SOURCES OF HEALTH CARE FINANCING

 

Introduction

The Financing eHealth study was commissioned by DG INFSO and Media, unit ICT for Health, with the aim to assess different financing opportunities against the financing needs of eHealth investment. The overriding goal of the study, and of this final report, is to assist Member States and the European Commission in their efforts to meet the eHealth Action Plan objective of "supporting and boosting investment in eHealth".

This report draws from the reports of previous stages of the project. It identifies concisely and comprehensively the possible approaches by the European Commissions to assist Member States in boosting eHealth investment. The report provides materials for Member States in response to challenges and opportunities regarding investment in eHealth. It includes a policy brief identifying individual challenges in supporting and boosting investment in eHealth and ways to address them.

Information sources

Information sources for the report are primarily face-to-face interviews, telephone interviews, desk research on literature and documents in the public domain and other EC studies, including:

       eHealth IMPACT: Study on economic and productivity impact of eHealth - developing a context-adaptive method of evaluation for eHealth, including validation at 10 sites - covering the whole spectrum of eHealth applications and services

       EHR IMPACT: Study on the socio-economic impact of interoperable electronic health record and ePrescribing systems

       Good eHealth: Study of best practice across Europe in providing innovative eHealth-related services

       eHealth ERA: Towards the establishment of a European eHealth research area - coordination of Member State innovation-oriented eHealth RTD as the basis for a common roadmap and joint RTD activities, thereby establishing an effective ERA

       Other reports and the two international workshops associated with the Financing eHealth study.

The first workshop was an expert workshop on Innovative approaches to financing eHealth solutions held at the World of Health IT conference, 25 October 2007, Vienna, Austria, provided initial input to the study. The second expert workshop, on Procuring for health benefits: critical factors for beneficial deployment of innovative eHealth and telemedicine services held at the World of Health IT conference, 06 November 2008, Bella Center, Copenhagen, Denmark, reinforced the conclusions from and added some new insights to other field work.

Report structure

This report is the final report to the study, and provides a concise yet comprehensive overview of the study findings. It addresses directly the overriding study goal of providing assistance to Member States and the European Commission in their efforts to meet the eHealth Action Plan objective of "supporting and boosting investment in eHealth". A critical aspect in efforts to boost investment in eHealth is to have a rigorous conceptual framework. This involves some understanding of what eHealth is and how it fits into the health delivery system, addressed in the first half of chapter. An eHealth investment is defined as expenditure on an eHealth solution and associated change management to achieve an improvement in healthcare quality, access, or efficiency. This study focuses on the financial aspects of eHealth investment, including the potential of financing as a tool to boost investments. Thus, section 2.3 defines the supply side of financing as the sources of funds for eHealth investments. Section 2.4 reveals a key finding of the study, which is a confirmation of the theoretical hypothesis that the amount of financing available alone is not the key challenge to boosting eHealth investment. Section 2.5 addresses the most crucial aspect of the conceptual framework: demand for finance for eHealth investment. The conceptual setting includes an analysis and structures of decision-making processes for eHealth investments, the role of eHealth in overall healthcare strategies and investment decisions, factors affecting the financial needs for different types of eHealth and general healthcare investment, and a generic illustration of these requirements.

Chapter 3 deals with various financing arrangements for securing the financial resources for healthcare investment in general and eHealth projects in particular. It provides a comprehensive treatment of ways to match the supply of and demand for eHealth investment financing from an investors perspective. The tools available to Member States to influence investment levels, in particular the conditions of subsidy and funding schemes, must be geared to and supported by these arrangements, accounting for the actual volume and type of demand for financing investments. An overview of such tools, in the form of a detailed list of different organisations and initiatives that provide financial support on regional, national, European, and international level is available in report D2.27 of the study.

Following the overview of arrangements facilitating the financing side of eHealth investment, organisational, managerial, and resourcing issues determining sustainability of eHealth investments are in chapter 4. The issues, critical to the goal of boosting eHealth investment, are addressing the perspective of all eHealth investment planners, including politicians and managers. The focus of the argument is on why eHealth does not take off. It is a fruitful way to identify actions that will boost investment in the future. Chapter 5 is devoted to a more hands-on support for healthcare managers, highlighting the skills and knowledge identified as critical, but often scarce. The scarcity of widespread skills and knowledge, as outlined in chapter 5, is the identified as being the main barrier to boosting eHealth investment across Europe.

