Ž Fiscal Background Ž Financing Higher Education Ž ......The World Bank Selected Issues in Fiscal...

The World Bank

Selected Issues in Fiscal Reform in Central Europe and the

Baltic Countries 2005

� Fiscal Background � Financing Higher Education

� Controlling Health Care Expenditures

VOLUME II: A NNEXES AND COUNTRY CASE STUDIES

Edited by Thomas Laursen

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Table of contents: Annex I: Fiscal challenges in the EU8 countries ....................................................................................................................5

Annex I.1. Adjustment experience in the EU member states............................................................................... 5

Annex I.2. Fiscal policy and growth ................................................................................................................... 9

Annex I.3. Efficiency of public expenditure ...................................................................................................... 24

ANNEX II: Financing Higher Education .............................................................................................................................38

Czech Republic ................................................................................................................................................. 38

Hungary ............................................................................................................................................................ 47

Latvia ................................................................................................................................................................ 59

Lithuania........................................................................................................................................................... 67

Poland............................................................................................................................................................... 73

Slovakia ............................................................................................................................................................ 79

Slovenia ............................................................................................................................................................ 85

ANNEX III: Health Sector.....................................................................................................................................................93

Hungary ............................................................................................................................................................ 93

Latvia .............................................................................................................................................................. 118

Poland............................................................................................................................................................. 139

Slovakia .......................................................................................................................................................... 167

Slovenia .......................................................................................................................................................... 194

Figures: Figure I.1.Free Disposal Hull....................................................................................................................................................27 Figure I.2. Data Envelopment Analysis ....................................................................................................................................28 Figure II.1.Tertiary education is composed of: .........................................................................................................................38 Figure II.2. Higher educational attainment of population .........................................................................................................47 Figures II.3: Higher educational enrolment ..............................................................................................................................48 Figure II.4. Higher educational institutions .............................................................................................................................49 Figure II.5. Unemployment rate of higher education graduates................................................................................................49 Figure II.6: Average monthly gross earnings of employees by educational qualification (earnings premium), 2003 ..............49 Figure II.7. Higher Education Finance in Hungary...................................................................................................................50 Figure II.8. Change of the number of students in Latvia in 1990/91 – 2004/2005.................................................................... 60 Figure II.9. Number of students per 10 000 residents in 1990 - 2004....................................................................................... 60 Figure II.10: Share of students in total population of the respective age group in 2004/2005 .................................................. 61 Figure II.11. Number of Higher Education Institutions in 1991 -2004 ..................................................................................... 61 Figure II.12. Total public expenditure on education as % of GDP ........................................................................................... 62 Figure II.13. Total public expenditure on tertiary education as % of GDP............................................................................... 63 Figure II.14. Total public expenditure on tertiary education as % of total public education expenditure ................................. 63 Figure II.15. Share of students in state budget founded and commercial studies...................................................................... 63 Figure II.16. Financing of HE from the State budget and other sources 1995-2003 ................................................................. 64 Figure II.17 Number of Higher Education Students in Poland. In fee-paying and non-paying forms of studies, 1990 – 2003 74 Figure II.18. Number of Higher Education Institutions in Poland. Public and Non-public, 1991 – 2003............................... 74 Figure II.19. Higher Education Institutions’ Total Income Structure by Source....................................................................... 75 Figure II.20. Share of tertiary students receiving social stipends, 1998 – 2003 ....................................................................... 76 Figure II.21. Credits Granted in years 1998-2003.................................................................................................................... 76 Figure II.22. Structure of Tertiary education in academic year 2005/06................................................................................... 85 Figure III.1: General government expenditure (percent of GDP) ............................................................................................. 96 Figure III.2: Total Fertility Rate, Hungary, 1980-2025 ............................................................................................................ 97 Figure III.3: Life Expectancy at birth, Hungary 1980-2025 ..................................................................................................... 97 Figure III.4: Hungary: Broad Age Groups (percent)................................................................................................................. 98

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Figure III.5a: Hungary 2005 .....................................................................................................................................................98 Figure III.6: Public and Private Expenditures on Health ........................................................................................................104 Figure III.7: Fiscal Position of the Health System..................................................................................................................104 Figure III.8: Structure of Public Expenditures on Health........................................................................................................110 Figure III.9: Total Fertility Rate, Latvia, 1980-2025 ..............................................................................................................120 Figure III.10: Life Expectancy at birth, Latvia, 1980-2025 ....................................................................................................120 Figure III.11: Broad Age Groups in Latvia (percent) .............................................................................................................121 Figure III.12. Latvia 2005.......................................................................................................................................................121 Figure III.13: Health Expenditures as Percentage of GDP......................................................................................................127 Figure III.14: Public and Private Expenditures on Health ......................................................................................................128 Figure III.15: Total Spending on Health .................................................................................................................................130 Figure III.16: Health Expenditure by functions ......................................................................................................................130 Figure III.17: Health Expenditures (by function, 2003 prices) ...............................................................................................131 Figure III.18: Total Expenditure on Pharmaceuticals (2003 prices) .......................................................................................133 Figure III.19: Statutory Health Expenditures (by function) ....................................................................................................134 Figure III.20: Poland registered unemployment .....................................................................................................................141 Figure III.21: Total Fertility Rate, Poland, 1980-2025 ...........................................................................................................142 Figure III.22: Life Expectancy at birth, Poland, 1980-2025 ...................................................................................................142 Figure III.23: Poland: Broad Age Groups ( percent)...............................................................................................................143 Figure III.24a: Poland 2005 ....................................................................................................................................................143 Figure III.25: Pubic Expenditures on Health Figure III.26: State Budget Allocations, 1999-2003.........................................148 Figure III.26: State Budget Allocations, 1999-2003 ...............................................................................................................150 Figure III.27: Functional Share of Public Expenditures on Health (percent) ..........................................................................151 Figure III.28: Comparisons of revenues of health insurance.................................................................................................. 152 Figure III.29: Structure of Hospital Debts ..............................................................................................................................154 Figure III.30: Seizure of SPZOZ Liabilities by Court Orders.................................................................................................156 Figure III.31: Expenditures on Drugs and Medical Supplies ..................................................................................................157 Figure III.32: Monthly Salaries of Full-Time Employed (October, years) .............................................................................158 Figure III.33: Out-of-Pocket Household Expenditures on Health (monthly, in zlotys) 2000..................................................163 Figure III.34: Total Fertility Rate, Slovak Republic, 1980-2025 ............................................................................................169 Figure III.35. Life Expectancy at birth, Slovak Republic, 1980-2025 ....................................................................................169 Figure III.36: Slovakia: Broad Age Groups (percent).............................................................................................................170 Figure III.37a: Slovakia 2005 .................................................................................................................................................170 Figure III.38: Fiscal position of the health sector (% of GDP) ..............................................................................................174 Figure III.39: Redistribution by Risk-Adjusted Index ............................................................................................................179 Figure III.40: Growth of Expenditures on Drugs....................................................................................................................187 Figure III.41 a: Access to Health Care....................................................................................................................................189 Figure III.41 b: Use fo Pharmaceuticals .................................................................................................................................189 Figure III.42: Total Fertility Rate, Slovenia, 1980-2025 ........................................................................................................196 Figure III.43: Life Expectancy at birth, Slovenia, 1980-2025.................................................................................................197 Figure III.44: Slovenia: Broad Age Groups (%) .....................................................................................................................197 Figure III.45a: Slovenia 2005 .................................................................................................................................................198 Figure III.46: Struture of General Government Expenditures.................................................................................................206 Figure III.47: Public Expenditure on Health...........................................................................................................................208 Figure III.48: Estimated Percent Cases Covered by Pathways (selected EU countries, 2004 and 2009)................................214

Tables: Table I.1. Expansionary consolidations: description of episodes................................................................................................8 Table I.2. Theoretical aggregation of taxation and expenditure................................................................................................12 Table I.3. Selected analyses of the impact of taxes on economic growth on the example of OECD countries.........................14 Table II.1: Ratio: Enrolled in the first year of studies (Bc. and “traditional” MSC.) / Total 19-year old.................................. 40 Table II.2. Changes in the structure of higher education institutions ........................................................................................ 40 Table II.3. The unemployment of graduates in 1996 – 2004, data from April of each year...................................................... 41 Table II.4. Higher education finance. ....................................................................................................................................... 41 Table II.5. The value of norms used for determining the amount of training fund ................................................................... 51 Table II.6. Attainment............................................................................................................................................................... 60 Table II.6. Unemployment rate of HE graduates ...................................................................................................................... 61 Table II.7. Average gross monthly earnings ............................................................................................................................. 62 Table II.8: Higher education institutions by level, ownership and number of students, 2002/03............................................. 67 Table II.11. Participation Rates in Higher Education in Poland ............................................................................................... 73 Table II.12. Number and proportion of full-time and part-time students - including public and private HEIs ......................... 80 Table II.13. Program structure of HE budget............................................................................................................................ 81 Table II.14. Distribution of wages in HEIs ............................................................................................................................... 82 Table II.15. Population aged 15 years or over by education attainment and sex (1991, 2002) ................................................. 87 Table II.16. Undergraduate students (1985/86, 1990/91 to 2003/04)........................................................................................ 87

