Introduction
The transition economies of central and eastern Europe (CEE) and the former Soviet Union (FSU) confront the same challenge as established market eco-nomies in health financing: how to mobilize and allocate resources equitably and efficiently to satisfy a growing need and demand for health services. In transition economies, solutions have been attempted amid profound social, political and economic transformation. Health-sector reform has been charac-terized by the same themes that have characcharac-terized the social and economic transition from central planning to markets. This has included reducing direct state involvement (including decentralization, privatization and organizational reform), increasingly subjecting various actors to market forces and competi-tion, and relying on market signals to guide resource allocation decisions.
In this chapter, we review the experience of transition economies with health financing reform since the early 1990s, based on a sample of 16 coun-tries representing both CEE and FSU councoun-tries: Albania, Azerbaijan, Croatia, Czech Republic, Estonia, Georgia, Hungary, Kazakhstan, Kyrgyzstan, Latvia, Poland, Republic of Moldova, Romania, Russian Federation, Slovakia and Slovenia. Most countries entered the transition phase with a similar inherit-ance in terms of health financing systems characterized by high levels of financial and risk protection and equity. A decade into transition, however, these systems have diverged significantly. Three patterns seem to have emerged:
1 The first group includes countries that, despite the decline in economic output and public resources, have managed to maintain high levels of financial protection. These countries, which include Croatia, the Czech Republic and Hungary, are characterized by higher per-capita incomes, less severe economic decline and early health reforms implemented consistently throughout the country.
2 The second group comprises countries that have experienced deterioration in financial protection and equity. This group has had lower per-capita incomes and more severe economic decline with prolonged and inconsistent economic and political transition. Health system reform was also initiated more recently and is typically more fragmented. Representative countries include Albania and the Russian Federation.
3 Finally, the third group comprises countries that experienced serious deteriora-tion in their health systems resulting from a drastic decline in economic performance in addition to their low initial income per capita. In these countries, which include Azerbaijan, Georgia and the Republic of Moldova, public financing has collapsed with a massive loss of resources for social services such as health care.
The same three clusters emerge in health financing reforms. The first group has moved to a Bismarck model predominantly financed by payroll taxes. This transition has been complex. In particular, introducing a social insurance model for health financing, with semi-autonomous quasi-state organizations, has been institutionally challenging. The main dilemmas included: whether to establish social insurance on a competitive or single-payer basis; adopting national versus decentralized revenue collection and pooling and/or purchas-ing systems; buildpurchas-ing management capacity in the quasi-state agencies; and clarifying the roles and responsibilities of these new organizations in relation to the ministry of health, ministry of finance and local governments.
The second group has had less comprehensive and smaller-scale reforms.
Payroll taxes have been introduced as a complementary mechanism of resource mobilization, but general tax revenue still predominates. The effects of an inherited fragmentation of public-sector pooling and resource allocation mechan-isms has become a key issue. At the same time, out-of-pocket payments – both formal and informal – have become a more significant revenue source than in the first group, with a parallel erosion in financial protection and equity despite legal entitlements to universal coverage.
Finally, in the third group, out-of-pocket payments have become the pre-dominant mode of health financing, amounting to 50 –80 per cent of total health revenue. This has severely reduced financial protection against the cost of illness. For these countries, rebuilding a system of resource mobilization from prepaid sources is a key reform priority.
In this chapter, we explore the factors that have led to the emergence of these three groups of countries and describe the health financing reforms adopted. In the next section, we present the analytical framework and key concepts. Next, we describe the macroeconomic context and give a detailed description of health financing reforms. We then discuss critical institutional issues that have supported or undermined the implementation of the envisioned
new financing mechanisms. Finally, we present trends in indicators of health system performance and our conclusions.
Analytical framework
This chapter analyses health care financing in 16 CEE and FSU countries from the early 1990s, based on country-specific studies published by the World Health Organization (WHO) and the World Bank, the academic literature and cross-sectional data on health care expenditure.
‘Health financing’ is an imprecise term, encompassing several sub-functions related to the flow of resources through the health system. We discuss two aspects of health financing in detail: the mechanism for mobilizing resources and the pooling of various revenue sources. The third element of health care financing – allocating resources to (or purchasing services from) providers – is referred to in this framework but is not our focus. (This topic will be treated in greater detail in a forthcoming World Bank publication on resource allocation and purchasing in developing countries (Langenbrunner et al., 2001).)