Finally, chapter 6 presents a policy brief with recommendations for Member States and the EC on steps towards effective support of eHealth investment initiatives.

Conceptual framework of eHealth investments

Defining eHealth and eHealth investment

This study aims to assess financing opportunities to boost, protect and manage investment in eHealth. Achieving these needs a reasonable return on that investment, usually as some form of net benefit, and can only be achieved by investment in a combination of ICT and changes in healthcare. Together, ICT and changes in working practices can lead to potential benefits, and ideally, net benefits. In this context, an eHealth investment is defined as expenditure on an eHealth solution and associated change management to achieve an improvement in healthcare quality, access, or efficiency. eHealth investment includes ICT and the resources needed to achieve the changes and improvements in health and healthcare that lead to net benefits. This definition enables the consideration of financing opportunities for eHealth investment alongside competing claims for finance for other beneficial investments in healthcare, such as new assets and new drugs. Consequently, eHealth is more than just the implementation and use of ICT in healthcare.

There is no consensus yet on any particular definition of the term eHealth. Even between documents issued from organs of the EU, the definition of eHealth varies. The "Action Plan for a European eHealth Area" defines and describes eHealth as the application of information and communications technologies across the whole range of functions that affect the health sector. eHealth tools or solutions include products, systems and services that go beyond simply Internet-based applications. They include tools for health authorities, healthcare provider organisations (HPO) and healthcare professionals at all levels, as well as personalised health systems for patients and citizens. Examples include health information networks, electronic health records, telemedicine services, personal wearable and portable communicable systems, health portals, and many other information and communication technology-based tools assisting prevention, diagnosis, treatment, health monitoring, and lifestyle management. Similarly, but not identically, the Ministerial Declaration at the EU Ministerial eHealth 2003 conference in May 2003 in Brussels pronounced that "eHealth refers to the use of modern information and communication technologies to meet needs of citizens, patients, healthcare professionals, healthcare providers, as well as policy makers".

If we allow "ICT-based tools assisting..." to mean much the same as "use of modern ICT to meet needs of...", then the main difference in structure between these examples is the way the definition refers to the domain of healthcare. This is a critical issue. In one case reference is made to healthcare processes as "... diagnosis, treatment, health monitoring...", probably with the intention of implying all healthcare processes; in the other case the reference is to individuals and organisations as "... patients, healthcare professionals, healthcare providers..." possibly with the intention of implying all healthcare stakeholders. The eHealth definition for this Financing eHealth study is consistent with these two references that refer ICT being used and ICT assisting. The core is that eHealth investment includes the resources needed to use and realise the benefits from ICT. General trends in eHealth enhance this wider perspective. It started in the 1980s with mainly administrative applications, such as patient administration systems, to the current century, where ICT, such as Picture Archiving and Communication System (PACS), that has a direct impact on improving quality and cost-effectiveness at the point of care, and telecardiology, that leads to a new healthcare model that can improve quality, access and cost-effectiveness of healthcare. Now, ICT can be an integral component of healthcare, hence eHealth.

Today, eHealth mostly assists processes as an external contributing element. This underlies the general position that modern eHealth is not yet widely recognised across the whole healthcare sector as a significant, integrated part of health policies, strategies, and delivery. This comprehensive investment context needs addressing, so the definition adopted for the Financing eHealth study is:

eHealth is ICT-enabled change in health services

The healthcare value system and its actors

Healthcare policy makers and strategists will have to devise ways to deliver increasingly complex services to meet increasing demand and expectations for the promotion and maintenance of health, and an expanding range of direct treatments and healthcare. Healthcare delivery processes need radical transformation10, supported by and making use of the latest ICT and recognising the reality of increasing consumer influence, probably leading to increasing demand for more personalised healthcare. Healthcare systems constantly evolve to provide a wider range of services, emphasising improvements in health and healthcare, and regarding citizens as independent consumers who can be both inside and outside healthcare services, rather than patients who are within the responsibility of healthcare professionals, especially doctors. Exhibit 1 shows a schematic model of health and healthcare processes depicted as a healthcare value system.