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Table II.17. 19-year old students (1991/92 to 2003/04)............................................................................................................88 Table II.18. Average monthly gross earning in enterprises, companies and organisations by level of school education in Republic of Slovenia (1999, 2002) ...........................................................................................................................................89 Table II.19.: Public expenditure on higher education (2001, 2002 and estimate for 2003).......................................................89 Table III.1: Overview of Basic Macroeconomic Parameters of the Hungarian Economy ........................................................95 Table III.2: Health Status Indicators, Hungary and other new EU Member States (2003) .....................................................100 Table III.3: Standardized Death Rates (per 100,000), different causes (2003) .......................................................................100 Table III.5: Composition of Primary Care Provision ..............................................................................................................103 Table III.6: Outpatient Services..............................................................................................................................................104 Table III.7: Parameters of the Health Insurance System.........................................................................................................106 Table III.8: Revenues of the Fund ..........................................................................................................................................107 Table III.9: Annual Per Capita Expenditures on Health, 2000 (HUF) ....................................................................................109 Table III.10: Expenditures of the Fund...................................................................................................................................110 Table III.11: Expenditures of the Health Fund on Primary Care (HUF million) ....................................................................112 Table III.12: Expenditures of the Fund on Inpatient Care (HUF million)...............................................................................113 Table III.13: Macroeconomic Indicators, 2000-2004 .............................................................................................................119 Table III.14: Health Status Indicators, Latvia and other new EU Member States (2003) .......................................................123 Table III.15: Standardized Death Rates (per 100,000), different causes (2003) .....................................................................124 Table III.16: Standardized Death Rates (per 100,000), different causes (2003) .....................................................................124 Table III.17: Statutory Health Budget, 1992-2004 .................................................................................................................127 Table III.18: Private Health Insurance Premiums and Claims ................................................................................................130 Table III.19: Macroeconomic Indicators, 2000-2004 .............................................................................................................140 Table III.20: Performance of Hauser Program (expenditures and revenues, percent of GDP)................................................142 Table III.21: Health Status Indicators, Poland and other new EU Member States (2003) ......................................................145 Table III.22: Standardized Death Rates (per 100,000), different causes (2003) .....................................................................145 Table III.23: Standardized Death Rates (per 100,000), different causes (2003) .....................................................................146 Table III.24: Expenditures on Health, 1999-2004 (million PLN) ...........................................................................................148 Table III.25: Average rate of increase in HP growth in comparison with rate of GDP...........................................................149 Table III.26: Health Insurance Premium Dynamic (percentages) ..........................................................................................150 Table III.27: Public health care expenditure by uses, 1999-2003, in million PLN .................................................................152 Table III.28: Matured debts of autonomous public health establishments (million PLN) .......................................................154 Table III.29: Debts of SPZOZ by type (as on August 31, 2004).............................................................................................156 Table III.30: Public Expenditures on Refunded Drugs ...........................................................................................................157 Table III.31: Macroeconomic Indicators.................................................................................................................................168 Table III.32: Health Status Indicators, Slovak Republic and new EU Member States (2003) ................................................172 Table III.33: Standardized Death Rates (per 100,000), different causes (2003) .....................................................................172 Table III.34: Standardized Death Rates (per 100,000), different causes (2003) .....................................................................173 Table III.35: Structure of main sources of finance, 1998-2003 (billion SKK)........................................................................175 Table III.36: Revenues and Costs of the Health System, 1998-2003 (billion SKK) ...............................................................176 Table III.37: Expected Number of Insurees, 2000-2006.........................................................................................................178 Table III.38: Resources of Health Insurance Companies, 1998-2003 (% of total resources of HIC)......................................179 Table III.39: Co-payments introduced as of June 2003 (SKK)...............................................................................................181 Table III.40: Priority List Diagnoses and Other Diagnoses ....................................................................................................182 Table III.41: Health Sector Costs, 1998-2003 (type of care as percentage of total health costs) ............................................184 Table III.42: Hospital indicators, 1991-2000..........................................................................................................................185 Table III.43: Structure of costs, 1996-2001 (percentage of total costs) ..................................................................................185 Table III.44: Drug Expenditures, EUR million.......................................................................................................................187 Table III.45: List of Citizens’ Priority Diseases ..................................................................................................................... 189 Table III.46: Macroeconomic Indicators................................................................................................................................. 196 Table III.47: Health Status Indicators, Slovenia and other new EU Member States (2003) ................................................... 200 Table III.48: Standardized Death Rates (per 100,000), different causes (2003) ..................................................................... 200 Table III.49: Standardized Death Rates (per 100,000), different causes (2003) ..................................................................... 200 Table III.50: Performance of Acute-Care Hospitals in the European Region (2002 or latest available year) ......................... 205 Table III.51: Mean Lengths of Stay (selected DRGs, 2001 and 2003, Ljubljana Clinical Centre) ......................................... 212

Boxes: Box I.1. Can fiscal consolidations be expansionary?.................................................................................................................. 6 Box I.2. Economic effects of flat tax ........................................................................................................................................ 16 Box III.1: Negotiating A Common Scope of Health Programs............................................................................................... 207

Annex I: Fiscal challenges in the EU8 countries

Annex I.1. Adjustment experience in the EU member states Analysis of the adjustment experience of the EU member states during the Maastricht convergence process and after the start of the third stage of the EMU as well as budgetary adjustments of OECD countries (from 1960 to the 1990s) show that there are some lessons be drawn in order to achieve durable and growth friendly consolidation. Fiscal consolidation varied widely across countries, but successful consolidation episodes had a number of common futures (von Hagen, Hughes Hallett and Strauch (2001), European Commission):

1. Scale of adjustment is essential

• Large consolidation are more successful than smaller ones

2. Composition of the adjustments (quality) is an important determinant of success:

• Successful consolidations on average put more emphasis on spending cuts than unsuccessful ones, and less emphasis on rising revenues.

The majority of EU economies undertook expenditure cuts, although in some countries fiscal adjustment was carried out through tax increases.

− Expenditure based adjustment: UK, Denmark, Ireland (87-89),

Finland and Sweden consolidated their fiscal position primary through expenditure cuts. Expenditure reduction in these countries varied but was the highest in case of Finland and Sweden (7-8%). They rely mainly on primary expenditures, with the large parts of cuts steaming from transfers and government wage bill.

− “Switching strategy”: Germany, Greece, Spain, France, Italy, Netherlands are marked by taxes increases in the first phase of their adjustment strategy and then by switching strategy and implementing substantial expenditure cuts.

− Revenue-based adjustment: Belgium, Ireland (82-84), Austria, Portugal opted to revenue-based strategy

• The likehood of success rise when government tackle politically sensitive

spending items such transfers, subsidies, and government wages more forcefully than unsuccessful ones Successful consolidation put much less emphasis on cutting public investment than unsuccessful ones.

− social security and welfare expenditure accounted for almost half o total expenditure adjustment in:

♦ Denmark (1.7% of GDP and than by 2.5% of GDP), concentrated on tightening eligibility criteria and availability of unemployment benefits

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♦ Finland (8% of GDP), among others by introducing a major pension reform package, plummeting accrual factors for early-retired and disabled, changing the indexation formula

♦ Sweden (5.8% of GDP), by improving targeting of social benefits, tightening child-care allowances and reducing the level of housing benefits.

− Ireland and UK significantly downsized government employment (by roughly 9%), which helped them to reduce public sector wage bill (by about 2% of GDP)

− other impotent areas of spending cuts were economic services provided by the government and social outlays, such as spending on education (Sweden, Ireland, Finland and health (Ireland)

3. Economic environment (initial conditions) matters for successful consolidation:

• Weak economy, both home and abroad raises the likehood of a consolidation effort to be successful

• The governments are more likely to undertake consolidation efforts if the stance of fiscal policy in other countries changes in the direction of tightening

• Large-debt ratio significantly increases the probability of fiscal consolidation start and last longer.

• Consolidation is more likely to be successful if accompanying monetary policy is tight (this contradict to opinion that the central banks can help making fiscal consolidation successful by easing monetary policy)

4. Adjustment strategy: timing matters

• Switching strategy, increasing revenue first and cutting expenditure later is significantly less likely to lead long lasting consolidation than a strategy that starts with the expenditure cuts from the beginning

Cross-country analyses show that roughly half of the episodes of fiscal consolidations that have been undertaken in the EU in the last thirty years exhibit non-Keynesian features, i.e are followed by an immediate acceleration in growth (EC (2003)). For theoretical insights describing non-Keynesian effects in fiscal policy see below). Box I.1. Can fiscal consolidations be expansionary?

In line with the standard Keynesian view is that a fiscal contraction has a temporary contractionary effect through an aggregate demand channel, in a model with sticky prices and wages. Fiscal multipliers are expected to be positive, although there are several factors (substitution effects, interest rates response, wealth effects, and openness) that could explain values smaller than one. The idea that fiscal policy may have short-run effects opposite to those predicted by the Keynesian model has been first suggested by Giavazzi and Pagano (1990) who, looking at the fiscal consolidation experiences of Denmark and Ireland in the mid-eighties, documented in both cases an acceleration in growth just after the governments put in place measures that drastically reduced budget deficits.

Since than several theories has tried to explain how fiscal contraction could be expansionary: 1. Wealth effects on consumption:

A cut in government spending, if perceived as long lasting, implies a future, permanent lowering in the tax burden, generating a positive wealth effect. In this context resolving uncertainty about the course of future

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fiscal policy is of highest importance. This suggest expectation channel (Fels and Froehlich (1986), Bertola and Drazen (1993)). Bertola and Drazen argue that the effects of current fiscal policy depend on what expectations it generates on the course of future fiscal policy. A second channel for wealth effects arises from a decrease in interest rates which may go with a fiscal restrain. Lower interest rates entail a higher market value of private wealth.

2. Credibility effect. Feldstein (1982) points out that the crucial element for the emergence of non-Keynesian effects is the credibility of government action to make public finances sustainable. The credibility of the fiscal adjustment can be increased by the size of the consolidation and/or the introduction of fiscal rules. A large fiscal consolidation, particularly in a high debt country, may have important credibility effects on interest rates by reducing risk premium (Alesina, Prati, and Tabellini (1989)).

3. Investment channel. - Alesina, Ardagna, Perotti and Schiantarelli (2002) formulate a rationale for fiscal policies producing non-

Keynesian effects through an investment channel. The link between fiscal policy and investment is represented by the impact of government spending, in particular of the government wage bill, on the labor market. Firms are assumed to be forward-looking and to optimize the expected value of future income flows thus investment decisions are steered by the expected present value of the net marginal product of capital, which in turn is a negative function of real wages.

The factors that have been found empirically to be relevant to characterized episodes of expansionary contractions are almost the same as those which characterize successful fiscal contraction. Building on existing researches we may identify a number of features that are common to nearly all episodes of expansionary fiscal contractions:

• Fiscal adjustments with expansionary effects are more liable when the size of consolidation (measured by a sufficient degree of improvement in structural budget balance) is large (Giavazzi and Pagano (1996), Giavazzi, Pagano and Jappelli (2000)).

