50835 Mitigating the Impact of the Economic Crisis on Public Sector Health Spending Pia Schneider as a result of the crisis, public spending on health may actually decrease in absolute amounts and in percentage of Key messages GDP. ECA policy makers can mitigate the impact of the The health sectors in most ECA countries are mainly economic crisis on public sector health spending by: (i) increasing indirect taxes, (ii) using additional financed from public sources (Figure 1 and Box 1). In donor funding for services targeted at low-income countries with low levels of public spending on health3, groups, and (iii) making fiscal transfers to poorer the majority of health services are paid for by patients. areas. Any reductions in public health spending would thus Increasing payroll taxes for social health insurance only add to the out-of-pocket expenditures of patients, would negatively affect labor markets and is thus not and may negatively affect access to care, particularly advisable. for the poor. There is increasing empirical evidence Countries need to provide targeted support for the that public sector spending improves health indicators most vulnerable groups in low-income and transition countries, particularly in Financial constraints on public health spending countries that have good governance systems in place4. during the current crisis will force some countries to implement short-term cost- Figure 1: Public Spending as a Percentage of Total containment measures and to identify actions Health Spending in ECA, 2005 that can reduce overcapacities and improve 100 90 efficiency. In the longer-term, these measures 80 70 can strengthen the financial sustainability of the 60 health care systems in ECA. 50 40 30 20 Introduction 10 0 The current global financial crisis is having a substantial Albania Serbia Armenia Georgia Czech Belarus EU Russian Fed Moldova Montenegro Croatia Slovenia Turkey Ukraine Europe R Estonia Latvia Bulgaria Romania Poland Slovakia Bosnia Lithuania Hungary Uzbekistan TFYR Macedonia Azerbaijan Kyrgyzstan Turkmenistan Kazakhstan Tajikistan impact in Europe and Central Asia (ECA) where economic growth is beginning to dip, unemployment is rising and government revenues are being cut. The GDP growth rate of the region is projected to decline by 4.7 percent in 20091 and the flow of remittances is also expected to slow down sharply, causing particular hardship to low-income groups. Source: ,,Health for All database, World Health Organization. While countries with fiscal capacity have adopted stimulus http://data.euro.who.int/hfadb packages to promote economic recovery, most ECA 3 countries are financially constrained and have revised their Including Albania, Armenia, Azerbaijan, Georgia, Tajikistan, and Uzbekistan (Figure 1). government budgets, including in the health sector2. Thus, 4 Gupta, S., M. Verhoeven, E.R. Tiongson: ,,The Effectiveness of Government Spending on Education and Health Care in Developing and 1 Global Development Finance: Charting a Global Recovery, World Bank Transition Economies, in European Journal of Political Economy, Vol 2009. Washington, DC. 18(4), 2002, Pages 717-737; Baldacci, E., B. Clements, S. Gupta, Q. Cui: 2 Including Tajikistan, Armenia, the Czech Republic, Baltic countries, ,,Social Spending, Human Capital, and Growth in Developing Countries, Hungary, Romania, and Slovakia. in World Development, Vol 36(8), 2008, Pages 1317-1341. The purpose of this Knowledge Brief is to help raise unemployment and a decrease in real wages, the total wage awareness of the impact of the current economic crisis on sum of countries (which is also the contribution base for public spending in health, as well as the potential for social health insurance) is shrinking. As a result, insurers are government interventions in the health sector during the facing the challenge of maintaining revenue levels to pay for crisis. Government interventions can address the revenue members health expenditures which are unlikely to side as well as the expenditure side in the health sector. decrease. Increasing payroll taxes to maintain insurance They can include reforms to raise additional financing for revenues and prevent insurance deficits is not an option, health care and control expenditures by rationalizing particularly not during the crisis, as it can negatively impact overcapacities and increasing productivity. job growth and future economic growth. Box 1: Public Financing of Health Sectors Increase indirect taxes to finance health care Public finances for health are generated from central and local government funds and payroll tax-funded social health Some governments have already introduced additional insurance (SHI). Social health insurers receive money from indirect taxes to compensate for revenue shortfalls from payroll taxes and government funds to pay for non- payroll taxes in health insurance, and protect the levels of contributing members and possible insurance deficits. In public spending on health. Several countries (including Slovakia, the Government contributes money on behalf of Estonia, Romania, Serbia and Slovenia) have increased the non-working population (including pensioners, the excise taxes on alcohol, tobacco and fuel, or introduced a tax unemployed and social assistance recipients)5 to health on mobile phone communication services. Poland has insurers. Payroll-tax funded SHI usually comprises about increased excise taxes on alcohol and car imports to finance 50-95 percent of total public spending in health in the ECA a solidarity fund, with benefits targeted to the poor. Hungary region, depending on the size of the formal economy in a has abolished the flat-rate health tax and raised excise taxes given country. Countries like Kyrgyzstan, Kazakhstan, for fuel, tobacco and alcohol. Switzerland plans to increase Tajikistan, and Latvia do not levy payroll taxes but use its VAT rate by 0.4 percentage points to pay for the deficit general government revenues to finance their health sectors. in payroll-funded disability insurance. Public funds are transferred