The generic core consists of interrelated value chains of individual health service providers, in economic terms producing health: promoting good health, providing healthcare and long-term care with the healthcare value chain. Supporting processes and tools connect to this value chain to create the total healthcare value system. Only as a system of integrated processes, can they lead effectively to healthier, or less ill, citizens.

An eHealth vision for this health value system is to invest in a way that the journey, and experience, of the citizen as they pass through the system is improved with increasing net benefits, and that healthcare professionals will have access to the data, information and knowledge they need to fulfil their role effectively and appropriately. So, eHealth investments, such as interoperable electronic patient records (EPRs), will be used to improve both the processes through the value chain, and the supporting care pathways, and enable citizens and healthcare professionals to take effective decisions between available choices.

Health promotion, as the first element in the core healthcare value chain, refers to the citizen provided with given reliable materials to enable them to exercise life-style choices in a way that improves, or maintains their health. Examples are information on appropriate action to avoid bird flue, the composition of a healthy diet and the importance of tetanus vaccination. Responsibility rests with the public health function, healthcare professionals and citizens themselves. Prevention of illness is included as a part of health promotion.

Diagnosis is the determination of the nature of a disease or injury. It can be clinical, and made from the study of the signs and symptoms of a disease; differential, by determining which of two or more diseases with similar signs and symptom is the one from which a patient is suffering; or laboratory, and made by chemical, microscopic, bacteriologic or biopsy study of secretions, discharges, blood or tissue; or derived from images, such as ultrasound and scans. Each type of diagnosis fits alongside details of patients medical and health histories. It is an activity often shared between hospitals, general practitioners (GPs), specialists, and laboratories. EPRs and personal health records (PHR) are key supporting and guiding tools in this process, particularly connected to, and integrated with, decision support systems, ePrescribing as part of wider computerised physician order entry (CPOE) systems, and evidence-based medicine tools.

Three different generic, but in reality often overlapping, forms of medical intervention may follow diagnosis if treatment are:

       Therapy is the medical or other healthcare, such as nursing and physiotherapy, treatment of illness, probably acute, usually relative short-term, often intensive treatment at this stage of the healthcare value chain

       Rehabilitation is part of the process of restoring a patient to good health or useful life, usually through medium-term treatment. In contrast to therapy, it is often more focused on regaining or re-learning specific functions through medium-term interventions and training, and can begin part way through a episode of therapy

       Long-term care is the treatment of and care for chronically ill, or disabled people who are not expected to regain totally their previous health status. It focuses on achieving an improved level of quality of life, or maintaining the status by preventing the worsening of the disease. Where neither of these is achievable, the goal can be to slow down the rate of deterioration.

The distinction between these three kinds of treatment can be fluid and relates to factors such as the intensity and duration of care and the age of the citizen. Electronic health record (EHR) and ePrescribing systems may play a more important, supportive role in these phases of the healthcare value system.

Alongside the citizens, health components of the healthcare value chain are important supporting processes:

Management includes the strategy, planning, organisation, delivery, control and administration of all health and healthcare services

Facilities and logistics refer to the procurement, supply, availability, scheduling and performance of all assets, consumables and goods, and ensuring that the right things are at the right place at the right time

Research creates opportunities for new or improved ways of delivering health promotion, diagnosis, therapy, rehabilitation and long-term care. In this respect, it is an important instrument changing core health processes

Education, training, continuing medical education (CME) and continuing professional development (CPD) connect to both healthcare provision and clinical and basic research, and creating opportunities to convert research into practice.

Complex eHealth investment can already, and will increasingly, play a central role in binding together and integrating these widely varying actors, functionalities and elements in providing optimal health services to all citizens. In this conceptual framework, eHealth combines the healthcare delivery chain and the supporting tiers. eHealth can impact at every stage of the healthcare value chain and across the whole healthcare value system. This is related to the requirements of sharing information across all tiers. In practice, eHealth investments have to be interoperable, integrated and interconnected, allowing cross-system access to data, in order to share data information and knowledge. This stresses the importance of the interoperability of the various parts of the eHealth setting.