• Composition of adjustments matters: expenditure-based cuts rather than tax-based adjustments have a higher probability of showing expansionary effects, especially if expenditure cuts are concentrated on public employees compensations and on government transfers (Alesina, Perotti and Tavares (1998), Alesina and Ardagna (1998), Alesina, Ardagna, Perotti and Schiantarelli (2002)).

• Initial state of public finance; non-Keynesian effects are more likely to occur in countries and periods where debt/GDP ratios are high (Alesina and Ardagna (1998), Perotti (1999)).

Table below shows various cases of fiscal consolidations identified in the EU according to the different criteria proposed to define consolidations and to detach expansionary consolidations. It reports expansionary effects of fiscal contractions in Belgium, Denmark and Ireland in the mid-eighties as well as in Spain and Portugal in 1986 and in West Germany in 1982.

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Table I.1. Expansionary consolidations: description of episodes

Consolidation: Size (benchmark)

Consolidation: Persistence

Consolidation: Size

Consolidation: Size

Criteria Expansion: Growth

(benchmark)

Expansion: Growth

Expansion: Trend growth

Expansion: Actual minus EU growth

Number of consolidation episodes 49 74 49 49

Number of expansionary episodes 24 43 22 21

Number of "pure"expansionary episodes 11 19 11 11

Description of expansionary episodes ("pure" episodes in bold)

BE 1984, 1985 1984, 1985, 1986 1987

1984, 1985 1984, 1985

DK 1983, 1984 1983, 1984 1983, 1984 1983, 1984 DE 1982 1982, 1983, 1984 1982 1982

EL 1982,1987,1994,1996

1994, 1996, 1997,1998

1986, 1987, 1991, 1994, 1996

1982, 1991, 1994, 1996

ES 1986 1985, 1986, 1987 1986 1986 FR .. 1995, 1996, 1997 .. ..

IE 1976, 1987, 1988

1984, 1987, 1988, 1989

1987, 1988

1987, 1988

IT 1976, 1977, 1993 1993, 1995 1997 1976, 1977, 1992, 1993

NL 1993 1982, 1983 .. 1993 AT .. 1995, 1996, 1997 1984 .. PT 1986 .. 1986 1986 FI 1993 1977, 1998 .. 1993

SE 1983, 1987, 1995, 1998

1982, 1983, 1984, 1987, 1994, 1995,

1997, 1998

1995, 1996, 1998 1983, 1998

UK 1997 1981, 1982, 1997 1980, 1997, 1998 .. Giudice, G., Turrini, A., in’t Veld, J. (2003). Can Fiscal Consolidations Be Expansionary in the EU? Ex-post Evidence and Ex-ante Analysis. Economic Papers No. 195, European Commission, p.11.

Transition countries experiences The empirical evidence from transition countries and emerging-economies suggest that successful consolidations in these countries relied predominantly on expenditure cuts (Purfield (2003), Von Hagen (2004)). Purfield analysies is based on 25 transition countries of the former Soviet Union (FSU), the Baltics, Eastern Europe and Mongolia 1992-2000. Her findings point to sizeable fiscal adjustments in transition countries between 1992 and 2000 but with the huge variation among

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countries. She shows that decline in the overall deficits in the period under review was achieved primary by expenditure cuts as revenue collection fell. On average, expenditure were cut by 2% of GDP annually, while revenue collection fell by about ¾% of GDP per annum, due to large significant drop in the FSU and CEE countries (by 1.0% and 0.3%, respectively). Purfield shows that out of the 33 fiscal contractions episodes in transition countries 24 cases were successful in sustaining the reduction in primary balance two years after adjustment, but only one case (Ukraine in 1998) was expansionary. Regression analysis conducted by her confirms that size of adjustment is the most significant factor for securing durable improvement in primary balance. Moreover, long lasting adjustment for transition countries relied on large cuts in primary expenditures accompanied by some moderate decline in revenue. Initial conditions are not found by her to have individually significant impact on probability of success. Von Hagen (2004) reports the adjustment patterns in large fiscal contractions in the CEE acceding states from 1999 to 2002. He shows that 5 out of the 11 fiscal contractions were expenditure dominated (all of them in Baltic countries). Only one episode, Hungary in 2002, was characterized by a strong increase in the tax burden. Next joint paper of Von Hagen and Traistaru (2005) extend previous analysis. It states that 77.8% of large consolidations in the new member countries from 1999-2004 were due to cuts in government spending. There are 9 out of 14 expenditure based fiscal consolidations, while strong increase in the tax burden contributed to consolidations in Hungary (2000), the Slovak Republic (2003) and Malta (2004). Von Hagen and Traistaru (2005) check also the “success” of the consolidations occurring between 1999 and 2002 in the new member states and conclude that it occurred in Malta (1999-2000), Estonia (2000), Latvia (2000-2001), Lithuania (2000), and Slovakia (2001). On the expansionary fiscal contractions, there is limited evidence of non-Keynesian effect in the transition and emerging economies in 1990s (Purfield (2003)).

Annex I.2. Fiscal policy and growth The Lisbon European Council of March 2000 called for the emphasis of public finances to be broadened from its focus on stability to include the contribution they can make to growth and employment (to so called “quality of public finance”). Another challenge for new member countries is the discipline imposed by the EU benchmarks the Maastricht criteria and the Stability and Growth Pact. At the same time, compliance with EU regulations and standards entails sizable budgetary outlays and large public sector investments in infrastructure, the environment, and other sectors. Expenditure pressure does not abate and moreover counties will soon have to face fiscal consequences of ageing populations. Quality of public finances in this context refers to the structure of taxation and public spending as well as mechanisms to maintain a high level of efficiency of public spending, such as effective expenditure rules. The purpose of this chapter is to shed light on the possible best ways how to redirect public expenditure towards “productive” items and to ensure that tax structures strengthen the economic growth. We summarize the key findings of recent literature on fiscal policy and growth and attempt to find out how in the light of literature existing current tax burden and expenditure structure in EU8 might influence economic growth. We are aware of the fact that there is no “cook book”

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for growth as it is extremely difficult to present an objective an unambiguous overall catalog of “high-quality”- expenditure and revenue-items. For example, the level of spending will depend on how efficient the government is in using resource available. That is why when judging growth enhancing public expenditure items we will try to emphasize their link to efficiency issues. A variety of studies have addressed the issue of effect of fiscal policy on economic growth, mostly using aggregate approach, looking at the impact of total government revenue or expenditure, as percent of GDP, on growth. These studies often fail to identify channels through which fiscal policy have an effect on growth, which is the central question. Much less is known about whether and how the composition of revenue or expenditure affects a country’s growth rate. According to the neoclassical growth models of Solow (1956) and Swan (1956), the share of expenditure in output, or the composition of expenditure and revenue don’t affect the long-run growth rate. In these models, tax and expenditure measures that influence the savings rate or the incentive to invest in physical or human capital ultimately affect the equilibrium factor ratios rather than the steady-state growth rate. Changes in government policy variable, while permanently changing the steady-state level of output per capita, will alter its growth only temporarily. Findings to support this claim are reported in Evans and Karras (1993) and Barro and Sala-i-Martin (1995). As such exogenous growth model has limited value for exploring the determinants of growth, which might explain why interest in growth theory declined in 1960s and did not revive until development of endogenous growth theory almost 25 year later. On the contrary, in endogenous growth models, such as those proposed by Barro (1990), Lucas (1988), King and Rebelo (1991) investment in human and physical capital does affect the steady-state growth rate, and consequently government policy changes may permanently change the growth rate of per capita output. Among the main ways in which fiscal policy affects growth in the endogenous models are the following1:

• Production externalities: public investment may boost production of private sector through complementarities between public infrastructure and private investment

• Productivity growth and differences: fiscal policy may influence innovation and R&D while differences between public and private sector efficiency may provide growth-ehancing opportunities

• Effects on factor accumulation: physical/human capital

• Crowding out effect: unproductive public expenditure versus productive private expenditure

Redistribution effect: i.e. by lowering saving and investment rates; work incentive; granting social insurance and overwhelming market imperfections. Since than explosion of work on endogenous growth has generated a number of models linking fiscal policy and long-term growth, demonstrating various conditions under which the relation is robust (see Barro and Sala-i-Martin (1995), Jones, Manuelli and Rossi (1993), Devereux and Love (1994) and Stokey and Rebelo (1995)). These models highlight the

1 European Commission (2000). Public finances in EMU - 2000. European Economy, 3/2000.

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distinction between productive or non-productive expenditures and distortionary or non-distortionary taxation. Distortionary taxes in this context are those which affect the investment decisions (with respect to physical and/or human capital) and create tax wedges on labor, and hence have effect on the rate of growth. Government expenditures are differentiated according to whether they are included as arguments in the private production function or not. For example if there are externalities from investment in physical or human capital then government intervention to increase school enrolment or capital formation may boost growth and be welfare-improving. If they are, then they are classified as productive and hence have a direct effect upon the rate of growth. These models envisage that shifting taxation from distortionary towards non-distortionary forms has a growth-enhancing effect, whereas switching expenditure from productive towards unproductive forms is growth-hindering. Non-distortionary tax-financed increases in productive expenditures are expected to have a positive impact on economic growth, while if non-productive expenditure are financed zero effect is predicted. Finally, non-productive (productive) expenditures financed by distortionary taxes have an ambiguously (unambiguously) negative growth effect. From a policy perspective, a key issue is the allocation of taxes and expenditures, respectively, to distortionary / non-distortionary and productive / non-productive categories. As theoretical notions do not translate easily into operational rules empirical literature offers different measures of “productive” public expenditure and distortionary taxation. Neither economic theory nor empirical evidence provides clear-cut answers to the question how the composition of public expenditures affects growth. Following Kneller, Bleaney and Gemmell (1999) specification (see below) income and property taxes are treated as ‘distortionary’ and consumption (expenditure based) taxes as ’non-distortionary’, on the grounds that the latter do not reduce the returns to investment, even though they may affect the labor / leisure choice. However, some empirical works point out that consumption taxes may distort the decision to invest (indirectly) to the extent that they affect the labor–education–leisure choices of agents. (Mendoza, Milesi-Ferretti and Asea., 1997).

