Assistance with Implementation of System of Health Accounts (SHA) Organisation of Workshops

Transcription

1 Assistance with Implementation of System of Health Accounts (SHA) Organisation of Workshops Eurostat Grant N Annex 2b (Part 1) HCR1 Capital formation of health care provider institutions Second Workshop Nicosia, December 11 13, October 2008

2 HCR1 Capital formation of health care provider institutions 1 Background paper for the SHA Workshop in Nicosia, December Introduction Capital formation and capital in health care Capital in the production of health care Investments and capital formation Depreciation and service lives Productivity Capital formation and capital in accounting Business accounts National accounts Health care providers as producers of capital formation Capital services Capital Formation in health accounts manuals System of Health Accounts (SHA1.0) Definitions Accounting rules Compatibility Double Counting Specific goods and services Producers Guide Definitions Valuing capital created Valuing capital consumed Investment as intermediate goods in production Capital Consumption Capital Consumption in SHA Viewpoints Practical considerations Capital Consumption in the Producer Guide Financing of capital formation and capital consumption Differences between service lives and financing periods Subsidies and grants Standard tables of SHA Financing of capital consumption Capital Formation and Foreign Trade Prepared by Dr. Markus Schneider, BASYS, Reisingerstr. 25, D Augsburg, ms@basys.de. The author is grateful to Cor van Mosseveld, David Morgan, and Roberto Astolfi for comments.

3 7. Measurement Surveys Revaluations References...20 Annexes...21 A.1 Classification of Capital in ESA A.2 Perpetual Inventory Method (PIM)...22 A.3 Glossary...24 Abbreviations ABS Australian Bureau of Statistics CFC Consumption of Fixed Capital CHE Current Health Expenditures COFOG Classification of the Functions of Government ESA95 European System of National Accounts 1995 EU European Union EUCOMP Comparable Health Care Data in EU Eurostat Statistical Office of the European Communities FISIM Financial intermediation services indirectly measured FS Classification of Financing Sources GCF Gross Capital Formation GFS Government Finance Statistics GFSM Government Finance Statistics Manual (IMF) HBS Household Budget Survey HC Functional Classification of Health Care (ICHA) HC.R.1 Gross capital formation in SHA HF Classification of Health Care Financing (ICHA) HIF Health Insurance Fund (GR) HP Classification of Health Care Providers (ICHA) ICHA International Classification of Health Accounts IHAT International Health Accounts Team IMF International Monetary Fund MS Member States NHA National Health Accounts NPISH Non-profit Institutions Serving Households OECD Organisation for Economic Co-operation and Development PG Producers Guide RC Classification of Resource Costs (PG) SHA System of Health Accounts (Version 1.0) SNA System of National Accounts TFP Total Factor productivity THE Total Health Expenditure WHO World Health Organization - 2 -

4 1. Introduction Capital is a crucial factor in the production of health care services and goods. Accumulation of capital allows to expand the production boundary and productivity. 2 SHA 3 includes the recording of Gross Capital Formation (GCF) as HC.R.1. But, both SHA and Producers Guide (PG) do not provide specific guidelines on how to compile GCF. Therefore, the key objectives of the SHA workshop in Nicosia, December 11-13, 2007 are, on the one hand to understand the interpretation of GFCF as part of SHA, and on the other to develop suggestions for a more consistent and comparable compilation of further data collections. This paper aims to give an overview about questions raised in the context of capital formation, the definitions used in the various manuals, the procedures recommended, and possible conclusions. When SHA was published in 2000, there were not many studies dealing with the issue of capital formation in health care. Both SHA and the Producers Guide recognize capital formation as an important expenditure item and propose to include it in the total health expenditure of a country. Furthermore, both manuals recommend to include consumption of fixed capital in the estimation of non-market output. As capital formation and capital consumption are closely related it is wise to check the consistency of the compilation of both variables concurrently. In practice, there are different methods used to compile capital formation and consumption of capital. For example, the OECD Manual Measuring Capital (2001a) includes definitions and recommendations which go beyond SNA93 and ESA95. The following chapter, therefore, starts with the economic concept of capital formation in health care and the observation of capital services. The term 'capital services' is crucial for understanding the modern concept of indirect measurement of capital stocks and consumption of capital. Chapter 3 reviews capital formation in SHA and PG, while chapter 4 examines consumption of fixed capital in both manuals. Here, one essential issue is the definition of the boundaries: What type of capital goods should be included? Which provider units should be included in the compilation of capital? What to do, if health care is a secondary activity of those provider units? 2 Other factors of economic growth as growth of human capital and knowledge are not discussed here. 3 The abbreviation SHA refers to Version 1.0 of the OECD Manual