Table 4.1 illustrates the key characteristics used to describe each of these three sub-functions of health care financing. In terms of resource mobilization, prepaid revenue sources are contrasted with those collected by providers at the point of service, and whether payment of prepaid sources is compulsory or voluntary. Under pooling, this analytical framework emphasizes the frag-mentation or integration of multiple revenue pools and their size as the critical determinants of the financial sustainability of health financing. Purchasing and resource allocation include the level and mix of services purchased, the population group covered, the providers of services and the payment mech-anism adopted. The organizational and institutional issues related to the
Table 4.1 Analytical framework for improving the performance of health systems
Key characteristics
Source: adapted from WHO (2000)
Purchasing
•
Prepaid versus point of servicesub-functions are also assessed. Finally, the framework takes into account the impact of changes in health financing on health, equity, financial protection and efficiency.
Macroeconomic context
All CEE and FSU countries experienced moderate to severe disruption in economic activity during the transition period. The closure of unproductive enterprises and industrial sectors and the collapse of previously established trade patterns – exacerbated in some cases by civil war – led to substantial declines in economic output in most countries. In the 16 countries reviewed, gross domestic product (GDP) declined in all but two in real terms between 1990 and 1997 (Table 4.2). The most serious decline (50 –70 per cent) was experienced in the FSU countries. More broadly, the economic crisis that has swept CEE and FSU countries translated into declining real wages and increas-ing income inequality and poverty.
Parallel to these events, the tax base has been severely constrained by a decline in the formal economic sector, expanding activity in the informal sector and weak administrative capacity to enforce tax collection in the new market context. As a result, governments’ ability to collect revenue and the total tax receipts needed to finance the social sectors have declined markedly in many of the countries examined. At the same time, expenditure pressure has grown because of increasing prices (especially for imported pharmaceuticals and medical equipment), demands for higher wages, technological develop-ments in health care during the 1990s and increased expectations from people newly exposed to western European standards.
In this context, it is easy to understand why many health care policy-makers have looked for extra-budgetary sources of revenue while trying to maintain financial protection against the cost of illness and improve value for money (allocative efficiency) of scarce health care resources.
Key characteristics of health financing
During the socialist era, revenue for health care was generated mainly from the revenue of state-owned enterprises, and private sources were negligible except as informal payments to providers. Health expenditure was determined through the political bargaining process, in which the health sector competed with other claims on the government budget. Throughout the 1970s and 1980s, the health sector – as one of the economy’s ‘non-productive’ sectors – received low priority in terms of overall public spending. Despite this relatively low level of spending, most countries offered their population a comprehensive range of services, ranging from ambulatory care to inpatient hospital care to population-based public health services. This low level of spending reflected the distorted prices characteristic of socialist economies.
In this section, we review two key dimensions of health financing in these coun-tries: the sources of revenue and the pooling and resource allocation to purchasers.
Funding health care: options for Europe Per-capita GDPa Percentage Per-capita health expenditureb Total health Real public health
(purchasing power change in (purchasing power parity in US$) expenditure as a spending as a percentage
parity in US$) real GDPa percentage of GDPb of 1990 spendingb
Total Public Private % Private
1997 1990–97 1997 1997 1997 1990 1997 1997
Cluster A
Croatia 6 735 −18 481.1 402.2 78.9 16.4 10.5 8.4 68.5
Czech Republic 12 930 −9 758.3 695.3 62.9 8.3 5.4 7.2 115.8
Estonia 7 504 −21 241.2 209.1 32.1 13.3 1.9 5.7 186.8
Hungary 9 914 −6 510.9 417.4 93.5 18.3 5.7 7.1 95.7
Slovakia 9 526 −2 617.6 498.4 119.2 19.3 5.4 7.8 113.3
Slovenia 14 032 4 897.0 802.8 94.2 10.5 5.6 7.6 149.2
Average, cluster A 10 107 −9 584.3 504.2 80.1 14.4 5.7 7.3 121.6
Cluster B
Albania 2 683 −11 58.0 44.5 13.5 23.3 4.4 3.3 46.5
Kazakhstan 4 513 −40 123.7 83.5 40.2 32.5 3.3 4.1 57.9
Latvia 5 609 −45 195.4 151.2 44.2 22.6 2.5 4.5 77.8
Poland 7 438 27 413.9 315.4 98.5 23.8 4.6 6.5 132.1
Romania 6 209 −13 78.5 54.9 23.5 30.0 2.7 4.2 93.5
Russian Federation 7 031 −40 228.2 175.5 52.7 23.1 2.3 5.2 121.9
Average, cluster B 5 581 −20 182.9 137.5 45.4 25.9 3.3 4.6 88.3
Cluster C
Azerbaijan 2 039 −57 64.5 11.9 52.5 81.5 2.6 7.4 21.8
Georgia 4 992 −68 34.6 4.3 30.3 87.5 3.2 4.6 28.9
Kyrgyzstan 2 310 −43 168.9 67.1 101.9 60.3 4.2 7.4 39.7
Republic of Moldova 2 175 −63 174.5 94.6 79.9 45.8 4.0 11.3 93.5
Average, cluster C 2 879 −58 110.6 63.1 62.0 60.2 3.5 7.7 46.0
Note: the averages are unweighted means for each cluster.