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Table I.2. Theoretical aggregation of taxation and expenditure Theoretical aggregation Functional classifications Distortionary taxation Taxation on income and profit

Social security contributions Taxation on payroll and manpower Taxation on property

Non-distortionary taxation Taxation on domestic goods and services Other revenues Taxation on international trade

Non-tax revenues Other tax revenues

Productive expenditures General public services expenditure Defense expenditure* Educational expenditure Health expenditure Housing expenditure Transport and communication expenditure

Unproductive expenditures Social security and welfare expenditure Expenditure on recreation Expenditure on economic services

Other expenditures Other expenditure (unclassified) * Barro (1990, 1991) finds that current expenditures less education and defense expenditure is associated with lower per-capita growth.

Source: Kneller, R., Bleaney, M.F., Gemmell, N. (1999). Fiscal Policy and Growth: Evidence from OECD Countries. Journal of Public Economics, 74: 171-190.

Generally, expenditures with a substantial (physical or human) capital component are treated as ‘productive’ (Kneller, Bleaney and Gemmell (1999)), but it may apply to very narrow range of expenditure subsidies to R&D, education and transport or even only to public investment (Romero De Avila and Strauch (2003)). Allocation of expenditure to productive / non-productive categories may also differ between rich and poor countries. The conditions under which a change in the composition of expenditure leads to a higher steady-state growth rate of the economy depend not only on the physical productivity of the different components of public expenditure but also on the initial shares. The various programs that have been hypothesized in theoretical literature to have positive growth effects typically amount to less than one- fifth of public expenditure in OECD countries, while they typically amount to more than half of public spending in less developed countries (Fölster and Henrekson (1997)). The empirical attempts to assess benefits or costs of government involvement have also mixed results: some identify no significant relationship between level of spending/government side2 and the rate of growth (Kormendi and Meguire (1985), Mandoza, Milesi-Ferretti and Asea (1997), Tanzi and Zee (1997), Linadauer and Velenchik (1992)), while other find either a significant positive (Korpi (1985), McCallum and Blais (1987), Sahni and Singh (1984), Holmes and Hutton (1990), Castles and Dorwick (1990), Sala-i-Martin (1992)) or negative relation between the variables (Barro (1991), Weede (1991), Hansson and Henrekson (1994), Grier (1997), Damalagas (2000), Heitger (2001), Fölster and Henrekson (2001), Gwartney, Holcombe and Lawson (1998)). The results may also depend on the level of development, i.e Fölster, Henrekson (2001) point to a robust negative relationship between government expenditure and growth in rich countries. However, no study has found a positive relationship between growth and aggregate expenditure hence the size effect of government spending on growth seems to be mostly negative.

2 Government expenditure ratio to GDP

13

The negative correlation between growth and “government size” is not a linear function. The review of structure-effects of public expenditure shows that the productive effects of certain level and type of public expenditure might be seen. This group of studies has typically tried to link particular component of government expenditure to private sector productivity or economic growth. Consumption and social security spending are found to have zero or negative growth effect (Landau (1983), Aschauer (1989), Barro (1990, 1991), Grier and Tullock (1989)), except Cashin (1995) who shows a positive growth upshot from welfare spending. By contrast government investment expenditure, such as provision of infrastructure services, is thought to provide the enabling environment for growth. Aschauer (1989) finds that “core infrastructure” – streets, highways, airports, mass transits has positive relationship with private sector productivity. (Following Aschauer’s seminal paper many studies have found plausible growth effects of government investment expenditure: Nourzad and Vrieze (1995), Sanchez-Robles (1998) and Kamps (2004)), with some evidence that law of diminishing returns holds (De la Fuente (1997)). Yet large number of authors presents evidence that public investment can be productive if it is spent on infrastructure that serves inputs to private investment (Devarajan, Swaroop and Zou (1996). Moreover, productivity of government investment depends also on the institutional context in which it is undertaken. The empirical literature on the growth-enhancing effect of expenditure on human capital is almost unequivocal (Guellec and van Pottelsbergh (1999), Busom (1999), Diamond (1999), De la Fuente and Doménech (2000), Heitger (2001)), under assumption that public spending (i.e. on R&D) complements private expenditure and does not crowd out private spending. (David, Hall and Toole 2000). For other categories of public spending there appears to be less agreement over whether they stimulate growth. Kormendi and Meguire (1985), Grier and Tullok (1989) and Summers and Heston (1988) classify defense and education expenditure as unproductive. On the contrary Gerson (1998) reveal that many studies find that high levels of educational and health spending correlate positively with growth. They argue that if the link between education, health and growth is weaker this may reflect poor targeting or allocation of expenditure. With the regard to defense and public order the evidence suggest that if spending exceed minimum required for growth enhancing level it starts to depress the economic growth. As highlighted above findings differ also between countries. As an example Fan and Rao (2003) have tested government expenditures by types in Asia and Latin America and Africa, between 1980 and 1998, and find that in Africa, government spending on agriculture and health was particularly strong in promoting economic growth. Asia’s investments in agriculture, education, and defense had positive growth-promoting effects. However, all types of government spending except health were statistically insignificant in Latin America. Additionally, as suggested by Devarajan, Swaroop and Zou (1996), expenditures which are normally considered productive become unproductive if there is an excessive amount of them. (i.e capital expenditure may have been excessive in developing countries, rendering them unproductive at the margin and as a result squeezed by capital expenditure, current expenditures may be productive at the margin). In case of taxation a number of authors have studied how the total tax revenue in relation to GDP, i.e., the average tax rate, affects growth. Empirical study conducted by Marsden (1990), based on a cross-sectional analysis of 20 countries is a good example of this kind of analysis (aggregated approach). In this study the countries were split into pairs, with each pair having

14

similar per capita income, but different levels of taxation. The selected countries were compared on the basis of lower and higher levels of taxation and their influence on growth rates over the period 1970-1979. In all cases, the countries that imposed a lower effective average tax burden on their populations achieved substantially higher rates of GDP growth than did their more highly taxed counterparts. The average annual rate of growth of GDP was 7.3% in the low-tax group and 1.1% in the high-tax group. The average tax/GDP ratio in the low-tax group increased from 13.3% in 1970 to 15.2% in 1979, while it rose from 21 per cent to 23.9 per cent in the high-tax group during the same period. Moreover, fiscal incentives provided by low-tax countries shifted resources from less to more productive sectors, thus raising the overall efficiency of resource utilization. Many other studies find significant negative effect of tax revenue to GDP on growth (Engen and Skinner (1996), Cashin (1995), Fölster and Henrekson (2001)). Yet, the size of the effect differs considerably (see below). Other studies cannot find a relationship, be it positive or negative. Again, no study so far has shown positive relationship between high taxation and growth. Table I.3. Selected analyses of the impact of taxes on economic growth on the example of OECD countries. Study Research area Impact of

taxation on growth

Extent of impact

Cashin (1995) 23 OECD countries 1971-1988

negative 1pp of GDP increase in taxes/GDP ratio lowers production per employee by 2%

Engen and Skinner (1996) USA, sample from OECD countries

negative 2.5pp increase in taxes/GDP ratio reduces economic growth by 0.2-0.3%

OECD - Leibfritz, Thornton, Bibbee (1997)

OECD countries 1965-1995

negative 10pp increase in taxes/GDP ratio lowers GDP growth by 0.5-1%

OECD (1997), European Commission

Model Quest negative 1% GDP increase of personal income tax lowers GDP growth by 2.4% compared to base scenario

Bleaney, Gemmell and Kneller (1999)

17 OECD countries 1970-1994.

negative 1% of GDP increase of distorting* tax revenues/GDP lowers GDP growth per capita by 0.4pp

Fölster and Henrekson (2001) Sample of most affluent countries of OECD and outside OECD 1970-1995

negative 10pp increase of taxes/GDP lowers GDP growth by about 1%.

Bassanini and Scarpetta (2001) 21 OECD countries 1971-1998

negative 1pp increase in taxes/GDP lowers GDP growth/per capita by about 0.3-0.6%.

PricewaterhouseCoopers (2003) 18 OECD countries 1970-1999

negative 1pp GDP increase of in direct taxation/GDP lowers GDP growth by 0.2-0.4%

*distorting tax revenue = revenue from taxes on income and profit, social security contribution, tax on payroll, tax on property.

Source: Leach, G. (2003). The Negative Impact of Taxation on Economic Growth. New edition. REFORM.

Clearly, in practice, almost all taxes are distortionary to some degree and the key issue in search for long-run growth effect of various taxes is whether these distortions can be expected to be substantial or minor with respect to the main determinants of growth, such as investment work and technical progress. It is shown that the effects of taxation on growth depend crucially on the elasticity of labor supply, the specification of the leisure activity as well as the structure of the human capital accumulation, and its tax treatment. Stokey and Rebelo (1995) show that large growth effects

15

of fiscal policy occur when depreciation rates are implausibly large and/or when the uncompensated labor elasticity is implausibly high. Lucas (1990), King and Rebelo (1990), Kim (1992), Jones, Manuelli, and Rossi (1993), Pecorino (1993), Devereux and Love (1994), and Stokey and Rebelo (1995) among others use simulations in order to quantify growth and welfare effects of tax reforms, such as, for example, a shift from income to consumption taxes or a lowering of capital income taxes. Although the quantitative growth and welfare effects identified by these studies differ considerably, they all reveal that consumption taxation induces fewer distortions than the taxation of factor incomes (human and physical capital). They show that a consumption tax involves only one fundamental distortion—it affects the choice between time spent in “productive” activities (labor and education) and in leisure time in favor of the latter, and therefore reduces the growth rate of the economy. This choice is affected in a similar fashion by income taxes, but these also involve other distortions that reduce capital accumulation and growth. A comprehensive discussion concerning growth effects of consumption tax systems compared with those of income tax systems has been provided by Krusell, Quadrini and Rios-Rull (1996).