Modern healthcare should focus on making the best use of finite resources in order to balance the health outcomes produced with the needs of all stakeholders in the healthcare arena. Responsibilities and interests of different participants in healthcare are diverse: physicians have interests that differ from those of the citizens who receive treatment. Hospitals differ from a GPs offices. Health insurances negotiate the payments for medical services with doctors and their associations. Medical care is dependent on data in order to create the basis and transparency for balancing all the different needs and interests of these stakeholders.

Exhibit 2 maps the processes of the healthcare value system, together with the main organisations involved, to identify the role of information availability and exchange in healthcare. The aim is to illustrate the complexity of information flows: each institution shown needs information from most other organisations, sometimes along several channels. Actual information and data flows within each of these organisations are much more voluminous and complex that conveyed by Exhibit 2.

It is not conceivable how all these communication channels can be efficient and effective without eHealth, particularly advanced EPR and EHR systems. For centuries, it has always been communication, the exchange of data, information, and knowledge, which has bound medical and healthcare processes and actors together. More recently, rapid developments in ICT, and solutions based on them, have led to paradigm shift, creating a new quality and scale of such exchanges and interactions.

Financing arrangements for eHealth

Three main types of finance affect eHealth. First, the already defined investment humps, which are temporary increases in expenditure usually during the engagement, development, design, and implementation stage. Second, recurring expenditure each year to support continuing costs, usually for suppliers contracts and eHealth operations. Third, finance liberated from existing activities, such as legacy ICT spending and the reduced time needed for healthcare activities.

Financing arrangements for eHealth should consider the need for, and include sources of:

       Additional non-recurring finance for investment humps in the earlier years of the investment lifecycle

       Additional recurring finance for increased revenue expenditure over the whole investment lifecycle

       Existing finance redeployed or reallocated from current budgets in the later years of the investment lifecycle.

There are different financing sources available including private equity funds, such as venture capital; public equity funds, such as stocks; loans in the form of bonds; commercial financing, such as direct loans and leasing; and public financing, such as direct government spending and grants. Each of these individual financing sources, or a combination of these sources, is available as a source of finance for eHealth investments for both ICT suppliers and HPOs. A number of factors help to determine the best financing arrangement for an eHealth investment. These factors are:

       Organisation of healthcare systems, such as private or public care provision models

       Financing healthcare, such as public or independent health insurance models

       Provision of ICT, either by HPOs or ICT suppliers

       eHealth investment lifecycles

       Scale of eHealth investment over its lifecycle

       Types of components of eHealth investment over its lifecycle

       Impact of eHealth investment over its lifecycle

       Affordability of eHealth investment over its lifecycle

       Level of risk for each partner.

These factors combine to create an eHealth investment model where ICT suppliers need finance for their activities, including, planning, design, development and implementation. In parallel, HPOs need finance for all the stages: from engagement, design, development, planning, and implementation through to operation, change and benefits realisation. These include payments to ICT suppliers, which help to finance their eHealth investment. From the operational period onwards, HPOs, as primary users, have to be able to finance the eHealth investment in full across its whole lifecycle, so it should be justified because it offers sustainable economic benefits and is affordable.

There are many different financial arrangements across EU Member States to support eHealth investment. Different types of Public Private Partnerships (PPP) have many different structures and seem to be suitable, and fashionable, for providing eHealth services by private ICT suppliers in public HPOs. However, PPP does not rule out traditional financing models, such loans, leases and internal finance.

A typical eHealth investment extends over several activities. These include planning, design, development, building, testing, implementation and operation of ICT. Suppliers and vendors, HPOs as users, and both working together can undertake all activities to varying degrees. In this setting, finance is needed for both capital and annual revenue expenditure by both sides of the partnership. HPOs also need finance for change, which is often critical to realising benefits from eHealth28, leading to the need for a financing model that sustains ICT-enabled change.