5 Chapter 5 deals with the financing of capital formation and consumption of capital. Governments often issue separate reports on current spending and capital spending. How should one deal with these public expenditure reports? In the private health care sector leasing is used more and more as a tool for health care financing. How one should handle the expenditure for leasing? Chapter 6 discusses capital formation and foreign trade. The European Commission is supporting the health sector development by means of the structural fund. Even if the amounts of capital formation financed from foreign sources are relatively small, one might be interested in this share. Finally, chapter 7 provides some information about data sources for the measurement of capital formation. It is not the intention of this paper to serve as a guide for the compilation of capital formation in SHA, rather to stimulate the discussion during the workshop. 2. Capital formation and capital in health care Investment in health care facilities and equipment creates physical assets that typically are used over a long period of time. In SHA, the current total of investment expenditure is referred to as gross capital formation. GCF is by definition the sum of net capital formation NCF plus the consumption of fixed capital CFC. NCF might be negative if CFC is higher than the current investment 4. In this chapter we will present some basic definitions from an economic perspective. 2.1 Capital in the production of health care In economics, capital is an input factor like human resources for the process of health care production which is playing an increasingly important role in health care delivery both in diagnostic and treatment, but even more in the production of intermediate goods used in health care delivery as pharmaceuticals or medical non-durables. There are several studies which tried to estimate production functions in health care including physical capital. For example, IT systems can affect a hospital s production and costs by reducing time lags with respect to patient care and adverse events on patient safety ( ). 4 GCF can also be negative because it is the difference between acquisitions and disposals over the period. For example, large assets sales by the public sector to the private sector can lead to negative gross fixed capital formation for the state institutional sector of SNA

6 2.1.1 Investments and capital formation The fixed capital stock C(t) of the current period t is the result of the capital stock of the previous period plus capital formation GFCF(t) minus consumption of capital CFC(t). The following equation holds C(t) = C(t-1) + GFCF(t) CFC(t) As the consumption of capital CFC(t) depends on the use of the C(t), but also on other factors such as innovation, different models exist for the estimation of CFC. For example, if one replaces CFC(t) by δ * C(t-1) with δ as the depreciation rate, one obtains; GFCF(t) = C(t) (1-δ) *C (t-1) The depreciation rate δ can be expressed as 1/λ with λ the service life under the condition of linear depreciation. Often, more complex models are used for depreciation. Furthermore, in the context of SNA, this simple equation of economic textbooks is slightly modified and includes value changes as a consequence of economic and technical developments. According to ESA95 fixed capital has to be compiled at constant prices both gross and net. Capital accounts distinguish three types of prices - current prices (prices of the year in question) - constant prices (prices of a single price year) - (historical) acquisition prices, because the capital stock represents investments of various years Depreciation and service lives Most assets lose value over time. Depreciation estimates the decline in the value of capital as a result of ageing, its maximum value being near its age of manufacture and its minimum value when it is dismantled and sold as a scrap. There are different reasons for the decline. How much the depreciation charge actually will be depends mainly on the depreciation rates which enterprises are officially permitted to charge for tax purposes (usually fixed by law), and on how fixed assets themselves are valued for accounting purposes. In OECD 2001, a different terminology is used: The consumption of fixed capital measures the decline in the value of assets associated with ageing. This decline in market values is described as the age-price profile of an asset

7 According to SNA, consumption of fixed capital should be distinguished from depreciation. Consumption of fixed capital should reflect underlying resource costs and relative demands at the time the production takes place (SNA 6.180). It is important to note that this approach differs from business accounts (see 2.2.1) Consumption of fixed capital is a cost of production, which is recorded in the income and capital accounts. It may be defined in general terms as the cost, in the accounting period, of the decline in the current value of the producer's stock of fixed assets as a result of physical deterioration, foreseen obsolescence or normal accidental damage. It excludes losses associated with damage caused by war or natural disasters. Such losses are classified as capital losses and are recorded under 'Other changes in volume of assets' as part of accumulation Productivity Capital stocks are important for the estimation of total factor productivity. TFP takes account of several factor inputs at the same time, and is largely a measure of the effects of improvements in the capital services, the work force, improvements in management practices, economies of scale, and so on. Measures of total factor productivity and of capital productivity rely on the availability of statistical series on the prices and quantities of capital services that enter the production process. Two OECD manuals, Measuring Capital (2001a) and Measuring Productivity (2001b) have described the concept and measurement of capital services and their relation to the better-known measures of gross and net capital stocks. Both manuals recommend that volume indices of capital services are the appropriate measure of capital input for activity and production analysis. The following conclusions have so far emerged from this work: Computation of capital services measures does not, in general, require a larger set of data or information than the computation of gross and net capital stock series. Indeed, the different capital measures are and should be all based on the same pieces of statistical information. The capital services approach not only offers a tool for productivity measurement but also leads to a consistent entity of measures of the gross stock, the net stock, prices and volumes of capital services and consumption of fixed capital. There are a number of alternative approaches to measuring productivity, including the use of different production functions. In health care, one has to remember that often the use of capital is linked to specialists working in health care like radiologists or anaesthetists. The derivation of health industry estimates of changes in factor productivity requires coherent current price and volume estimates of output, intermediate inputs, capital services and labour input