either directly or through the insurers to public health facilities. Instead of line-item Use additional donor spending for health services targeted budgets, insurers and governments increasingly pay to the poor hospitals on the basis of the number of cases treated, and make per capita payments to primary health care centers Countries such as Tajikistan, Kyrgyzstan, Turkmenistan, based on the populations living in their catchment areas. In Uzbekistan, Armenia, and Georgia have limited fiscal addition, patients co-pay for health services and drugs capacity to launch counter-cyclical fiscal programs and received. protect core spending during downturns. These countries are also the ones most vulnerable to increased poverty. They may need to increase spending on vulnerable groups as poorer households curb their own health spending in order Ensuring Public Revenues for Health in to pay for food. Times of Crisis Fiscal pressures may cause low-income countries to seek There are a number of approaches ECA policy makers could additional external assistance to protect their core spending. take to mitigate the impact of the economic crisis on public In these countries, continuous donor aid can prevent an sector health spending. Raising additional public revenues increase in out-of-pocket payments by patients and ensure for health by increasing payroll taxes would negatively spending on key health services targeted at vulnerable affect labor markets and is thus not advisable. However, groups so that progress can continue to be made towards the other measures to ensure public funding for health include: Millennium Development Goals (MDGs). Generally, poorer (i) indirect taxes, (ii) additional donor funding targeted at countries with higher disease burden receive greater external services used by low-income groups, and (iii) fiscal transfers aid. Therefore, accessing additional donor aid may be to poorer areas. difficult for some lower-income ECA countries that receive less donor support for health compared to other countries at Increasing payroll taxes for health is not an option similar levels of GDP (Figure 2). In the ECA region, these countries include Tajikistan, Kyrgyzstan and Uzbekistan. To Payroll contribution rates for social health insurance range mitigate the impact of the crisis on poorest households, from 8 percent of gross salary in Bulgaria to 15 percent of donor aid will thus need to be kept flexible to allow gross salary in Croatia; they are paid by employers, additional funding to countries that are hardest hit. employees and the self-employed. With growing 5 In 2008, the contribution amount was 4.5 percent of the national average salary. Figure 2: Health Spending Support from Donors as Short-term measures: postpone investments, reduce a Percentage of Total Health Spending, 2005/06 overhead costs, corporatize hospitals, and reduce payments to providers SLB Fiscal constraints force governments to prioritize public 80 spending and postpone investments in expensive medical MOZ technology and infrastructure. Kazakhstan has put its MWI Presidential Program for hospital and school investments on 60 TMP hold in response to the crisis. In addition, countries like BDI ERI MDG Estonia and Kazakhstan are planning to reduce overhead RWA LBR expenditures by consolidating ministerial administration. 40 SLE ZMB ETH CAF UGA PNG COM The Polish Government plans to corporatize hospitals under GNB GMB TZA BFA commercial law to address the financial risk caused by GHA KHM MRT ZAR accumulated hospital debts. Similar measures have been 20 ZWE BEN HTI NERNPL MLI KEN YEM introduced in Hungary and Slovakia as well. TGO TCD GIN BGD SEN TJK LAO LSO NIC KGZ SDN SSA CIV NGA LIC UZB PAK CMR Latvia has reduced prices paid to physicians and hospitals VNM SAS MNG MDA IND 0 and tightened co-payment exemption mechanisms. 0 200 400 600 800 1000 GNI per capita, Atlas method (current US$) However, if reductions in public payments are not accompanied by cost-containment strategies, providers who Source: World Bank, HNP Stats 2005. Countries ranked based on their receive less public funding may increase prices to patients to GNI per capita. maintain their revenue levels. This could exclude the poor from care. Make fiscal transfers to support health care in poorer regions While these short-term actions may lower current health spending, none of them is expected to have any meaningful In decentralized health sectors, local governments (for impact on containing the growth of future health spending example, districts and municipalities) are the owners of and strengthening the systems financial sustainability. hospitals--they pay for infrastructure and maintenance costs, as well as for recurrent costs in the absence of insurance. Rationalize overcapacity in hospitals Since the 1990s, socio-economic inequalities have increased in ECA, including within countries and across local In ECA, the main cause of wasteful health expenditure is governments. This means that poorer districts will raise less overcapacities in hospitals and hospital beds. Hospitals own revenues per capita to finance public services than consume the major part of health spending. Since hospital wealthier districts; hospitals in poorer areas may end up rationalization is politically difficult to implement, the underfunded as a result. In response to the crisis, Lithuania current crisis may provide an opportunity for governments and Serbia have already announced cuts in budget transfers to restructure hospitals, based on a health sector from the central to local governments. Reducing fiscal rationalization plan or a master-plan. Such reforms are transfers, particularly to poorer areas, may negatively affect generally accompanied by measures to improve the hospital budgets and capitation rates for primary health care productivity of the health workforce. Hospital and further contribute to unequal public funding in health rationalization tends to be accompanied by provider across districts or municipalities. To prevent insufficient payment reforms to set financial