Allocation of labour to somatic and psychiatric specialist care--the effects of earmarked grants.

Until 2002, counties were responsible for providing both somatic and psychiatric specialized health care services in Norway. The financing arrangement of the counties consisted of fixed local taxes, a general block grant and different types of earmarked grants from the national government. Since 1997, earmarked conditional grants related to DRG-activity have been used for somatic services, whereas earmarked unconditional grants have been used for mental health care services from approximately the same time. This paper analyse the price and revenue effects of grants on the allocation of labour, with special attention to the two types of earmarked grants: conditional and unconditional. Theoretically, labour (as an index of production output) is assumed to be allocated to somatic and psychiatric services dependent upon revenues (taxes, block grants and earmarked unconditional grants), price per labour-year (that among other things are affected by earmarked conditional grants) and the preferences of the local government (which relate to the age structure and population density of the county). We assume that a conditional grant reduces the net price of labour and thereby increases the (relative) demand, whereas an unconditional grant adds to the other revenues of the county and do not affect the relative allocation of labour. Data from a panel of 18 counties for the period 1992-2001 is analysed using OLS with fixed effects. The results show revenue effects and direct price effects as expected. However, the assumption that unconditional grants do not affect relative allocation of labours is not supported. We find a positive effect of the unconditional grant to psychiatric care on the demand for labour in this sector. We interpret this as an effect of hierarchical governance such as supervision and monitoring that were remedies that were used together with the unconditional grant.