8 2.2 Capital formation and capital in accounting In accounting, capital is recorded in the balance sheet. As such, fixed capital stock is an indicator of how the assets of a country have changed as a result of the production process. It is an indicator of the wealth of a country. But, at the same time, fixed capital is also an indicator of the future potential to produce goods and services. It is important to recognise these two different interpretations. Acquisitions and disposals of non-financial assets are recorded in the capital account. They are broken down into gross fixed capital formation, net acquisitions of non-produced non-financial assets and changes in inventories. Gross fixed capital formation is the net result of the acquisition and disposal of fixed assets. (The 'gross' in gross fixed capital formation reflects the fact that the estimates are not adjusted for consumption of fixed capital.) Conceptually, net acquisitions of valuables should also be recorded in the capital account, but as there is often no reliable data source for such transactions this item is not included. Non-produced non-financial assets include land, subsoil assets and other natural assets. One has to be aware that a deficit on the capital account has to be financed by increased liabilities or by a reduction in financial assets. The net acquisition of non-financial assets is financed by gross saving (or net saving plus consumption of fixed capital) and capital transfers. The balance of the capital account is known as net lending/borrowing. Therefore, net lending or borrowing in the capital account is equal in concept to net change in financial position in the financial account but is derived entirely from non-financial transactions, whereas net change in financial position is derived entirely from financial transactions. Such balances provide a measure of the consistency of the two sets of data and can be used to monitor the accuracy and quality of the statistics. If gross saving plus capital transfers exceeds the net acquisition of non-financial assets then there is a surplus that results in the accumulation of financial assets or a reduction in liabilities. There are some differences between business accounting and national accounts in recording capital formation Business accounts Data from business accounts form the base of national accounts. There are very different capital goods by nature which are documented in business accounts - usually in an inventory. The inventory is updated continuously using various depreciation methods which are defined by law. The results of these regular - 7 -

9 updates are shown in the balance sheet. It shows the actual net values of the inventory at the beginning and at the end of the accounting period. The stocks are assessed by acquisition prices or in historical cost. The difference is between the two stock levels at the beginning and the end of the period is identical with the net capital formation. CFC is used in preference to "depreciation" to emphasize that fixed capital is used up in the process of generating new output; CFC may include other costs incurred in using fixed assets beyond actual depreciation charges. Business and administrative records do not always provide information that reflects economic reality. For example, interest charges generally include a service charge as well as a return on capital invested National accounts In national accounts, the capital formation of business accounts only aggregates and consolidates retrospectively investments over branches. It assesses capital at current prices. Furthermore, some adjustments are made. The Gross Capital Formation in National Accounts is broader than that in SHA. In SNA, gross capital formation (GCF) consists of (ESA and following articles; SNA 10.32) by the total value of the gross fixed capital formation (GFCF, P51), changes in inventories (P52), and acquisitions less disposals of valuables (P53). These three types of capital formation are linked in the balance sheet to produced assets (AN1) including fixed assets (AN.11), inventories (AN.12), and valuables (AN.13). 5 Following the SNA rules, the compilation of capital in the health branch has to consider the different products which are provided by specialised industries such as the manufacture of medical instruments or other industries such as construction. The service lives of capital goods vary significantly, which is important for the compilation of the consumption of fixed capital for all such fixed assets. Consumption of fixed capital (is a cost of production (ESA 6.02, SNA 6.179) and as such it must be included in the valuation of non-market output of health care provision. In market production it is supposed that prices include the cost of consumption of capital. 5 See ESA95 Chapter 7 Balance Sheets and Table 7.1 Classification of Assets

10 2.2.3 Health care providers as producers of capital formation Typically, producers of health care do not produce capital goods. However, for certain products, as software, one might find producers which produce both health care and health capital goods. Therefore, we asked in the questionnaire: Do you have any examples where health care providers also produce capital goods for the health sector (HP.7 is limited to health care providers producing health care as a secondary activity)? 2.3 Capital services OECD 2001a proposes that the contribution of capital to production should be measured in terms of the flow of services produced by capital assets rather than by the stock of those assets. For any given type of asset, there is a flow of productive services from the cumulative stock of past investments. This flow of productive services is called capital services of an asset type and is the appropriate measure of capital input for production and productivity analysis. Conceptually, capital services reflect a quantity, or physical concept, not to be confused with the value, or price concept of capital. This means that a volume index of capital services has to be constructed in a way that is consistent with the measurement of capital stocks and consumption of fixed capital. In the case of health care, capital services are the number and quality of investigation, square meters of hospital buildings, occupied hospitals beds, kilometres of patient transportation. The pattern of the quantity of capital services produced by an asset is described as the age-efficiency profile of an asset. It reflects the loss in productive capacity of a capital good over time or the rate at which the physical contributions of a capital good to production decline over time, as a result of wear and tear, and technical obsolescence. Capital services estimates are sensitive to assumptions about age-efficiency functions and the choice of the rate of returns also play a role. There is presently no recommendation as to whether capital services should be compiled in Health Accounts. 3. Capital Formation in health accounts manuals 3.1 System of Health Accounts (SHA1.0) In SHA, gross capital formation is part of total health expenditure (THE) which is, by SNA definition, part of total gross domestic expenditure (SHA: 5.3)