Large-scale eHealth investment, such as an Electronic Patient Record (EPR) system for a hospital, needs a long engagement, planning, development, design and build period. Financing this type of eHealth investment may need a period extending beyond five years, as identified by the eHealth IMPACT study. Including implementation, operation, and change activities, financing eHealth needs to match the entire longer-term investment lifecycle, sometimes beyond ten years. These timescales need stable, multiyear budgeting that is problematic for most HPOs used to a financial planning horizon between one and five years. This is the financing challenge for HPOs that eHealth financing models must overcome by effectively linking the general healthcare financing arrangements to eHealth investment lifecycles. Managing each eHealth investment over its whole lifecycle enables the integration of new finance and finance redeployed from existing activities. This helps to fit together the financial impacts, such as withdrawn legacy ICT investment, payments for new ICT, change management effort supported by HPO staff, who can reallocate their time from operational activities to spend time developing and introducing new clinical and working practices.

eHealth investment alongside other strategic investment, such as new assets and new drugs, helps to create the longer-term, financial planning context needed to finance these types of investment decisions. This is especially important in assessing factors including:

       Longer-term affordability

       Links between financing, affordability and economic benefits

       Impact of benefit realisation on allocating operational resources of HPOs to ICT components of eHealth.

Completing some of these changes runs across several types of HPOs, especially between primary and secondary, hospital services. In the healthcare system, beneficiaries of eHealth are not always the same groups as those who pay for and finance eHealth investment. For example, a hospital may finance extensions to its computerised physician order entry facilities so that local GPs can use it to refer test requests. The GPs may be able to achieve significant time-savings for a small cost, with the hospital achieving relatively small gains for its large costs, but with a combined net benefit to all HPOs and patients. Financial arrangements must address these potential financing disincentives by ensuring that each stakeholder reaps at least a reasonable value of their share of the investment.

The rest of this chapter provides an overview of different financial sources and arrangements that allow investors and funding bodies to secure the financial resources needed for eHealth investments, and accounting for the issues discussed above.

Venture capital

Venture capital is a type of private equity capital that provides finance to high potential growth companies that are too risky for standard investment by capital markets or conventional banks. Its purpose is to accelerate the growth of privately and newly established companies to an Initial Public Offering (IPO) or to a sale to publicly traded companies that are already established.

Venture capital in healthcare aims to boost investment in new, high-risk, often ICT-related projects. Two main uses are in pharmaceuticals and health services where eHealth is an integral component. In particular, there were significant joint ventures between IT and healthcare venture capitalists for eHealth projects in 1999 and the early 2000s. For example in 1999, Earlybird venture capital fund in Germany invested in establishing a company called GMD (Gesellschaft für Medizinische Datenverarbeitung mbH) for providing eHealth solutions. GMD developed a software platform for clinical workflow and Virtual Electronic Patient Records as well as integrating healthcare networks between hospitals, GPs, and other homecare providers. This company was so successful, that an Italian-based company, Dianoema30 acquired it in 2002. Since then, this type of investments has dropped to a much lower level. A more recent example is the electronic Scientific Medical Information Library Europe (SMILE) established for European medical publications in 2008 by the Scientific Institute for Medical Information and Documentation (SIMID) and jointly financed by some health financial institutions, such as health insurance providers, the pharmaceutical industry and a venture capital fund provided by the Health Innovation Fund I BV31;32;33. The Health Innovation Fund I BV is a venture capital fund founded in 2007. It supports innovative entrepreneurs providing technological, modernising solutions and business models for the healthcare industry.

Venture capital in eHealth and ICT investments can support private companies that provide services to HPOs in a PPP model, or private HPOs for eHealth investment financing. The European Private Equity and Venture Capital Association is a major source of venture capital investments throughout Europe34. According to 2007 financial reports, venture capital investment in Europe has climbed compared to 2006. Investments in healthcare services increased by 10% and IT by 3% in the second quarter of 2007 compared to the investments in the same quarter in 2006.

This type of financing also helped to establish private HPOs that are highly equipped with ICT. For existing public HPOs though, private venture funding may not be attractive and accessible source of finance, even if the regulations allow for such an arrangement. Public HPOs can receive the equivalent venture capital from public sources. For example, the Entrepreneurship and Innovation Programme (Exhibit 10) sponsored by the European Commission provides grants to public institutions for entrepreneurial investments.

Advantages of venture capital, in addition to being a source of funding, are that it also provides financial and business advice and introduces the company to networks of related businesses and strategic partners for possible acquisitions. They also lead the companies activities toward preparing an initial public offering (IPO). However, the disadvantage of such control and advice by venture capitalists might be that they can take company strategies and opportunities in directions that may not be favourable to the companys decision makers and owners.

