Excerpt from the "Bank of Israel – Annual Report for 2014" to be published soon: The Flow of Funds in National Health Expenditure

In 2012, national expenditure on health in Israel totaled NIS 73.9 billion, which is equivalent to 7.5 percent of Israel’s GDP. This box describes the flow of funds from sources to uses in the healthcare system. Figure 1 below presents the flow of funds and illustrates the complexity of the system and the numerous reciprocal relationships between its components. This box is a revision and expansion of one that appeared previously[1], which was based on 2007 data and examined only public expenditure. As will be explained below, the healthcare system in Israel is still based primarily on public funding and the public provision of services; nonetheless, the share of private funding and privately provided services has been rising continuously during the last two decades.

The funding of health expenditure (grey boxes)
The general government funded 60.8 percent of the national expenditure on health in 2012. The major portion of this amount (44 percent of total expenditure) went to finance the health services basket provided by the health funds, in accordance with the National Health Insurance Law. The National Insurance Institute collects somewhat more than half of the cost of the basket of services by means of health insurance fees (the “health tax”) and the rest is financed from other government revenues. In addition, the health funds receive additional resources from the government (1.2 percent) as part of stabilization agreements and support tests. The revenues from taxes also pay for health expenditure of other government ministries (such as the Ministry of Defense which makes payments to the hospitals and in some regions also to the health funds for the care of its soldiers)[2] and expenditure on health in the local authorities (which are also funded from local tax revenues). In addition to its share of the basket of services, the National Insurance Institute pays a hospitalization grant to the hospitals for births (3.2 percent of national health expenditure) and also pays the health funds for the care of work accident victims (0.6 percent).
Households financed 37.6 percent of national expenditure on health (in addition to the taxes they paid to the government). About one-third of this amount is paid as part of an insurance framework: premiums paid to insurance companies (5.1 percent of expenditure), payments for additional health service insurance provided by the health funds (4.9 percent) and also direct payments to the health funds for services included in the public healthcare basket (4.4 percent). About two-thirds is paid directly to suppliers of services and medical products: households purchase hospitalization services from the long-term care hospitals (4.9 percent) and pay directly for dentistry, oral hygiene products, private surgery, drugs, etc.
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Notes to Figure 1:
1.       The payment by the Ministry of Defense to the government hospitals for the treatment of soldiers. We do not have data on the payments to other hospitals.
2.       The payment by the Ministry of Defense to the health funds for the treatment of soldiers.
3.       The hospitalization grant paid by the National Insurance Institute to the hospitals for births (1.2 percent to government hospitals and 2 percent to non-government hospitals).
4.       The share of health insurance fees (which are collected by the National Insurance Institute) within the funding of the healthcare basket.
5.       Payments by the National Insurance Institute for the treatment of work accident victims.
6.       The share of the government budget in the funding of the healthcare basket (paid by means of a budget item in the Ministry of Health budget).
7.       The share of self-earned (normative) revenues of the health funds in the funding of the healthcare basket (i.e., revenues from the collection of copayments from households).
8.       Copayments which the health funds collect from households, in addition to the normative revenues.
9.       Transfers from the Ministry of Health to the government hospitals: the budgets for subsidies (1 percent) and development (0.25 percent).
10.    Transfers from the Ministry of Health to non-government hospitals (including development and support of the Clalit Health Fund).
11.    Services that the health funds purchase from private laboratories and institutes (3.8 percent), in addition to payments to independent physicians (4.5 percent).
12.    Share of usage in the business sector does not include non-medical expenses of the private insurers, expenses of the long-term care hospitals, and private medical services provided through the general hospitals (owned by private non-profit organizations).
13.    Government support for the health funds, apart from the healthcare basket, i.e. stabilization agreements and support tests.
14.    The Ministry of Health budget and the development budget for health.
15.    Hospitals for general hospitalization, surgical clinics and dialysis institutes in the business sector, all of which operate under license.
16.    Estimated. The revenues from private medical services (called by its Hebrew acronym, Sharap) in the Sha’arei Tsedek hospital totaled about NIS 120 million (according to the minutes of the Advisory Committee to Strengthen the Public Healthcare System). The revenues from private medical services in the Hadassah Hospital totaled NIS 253 million in 2013 (according to the hospital’s recovery plan). Includes salary payments and payment for Form 17.
17.    Other revenues (totaling NIS 1.05 billion) include those from medical tourism (NIS 291 million), direct revenue from households, revenue from insurance companies (NIS 8 million), revenue from donations (NIS 384 million), etc. The revenues originate from households, the business sector and abroad.
