Labour and social dimensions - Sectoral Activities

List of abbreviations

AARN

Alberta Association of Registered Nurses (Canada)

AFL

Alberta Federation of Labour (Canada)

AIDS

acquired immune deficiency syndrome

AMA

Alberta Medical Association (Canada)

FONASA

Fundo Nacional de Salud (National Health Fund -- Chile)

GDP

gross domestic product

HMO

health maintenance organization

ILO

International Labour Organization

ISAPRE

Instituto de Salud Previsional (pre-paid private health insurance plan -- Chile)

LA

Los Angeles (USA)

Medi-Cal

California health assistance programme for the poor, funded by the state and US federal government (USA)

OECD

Organisation for Economic Co-operation and Development

PAHO

Pan American Health Organization

RHA

Regional Health Authority (Alberta, Canada)

SEIU

Service Employees International Union (USA and Canada)

SERMENA

Servicio Médico Nacional (National Medical Service for Employees -- Chile)

SNS

Servicio Nacional de Salud (National Health Service -- Chile)

SNSS

Sistema Nacional de Servicios de Salud (National System of Health Services -- Chile)

UNA

United Nurses of Alberta (Canada)

WHO

World Health Organization

Executive summary

Advances in science and technology and ageing populations have made health care increasingly expensive at a time of slow growth in developed economies and constrained government budgets in developing economies. As a result, there has been widespread restructuring of health systems to achieve greater efficiency, reduce costs and extend coverage. Many public health systems are experimenting with privatization of parts of their health sector, among other reforms.

As governments and societies consider how best to structure health care systems for maximum efficiency and equity, several key issues have emerged. These include the proper roles of government and of private markets; the mechanism used to allocate available health resources among competing demands; and the utilization of human resources in this labour-intensive sector.

The International Labour Organization recognizes that health care personnel are central to the performance of health systems and that, in turn, the efficiency and equity of the systems determines the health protection of all workers. Several ILO Conventions and Recommendations are concerned specifically with conditions of personnel in the health and public sectors. Therefore, the organization attaches great importance to the reforms which are underway in this sector. The ILO Salaried Employees' and Professional Workers' Branch has commissioned the present paper pursuant to requests by health and public sectoral meetings of the organization to study the impact of structural adjustment and privatization of health systems on the employment of health workers and on health service delivery.

Health systems are complex structures whose major components interact to establish incentives and constraints which significantly determine system performance. Therefore it is essential to approach any analysis of such systems by studying the major structures involved. The current paper presents the analytic and economic concepts necessary to evaluate health systems, with a brief description of the functional components of any system: finance, delivery and the allocation mechanism. Because this study is concerned with privatization, particular emphasis is placed on factors which make it more likely that either governments or markets will perform a given function better. The conclusion here (and a growing consensus among health policy experts) is that governments are better positioned to organize the financing of health care, because of the advantages of establishing the largest possible risk pool and the greater ability to control costs when there is a single payer with monopsony purchasing power. With respect to delivery systems, both public and private arrangements have distinct strengths and weaknesses. There is not a consensus that one is superior, and the three case-studies indicate that the allocation mechanism may be an important determinant of the efficiency of either public or private delivery systems. The fee-for-service allocation mechanism is prone to cost escalation. Capitation systems can produce better cost containment (although they do not necessarily do so) but there is the danger that appropriate health care will be denied. In private delivery systems, either allocation mechanism requires government regulation to correct for market imperfections.

Health care is a labour intensive sector, with salaries and related expenses typically accounting for 50-75% of total sectoral costs. Health labour markets exhibit certain characteristics which must be kept in mind when evaluating health systems overall and employment effects specifically. Health professions require years of specialized training and so there is a long delay between labour market signals of over- or under-supply and a response in the number of entrants to the profession. Without overall human resource planning and market guidance (which usually requires a government role) there is likely to be overshooting, with surpluses or shortages of particular skills. Scope of practice regulations, designed to protect the public from unqualified health personnel, can also introduce rigidities which make the health sector inefficient and may be used by professional associations to seek rents.

Chile

Chile undertook the first privatization of a public health system in 1981 under the military government. It is studied here both because Chile has been looked to as a model of social sector privatization by some other governments and because the system's 16 years' experience presents an extensive record from which lessons may be drawn.

The Chilean reform allowed workers to assign their mandatory payroll contribution for health care to private insurance plans called ISAPREs. This had the effect of diverting resources from the public system. The government also made deep cuts in the fiscal contribution to the public health system. As a result, the public system deteriorated sharply, health employment fell and real wages in the sector declined. There was virtually no input on the restructuring by consumers or health care workers, although a few of the largest employers were consulted.

The private ISAPREs grew slowly but now cover about 25% of the population. They are very profitable, primarily because they have been successful in seeking out the healthiest and higher-income segments of the population. The public system covers the less healthy, lower-income 75% of the population, although it receives only a little more than half of all health financial resources to provide for this higher risk group. The result has been long waiting lists for care in the public system.

Since the restoration of democracy in Chile, the government has steadily increased the resources devoted to the public health system, but 15 years of low investment left an infrastructure and human resource deficit which has not yet been overcome. Most modern equipment is concentrated in the ISAPREs. Public health sector employment and compensation levels are still low compared to the early 1970s. There is now a dual labour market in the health sector, with higher wages and better working conditions in the private plans. The government has gradually begun to increase public sector wages and strengthen labour laws governing health workers.

Opinion polls show that the health system is a major concern to the Chilean public, and the government has attempted some structural reforms in addition to pumping more money into the public system. The ISAPREs have become a powerful political actor, however, and have been successful in blocking any serious reform.

Alberta, Canada

In 1993, a newly-elected provincial government in Alberta began a major restructuring of the publicly funded, privately delivered health system there. The provincial system is part of Medicare, the national single payer health system in Canada which is funded jointly by the federal and provincial governments and, in Alberta, also through premium contributions by households. Health spending had grown to 30% of the provincial government's budget; the reform sought to cut the contribution by 20%. A major emphasis was placed on institutional changes which were intended both to control costs and shift more of the burden for health care to the private sector. Health care premiums charged to households were increased and retired citizens were required to pay premiums for the first time.

The Alberta government allowed clinics to charge additional fees, beyond the Medicare payment, directly to consumers, which is not permitted under the Canadian single payer system. The federal government, which provides about 24% of the finance for the provincially-run system, withheld funds to Alberta until the province backed down and eliminated the fee co-payments. The single payer arrangement is seen by the federal government as key to the control of health care costs and to the ability of the government to manage the allocation of health resources. Private insurance is not allowed for any service covered by the public health programme, because of concern about the migration of financial resources from higher income groups to the private sector, as happened in Chile.

Another major objective of the Alberta reform was to shift the delivery of health care out of hospitals to less expensive settings. When the budget cuts were made, employment in the health sector was cut by almost 20%. Most of the lay-offs were among hospital staff. Some funds were transferred to pay for an expansion of care in lower cost facilities, such as nursing homes and home care, but there has been at least a temporary gap in the continuum of care. Waiting lists developed for hospital-based procedures. As a result of public and health care union pressure, some funding has been restored to the system, including provision to restore about 11% of the positions which were eliminated.

There is an ongoing effort to change the skill mix of health care workers to make the use of human resources more efficient and cost effective. Most unions are participating in the effort, although critical of the restructuring process. Major changes in scope of practice regulations are being proposed.

Los Angeles County, USA

The county government in Los Angeles provides a safety net of health services to the poor and uninsured in the county and the main emergency and trauma services for the public as a whole. This system is funded by federal, state and local governments. The burden on the county system has grown in recent years, due to a growing tendency by private employers not to provide insurance to workers (employment-based insurance has been the main source of health finance in the USA), economic recession and increased immigration.

Federal funding to the county system was limited in recent years by caps imposed by the US federal government to rein in its health care expenditure. In 1995, California moved from a fee-for-service allocation system to a capitated (managed care) system for state welfare recipients. This meant that the county public health system stood to lose at least part of its revenue to private managed care firms. Recently, the State of California cut off state funding for all but emergency and obstetric services to undocumented immigrants.

The combination of these changes in the funding stream and the structural problems identified above led to a severe budget crisis for the county, which responded by deciding to close the largest of the six public hospitals. Reaction by affected unions, public health advocates and the surrounding community was intense. Through a process of confrontation and cooperation, the county and these stakeholders evolved an alternative plan to seek federal funds to keep the hospital open while the county restructured toward more outpatient-based and preventive care and prepared to compete with private-managed care plans for state funds. The federal government agreed to provide additional funding based on a five year plan to eliminate hospital beds and expand primary care through clinics.

Two years into the plan, the county has eliminated about 20% of its hospital beds and is proceeding with plans to privatize the two smallest public hospitals. Primary care has been expanded mainly through contracts with private clinics. The unions have cooperated with the restructuring and have participated in designing a programme to retrain and reallocate the workforce toward primary care. About 10% of the county health workforce has been laid off. The unions won an agreement that these workers would have first right to positions created in the private clinics.

The short-term survival of the county health safety net has been assured and restructuring has produced efficiencies which should lower costs in the longer term. However the structural imbalance between increasing demand, from the growing proportion of the population which is uninsured, and constricting supply, due to severe revenue limits from public sources and competition by private-managed care plans for the insured poor means that the system is not in equilibrium. Recent federal decisions to limit the duration of welfare benefits means that many of the insured poor will join the uninsured in the future, producing even greater strain. The microeconomic efficiency gained through the Los Angeles restructuring will not be enough to offset these macroeconomic forces.

Conclusions

The paper concludes with a comparison of the lessons which can be drawn from the three cases studied for other governments and social partners considering health care reform. The discussion of which functional roles are best suited to either government or private markets is revisited in light of the empirical results of the three cases. The choice of mechanism used to allocate available health resources is discussed with material drawn from the cases. Finally, issues in the utilization of human resources, employment outcomes and health labour market policy are addressed. In each discussion, emphasis is placed upon long term implications of health system reform.

Selected cases in the Americas
by Sandra Polaski*

* At the time of the study's preparation, consultant on labour issues in health services and, at the time of this publication, Director of Labor Law and Economics Research at the NAFTA labour-related secretariat. Ms Polaski can be reached at the Secretariat, Commission for Labor Cooperation, 350 N. St. Paul, Suite 2424, Dallas, Texas 75201, USA. E-mail : polaski@naalc.org.

1. Introduction

Health care is a fundamental human need, essential for the full realization of the potential of individuals and societies. Scientific and technological advances in health care have prolonged human life and improved its quality, and have raised the productive capacity of individuals, expanding the wealth of global society.

But these advances have also made the delivery of modern health care to entire populations an expensive endeavour. As societies grow wealthy, the demand for health care increases and its provision grows to be an important sector of the economy. In the G-7 countries, health care accounted for an average of 9.3% of GDP in 1994.⁽¹⁾ In advanced, diversified economies it may be the single largest sector, as in the United States, where it accounts for over 14% of GDP. For developing countries, the imperative to improve the health of their populations is both an ethical and economic necessity, but it is constrained by the scarcity of resources and the need to prioritize their use to achieve optimal results. The average expenditure on health for all developing and transitional economies is about 4.5% of GDP, with wide variations between countries and regions.⁽²⁾

The importance of health care to human and economic development, coupled with its high cost, make it critical that this sector be organized in the most efficient and equitable manner possible. Over the last two decades, developed countries have experienced increasing strains on their economies from the share of GDP consumed by this sector; developing countries have faced reductions in already scarce available resources due to structural adjustment programmes. These stresses have led to widespread restructuring and experimentation with new organizational models for the health sector. The fact that the problems are widely prevalent has served as an impetus for comparative study of health systems to glean the lessons of experience.

The International Labour Organization is among the international organizations which have undertaken comparative studies of the sector. The ILO recognizes that health care personnel are central to the performance of health systems and that the efficiency and equity of the systems determines the health protection of workers. The ILO Salaried Employees' and Professional Workers' Branch has commissioned the present paper pursuant to requests by health and public sectoral meetings of the organization to study the impact of structural adjustment and privatization of health systems on health service delivery and the employment of health workers.

This study presents three cases in which governments have undertaken major reorganizations of health systems, including the privatization of some functions. The cases studied are the reorganizations of the national health care system in Chile, the provincial system in Alberta, Canada, and the local public health system in Los Angeles County in the USA. The three examples are important in themselves and because they are looked to as possible models by other countries and governmental jurisdictions grappling with similar problems. They were selected because they illuminate the pivotal issues of current restructuring efforts and debate. There are three key issues involved. The first concerns the proper role of the State and the role of the market in financing and delivering health care. The second key issue is how to allocate available health resources among multiple competing demands. The question here is how to organize institutions and incentives in the health sector to optimize allocation in terms of both efficiency and equity. The third key issue concerns health care labour markets and labour utilization. Health care is a labour intensive industry; the organization of human resources is an important determinant of the efficiency of the sector.

Each of the reorganizations is evaluated for its macroeconomic results in terms of efficiency, including its effect on government spending, and for its impact on equity and access to health services. The paper then examines the interaction between the reorganization and sectoral employment, wages, working conditions and labour-management relations. There is also a review of the degree and nature of participation by workers, unions and consumers in the process of reorganization.

Health systems are complex structures whose major components interact to establish incentives and constraints which significantly determine the performance of the systems. In order to understand the impact of a change in structure (such as privatization) on employment, efficiency and equity it is essential to analyze the core components of health systems, including finance, service delivery and the allocation mechanism used. Analytic and economic concepts necessary for doing so are presented in Section 2. The focus is on characteristics which distinguish health care from other sectors with respect to the functioning of governments and markets. The aspects of health economics addressed are those which are specifically relevant to the public-private mix and the question of privatization. The basic allocation mechanisms are also covered in this section. An overview of employment issues in the health sector is presented in Section 3. The interests and mandate of the International Labour Organization in this area are identified in this section as well.

The case-studies are presented in Sections 4 through 6. In each, a brief description will be given of the existing health system before restructuring was undertaken. The nature of the reform will then be described, as well as the objectives and motivations for the changes. Empirical results of the changes will be presented for the major categories of evaluation: efficiency, equity, employment and participation. The Chilean restructuring, which took place in 1981, is considered first. It was the earliest and most radical privatization of a public health care system and thus provides the most extensive experience on which to draw in assessing results. The next case considered is the province of Alberta, Canada, which undertook a major restructuring of a publicly financed, privately delivered health system beginning in 1994. Finally, the case of Los Angeles County in the USA is examined. In this example, a public system covering the poor and uninsured has undertaken restructuring and privatization of delivery of some services, beginning in 1995.

Section 7 of the paper compares experiences in the three cases. The lessons that can be taken from the experiences regarding efficiency, equity, employment and participation are drawn out for other governments considering reforms.

2. Analytic and economic concepts

Overview

To analyze and compare health care systems it is necessary to disaggregate their overall structures into three main functional components which make up any health system. These are the organization of finance (sources of funding), the organization of health service delivery (health care providers and facilities) and the mechanisms used to allocate available resources to health applications (linking finance to delivery).

The organization of finance and delivery may be either public or private; existing health systems exhibit an array of combinations of roles for government and the private sector in each of these functions. There are theoretical economic arguments which suggest that either public or private actors may be better suited to certain functions, because of tendencies of either to certain kinds of failure which should be anticipated in the design of reforms. These theoretical predictions are outlined in the discussion of each function below. For some functions, most notably finance, there are fairly extensive empirical results which confirm the predictions of theory and these will be noted as areas where optimal policy is fairly clear.

The third category for analysis, the mechanism used for resource allocation, is the link between finance and health services. This aspect of health systems determines how available funds actually are spent by the myriad decision-makers in health systems. Different allocational mechanisms create different incentives for providers. As a result, they produce quite varied outcomes, even where the available level of per capita finance is similar. The main existing allocation arrangements are discussed in the section on allocation of resources below. Some of these mechanisms can function in either public or private systems.

Finance

The major sources of funding for health systems are national taxes, local taxes, social insurance (mandatory contributions by workers, employers or households), private insurance and direct payments by users. Public finance systems typically combine tax revenue (public) and mandatory social insurance (quasi-public) sources of funds, and may also raise revenue through user fees. Private finance systems are based on direct user payment for services or prepayment through private insurance; insurance plans may also require co-payments at the point of service.

Both social and private insurance systems pool funds from a group (the risk pool) and use the funds to pay costs for those individuals in the group who actually utilize health services. This spreads the risk over the entire group and lowers the average cost of health care for each individual. If the population is divided into numerous risk pools, then risk may not be distributed evenly. In such a segmented insurance situation, risk pools with higher proportions of healthy individuals will require fewer health services. The insuring entity will thus be left with surplus (or profits) from the funds collected to cover that group. If the insurance market is competitive and premiums can vary, the segmentation of risk pools may lead to lower insurance costs for healthy individuals, in effect splitting the surplus between the insurer and the insured. Private insurers will have the incentive to engage in what is called risk skimming, the selection of those likely to incur the lowest health costs, in order to realize profits. Individuals with high risk (those in greatest need of health care) may be unable to obtain insurance. Where a public system coexists with a private system, risk skimming may shift those in greatest need of health care to the public system, making the average cost of care higher in that system, while diverting resources (insurance premium payments) into the private system. This tendency by private insurance markets to avoid risk means that efficient financing (in terms of matching all available resources for health with the full health risk exposure) requires creation of the largest possible risk pool. In practice, only public finance systems have achieved optimal risk pools. Even countries with sophisticated regulatory capability have not been able to prevent risk skimming in private insurance markets or mixed public/private insurance systems.

There is also an important consequence for equity of segmented risk pools. The scope for redistribution is narrowed or eliminated as the risk pool is fragmented. The ability to use funding from affluent and healthy individuals and groups to finance health care for low income groups, those at high health risk or for underserved geographical regions is curtailed if mandatory premiums or tax payments can be funnelled into a private insurance plan which pays for services incurred only by participants of that plan.

Another aspect of the organization of finance which has efficiency consequences for health systems concerns the relationship between the funder of health care (the payer) and the providers. If there is a single payer, that entity enjoys monopsony bargaining power over providers and is thereby better able to control costs. The only single payer systems are public finance systems providing universal coverage. In a system where there are multiple payers, a similar result could theoretically be achieved through effective coordination among them. This has been difficult to achieve in practice, however, even where sophisticated machinery exists, as in Germany. In multiple payer systems, cost shifting between payers has dominated. The greater the number of payers, the greater is the dominance of cost shifting over cost containment.

