital care for everyone. The imminent conflicts between individual and social value systems on the one hand and between allocative and distributive objectives on the other hand are pointed out. The second section contains a short description of the most important elements of a hospital financing system: first the method of coordination of supply and demand. Since pure market systems are rejected as the only mechanism for the coordination of hospital care, other coordination systems must be applied. There are in principle two alternative systems at one's disposal: regulation of the hospital care by public authorities or negotiations between hospitals and financiers. Second, it is analysed how the financial burden can be shared amongst the patient and the various third party financing institutions such as statutory health funds, private insurance companies and public budgets. Third, the modes of reimbursement are discussed. It is pointed out, that besides the problem of how the hospital performance should be measured and how the level of prices of the services should be determined, the distribution of the production risks is the central matter in hospital reimbursement. The more hospitals have to undetake financial risks, the greater the incentives are for an efficient production of services. The third section contains a description of the main failures of the German hospital financing system. It is argued that the central public planning of capacities, which is dominated by political interests, causes excess capacities and structural disequilibria in particular sectors of hospital care. The next important failure is the division of the financial burden amongst public households and statutory health funds in spite of exclusive public planning authority. In the area of reimbursement the total cost reimbursement is criticized. The cost based public investment grants and cost based lump sum per-diem rates per patient in the area of operating cost imply incentives for an inefficient (and ineffective) production of services. The last section deals with some reform proposals which at present are being discussed. All proposals claim a regionalization of the hospital planning and a stronger participation of the hospitals and health funds concerned in the planning process.(ABSTRACT TRUNCATED AT 400 WORDS)