3.3. Overview of the statutory financing system

The Israeli health care system is financed by public sources (the NHI) and private sources (VHI and OOP payments) (Fig3.6). The financing system can be characterized by its breadth (population covered), scope (benefits covered) and depth (cost coverage). This section describes each of these dimensions of funding. Fig3.7 illustrates the public and private health financing systems according to these three dimensions.

Fig3.6

Fig3.7

3.3.1. Coverage

Breadth of coverage

Since 1995, all permanent residents of Israel have been entitled to a benefits package specified in the NHI Law (see below). They are free to choose among four competing, non-profit-making HPs, which must accept all applicants. Residents are allowed to switch between plans any time, up to twice a year. No resident can opt out of the NHI system.

Public NHI financing comes from two sources: the health tax and general tax revenue. The health tax is the NHI premium, which functions as an earmarked payroll tax collected by the NII. All permanent residents above age 18 must pay a health tax. The health tax is 3% of the wage for employees earning up to 60% of the average wage,[11] and 5% of the wage for those earning above it. The self-employed pay the same rates from their total income, and retired people pay the same rates from their pensions. Married women who do not have paid work are exempt from paying the health tax. Students and the unemployed must pay 5% of their income or cash transfers (e.g. unemployment benefits, income support, NII allowances or scholarships). Those who have no income pay a minimum rate of NIS 103 (about €20) (NII, 2014a). Soldiers in their regular compulsory service receive health care through the IDF’s Medical Corps, rather than through NHI; therefore, they do not pay the health tax. Income above five times the national wage is not taxed for NHI purposes. Failure to pay the required health tax will result in government action to enforce payment but in no way jeopardizes the individual’s right to NHI benefits.

Populations excluded from the NHI include undocumented migrants, temporary residents, foreign workers and tourists. (For more details on the coverage of non-resident populations, see section 5.14.)

Scope of coverage

The NHI Law stipulates a standard benefits package, the health basket, which all residents are entitled to receive from their HPs. In setting out the details of the initial benefits package in 1995, the Knesset essentially adopted that of Clalit, the largest HP. Since then, all HPs are legally mandated to provide the same benefits package, which is specified and periodically changed by the government.

The health basket includes, for example, physician services, hospitalization, medication, diagnostic examination and in vitro fertilization treatment. New services recently included are dental care for children (introduced in 2010) and mental health care (starting in mid-2015). Institutional LTC, preventive care, dental care for adults, contraception and alternative medicine are not included in the package at the time of writing (mid-2015).

Mother and baby preventive care is funded by the Ministry of Health and provided by the Ministry of Health, the municipalities and HPs. The Ministry of Health provides needs-based assistance for institutional LTC. The remaining non-NHI care can be purchased privately either through VHI or OOP payments.

The health basket is an explicit list of services to be provided, and in many cases it also specifies quantities and conditions. In 2014, the Ministry of Health launched a website that lists all the benefits provided by the NHI. It contains up-to-date information on key aspects of health insurance (public and voluntary). The idea was to empower insurees with knowledge and awareness of their rights and eligibility to benefits, so they can demand them from the HPs. If refused, they can refer the case to the regulatory body, the Ministry of Health. This policy instrument addresses market failures related to information asymmetry and can potentially improve competition among the HPs and within the VHI market (Brammli-Greenberg et al., 2014).

In 1997, Israel established a formal priority-setting process for the addition of new services to the benefits package (no technology is excluded from the benefits package). Each year, as part of the annual budgeting process, the government determines how much money will be available to fund new technologies. The Ministry of Health solicits recommendations from the HPs, pharmaceutical companies, the IMA, patient organizations and other groups for new technologies to be given priority for inclusion in the benefits package. The Medical and Infrastructure Technologies Administration at the Ministry of Health performs technology assessments on the recommendations received, mainly regarding the medical effectiveness and safety of the technology. Based on the technology assessment, a technology forum, comprising technology specialists at the Ministry of Health, the Director-General, and representatives of the legal office at the Ministry of Health, rates the technologies according to a priority list. Technologies considered worth including undergo a costing procedure by a subcommission in which representatives of the Ministry of Health, Ministry of Finance and HPs participate. The costing also considers epidemiological patterns and predicts the overall cost of the technology for the NHI based on the number of people who would benefit from it. Finally, based on the technology assessments and their costing, a public committee (the Basket Committee) – made up of HP representatives, Ministry of Health, Ministry of Finance, IMA, experts in health economics and health policy, and public figures from outside the health care system – recommends which new technologies should be adopted. Final decisions as to what will be included are made by the Minister of Health (2010a).