However, the choice between taxes within group of direct taxation is less clear. Mendoza, Milesi-Ferretti , Asea (1997) point out that changes in labor income taxes might have stronger effects on growth than changes in capital income and consumption taxes. The estimations carried out by Daveri and Tabellini (1997) and B. Heitger (2001) underscore the weight of tax burdens of private individuals. The first study proves that a 14pp rise in personal tax in the EU countries in 1965 – 1995 led to a 3pp reduction of the share of investment in GDP and slowed down annual economic growth by about 0.4pp. The authors show the impact of higher labor taxation on the behaviour of enterprises which by substituting capital for work, contribute to the decline of the end capital product and limit inclinations to invest. On the other hand, Leibfritz, Thorton and Bibbee (1999) or Xu (1999), confirm that capital taxes in the long term lead to much greater disturbances than wage taxes or taxes on consumption. Some of the strongest and most recent empirical evidence that the tax structure affects economic growth is reported in Widmalm (2001). Using pooled cross-sectional data from 23 OECD countries, between 1965 and 1990, Wildmalm finds evidence that different taxes have different growth effects, and moreover the tax progressivity is bad for economic growth. Specifically, the proportion of tax revenue raised by taxing personal income (which includes also capital tax) has a negative correlation with economic growth. Results show that if an economy has a share of personal income tax of say 25% and another one has a share of 62%, the latter would be expected to have one percentage point lower annual growth, ceteris paribus. This result is robust to a rigorous sensitivity analysis. Still more studies showed that a progressive income tax rate structure caused more damaging economic effects than a flatter rate tax schedule (Sarte (1997), Castañeda, Diaz-Gimenez and Rios-Rull (1999), Koester and Kormendi (1989), Cassou and Lansing (2000), Cauccutt (2003), Afonso, Ebert, Schuknecht and Thöne (2005)). Koester and Kormendi isolated marginal tax effects from average tax effects and found that after controlling for average tax rates, increases in marginal tax rates had a negative effect on economic activity. In other words, reducing the progressivity of tax system, while allowing the government the same tax revenue (the same tax/GDP ratio) may lead to higher levels of national income. Many empirical studies confirm that high and increasing marginal tax rates impede the formation of capital, constrain labor supply, retard economic growth while an introduction of a flat tax

16

system helps to avoid many if not all these costs. (For the discussion about flat tax system - see Box). Box I.2. Economic effects of flat tax

Although ‘flat tax’ is not touted as a panacea to all economic ills, an increasing number of European countries – among them a few new EU member states – have introduced or are developing flat tax regimes.

The case for a flat tax has been around for over two decades. In the early 1980s, Robert Hall and Alvin Rabushka of the Hoover Institution developed a tax system that is based on a single rate of taxation for all sources of income, as close as possible to the source. All income is classified as either business income or wages and taxed at one rate, except for a personal allowance exempting lower income individuals and families from taxation (this makes the Hall-Rabushka proposal to some extent progressive). There are no other exemptions, no deductions, no loopholes. The other essential aspect of the flat tax system developed by Hall-Rabushka is radical simplification of the tax system, by removing any deductions or reliefs, and by eliminating double taxation. This proposal represents a fundamental change in the way governments would collect tax revenue.3 The Hall-Rabushka proposal has served as the blueprint for several proposals to reform tax system in other countries (i.e. Russia, Slovakia).

Flat tax is believed to:

1) Help reduce red tape and associated difficulties and confusion. With tax form down to size of postcard the flat tax system makes tax filling much simpler and more efficient.

2) Achieve simplicity, economic efficiency and fairness (same rate for all) – three principle of effective/sound taxation.

3) Reduce tax evasion and cheating, by lowering opportunity cost of avoiding taxes. Flat tax system means elimination of relief, allowances and thus eliminates loopholes in the system.

4) Provide incentives to work, save and invest that trigger an economic boom.

Introduction of flat tax rate tends to redistribute income that encourages saving because higher-income families tend to be bigger savers than lower-income families, even on a lifetime basis. The saving incentives come from the increase in the after-tax return from postponing consumption. Second, one flat rate at personal- and corporate-level removes the double taxation of corporate equity and hence tend to reduce the cost of corporate capital. Moreover, dividends and interest are not taxed at individual or household level, which encourage real investment in economy. Finally, broadening the tax base may imply lower overall marginal tax rates and reduce the overall cost of capital. A switch to flat tax may cause the supply of labor to increase, depending on the significance of reductions in marginal tax rates and a lower price of future consumption in relation to present consumption. Marginal tax rates on labor directly reduce the after-tax wage and hence reduce the relative cost of leisure. Thus, people have an incentive to work less. Further, what matters the most for the labor supply is the marginal tax rate on total compensation, not just the marginal tax rate on wages received. Total compensation includes fringe benefits, such as health insurance and pension benefits, as well as payroll taxes paid by the employer. Fringe benefits are often excluded from tax under current law, and thus the effective marginal tax on compensation might be much less than the statutory tax rate on wages. High marginal tax rates induce individuals and firms to change the form of compensation from taxable cash to taxfree fringe benefits, including nicer working conditions and other perks. The effects of tax reform on human-capital accumulation depend largely on whether human capital is more of a substitute for or a complement to new physical capital.

The effects of switching to flat tax are somewhat uncertain and depend critically on the details of the reform. Thus existing empirical results need to be interpreted carefully. Many estimates apply to a pure, well-designed flat tax while any compromises in the design, such as including some deductions or exemptions are said to reduce the gains or turn them into losses. However, in principle, some broad conclusions stand out that high and increasing marginal tax:

• impede the formation of capital (Carroll, Holtz-Eakin, Rider and Rosen (1998), Ventura (1999)

• hinder economic growth and constrain aggregate labor supply (Koester and Kormendi (1989), Mullen and Williams (1994), Padovano and Galli (2001), Becsi (1996), Feldstein (1995a), Feldstein (1995b), Feldstein and Feenberg (1995), Cassou and Lansing (1996)).

According to Cassou and Lansing (1996) adoption of flat tax plan similar to one proposed by Hall-Rabushka for US economy leads to an increase in labor hours, income and investment (or savings). As labor and investment are driving forces for growth, a flat tax rate raises the US economy’s long run growth (by 0.2 to 0.8pp per capita, yearly). The strength of the growth effect crucially depends on elasticity of household labor supply, capital/s share of output and elasticity of the capital stock with the respect to new investment. The gains are attributable to both the lowering of the marginal tax rate and full write-off of investment expenditures.

5) Generate increased tax revenue. As a result of a more dynamic economy and less tax evasion, the government actually collects higher revenue. As evidence by Laffer’s analysis if taxes are higher than optimal tax rate than implementation of the moderately low flat tax rate would increase tax revenue.

6) Eliminates double taxation on saving and investment (if applied in ideal form as proposed by H-R). Since all

3 More details can be found in: Hall, R.E., Rabushka, A. (1995). The flat tax. 2nd edition. Hoover Institution Press, Stanford University.

17

forms of income are taxed only once people are free to choose whichever form of investment maximizes their profits.

At the same time, a flat tax regime is understood to

1) eliminate practically all forms of tax exemptions and allowances

2) be non-progressive (at least as far as the ’marginal’ rates are concerned)

3) favour the wealthy at the expense of the poor. However, the flat tax may exempt the poor from paying any tax by providing a generous tax allowance. (Slovakia: the non-taxable threshold was significantly increased, from original fixed amount of SKK 38,760 to 1.6 multiple of the poverty line , i.e. SKK 80,832 in 2004.)

4) favour share and dividend-holders since profits are taxed only once, at source

Flat tax at work

The flat tax concept was the subject of heated debate in the mid 1980s. The modern-day renaissance of the flat tax concept was initiated by Estonia (1994), followed by Lithuania (1994) and Latvia (1995). Inspired by the success of fiscal reforms in the three former communist countries, Russia (2001) followed with a record-low 13% flat tax. Ukraine and Slovakia implemented the flat tax last year, while Georgia and Romania have switched to the flat tax system just this year, which attests the continuity of the flat tax reforms.

Flat tax rate on personal income Corporate income tax1)

Country RateYear introduced

Tax credit

Rates before reformType Rate

Estonia 26 1994 Yes 16,24,33 Flat (F) 26*)

Lithuania 33 1994 Yesrates ranging from 18 to 33 F 15**)

Latvia 25 1995 Yesbasic rate at 25%, with top

marginal rate of 35% F 15Russia 13 2001 No 12, 20, 30 F 30 (24)***Serbia 14 2003 Yes 10, 15, 20 F 14Ukraine 13 2004 Yes 10, 15, 20, 30, 40 F 25Slovakia 19 2004 Yes 10, 20, 28, 35, 38 F 19Georgia 12 2005 n/a 12, 15, 17, 20 F 20Romania 16 2005 n/a 18, 23, 28, 34, 40 F 16

1) the same period as introduction of the flat tax, *) tax on retained earnings abolished, **)13 for SME, ***) 24 from 2002

Source: MOFs, internet

The flat tax has already had remarkable result in the countries which adopted it. Among other it has achieved greater compliance due to its simplicity and low rate, has been producing far more revenue than the former system and has boosted economic growth by improving incentives to work, save, invest and take entrepreneurial risks. The most frequently citied example of successful flat tax implementation is Russia. The supporters of the Hall-Rabushka (1995) flat tax often refer to the Russian pattern as evidence in their favor. As in Russia after introduction of a flat tax in 2001 the country’s tax revenue and GDP grew dramatically over the next years (see charts below). However, more detailed studies on tax reform in Russia show that links between growth and flat tax might be not so obvious. For example Gaddy, Gale (2005) point out that (1) the change in the personal income tax was not a stand-alone reform, but rather part of a comprehensive set of fiscal reforms undertaken after the country’s debt crisis of 1998, (2) changes in tax administration and enforcement, and other structural changes, appear to be significantly more fundamental and sweeping than the changes in income tax rates, (3) economic growth had begun well before the reforms were introduced, (4) microeconomic data suggest that the tax rate reductions had little if any effect on labor supply, which undercuts the notion of a large supply-side response. According to their analysis Russia’s example suggest that the principal virtue of the flat tax was its simplicity, as the system became easier to administer and comply with. Ivanova, Keen and Klemm (2005) do not see any evidence that rate reduction in Russia had a strong incentive effect, with labor supply changes over the post-reform period.

18

Estonia

0

5

10

15

1993 1995 1997 1999 2001 2003-10

-5

0

5

10

15

Direct taxes GDP growth

Latvia

0

2

4

6

8

10

1994 1996 1998 2000 2002 2004-2

0

2

4

6

8

10


Lithuania

0

4

8

12

1993 1995 1997 1999 2001 2003-20

-15

-10

-5

0

5

10

15


Slovakia

0

5

10

15

1993 1995 1997 1999 2001 2003-10

-5

0

5

10

15


Russia

02468

1012141618202224

2000 2001 2002 2003 20040

2

4

6

8

10

12

R evenue/GDP P IT /GDP

GDP growth

Source: MOFs, World Bank.