Finance of health systems is one area of policy where both theoretical and empirical approaches point in the same direction as to the best route to achieve optimal efficiency results. In both OECD and middle-income developing countries, those that have contained costs best while achieving health outcomes comparable to higher spending countries "have greater government control of health spending and a larger public sector share of total health expenditures."⁽³⁾

As it turns out, the finance model which produces the greatest efficiency is also the model with the greatest potential for equity. A large government share of expenditures allows for greater risk pooling and greater redistribution within the risk pool across income groups, age groups, vulnerable groups and individuals and regions.

Delivery

Health service delivery systems may be either public or private, including in systems where finance is public. Public and private systems each exhibit some specific strengths and some serious weaknesses which must be actively managed. Unlike the case of health finance, there is neither a theoretical consensus nor empirical evidence that either public or private models of health care delivery consistently produce superior results compared to the other model. This is true for efficiency as well as for equity results. In many cases, the allocation mechanism appears to be more important than whether a delivery system is public or private as such.

The strengths of public systems will generally include economies of scale, because of their large size relative to segmented private systems. They allow for systematic planning of infrastructure and human resource needs for the entire population. Because public health functions such as immunization, sanitation and communicable disease control are typically provided by the public system, an integrated public delivery system can combine prevention, primary and curative care as a continuum, which from the point of view of medical science will produce the best results.⁽⁴⁾ In terms of weaknesses of public health systems, the need for rules and predictability in large public systems introduces rigidity which may inhibit response to changing demand at the consumer level. The rigidity may also delay response to knowledge-based changes in technique or organization. Where public and private systems coexist, the rigidity may impede strategic changes by the public sector in response to organizational change in the private health sector. In a mixed public-private environment, such delays can lead to increased risk shifting or cost shifting from the private to the public sector.

Private health delivery systems may be more responsive to changing demand. They may be more flexible in their use of resources and inputs and more readily able to adopt new technologies and organizational structures. However, the main strengths of private markets in other sectors the use of prices as allocation mechanisms and competition as a means to efficiency work less well in the health sector. For markets to produce efficient results, there must be competition between providers and symmetrical information between providers and consumers. Competition works to eliminate excess profits and inefficient use of resources. Reliable and equivalent information shared by consumers and providers will allow consumers to choose the most effective and efficient providers, thus moving the overall system toward greater efficacy and efficiency. Private health delivery systems are widely recognized to be imperfect markets, because the numerous submarkets which comprise them tend not to be perfectly competitive (as discussed below) and because there is very significant asymmetry of information between consumers and health care providers. The nature of health care itself, as a determinant of well-being or even survival of the individual consumer, results in a weakening of the price mechanism as an efficient means for optimizing the use of resources. The consumer's elasticity of demand is lower for essential health care than for most other consumption. If a third party, whether the government or a private insurer, is paying the fee, the consumer's sensitivity to cost will be lower still. Thus, the essential conditions for markets to succeed are either absent or inadequate in health care markets.

The major submarkets which make up private health care physicians' services, hospitals, managed care organizations and pharmaceuticals each exhibit some degree of market failure. With respect to physicians, markets have typically been organized as private or small group practices. The resulting market structure has tended toward monopolistic competition, in which providers can charge more than their opportunity costs because of perceived quality differentiation and a high degree of asymmetry of information between providers and consumers. These markets are further distorted where physician organizations restrict the supply of physicians through their role in accreditation of individuals and training institutions. Hospital and pharmaceutical markets tend to be oligopolies or monopolies because of economies of scale, high capital requirements, sunk costs, operating licenses, patents and other barriers to entry. They also exhibit product or service differentiation and high information asymmetry. In the case of integrated private delivery systems (managed care), such as health maintenance organizations (HMOs), the market structure tends toward oligopoly. Managed care businesses typically have very high capital requirements for entry because they combine both insurance and health care delivery functions and thus must finance reserve requirements as well as infrastructure; they require sizable risk pools; there are important economies of scale in both provision of services and purchasing power; and there may be sunk costs and licensing barriers to entry as well. Because these major submarkets within private health delivery systems are imperfectly competitive, market power leads to rents and prices (relative to opportunity costs) above those in the surrounding economy.

Another efficiency loss that occurs with private systems is that they do not contribute to public health functions such as immunization and other disease prevention activities, public health education and environmental health measures such as sanitation, as noted above.

Allocation of resources

Allocation mechanisms can be grouped into three broad models: integrated public systems, fee-for-service systems and capitation systems. In integrated public systems, both finance and delivery are organized by the government. Allocation is primarily a matter of centralized planning and budgeting. Such systems may exist at the national, provincial (state) or local level. The focus in this model is on the supply of health care inputs, including physical facilities, health care personnel and equipment.

In contrast to integrated public health systems, fee-for-service and capitation models are utilized in systems in which finance and delivery are distinct, whether public, private or mixed. Fee-for-service systems allocate finance to health care providers on the basis of services actually rendered. The decision about what services should be supplied, and how much care should be consumed, are made jointly by the individual provider and the consumer. The incentive for the provider is to increase the amount of health services utilized to increase revenue. Because of the high degree of asymmetry of information, the influence of the provider is very great in the consumption decision. As discussed in the previous section, the consumer's elasticity of demand for health care may be very low. Payment by a third party will further reduce the consumer's usual price sensitivity. As a result, fee-for-service allocation mechanisms tend to produce overconsumption of health care and higher total health expenditure, all else being equal.

Capitation systems allocate resources by paying a fixed amount per capita to a provider or group of providers in advance of service utilization. The providers agree to provide all necessary health care to the covered beneficiaries for the fixed capitation payment. The incentive for the providers is to limit the amount of health services utilized, either by keeping beneficiaries healthy, or simply by restricting access to services. Thus, capitation reverses the incentives present in fee-for-service allocation, from the point of view of the provider. Instead of overprovision of services, the incentive here is for underprovision of health care. As with fee-for-service, the capitation allocation mechanism can be used in either a public or private system.

The risk that covered individuals will require health services is borne by the payer (government or private insurers) in fee-for-service models. In capitation models, the risk is borne by the provider. In both fee-for-service and capitation models, the focus is on demand for health care, rather than on supply, as in the case of integrated public systems.

Each of these allocation models has strengths and weaknesses. The different incentives that they create for individual providers and consumers often lead to unintended distortions in the system as a whole. There is no mainstream consensus that any one of them is optimal, and this is currently an area of extensive experimentation. Various combinations of these models are utilized in the three case-studies, and will be examined in depth there.

3. Employment

Despite increasingly sophisticated technology and improvement in inputs such as equipment and pharmaceuticals, health care remains a labour intensive industry. Therefore the functioning of health labour markets is an important determinant of the efficiency of the sector. Further, the health sector is a significant source of employment in the society.

Health labour markets exhibit a number of specific characteristics which must be kept in mind in evaluating health systems. The major health professions, including physicians and nurses, require years of training. There is a long delay before labour market signals of over or under supply are translated into changes in supply of health professionals. In the case of nurses, for example, there have been sharp swings in compensation in recent years in OECD countries such as the USA and Canada. Low nursing salaries in the 1960s and 1970s led to low numbers of entrants into the profession. As demand grew in response to demographic and funding changes, nurse shortages arose, which pushed up salaries, especially during the late 1980s. Enrollment in nursing schools grew in response and there is now downward pressure on wages.⁽⁵⁾ Such swings in availability and cost of specific grades of labour in the health sector complicate planning and lead to inefficiency.

Other distortions may be created in health care labour markets by scope of practice regulation, through which public or professional bodies establish binding restrictions as to which professionals may perform various functions. The basic thrust of such regulation is sound, since it is designed to prevent insufficiently trained health practitioners from working beyond their levels of knowledge. However such regulations can be rigid, artificially restricting the assignment of tasks which can change based on constantly evolving levels of training as well as changing technology and clinical practice. Further, lobbying by practitioners' associations, particularly those of physicians and other very highly skilled professions, can easily combine rent seeking with legitimate concerns about patient safety and the desire for appropriate returns to education. Because there are large disparities in salary levels among health professions, the allocative inefficiencies of such restrictions can be substantial.

Gender concentration in certain professions probably accounts for some of the high disparity in salaries. In all of the cases studied here, physicians are predominantly male while nurses are predominantly female. This means that scope of practice restrictions may have adverse equity consequences, in addition to any efficiency problems they create.

The size and labour intensity of the health sector has made it an important sectoral interest for the International Labour Organization. Employment levels, wages, conditions of work and gender disparities are the subject of numerous ILO Conventions and Recommendations. The Nursing Personnel Convention, 1977 (No. 149), deals specifically with terms and conditions of employment for nurses and their participation in determining these conditions.⁽⁶⁾ These issues will be addressed in the case-studies.

4. Privatization of health care in Chile

Overview

The military government which took power in Chile in 1973 under General Augusto Pinochet made major policy changes in the health sector there. The partial privatization of the public health care system in 1981 was the most radical. It was the first of a now-growing number of restructurings in various countries aimed at transferring portions or functions of public health systems to the private sector. After fifteen years' experience, the Chilean case presents the most extended record on which to draw in evaluating the impact of such policy changes on government, consumers, employers and the health sector workforce, as well as the consequences for cost efficiency, equity and quality.

Currently, some governments and policy advisers look to the Chilean privatization as a positive model. As such, it carries a significance even beyond its importance within the Chilean national context. However, the now lengthy Chilean experience gives reason for serious concern as to whether this approach will achieve either efficiency or equity goals. Since the restoration of democracy in 1990, elected governments have reversed many of the health policies of the military regime. The privatized portion of the health system, however, has resisted change, with negative consequences for the overall performance of the health sector.

Background

The health system which existed before the military coup in the early 1970s had been built over five decades, beginning in the 1920s, by successive Chilean governments, unions and employers. In 1952, the various elements of the system were consolidated and centralized in the National Health Service (SNS, Servicio Nacional de Salud). The public health sector continued to develop as part of one of the most extensive social welfare systems in Latin America. By the early 1970s, about 90% of the population were covered by three public health systems. The largest was the SNS, which provided free care in public facilities to about 65% of the population, roughly those in the bottom three quintiles of household income. This plan encompassed most blue-collar workers and their dependents (roughly half of the population), as well as the uninsured poor (about 17% of the population). Finance for the plan was provided by workers' payroll contributions through a social insurance scheme and for the poor, from general government revenue. The SNS also provided preventive public health services for the entire population, financed by general revenue. A second service, the National Medical Service for Employees (SERMENA, Servicio Médico Nacional), was introduced in 1968. This was a separate payroll-based insurance system which paid part of the costs of health care for white collar employees and their dependants. SERMENA benefits were paid through a voucher system, with individual beneficiaries deciding whether to obtain health services through the public system or private providers. SERMENA covered about 20% of the population, roughly the fourth highest quintile of income. About 5% of the population was covered by publicly funded health services for the armed forces and police. The remaining 10% of the population were primarily upper-income households which financed their own health care and utilized private providers.

Mandatory payroll contributions by all employees were set at 4% of payroll, allocated to either SNS or SERMENA. Public spending on health, including budget contributions by government and the mandatory social insurance contributions, was approximately 2.9% of GDP as of 1970.⁽⁷⁾

The public health sector was centralized in its administration. SNS operated all public health services. It built and maintained hospital and clinic infrastructure and trained and employed most health sector professionals and other workers. Planning of both human resource and physical infrastructure needs was conducted centrally. Geographical coverage was quite extensive, relative to Latin American health systems of the period. In addition to the health services already described, Chile also had an extensive and interconnected system of maternal and child nutrition support programs. Public health clinics identified pregnant women and children suffering from or at risk of malnutrition, and provided them with food supplements and additional health monitoring.

A private health sector also existed, composed primarily of individual and group professional practices. While most physicians and other professionals worked for the SNS, many maintained private practices on the side, delivering services to affluent private payers and affiliates of the SERMENA system. In addition, a few industries such as banking, construction and copper operated prepaid medical plans (cajas) for their white collar employees, funded by both employer and employee contributions. Such plans covered about 2% of the population. Private expenditure for health care grew as a proportion of total health expenditure up to 1969, but fell somewhat in the early 1970s as a result of higher state spending on health under the Salvador Allende government. Estimates of the proportion of private spending in the health sector during this period vary, with figures for the late 1960s ranging from 53% to 60%.⁽⁸⁾

Despite the notable successes of the pre-1973 health system, there were significant shortcomings in equity and adequacy of supply of health services. A 1968 government survey found that 60% of total health expenditure was consumed by the wealthiest 30% of the population. At most income levels, health services were deemed to satisfy only about half of the demand for them.⁽⁹⁾ Whether and to what extent the system was redistributive, and if such redistribution was progressive, is a matter of strong disagreement among analysts.⁽¹⁰⁾ In spite of these limitations, the Chilean health system and its planning apparatus were widely considered a model in Latin America, for their scope, efficiency and lack of corruption.⁽¹¹⁾

Privatization and restructuring

The military government reorganized the health sector through a series of funding, policy and institutional changes in the 1970s and early 1980s. The first changes after the 1973 coup consisted of a series of sharp funding cuts to the public health system. Health spending by the State was reduced approximately 15% in 1974 and an additional 22% in 1975. These early cuts were partly a response to macroeconomic instability, notably annual inflation of over 600% and a large fiscal deficit. However, they also reflected the strongly neoliberal orientation of the economic advisors to the military government, who favored a much smaller public sector and a "subsidiary role of the State".⁽¹²⁾ The contraction of public spending had the intended effect of increasing the private share of health expenditure, which grew by 22% from 1974 to 1976.⁽¹³⁾

While overall public health spending and services were reduced, the regime followed a policy of targeting resources to the poorest segments of the population. For example, the pre-existing maternal and infant health and feeding programmes were maintained but more narrowly targeted. This had the effect of converting what had been a preventive programme into a curative programme for those already suffering from malnutrition.⁽¹⁴⁾

In 1979, the military regime introduced the first institutional restructuring of the health system. The major elements of this initiative were the reorganization of funding and service delivery and the exclusion of the Chilean medical society (Colegio Médico) from its long-standing official role in policy formulation, wage-setting and professional regulation. In the reorganization, the functions of policy formulation, service delivery and finance were separated into three distinct institutions. The role of the Ministry of Health was narrowed, with an emphasis on policy formulation and regulation. The SNS, renamed the National System of Health Services (SNSS, Sistema Nacional de Servicios de Salud) was decentralized into 26 regional health service delivery areas with devolved responsibility for operating hospitals and outpatient clinics in each region. Primary health clinics were subsequently spun off to municipal administration. A separate agency, the National Health Fund (FONASA, Fundo Nacional de Salud), was established as the funding mechanism for the public health system. FONASA was responsible for collecting and distributing health finance. The main sources of finance continued to consist of workers' mandatory payroll contributions, federal budget contributions and co-payments (user fees) from middle- and higher-income users of the public system. Any participants in the public system could also opt to use private providers, by purchasing vouchers from FONASA. The level of co-payments required for use of private providers was higher than in the public system.

Another aspect of the reorganization was a significant shift in the approach to allocation of resources. In contrast to the earlier allocation of finance, under which funds were distributed to support the centrally planned supply of services (the number of hospital beds, medical personnel and other inputs), the new approach put emphasis on the demand side. Reimbursement was made on a fee-for-service basis for services actually delivered. There were two important exceptions to the fee-for-service allocation mechanism. Salaries and other personnel expenses continued as a direct budget allocation. Employees of the SNSS facilities continued to be public employees, directly employed by the Ministry of Health. The other exception to the fee-for-service approach covered investment in infrastructure and fixed costs.

The second major institutional change made in 1979 was designed to break the political and policy power of the Colegio Médico.⁽¹⁵⁾ The physician's group had been a major opponent of the defunding of public health services by the military regime and its plans for institutional restructuring. Historically the group had been an important actor in health policy, with legal input into medical policy, fee schedules and the salaries of physicians and other health sector workers. The organization also had legal standing as a professional regulatory body. Membership was mandatory. As part of the 1979 reorganization, the government eliminated the formal role of the Colegio Médico in health policy formulation and wage setting, and made membership voluntary. It also forbade gatherings of doctors for non-clinical purposes, thereby eliminating the possibility of their unionization in response to the downgrading of their role.

Another round of institutional restructuring, which proved to be the most significant of the many profound changes in the health system, was undertaken in 1981. The government authorized the creation of private, for-profit health insurance plans (ISAPREs, Institutos de Salud Previsional). The ISAPREs were allowed to compete with FONASA for workers' mandatory payroll contributions. Employees could now enroll themselves and their dependents in the ISAPREs, which in turn would provide health care services through private providers with whom they contracted or in their own facilities. This meant that a portion of the mandatory quasi-public contribution to the public health system could now be redirected to the private sector, thereby diverting an important source of finance from the public system. The insurance risk pool was also segmented as a result, into a public and numerous private risk pools. The new plans were loosely modeled on the cajas which existed in a few industries for higher salaried workers. Several of the initial ISAPREs were modifications and expansions of existing cajas. The structure of the plans is similar to that of some types of health maintenance organizations (HMOs) in the USA and elsewhere, although co-payments for services are higher and more extensive in the ISAPREs.

The government's motivation in creating the ISAPREs was both to continue to downsize the public health system and to expand the private sector by attracting private investment and thus building up a competing infrastructure and delivery system.⁽¹⁶⁾ From the beginning, the ISAPREs sought to attract the highest paid and healthiest segments of the population. They accomplished this through their fee structure, which exceeded the mandatory 4% payroll contribution and therefore required an often substantial additional voluntary contribution; they also required co-payments for many services. In many plans, risk skimming to select the healthiest possible risk pool was also accomplished through explicit exclusion of women of child-bearing age, individuals with existing medical conditions and other high-risk individuals, such as the elderly. There were no legal restrictions on the ability of the ISAPREs to siphon off the healthiest segments of the population (those least expensive to care for) from the public system. This was in keeping with the Pinochet government's general philosophy of deregulation in the newly privatized sectors.