11 3.1.1 Definitions SHA: 5.2 states: Gross capital formation in health care industries are those expenditure that add to the stock of resources of the health care system and last more than an annual accounting period. Gross capital formation can further be classified by type of institutional unit involved in the provision of health care services (see Chapter 4) Accounting rules SHA: 6.3 states: The complex issue of accounts for capital formation and its financing is not part of this manual. However, there are some important rules included. But, SHA refers also to SNA rules. What are these rules? First, each transaction should be explicitly allocated to the economic SNA category to which it belongs. Capital formation refers to goods which are not consumed in the current period. Capital formation is therefore not part of current health care expenditure Compatibility As an accounting framework built around a core set of tables in monetary-terms, the SHA has to be methodologically compatible with the System of National Accounts (SNA). Each item should be explicitly allocated to the SNA category to which it belongs (final consumption, intermediate consumption, capital formation, transfers of benefits, etc.) (SHA: 1.34). SHA states: Methodological compatibility with the SNA is a prerequisite for calculating meaningful expenditure ratios and for international comparability. Different accounting rules applied nationally, for example on how to allocate investment in health facilities over time, can significantly influence the outcome of health expenditure analysis in international comparisons. SHA presents the input-output matrix as an example but not as a priority task in the framework of the SHA to show the link between SHA and SNA 6. The framework in these tables does, however, provide suggestions on how to check the consistency of statistics on expenditure flows of goods and services obtained from different statistical sources (surveys in health care provider industries, expenditure surveys, accounts of social insurance and government authorities, investment surveys, foreign trade statistics, etc). Within this framework, it would be possible to calculate cross-checks for expenditure on health by comparing separate estimates for the production and for the use side of the accounts after the deduction of intermediate consumption and non-health-care production from 6 See SHA: Tables 8.2 and

12 total gross production. Inter-industry flows within medical service industries may be very small with the largest part of production going to final consumption Double Counting Some double counting in the compilation of GCF and CFC as part of Total Health Expenditures by type of health care providers might arise as GCF includes by definition current depreciation Specific goods and services One important question is the boundary of capital goods included in SHA. The starting point of the System of Health Accounts (SHA) is the definition of goods and services whose final consumption constitutes the core functions of a country s health care system (SHA: 8.12). Analogously, the first step in designing a health satellite account is to define the goods and services specific to health (SNA, para ). Specific goods are further subdivided in the SNA recommendations into characteristic goods and connected goods. Characteristic goods and services are those of which the production side is studied in some detail, at least by cross-classifying goods and services and the institutions involved. The capital investments of these producers, the personnel they employ, etc., are to be analysed explicitly. In both the System of Health Accounts, and in health satellite accounts, these goods and services correspond to total expenditure on health. Connected goods and services are those for which their conditions of production need not be monitored in detail (SHA: 8.13). Corresponding outlays could be considered as expenditure on health in a wider sense for which the personnel employed is not considered as belonging to health care employment, nor is the investment into the producing units considered as investment into medical facilities. The corresponding item in the SHA are the functions HC.4, Ancillary services to health care and HC.5, Medical goods dispensed to out-patients. For health satellite accounts, SHA divides the production side of the economy into three kinds of activities: health care provider industries, other medical industries, and other industries (SHA: 8.21). Other medical industries are mainly acting as producers for intermediate consumption and for capital formation in the health care system, or for export. Part of final consumption in health care goods and services as well as part of intermediate products and gross capital formation is in turn imported. Expenditure of health care goods and services comprise both purchases and own final use. Own final use is non-market production by government and non-profit institutions serving households plus household production of health services