Summing up, what lessons can be drawn for other countries considering the adoption of similar reforms? A key lesson must be that tax-cutting reforms should be well designed (which means accompanied by comprehensive set of fiscal reforms, including tax administration and enforcement) to be expected to pay for themselves by greater work and improved compliance. The revenue neutrality is crucial especially if country is confronted with sizeable budget deficits.

As approach proposed above is useful to identify budgetary categories that are on average more “productive” or “distortionary” than others and may omit important country-specific features of revenue/expenditure policies (design, linkages with other policy instrument i.e. between benefits and entitlements, specific aims of spending programs) the quantitative importance of the taxes’ and expenditures’ growth effects vary substantially between empirical studies. Moreover, empirical literature examining relationships between economic growth rates and fiscal variables in the endogenous growth models varies in terms of data set, econometric technique and quality. The variability non-robustness of the results comes also from “widespread tendency to add fiscal variables to regressions in a relatively ad hoc manner without paying attention to the linear restriction implied by the government budget constraint.“4 . The importance of a complete specification of the government budget constraint is brought out by many recent empirical studies (Helms (1985), Mofidi and Stone

4 Source: Kneller, R., Bleaney, M.F., Gemmell, N. (1999). Fiscal Policy and Growth: Evidence from OECD Countries. Journal of Public Economics, 74: 171-190.

19

(1990) and Miller and Russek (1993), De la Fuente (1997) Mendoza et al. (1997)). Miller and Russek, for example, find that the growth effect of a change in expenditure depends crucially upon the way in which the change in expenditure is financed. Another example might be Kocherlakota and Yi (1997) showing that tax measures significantly affect growth only if public capital expenditures are included in regressions. Adding to that in the empirical growth literature, correlations between economic growth and its proposed determinants are often sensitive to the inclusion of other potential growth sources. Levine and Renelt (1992) point out that over 50 different variables have been reported significantly correlated with economic growth in empirical studies, but that only two of these survive a systematic sensitivity analysis. They identified a positive, robust correlation between growth and share of investment in GDP as well as initial level of income (conditional-convergence hypothesis). Finally another analytical problem is issue of endogenity (extend to which endogenity may impact regression results). It may be that the significant associations observed between fiscal variables and growth alt least partly reflect tendency, for example, for higher income countries to devote proportionally more resources to government spending. (Bleaney, Gemmell and Kneller (2001), Kocherlakota and Yi (1997)). Among the most prominent issues which require further attention and work, before fiscal growth effects can be reliably identified for policy advice is problem of efficiency, especially related to delivery of public services. Almost none of the panel investigation across EU and OECD studies allow for fiscal parameters heterogeneity in the sample that for example, may reflect efficiency differences with which countries deliver public services. Main findings in macroeconomic links between public expenditure items and economic goals: selected studies

Expenditure issues Main findings Public investment 9 Aschauer (1989): a ’core’ infrastructure (highways,

airports, etc.) has most explanatory power for growth and productivity improvement.

9 Cashin (1995): productive government spending, in the

form of public investment and transfer payments, is demonstrated to enhance economic growth. A trade-off exists between the growth-enhancing provision of public capital and transfers and the growth-diminishing influence of distortionary taxes. For small government (where public spending is low), the growth-enhancing effect dominates.

9 Sanchez-Robles (1998): indicators of infrastructure

physical units used as proxies of investment in infrastructure are positively and significantly correlated with the per capita growth. Public investment in some countries may suffer from lack of efficiency.

9 Kamps (2004): elasticity of output with respect to public

capital is positive and statistically significant in most of OECD countries.

20

9 Devarajan, Swaroop and Zou (1996); expenditure which

are normally considered productive could become unproductive when used in excess, in particular capital expenditures; a economic infrastructure expenditure that in general have a high proportion of capital spending are negatively correlated with per-capita real GDP. (data from 43 developing countries over 20 years);

9 Easterly and Rebelo (1993): positive impact on growth

depends on the quality of public investments; investment in transport and communication is consistently positively correlated with growth

9 De la Fuente (1997): non-linear effects; positive effects on

growth for levels up until 2% of GDP, 9 Heitger (2001): Total government expenditures as well as

expenditures by type indicate a significant negative impact on economic growth (excepting transfers and public investments) OECD countries in 1960–2000

9 Kocherlakota and Yi (1996): government policy can have

persistent, sustained effects on growth rates at the aggregate level; investment has significant, positive effect on growth when a tax is included in the regression; time series data spanning up to 100 years for the US and 160 years for the UK

9 Cassou and Lansing (1999): none of the observed public

capital policies in the eight OECD countries can account for slowdowns in the growth rates of aggregate labor productivity since 1970

Research and development

9 Keefer Knack (1997) : breakdowns in foreign investment or human capital accumulation should be considered proximate, but not fundamental causes of low growth rates and failure to catch up

9 Bussom (1999): public funding induces more private effort,

but for some firms (30% of participants) full crowding out effects cannot be ruled out

9 Diamond (1999): no support for the hypothesis of federal

spending crowding out private spending (aggregate annual time series data 1953-1995); complementarity between federal and private spending on basic research

9 David, Hall and Toole (2000): survey of available econometric

evidence on crowding-out effect of public R&D spending

21

accumulated over the past 35 years; public funded R&D can displace private sector investment

9 Bassanini Scarpetta and Hemmings (2001): in addition to the

‘primary’ influences of capital accumulation and skills embodied in the human capital, the results confirm the importance for growth of R&D activity, the macroeconomic environment, trade openness and well developed financial markets

9 Guellec and van Pottelsbergh (2003): increasing positive

impact of public funded R & D on private R & D up to a ceiling (about 10% of business R&D), after which public spending crowds out private R&D; defence research performed in public laboratories and universities crowds out private R&D

9Education 9 Hanushek and Kim (1995): the quality of education, measured

by students average performance on standardized international tests in mathematics and science, contributed significantly and positively to productivity growth.

9 Barro, Sala-i-Martin (1995): significant positive effect for 97

countries during the period 1965-85 9 Bleaney, Gemmel and Kneller (2001): mixed effect of

variation of public spending on growth during 1990s in EU countries: positive in DK, F, UK, negative in: NL, S,

9 De la Fuente and Doménech (2000): human capital has

positive impact on growth for a sample of OECD countries, findings are robust; .counterintuitive findings on the lack of relationship between educational investment and growth may be due to poor data quality

9 Buysse (2002): positive effect of public expenditure in OECD

countries on productivity growth, after controlling for demographic differences.

9 Thöne (2003)

Healthcare 9 Rivera and Currais (1999): evidence for reverse causality: economic growth has created high real incomes which enable people to spend more on the consumption good “health”

9 Bleaney, Kneller and Gemmel (2001): positive and significant

effect on growth in OECD countries for the period 1970-95 9 Bloom Canning Sevilla (2001) good health as one of

fundamental component of human capital has a positive,

22

sizable, and statistically significant effect on aggregate output.

Social expenditures 9 Feldstein (1976): negative effect of pension transfers in PAYG systems on national savings and private investments,

9 Hakan Nordstrom (1992): evidence that greater government

transfers in proportion to GDP are negatively associated with average growth in the OECD countries between 1970 and 1985

9 Persson and Tabellini (1994): significant positive effect on

GDP growth in OECD countries during the period 1960-85 9 Hanson, Henrekson (1994): government transfers,

consumption and total outlays have consistently negative effects, while educational expenditure has a positive effect

9 De la Fuente (1997): no significant effect on growth. 9 Cashin (1995) : reports the growth-enhancing effects of both

intragenerational and intergenerational transfer payments (for 23 developed countries between 1971 and 1988; transfers are argued to raise the marginal product of private capital by reducing the negative externalities flowing from (1) poor enforcement of private property rights, and (2) workers with a below-average stock of human capital.

Public employment 9 Algan, Cahuc and Zylberberg (2002): negative effect on labor-

market performance; public employment crowds our private employment when the public sector offers attractive wages and/or benefits

Source: European Commission (2002). Public finances in EMU - 2002. European Economy, 3/2002;Afonso, A., Ebert, W., Schuknecht, L., Thöne, M. (2005). Quality of Public Finances and Growth. Working Paper No. 438, European Central Bank.

Recent studies examining the effects of the tax burden on labor supply, capital formation and savings. Studies on the effect of tax on savings and capital formation Denison (1958) The gross private savings rate (GPSR) is a stable function of GNP and changes in

the tax system or other changes in the real after-tax rate of return to capital do not affect the GPSR.

David and Scadding (1974) The gross private savings rate is constant and taxes cannot affect savings behaviour, either through a reduction in private income or a reduction in a real rate of return on capital.

Boskin (1978) The savings function of Denison (1958) and David and Scadding (1974) was criticized on the ground that the savings rate out of private net-of-tax income grew by more than 50 per cent during the period 1929-1969 (the same period examined by David and Scadding). Boskin pointed out that taxes would result in a decline in savings by decreasing the net return to savings.

Evans, M.K. (1983); Canto, Joines and Laffer (1983)

There is a close relationship between tax rates, revenues and productivity. Taxation is identified as one of the policy instruments to accomplish the task of stimulating capital formation. If the tax rate increases above or decreases below the optimum rate, the tax revenue declines and so does productivity. The optimum rate which produces the desired revenue and the desired national product is determined by the

23

electorate and its ability and willingness to pay tax in a democratic system. Mathur (1985) Income taxation has a significant effect on household savings through disposable

income and interest rate channels. Reduction in income tax rates would induce higher household savings by shifting the household budget constraint and changing the slope in favour of savings.

Carrol and Summers (1987) Tax incentives play an important role in influencing the aggregate level of personal savings. Tax exemption for savings that takes the form of superannuation has a positive impact on total savings.

Jenkins (1989) Tax reform in Sri Lanka after the change in government in 1977 shifted the focus in the fiscal system from direct taxes to indirect taxes. As a result of these changes, gross capital formation increased substantially from an average of 14.5 per cent of GDP in 1976-1977 to an average of 28.9 per cent during the period 1978-1982.