Initially the ISAPREs grew much more slowly than anticipated, in part because their inception coincided with the severe recession of 1982-83. Falling real wages and unemployment of 30% of the workforce caused a sharp contraction of private demand, including in the health sector.⁽¹⁷⁾ Some of the weaker ISAPREs went bankrupt, and were taken over by the government. The recession in Chile was a product of the world recession and the related debt crisis, aggravated by aggressive private sector borrowing and weakness in the country's recently privatized and largely unregulated banking sector. The government took over large parts of the failing financial system and underwrote private debtors with exchange rate preferences. The government had achieved a fiscal surplus by the late 1970s as a result of spending cuts, including those for health.⁽¹⁸⁾ But now the deficit ballooned again. The new fiscal deficit was created by the public expenditures on behalf of high-income sectors, by the recession itself and by government spending necessitated by the privatization of the social security pension plan in 1981.⁽¹⁹⁾ The government addressed the new deficit through further cutbacks in health and other social spending and even more aggressive efforts to shift health finance and delivery to the private sector. The mandatory payroll contribution rate was increased to 5% in 1983, to 6% in 1984 and to 7% in 1986. In 1983, the co-payments required in the public FONASA system were increased sharply. In aggregate, the consumer price index measured a 134.8% increase in health care co-payments by the end of that year.⁽²⁰⁾ Government spending in the health sector was curtailed by an additional 20%. Thus, a further major shift of expenditure to the private sector was accomplished.

The higher mandatory payroll contribution rate and higher co-payments in the FONASA system made the ISAPREs relatively more attractive to a somewhat wider pool of workers. The government took further steps to increase their utilization, including a tax break for employers who contributed up to an additional 2% of payroll (above the mandatory 7% contribution by employees) to fund the higher ISAPRE premiums. As the economy recovered in the mid-1980s, the ISAPREs began to grow. The failed ISAPREs which had been taken over by the State were reprivatized. By 1988, about 12% of the population was covered by the private plans; the number rose to about 15% by 1990, and to about 20% by 1992. The figure is currently about 25%. As of 1995, the rate of growth appeared to be slowing.

As the ISAPREs grew, there was an increasing public perception that the unregulated status of the plans had given rise to abuses, including the discriminatory exclusion of women and elderly already noted and what was seen as price gouging.⁽²¹⁾ In 1989, the military government, which had begun regulating some other privatized sectors where problems had arisen (such as banking and finance), drew up plans for a Superintendency of ISAPREs to regulate the organizations. A new law required the plans to provide lifetime contracts, which only the affiliated individuals could cancel by withdrawal; previously the ISAPREs issued only annual contracts, giving them the ability to cancel coverage for subscribers who developed health problems. The law also forbade discrimination against women, the chronically ill and the elderly, which had formerly prevailed.

The military government lost a popular plebiscite in 1988 through which it sought a mandate to continue in power. As a result, presidential elections were held in 1989 and a civilian, Patricio Aylwin, was elected and took office in 1990. The new government debated whether to implement the Superintendency and other measures adopted by the military regime or to pursue a more thoroughgoing reform of the controversial and unpopular ISAPREs.⁽²²⁾ The final decision was to implement the limited oversight and regulation enacted by the Pinochet government.

The level of government spending on the public system has been significantly increased by the civilian governments since 1990, in response to widespread discontent with waiting times, deteriorating facilities and other quality problems in the public system. Opinion polls show the health system to be one of the top issues of concern among the public, reflecting both the inadequacy of the public system and criticism of the ISAPREs. For example, the ISAPREs were ranked lowest among insurance and financial institutions in a widely cited recent public poll.⁽²³⁾ The two democratically elected governments since 1990 have attempted to achieve better quality in the public system and greater equity overall. But the allocation of a disproportionate share of finance to the private plans has circumscribed the possibility of redistribution and quality improvement, even with substantially greater fiscal effort.

The regulations governing the ISAPREs were revised in 1992 and again in 1995; among other provisions, these changes placed restrictions on the frequency with which the ISAPREs can increase their rates. There is ongoing consideration of measures to increase transparency, including establishment of basic benefit packages to make the private plans more easily comparable by consumers.⁽²⁴⁾ However, the fundamental structure of the health sector remains a source of public dissatisfaction and a topic of debate. No political consensus has emerged on whether or how to reform the system.

Evaluation of the effects of privatization

Categories for analysis

The effects of the privatization and related restructuring of the health care system in Chile are divided into the following categories for analysis: the political process involved; the impact on the economic efficiency of the health sector; the budgetary repercussions for the government; the results in terms of equity and quality for consumers of health care; and the effects on employment, wages and working conditions in the sector.

The political process of restructuring

Before turning to the outcomes of the Chilean reforms, it is important to bear in mind the process under which the reforms were undertaken. The Chilean restructuring was marked by a virtual absence of participation or political input by employees in the sector, including medical professionals, health care consumers or the public in general. All of the major decisions on funding levels, privatization and the specific institutional transformations were taken by the military government and its economic advisors during a period when the national congress was dissolved and political parties were forbidden to undertake political activity, thus eliminating any checks or balances.⁽²⁵⁾ Without elections and with no legislative apparatus, there was no formal mechanism for public or sectoral input to these decisions. The labour movement was a specific target of repression after the 1973 coup.⁽²⁶⁾ Repression and unemployment (especially in the downsized public sector) reduced union membership to one-third of its previous level. Collective bargaining was banned from 1973 to 1979; when re-allowed, it was under a new and restrictive labour law, which limited bargaining to the firm level, and curtailed the right to strike. The Colegio Médico, as discussed above, was excluded from policy-making and stripped of its previous status and role in the health system. The government did consult informally with the largest employers, who generally welcomed the increases in employee contributions as a way to cut down their own direct and indirect contributions to health care.⁽²⁷⁾ The ability of the government to reduce the size of the public health sector, shift costs to individuals and reduce wages and employment for health sector workers and professionals was a result of the authoritarian nature of the regime.⁽²⁸⁾

Economic efficiency

The partial privatization of the finance of health care is the most significant of the reforms in terms of the impact on economic efficiency. The introduction of the ISAPREs led to a diversion of increasing portions of the mandatory payroll contributions away from the public health system. The private plans also segregated portions of the overall risk pool of the population into separate, smaller risk pools. As discussed above, the private plans aggressively sought (and still seek, under somewhat restricted terms) the healthiest and wealthiest segments of the population. As a result, they receive the maximum quasi-public revenue (7-9% of the highest salaries) while incurring lower costs than the public system because of the superior health status of the population they cover. The adverse impact of this segmentation on the public system has been quantified in a World Bank study:

The ISAPREs, by targeting the richest segments of Chilean society, impoverished the rest of the social insurance system. Each salaried beneficiary who chose to shift to an ISAPRE cost the public system 2.5 times the contribution of an average salaried worker. Because the ISAPREs are permitted to rate individual health risks, they have "skimmed" the population for good risks, leaving the public sector to care for the sick and the elderly.⁽²⁹⁾

As of 1990, for example, ISAPREs received 45.5% of all expenditures on health care, through payroll contributions, additional premiums and co-payments. The public system received 54.5% of expenditures, through payroll contributions, co-payments and federal and municipal fiscal contributions.⁽³⁰⁾ However, while receiving nearly half of all health spending, the ISAPREs provided care to only about 15% of the population. The public system was responsible for about 70% of the population, which was covered by the FONASA system. It also served as provider of last resort to the 12% of the population not covered by either insurance system, a group which turns to public hospitals when in need of care.⁽³¹⁾ Thus the share of resources flowing to the public system has been cut dramatically, without a commensurate reduction in the burden of providing care. The consequences for equity of this division of resources will be discussed below.

In terms of economic efficiency, the separation of risk pools has meant that a small, relatively young and relatively healthy segment of the population receives a disproportionate share of health resources, while the much larger, older and less healthy segment is undersupplied. This is not an efficient allocation in terms of the overall health of the population. Expressed in the paradigm of investment in human capital, higher marginal returns to investment in health would be achieved by allocating a greater proportion of resources to the underserved population in the public system. These theoretical concepts are supported empirically through the experience of societies with single risk pool, single payer financing schemes compared with those employing multiple source financing and segmented risk pools. For example, the United States, which has a multiple payer health financing system, has consistently experienced costs which are about 40% higher than those of Canada (14% of GDP compared to 10%). The Canadian system has single payer public financing with a single risk pool in each province. The two countries have comparable private health delivery systems, similar income levels and similar health outcomes.⁽³²⁾ Both relied until very recently on fee-for-service allocation mechanisms. Thus most of the vast difference in costs between the two health systems must be attributed to the different modes of finance.

There are many channels through which multiple payer finance leads to higher overall costs. Multiple payers have incentives to shift costs to other payers, while single payers have incentives to control costs. Cost shifting is evident in the risk skimming behaviour of the ISAPREs discussed above. In addition to having the incentive to control costs, single payers have the power to do so through their monopsony bargaining power over providers of health care. In multiple payer systems, by contrast, the payers lose some bargaining power, which providers gain, over prices. Providers and private payers both have some ability to shift costs to other payers through manipulation of billing.

Another source of higher costs arises if private plans have market pricing power due to market concentration. In Chile, the six largest ISAPREs enrolled 85% of all ISAPRE participants as of 1990; there was a positive relationship between the size of the ISAPRE and the level of profit.⁽³³⁾ The top six plans still controlled almost 81% of the market as of 1995.⁽³⁴⁾ The tendency toward oligopolistic market structures is characteristic of HMO plans like the ISAPREs, as noted in Section 2. Another related channel through which multiple payer systems generate higher costs is administrative costs, including advertising, recruitment, premium and co-payment collection and fee negotiation and payment. Of the 45.5% share of total health expenditure that the ISAPREs received in 1990, they retained 23% of that amount as either profits or administrative costs.⁽³⁵⁾ The average return on capital and reserves among ISAPREs was 40.5% in 1990; the average return for the period 1986-90 was 34.8%.⁽³⁶⁾

In fragmenting the risk pool and reallocating resources between the public and private systems, the partial privatization was not cost efficient and it also was not pareto efficient.⁽³⁷⁾ It may have produced better health care for a small segment of the population, but at the expense of the large majority, which suffered a deterioration as a result.

Effect on government

The effects of privatization and restructuring on the fiscal burden of the Chilean government can be divided into three distinct time periods or phases. The first was the period of cutbacks of government contributions to the health system, which prevailed during most of the military regime. The second is the subsequent period in which the cutbacks have been reversed, mainly since the return to democratic government. The third period is the projected impact of privatization on the state in the future, resulting from the segmentation of the risk pool, possible shifting of retirees from private plans to the public plan and demographic changes. These phases are discussed in detail below.

Table 1 presents public spending on health in per capita terms and as a share of GDP from 1974 to 1993. Figures for 1970 are included for comparison.

Table 1. Public spending on health, 1970, 1974-93⁽³⁸⁾

Year

Per capita, 1992 pesos

Percentage of GDP

Year

Per capita, 1992 pesos

Percentage of GDP

Year

Per capita, 1992 pesos

Percentage of GDP

1970

21 601

2.9

1980

17 789

2.1

1987

18 213

2.3

1974

18 712

2.7

1981

16 152

1.9

1988

20 849

2.4

1975

14 498

2.6

1982

16 941

2.3

1989

20 614

2.2

1976

13 543

2.2

1983

13 479

1.9

1990

19 361

2.1

1977

14 650

2.2

1984

14 241

2.0

1991

22 440

2.4

1978

16 202

2.0

1985

13 745

1.9

1992

26 535

2.6

1979

15 952

1.8

1986

13 428

1.8

1993

29 149

2.7

The figures include both contributions from central government revenue (from taxes and other sources) and mandatory payroll contributions to health insurance, that is, both public and quasi-public sources. This is the standard definition of public expenditure used by the World Bank, OECD and others. Figures from FONASA indicate that the share of total public health spending that came from the central government budget was about 49% from 1974 to 1984, dropped to 39% from 1985 to 1990 and then rose to 46% from 1991 through 1994.⁽³⁹⁾ Applying these percentage shares to the data in Table 1, central government contributions amounted to only about 1% of GDP from the late 1970s to the mid-1980s, then dropped to as low as 0.7% of GDP in 1986 before starting to recover slowly. It is only since the re-democratization that the central government contribution as a share of GDP has once again exceeded 1% and continues to grow.

Despite the limitations of the data, and while spending varied from year to year, the trend was clearly for much lower public spending from 1974 until the late 1980s. Government health spending cuts during the period after 1974 reduced the fiscal burden and initiated what has been termed passive privatization, or cost shifting to the private sector, mainly individual consumers.⁽⁴⁰⁾

Reduced spending within the public health delivery system was primarily manifested in lower employment levels and lower salaries for physicians and health care workers (discussed in the final subsection of Section 4 below) and in reduced investment. Capital investment fell from about 9-10% of total public health expenditure in the early 1970s to 2-4% during the period 1974-88.⁽⁴¹⁾ The combination of lower investment and lower employment over a period of fifteen years produced a marked deterioration of infrastructure and long waiting lists for services in the public sector. These results were not unintended by the military government, which, as noted, sought to reduce the role of the State in the health sector. However, the depth of the spending cutbacks while the public system still provided care to the overwhelming majority of the population led to what was widely described as a crisis in the health system by the mid-1980s. Professional medical associations and others began to strongly criticize shortages of personnel, medicine and supplies, as well as the deterioration of medical technology and infrastructure.⁽⁴²⁾ The regime began to increase health expenditure beginning in 1987 in response to the widespread crisis of confidence in the health system. Since 1990, with the return to civilian government and the restoration of normal democratic channels for the expression of public sentiment on social policy, public spending on health has been increased significantly. Table 1 shows that public health expenditure per capita surpassed 1970 levels for the first time in 1991. The share of this increasing budget devoted to investment has been tripled compared to the late 1980s.⁽⁴³⁾ In light of the public discontent and responsive decisions taken by the two democratic administrations since 1990, the fiscal cutbacks under the military regime can be interpreted as having created a deficit of infrastructure and personnel which is now being addressed through much higher levels of spending. In this sense, the burden of public health was not shifted from the State to the private sector to the degree it appeared at the time. Rather, the earlier spending cuts can be seen as a shift of government spending to the future, with the accumulated deficit now being paid out of current revenues. In one study, the amount that was cut from public health spending from 1983 to 1991 was calculated as the equivalent of US$1.85 billion. This amount is quite comparable to the estimate made by the new democratic government in 1990, which assessed that the need for infrastructure repair and technological upgrading in the public health system would cost US$1.5 billion.⁽⁴⁴⁾

The "passive" privatization of the health sector pursued by the military regime had among its objectives to call forth greater effort from the private sector, which in practice meant mainly from private households. This was accomplished by several mechanisms: the increase in the mandatory payroll contributions from 4% to 7%; in the private sphere, the premiums (above the mandatory 7%) and co-payments required in the ISAPREs; and in the public sphere, the mandatory co-payments for middle and higher income users. Whether the aggressive restructuring accomplished this goal is ambiguous at best. A recent study by the World Bank, which attempted to overcome shortcomings and omissions in health expenditure data by various methods, found that, as of 1990, 53% of health expenditure occurred in the private sector.⁽⁴⁵⁾ While there is no directly comparable study for earlier periods, various analysts have estimated the private share of expenditure in the late 1960s at 53% to 60% of total health spending, as noted in the background subsection above. Further, the sharp increases in health spending by the federal government in the six years since the 1990 World Bank study suggest that the current ratio of private spending is probably 50% or less, a proportion which is typical of Latin America as a whole.⁽⁴⁶⁾

The preceding discussion took into account only the "passive" privatization of health care. A second major impact on the government stems from the partial privatization of the finance and risk pools. This "active" privatization produced results which are more longlasting and difficult to either manage or to reverse than the effects of the cuts in central government funding. The result of the active privatization has been an increase, rather than a decrease, in the public burden in the health sector, since a significant share of private contributions to health expenditure, the mandatory payroll deductions, have been diverted from the public system to the ISAPREs, while the responsibility for providing care to 75% of the population continues to rest with the government. The figures given in the previous subsection on the allocation of resources to the private health sector relative to the size of the population served give a broad indication of the public burden which has been created by the partial privatization. In the absence of fundamental restructuring, this burden will continue to require sharp increases in government spending in the future, the third time-period for which effects must be considered. As noted above, the share of spending in the public system provided by the federal government has already risen from 39% in the 1985-90 period to 46% in 1991-94, without yet achieving a satisfactory equilibrium between supply and demand.

A further potential problem for the future period looms in the prospect that increasing numbers of the elderly will switch from the ISAPREs to the public system as premium and co-payment costs in the private plans continue to rise while their incomes decline in retirement. Although the first reforms to the ISAPRE system in the late 1980s legally limited the ability of those plans to terminate coverage because of age, the cost of the plans to the beneficiaries often produces the same result. If retirees who have contributed to the ISAPREs during their working lives migrate to the public system at the point when their medical costs are rising because of ageing, this will create what has been described as an impossible financial burden on the public system.⁽⁴⁷⁾ The segmented risk pools prevent health care expenditure smoothing over the life-cycle, since surpluses accumulated during younger, healthier periods have been retained by the ISAPREs as profits. Despite the earlier regulatory reforms banning discrimination, as of 1992 more than 70% of ISAPRE affiliates were under age 40 while only 2% were 65 or older.⁽⁴⁸⁾ The coverage of the elderly population is one of the current issues in the debate over reform of the system. The private plans have opposed government proposals to set aside a small portion of the 7% payroll contribution to prefund retirement health coverage.⁽⁴⁹⁾

Effect on equity and quality for consumers of health care

The public and private health systems provide distinctly different levels of spending for participants, with consequences for equity and quality of care. Within the public system there are also differences in contribution levels, which will be discussed as well.

A broad measure of the differences between the public and private systems is the amount of spending per individual beneficiary. One report for 1990 put per capita outlays by the public system at only 22% of those by the ISAPREs.⁽⁵⁰⁾ In 1994, according to FONASA, the average private sector per capita outlay was US$280, while in the public sector it was US$170, or 60% of the private level.⁽⁵¹⁾ While the two sets of data are not directly comparable, it is likely that the increase in government spending since 1991 has narrowed the gap between the systems to some degree. Nonetheless, there continue to be long waiting lists in the public system. Facilities are still in need of expansion and repair, even after five years of sharply increased public investment. Most modern technological equipment and supplies continue to be concentrated in ISAPRE facilities.⁽⁵²⁾

The redistributive potential of the health system is curtailed by the high proportion of resources going into the ISAPREs. Contributions to the private plans, which come from the most affluent segment of the population, are not available to subsidize the public health system, which is utilized by lower income segments, nor for use in such related applications as preventive public health measures, public health education and public health research.