18.    The revenues of the health funds from the profits of subsidiaries, donations and rent (NIS 643 million).
The rest of the funding for health expenditure (1.6 percent) comes from income from abroad. This includes donations as well as income from medical tourism, i.e., patients who come to Israel for medical care (according to estimates, the income from this activity amounts to about NIS 0.5 billion or 0.7 percent of total funding).[3]
The share of private funding (including income from abroad) in national health expenditure is relatively large from an international perspective and has become even larger over time (from 31.7 percent in 1995 to 39.7 percent in 2013) (Figure 2).
The insurers (green boxes) and the intermediating mechanisms between funding and provision of services (blue boxes)
The health funds insure the public within the framework of the National Health Insurance Law. To this end, they receive government funding (45.1 percent of total funding, including stabilization agreements) and collect copayments from households (4.4 percent of funding). In addition to the basket of health services, the health funds receive funding from the National Insurance Institute for the care of work accident victims (0.6 percent) and payment from the army for the care they provide to some of its soldiers (0.1 percent). The health funds receive additional revenues from the profits of subsidiary companies, from donations and from rent (0.9 percent[4]). The health funds use this funding to purchase hospitalization services from the hospitals (20.7 percent) and to provide primary care services, either on their own (21.5 percent) or by means of payment to independent physicians (3.8 percent), and purchase of services from hospitals, clinics and institutes in the business sector (4.5 percent). In total, the health funds, in their role as insurers, receive funding in the amount of 51 percent of national expenditure on health and expend 50.6 percent of the total expenditure. Therefore, the insuring health funds (in the community sector) finished 2012 with a surplus of NIS 445 million.[5] It should be noted that this surplus is primarily due to the Clalit Health Fund, which can determine the division of its deficit between the community sector and the hospitals it owns (through the setting of internal transfer prices).[6] The other three health funds (Maccabi, Leumit and Meuhedet) finished 2012 with a combined deficit of NIS 421 million in the community sector.
The health funds also serve as private insurers as part of the supplementary health services they provide, called by their Hebrew acronym, Shaban. The public pays an amount equal to 4.9 percent of the national expenditure on health for this insurance and the health expenditures paid for by these insurance policies total 83 percent of the revenues, which is a much higher rate of utilization than among private insurance companies.
The insurance companies that provide private health insurance collect premiums from the public in the amount of 5.1 percent of national health expenditure.[7] Almost two-thirds of the total premiums are for 'individual insurance' that the individual purchases himself, usually through an agent, while 'group insurance', which is usually purchased by an employer, accounts for the other third. Insurance companies spend less than 60 percent of the premiums collected for medical insurance in order to cover the claims of beneficiaries. The remainder is used to cover the costs of administration and marketing, commissions to insurance agents and reserves for future risks.[8]
The Ministry of Health also serves as an insurer in the areas it is responsible for, as specified in the Third Addendum to the National Health Insurance Law. In order to carry out this function, it purchases long term care hospitalization services (in an amount equal to 2.4 percent of national expenditure), which is supplemented (bringing it up to 7.2 percent) by the copayments of those eligible for subsidization and their families (“codes”), along with the purchases of other households. The Ministry purchases services from the psychiatric hospitals and clinics and also from the psychiatric departments of the general hospitals (1.6 percent). The responsibility for insurance in the area of mental health will be transferred to the health funds in July 2015. The Ministry participates in the cost of rehabilitation and mobility equipment purchased from external suppliers and also provides public health services (primarily on its own), such as vaccinations, baby clinics, etc. (1.3 percent).
The use of funds for healthcare (pink boxes)
The health funds, which on their own provide community health services (primary and secondary), are responsible for 21.5 percent of national health expenditure. This includes payment of salaries to employees of the health funds (8.7 percent), payment for drugs and equipment (10.6 percent),[9] administrative and logistic expenses (1.9 percent)[10] and expenditure on development.
The general hospitals provide 29.3 percent of the services within total health expenditure. While the budgets of the government hospitals are balanced every year by means of a subsidy provided by the Ministry of Health, many of the non-government hospitals are in deficit. In 2012, the deficit of the Clalit Health Fund hospitals funded 1.7 percent of health expenditure. The revenues from the sale of private medical services (called by their Hebrew acronym, Sharap) in the general hospitals owned by private nonprofit organizations totaled about 0.5 percent of health expenditure.[11] The public receives additional healthcare services from the psychiatric hospitals and mental health clinics (2.4 percent) and the long-term care hospitals and institutions (7.2 percent). The total proportion of expenditure on hospitals and research stood at 33.7 percent of national health expenditure in 2011 (see Figure 2). This proportion stood at 40 percent in 1995 and has exhibited a downward trend since then. On the other hand, there has been a rise in the proportion of expenditure on medical services in the community.
