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
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
·
eHealth ERA: Towards the
establishment of a European eHealth research area -
coordination of
·
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,
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
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
Finally, chapter 6 presents a policy brief with recommendations for
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
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
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 company’s 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,
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.