Within the public system itself there is significant progressive redistribution. Statistics for the public plan for 1990 show a net subsidy of US$65.2 million (about 22% of all beneficiary contributions to the system) from the highest quintile of contributors to the lowest three quintiles. The fourth quintile, consisting of middle income contributors, was essentially self-financing.⁽⁵³⁾ The progressivity within the public system is a product of the payroll contribution formula (a percentage of salary with no upper contribution cap) and of the co-payments introduced during the restructuring. Those beneficiaries whose are in the bottom 50% of income are not required to make co-payments for use of public health services. Beneficiaries in the next 25% income bracket make co-payments equa to 25% of costs; and those in the upper 25% income bracket pay 50% of costs.

The importance of the constraints on redistribution which were introduced by the privatization must be understood in the context of the overall inequitable distribution of income and the high concentration of wealth in Chile. In 1992, the top 20% of the population received 60.4% of all income, while the bottom quintile received only 3.3%.⁽⁵⁴⁾ The inequality grew dramatically under the economic policies of the military government, with the bottom three quintiles losing income share (the lowest quintile of household lost more than half of its share of national income), the fourth quintile remaining steady and the top quintile increasing its share of national income by about 35%.⁽⁵⁵⁾ Public health insurance systems are sometimes criticized for favoring upper and middle income sectors over the poor, particularly where the poor are relegated to a separate system because they are not in the formal workforce and therefore not covered by social insurance. These criticisms do not apply to the public system in Chile, because the poor are largely included in the public system and the contribution and co-payment mechanisms produce progressive internal redistribution within the system.

Effect on employment, wages and working conditions in the health sector

The employment trend in the Chilean health sector for most of the period from 1974 to 1990 was a decline in employment and real wages. The cuts in public health spending were concentrated in reduced personnel costs (both employment levels and wages) and investment. Total employment in the public health system and in certain occupations for selected years is presented in table 2.

Table 2. Employment by SNS and SNSS
for selected years, 1975-92

Year

Total

Doctors

Dentists

Nurses

Midwives

Auxiliary
Nurses

Transport
and aides

1975

76 000

5 248*

n/a

2 550*

n/a

21 389*

n/a

1980

67 000

4 128

1 752

2 509

1 839

n/a

n/a

1985

62 000

6 063

1 886

2 737

1 990

23 557

14 108

1990

59 800

6 085

1 112

2 416

1 662

20 670

13 110

* = 1978.
(Sources: Compendio Estadistico 1992; Scarpaci (1988)

The reduction in real wages resulted from a series of policies by the military government. From 1973 to 1979 collective bargaining was banned; although bargaining resumed thereafter it was under an amended labour law which weakened the power of unions. In 1982 the government eliminated wage indexation, which meant that inflation subsequently eroded wages. During 1982 the real minimum wage, the wage floor for collective bargaining and public sector wages specifically were each reduced. From 1982, public sector wages no longer set the level for economy- wide wages but began to lag the private sector.⁽⁵⁶⁾ Within the public health sector, salaries represented 40% of total public expenditure in 1984, 35% in 1988 and 34% in 1992.⁽⁵⁷⁾

The erosion of both salaries and employment in the health sector resulted in 1985 in only 79% of Chilean doctors practicing in their profession, according to an estimate by the Colegio Médico.⁽⁵⁸⁾ This unemployment of doctors existed alongside a shortage of medical personnel in the public system which produced long waiting lines and declining numbers of medical consultations in the late 1980s.⁽⁵⁹⁾

The fragmentation of the system undermined the human resource planning capability which previously existed. This has resulted in labour shortages for some skills, particularly nurses and overspecialization (75% of physicians are specialists).⁽⁶⁰⁾

Since the re-democratization, there have been some improvements in both levels of employment and wages. Total employment in the public system had risen to about 66,000 by 1994, comparable to levels just before privatization, although still well below employment levels in the early 1970s. Employment in the ISAPREs was low, in keeping with the small share of the population affiliated with them, until they began to grow in the late 1980s. By 1992, the private plans employed 38% of practicing physicians, more than half of employed nurses, and about 30% of other nursing personnel. These relative proportions suggest that the ISAPREs have adopted a medical model which utilizes nurses more and physicians less than the traditional physician-intensive Chilean model. Such a shift may produce an efficiency gain. As the ISAPREs have grown in recent years, a dual labour market has developed, with higher wages and better working conditions in the private plans. This has led to the migration of some of the most skilled and experienced workers from the public to the private system.⁽⁶¹⁾ One result has been unfilled vacancies in some professions in the public system, including nurses and midwives. On the other hand, increased spending levels by the government, a revision and strengthening of the labour law in 1990 and the competition for medical personnel have contributed to some recovery of wages in the public system. In 1994, legislation was adopted which set a minimum wage and standardized conditions for personnel in the public facilities which had been decentralized to municipalities, where some of the poorest working conditions and wages existed.⁽⁶²⁾

5. Restructuring of health care in the Province of Alberta, Canada

Overview

The Canadian system of health care provides universal coverage through a combination of public finance and mainly private delivery of services. The plan is financed by the federal and provincial governments from tax revenue, supplemented in some provinces by mandatory premium contributions by households or by employers. The system is organized at the provincial level within certain required federal guidelines. Most health care providers are private non-profit institutions (including hospitals, nursing homes and clinics) and for-profit self-employed practitioners (such as physicians and dentists).

Like most industrial countries, Canada has faced a growth in health costs which outstripped growth of GDP in recent years, as the overall rate of growth of the economy began to slow in the 1980s. The economy went into a prolonged recession in the early 1990s, and in response to reduced revenues, federal contributions to the health system were frozen for five years. Thus, more of the burden of financing health has been shifted to the provinces, which face their own fiscal pressures from slow growth and recession. The result has been a period of deficits, cutbacks and restructuring by the provinces as they struggle to cope with the combination of expanding demand and constrained budgets. The province of Alberta has undertaken the most radical restructuring over the last several years, under a conservative provincial government elected in 1993. Other Canadian provinces have watched the changes there with a range of reactions which mirror the political coloration of their governing parties and electorates. Recently the newly elected conservative government of the largest province, Ontario, has indicated it would like to emulate many of the policies implemented in Alberta. The impact of restructuring in Alberta may thus begin to be amplified throughout the Canadian system.

Background

The Canadian health system is structured as a publicly financed, single payer plan at the provincial level. The entire population of each province constitutes a single risk pool under this structure. Financing, as mentioned, comes from the federal and provincial governments and from premium contributions. All funding sources are channelled into a single payer entity at the provincial level. The federal share of total national spending on health care has been roughly 24% in recent years; the provincial share is approximately 48%; and the balance comes from private sources. These private contributions consist of premiums paid by households or employer payroll taxes (differing arrangements are used in different provinces) and out-of-pocket payments by consumers for health costs which are not covered by the public system, such as pharmaceuticals and non-essential care.

The plan is administered by the provinces with a fairly high degree of autonomy, as long as federal standards are met. The key federal standards are (1) the requirement that provinces provide universal health insurance coverage in a single risk pool, (2) access to and coverage of all medically necessary services and (3) the exclusion of user fees or direct billing of consumers by health care providers, above the payments made by the provincial plans, which must be the single payer. The federal government does not make the practice of user fees and extra-billing by the provinces unlawful, but it penalizes them for such actions through dollar-for-dollar deductions from the federal contribution to costs. This provision, a part of federal health legislation since 1984, has effectively maintained the single payer nature of the Canadian health system by eliminating any incentive for the creation of a separate, privately financed sector in the core health services covered by the public system.⁽⁶³⁾ It has also meant that the bargaining power of provincial authorities with health providers has remained intact, since they are in a monopsonist position in the hospital, physician, health labour and other service delivery markets.⁽⁶⁴⁾

Provinces are required to administer their insurance plans on a universal, non-profit basis, as noted. This has provided key cost advantages for the government and the society as a whole, compared to the Chilean and US examples discussed in this study. Because coverage must be universal, the risk pool has been kept intact. Adverse selection in the form of risk skimming has been avoided and thus the public insurer has not been left with a disproportionate share of the less-healthy or those at greater health risk because of factors like poverty. Secondly, the monopsonist position of the single payer has provided a key mechanism for restraining costs in the delivery system. Finally, there is no possibility of price discrimination by providers, which typically occurs in multiple payer systems and which has the effect of appropriating consumer or public surplus to the provider.

The growth in health costs in Canada has been primarily a product of three factors: demographic changes, technological innovation in health care, and problems which arise from the fee-for-service allocation mechanism of the system. With respect to demography, longer life spans, lower birth rates, less immigration and the ageing of the post-war baby boom have all led to a much higher proportion of older segments of the population, who use more health services. The demographic bulge of the baby boom means that this tendency will increase for the next several decades. Technological innovation has been similar to that in other industrialized countries, with more expensive equipment, procedures, supplies and medicines all contributing to better health outcomes, but at much higher costs. The fee-for-service payment mechanism, through which physicians and other providers decide what services to provide and are payed according to a pre-negotiated schedule for such services, has been shown to produce higher overall costs. This results from overutilization of health services (particularly expensive diagnostic and surgical procedures), a problem which follows from the financial incentives for the provider to overprescribe. The shortcomings of the fee-for-service system have probably been exacerbated by an oversupply of physicians in Canada, which developed during the 1980s.

The growth in costs resulting from these factors, combined with the slowdown of overall economic growth over the last 15 years, have produced the so-called "denominator effect", in which health spending increases as a percentage of GDP. While federal and provincial governments faced reductions in revenue (or slower revenue growth) because of a slowing economy and then several years of recession, health costs continued to climb, becoming an increasing share of both federal and provincial budgets. Total health expenditures as a percentage of GDP, were essentially stable through the 1970s and early 1980s at about 7.1% of GDP; the percentage grew after the 1982 recession and experienced a particularly rapid increase during the long recession of the early 1990s. Spending peaked at about 10.1% of GDP in 1992 and 1993; it has since moderated to about 9.7% and has held steady at that level.⁽⁶⁵⁾

An early result of the denominator effect, beginning in the late 1980s, was a reduction in the contribution by the federal government to health costs, including a five year freeze on federal contributions beginning in 1990. The shifting of the burden to provinces contributed to growing deficits at that level of government.

Alberta is a province in western Canada whose economy has traditionally been based on extractive industries, including oil, agriculture and cattle. This economic base has produced frequent boom and bust cycles as a result of the tendency for volatility in commodity prices. There is a relatively low population density except for the metropolitan areas of Calgary and Edmonton. Alberta has typically spent the lowest proportion of provincial GDP on health care of any of the Canadian provinces. In 1994 for example, Alberta spent 7.9% of GDP on health, compared with the Canadian average of 9.7%.⁽⁶⁶⁾ Nonetheless, because of growing health costs, which rose by 215% (unadjusted for population growth and inflation) from 1980 to 1992 and the freeze in federal contributions beginning in 1990, health spending as a portion of the total provincial government budget grew from 20% in fiscal year 1980/81 to 30% by 1992/93.

Restructuring in Alberta

A conservative government was elected in 1993 on a platform of rapidly balancing the provincial budget. The new administration set out to cut health costs dramatically, along with all other social spending by the provincial government. The approach taken included setting a global goal of reducing government health spending by 20%, along with a number of steps to restructure the health system which were intended to force cost containment, institutionalize the cost containment gains which resulted and shift some costs to the private sector. The proposed spending cuts were quite drastic compared with other provinces, which, facing many of the same fiscal constraints, cut health expenditure by about 1.2% overall during the same period.⁽⁶⁷⁾

The major elements of the restructuring, which began in 1994, are summarized here, with a fuller discussion of each in the following sections. First, the overall structure of health administration was reorganized, with authority transferred downward from the provincial level, and upward from the hospital level, to 17 regional health authorities (RHAs). Second, treatment was shifted out of hospitals to less-expensive delivery sites through shrinkage of hospital budgets and closure of hospital beds. Third, the scope of practice of individual health professions was shifted to allow utilization of less highly compensated workers in place of more highly compensated ones. Fourth, the government increased premium payments by the public. Revenue from this source rose from 11% of provincial health spending in 1993 to 16.2% in the last fiscal year. Fifth, the government attempted to expand the role of the private sector through a controversial foray into allowing extra-billing. The federal government responded by cutting $3.2 million dollars from the province's transfer payment. The provincial government has backed away from the private billing experiment, but continues to advocate for changes in the federal law to allow for such partial privatization of finance of the health system and continues to pursue other forms of privatization at the margin.

Reorganization

A key component of cost containment in the Alberta restructuring is the creation of the regional health authorities as the main institutions for administration. As indicated above, the RHAs represent both a decentralization of responsibility for administration from the provincial to the regional level, but also a recentralization of the previous system of individual hospital governance through boards at each of the 200 provincial hospitals. The decentralization of provincial-level functions to the RHAs was intended to allow streamlining of costs at the provincial level. The recentralization resulted in the elimination of a number of management positions on the former hospital boards. The result of these changes was that administrative staff levels and costs were reduced by 20% during the first year of RHA operation.

The recentralization through the elimination of hospital boards also provided a more favorable structural setting in which to accelerate the shift of treatment out of hospitals to less-costly delivery sites, such as clinics, outpatient surgery centres, long-term care facilities and home care. The trend out of hospitals had already begun in Alberta, as discussed in the next subsection. However the provincial government sought a much more rapid downsizing, including closure of some hospitals and the conversion of others to less-intensive care. With the elimination of the hospital boards and the shift of authority to the RHAs, a potential locus of opposition to such an accelerated shift was eliminated.

The RHAs were responsible for implementing the major reorganizational steps discussed below. There was latitude for each region to emphasize a different mix of cost cutting, but all regions were constrained by the severely reduced overall budgets they were given.

The establishment of RHA jurisdictions along geographic and political demarcations has raised problems in that the populace routinely crosses these boundaries for the actual provision of services, because tertiary care and specialists are not evenly distributed. Under the very constrained budgets assigned to RHAs when they began operating in 1995, regions had the incentive to shift treatment and thus cost to other regions where possible. Numerous changes in reimbursement arrangements and a major shift in the funding formula have already been required after two years of RHA operation.

A political debate arose early in the reorganization concerning the role and responsiveness of the RHAs, given their extensive power to allocate resources. The RHA members were appointed by the provincial government, and perceived to be beholden to it. Individuals employed or funded by the provincial health system were categorically excluded from sitting on the RHAs, and so the views of physicians, nurses and other workers in the system were not included in decisions. In response to political pressure, the government announced in the spring of 1996 that in the future, one-third of the authority members will be appointed by the provincial government and two-thirds will be elected in municipal elections to be held in 1998. Thus, the local democratic control will not become operative until the major elements of restructuring have been completed.

Shift out of hospitals

A shift in the locus of delivery of health care from hospitals to less expensive sites began in earnest in Canada in the early 1990s. As in other OECD countries, this shift was a correction in course from an overexpansion by hospitals (relative to population growth) during the previous decade and also a response to technological advances (such as laparoscopic surgery) which allowed an increasing number of procedures to be performed safely outside of hospitals, or with shorter hospital stays. These microeconomic forces of supply and demand, as measured by hospital bed vacancy rates, had begun to produce a contraction in the number of hospital beds; but vacancy rates still stood at about 30% in 1993. The increased macroeconomic pressure to contain health spending naturally focused on hospitals, which accounted for 58% of total provincial health spending. The new Alberta government sought to accelerate the contraction significantly to reduce the fiscal burden. Hospital beds were reduced by 25% during the first full year of the restructuring plan, compared to reductions of 11% and 6% in the previous two years. The government sought to reduce the number of hospital beds from 3.8 per thousand population to 2.4; that target was exceeded by late 1995, with hospital beds falling to 1.47 beds per thousand, a number lower than in any other developed market economy.⁽⁶⁸⁾ This overshooting of the target was probably a result of the severe contraction of RHA budgets compared to previous funding levels.

Further downward pressure was also put on numbers of admissions and average length of hospital stays. The government's three year plan for restructuring calls for a reduction of patient-days per thousand population from 1,083 to 745, which would make it the lowest ratio in Canada.

Changes in the skill mix of health care workers

The health care sector is highly labour intensive worldwide, with the majority of health expenditures going to professional fees and wages in most health systems. For Canada as a whole, the proportion of the wage bill has been estimated as high as 75% of total health expenditure.⁽⁶⁹⁾ The reorganization in Alberta targeted the skill mix of health care workers as another major area in which to achieve cost reductions. One target was the number of physicians, which had grown much more rapidly than the population during the 1980s. The outcome of negotiations between the government and the well-organized physicians appears to have been to maintain a steady state for the near future and to reduce medical school graduates over the longer term.

Initial efforts to shift work to lower skilled and lower paid workers were constrained, because regulations govern the scope of practice of each professional discipline. Among the professions governed by scope of practice regulations, the following changes have been made: nurses were allowed to provide extended health services normally performed by physicians in areas of sparse population, which were deemed underserved; a midwifery programme was begun; and optometrists' scope of practice was extended. In institutional settings such as hospitals and nursing homes, the assignment of tasks is typically determined by management, with scope of practice constraints operating only as outer limits to potential task assignments. As a result, the effort to lower the wage bill was particularly concentrated in such facilities. Nursing tasks which did not require nurses with degrees or diplomas (based on existing scope of practice laws) were increasingly assigned to licensed practical nurses and nurse aides. The number of registered nurses working in Alberta, most of whom work in hospitals, dropped by 43% between 1992 and 1995.⁽⁷⁰⁾ The government also undertook a longer term effort to modify scope of practice regulations to enable future skill mix changes. A Workforce Adjustment Program was created as a joint initiative of employers, unions and government, which included a Health Workforce Rebalancing Committee and funds for assistance to displaced workers.⁽⁷¹⁾

Overall, health employment in Alberta declined from 62,785 in 1993 (before the reorganization), to 58,248 in 1994 and to 51,639 in 1995, a decline of almost 18% in two years.⁽⁷²⁾ Through March of 1996, 4,500 of the displaced workers had received assistance through the Workforce Adjustment Program.

