Observations on the Israeli Health System

Posted by

Paul Levy

First published 3/9/11 on [Not] Running A Hospital

As I share this view from my room in Tel Aviv after leaving theconference in Haifa, it is a good chance to consider the features of the Israeli health care system and draw some comparisons with that of the US. You can find a full description here, but let me hit the highlights as I understand them, based on discussions over the last two days.

Israel has had universal coverage for many years. It is provided by four HMOs, one with about 55% of the market, another with 20% or so, and the remaining two splitting the rest. The competition that exists is not based on price. Indeed, the cost of care is covered by a payroll tax and other government funding in the form of a capitated payment to each HMO based on enrollment. People are free to shift from one HMO to another as often as every two months, but only a very small percentage (well under 2%) shift each year.

Supplemental insurance, privately paid, is also available. However, the basic coverage offered to the population is very inclusive, and the supplement is for the small number of elective items that are not of great interest to most people.

The HMOs offer a strong primary care network and then contract with the hospitals for secondary and tertiary care. Some hospitals are owned by the HMOs, but many of the patients go to hospitals that are not owned by the HMOs. These are either government owned or are private, non-profits.

Now, as we explore transactions among these entities, it gets interesting. What is the process by which the rates for the government hospital are set with the HMOs, for the services purchased by the HMO out of its capitated budget? This is a negotiation in which the government is a participant. But recall that the government also owns those hospitals for which it is negotiating the rates with the HMOs. The HMOs are not permitted to joint together to negotiate with the government.

The government has also established uniform salaries that can be paid by HMOs to their executives and doctors. Even accounting for exchange rates and different standards of living, the salaries paid to doctors are well below those in the US. This is possible, in part, because the cost of medical education is highly subsidized by the government.

Finally, if any of these institutions — government hospitals or HMOs — runs a deficit, the finance ministry makes up the losses.

For those in the US hospital and physician practice world who are aghast at the idea of rate-setting, you find it here in a very interesting form. In essence, there is little in the way of market forces in place determining the level of financial transactions within or among the major entities providing health care services. And, the whole system is subject to a budget that is set, directly or indirectly, by the parliament.

Regular readers may recall observations I made a few years ago about the Icelandic health care system. There, too, the annual national budget for health care, as a percentage of GDP, was set by the parliament. I asked my Icelandic hosts the following questions and derived a conclusion:

Is this percentage based on a quantified assessment of the actual health care needs of the public, i.e., is it driven by public demand (e.g., a growing aging population)? No. Does it take into account the government’s expectation for certain quantifiable levels of service quality, medical quality, or operational efficiency of hospitals and other parts of the system? No.

In essence, this appropriation by the parliament is a politically derived decision, just as it would be for any appropriation for a program of important national priority, and it therefore competes with other worthy national programs for resources.

Such is the case in Israel, too.

It is instructive to compare the differences among these systems, and it is worthwhile to understand the trade-offs that have been made in each political jurisdiction. There is no right or wrong way to do this. The system in each country is a composite societal judgment call.

It is important to recall, though, that all developed countries face similar structural challenges for the future: An aging population that is living longer and demanding more in the way of hospital service; a rapid introduction of technological innovation in diagnosis and treatment that tends to increase the cost of health care; a greater expectation on the part of the public of the “rule of rescue,” i.e., devoting more and more resources to the more unusual, but emotionally charged, medical conditions; and a growing base of consumers/patients who are better informed through social media and who therefore have higher expectations of the services provided to them.

These trends intersect with the ability of a society to pay for them, and the bulls-eye for that intersection will be the hospitals. Why? Hospitals are capital-intensive and staff-intensive organizations. In essence, they are characterized by large fixed costs or by variable costs that are hard to vary very quickly. In competing for business, hospitals are prone to engage in the “medical arms race,” prompted by their doctors, companies who cleverly market expensive devices and equipment, and ultimately by patients who want the latest and best — even if clinical efficacy has not been demonstrated.

Hospitals also often have an overlay of responsibility for medical education, the costs of which cannot be easily shed, and many also engage in research for which they are not fully compensated.

In contrast, the HMOs in Israel or the multi-specialty physician practices and primary care groups here in the US have the most potential to change their ways of delivering service to get ever more clinically effective and cost-effective. For one thing, they are not burdened by high levels of fixed overhead. For another, they are better situated to use technology to deliver care more efficiently. For example, they can start to use home-based, remote reading devices to check on a congestive heart failure patient’s weight and other vital signs — or they might use other types of remote testing devices to review a diabetic patient’s blood levels and other metrics. These technologies, in the hands of primary care doctors, will enable patients to get the care needed in a low-cost setting and help avoid hospitalization.

The hospitals that succeed in the future will need to do everything possible to avoid incurring large increments of capital expenditures. To do that and otherwise minimize cost increases, they will also have to learn to engage in front-line driven process improvement (whether of the Lean variety or something else) to redesign their work flows. A strong emphasis on quality and safety improvement will also be a virtue rewarded over time. These latter steps do not happen without a strong commitment to transparency: You can’t improve unless you acknowledge where you are failing.

Paul Levy is the former CEO of a large Boston hospital. He writes on [Not] Running a Hospital.


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