An interesting development is that, in the beginning of the NHI era, most additions to the health basket were for life-saving technologies, and very few involved technologies that improve the quality of life without extending its duration. Recently, increased attention and priority is being given to the latter and even to preventive services. The Basket Committee process is also becoming more transparent, with greater public and media access and coverage.

Depth of coverage

Emergency, primary and inpatient care are provided free of charge. Secondary care, such as visits to specialists and diagnostic examinations, requires small co-payments of about NIS 25 (€5). Co-payments for drugs are generally 10% of the price with a minimum of NIS 15 (about €3). There are also small co-payments for rehabilitation care and paramedical care such as physiotherapy and speech therapy. Discounts and spending caps are provided for the chronically ill, the elderly and families. Co-payments and other user charges constitute 6.5% of HPs’ income (Ministry of Health, 2014g).

The HPs submit co-payment plans for approval by the Ministry of Health and the Finance Committee of the Knesset. Consequently, there are differences in co-payments among the HPs.

Non-NHI financing

Services not included in the NHI benefits package and not generally provided by the HPs include LTC and dental care for adults. Non-NHI financing also covers investment in hospital construction and equipment, and medical research. LTC is financed via a mix of revenue sources, including households (through private insurance and OOP payments) and a number of agencies, including the NII, government ministries and HPs. Households pay out of pocket for the following services: private surgery and laboratory tests, visits to private physicians, complementary and alternative medicine (CAM), private nurses and ambulances, private psychological and psychiatric visits, and private dental care.

3.3.2. Collection

Table3.4 presents information on the main sources of financing for the health care system as a whole. Before NHI, individuals paid their health insurance premiums directly to the HPs on a voluntary basis. HP premiums were subsequently replaced by the health tax (a payroll tax). Today, NHI funds are collected primarily via payroll and general tax revenues. The health tax is earmarked for health and is collected by the NII, which then transfers it to the Ministry of Health. By 2012, the health tax accounted for 24.5% of total health care financing. The NHI is also financed by general tax revenues transferred by the Ministry of Finance to the Ministry of Health (34.6% of THE). General tax revenue is derived from a mix of progressive taxes such as income tax and regressive taxes such as value-added tax and customs levies. General tax revenue is used to fill the gap between the officially determined level of NHI funding and revenue from the health tax. The system, therefore, lies somewhere between a social health insurance system and a tax-financed system.

Table3.4

3.3.3. Pooling of funds

Allocating from collection agencies to pooling agencies

The NII plays a central role in pooling funds for the NHI system. It is the NII that collects the health tax and receives the government’s funds for NHI and distributes that funding among the four HPs. As noted in section 3.3.1, the system is financed according to ability to pay (i.e. via the health tax and general revenue, which is, in turn, based mainly on progressive income tax). The monies are distributed to the HPs largely based on needs. Thus, because of the pooling function of the NII, an HP’s income is in principle a function of the needs of its members, rather than of the incomes of its members.

Allocating resources to purchasers

The distribution of NHI funds, per the officially recognized cost of the benefits package, to the HPs by the NII is carried out to cover physical health and mental health.

Physical health

The main core is distributed according to a prospective capitation formula (which accounts for around 88.3% of HP income in 2014). The formula reflects each HPs share in the market (number of standardized persons enrolled) and three risk adjusters: age, gender and place of residence (in the periphery). The capitation formula is reviewed periodically by the “capitation committee”, which consists of representatives of the Ministry of Health and the Ministry of Finance. Capitation weights are reviewed every three years and are set as a function of three expenditure categories (ambulatory care, pharmaceuticals and inpatient care), based on the previous year’s average use of each capitation group.

Small co-payments for pharmaceuticals, specialist physician visits and certain diagnostic tests also play a role in financing the NHI system (6.5% of the HPs’ income in 2014). In addition, HPs receive retrospective payments (5.3% of their income in 2014) from the Ministry of Health for enrolees with any of five “severe diseases”; for example, in 2014, the diseases were thalassaemia, Gaucher disease, kidney dysfunction, haemophilia and cancer (Ministry of Health, 2015c).

Besides the NHI budget, HPs can receive special financial support from the government at the end of each year. The size of these payments is determined primarily by the extent to which the HPs meet various fiscal responsibility and efficiency targets. These targets are set by the Ministry of Health every three years, in accordance with key policy objectives. For example, in 2013–2014, the objectives included providing preventive care and oral health for children without co-payments, preventing hospital readmissions, promoting healthy lifestyles, tackling geographic and social disparities in health, and providing care for chronic obstructive pulmonary disease (Ministry of Health, 2014g).