Increased premium payments

A significant objective of the reorganization was to shift costs from the government to the private sector. The primary mechanism was to increase premium payments required of all households, with a goal of raising the share of overall revenue generated by premiums from 11% before the reorganization to 20%. General premiums were increased by about 25% over two years, to a level of Can$408 per year for individuals and $816 for families. The elderly population (over age 65), which had previously been covered by the system without making premium contributions, was now required to pay the standard premium, with need-based subsidization of the premium available to them on the same sliding scale previously available to the general population. The result has been that about 55% of the senior population receive full or partial premium assistance (compared with about 12% of the non-senior population), while 45% of the elderly now pay full premiums. Premium payments overall rose to 16.2% of total revenue for the health system over two years, an increase of 47%.⁽⁷³⁾

Experiments with privatization

As noted above, the Canadian health system is maintained as a single, public payer plan by federal legislation that penalizes provinces which allow providers to bill consumers (or third parties) for any additional payments for services covered by the public health system. Any such extra billing is effectively discouraged by a dollar-for-dollar deduction from the federal contribution to the provincial plan. One thrust of the Alberta restructuring was an attempt to skirt the restriction by allowing private clinics to charge users directly for what were termed "facility fees", in addition to the payments made by the provincial plan for medical procedures. These fees, which in some cases amounted to 80% of revenue for the clinics which charged them, in effect allowed more affluent consumers to bypass waiting lists in public facilities which did not charge such fees. While billing for non-medical service enhancements (such as televisions and family observation rooms) was allowed under the existing system, the facilities fees, by virtue of their extent, encompassed a significant portion of medical costs as well. The federal government responded by cutting the full amounts charged as facility fees from the federal transfer payment to the province. After a standoff of several months during early 1996, the Alberta government backed down and agreed to pay the fees out of the public health budget. Subsequently, the Ministry of Health issued guidelines for the future that prohibit private clinics from charging patients for any medical or medically related services covered by the public plan. The new guidelines also prohibit providers from allowing faster access to medically required services by patients who purchase optional "educational and hospitality" services such as videotaping and refreshments.⁽⁷⁴⁾ The issue of user fees continues to be debated at the federal level, with Alberta and some other provinces arguing for a relaxation of restrictions while most provinces and the Canadian Ministry of Health oppose changing the current policy.

Other small-scale efforts to privatize parts of the health sector have also been undertaken. An effort to accelerate contracting out of hospital functions previously performed by public employees was temporarily turned aside by a wildcat strike, discussed in the next subsection. Two hospitals in rural areas recently decided against a proposal to lease portions of the hospitals to a Canadian firm which would have used the space to treat privately paying patients from the United States. One RHA agreed to privatize cardiac rehabilitation services, formerly performed in a public facility, to a private, physician-owned clinic. Each of these proposals has encountered opposition, sometimes substantial, from coalitions of opponents who fear that a growth in the private health sector will gradually undermine the public system by drawing resources away from the public sector.

Evaluation of the effects of restructuring

Categories for analysis

As in the previous case-study, the Alberta restructuring will be analysed first in terms of the process of reform and the degree of participation by the affected parties. The outcomes will then be examined with respect to the impact on the economic efficiency of the health sector, the budgetary repercussions for government, the results in terms of equity and quality for consumers of health care and the effects on employment, wages, working conditions and labour unions in the health sector.

The process of restructuring

The restructuring of the Alberta health system was designed and carried out by the government of Premier Ralph Klein, elected in 1993 on a conservative, deficit reduction platform. During the autumn of 1993 the government convened a series of "round table" discussions around the province about the health system and a set of proposed reforms. The round tables were open to the public, but a number of unions boycotted them, asserting that the decision for deep funding cuts had already been made. The round tables were asked to focus on broad outlines of reorganization. Perhaps through a process of self-selection, the participants generally endorsed the idea of reforming the system to lower costs, reduce waste and hold providers accountable. One pivotal task the government put before the round tables was to provide input in defining "core services" which would continue to be covered by the publicly funded system. This definition could then be used to identify services which were not part of the core and which might be de-insured or otherwise privatized. No such consensus was developed through the round tables, however, and eventually this approach was dropped. The specific plans for reorganization of the health sector were drawn up by technical and political advisers within the new provincial government and announced in 1994. The initial changes were primarily administrative and perhaps as a result there was not a negative reaction from most constituencies. The Alberta Medical Association (AMA) raised concerns about the extent of the budget cuts and the reorganization early in the process. But the public saw the physicians' concerns as somewhat self-serving, particularly since the AMA was involved in negotiations over fee schedules and the government sought significant rollbacks.⁽⁷⁵⁾ Physicians pressed for a role in the regional health authorities; the government refused to give them voting seats on the RHAs, but agreed to a consultative process between the appointed bodies and local physicians' associations. Physicians became involved in the restructuring process in some regions.

The RHAs began to function in early 1995 with sharply constrained budgets, and began to downsize and close hospitals, causing concern among health care workers and unions. Because of the budget cuts, large numbers of staff were retrenched, including frontline staff such as nurses. The AMA fee negotiations had dragged on and become increasingly confrontational. In October 1995 the organization launched a public campaign, "Tell us where it hurts", which included radio and newspaper advertising about the effects of the budget cuts on the health system. A group of hospital laundry workers took the first direct action by unionized workers when they waged a wildcat strike in November 1995 over a plan by the Calgary Regional Health Authority to contract out their jobs to the private sector, although they had previously accepted wage cuts of 25-40% to avoid that outcome. Other unions, reacting both to the perceived inequity of the laundry workers' treatment and their own mounting concerns about cutbacks, staged a support walkout. The AMA also came to their defense, and the press and public were broadly supportive of the strike.⁽⁷⁶⁾ The laundry workers were given a one year extension of their employment.

Layoffs continued, and as a result waiting lists for health services lengthened; for example, the wait for urgent coronary bypass surgery grew to nearly ten weeks, three times the average wait in Canada as a whole. Some regional branches of the AMA began to describe the situation as a crisis, particularly in densely populated areas where the regional funding formula had produced the most severe budgetary contractions. By 1996, two years into the reform, a negative public reaction began to gather force. Polls showed that the cuts in the health system and hospital closures worried a majority of the population.⁽⁷⁷⁾ Employers, who were not opposed to the general thrust of the reforms, began to fear that the result would be to shift costs to them, as the province cut back some of the health services covered by the public plan.⁽⁷⁸⁾ The federal government had withheld funds, as noted above, in response to the provincial decision to allow private clinics to charge facility fees; this caused further public concern.

Beginning immediately after the laundry workers' strike, the provincial government began to add funds back into the system, apparently convinced that cuts had been too deep in some areas. About $90 million, or 2.5% of the total budget, was restored. In May 1996 the cabinet was reshuffled and the Minister of Health who had overseen the cuts was replaced. The provincial government reached an agreement with federal health officials to end the practice of facility fees.

The political process was confrontational, rather than cooperative; but it led to a degree of accommodation by the provincial government, which faced elections in the spring of 1997. In November 1996 a number of revisions to the restructuring process were announced, with the central change being an increase of an additional 5.6% in funding for 1997 and 1998. Some of the increase in funds was specifically earmarked to hire 1,000 nurses and other front-line staff. Future funding will be distributed on a new population-based formula which will also take into account age, gender and social and economic health risk of the covered population, in an attempt to redress inequities which had become apparent between regions after the restructuring.⁽⁷⁹⁾

It is fair to conclude that there is not yet a strong consensus on the future direction of health reform in the province. The newly re-elected Klein government continues to push for privatization at the margin. The opposition to any privatization which could encroach on the single-payer system is fairly broad and includes unions and many in the academic community. The process of change in Alberta will probably proceed through a process of confrontation and correction for the foreseeable future.

Economic efficiency

The Canadian health system, including that of Alberta, has addressed the issue of cost containment and efficiency primarily through the use of monopsony bargaining power over providers of services. For example, physicians' fees, as noted, are negotiated collectively with the AMA. Hospital funding has been based on global budgets for all services, with the institution bearing the risk of meeting the budget. The Alberta experiment with facility fees posed a threat to this system because of the potential that a privately-paid health sector, outside the effective cost controls of the public system, would put upward pressure on hospital and clinic charges, professional fees and salaries. Because of the decisive action by the federal government, however, the Alberta restructuring did not proceed on this front, and so the integrity of the single payer system was maintained.

Overall, it seems likely that there have been efficiency gains as a result of the restructuring, given that actual spending cuts of 10% in nominal terms (about 14% in real per capita terms) were achieved, measured from the pre-restructuring peak expenditure of 1992-93 to the augmented spending levels announced in November of 1996. The magnitude and speed of these cuts is itself testimony to the power of a single payer system to control spending.

The data for a microeconomic analysis of efficiency gains is not yet available, but certain aspects of the reforms seem likely to dominate any gains, given their share in overall health spending. These include the shift of treatment out of hospitals to less expensive settings, physician fee reductions, the reductions in staffing levels, and administrative efficiency gains.

The shift of services to less expensive settings has probably been the most important factor in increased efficiency of the system, although at least temporary gaps emerged in the coverage and availability of care in some of the lower cost delivery settings. Provincial and RHA budgets did not expand expenditure for lower cost services and institutions commensurate with increased demand, given the speed of the shift out of hospitals. In some cases what at first appear to be efficiency gains may turn out to be cost-shifting to individuals. For example, pharmaceuticals are covered only for hospitalized patients. As hospital stays are shortened, pain and other medications may become the responsibility of the patient. Gaps in home care and long-term care can shift burdens to family members and others, which can result in opportunity costs and efficiency losses for society through lost work time and other effects, offsetting the gains from reduced health budgets. (These gaps were among the main reasons for public concern about the shift of services out of hospitals; they were partly addressed in the series of funding increases after November 1995 and particularly in November 1996.) Premiums for private insurance covering health services not included in the public plan have been rising, a further indication that some shifting of costs is under way.⁽⁸⁰⁾

The reduction in staffing levels may turn out to combine both efficiency gains and efficiency losses. Gains could result from health care employees working either more effectively or simply harder across a broader skill range. On the other hand, given the labour intensity of health services, the quality of care may suffer. There is some indication that infection levels in hospitals are rising as both nursing and housekeeping staffs have been cut.⁽⁸¹⁾ There is also the possibility that spending on workforce skills, physical infrastructure and maintenance have been cut in ways which will only become apparent as efficiency losses in the longer term.

Other structural reforms now being addressed could contribute to greater efficiencies in the future. These include discussions with the AMA on moving from fee-for-service to a capitation-based allocation mechanism and greater emphasis on primary and preventive care. Both the fee-for-service mechanism and an inadequate emphasis on primary and preventive care have been factors impeding efficiency in the existing health system in Alberta and so these changes can be expected to yield efficiency gains.

Effect on government

The initial budget goal of the Alberta government was to reduce nominal spending on health care by 20% over several years. Actual spending cuts reached a peak of 12.5% in the 1995/96 fiscal year, compared to 1992/93, the last full fiscal period before restructuring began. However, after the negative reaction began to mount about overly deep cuts in the sector, spending for 1996/97 was restored to a level which was only 10% below 1992/93 levels. (The original target for 1996/97 spending was a reduction of 17.8% from 1992/93 levels.) The nominal 10% cut is approximately 14% in real per capita terms.⁽⁸²⁾ While the reduction in health spending has been moderated considerably from the original targets, the government has nonetheless achieved substantial reductions in actual dollars spent and has at least temporarily stopped the earlier growth path of government health expenditure. The targeted budget for 1999/2000 will equal the 1992/93 budget in nominal terms and will be considerably lower in inflation adjusted and per capita terms.

Effect on equity and quality for consumers of health care

The degree of equity which existed in the Alberta health system prior to the restructuring appears to have been marginally worsened by the reforms to date. The major threat to equity, the use of facility fees, was reversed in the face of adamant resistance by the federal government. However, the increase in premium payments as a share of funding reduces equity compared to the tax-based revenues the premiums replace. Although need-based subsidization of premiums is available, it is limited, with full subsidy available only to those with incomes well below the officially defined poverty level. As the flat rate premiums have increased, the poor and near-poor are paying a larger share of health care costs. The extension of premium payment requirements to retired beneficiaries for the first time may have had a slightly pro-equity effect, to the extent that high-income retirees are now contributing more. The weakness of the subsidy system, however, extends the inequities affecting low-income households to low-income retirees as well.

In terms of quality, waiting lists increased, as already noted. Some critical surgeries such as heart, cancer, transplant and neurosurgery were delayed. The government tacitly acknowledged claims by the AMA and others that clinical guidelines covering acceptable waiting times were exceeded and, as a result, increased risk was incurred by affected segments of the population.⁽⁸³⁾ Hospital infection rates may be rising, as noted in the subsection on economic efficiency above. The shifting of care out of hospitals was not accompanied by sufficient funding for provision of care in lower cost settings, such as long-term care facilities, community clinics and home care. The quality of convalescent care has probably suffered both through excess demand on existing capacity and the shifting of some care to family members in the home.

Effect on employment, wages, working conditions and labour relations in the health sector

Employment

As discussed in the subsection on p. 26, overall health employment was reduced by 11,146 employees during the first two years of restructuring, a reduction of about 18%. These reductions will be offset to a limited degree by new funding (announced in November 1996) for 1,000 additional front-line staff positions, primarily nurses.

Nurses and other health professionals have participated in the Health Workforce Rebalancing Committee, established by the provincial government to involve the affected disciplines in drafting new legislation on professional regulation, scope of practice and related issues as part of the restructuring plan. Some unions took part in the committee, while criticizing the funding cuts and other policies of the restructuring.⁽⁸⁴⁾ One legislative proposal which has emerged from the committee (without unanimous support) would allow licensed practical nurses to give medications, do physical assessments of patients and initiate intravenous therapy, tasks which currently must be performed by a registered nurse.

As already noted, the Workforce Adjustment Program provided assistance to 4,500 workers through March 1996.

Wages, working conditions and gender impact

Nearly all health care wages were reduced by at least 5% during the first year of the reforms and have been frozen since. (An exception occurred recently as one of the nurses' unions, the United Nurses of Alberta, won wage increases above inflation levels for each of the next two years, after long and difficult negotiations.) Lay-offs have resulted in heavier workloads for remaining employees; in some regions and hospitals these workloads have led to claims that the quality of care, health and stress levels of providers and the health system itself were approaching crisis level.⁽⁸⁵⁾ The number of safety complaints filed by nurses and patients in Alberta hospitals nearly doubled between 1995 and 1996.⁽⁸⁶⁾

With respect to the gender impact of employment changes, there have been concerns that, as higher skilled duties have been shifted to lower paid classifications in which women predominate, gender discrimination in the wage structure may have increased. On the other hand, if physicians duties are shifted to nurses, this could represent longer-term gains for female-dominated occupations, if wages increase to match the broader scope of practice and skill levels. The current salary freeze, lay-offs and heavier work loads for nurses may adversely impact entry into the profession. This may also set the stage for later wage gains due to nursing shortages, which would repeat the pattern which occurred in the 1980s, when nursing salaries increased dramatically. Since nursing is the largest single category in health employment, the forces buffeting nursing jobs will have a substantial impact on overall health care wage levels, working conditions and gender equity.

Unions and labour relations

Labour laws in Alberta are less favorable to unions than in most other Canadian provinces, reflecting the long-standing conservative orientation of provincial politics. Partly as a result, union density in Alberta is the lowest in Canada. Strikes by hospital employees are not permitted under the provincial labour code. Those strikes which have occurred, including one by nurses in 1988 and the recent laundry workers' strike, have been undertaken without legal protection. There are eight unions in the health sector in Alberta, with three representing nurses, two representing various professional and technical classifications and three representing support and some technical classifications.

The health care reforms introduced by the current government have posed numerous challenges to the unions, including lay-offs, facility closings and concessionary bargaining over pay. All of the unions agreed to the "voluntary" 5% cut in pay requested by the Klein government, although some resisted more than others. The unions have made efforts to coordinate their activities regarding the restructuring, and were notably successful in their combined support for the laundry workers' strike. The strike played an important role in galvanizing public opinion to a consensus that the funding cuts were too deep. Unlike the AMA, the laundry workers were not seen by the public and media as special interests guarding high incomes at the expense of the system.⁽⁸⁷⁾

The reorganization of the Ministry of Health and individual hospitals into the RHAs has posed a new problem to the unions, as bargaining units were combined in the newly configured administrative and service delivery structures. As result, unions have been forced to face new representation elections in bargaining units which combined workers from two or more existing units. In at least one case, workers who had previously been organized lost representation through the administrative reorganization without an election. In Edmonton, health care employers requested that the provincial Labour Relations Board collapse all existing bargaining units into five functional units, which would lead to extensive new elections between current union representatives. Some unions have challenged the "winner-take-all" election approach. They are proposing instead that co-representational bargaining councils of the unions with current representation rights be established and recognized and that transfer arrangements, protecting seniority rights, be agreed to for workers. Hearings on the employers' request are underway and may set the pattern for the province.

6. Restructuring and privatization of health service delivery
by Los Angeles County (USA)

Overview

Unlike the Chilean and Canadian health systems, the United States has never had an integrated national system for the provision of health finance or health services to its population. Instead, a highly plural system exists, without central direction or oversight. Finance is provided by a combination of private, employment-based insurance (which is not mandatory), individually purchased insurance, out of pocket payments by consumers, a federal insurance programme for the elderly (Medicare), a state and federal joint programme for those in poverty who also meet other categorical qualifications (Medicaid), state and local programmes in some jurisdictions which serve as a provider of last resort for the uninsured poor and private charity. The delivery system is organized at the local level and is mainly private, although some large urban governments operate public delivery systems. In the private sector, non-profit hospitals and nursing homes have been the norm, but for-profit corporations are gradually taking over a larger share of many local markets. Physicians traditionally have been organized as for-profit individual or group practices, but they are now joining integrated private service delivery systems at a rapid pace.

The United States spends a far higher share of its income on health care than any other nation, amounting to over 14% of GDP in recent years, despite the fact that about 15% of the population is uninsured. The high level of spending is generally attributed to the fragmented multiple-payer system, the predominance of the fee-for-service payment mechanism until very recently, the incentives of third-party insurance coverage and the rapid diffusion of new technology.⁽⁸⁸⁾ Health spending increased more rapidly than general inflation during most years in the 1980s and 1990s. An attempt at the federal level in 1993 to integrate and universalize the finance of health care failed after a vigorous negative lobbying campaign by affected groups, notably private insurance companies.