Marsden (1990) A cross-section analysis of 20 selected countries was compared on the basis of similar per capita income with different tax rates. For example, Singapore was compared with New Zealand, which has similar per capita income but higher levels of taxation, Japan with Sweden, and so on. In all cases, the countries that imposed a lower effective average tax burden on their populations achieved substantially higher rates of GDP growth than did their more highly-taxed counterparts.

Harberger (1990) Tax credits are implemented to stimulate investment. The investment tax credit on the machine or other physical assets tends to subsidize depreciation, thus artificially biasing investors in the direction of choosing short-lived assets. The investment tax credit would artificially turn a socially wasteful investment into a privately profitable one. Many countries have imposed statutory minima on the lives of the assets to reduce the bias. One important way is to provide incentives to the net income generated by the assets covered.

Ahmad and Stern (1991) Direct tax reduces productive investment and thereby reduces capital formation and growth. However, their main concern was indirect tax reform, since 80 per cent of the tax revenue raised by developing economies is from indirect taxes

Tanzi and Shome (1992) A study of tax regimes in eight Asian economies (Hong Kong, China; Republic of Korea; Singapore; Thailand; Philippines; Malaysia; Taiwan Province of China; and Indonesia) revealed that the beneficial effects of tax incentives in the Republic of Korea, Singapore and Taiwan Province of China were dependent on other supporting factors. The tax rate in Hong Kong, China, was comparatively lower and is one of the factors responsible for a high growth rate in that economy.

Trela and Whalley (1992) Pro-growth tax policies (direct tax reductions and indirect tax exemptions) made a discernible contribution to the Republic of Korea’s economic growth over the period 1962-1982. The generalequilibrium model, using the “outward-oriented growth strategy”, estimated the increase in output due to pro-growth tax policies to be 0.54 per cent per annum.

Bernheim and Shoven (1987), Shoven and Topper (1992) and Taylor (1993),

The current income tax system is inefficient, since it discriminates against savings. These studies recommend replacing the current corporate income tax with a consumption-based, cash-flow approach to tax that exempts savings and investment from taxation. This system removes tax-related differences between the costs of debt and equity financing.

Kerr and Monsingh (1998a, 1998b) and Monsingh (1998a, 1999b)

These studies reveal that direct tax is one of the many variables that affect savings and capital formation, and reduction in direct tax rates has boosted the growth of the Indian economy. Tax policy can promote growth by increasing the rate of savings in the economy. Tax on expenditure would discourage non-productive consumption and promote capital formation.

Tanzi and Zee (2000) Optimal tax models are of no practical use to developing economies. Tax theory shows that the direction of causation tends to run from development to tax levels rather than the other way around. Tanzi and Zee feel that tax incentives may not promote sustained development but lead to unnecessary distortions. These distortions encourage “rent-seeking activities.”

Studies examining the effects of the tax burden on labour Nickell (1997) Payroll taxes have negligible coefficient; overall tax burden may raise

unemployment and reduce labour supply.

Mendoza Milesi-Ferretti and Asea (1997)

Factor income tax ratios are negative and consumption tax ratios significantly positively related to investment, but there is relationship between tax ratios and growth.

Elmeskov, Martin and Scarpetta (1998)

Tax wedge significantly related to unemployment, but not in case of high levels of degree of centralisation/co-operation in the labour market.

Nickell and Layard (1999) Total tax wedge affects unemployment, while payroll taxes alone have no additional effect.

Blanchard and Wolfers (2000) Higher taxation increases unemployment, but the effect is small.

24

Martinez-Mongay (2000) Labour tax ratios affect private investment and growth negatively. No effects on (un)employment, which is "unsurprising" as interplay with market institutions not taken into account.

Fiorito and Padrini (2001) Increasing taxation (especially labour taxation) negatively leads both the labour force and employment, while increasing taxation positively leads unemployment.

Prescott (2004) High responsiveness of labour supply to marginal labour tax rates. Marginal tax rate accounts for the predominance of difference at poin in time and large change in relative labour supply over time

Source: Monsingh, P., Kerr, I.A. (2001). The Influence of Tax Mix and Tax Policy on Savings and Capital Formation in Developing Economies: a Survey. Asia-Pacific Development Journal, 8(1): 32-33; Nickell, S. (2003). Employment and Taxes. CESifo Working Paper No. 1109, Center for Economic Studies and the Ifo Institute.

Annex I.3. Efficiency of public expenditure In spite of all efforts to identify sources of growth we still have simplistic growth concept that ignores many “quality-indicators”. In context of quality of public finance growth equations usually do not capture the performance and efficiency of the public sector, which are essential while assessing growth effects of public spending. From this perspective, the shift of the focus from quantitative to quality considerations could give valuable additional insight to our study, and can be an avenue for further work on the topic. Assessing public expenditure efficiency requires setting output/outcome measures in relation to inputs utilized, what presents a difficult empirical issue. Both real inputs and benefits from the governmental expenditure are not easily determined, due to deficient budgetary classifications, lack of reliable data or difficulties in allocating fixed costs to various functions of the government. The concept of efficiency has a broad meaning. Government expenditure can be efficient in a technical sense (providing the output at low cost) but inefficient in a public interest sense, i.e. the government produces efficiently the wrong output, what is clearly a political issue. This should be distinguished from technical inefficiency when the budget is allocated to socially desired goals but wastes resources by not using them in an efficient way. Both of these types of inefficiencies are common and equally harmful. As noted by Tanzi (2004) in the analysis of public expenditure one should not assume the identity between expenditure and benefits. It is quite often the case in health and education or generally labor intense activities where additional resources are absorbed mostly by higher salaries which are not accompanied by increased productivity. In this context it is also vital to make a distinction between output and outcome, which is fundamental in the analysis of public spending efficiency. The output of educational spending may be the number of children attending school or completing certain grades whereas the outcome is what they learn and how this will affect their future situation on the labor market. The measures of efficiency of public spending should focus on the latter. In recent years a number of attempts have been made at measuring the efficiency of public sector. The techniques developed are divided into parametric and non-parametric approaches. The parametric approach assumes a specific functional form for the relationship between inputs and outputs of government spending. The inefficiency term is reflected in the deviation of the observed values from the unobservable efficiency frontier. This group is based on econometric methods and includes Public sector performance indicator (PSP) and Public sector efficiency indicator (PSE).

25

The non-parametric approach calculates the frontier from the data without imposing any specific functional restrictions. Techniques developed within this approach: Free Disposal Hull (FDH) and Data Envelopment Analysis (DEA), use mathematical programming techniques. The brief description of the specified methods is presented below. Parametric methods Public sector performance indicator (PSP) is one of the parametric approaches developed by Afonso, Schuknecht and Tanzi (2003). The approach attempts to determine whether there is a positive identifiable linkage between higher public spending and higher social welfare, i.e. public sector performance, defined as the outcome of public policies. Assume that public sector performance is a function of a number of socio-economic indicators (I), i.e. depends on life expectancy, literacy rate, employment rate etc. For any country i there are j areas of government performance which contribute to the overall performance in country i, (PSPi). Thus,

∑=

=n

jiji PSPPSP

1

,

with

PSPi = f(I1, I2,…,Ik).

Therefore an improvement in public sector performance depends on the positive development of the relevant social and economic indicators:

∑ ∆∆=

=k

ll

lij II

fPSP

1 δδ

.

Thus, public expenditure attempts to bring about desirable changes in the selected performance indicators. The greater the positive effect of government spending on the indicators, the greater will be the improvement in social welfare reflected in PSP indicator. This approach assumes that any changes that might occur in the economic and social indicators may be seen as changes in public sector performance.

The performance indicators used under this methodology belong to two broad groups: process (opportunity) indicators and traditional (Musgravian) indicators. The opportunity indicators include four sub-groups: administrative, education, health and public infrastructure, each of which can contain several indicators, i.e. health includes infant mortality and life expectancy. The group of indicators reflecting traditional functions of government is made up of three sub-groups: income distribution and economic stability and allocation, again each of them consisting of several indicators. All the indicators are given equal weights. Afonso, Schuknecht and Tanzi (2003) studied performance of the public sectors of 23 industrialized OECD countries in 2000 computing PSP indicators for the government as a whole as well as for its core functions. The results suggest notable but not very large differences across countries. The authors found that small governments (industrialized countries with public spending below 40% of GDP in 2000) on average report better

26

economic performance than big governments (public spending above 50% of GDP) or medium sized governments (40-50% of GDP). Similar conclusion was reached in case of administrative and economic performance. Countries with large public sectors show more equal income distribution. These results are consistent with the findings of Tanzi and Schuknecht (2000). However it should be stressed that public sector performance indicator as defined above reflects outcomes without taking into account the level of public spending, which can be assumed to reflect the opportunity costs of achieving the estimated social welfare. Further in their work, basing on the framework already outlined, Afonso, Schuknecht and Tanzi (2003) introduced indicator of Public sector efficiency (PSE), defined as the outcome of public policies in relation to the resources applied. Public sector efficiency indicator weighs the performance, measured by PSP indicators, by the amount of relevant public expenditure (PEX) used to achieve a given level of performance. For any country i the overall PSE indicator is defined by:

PEXPSPPSE

i

ii= ,

with

∑=

=n

j ij

ij

i

i

PEXPSP

PEXPSP

1

.

