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In 1991, Indonesia began a process of decentralization in the health sector which had implications for the country's public hospitals. The public hospitals were given greater authority to manage their own personnel, finance and procurement, with which they were allowed to operate commercial sections in addition to offering public services. These public services are subsidized by the government, although patients still pay certain proportion of fees. The main objectives of health sector decentralization are to increase the ability of public hospitals to cover their costs and to reduce government subsidies. This study investigates the consequences of decentralization on cost recovery rate of public hospitals at district level. We examine five service units (inpatient, outpatient, operating room, laboratory and radiology) in three public hospitals. We find that after 20 years of decentralization, district hospitals still depend on government subsidies, demonstrated by the fact that the cost recovery rate of most service units is less than one. The commercial sections fail to play their role as revenue generator as they are still subsidized by the government. We also find that the bulk of costs are made up of staff salaries and incentives in all units except radiology. As this study constitutes exploratory research, further investigation is needed to find out the reasons behind these results.

Decentralization in Indonesia: lessons from cost recovery rate of district hospitals