About 42% of health spending in the US is covered by public budgets, through Medicare, Medicaid and local government programmes. As the rate of growth of the US economy slowed in recent years, public deficits increased in part because public health spending continued to grow rapidly. For example, Medicaid, the joint federal-state programme for the poor, was the fastest growing component of state budgets by the end of the 1980s. As a result of these forces, public health programmes have come under increasing pressure in federal, state and local government budgets.

Los Angeles County, which is the largest urban governmental jurisdiction in the USA, operates the second largest public health system in the country. The system provides a health care safety net for the poor and uninsured and, through the operation of emergency and trauma services and public health programmes, for the citizens of the county at large. Four university-linked teaching hospitals are among its six hospitals. The extent of the system reflects both a state-level mandate, which requires all California counties to provide for the health of their indigent populations, and a long-standing civic and political consensus in Los Angeles to do so. However, in recent years a combination of factors have put enormous strain on the LA County health system.⁽⁸⁹⁾ These include the general pressure on federal, state and local contributions to health care already discussed; in California, the pressure has been exacerbated by a restrictive tax policy mandated by a ballot initiative in the late 1970s (Proposition 13) which put sharp restrictions on property tax increases. A severe recession in southern California lasted for most of the first half of the 1990s, further reducing revenues and increasing the number of unemployed and uninsured, who depend on the public system. A continuing influx of immigrants from Latin American, Asian and other regions swelled the rolls of the uninsured. It has been estimated that as many as 25% of those served by the LA public health system are undocumented immigrants.⁽⁹⁰⁾ Further increasing demand, there have been sharp increases in the number of cases of tuberculosis and AIDS in recent years. Finally, an earthquake struck the area in 1994, causing damage to a number of the county's health facilities; affected hospitals and clinics are in need of expensive repairs or rebuilding to meet seismic standards for the future.

Against this backdrop of expanding demand, the county experienced a particularly large budget deficit in 1995. The deficit was in significant part a reflection of cutbacks or caps on federal transfers to state and local jurisdictions for health care and immigrant services.⁽⁹¹⁾ At the same time, the structure of finance of Medicaid at the state level was changed. In order to contain health spending by the State, the government of California had been proceeding with plans to convert most coverage of recipients under the state Medicaid plan (Medi-Cal) from fee-for-service payments to a managed care basis. This conversion was to include LA County by the end of 1995. Under managed care, the State would provide a single capitation payment for each Medi-Cal recipient to an integrated plan (such as an HMO) which would provide all of the individual's health care. The LA County public system would now be forced to compete with private managed care plans for Medi-Cal funds.

The large county budget deficit and the change in the Medi-Cal financing mechanism created a crisis in the LA public health system. The county government responded by proposing a variety of cost-saving measures, including the closure of the largest public hospital and many clinics. That proposal met strong resistance from a range of stakeholders, including advocates for the poor and immigrant communities which use the system, unions representing the workers in the public system and a range of public health and political forces. After several months of a political process which included both confrontation and participation, and crisis-driven efforts to find new sources of finance and ways to reconfigure the public system, a compromise approach was achieved which averted the closures. The compromise outlined a plan for a fundamental restructuring of the system, with a shift in emphasis from hospital-based and curative care to outpatient and preventive care through the reduction of hospital beds by one-third over five years and a 50% increase in the volume of outpatient care over the same period. As a result of intensive political lobbying by the county, the major union representing county health workers and other interested parties, the restructuring plan drew in additional federal funds. The funds were agreed to by the federal government on the basis that the restructuring would serve as a demonstration programme which other jurisdictions might emulate. The plan includes the privatization of delivery of some health services which the public system had previously provided and the expansion of outpatient care through private providers.

Background

The LA County health system provides health care to the 2.7 million county inhabitants who are uninsured, and to 30% of the 1.8 million Medi-Cal recipients in the county. The system has suffered from an imbalance between the demands it faces, which include primary and preventive care for the uninsured population, and its supply of resources, which are heavily concentrated in in-patient hospital facilities. This imbalance partly reflects incentives in financing mechanisms from the federal and state governments, which have provided payments to hospitals which were not available for out-patient use. Those incentives began to change at the state level only recently (through the Medi-Cal shift to managed care) and have not yet changed at the federal level except for experiments such as the present case.

As the USA has sought ways to control health cost escalation in recent years, the use of managed care has become the dominant paradigm for achieving cost containment.⁽⁹²⁾ Unlike the fee-for-service allocation mechanism, which had been the norm in the US system, managed care schemes provide a single capitation payment to providers, which shifts the financial risk for greater volumes of care from payers to providers. The capitation system creates an incentive for the provider to deliver care less expensively. At its best, this approach leads to more primary and preventive care, while at its worst it leads to denial of necessary care. Curative care is delivered in the lowest cost setting feasible. These incentives lead to lower hospital utilization and greater demand for out-patient facilities.

The move to managed care has proceeded very rapidly in the US private sector over the last few years, especially in employment-based insurance plans. In the public sector, States must seek a waiver from the federal government in order to use Medicaid money to pay for managed care programmes, which are considered to be demonstration projects to inform future policy choice for the programme as a whole. Such a waiver allowed the California government to make the changes in Medi-Cal referred to above.

As the State moved toward a capitated system, private managed care providers began to compete aggressively to insure the Medi-Cal population. The result for LA County was the impending loss of state revenue which had previously paid for hospitalization of Medi-Cal recipients in county facilities on a fee-for-service basis. The need was clear for a restructuring of the county health system to provide a more integrated delivery system with greater emphasis on preventive care and greater provision of services in outpatient and community settings both to ensure adequate health coverage to the large uninsured population and to be able to compete for state funding for Medi-Cal recipients. The county had operated a small managed care programme for a number of years, but the resource structure of the system and the high-risk client base (including many homeless individuals) kept the programme at a small and struggling level. Beginning in 1993, the county and other providers of care to the indigent community began to draw up plans for a larger network which would combine their operations to provide integrated services (and compete for Medi-Cal capitation payments) in several parts of the county. These plans were called into question in 1995 when the county's budget shortfall led to the proposals for closure of important parts of the public infrastructure.

The closures that were proposed provoked such public alarm that a "Health Crisis Task Force" was quickly appointed by the elected body which oversees the county government, the Board of Supervisors. After a preliminary review, the Task Force concluded that "if the County were to permanently eliminate the services under consideration, it would endanger all members of the population, create conditions of great societal unrest and potentially lead to a public health emergency."⁽⁹³⁾ (It should be noted that the county had experienced serious riots in many of its poorest sections only three years earlier.) The report also concluded that a shutdown of any of the county hospitals which serve as trauma centers for the general population would be difficult if not impossible to reverse and would put such pressure on remaining hospitals that the entire emergency system would collapse.⁽⁹⁴⁾

Restructuring and privatization

The severity of the situation mobilized actors in the county government and health system, as well as constituent advocacy and health policy communities and unions representing the employees in the county system. There was a broad consensus among these parties on two points. The first was that the solution to the crisis had to be built around the restructuring of the system toward integrated, out-patient-based care. The second was that the only hope for obtaining adequate funds to reconfigure the system was at the federal level. The federal administration, under President Bill Clinton, favoured public health systems, while at the state level the administration of Governor Pete Wilson favoured downsizing of government in general and in particular opposed public funding of any assistance to immigrants, including health care.⁽⁹⁵⁾ However, any exception to existing funding arrangements required both federal and state participation and approval because of the joint nature of the Medicaid programme. The county government, with support from the key actors identified above, sought a waiver from the federal government for a sub-state level demonstration project which would draw in additional federal money to stabilize and reorient the LA system toward integrated care. The federal government, while eager to avoid the crisis of a collapse, was equally concerned that the Los Angeles system be thoroughly restructured so that additional funding would not serve simply as a short-term bailout, prompting similar requests from other jurisdictions. Eventually a waiver was approved and additional funding was granted for a restructuring which combines continued public finance with a mixed system of public and private service delivery.

The new structure can be analysed by distinguishing between changes made in the organization of the supply of health care services and the changes in the way demand for health care is organized.

Reorganization of supply

The shift in relative supply of hospital and out-patient services is quantified in a goal of expanding out-patient care by 50% over five years while reducing hospital beds by one-third, as noted above. A related but distinct objective is to change the orientation of out-patient visits from single purpose, disease-related visits to preventive and primary care. The shift to primary care will be discussed further as part of the reorganization of demand.

A significant portion of the expansion of primary care facilities will be accomplished through contracts with private health care companies to operate public facilities or to provide services in their own facilities. The decision to privatize was in part a recognition that the county system did not have the capacity to increase out-patient care and shift its orientation so extensively in so short a period. It was also an accommodation to political forces which advocated privatization as a means to achieve greater efficiency through private management. Now in the second year of the restructuring, the county has contracted with private providers to expand the number of primary care sites from 39 before the budget crisis to 107. Of the 39 public health centres which existed before the restructuring, eight are now privately operated and five are operated jointly by the county and private providers. The new sites were selected to improve geographical coverage in the county as well as to increase the number of out-patient visits overall by 250,000 annually. The first round of contracts, with private organizations selected to operate county-owned clinics, have gone to non-profit providers who were already established in the communities where they have taken over county operations.

The county began to reduce hospital in-patient supply by eliminating beds in five of the six public hospitals. Midway through the second year, beds had been reduced by about 20%. The county is also proceeding with a plan to privatize its two smallest hospitals, one a rehabilitation hospital (with a reputation as an innovative and high quality facility) and the other in a relatively remote part of the county. These steps would largely achieve the reduction in in-patient beds called for in the restructuring plans and meet the conditions of the waiver, without sacrificing the four large teaching hospitals and their emergency services, which are an essential part of the public safety net.

Reorganization of demand

The restructuring also attempts to change the way demand for health care is managed. This aspect of the reorganization can be separated into two components: demand by the uninsured population and demand by those covered by Medi-Cal, with its new managed care requirements.

For the uninsured, the shift to greater availability of primary care is in part an effort to reduce demand for hospital and emergency room services. Because the public system in Los Angeles has provided care mainly to the uninsured population, the utilization of emergency rooms is more extensive than in health systems where most of the population has economic access to basic health care. In addition, the county system is the provider of last resort for undocumented immigrants. Under current law, federal and state funds cannot be used for their care except in emergency situations and for prenatal care and delivery.⁽⁹⁶⁾ The perverse incentive is created to delay care until health problems become emergencies. For both ethical and efficiency reasons, the county has maintained a policy of providing primary care to undocumented immigrants at its own expense.⁽⁹⁷⁾

Restructuring is intended to expand access for the uninsured to primary care providers by increasing the supply of primary clinic services, through better geographical distribution of sites and through greater language and cultural sensitivity of providers. Hospital and specialty clinic staff now direct patients back to primary clinics whenever appropriate. Experience with underserved populations elsewhere suggests that expansion of supply of primary care will be dominant in determining whether emergency and hospital utilization can be reduced through lower demand. Progress on providing rationally managed health care to the large group of undocumented immigrants is extremely problematic for the public system, given the current status of federal and state law limiting their access to publicly funded services.

For the Medi-Cal insured population, management of demand will be more direct, as a result of the county's participation in the state-managed care programme. Under the state plan, an increasing proportion of Medi-Cal beneficiaries are required to enroll in one of two managed care plans made available to them. One of the managed care options must be public and the other, private, reflecting the compromise between competing ideological approaches. The county will lead a consortium of local providers as the public plan in the Los Angeles area, and a private provider, Foundation Health Plan, was awarded a contract by the State to provide the private alternative. State and federal funds from the Medi-Cal programme are allocated on a capitation basis to the plan selected by each Medi-Cal recipient. In the county, 1.2 million of the 1.85 million Medi-Cal beneficiaries are required to be in managed care plans once they become operational in the spring of 1997. The public consortium has agreed that at least 25% of those enrolled in the public plan will be assigned to the county's managed care plan in order to protect funding for the county health safety net.

Evaluation of the effects of restructuring and privatization

Categories for analysis

As with the other case-studies, the process and degree of participation in privatization will be considered, followed by an analysis of the impact on economic efficiency, government, consumers, the health care workforce and unions.

The political process

The announcement by county executives of planned hospital and clinic closures in response to the county budget crisis in June of 1995 prompted a public furor. The most vocal opposition came from unions representing county workers in the health system and from community, public health and immigrant advocacy groups. The largest affected union, Service Employees International Union and its affiliated Local 660 (SEIU) organized a coalition of affected groups and staged frequent demonstrations, one-day strikes at facilities targeted for closure and a television and radio campaign against the cuts. While the tone of the activities was often confrontational, the opponents of the cuts also began lobbying at the state and federal levels for additional funding for the system. After the report by the Health Crisis Task Force, there was increasing overlap and convergence of the political efforts by the county and the coalition in seeking the Medicaid waiver from the federal government as well as other sources of revenue from the State. When President Clinton announced the decision to grant the waiver and additional funds to the county, he singled out the union as a critical actor in the process and called for the involvement of the union in the implementation of the demonstration project with respect to its impact on employment and health care workers.⁽⁹⁸⁾

Economic efficiency

The restructuring and privatization have significant efficiency consequences for both finance and delivery of health care in the county. The financial structure of the LA system combines a funding stream from county, state and federal governments to pay for care for the uninsured and for those eligible for coverage under Medi-Cal. Government funding for health care for the uninsured has become more efficient as a result of the waiver, since it allows federal and state funds to be used for out-patient and preventive care to a greater degree. This should produce a more efficient allocation of health resources to less costly levels of service delivery and produce social benefits through prevention of more serious and costly illnesses. Despite progress, there is still a bias toward hospital-based care in some aspects of the federal and state funding mechanisms, which will constrain efforts to continue to shift toward primary and preventive care.⁽⁹⁹⁾

With respect to the Medi-Cal insured population, the efficiency effects are more complex and less certain to produce a better allocation of resources. The state's "two plan" model is designed to shift the majority of beneficiaries into managed care; it is further meant to set up competition between the public and private health sectors for those patients, thereby theoretically increasing incentives for efficiency. However, there is the danger with managed care that the private firms will engage in risk skimming, seeking the healthiest, least costly Medi-Cal beneficiaries and shifting the high-risk, high-cost population to the public plan. This would drive up the per capita costs in the public system, while diverting state and federal revenues for part of the Medi-Cal group from the public system to private plans. There is already evidence of private plans targeting recruitment of young mothers who are eligible for Medi-Cal and their children, while leaving the elderly, homeless and AIDS patients to the public plan. The state plan partially addresses this problem by prohibiting door-to-door marketing. Under previous state rules, private plans sent marketers, often paid on a commission basis, into low income communities to enroll Medi-Cal recipients. The system has been widely criticized for fraud and abuse, with misrepresentation of the plans and aggressive risk skimming by marketers. The new system will require a balanced presentation of the two choices, presented by a neutral agency contracted to make the presentations. Beneficiaries who do not make an affirmative choice will be assigned to the public plan, an effort to protect some portion of the financing stream to public systems and thus to help preserve public safety nets.

The diversion of public health funds to private managed care plans may also reduce the overall efficiency of health resource allocation by reducing funds available for public health functions, such as immunization, prevention and other epidemiological activities. The AIDS epidemic, the resurgence of tuberculosis in Los Angeles (as in other urban areas of the US in recent years), an increase in food-borne infections and other public health risks make this potential problem a serious one.

The level of reimbursement set by the State for Medi-Cal managed care participants raises another complex efficiency problem. Both private and public providers claim that the proposed rates are too low to ensure the success of the plans. The rates are lower than those currently paid to managed care providers under Medi-Cal. The new lower rates reflect a programme requirement that managed care rates be lower than average fee-for-service rates, in order to realize savings. Because of the high penetration of managed care plans in California, fee-for-service rates have been competed down to levels that are among the lowest in the nation. The previous higher Medi-Cal reimbursement rates sometimes exceeded equivalent fee-for-service costs, leading to criticism of the entire thrust of efforts to force more Medi-Cal recipients into managed care. This conundrum reflects a broader concern among health analysts that the managed care model may already be approaching its limits as a cost-saving paradigm.⁽¹⁰⁰⁾ The Clinton administration is also seeking to reduce the formula for managed care rates paid by the Medicare programme for the elderly, which is expected to lead to cost shifting to other payers. Cost shifting was a dominant problem in the US health system before the growth of managed care, and it appears that the new paradigm will not solve this problem as long as managed care functions in a system of multiple payers.

Effect on government

The federal funds injected into the Los Angeles public health system as a result of the demonstration project are required to be "budget neutral" for the federal government over the five years of the project. That means that federal outlays will not exceed what would have been available under the traditional hospital-based funding rules. The ability to use funds formerly restricted to inpatient care should help finance the transition to an out-patient, preventive approach to care for the covered population. Theoretically this will allow the county to provide equivalent or better health care at lower cost and therefore to meet the increasing demands it faces within its stringent revenue constraints. As has been discussed above, however, there are numerous reasons for concern about the practical attainment of these goals, including the competition for Medi-Cal patients, the danger of risk skimming by the private managed care alternative, the capitation rate levels set by Medi-Cal and the intrinsic difficulties of providing adequate, ongoing primary care to a population at risk because of poverty, homelessness or immigrant status. Despite these daunting challenges, the county programme has proceeded aggressively under a new public health administration to pursue the restructuring. It has been particularly determined in the expansion of primary care through contracts with private providers, private-public hybrid arrangements and the impending privatization of two hospitals. The county now believes that the progress cannot be sustained if certain structural problems which contributed to the crisis are not addressed. These include the constraints on raising revenue (such as the limitation on property tax increases and a state-mandated diversion of county resources to some formerly state-funded education costs), the cutbacks in funding for services to immigrants and the growth in the number of uninsured. The latter group has increased as more new jobs are temporary, part-time or in low wage industries which do not provide employment-based insurance.⁽¹⁰¹⁾ It should be noted that 2.1 million of the 2.7 uninsured in Los Angeles County are employed or live in the household of an employed worker.⁽¹⁰²⁾ These structural problems will remain even if the difficult problems of health system design can somehow be resolved. In addition, changes to federal welfare policy adopted in 1996 will limit the amount of time that recipients can receive welfare payments and associated benefits such as health care. This will very likely increase the number of uninsured, as parents and children who were covered by Medicaid lose this benefit.