Venture capital investments, as mentioned earlier, are generally more suitable for the industries in their infancy. When an industry becomes more mature, investments backed by public debt in the form of bonds and equities in the form of stocks are more likely. Commercial banks often support more stabilised situations in conventional ways, such as loans. However, commercial banks and financial institutions, such as Chase Manhattan Bank, as well as non-financial institutions, such as IBM or GE, rely on some venture funding as part of their entrepreneur investments.

Investments on innovative eHealth solutions and services are those that are attractive to venture capitalists. A decade ago during dot com ages, providing web-based eHealth solutions was an area of interest to venture capitalist. Nowadays, eHealth industry is becoming older and innovative solutions appear to be more difficult. Solutions for interoperability and integrating various healthcare information systems and data networks for universal access are the potential opportunities for innovation and seem to be able to receive venture capital funding. Innovative solutions in ePrescribing, EHR tools, such as data mining tools in integrated systems that improve decision making, and clinical radio frequency identification (RFID), such as patients tracking systems, are examples of areas which can secure venture capital funding.

Capital markets

Governments and companies can raise funding for asset investments through capital markets by issuing bonds or selling equities as stocks. Equity financing is where a company sells its stocks, and so a share in the ownership. Debt financing is by issuing bonds, so a company can take on a liability and avoid giving up shares of ownership of the company.

The return on investment and variability of return are two important parameters for any investor before deciding to buy stocks and bonds. Return on investment is the average financial return. Variability of return is a measure of not earning the expected average return and represents the risk of such an investment. The projected return rate and variability of return are two uncertain aspects in each particular case of eHealth investment. Estimating these two factors uses either an historical pattern, which may not exist for the case of eHealth, or a predictive approach that forecasts the parameters. Evaluating eHealth economic and financial performance, especially benefits, helps to estimate these two factors. Thus far, not many existing studies are available to suggest these numbers.

Bonds as debt financing

Bonds are similar to loans, in which the bond issuer borrows money from the bond holder, and so is obliged to pay back the principal, the amount of the borrowed money, as well as the interest according to a time plan. Contracts fix the price of bonds and their interest rates at the beginning of the contract. Some healthcare organisations can issue bonds to raise capital for investments. These types of investments are usually long-term investments. If local and national governments approve them, they are appropriate when public funds are not sufficient. For example in 2007, Milford Regional Medical Center in the US planned some fund raising by selling $95 million worth of bonds, to build and develop some new facilities including a cancer centre38. Local and national governments can also use this method of fund raising and issue bonds to support public HPOs eHealth investments. Another example is the Healthcare Corporation of America (HCA). It has one of the largest hospital chains in the US, raised $2 billion through selling bonds in the market39. Unfortunately, we were not able to find examples of healthcare bonds issued by the governments or private healthcare institutions in Europe. This may indicate the limited potential of bonds for eHealth in the EU.

The disadvantage of raising capital by issuing bonds is that the issuer has to pay interest payments regularly and return the principal at a specified date. These could be significant financial burdens on the issuers, if they have low income, or deferred, insufficient, or nonfinancial benefits. However, interest is tax-deductible, reducing the net expenditure.

Stocks as equity financing

Selling stocks is a different way of fund raising for asset investments by companies. Stocks represent shares of ownership in corporations. Companies can sell stocks if they need additional capital, especially for new investments. For example in September 2007, InterComponentWare (ICW), a private German-based health ICT vendor company, sold some capital stocks to the Strüngmann brothers, an investor company, to raise money to expand its activities in international eHealth markets.

Commercial financing

Commercial financing for investments includes loans from banks or other financial institutions. Long-term loans in commercial financing are usually asset-based, securing the loans against various assets. Unpaid loans lead to assets taken by the banks. Loans are available based on the record and history of profitability of similar investments. In asset-based lending models, accounts receivable, real estate, machineries, or equipment can help to secure loans. Financing eHealth and its ICT applications are a bit difficult to fit with this approach. Whilst ICT is an asset in the accounts of an entity, rights and licenses to use healthcare application software is non-transferable, and in case of default the software has no value as an asset. Hardware may be obsolete, with minimal value. Consequently, such borrowing is effectively unsecured.