Until 2010, the capitation formula’s sole risk adjuster was “age”. There were concerns that, because it only included that one risk adjuster, the Israeli formula did not do enough to prevent risk selection (van de Ven et al., 2003, 2007). Besides the change in 2010 (the addition of gender and place of residence), there have been various proposals to add additional parameters such as socioeconomic status, health status and disability status. These proposals have not been implemented to date because of a mix of concerns related to, for example, data availability and reliability, potential adverse incentives and change in the balance of the current pooling of funds.

Recent studies still identify inefficiency and point to the pooling of funds for HPs, which might lead to incentives for selection of low-risk individuals by HPs (Shmueli, 2011; Achdut et al., 2012; Brammli-Greenberg et al., in press). Although the capitation formula was improved in 2010, there is not enough evidence that the additional risk adjusters have sufficiently improved the pooling of funds (Brammli-Greenberg, Waitzberg & Glazer, in press). Moreover, evidence is still lacking to evaluate whether the funds allocated to improve health care provision in the periphery (through the new risk adjuster in the capitation formula) have achieved their purpose, and many analysts believe that they were insufficient in magnitude.

Mental health

From June 2015, as part of the mental health reform, HPs receive an additional budget of about €360 million from the Ministry of Health to provide mental health services. This additional budget is approximately the amount the Ministry of Health spent on mental health before the reform. HPs will be responsible for providing (or contracting with private providers for) individual or group psychotherapy and psychiatric care in the community and will purchase inpatient care from hospitals (previously the Ministry of Health paid for psychiatric inpatient care in general or in psychiatric hospitals). In mid-2015, it was still not finalized exactly how the mental health budget would be distributed among HPs from 2016 onwards.

From June 2015, the budget would be distributed separately for inpatient and outpatient care. The inpatient care budget would be distributed according to the HP’s share in hospitalization days before the reform, with adjustments for projected changes based on trends from 2006 to 2013. Funding for outpatient care would be distributed among the HPs through a basic capitation formula with age as the sole risk adjuster (with two groups: children up to 18 years old and adults over 18 years). The current formula assumes that, each year, 2% of the children will utilize mental health care (with 12 visits on average), and that 4% of the adults will utilize mental health care (with nine visits on average) (Tabibian-Mizrahi, 2006, 2007). In future, outpatient mental health care might be included in the general capitation formula as an additional expenditure category.

3.3.4. Purchasing and purchaser–provider relations

Purchasing hospitals services

In recent years, contracting has become a very significant feature of relations between hospitals and HPs. In government and independent non-profit-making hospitals, almost all sales of services to the HPs are governed by such contracts. Contracts play a much more marginal role for the Clalit hospital system, as a large portion of its sales are to Clalit regional management.

The contracts build upon the official government reimbursement prices and mechanisms (see section 3.7) as benchmarks. Typically, in return for guaranteeing a minimum revenue stream, the HPs are given an additional price discount.

The HPs have significant market power in their negotiations with hospitals as there are only four plans and hence each has a sizable market segment (with concentration levels even higher at the regional level than at the national level). Moreover, a significant proportion of hospital expenditure is fixed, rendering them particularly vulnerable to the threat of sharp reductions in volume.

There is no law in Israel that forbids HPs from channelling patients to particular hospitals. With the spread of contracting arrangements, along with Clalit’s growing interest in hospitalizing its members in hospitals that it owns, channelling has become more common and tensions have arisen regarding this development. To limit the extent of the channelling, the Ministry of Health has recently decided that each HP will have to pay to each hospital 95% of what they paid to them in the previous year, even if the HP reduces consumption at a certain hospital by more than 5% (Ministry of Health, 2014a). Further steps are under consideration (see section 6.2).

Purchasing ambulatory services

In Israel, HPs provide most of the ambulatory services in house. However, they do purchase some services (from either hospitals or independent community-based facilities), particularly in the imaging field for the particularly expensive technologies. In addition, they also purchase services from independent physicians – to some extent for primary care but more so for specialist care.

Regarding mental health services, the HPs have been developing multispecialty community mental health clinics since 2012, at the urging of the Ministry of Health. HPs will also purchase mental health services from government and public community clinics (the main providers before the reform), and from independent professionals such as psychologists, psychiatrists and other mental health caregivers.