Effect on equity of health care

Under the Medi-Cal programme, as with Medicaid generally, recipients must meet not only means tests but also certain categorical qualifications. The largest eligible categories are single parents (overwhelmingly mothers) with dependent children (68% of recipients), the elderly poor (13%), and the blind and disabled (15%).⁽¹⁰³⁾ Nationally, 60% of the poor below the poverty line are excluded from coverage, including the working poor. Undocumented immigrants are now categorically excluded from Medi-Cal coverage. Thus, even among the poor there are serious inequities in access to health care under federal and state programmes. A key objective of the restructuring is to achieve efficiencies, through the shift to preventive care and less expensive delivery of services, in order to afford greater coverage of the uninsured population. Additional improvements in equity can be expected from the enhanced geographical penetration and efforts to reduce language, cultural and transportation barriers to service. The overall thrust of the reform has been to increase equity in the system. However, the sustainability of this progress is a serious concern, as discussed in the subsection on the effect on government below.

Effect on employment, wages and working conditions in the health sector

The LA county health system had a workforce of about 24,000 employees before the reforms, with about 75% of them employed in the six hospitals of the system. The federal funds made available to Los Angeles as a result of the demonstration waiver allowed the county to avoid the shutdown of any hospitals. But the elimination of hospital beds and other downsizing efforts have led to about 2800 lay-offs during the first two years of restructuring. The privatization of two hospitals will affect several hundred additional employees.

SEIU negotiated an agreement with the county whereby employees in the public system have the first right to jobs created when private employers take over county facilities or establish expanded operations to serve beneficiaries of the public system. The agreement requires that the new private employers recognize the union or remain neutral in organizing efforts by the workers in the new units. If a majority of employees in a new unit come from the county workforce as a result of the preferential hiring agreement, the union must automatically be recognized as the bargaining agent. In cases where there is not a majority of former county employees, union representation elections are to be held under expeditious arrangements which are superior to labour laws which would otherwise govern and the employer, as noted must remain neutral, something not required by US labour laws. When recognition of the union is achieved through either process, a right to bargain is established, but not the terms of employment. Wages, hours and working conditions must be negotiated with the new private employers. In the county system, all workers are organized, largely in one union, and so they are in a position of bilateral monopoly with the county in negotiations over salaries and conditions, giving the union substantial power. By contrast, as parts of the delivery system are privatized, the jobs created have been in small establishments in a largely unorganized sector. This will tend to put downward pressure on wages and working conditions.

The waiver from the federal government required that the county develop a human resource plan to address staff retraining and placement for the reconfigured health care delivery system. As a result of the union's efforts to help secure funding from the federal and state governments, the new county health administration readily agreed to union involvement in designing the plan. While previously there had been no system-wide training programme, such a plan will be put in place by 1998.

7. Lessons from the case-studies -- Comparisons and conclusions

As countries both rich and poor continue to search for ways to organize health care for maximum efficiency and equity, common issues repeatedly emerge. These include the proper roles of the state and the market in financing and delivering health care; how to organize institutions and incentives to optimize the allocation of health resources between competing applications; and the interaction of employment and labour relations with restructuring. Having examined the experiences of Chile, Alberta and Los Angeles, we now turn to a comparison to draw lessons on these pivotal issues. We will also consider the importance of the political process and participatory mechanisms in achieving satisfactory health systems.

The roles of the State and the market in the health sector

The governments in the three cases were each driven, at least in part, by a desire or need to cut public spending on health. A reduction in government spending will necessarily shift some of the burden of health care to private payers, and result in some degree of passive privatization. In the cases of Chile and Alberta, the fiscal motivation was accompanied (or driven) by an ideological belief that the role of government should be reduced, including in the health sector. In both cases there was active privatization as well as passive, although in Alberta the effort was largely reversed by the federal authorities. These cases thus combined budget reductions with political and social experimentation. In the case of Los Angeles, fiscal concerns predominated. The restructuring was a practical adaptation to a fiscal crisis, without a change in political philosophy. The assumption before and after restructuring was that, in a market-oriented system like that of the USA, the government will be left with the responsibility to care for the poorest and least healthy segments of society.

The lessons of Chile, Alberta and Los Angeles demonstrate that both the State and the market have certain strengths and certain tendencies to failure which affect their performance in particular roles in the health sector. These cases confirm experiences elsewhere and the predictions of theory that the State is better suited to organize the finance of health systems than the private sector. As to the organization of delivery of health services in the cases considered, both states and private markets had successes and failures. The relative advantages of State or market depended on a variety of factors, especially on the allocational mechanism selected.

The advantage of the State as the organizer of finance stems from two characteristics of the sector: first, the critical importance of the size and universality of the risk pool and second, the advantages of a single payer. Both of these have proven determinative in achieving cost efficiency. The State is the only entity large enough to achieve a single risk pool and to act as a single payer. Market-organized finance will cover only that portion of the population able to pay premiums or direct user fees (as seen in Chile). The uninsured may receive some health care in the market, but only if the costs can be shifted to other private payers (such as larger employers, as in Los Angeles) or to public payers (as in Chile and Los Angeles). Cost shifting produces inefficient allocation and economic distortions: there are higher costs for those private employers who do provide insurance and especially for the government (evident in Los Angeles and Chile).

Market-organized finance also results in inequity, both for those who have no access to health care (in the USA) and for those in government programmes who receive inferior quality care with long waits because of risk shifting and cost shifting to the government (as in Chile). As more of the Chilean system is privatized, the public sector may increasingly resemble the difficult situation in Los Angeles County, where the poorest and least healthy segments of society those most in need of health care are the responsibility of a system which has rigid limitations on its ability to secure funding and little ability to redistribute health funds between various income groups.

Turning to the fiscal burden on the State in publicly organized systems of finance, the Chilean case is instructive. The privatization and restructuring did not ultimately accomplish the goal of reducing the fiscal burden for health. Public spending today as a percentage of GDP is as high as in the late 1960s and early 1970s, when an integrated public system provided nearly universal coverage. Despite the level of fiscal effort, the quality of care in the public system (still 75% of the total system) is low. The earlier cuts left a deficit of infrastructure and human resources which must now be made up. In the USA, a predominantly private system of finance has been a major factor in producing the costliest system of health care in the world, which consumes a percentage of GDP which is 50% higher than in the average OECD country. This burden falls on government, on employers competing in international markets and on individuals. Although government shoulders only about 42% of the total burden of health finance in the USA, its costs are driven by the dominant multiple payer system; strenuous efforts at cost containment have had limited success. The latest paradigm for cost containment, managed care, may have already reached the "flat of the curve" in reducing cost escalation, as indicated in overall health inflation data and the experience of managed care pricing in the Medi-Cal system.

In Canada, a political and epistemic consensus exists at the national level that the public system of finance is superior to market finance. Because of this consensus the attempt in Alberta to move in the direction of privatization of finance was quashed. This prevented a break up of the risk pool and the single payer system. Maintaining these structures meant that the provincial government retained the ability (albeit against its initial wishes) to restore and realign funding when it was determined that spending cuts were too deep in some areas. The province also maintained its ability to control costs through monopsony purchase of services. By contrast, once finance is partially privatized, as in Chile, the ability to marshal health resources and to correct inefficiencies and inequities is severely constrained. The further the system of finance is privatized, the more the ability to manage these issues in a systematic way passes out of the control of government, without any suitable successor to assume the role of manager.

A further important concern regarding the role of the State and the market lies in the area of political economy. Once finance is fully or partly privatized, private health insurance companies become important political actors in the system. Attempts at reform or redistribution must contend with the interests of the insurers. Private health insurance markets tend to be oligopolistic because of the need for large capital reserves, large risk pools and other factors. This means that insurers have both the resources (from rents) and the ability to organize themselves effectively (because of the relatively small number of market participants) to aggressively resist any changes in the health system which will adversely affect their interests. The defeat of the Clinton health reform effort in the USA in 1993 was above all a product of efforts by the insurance industry. In Chile, the ISAPREs became a formidable political force and have successfully blocked both major and incremental reforms which would restrict their profitability.⁽¹⁰⁴⁾

Allocation mechanisms

There is general agreement that fee-for-service allocation mechanisms lead to higher costs and overutilization of health care because they give providers the incentive to furnish more services and they place all of the cost consequences (risk) on the payer. Where the payer is a third party, such as a private insurer or the government, the consumer has no incentive to constrain costs or consumption of services. In such a system, extensive and sophisticated oversight is required to monitor utilization and outcomes in order to establish optimal cost-benefit relationships in the volume of health interventions provided. These problems are evident in the Alberta system and in the US. In the public system in Los Angeles, the allocation mechanism was also distorted by funding incentives for greater hospital use and disincentives for primary and preventive care.

Capitation systems shift the risk of rising costs to the provider. This approach is the key to cost containment mechanisms now being adopted in Los Angeles and Alberta. The danger with capitation systems is that providers have the incentive to restrict even necessary care in order to stay within capitated budgets or, in the case of for-profit private providers, to increase profits. This may produce cost shifting in the short run and worse health outcomes in the long run. Capitation systems require effective public oversight to prevent denial of necessary care and to encourage optimal levels of preventive care. After the failure of the Clinton health reform in the USA, private markets moved quickly to capitation payment systems (the allocation mechanism in the Clinton plan) but without any of the regulatory oversight and payer coordination which were part of the reform package. As the public has been pushed into managed care, primarily by their employers, there has been a strong negative reaction to the constriction of care. Legislative, referendum and judicial initiatives have multiplied in the last three years. For example, numerous state legislatures and then the US Congress enacted laws requiring managed care plans to provide at least two days of hospital stay for maternity delivery. A similar move is now sweeping the country to require the plans to allow hospitalization for radical mastectomies, which have been performed on an out-patient basis in many of the new capitation plans. This is clearly a cumbersome and inefficient way to regulate the health sector and to allocate its resources. Adequate regulatory institutions were not created and as a result, the public has sought voice and oversight in whatever institutions are at hand. If the USA has not yet been able to achieve efficient oversight of capitation systems, it will also be difficult for developing countries to establish the institutional capacity to regulate them. The experience in Chile with oversight of the ISAPREs has been very problematic to date, with continuing public dissatisfaction with rates, profit margins, extra charges for services and denial of coverage and care.

In integrated public systems, as in the public sector in Chile or Los Angeles, the allocation through central planning and budgeting allows redistribution, but also introduces rigidity and perhaps bureaucratic inefficiency. Such systems have been criticized because they tend to function as bilateral monopolies between the government and the unions representing workers. In Chile, this criticism has limited relevance, because of the weakening of the unions under the military government and the resulting drop in wages and working conditions over fifteen years. Public sector salaries and conditions are below those in the private health sector, so the notion of bilateral monopoly cannot be considered a source of cost inefficiency. In Los Angeles, the unions were more powerful than in Chile but were still constrained by a number of forces in their ability to increase wages. Among those factors was a weak public sector labour law which denied public employees the right to strike, a largely unorganized private health sector in Los Angeles, which kept downward pressure on wages in the local health labour market and the ongoing budget crises of the county throughout the early 1990s.

The political process and participation in health care reform

An important lesson emerges from the comparison of the three cases regarding the role of political participation by consumers and workers in the process of health care reform. The degree of political participation in each of the three countries produced quite different results. In Chile and Alberta, reforms were motivated by a desire to cut government budgets and by a neo-liberal belief that the role of the government in health should be reduced. Because of repression in Chile under the military regime, widening discontent with the reforms was suppressed and distortions caused by the restructuring were allowed to continue and become entrenched. When civilian government returned in 1990, the newly restored political space was used by the public to express strong discontent with the restructured and partially privatized system. There was wide consensus that the system was in need of repair. Funding has consistently been increased during the ensuing years. However, as noted above, serious reform of structural distortions in the health system has been constrained by the political power of the ISAPREs and further undermined by the diverging interests of the 25% of the public who are now in the segmented risk pools. In Canada, by contrast, the political process at the provincial level led to a partial reversal of funding cuts within three years of the restructuring. At the federal level, the attempt at privatization was turned back, based on an existing national political consensus. Democratic institutions in Canada produced both a quicker correction in course and more stringent constraints on the latitude for privatization of health finance.

The reforms in both Chile and Alberta were social experiments, which arose from a change from one governing ideology (and related economic assumptions) to another. The experiments were undertaken in a sector which has a direct affect on the quality of life and economic well-being of the population. The speed with which the public reacted to changes that were unpopular differed depending on the extent of democracy and the degree of political participation. Thus political institutions had a significant effect on the resulting health sector institutions and on the level of public finance for health.

In the case of Los Angeles, the affected segments of the public the poor, welfare recipients and undocumented immigrants were in a weak position to use democratic institutions to defend their interests. However, the unions adopted a policy of supporting restructuring as a means to save both the health safety net for their clients and as many of their own jobs as possible. There was also a network of institutions advocating for public health, the poor and immigrant communities, and they combined their efforts with those of the unions. Given the depth of the county's budget crisis, the structural difficulties impeding a restructuring of the system and the ideological position of the state government in favor of downsizing government and cutting off health benefits to undocumented immigrants, it is reasonable to conclude that without the active political role of the union and coalition, the outcome probably would have been the closure of a major hospital and a serious crisis of the public health and trauma system in Los Angeles.

Employment

In each of the three cases, employment in the health sector declined as a result of privatization and restructuring. Over time, employment levels in Chile have recovered, but are still lower than in the early 1970s. It would be tempting to think that the lower employment is an outgrowth of productivity gains. But the poor overall quality and long waiting lists of the public sector, combined with the high escalation of costs in the ISAPRE sector suggest otherwise. It is more likely that the employment reductions simply translated into less health care, with differential results for different income groups and lost progress in raising overall health levels. In Canada, the employment loss was roughly as steep as in Chile, and occurred in a shorter period of time. But the overall ratio of health care workers to population is roughly five times greater in Alberta than in Chile, and so the effect on the public has not been as severe. There may be productivity gains in Alberta as a result of the reorganization and future changes in scope of practice, which may partially offset the cutbacks in health personnel. Lay-offs in Los Angeles have been less extensive proportionately than in either Chile or Alberta, reflecting in part the different ideological origins of the restructuring. Given the excess of demand over supply of health services among the uninsured in LA, there will be a need for employment growth if the structural problems limiting finance can be overcome.

Beyond these general observations about overall employment effects, there are several specific points regarding the skill mix of health care personnel which are worth noting. The physician mix of general practitioners to specialists is an area in which efficiency gains and cost containment can be achieved in most health systems, given the role of generalists in cost effective primary and preventive care and the fact that they are less highly compensated. In Canada, the ratio of generalists to specialists is approximately 50/50; in the USA overall it is 20/80, although in Los Angeles the ratio is about 40/60, reflecting the greater penetration of managed care in the area; in Chile, the ratio is 25/75. There are also large efficiency gains to be realized by shifting some physician duties to nurses, especially in the case of primary and preventive care. Nurses are undersupplied in Chile, reflecting the long period of declining real wages and the deterioration of working conditions. While labour markets will eventually respond to these misalignments, the functioning of these markets is quite imperfect because of long training times. For example, in the USA as a whole, specialists salaries are being driven down by the reorganization of delivery from fee-for-service to managed care and the resulting reduction in specialist utilization. However, there continues to be a shortage of general practitioners. Medical school entrants today will no doubt respond to these market signals and the ratio will shift. But the results will not be felt for six or more years. There is also a pronounced tendency to overshooting in health labour markets. The ability to achieve an optimal skill mix requires overall planning and intervention in training, which can only be accomplished by the government, since individual professions will confront different incentives than the health system as a whole. Scope of practice regulations are also an important factor in the optimal utilization of health personnel. It is important that these rules not be captured by affected groups at the expense of efficiency and equity in the overall system.

Conclusion

The cases explored illustrate and underscore three main lessons for public policy as reforms go forward in the health sector. The first and perhaps most fundamental from the point of view of government is that the most effective structures for achieving both efficient and equitable use of the society's health resources are the establishment and maintenance of the largest possible risk pool and the establishment (and maintenance) of a single payer or well-coordinated groups of payers.

The second lesson is that the allocation mechanism must be constructed and supervised in such a way that the incentive for individual consumers and providers is aligned as closely as possible with overall health policy goals. These incentives must reward an integrative approach to preventive and curative care. Getting the incentives for consumers and providers right may have more of an impact than whether the delivery system is public or private as such.

The third important lesson to emerge from these experiences is that health care labour markets require at least some active management to achieve optimal results.

Judging the overall success of health care systems is difficult. The ultimate test of the efficiency of health expenditure is the health enjoyed by society. But health outcomes are the product of many factors in addition to health spending, and the effect of changes in health care may not be evident until years later. The impact of restructuring of health finance and delivery systems and levels of spending can only be judged over long periods. If serious mistakes are made, the consequences can harm a society for decades, or even generations. Some changes create new political economic contexts, where powerful actors prevent corrections in course, even after deleterious results from earlier policy choices are clear. These considerations point up the importance of careful analysis before restructuring and privatization of health care systems are undertaken. The lessons of Chile, Alberta and Los Angeles can contribute to a better understanding of the factors involved.

Notes

1. Organization for Economic Co-operation and Development. 1996: OECD in figures: 1996 edition. Paris, OECD, pp. 48-49.

2. Ramesh Govindaraj, Christopher J.L. Murray and Gnanaraj Chellaraj. 1995: Health expenditures in Latin America. World Bank Technical Paper No. 274. Washington, DC, World Bank, pp. 15, 38.

3. World Bank. 1993: World Development Report 1993: Investing in health. Oxford University Press, New York, p. 122. For poorer countries, this link is less clear, perhaps because of the multiple difficulties external to the health sector which typically affect their health systems and outcomes.

4. It is generally agreed that the private sector will not supply public health services (such as immunization and AIDS education) at the socially desirable level because they are public goods, meaning that non-paying individuals cannot be excluded from their benefits, or because they have important positive externalities, such as the control of epidemics, which cannot be appropriated by the private provider.

5. Other factors enter into wage levels and into decisions to enter a profession, of course. Some of these factors will be discussed in the case-studies.

6. An overview of the concerns of the ILO in the health sector, along with the relevant Conventions and Recommendations, can be found in "General Report: Standing Technical Committee for Health and Medical Services, First Session", 1992. Geneva, International Labour Organization Sectoral Activities Programme.

7. Calculated by Dagmar Raczynski and Pilar Romaguera. 1995: "Chile: Poverty, adjustment and social policies in the 1980s, in Lustig (ed.): Coping with austerity: Poverty and inequality in Latin America. Washington, DC, Brookings Institution, pp. 292.-293.