Sources:a World Bank (2000), World Development Indicators Central Database CD-ROM. bAuthors’ calculations based on published official figures and World Bank staff estimates and from household surveys where available. Detailed references are available from the authors on request
Percentage of total health expenditure from social health insurance
Percentage of total health expenditure from taxation Cluster A
Cluster C
Cluster B
MO
Figure 4.1 Percentage of total health expenditure financed by taxes and by social health insurance in 16 CEE and FSU countries, 1997 or latest available year
Key: AL, Albania; AZ, Azerbaijan; CR, Croatia; CZ, Czech Republic; ES, Estonia; GE, Georgia; HU, Hungary; KAZ, Kazakhstan; KY, Kyrgyzstan; LAT, Latvia; MO, Republic of Moldova; PO, Poland; ROM, Romania; RU, Russian Federation; SK, Slovakia; SL, Slovenia.
Source: Authors’ calculations based on World Bank data. Details are available from the authors on request
Sources of revenue
One of the most important policy dimensions of revenue collection for the health sector is that adequate resources should be mobilized though prepayment in an equitable way. The more progressive the contribution plan (increasing contribution rates at increasing income levels), the more equitable the overall financing system. Out-of-pocket payments significantly reduce both financial protection against the cost of illness and the equity of the overall financing plan in terms of the burden of financing borne by poor people.
During transition, two new sources of funding emerged: payroll-based social health insurance and increased reliance on both informal out-of-pocket pay-ments and official co-paypay-ments. Most countries have diversified health care financing sources, combining social health insurance, general tax revenue and private out-of-pocket payments. Private health insurance has not made strong inroads in any of the countries examined.
As Figure 4.1 illustrates, the relative proportion of these sources of financing separates the transition countries examined into three groups. Clusters A and B have maintained the predominance of prepaid revenue. The predominant source of financing in cluster A is social health insurance; cluster B continues
to rely mostly on general tax revenue. Cluster C comprises countries in which prepayment has collapsed and the health system is now financed largely through direct out-of-pocket charges.2
A new revenue source: social insurance based on payroll taxes
Social health insurance based on payroll taxes has emerged as a standard part of a diversified source of health care financing in CEE and FSU countries, supplementing what is often dwindling general tax revenue. Of the 27 CEE and FSU countries, 14 have introduced payroll taxes – nine as a predominant mechanism of financing and five complementary to general tax revenue and out-of-pocket payments. In our sample of 16 countries, 14 have introduced payroll taxes – seven as a predominant source. This means that countries relying on general taxation as a predominant revenue source are under-represented in our sample and are factored into the assessment.
Contributions
The contribution rates for salaried employees are about 13 per cent in countries with social insurance as the predominant financing mechanism and between 2 and 4 per cent in countries in which it is a complementary source of revenue (Table 4.3). In most countries, the contribution rate between employ-ers and employees is split equally. The contribution rate depends on such factors as the cost of the benefit package, the size of the covered population, the desirable level of redistribution towards non-employed people and other available sources of financing.
In most countries, the contribution rate was not calculated based on an actuarial analysis of expected cost and revenue for the insured population (Ensor 1999). Instead, the rate-setting process reflected a combination of optimistic eye-balling of desired revenue and guesses about the political acceptability of adding to the already heavy tax burden on employers and employees. In the mid-1990s, all social insurance taxes amounted to 30 per cent of total labour costs in a sample of 13 CEE and FSU countries, reaching as high as 40 per cent in some cases (Palacios and Palleres-Miralles 2000).
This compares with 26 per cent in the high-income countries of the Organisa-tion for Economic Co-operaOrganisa-tion and Development and under 20 per cent in the rest of the world (Table 4.3). Given the declining economic context, reducing high payroll taxes and thus labour costs were at the forefront of economic policies to jump-start growth. In response to the two opposing pressures of collecting more health revenue and reducing labour costs, the contribution rate has been adjusted frequently in most countries. For instance, the contribution rate in Croatia increased from 14 per cent in 1993 to 16 per cent in 1997 to 18 per cent in 1999. Conversely, Hungary reduced its payroll tax rate four times from a peak of 23.5 per cent in 1993 to 14 per cent (plus a flat fee) in 1997 (Table 4.3).