13 3.2 Producers Guide The Producers Guide proposes two important extensions: a) Expenditure on capital formation should be estimated for all institutions and activities within the expenditure boundary, i.e. both government and non-government entities. In contrast, SHA: 5.38 defines GCF as sum of capital formation in the institutional units listed under the ICHA-HP classification items HP.1 to HP.3, HP.5 and HP.6, where health care is the predominant activity. b) Both consumption of capital and capital outlays are line items in the resource cost classification (Producers Guide Table 4.8), which captures expenditure according to the standard economic classification of resources used for the production of health services. The classification includes categories for current outlays (RC.1) and capital outlays (RC.2), with breakdowns for each one of these major categories Definitions The ICHA-HC classification scheme separates those functions that directly involve current health care from those that are related to the health infrastructure (SHA: 3.19). Fixed capital formation for health care provider institutions (HC.R.1) is used to build (or rebuild) the physical facilities of hospitals and other providers of care. Fixed capital investments for institutions performing healthrelated functions, such as construction and equipping of research and training facilities, should be included in HC.R.2 to HC.R.5. If there is interest in showing these capital expenditures separately, they can be presented as subcategories under each related higher-level category. Capital expenditure (RC.2) records the value of non-financial assets that are acquired, disposed of or have experienced a change in value during the period under study. The assets held by the health system include new acquisitions, and major renovation and maintenance of tangible and intangible assets that are used repeatedly or continuously in production processes of health care, over periods of time longer than one year. The main categories of the classification features are - buildings (RC.2.1), - capital equipment (RC.2.2), and - capital transfers (RC.2.3). The categories RC.2.1 and RC.2.2 may include major renovation, reconstruction or enlargement of existing fixed assets, as these interventions can improve and extend the previously expected service life of the asset

14 3.2.2 Valuing capital created Investment in health care facilities and equipment creates assets that typically are used over a long period of time (SHA: 12.19). Health accountants need to be sure that the value of that use is included in the estimated costs of non-market producers. Two distinct aspects of capital must be considered in measurement of health expenditure: gross fixed capital formation and the consumption of fixed capital (see Section H.1, paragraphs 1.48 to 1.57, in the SNA93). SHA recommends that health accounts should include an estimate of the total expenditure on gross fixed capital formation during the period (SHA: 12.20). This includes items such as new building construction or major renovations, or purchases of large equipment. Expenditure on capital formation should be estimated for all institutions and activities within the expenditure boundary, i.e. both government and non-government entities Valuing capital consumed Consumption of fixed capital refers to the value of the capital assets used up for production during the current period (SHA: ). Typically, both market and non-market producers will use (or wear down ) some of the value of fixed capital in producing goods and services during the current period. For market producers, this is assumed to be captured in the prices charged at the time of consumption of their goods and services, and so is already captured in the estimates of the value of their production. For non-market producers, however, the value of consumption of fixed capital must be added to other components of their cost of production, such as compensation of employees and the cost of goods and services used in production. This may require special attention by the health accountant. Many government agencies do not calculate an estimate of capital consumption, or do not budget for that, as money does not change hands in this activity. Where it is not included, the health accountant should estimate an appropriate value for this item and add it to the production costs that do involve exchange of money. National income accountants have methods for estimating this economic cost, and health accountants should follow the same practices (see paragraphs 1.62 and 1.63 and Chapter 6.I of the SNA93) Investment as intermediate goods in production The PG discusses also investments in the context of input/output analysis PG:C.07): A special offshoot of the system of national accounts is a product called an input/output table, an example of which is shown in Table C.1. As its name suggests, it is a table that shows where an economy s production comes from and where it is used. If a country's national accountants have developed an input/output table, or if such a table has been developed in the ministry of planning, a university, or a similar place, it should be examined carefully. Often the health system is combined with other industries such as social welfare or

15 recreation, but in other cases the input/output table can be a rich source of data for the NHA tables. In any case, health accountants should work with colleagues from national accounts to build up the section of the input/output table devoted to the health care industries. 4. Capital Consumption Both Health Accounts and National Accounts strive to measure the current use of resources in the provision of goods and services. Consumption of fixed capital, whether booked by the provider or not, is estimated and included in the value of goods and services provided (see Chapter VI, Section I, of SNA93) Capital Consumption in SHA Viewpoints As the standard tables of SHA1.0 do not exhibit capital consumption the question is: Why is it necessary to compile consumption of fixed capital? 1) The argumentation in SHA is as following: Because a pure cash-flow approach does not lead to comparable accounts due to differences in the organisation of health care systems and differences in administrative accounting systems, the SHA recommends that the SNA principles of measurement of output of health care services are followed. 7 Producers Guide

16 The SNA concepts of output and intermediate consumption are applied analogously in calculating national expenditure on health in the SHA. The expenditure on health care services that are provided by non-market producers to house holds free of charge or at prices that cover only part of their production costs may be underestimated in existing National Health Accounts. This separation of output into market and non-market output is used in health accounting as a technical concept for valuing output of health care services correctly in monetary terms. It is not shown as a separate item in the standard tables proposed for the SHA. However, for the internal estimation process, separate accounts for non-market and for market production will be an essential tool (SHA: 5.21). 2) The second argument in SHA1.0 for the compilation of capital consumption stems from the idea to measure not only domestic demand of health care goods and services, but also investments in health care. Therefore, capital formation is included in total health expenditures. The consistent reporting of current expenditures for health care and for health care capital formation requires the consideration of consumption of fixed capital. Consumption of Fixed Capital are costs during the course of the accounting period as consequence of the decline of the current value of the capital stock owned and used by the producer as a result of physical deterioration, normal obsolescence or normal accidental damage (SNA 6.179) Practical considerations Furthermore, SHA 5.24 states: For these reasons, and also to ensure that the various non-market services produced by government units and NPISHs are valued consistently with each other, they are all valued by the sum of the costs incurred in their production: that is, by the sum of: - intermediate consumption; - compensation of employees; - consumption of capital; - other taxes, less subsidies, on production. In principal, this would mean compiling the output of non-market health care producers by resource cost. Because market producers must cover all their intermediate expenses, including capital goods used and the labour inputs of owners, the expenditure on final consumption reasonably represents an all-in value

