St. Gallen wants to modernise its hospitals. The canton plans to spend about SFr1bn rebuilding or modernising four regional hospitals, one cantonal hospital and a children’s hospital. Emmental’s regional hospital, co-located in Burgdorf and Langnau, is also spending. Building has already begun in Langnau, while SFr145m more will go for expansion in Burgdorf. In Zurich, the Limmattal hospital intends to plough more than SFr250m into a total rebuilding. In Graubünden, about SFr400m has been earmarked to extend the cantonal hospital; Schwyz, which had been talking about closing Einsiedeln hospital, has decided instead to renovate and expand, while the hospital in neighbouring Lachen wants to spend about SFr180m on a new offshoot in Galgenen.

Such figures are no exceptions. A survey last year by management consultants PwC showed a similar pattern at 12 public sector and 7 private hospitals, with investment due to climb significantly from 2012, compared with previous years. The study showed the bulk of spending was on big projects – costing more than SF10m – while smaller schemes were, if anything, being run down. Public sector hospitals appeared to be particularly ambitious.

The trend is astonishing, given the introduction in 2012 of a new hospital financing system which, in essence, brought in a new pricing system and greater choice of hospitals for patients (including receiving treatment in other cantons). Along with more transparency in terms of quality of care, the innovations were meant to pave the way for greater competition.

The idea was to adjust the price of inpatient care to reflect hospitals’ performance via broad, diagnosis-based parameters, making it easier to compare costs and standards and helping to streamline the system by removing unnecessary beds and excessive hospital stays. More transparency and competition were intended to shake up the healthcare market and prompt structural change. Switzerland’s extraordinarily high number of relatively small hospitals is not only expensive, but can also be detrimental to care, as many smaller hospitals simply lack enough cases of a given disease each year to gain the expertise to allow the most efficient care.

Swiss hospitals in international comparison

Many reasons for the investment boom

But if the new funding mechanism prompted greater competition – as hoped – the current investment boom would be strange, as hospital owners would surely be wary of risky new spending. So why the boom?

  • Some hospitals may be banking on lower patient mobility: Hospitals may be assuming patient numbers will stay constant – or even grow – and pricing remain broadly stable. Many doctors and hospital managers think mobility – a key factor in inter-hospital competition – will barely increase, in spite of the greater transparency now available.That call may be based largely on the fact that many patients until now have depended on general practitioners for selecting their hospital and have generally ignored other sources. But matters could change: in tourism, consumers’ habits evolved quickly when they gained access to greater information via the internet. Growing transparency means patients (or the doctors referring them) will have far more opportunity and incentive to do some digging.
  • Protection from competition: Public sector hospitals may be assuming the increase in competition will be less intense than feared. That is because the new funding mechanism hasn’t created an entirely level playing field and open market pricing. First, cantonal officials remain closely involved in setting hospital prices. Second, their right to determine hospital planning gives them a powerful tool to defend public sector hospitals against private rivals.  Some cantons have been particularly restrictive in defining the rules governing which hospitals can even be considered for patient care, or have used other means to limit competition.
  • Strategic investments: Investing in more beds or reducing operating costs (such as through more efficient new buildings) could be explicable, even if competition were expected to rise.  Such measures would be a signal to potential private sector rivals. As most building costs are irreversible (so called sunk costs), they hardly influence a hospital’s future operating policy. In other words, hospitals that invest today are certain to remain in the market and, in extremis, could even price services at marginal cost. New entrants would be well advised to expect cutthroat competition. Games theory suggests this alone might be a sufficient disincentive.
  • Public subsidies: the (over) investment strategy in an open market described above works particularly well for wealthy investors like public sector bodies funded by tax revenues. Such a strategy is even more credible when the investor can simultaneously justify spending under regional policy goals, and receive commensurate funding. True, the new hospital finance system envisages fixed costs being covered by patients’ fees. But based on the excessive number of hospitals in Switzerland, it’s probable that many smaller hospitals will discover future tariffs and patient numbers are insufficient to cover interest and amortisation on their investments. The bottom line is that the public sector ends up subsidising the new building and expansion given its role as owner, financier and lender of last resort.

By the way, the OECD has already sounded the alarm in its 2011 report on Swiss healthcare: “Anticipated efficiency gains from case-mix payments could be compromised if cantonal governments subsidise hospitals beyond case-mix payments.”