Most countries apply the same contribution rate to self-employed people (individual entrepreneurs and agricultural workers) as to salaried employees.
Table 4.3 Characteristics of health insurance contribution revenue in 16 CEE and FSU countries
Payroll tax rate for health (1999) Total social insurance taxes (mid-1990s)
Table 4.3 (cont’d)
Payroll tax rate for health (1999) Total social insurance taxes (mid-1990s)
Sources: Palacios and Pallares-Miralles (2000) for overall social insurance rates and authors’
compilations
Defining the contribution base for self-employed people is, however, a chal-lenging task, as their income is irregular, often not in cash and difficult to verify. Some countries narrowly define the contribution base as the net income from selling personal services and goods; others rely on a broader definition that includes incomes such as royalties, revenue from patents and capital gains. Most countries have opted to introduce a required minimum contribu-tion and a contribucontribu-tion ceiling, contributing to the regressive nature of this form of health care financing. In Hungary, for example, self-employed people must pay 14 per cent of their declared income or 14 per cent of the statutory minimum wage, whichever is higher. The government also introduced a flat per-capita fee, undifferentiated by income.
The third population group covered under health insurance encompasses non-employed population groups such as pensioners, children and other
family dependants, officially registered unemployed people and poor people.
Countries have used various mechanisms to cover their incurred expenditure.
They may be covered indirectly through the contributions made by active population groups whose expected expenditure is less than their contribu-tions. Second, they may be covered by explicit transfers from other public revenue sources such as central or local government budgets. Finally, the people covered may contribute directly by paying a premium levied on their cash benefits such as their pension or unemployment benefit.
When the source of funding for the non-employed population is a central or local government budget, the subsidy often does not fully cover the cost of care provided for the target population in question. This is especially true for pensioners, who use health services more than other segments of the popula-tion and whose care is often the most expensive because of the seriousness of their illnesses. Thus, the transfers are often notional and bear little relation to costs. In other cases, the transfer is not linked to the benefit group at all. For example, in the Russian Federation, the health insurance law mandates that the local government budget contribute to the mandatory fund on behalf of the non-employed population, although neither the level of such contribu-tions nor the mechanism for enforcing this obligation has been defined. Not surprisingly, local government contributions have not always been forthcom-ing, and a distinct gap often remains between local budget resources and the revenue needs of the insurance funds. Furthermore, the different territories vary significantly in executing these financing responsibilities (World Bank 1997; Sheiman 1999).
Payroll taxes have yielded less revenue for the health sector than had been anticipated. First, the contribution base has continued to decline in many transition countries for several reasons: an increasing dependency ratio caused by the ageing of the population and unemployment; a decline in real incomes;
arrears from bankrupt formerly state-owned and new private enterprises;
and tax evasion in both the shrinking formal sector and growing informal sector. Evasion can take several forms: under-reporting private-sector earnings, especially by self-employed people; increased use of non-taxable forms of employee remuneration such as food, clothing and fuel allowances; and under-reporting of income by formal-sector employers and hiring staff on a short-term or contractual basis (Ellena et al. 1998). The high contribution rates in many transition countries created incentives to shift economic activity into the informal sector, at least during the initial years of transition when tax administration systems were weak.
Second, most CEE and FSU countries are under strong pressure to reduce the total fiscal burden (general and payroll taxes) in an attempt to stimulate the private sector, international competitiveness and economic growth. This has led many policy-makers to lower the payroll tax contribution rate, even when such a cut would lead to deficit financing. The expectation that downward pressure on the revenue side would lead to improved expenditure control has not materialized. Third, when health revenue is collected by a central collec-tion agency that also collects other employment-related revenue, the money dedicated for health may be used to informally cross-subsidize expenditure for other benefits.
Population coverage
In principle, population coverage has remained universal, since most countries have retained the inherited legal safeguards to free access. In practice, how-ever, the social insurance countries (cluster A and some countries in cluster B) have passed overriding health insurance legislation, tying active contribution status to eligibility. Nevertheless, this legislative effort has had little practical implication, since the contribution status of most individuals is not known
In principle, population coverage has remained universal, since most countries have retained the inherited legal safeguards to free access. In practice, how-ever, the social insurance countries (cluster A and some countries in cluster B) have passed overriding health insurance legislation, tying active contribution status to eligibility. Nevertheless, this legislative effort has had little practical implication, since the contribution status of most individuals is not known