17 4.2 Capital Consumption in the Producer Guide PG: B.37. The consumption of fixed capital (RC.1.4) represents the reduction in the value of the fixed assets used in the production process during the accounting period, resulting from physical deterioration, normal obsolescence or damage. It measures the decline in the usefulness of a fixed asset for purposes of production. Measurement is frequently an assumed regular rate of decline of their efficiency in production over time, based on an average service life of the asset. 5. Financing of capital formation and capital consumption 5.1 Differences between service lives and financing periods Because of the long-term nature of investments capital financing considers the service lives of capital goods. Therefore, financing of capital formation is usually different from financing of health care services. As a consequence, it is not uncommon for governments to issue separate reports on capital spending and current spending. In the context of SHA it is important to note that the periods of service lives and the periods of financing commonly differ. The cash flows reported in public finance statistics are not exactly identical with value of capital created or the capital consumed. This is a reason why capital accounts are necessary. Investments are often, at least partly, financed by loans. Loans increase the funds available to a provider or financing agent, but they should not be included directly in the health accounts. A simple example may help to show the proper treatment of the amounts. Because loans affect the assets of the entity, two sets of accounts are needed current-account, which track revenues and expenses, and capital-account, which track assets and liabilities. The loan itself affects the capital account (or balance sheet). 5.2 Subsidies and grants While loans have to be repaid by the providers of health care, subsidies and grants have not to be repaid. Subsidies aim to support the production activities or to lower the price. The SNA distinguishes between subsidies and grants. Subsidies are current unrequited payments that government units make to enterprises on the basis of the levels of their production activities or the quantities or values of the goods or services which they produce, sell or import (SNA 93: 7.71). Subsidies on products (payable per unit of good or service)

18 should be distinguished from other subsidies on production (not calculated per unit of good or services) often taking the form of regular transfers paid to cover persistent losses. It is important to recall that Subsidies... do not include grants that governments may make to enterprises in order to finance their capital formation,...such grants being treated as capital transfers (SNA 93: 7.72). The items in the functional classification refer to commodities and thus to the functional structure of output of the health care system. (SHA: 3.25). 5.3 Standard tables of SHA1.0 What does SHA recommend for reporting of expenditures for capital formation? Standard Table 5 of SHA shows a breakdown of HC.R.1 by health care financing. Table 5 of SHA is the only table which presents capital formation, while other tables are focusing on current health expenditures (Tables 1 4) or personal health expenditures (Table 6 and 7). Additionally, the JHAQ require the HCxHP table including the breakdown of HC.R.1 by provider (HP) respectively. The HPxHF table is in current expenditure terms and therefore by definition excludes capital formation. Table 5 (HCxHF) allows to describe the public/private mix of financing of domestic capital formation as well as the share financed by the Rest of the World. However, prerequisite for this compilation is an inventory of capital formation not only across financing agents but also across health care providers. 5.4 Financing of capital consumption The SHA does not present a table on capital consumption. But, as already mentioned, the PG includes a classification of Resource Cost (RC) and recommends compiling the cross-classification resource cost by type of providers. RC are the costs of the factor inputs used by providers or financing agents to produce the goods and services consumed or the activities conducted in the system. However, the RC classification of the PG captures not only expenditure according to the standard economic classification of resources used for the production of health services, but also investments. The classification includes categories for current outlays (RC.1) and capital outlays (RC.2), with breakdowns for each one of these major categories (see Table 1)

19 Table 1: A resource cost (RC) or economic classification Code RC.1 RC.1.1 RC RC RC RC.1.2 RC RC RC RC RC.1.3 RC.1.4 RC.1.5 RC.1.6 RC.1.9 RC.2 RC.2.1 RC.2.2 RC RC RC.2.3 Description Current outlays Compensation of employees and owners Wages Social contributions Non-wage labour income Supplies and services Material supplies Drugs and pharmaceuticals Other supplies Services Consumption of fixed capital Interest Subsidies to providers Transfers to households Other current expenditure Capital expenditure Buildings Movable equipment Vehicles Other Capital transfers to providers Source: PG: Table 4.8 These categories are not applicable when classifying resource costs faced by providers. 6. Capital Formation and Foreign Trade SHA 5.28 states that foreign trade in capital formation in health care industries and health insurance is a relevant candidate for reporting in the SHA. There are at least two aspects: a) the foreign trade of goods of capital formation, and b) the foreign financing of capital goods. Trade statistics are able to identify exports and imports major medical equipment. 7. Measurement Obviously the measurement of GFCF and CFC is a complex undertaking which requires a comprehensive collection of statistics and an inventory of investments made by different types of providers. The gross capital stock can be estimated