incentives to hospitals. As public funding for health in regions with declining local a result, hospitals will be encouraged to shorten the average revenues, central governments would have to transfer length of stay, treat patients in less-costly outpatient settings additional funds to poorer regions to ensure the availability where possible, and close unnecessary hospital beds, or of health care services. transfer acute care beds into less-costly chronic care beds. Cost-Containment Strategies to Manage Manage pharmaceutical expenditures Health Spending Some countries have introduced cost-saving measures to Several short-term measures are available to ECA policy reduce pharmaceutical expenditures. These measures makers to manage health spending. In some countries, include continuous expenditure control in public tendering policy makers are using this crisis to implement reforms and of pharmaceuticals; reducing the number of tenders to manage expenditures with the objective of improving the purchase larger quantities at lower prices; procurement of longer-term performance of the health sector. At the same generic drugs instead of brand-name drugs; putting least time, countries are protecting selected expenditure items costly drugs on the essential drugs list; reference price targeted at lower-income groups. setting; and having physicians adhere to standard prescription protocols. These measures are particularly committed to restoring health spending of about US$ 3.8m important for nations where pharmaceuticals have to be for priority programs for the poor, and for maternal and imported and paid for in foreign currency, in countries child health services. facing the risk of currency devaluation during economic downturns, and in countries that have health sector debts Governments can also invest in targeted subsidies for lower- and arrears in foreign currency. income groups to offset the possibility of higher out-of- pocket health spending by patients. For example in Improve targeting efficiency in health Switzerland and in the Netherlands, the Governments pay means-tested subsidies to individuals with incomes below Many health safety net programs do not efficiently target the defined thresholds, based on their taxable income. As a poorest segments of society. While some countries have result, about 70 percent of Dutch and 40 percent of Swiss clearly defined exemption rules from co-payments, most households receive means-tested subsidies and health ECA countries do not use means-testing to identify exempt coverage at reduced prices. groups. In OECD countries, lower-income individuals tend to be exempt from co-payments in health service use. They The World Bank's Role: Working with are identified based on their income tax assessment. Countries in Addressing Longer-Term Policy Challenges Social health insurers usually pay for sick-leave and maternity leave which are often generously defined, The World Bank has already provided technical assistance independent of the patients socio-economic backgrounds. and fiscal support to countries hit by the crisis. At the same For example, Lithuania just extended the untargeted time, the Bank is working with countries in addressing maternity leave benefit to two years, although the World longer-term policy challenges in health to better mitigate the Bank recommended a reduction to one year. Other impact of the current downturn. In ECA, these longer-term countries--among them, Hungary, Serbia and Latvia--are measures include: trying to improve the targeting efficiency of their health systems as a consequence of the crisis. Hungary introduced Efforts to decrease payroll taxes and increase the a 10 percent cut in sick-leave payments. Serbia halved sick- share of general budget funds for health. leave expenditures for the health insurers by obliging employers to pay for the first 30 days of illness of Reforms in provider payments to pay capitation employees. In Latvia, the maximum period for sickness payments to outpatient health care providers and benefits has been reduced from 52 to 26 weeks. case-based payment to hospitals. Specific measures to improve equity in health Protect spending on pro-poor health programs financing and the financial viability of health systems. When governments do not spend enough on ensuring the Modernizing management and the provision of care availability of services and drugs in public health facilities, to increase productivity and reduce wasteful better-off citizens can seek more expensive care in the spending, and improving equity in access to quality private sector but the poor lose out. To protect the poor health care. against the negative impacts of the economic crisis, health Improving governance and institutional capacity to spending can be used as a potential crisis response prevent leakage in public spending. mechanism. This can be achieved by protecting government- funded health programs used by low-income groups-- Investing in these measures will help governments to be including immunization and maternal and child health care better prepared to respond more adeptly to future crises. in public health centers, as was done in Argentina during the 2001/02 crisis. During the Asian crisis, Thailand doubled About the Author subsidies to the Voluntary Health Card (VHC) insurance Pia Schneider is a senior economist working on health scheme, providing access to care for unemployed and low- system reform in the ECA region. income groups. As a result, there was a marked increase in _________________________ 6 service use by Card holders, allowing poor people to afford ,,Protecting Pro-Poor Health Services during Financial Crisis, care during the crisis6. In response to the current crisis, Lessons from Experience, in Gottret P. et al, HNP, World Bank, March 2009. Armenia (with the support of the World Bank) has "ECA Knowledge Brief" is a regular series of notes highlighting recent analyses, good practices and lessons learned from the development work program of the World Banks Europe and Central Asia Region http://www.worldbank.org/eca