8. Various estimates are obtained from the following sources: David E. Hojman. 1993 Chile: The political economy of development and democracy in the 1990s. Pittsburgh, PA, University of Pittsburgh Press, p. 53; and Joseph Scarpaci. 1987: "HMO promotion and the privatization of health care in Chile", Journal of Health Politics, Policy and Law, Vol. 12, No. 3, p. 554. A fuller discussion of the problems of obtaining health expenditure data and disaggregating it into public and private components is included in the section on p. 20 and Note 40, below.

9. Cited by Hojman, op. cit., pp. 52-53.

10. See for example Raczynski and Romaguera, op. cit., p. 309; and Hojman, op. cit., p. 53.

11. Javier Martinez and Alvaro Diaz. 1996 Chile: The great transformation. Geneva, United Nations Research Institute for Social Development, pp. ix-x, 1-7; and Raczynski and Romaguera, op. cit., pp. 309-313.

12. Barbara Stallings and Philip Brock. 1993: "The political economy of economic adjustment: Chile, 1973-90", in Bates and Krueger (eds.): Political and economic interactions in economic policy reform: Evidence from eight countries. Oxford, Blackwell Publishers, pp. 82-83.

13. Calculated from work by Anamaria Viveros-Long (1982), cited in Joseph L. Scarpaci. 1988: Primary medical care in Chile: Accessibility under military rule. Pittsburgh, PA, University of Pittsburgh Press, p. 37.

14. Raczynski and Romaguera, op. cit., pp. 305-306.

15. Scarpaci (1987), op. cit., pp. 558-559; Scarpaci (1988), op. cit., pp. 41-45.

16. Statements of the National Planning Office (ODEPLAN), 1983, and the Ministry of Health, 1977, cited in Scarpaci (1987), op. cit., p. 557.

17. This figure includes both open unemployment and the portion of the population receiving subsistence payments through government emergency employment programmes, as calculated by Raczynski and Romaguera, op. cit., p. 284.

18. Patricio Meller. 1994: "Latin American adjustment and economic reforms: Issues and recent experience", in Solimano, Sunkel and Blejer (eds.): Rebuilding capitalism. Ann Arbor, Michigan, University of Michigan Press, pp 245-247, 268; Felipe Larraín and Marcelo Selowsky. 1991: The public sector and the Latin American crisis. San Francisco, Intemational Center for Economic Growth, pp. 128-131; Raczynski and Romaguera, op. cit., pp. 276-282.

19. The government assumed the cost of funding current pensions in order to convert the former pay-as-you-go pension system into a privatized plan based on individual accounts. Active workers' contributions went into these accounts and so were removed from the funding stream for current retirees. The resulting obligations assumed by the govemment amounted to almost 4% of GDP by the mid-1980s and almost 5% by the early 1990s. Patricio Mujica Riveros. 1994: "The Chilean experience", in Barreto de Oliveira (ed): Social security systems in Latin America. Washington, DC, Inter-American Development Bank, pp. 131-132.

20. Scarpaci (1988), p. 27.

21. Hojman, op. cit., p. 54.

22. ibid.

23. Market Opinion Research International, cited in El Mercurio, Mar. 3, 1996, p. B16.

24. Pan American Health Organization. 1994: Health conditions in the Americas 1994. Washington, DC, PAHO, Vol. 1, p. 316.

25. Martínez and Díaz, op. cit., pp. 11-18.

26. Paul W. Drake and Iván Jaksic: The struggle for democracy in Chile. University of Nebraska Press, Lincoln and London 1995, pp. 4-6, 188-189; Stallings and Brock. op. cit., pp. 84-85

27. Scarpaci (1987), p. 559. Because of deregulation and other economic policies, two-thirds of all capital in Chile was concentrated in six firms, which were closely aligned with the military government.

28. Larraín and Selowsky, op. cit., p. 135; Scarpaci (1987), pp. 564-565

29. World Bank (1993), op. cit., p. 162.

30. Calculated by Cristián Aedo and Osvaldo Larrañaga. 1994: "The Chilean experience", in Aedo and Larrañaga (eds.): Social service delivery systems: An agenda for reform. Washington, DC, Inter-American Development Bank, pp. 21-23.

31. ibid., p. 23.

32. Organisation for Economic Co-operation and Development. 1994: The reform of health care systems: A review of seventeen OECD countries. Health Policy Studies No. 5. Paris, OECD, pp. 106-107, 321, 325-327.

33. Hojman, op. cit., pp. 54-55. These figures refer to the majority of ISAPREs which are open in the sense that anyone willing to pay the premium can enroll. There are a smaller number of ISAPREs which are only available to employees in certain industries or certain employers, which naturally exhibit different pricing characteristics.

34. María Elena Etcheberry, Superintendent of ISAPREs, quoted in La Epoca, Apr. 24. 1996, p. 17.

35. Aedo and Larrañaga, op. cit., pp. 22-23.

36. Superintendency of ISAPREs, cited in Mujica Riveros, op. cit., p. 126.

37. The economic concept of pareto efficiency is an optimal equilibrium in which it is not possible to make anyone better off without making someone else worse off.

38. Raczynski and Romaguera, op. cit., pp. 292-293. It should be noted that much of the data on expenditures for health care is incomplete or not precisely comparable, because the interrelations between the public, quasi-public and private sectors are intertwined in complicated ways in Chile and have changed over the period studied. The figures used here were selected because they cover the entire period under review and because the authors had access to a variety of sources which would tend to correct inaccuracies in any single source. They are consistent with the broad trends shown in other data series. A discussion of the problems involved in health expenditure data collection in Latin America generally, including Chile, can be found in Ramesh Govindaraj, Christopher J.L. Murray, and Gnanaraj Chellaraj (1995), op. cit., pp. 1-4 15-20. These authors find a higher level of public spending in Chile in 1990, measuring it at 3.4% of GDP.

39. César Oyarzo, Eduardo Román and Gustavo Zuleta. Oct. 1995: Tendencias en el Financiamiento de la Salud Pœblica en Chile. Documento de Trabajo No. 36/95. Santiago, Chile: Corporación de Promoción Universitaria, p. 5. Another recent study by Carlos Montoya-Aguilar and Luis Marchant-Cavieres found somewhat more variation, with central governrnent contributions amounting to 61% of public health spending in 1974, 35% in 1989 and 44% in 1992. The high percentage of government spending for 1974 was probably distorted in part by the hyperinflation of 1973-74. It was also before mandatoly payroll contribution rates were increased from 4% to 7%. Carlos Montoya-Aguilar and Luis Marchant-Cavieres. 1994: "The effect of economic changes on health care and health in Chile." in International Journal of Health Planning and Management. Vol. 9, pp. 282-284.

40. The distinction between passive and active privatization is made in World Health Organization. 1995: "Technical briefing note on privatization in health". Geneva, World Health Organization. Unpublished document prepared for the WHO Task Force on Health Economics, p. 8.

41. Raczynski and Romaguera, op. cit., pp. 293-294.

42. ibid., p. 294.

43. Pan American Health Organization, op. cit., p. 126; Oyarzo, Román and Zuleta, op. cit., p. 6.

44. Montoya-Aguilar and Marchant-Cavieres, op. cit., p. 291.

45. Govindaraj, Murray and Chellaraj, op. cit., Appendix 9, p. 41.

46. ibid., Appendix 8, p. 40. For a discussion of possible determinants of the proportion of public to private spending by the authors of the World Bank study, see pp. 21-23.

47. Mujica, op. cit., p. 128.

48. Patricio Márquez. 1995: Chile: The adult health policy challenge. Washington, DC, World Bank, p. 8.

49. Marquez, op. cit., p. 141.

50. Aedo and Larra–aga, op. cit., p. 23.

51. Oyarzo, Román and Zuleta, op. cit., p. 18.

52. Aedo and Larrañaga, op. cit., pp. 25-27.

53. ibid., pp. 24-25.

54. World Bank. 1995: World Development Report 1995. Washington, DC, World Bank, table 30, p. 221.

55. ibid.; Raczynski and Romaguera, op. cit., pp. 286-288.

56. ibid., pp. 285-286.

57. Pan American Health Organization, op. cit, p. 125. Directly comparable figures for earlier periods are not available. But another analysis of FONASA data indicates that personnel costs accounted for about 50% of public health expenditures in the mid- 1960s, rising to about 60% in 1970, to 68% during the high inflation and indexed wages under the Allende government. Thereafter the share of personnel costs in health spending dropped sharply in 1974 and remained in the 50-55% range until the 1982 policy decisions to lower public salaries, referred to in the text. The source for this series of data is Scarpaci (1988), op. cit., pp. 34-36.

58. ibid.

59. Raczynski and Romaguera, op. cit., pp. 311, 314-315.

60. Piper Guthrie. 1996: "The public/private mix: A case sudy of the Chilean health care system." Unpublished paper prepared for the Department of Health Administration, University of Toronto, p. 27.

61. Aedo and Larrañaga, op. cit., p. 26.

62. Raczynski and Romaguera, op. cit. 324-326.

63. OECD (1994), op. cit., pp. 108-109.

64. OECD. 1993: OECD Economic Surveys, 1992-93 Series: Canada. Paris, OECD, p. 111.

65. Statistics Canada. 1995: National health expenditures, 1975-1994. Ottawa: Statistics Canada.

66. ibid., table 27.

67. Health Canada. 1994: National health expenditures in Canada 1975-1993. Ottawa, Health Canada, p. 10.

68. KPMG Management Consulting Ltd. 1996: "Health care system benchmarking". Vancouver: KPMG.

69. Douglas E. Angus. 1995: Sustainable health care for Canada. Ottawa, Queen's University of Ottawa, p. 98.

70. Alberta Health. Dec. 1996: Inventory of health workforce in Alberta. Edmonton, Alberta, Alberta Health.

71. Alberta Health. July 1996: Annual Report 1995-96. Edmonton, Alberta, Alberta Health, p. 12.

72. Alberta Health. 1996: Health workforce in Alberta 1993-1995. Edmonton, Alberta, Alberta Health.

73. Alberta Health: Annual Report 1995-96, op. cit., p. M-24.

74. Alberta Ministry of Health: "Guidelines for patient charges released", Government of Alberta news release, Nov. 7, 1996.

75. Alberta Medical Association. 1995: Annual Report, 1994-95. Edmonton, Alberta, Alberta Medical Association, pp. 2-4.

76. Anne McGrath and Dean Neu. Mar./Apr. 1996: "Washing our blues away: The laundry workers' strike", in Our Times, Vol. 15, No. 1, pp. 25-36.

77. Vancouver Sun, July 30, 1996, p. A5.

78. Benefits Canada. Feb. 1996: "Unhealthy situation: Cuts to Alberta's health care system are great for the province's bottom line, but what about the beleaguered employer who is picking up the tab?" Vol. 20, No. 2, pp. 53-54.

79. Alberta Health. 1996: Action on health. Edmonton, Alberta: Alberta Health, p. 5.

80. Richard H.M. Plain. 1995: "The role played by health reform in the re-inventing of government within Alberta". Paper presented to the Government Reinvented Conference in Banff Springs, Alberta, Oct. 22, 1995, p. 19.

81. Edmonton Journal. Aug. 19, 1996, p. A1.

82. All provincial government sources present data in nominal terms. The adjustments for inflation and population growth here and elsewhere are extrapolated from Plain (1995).

83. Review Team. Oct. 31, 1996: "Report of province-wide health services in Alberta". Edmonton, Alberta, Alberta Health,
pp. 3, 21; Alberta Medical Association: "The President's Letter". Edmonton, Alberta, AMA, Dec. 20, 1996.

84. An example is the Alberta Association of Registered Nurses. October 1995: "Response and proposal to the Health Workforce Rebalancing Committee -- Discussion Paper II", Edmonton, Alberta, AARN.

85. Examples are cited in numerous media reports, including: Edmonton Journal, July 26, 1996, Editorial and Al; Aug. 8, 1996, Al.

86. Alberta Federation of Labour. Aug. 1996: Labour News, Vol. 3, No. 6, p. 15.

87. McGrath and Neu, pp. 27, 29.

88. OECD (1992), op. cit., p. 326.

89. Michael R. Cousineau, et. al. 1994: "At risk: Los Angeles County, the health of its people and its health system". Los Angeles, The University of California at Los Angeles Center for Health Policy Research, pp. 3-4, 12-13, 17-18, 63-65.

90. There is no authoritative measurement of the coverage provided to undocumented immigrants. One source of difficulty is the problem of gathering information from a vulnerable group. Various studies have been issued, but each is disputed by academic, government or political groups. The controversy also stems from recent legislative and referendum initiatives to deny benefits to undocumented (and, in some cases, to documented) immigrants. Because of the political consequences, the studies are called into question for bias in one direction or the other.

91. Legislative Analyst's Office. July 11, 1995: "An overview and assessment of Los Angeles County's 1995-96 budget problem". Sacramento, California.

92. OECD (1992), op. cit., pp. 328-329.

93. Health Crisis Task Force. July 24, 1995: "Report of the Health Crisis Task Force". Los Angeles, County of Los Angeles, p.2.

94. ibid.

95. An anti-immigrant policy characterized important sectors of the Republican Party, both at the state level under Governor Wilson and in the federal Congress after 1994, when conservatives won majority control of both houses. As a result of various initiatives at the federal and state level, funding was not available from these sources for health care for undocumented immigrants except in emergency situations and child delivery. The county, by contrast, has maintained a policy of provided primary care to all indigent persons, regardless of their immigration status.

96. Health Care Financing Administration. Apr. 15, 1996: "Special terms and conditions: Medicaid Demonstration Project for Los Angeles County". Washington, DC; US Department of Health and Human Services, p. 9.

97. This policy would be disallowed under a recently passed ballot initiative in California. The effects of the initiative are currently stayed by a temporary court injunction. Further, two of the five elected members of the Board of Supervisors, the governing body of the county, have called for an end to non-emergency services provided by the county to undocumented immigrants.

98. US Department of Labor. Sep. 22, 1995: "Transcript of press conference by President Clinton".

99. County of Los Angeles Department of Health Services. Jan. 1997: "Medicaid Demonstration Project for Los Angeles County:Project Management Plan". Los Angeles, County of Los Angeles, pp III-37, IV-2, IV-3.

100. Milt Freudenheim: "Health care costs edging up and a bigger surge is feared", in New York Times, Jan. 21, 1997, p. A 1. The author cites a newly released study by Foster Higgins, a US benefits consulting film, which surveyed US employers regarding their health benefit premiums for 1997, which are again predicted to rise faster than general inflation. Other employers and analysts interviewed pointed to increasing cost shifting to private employers as government payers hold down their reimbursements to managed care plans.

101. County of Los Angeles (Jan. 1997), pp. II-1, II-3, IV-2. The county has the highest rate of uninsured among the thirty largest metropolitan areas in the USA.

102. For example, 70% of workers employed in agriculture or fishing in the country do not have employment-based insurance. In the garment, food processing, entertainment and constructions industries over 40% are uninsured. The University of California at Los Angeles Center for Health Policy Research. "Analyses of March, 1994 Current Population Survey". Cited in the Los Angeles Times, Oct. 30, 1995, p. 10.

103. OECD (1992), op. cit., p. 320. These figures are for the Medicaid programme nationally.

104. An example is given in a recent report by the Inter-American Development Bank: "Chile's efforts in the last few years to reduce the scale of adverse selection affecting the public health sector have been strongly resisted by private insurers." Inter-American Development Bank. 1996: "Special Report: Making, social services work" in Economic and social progress in Latin America: 1996 Report. Washington, DC, Inter-American Development Bank, p. 272.

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Updated by BR. Approved by OdVR. Last update: 28 September 2000.

AARN	Alberta Association of Registered Nurses (Canada)
AFL	Alberta Federation of Labour (Canada)
AIDS	acquired immune deficiency syndrome
AMA	Alberta Medical Association (Canada)
FONASA	Fundo Nacional de Salud (National Health Fund -- Chile)
GDP	gross domestic product
HMO	health maintenance organization
ILO	International Labour Organization
ISAPRE	Instituto de Salud Previsional (pre-paid private health insurance plan -- Chile)
LA	Los Angeles (USA)
Medi-Cal	California health assistance programme for the poor, funded by the state and US federal government (USA)
OECD	Organisation for Economic Co-operation and Development
PAHO	Pan American Health Organization
RHA	Regional Health Authority (Alberta, Canada)
SEIU	Service Employees International Union (USA and Canada)
SERMENA	Servicio Médico Nacional (National Medical Service for Employees -- Chile)
SNS	Servicio Nacional de Salud (National Health Service -- Chile)
SNSS	Sistema Nacional de Servicios de Salud (National System of Health Services -- Chile)
UNA	United Nurses of Alberta (Canada)
WHO	World Health Organization


Year	Per capita, 1992 pesos	Percentage of GDP	Year	Per capita, 1992 pesos	Percentage of GDP	Year	Per capita, 1992 pesos	Percentage of GDP

1970	21 601	2.9	1980	17 789	2.1	1987	18 213	2.3
1974	18 712	2.7	1981	16 152	1.9	1988	20 849	2.4
1975	14 498	2.6	1982	16 941	2.3	1989	20 614	2.2
1976	13 543	2.2	1983	13 479	1.9	1990	19 361	2.1
1977	14 650	2.2	1984	14 241	2.0	1991	22 440	2.4
1978	16 202	2.0	1985	13 745	1.9	1992	26 535	2.6
1979	15 952	1.8	1986	13 428	1.8	1993	29 149	2.7


Year	Total	Doctors	Dentists	Nurses	Midwives	Auxiliary Nurses	Transport and aides

1975	76 000	5 248*	n/a	2 550*	n/a	21 389*	n/a
1980	67 000	4 128	1 752	2 509	1 839	n/a	n/a
1985	62 000	6 063	1 886	2 737	1 990	23 557	14 108
1990	59 800	6 085	1 112	2 416	1 662	20 670	13 110
* = 1978. (Sources: Compendio Estadistico 1992; Scarpaci (1988)

Labour and social dimensions of privatization and restructuring : Health care services

Restructuring and privatization of health care services: Selected cases in the Americas by Sandra Polasky

Labour and social dimensions of privatization and restructuring :
Health care services

Restructuring and privatization of health care services: Selected cases in the Americas
by Sandra Polasky