20 either by surveys of enterprises or by the perpetual inventory method (PIM). SHA refers to SNA/ESA95 which recommends PIM (see Annex). 7.1 Surveys However, also in the case of the application of PIM, information about actual expenditures for investment goods or depreciations are necessary. 7.2 Revaluations Changes in the value of fixed assets arising from changes in the general price level are recorded in the revaluation accounts and do not form part of consumption of fixed capital According to OECD 2001a. The revaluations are carried out by the enterprises themselves either using coefficients supplied to them by the statistical agency or on the basis of information about the current market prices of the assets. The coefficients varied from one type of an asset to another but not from one enterprise to another. Thus, the gross value of an asset at the beginning of each would either be equal to its original price of acquisition multiplied by the cumulative product of all the revaluation coefficients applied up to that point of time or, alternatively, it would be equal to the estimated current market price of a replacement asset

21 8. References ABS (2000), Australian National Accounts: Concepts, Sources and Methods, Canberra. Barro R.J, Sala-I-Martin, X. (2004), Economic Growth, 2 nd ed. New York: McGraw-Hill. European Commission, IMF, OECD, UN, World Bank (1993), System of National Accounts New York: United Nations Publications. IMF (2001), Government Finance Statistics Manual, 2 nd edition. OECD (2000), A System of Health Accounts (Version 1.0), Paris. OECD (2001a), Measuring Capital - OECD Manual, Measurement of capital stocks, consumption of fixed capital and capital services, Paris. OECD (2001b), Measuring Productivity - OECD Manual: Measurement of Aggregate and Industry-Level Productivity Growth, Paris Schmalwasser O., Schidlowski M. (2006), Measuring Capital Stock in Germany, in: Statistisches Bundesamt, Wirtschaft und Statistik 11/2006, Wiesbaden. Walters R., Dippelsman R. (1985), Estimates of Depreciation and Capital Stock, ABS Occasional Paper (1985/3). WHO/World Bank/United States Agency for International Development (2003). Guide to producing national health accounts with special applications for low-income and middle income countries. Geneva: World Health Organization,

22 Annexes A.1 Classification of Capital in ESA95 Table 2: Classification of assets AN. NON-FINANCIAL ASSETS (AN AN. 2) AN.1. Produced assets AN.11 Fixed assets AN.111 Tangible fixed assets AN.1111 Dwellings AN.1112 Other buildings and structures AN Non-residential buildings AN Other structures AN.1113 Machinery and equipment AN Transport equipment AN Other machinery and equipment AN.1114 Cultivated assets AN Livestock for breeding, dairy, draught, etc. AN Vineyards, orchards and other plantations of trees yielding repeat products AN.112 Intangible fixed assets AN.1121 Mineral exploration AN.1122 Computer software AN.1123 Entertainment, literary or artistic originals AN.1129 Other intangible fixed assets AN.12 Inventories AN.121 Materials and supplies AN.122 Work in progress AN.1221 Work in progress on cultivated assets AN.1222 Other work in progress AN.123 Finished goods AN.124 Goods for resale AN.13 Valuables AN.131 Precious metals and stones AN.132 Antiques and other art objects AN.139 Other valuables AN.2 Non-produced assets AN.21 Tangible non-produced assets AN.211 Land AN.2111 Land underlying buildings and structures AN.2112 Land under cultivation AN.2113 Recreational land and associated surface water AN.2119 Other land and associated surface water AN.212 Subsoil assets AN.2121 Coal, oil and natural gas reserves AN.2122 Metallic mineral reserves AN.2123 Non-metallic mineral reserves AN.213 Non-cultivated biological resources AN.214 Water resources AN.22 Intangible non-produced assets AN.221 Patented entities AN.222 Leases and other transferable contacts AN.223 Purchased goodwill AN.229 Other intangible non-produced assets Source: ESA95: Table

