Introducing capital charges in Jordanian Health Sector: improving performance efficiency.

• Author: Bdour, Jamal I.
• Position: Report

1. INTRODUCTION

   Many governments around the world have been attempting to provide their citizens with the best health care services, which may sometimes be offset by the limited resources available on hand. In several countries, plans to extend private sector accounting techniques to the public sector have been shaping policy formulation with the explicit objective of improving the efficiency of resource utilisation.

   Both developed and developing countries have used an advance method in provision of services to squeeze more outputs from inputs used (Heald, and Dowdall, 1999). In addition, governments' budget limits and its poor incentive structure have affected the access of public units to the resources needed to maintain their asset base to meet the simultaneous demand. All these factors have compromised the productive efficiency of service provision and led to making bad investment decisions due to the absence of full cost information relevant to the acquisition of new assets.

   The introduction of capital charges system as one of the methods used to improve service provision efficiency and secure further performance improvements was discovered to measure and report for the cost of governments' activities (Heald and Dowdall, 1999, p.240). Capital charging system is a technique used by public sector bodies to improve asset management by having providers of public sector services recognise an annual charge for their capital based on the value of assets used to provide services. Henceforth, public sector units have to include the cost of capital plus depreciation when charging their purchasers as well as take responsibility for the payments of past capital and its maintenance (Shaoul, 1998).

   In early 1990 the United kingdom and New Zealand were the leading nations in using capital charges as a mechanism for making more efficient use of the public capital stock. Heald and Dowdall (1999) state that a capital charge is sought to be about securing the alignment between managerial incentives and resource costs. However, in a public sector environment where an asset registrar often does not exists, the lack of a skilled staff and policy-maker recognition could make effective implementation of the capital charge system both difficult and slow.

   This study empirically perform a cross sectional analysis of efficiency scores and the impact of capital charges on efficiency across hospitals according to their size, type and location, which to the best of the researchers knowledge have not been explored in the literature within the Jordanian and even the Middle Eastern context.

   1.1 The Jordanian Health Sector

   While the Jordanian health sector performs well in terms of access and health outcomes, which are among the best in the region and among other middle-income countries, it is both expensive and inefficient, and there are geographic misdistributions of resources. In 1999, health expenditure amounted to more than 468 million JD, 8.6% of the GDP (World Bank, 1999b). In terms of capacity level, the Jordanian current occupancy rate of beds is 63% which is below the generally accepted norm of 80%. In regards to bed occupancy level, current rate of population growth and hospital utilisation patterns, Jordan would not have to add any new bed capacity until 2003 (World Bank, 1999b).

   The Jordanian government, as many other governments around the world, has been trying to provide its citizens with the best possible services despite the limited resources available on hand. Reforms have been proposed and designed to improve the performance of the financing, human and physical infrastructure bases of the public programmes while assuring effective co- ordination with the substantial delivery and technological capacity of the private sector. As part of this reform initiative, the Jordanian government has announced early in 1996 plans to extend private sector accrual-based accounting with capital charges at its core to the health sector (The Hashemite Kingdom of Jordan, 1996a).

2. PREVIOUS RESEARCH

   Many governments around the world have started a transformation process of public sector accounting by adopting private sector accounting techniques. The introduction of Capital accounting (viz. capital charges) was one of the most significant features in the public sector in general and in public health units in particular, which entails that providers of public services must explicitly pay for the use of their capital through an annual charge based upon the value of assets used in service provision (Heald and Dowdall, 1999).

   2.1 Capital Charges as an Incentive Mechanism in Public Sector

   Shaoul (1998) claims that the introduction of capital charges in public sector would encourage managers to make the most efficient use of their physical resources by ceasing the treatment of capital as free goods. The negligence of the cost of asset acquisition has been widely identified as a source of inefficiency within public sector units (Luder, 1991). To avoid a loss of revenue, managers would have to dispose of surplus assets to reduce their capital costs and /or increase their output to reduce the average capital cost per unit (Shaoul, 1998). Proponents of capital charges share the belief that there is a scope to improving capital asset management within the public sector (Heald and Dowdall, 1999). It is possible to establish an asset register under cash-based accounting although this may be unpractical and rare. Thus, Heald and Dowdall (1999) state that capital accounting and/or charging would be necessary, whether to generate cost saving directly or through creating a competition climate which would stimulate these saving. None of the reviewed literature has revealed any evidence of the effect of introducing capital charges on asset management and efficiency performance of the pubic sector in general and the health sector in particular. This may be due to the limited practical experience in applying such system.

   2.2 Performance Evaluation in the Public Sector

   Over the past few decades, the cost of health care has grown dramatically in most developed economies. It is widely believed that the inefficiency of health care institutions has contributed, at least in part, to this cost increase. Therefore, an extensive body of literature has addressed the issue of performance efficiency and its measurement in the health sector. These studies have focused on the growing volume of health care cost, the effect of this cost on public expenditure and private industry, and the impact of increased competition in the health care market (Worthington, 2000). High health care costs around the world and the effect of this cost on governmental budgets have stimulated cost consciousness among purchasers of hospital care (Byrnes and Valdmanis, 1994).

   In the past, hospital managers used to compete on the basis of quality of health care provision, because reimbursements were based on the cost incurred, and hospital managers did not face budget constraints or pressures from price competitions. To increase cost awareness in the USA, new arrangements such as preferred provider organisations and health maintenance organisations, entered the health care market. These providers have encouraged market competition in the hospital industry by contracting with hospitals, on the basis of price, to care for patients. However, one has to keep in mind that in order to remain financially solvent, hospital managements must meet these competitive pressures with cost-efficient production practices (Byrnes and Valdmanis, 1994).

   In the UK, the health sector has faced rapidly increasing expenditure so much so that health care institutions are particularly suspect of inefficiency and low productivity. Together with financial pressures and an increasing demand for health care, this led the UK government in early 1990s to dramatically reform the NHS with the introduction of an internal health care market, which was created by means of a split between the providers and purchasers of health care services. The aim of this reform was to increase the efficiency of healthcare provision and, thus, increase the level of patient care (Lapsley, 1994). One of the main features of this reform was the introduction of capital accounting to increase competition in the internal market, which has been hoped to improve service quality and increase efficiency in the use of physical resources.

   It is worth noting, though, that it is only recently that attempts were initiated for assessing performance in public sector entities and specifically in healthcare units. The concentration has been on performance evaluation in the public sector and the measurement of relative efficiency in public hospitals as non-for-profit organisations. Performance measurement could be a very difficult task which requires collecting performance data about areas that need corrective actions.

   Puig-Junoy (1998) states that examining heath is the final output of health services and that relating this to the inputs permits us to determine the most efficient way of allocating resources for increasing health, because increased expenditure on health care is expected to improve health performance. Coelli et al, (1998) maintain that organisations could increase their efficiency by either (1) minimising operational costs per unit without changing organisational structures or (2) minimising cost per unit by making some changes to organisational structure. Which structural reforms are likely to be more efficient for reducing transaction costs in the health sector is a matter worth consideration.

   2.3 Theoretical Foundation of Efficiency Measurement

   Efficiency is generally defined as 'the allocation of scarce resources that maximises the achievement of aims' (Hollingsworth and Parkin, 1998). Farrell (1957) maintains that a unit is efficient when it is able to obtain the highest amount of goods and/or feasible services (outputs) using the least...