The business sector (i.e., for-profit producers) was responsible in 2012 for about 30 percent of health expenditure. This sector includes, among others, independent physicians, pharmacies, dentists (7.6 percent) and examination institutes. The business sector also includes entities that operate under licenses from the Ministry of Health, including private hospitals, surgical clinics and dialysis institutes. They were responsible for 3.4 percent of national health expenditure in 2012.[12] Their total revenues in that year totaled about NIS 2.5 billion, twice the amount for 2007 (when they accounted for 2.4 percent of expenditure). Their pre-tax profit amounted to NIS 123 million in 2012 (0.2 percent of health expenditure).[13] They also provided medical tourism services, which accounted for 6.9 percent of their sales (not including VAT), an increase relative to 2007 (6.3 percent). The increase in the proportion of private funding and the growing reliance of the health funds on the purchase of services in the business sector contributed to the increase in the business sector’s share of services provided, from 23 percent in 1995 to 31 percent in 2013 (see Figure 2). 
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[1] See “Arbitration ruling on physicians’ wages and public expenditure”, in Recent Economic Developments no. 123, (2010), Bank of Israel.
[2] The army provides soldiers with healthcare services on its bases as well, but this expenditure is not recorded as part of the national expenditure on health but rather as part of defense expenditure.
[3] The estimated scope of this activity appears in the report of the Advisory Committee to Strengthen the Public Healthcare System (2014), Chapter 4: Medical Tourism (Hebrew). It should be noted that the Central Bureau of Statistics currently includes the expenditure on the provision of medical tourism in Israel’s health expenditures (and there is no way to differentiate them and include them in the export of services). Total revenues from medical tourism (and not just the profit from this activity) are considered to be a source of funding for health expenditure.
[4] For simplicity, the sources of funding of this amount do not appear in the chart. These include the funds that the business sector, households and sources abroad transfer to the health funds (the division between these sources of funding is unclear).
[5] The surplus derived from the chart totals about NIS 300 million and it is unclear what the source of the discrepancy is between this amount and the actual surplus. It should be noted that the results of activity are influenced by the three-year cycle of the stabilization agreements, since they are generally signed with a delay. During the most recent agreement period (2011­–3) the annual surplus in the community sector amounted to NIS 690 million on average (and the deficit for all the sectors amounted to an average of NIS 838 million per year, an increase relative to the average for the previous three years).
[6] Clalit recorded a deficit of NIS 1.3 billion in 2012 for its hospitals and a surplus of NIS 866 million in the community sector.
[7] This amount includes premiums paid for insurance against medical expenses, serious illness, dental care and disability. See the Annual Report for 2012 of the Capital Market, Insurance and Savings Division in the Ministry of Finance.
[8] Individual insurance is usually for the entire life and therefore the insurance companies need to maintain relatively large surpluses for future risks, such as changes in the incidence of disease or technological changes that require new and expensive treatments. (It should be noted that technological changes might also reduce the costs of insurance companies, since the payment is not revised when the prices of old technologies decline.) Because of the risk, insurance for such a long period is not common in other countries.
[9] The reported expenditure on drugs and medical equipment also includes the salaries of pharmacists in the health fund pharmacies.
[10] Since the health funds provide many services on their own, one cannot differentiate between administrative and marketing expenses that are the result of the funds’ function as insurers and those that are a result of their function as service providers.
[11] Figure 1 presents private medical services (Sharap) in the business sector for simplicity only, since the sources of its income (private insurance and direct payments) are identical to those of the business sector. Currently, private medical services exist only in the general hospitals owned by private nonprofit organizations (the private hospital in Ashdod will also offer private medical services when it is completed, if such services are not canceled by then).
[12] Aggregate figures of the Chief Economist in the Ministry of Finance. The figures include almost all of the aforementioned entities, which hold licenses from the Ministry of Health (entities were omitted if their annual revenue was lower than NIS 10 million or if an independent annual report was not available for them).
[13] The rate of profit (before tax and out of revenue not including VAT) was 5.5 percent in 2012 as compared to 3.9 percent in 2007.