23 A.2 Perpetual Inventory Method (PIM) The main method of calculating fixed assets and consumption of fixed capital is the Perpetual Inventory Method, which is recommended by the ESA. The Perpetual Inventory Method is based on the idea that today s stock of fixed assets is composed of assets that were accumulated in the past. Taking into account the different service lives of the assets one can estimate the stock of fixed assets from the time series of GFC. In practice, the application of PIM might differ because of assumptions about the service lives, the age-efficiency and age price profiles as well as the price measurement. Figure 1: PIM of the German SNA Calculations of fixed assets and consumption of fixed capital using the Perpetual Inventory Method Results Basic material Results (+) Time series on gross fixed capital formation at constant prices (long-run data of the past and broken (+) down by group of assets) (+) Gross fixed assets (value as new) at constant replacement costs 1) Retirements in constant prices 1) Density function (e. g. Gamma distribution, log. normal distribution) (-) (-) Distribution of retirements Average economic service life (estimated by group of assets) Depreciation method (in most cases straight line, geometrically degressive) Distribution of consumption of fixed capital Consumption of fixed capital at constant prices 1) Net fixed assets (current market value) at constant prices 1) (+) Gross fixed assets (value as new) at current replacement costs Retirements at current prices (current replacement costs) Annual average prices indices (price indices of gross fixed capital formations) Price indices at the beginning of year (estimated) Other changes in the volume of assets at constant prices Consumption of fixed capital at current prices (replacement costs) Net fixed assets (current market value) at current replacement costs Value as new (gross) Current market value (net) 1) The respective data on historic cost value can be derived from the time series on gross fixed capital formation at current prices. Source: Schmalwasser O., Schidlowski M. (2006), Statistisches Bundesamt

24 Figure 2: PIM of the Australian SNA Source: ABS (2000),

25 A.3 Glossary Term Consumption of fixed capital (CFC) Depreciation Dwellings (AN.1111) Fixed assets (AN.11) Gross capital formation (GCF) Gross fixed capital formation (GFCF) Intangible fixed assets (AN.112) Inventories (AN.12) Machinery and Equipment (AN.1113) Non-financial assets (AN) Non-produced assets (AN.2) Other buildings/structures (AN.1112) Produced assets (AN.1) Subsidies Tangible fixed assets (AN.111) Definition Consumption of fixed capital (K.1) represents the amount of fixed assets used up, during the period under consideration, as a result of normal wear and tear and foreseeable obsolescence, including a provision for losses of fixed assets as a result of accidental damage which can be insured against. (ESA 95, 6.02.) CFC is a decline, during the course of the accounting period, in the current value of the stock of fixed assets owned and used by the producer as a result of physical deterioration, normal obsolescence or normal accidental damage. (SNA 6.179) Consumption of fixed capital should reflect underlying resource costs and relative demands at the time the production takes place. (SNA 6.180) The anticipated reduction in the value of an asset over time that is brought about through physical use or obsolescence (Producer Guide). Buildings that are used entirely or primarily as residences, including any associated structures, such as garages, and all permanent fixtures customarily installed in residences. Houseboats, barges, mobile homes and caravans used as principle residences of household are also included, as are historic monuments identified primarily as dwellings. Costs of site clearance and preparation are also included. (SNA; Annex to chapter XIII) Produced assets that are used repeatedly or continuously in production processes for more than one year. Fixed assets consist of tangible and intangible fixed assets. (SNA; Annex to chapter XIII) GCF consists of gross fixed capital formation (P.51), changes in inventories (P.52), and acquisitions less disposals of valuables (P.53). (ESA 95, 3.100) Gross fixed capital formation (P.51) consists of resident producers acquisitions, less disposals, of fixed assets during a given period plus certain additions to the value of nonproduced assets realised by the productive activity of producer or institutional units (ESA 95, ) Fixed assets that consist of mineral exploration, computer software, entertainment, literary or artistic originals and other intangible fixed assets intended to be used for more than one year. (SNA; Annex to chapter XIII) Produced assets that consist of goods and services that came into existence in the current period or in an earlier period held for sale, use in production or other use at a later date. They consist of material and supplies, work-in-progress, finished goods and goods for resale. Included are all inventories held by government, including, but not limited to, inventories of strategic materials, grains and other commodities of special importance to the nation. (SNA; Annex to chapter XIII). Inventories should be valued at prices prevailing on the date to which the balance sheet relates, and not at the prices at which the products were valued when they entered inventory. (ESA 95, 7.37.) Transport equipment and other machinery and equipment, other than that acquired by household for final consumption. (SNA; Annex to chapter XIII) Entities, over which ownership rights are enforced by institutional units, individually or collectively, and from which economic benefits may be derived by the owners by holding them, or using them over the period of time. (SNA; Annex to chapter XIII) Non-produced assets are non-financial assets that have come into existence other than through processes of production. (SNA; Annex to chapter XIII) Some of these assets occur in nature, others, which may be referred to as constructs devised by society, come into existence by legal or accounting actions. (ESA 95, 7.17.) Non-residential buildings and other structures. (SNA; Annex to chapter XIII) Non-financial assets that have come into existence as outputs from production processes. (SNA 13.14) Subsidies are payable to producers only and not to final consumers, and are current transfers and not capital transfers. They are payable on specific products or on production in general. A subsidy in a product is payable per unit of good or service. (Producer Guide) Fixed assets that consist of dwellings; other buildings and structures; machinery and equipment and cultivated assets. (SNA; Annex to chapter XIII) Tangible fixed assets have to be recorded at market prices if possible (or basic prices in the case of own-account production of new assets), if not then at current purchasers