Private Hospitals and Public Funding: Lessons from Estonia’s Healthcare Reform

Healthcare systems worldwide struggle to balance efficiency, access, and financial sustainability. One of the most debated approaches is integrating private hospital operations with public funding—leveraging market mechanisms while maintaining universal access. Proponents argue that this model enhances efficiency, fosters innovation, and improves patient choice, while critics warn of potential inequities and cost escalation.

A natural experiment in this domain is Estonia, a dynamic European country that undertook ambitious healthcare reforms after regaining independence in 1991. Estonia’s approach, particularly through its Hospital Master Plan, offers valuable insights into hospital consolidation, financing models, and the governance of public-private healthcare systems. This article focuses solely on the Hospital Master Plan: did it work, and what can other countries learn from Estonia’s experience?

Estonia’s Healthcare System: A Transformation in Three Phases

Estonia inherited a Soviet-style healthcare system—overcentralized, hospital-heavy, and inefficient. Reform began with three key phases:

1. Health Financing Overhaul (1992) – Establishment of the Estonian Health Insurance Fund (EHIF), a social insurance model funded by payroll taxes, replacing the state-budgeted system.

2. Hospital Ownership Reform (1994–2001) – Decentralization of hospitals, with many transformed into autonomous foundations or joint-stock companies operating under private law but delivering publicly funded care.

3. Hospital Master Plan (2000–present) – A comprehensive restructuring that consolidated hospital networks, optimized service distribution, and implemented performance-based financing.

This stepwise approach enabled Estonia to transition from an inefficient, fragmented system to a leaner, high-performing model with a clear separation between purchasers (EHIF) and providers.

How Estonia Reformed Its Hospital Network

One of Estonia’s most significant moves was rationalizing its hospital network. Before reforms, the country had over 120 hospitals for 1.5 million people—far exceeding clinical and financial sustainability. The Hospital Master Plan aimed to reduce inefficiencies while ensuring equitable access.

Key restructuring measures included:

• Reducing acute care hospitals from 120+ to fewer than 20

• Introducing a tiered hospital system with regional, central, and general hospitals

• Shifting funding to case-based payment models, incentivizing efficiency and quality

• Encouraging competition between autonomous providers while maintaining unified quality and pricing standards

These changes helped Estonia modernize its hospital infrastructure while avoiding the pitfall of unregulated privatization seen in some post-Soviet states.

Did It Work? Measuring Estonia’s Success

Over the last two decades, Estonia has undergone a significant transformation in hospital efficiency, financial sustainability, and patient access. One of the clearest indicators of success is the reduction in hospital bed capacity. In 2005, Estonia had a much higher number of hospital beds per capita compared to many Western European countries, but by 2021, the country had reached 4.4 hospital beds per 1,000 people, closely aligning with the EU average of 4.8 per 1,000. This reduction reflects a deliberate shift away from inpatient care toward more outpatient and community-based models.

Hospital length of stay is often used as an indicator of efficiency in healthcare systems. In 2005, patients in Estonia spent an average of 7.8 days in the hospital, but by 2023, this had declined to 5.8 days. This reduction suggests improvements in patient throughput and more streamlined care pathways. While Estonia’s figures remain above those of Denmark (4.6 days) and the Netherlands (5.2 days), they are now comparable to Sweden (5.5 days) and still significantly lower than Germany (7.5 days).

From a financial perspective, Estonia operates a cost-efficient healthcare system. Per capita health spending in 2021 was EUR 2,124, which is about half the EU average (EUR 4,028). In terms of cross-jurisdictional comparisons, Estonia spends less on healthcare relative to GDP than most of its European counterparts. In 2021, Estonia’s healthcare expenditure accounted for 6.7 percent of GDP, compared to 12.8 percent in Germany, 11.1 percent in the Netherlands, 10.8 percent in Denmark, and 10.3 percent in Sweden. This lower overall spending is partly due to lower wages for healthcare professionals, which reduce labour costs compared to high-income countries. However, Estonia’s hospital consolidation strategy has also played a role, reducing infrastructure costs and increasing efficiency while keeping administrative costs below 3 percent of total health expenditure, compared to 5 to 6 percent in Germany and 4 to 5 percent in the Netherlands.

One of the major challenges Estonia faced was long waiting times for specialist care and elective surgeries. Before 2020, patients often waited 1.5 to 2 years for elective surgeries. However, targeted investments and service reorganization have dramatically improved this, with waiting times for many procedures now reduced to under six months by 2022. While this is a notable improvement, countries like Denmark and the Netherlands, which operate more efficient referral systems, continue to outperform Estonia in this area.

While Estonia’s reforms have been largely successful, there are trade-offs. The closure of many smaller hospitals has resulted in uneven access across rural areas, requiring ongoing policy attention to avoid disparities in care. In contrast, countries like Sweden have maintained regional equity by investing heavily in transport networks and digital health solutions to bridge access gaps. Estonia’s challenge moving forward will be ensuring that efficiency gains do not come at the cost of accessibility for underserved populations.

What Estonia Can Learn from Canada and South Korea

Looking beyond Europe, Canada and South Korea provide two contrasting examples of public funding for private hospitals, each with lessons for Estonia.

Canada’s system relies on global budgets for hospitals, ensuring cost control but often leading to capacity constraints. Fixed hospital funding means that while costs are predictable, long wait times for elective procedures remain a persistent challenge. Estonia, which has struggled with waiting lists in the past, should be mindful that underfunding hospital capacity could create similar bottlenecks. Moreover, Canada’s approach has sometimes limited innovation and efficiency, as hospitals lack incentives to streamline services when their budgets are fixed.

South Korea, in contrast, funds private hospitals through a competitive, publicly funded insurance system. This market-driven approach has made South Korea’s hospitals some of the most efficient in the world, with short average hospital stays and high service availability. However, this model comes with risks. Overutilization—where hospitals incentivize excessive procedures to maximize revenue—is a well-documented issue. Estonia should be cautious that allowing private providers to compete for public funds does not lead to unnecessary medical interventions that inflate costs without improving patient outcomes.

Ultimately, Estonia’s approach strikes a balance between Canada’s cost-containment strategy and South Korea’s efficiency-driven model. However, policymakers should remain vigilant about the risks of underfunding, access disparities, and financial incentives that may drive inefficiencies over time.

Conclusion

Estonia’s healthcare reform illustrates how integrating private hospital operations with public funding can work when carefully designed. Its experience offers a unique natural experiment in hospital consolidation and financing, with lessons for both developed and emerging healthcare systems.

Countries facing inefficiencies, excess hospital capacity, or unsustainable health spending can look to Estonia as a case study—balancing market principles with public health objectives to build a more effective healthcare system. Estonia’s governance of its healthcare system, marked by a commitment to phased and data-driven reform, has played a crucial role in its success.