Joint study by Roland Berger and the University of Bayreuth on hospital financing

• Survey among hospital associations, planning authorities, banks, medical devices providers and builders
• Public provision is insufficient to finance the necessary investments: investment shortfall of approx. EUR 50 billion
• From "dualistic" to "monistic" or single-source financing: Capital funding based on flat-rate per-building allocations will give hospitals more scope for investment than the former dual system, but won't solve all the problems
• Financing models involving industry partnerships or fundraising and factoring offer additional support

Hospitals represent the biggest single item in Germany's health service budget. The Federal Statistical Office puts government spending on hospitals at EUR 64.6 billion in 2007. Falling public spending will not be able to finance the urgently needed investments. The national federation of hospitals, the Deutsche Krankenhausgesellschaft, estimates that there is now an investment shortfall of EUR 50 billion. Länder governments and the federal government have the task of calculating a per-case value for investment by the end of 2009 – using a diagnosis-related group (DRG) remuneration system. This case-based approach to investment financing is to replace the present dual remuneration system in which capital costs and operating costs are granted separately. Trials of a regional monistic financing system in North Rhine-Westphalia have gone well. It gives hospitals in the state substantially more scope for responding to investment needs. The Chair for Business Administration at Bayreuth University and Roland Berger Strategy Consultants have analyzed alternative funding models and developed policy recommendations for government, hospitals and industry.

"German hospitals must find new ways of financing urgently needed investments. The available public resources will increasingly fail to keep hospital facilities state-of-the-art," says Dr. Joachim Kartte, Partner and head of the Competence Center Pharma & Healthcare at Roland Berger Strategy Consultants. Most hospitals have been in a financially precarious situation for many years. Costs are rising while revenues remain, at best, constant. The only way out of this dilemma is to have targeted investment initiatives. The challenge for the hospitals is no longer just to ensure operational efficiency and quality. They must also raise part of their own capital funding. The national hospitals federation, the Deutsche Krankenhausgesellschaft, estimates that the investment shortfall has already reached EUR 50 billion.

Monistic financing provides autonomy but no remedy

Hospitals have so far been funded by means of a dual financing system. "The funds to meet investments and operating costs are currently granted separately," explains Oliver Rong, a Partner at Roland Berger with specialist expertise in hospitals. "But this model is in crisis. As funding declines, public provision can no longer go anywhere near meeting the costs of technical progress. Flat-rate funding via a diagnosis-related group (DRG) remuneration system pushes up the investment requirements even further. And hospitals must invest in order to optimize service delivery with regard to overheads." A monistic financing system would roll flat-rate capital spending allocations into the DRG system of remunerating services. This would give hospitals more autonomy in the use of resources from 2012. It should result in increased competitiveness, higher health care quality and greater patient satisfaction. It can also enable advanced technologies to be put into hospitals more quickly. In North Rhine-Westphalia, the test case for a regional monistic system, the outcomes have already been positive. However, there is no doubt that the investment gap cannot be closed simply by changing the funding arrangements. The budget as a whole must be increased.

Hospitals are seriously underfinanced

"The central problem of inadequate funding cannot be resolved just by introducing a new allocation system," says Rong. "So hospitals must find alternative ways of paying for their capital investments." At present, they mainly use bank or shareholder loans. But, going forward, we will see a bigger emphasis on industry partnerships along with fundraising and factoring.

Partnerships and donations to inject cash

The fundraising market in Germany is stagnant, with more and more organizations competing for donations. Nevertheless, a professional approach can unlock significant contributions. "A clear advantage is that, unlike sponsoring, resources are provided without any trade-offs," says Kartte. "And industry partnership in particular can also help to overcome the investment shortfall and bring in external know-how. Technology partnerships offer advantages for industry as well as hospitals." For industry, they present opportunities to build long-term customer relations. For the hospital, they offer a path to acquiring state-of-the-art facilities along with servicing arrangements. "Factoring, in the sense of selling accounts receivable, can also positively impact ratings and credit negotiations with banks," adds Kartte.

Länder still responsible under the monistic system

The Roland Berger experts agree that government should switch to a monistic financing model and grant hospitals greater autonomy in their investment decisions. But important details still need to be fleshed out – above all the configuration of the per-case flat-rate investment allocations. As the hospital associations point out, adopting monistic financing does not release the Länder governments from their responsibility for hospital facilities. For their part, the hospitals must be open to alternative financing instruments so that they can invest from a position of strength. Rong: "The management of financing at German hospitals will in future be a more diverse and sophisticated task."