It is however stressed that not all expenditure categories are equally suitable as input measures (PEX) used under the proposed approach. Whereas health and education expenditure seem good measures of the public sector inputs in these areas, public consumption is a mere approximation for input to produce administrative outcomes. It is assumed that public investment can be used as a proxy for infrastructure quality while transfers and subsidies as proxies for input to affect income distribution. Total spending may be a useful proxy for the input to affect economic stabilization as well as economic efficiency (since it is generally financed by distortive taxation). Furthermore the authors note a few caveats to the proposed methodology as comparability of the public spending data across countries. Apart of some data problems the outlined approach to measure public sector performance and public sector efficiency is subject to problems of distinction between output and outcomes. Another serious caveat also already mentioned is the assumption that any outcomes (positive development of socio-economic indicators) results from public sector activities, what neglects any possible contribution from other factors (ex. effects from changing diets contributing to improvement in health indicators). Moreover these approaches require assuming specific functional relationship between inputs and outputs or for the inefficiency terms. The analysis of public sector in 23 industrialized OECD countries in 2000 presented by Afonso, Schuknecht and Tanzi (2003) indicates that differences in efficiency are much more significant than in performance across countries. Countries with small public sectors report

27

much better efficiency indicators clearly outranking the others. These results suggest that in many industrialized countries the size of the government may be too large, with declining marginal products being rather prevalent. Non-parametric methods To avoid the caveats of the outlined parametric methods some studies apply non-parametric approaches to the evaluation of public spending efficiency. The group of these methods include: Free Disposal Hull (FDH) and Data Envelopment Analysis (DEA)5. Free Disposal Hull (FDH) as a non-parametric technique was first proposed by Deprins, Simar and Tulkens (1993). The FDH method imposes the least amount of restrictions on the data as it only assumes free-disposability of resources. Central premise to this approach is the notion of relative efficiency defined as the ability of the producer to generate more or equal amount of output (as compared to other producers) given less or equal amount of input. The figure below presents a simple (single-input single-output) case of FDH production possibility frontier. Countries A and B use input XA and XB to produce outputs YA and YB respectively. The input efficiency score for country B is defined as the quotient XA/XB. The output efficiency score is given by the quotient YA/YB. A score of one implies that the country is on the frontier. An input efficiency score of 0.75 indicates that this particular country uses inputs in excess of the most efficient producer to achieve the same output level. An output efficiency score of 0.75 indicates that the inefficient producer attains 75 percent of the output obtained by the most efficient producer with the same input intake. Multiple input and output efficiency tests can be defined in an analogous way. Figure I.1. Free Disposal Hull

A

EB

C

D

spending

index of performance

production possibility frontier

XA XB

YA

YB

The FDH framework allows the ranking of several countries in terms of public expenditure efficiency by calculation of input efficiency and output efficiency scores (reflecting how much less a given country uses to produce the same output or how much more output it produces at the same level of spending). The scores are set between 0 and 1 (maximum for all countries located on the production possibility frontier). It is stressed that this methodology is likely to underestimate inefficiencies as countries placed on the frontier are assumed to be efficient, without respect to any possible improvements they could or should introduce.

5 More detailed information on non-parametric approaches could be found in: Herrera S., Pang G., Efficiency of Public Spending in Developing Countries: An Efficiency Frontier Approach. World Bank, May 2005.

28

This technique was used by Vanden Eeckhaut, Tulkiens and Jamar (1993) to assess public expenditure efficiency in Belgian municipalities and by Fakin and Crombrugghe (1997) to study efficiency of government expenditures in OECD and Central European countries. Non-parametric efficiency analysis presented in the latter study reveals cost-inefficiency of transition governments. The authors suggest that Central European countries could enhance their efficiency by lowering and restructuring their government expenditure and that the reform of future pension rights would contribute to this end. Gupta and Verhoeven (2001) assessed efficiency in education and health spending in 37 countries in Africa concluding that on average African countries are inefficient in providing education and health services relative to both Asian and the Western Hemisphere countries. The authors also report a negative relationship between the input efficiency scores and the level of public spending. The same approach was applied to assess education spending in the EU by Clements (2002) leading to the conclusion that 25% of education spending in the EU is wasteful as related to the best practices observed in the OECD. Already cited Afonso, Schuknecht and Tanzi (2003) in their evaluation of public sectors of 23 OECD countries also used FDH as one of the methods finding that the EU countries are mostly well inside the possibility frontier. The results show the average input efficiency of the EU15 countries to equal 0.73 meaning that they should be able to provide the same level of output using only 73% of inputs they are currently using. The output efficiency of the EU15 amounts to 0.82 – with given public spending these countries “produce” on average only 82% of what they could have produced if they were on the production possibility frontier. Another non-parametric approach used in the public expenditure efficiency analyses is Data Envelopment Analysis (DEA) developed by Charnes, Cooper and Rhodes (1978). This technique implies a convex production possibility frontier, i.e. assumes that linear combinations of the observed input-output bundles are feasible (a constraint that is not required by the FDH approach). The figure below provides a single-input single-output DEA production possibility frontier as a simple graphic illustration of this technique. Figure I.2. Data Envelopment Analysis (DEA)

D

V C

B E

A

spending

index of performance

production possibility frontier

Y

The feasibility assumption, displayed by the piecewise linearity, implies that the efficiency of C, for instance, is not only ranked against the real performers A and D, called the peers of C in the literature, but also evaluated with a virtual decision maker, V, which employs a weighted collection of A and D inputs to yield a virtual output. Country C, which would have been considered to be efficient by FDH, is now lying below the efficiency frontier. This

29

example shows that FDH tends to assign efficiency to more countries than DEA does. The input-oriented technical efficiency of C is now defined by TE = YV/YC. Data Envelopment Analysis (in addition to FDH) has been used in recent paper by Afonso and St. Aubyn (2004) to evaluate efficiency of education and health expenditure in OECD countries. A recent study by Herrera and Pang (2005) provides an estimation of efficiency frontiers of nine education output indicators and four health output indicators, based on a sample of over 140 countries and covering years 1996-2002. The results show that countries with higher expenditure levels as well as countries where the wage bill is a larger share of the government’s budget register lower efficiency scores. The authors found that the average output efficiency in developing countries amounts to around 0.9 (alternatively 0.7 – depending on the framework applied) implying that they could increase health and education attainment by between 10 to 30% while using the same input assuming they were as efficient as the countries from the production possibility frontier. It is stressed that all results based on the methodologies outlined above should be seen as indicative and need to be interpreted with great care. Assessing public expenditure efficiency requires determining the relationship between public spending and the outcomes as well as separating the impact of other factors, what is not always an easy task. Another fundamental problem is the issue of data comparability across the countries. Finally, what is seen as inefficiency can result from numerous cultural and social factors that in many cases escape definition and measurement but are likely to play a significant role.

30

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ANNEX II: Financing Higher Education

Czech Republic

1. Description of the Higher Education System The term „higher education” as used in some countries and as it is now understood under the Bologna process corresponds in the Czech context with the whole tertiary sector. Tertiary education in the Czech Republic includes any type of education recognised by the state that requires a completed secondary education as an entrance condition.

Figure II.1.Tertiary education is composed of:

Tertiary Professional Schools (TPSs) provide tertiary professional studies, a more practically oriented type of education, lasting mostly three years (only in case of health programmes 3,5 years). These studies lead to the Diploma in different subjects, e.g. in economics, in social sciences, in health etc. This diploma is not academically equivalent to the bachelor degree. There are also examples that both a diploma from a tertiary professional school and a bachelor academic title from a HEI are recognised as the same professional qualifications (e.g. nurseries and midwives). The TPS can also provide next to the three (3,5) year programmes professional courses lasting only one or two years leading to the Certification. TPSs compose relatively small part or the tertiary sector of education as regards number of students.

Higher Education Institutions (HEIs) form the highest level of Czech education. They offer accredited study programmes at three levels – Bachelor’s, Master’s, and doctoral, as well as lifelong learning. HEIs are either university-type or non university-type.

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University-type HEIs may offer all types of study programmes (Bachelor’s, Master’s, and doctoral) and carry out associated scholarly, research, developmental, artistic or other creative activities. Non university-type higher education institutions offer mainly Bachelor’s study programmes, but may also provide Master’s study programmes and carry out associated scholarly, research, developmental, artistic or other creative activities. They are not allowed to provide doctoral study programmes. Both types of higher education institutions can be public, state and private. The public and private higher education institutions come under the responsibility of the Ministry of Education, Youth and Sports (Ministry), while state institutions (military university and the police academy) are under the responsibility of the Ministry of Defence and the Ministry of the Interior. The list of HEIs is available at: http://www.msmt.cz/files/htm/Vswwwser1.htm or www.csvs.cz. Higher education is realised within the framework of accredited study programmes and given form of studies. The form of study can be daily (face to face), distance or a combination of both Access to a bachelor study programme is conditional on completing a full secondary general or vocational education with a “maturita” examination. Access to master studies is conditional on graduating from a bachelor study programme, while access to a doctoral study programme is conditional on graduating from a master study programme. Higher Education Qualifications A bachelor study programme aims at qualifying to enter a profession or a master study programme. It takes from 3 to 4 years (180-240 ECTS credits). Graduates receive the academic degree Bachelor (Bc). The study programme must be completed in due form with a final state examination, which usually includes the presentation and defence of a bachelor thesis. A master study programme follows a bachelor study programme. The length is 1 – 3 years (60 – 180 ECTS credits). In selected fields, where the nature of the study programme so requires, a master study programme need not follow on from a bachelor programme. In this case, the programme lasts 4 - 6 years (240 – 360 ECTS credits). Admission to these study programmes is conditional on passing the “maturita” examination (see access to bachelor studies). Graduates in a master study programme have to take a final state examination and publicly present and defend a master thesis. Studies in the field of medicine, veterinary medicine and hygiene are completed by passing a rigorous state examination including the presentation and defence of a rigorous thesis. The standard length of a doctoral study programme is 3 years. Doctoral studies are completed by the state doctoral examination and the public presentation and defence of a doctoral thesis (dissertation), based on original results, which must be published.

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2. Higher education statistics

a. attainment, (% of population with HE ) – 13,3 % b. enrolment, (gross enrolment in HE in years 1990 – 2004 and net enrolment if

available)

Table II.1: Ratio: Enrolled in the first year of studies (Bc. and “traditional” MSC.) / Total 19-year old

97/98 98/99 99/00 00/01 01/02 02/03 03/04 04/05 *)

Enrolled in the first year of studies (Bc. and „traditional“ MSc.)

44 478 45 901 44 930 43 713 52 527 58 342 66 517 81 348

Total 19-year old

174 017

167 991

150 657

141 206

139 854

134 929

135 777

134 000

Ratio – enrolled in the first year of studies/ total 19-year old 0,26 0,27 0,30 0,31 0,38 0,43 0,49 0,61

c. HE institutions, (changes in # of HE institutions, by type public vs. non-public)

Table II.2. Changes in the structure of higher education institutions Type of higher education institution 1989 1999 2001 2003 2005

Universities (multi-field) 3 9 10 10 10 Technical universities (multi-field) 2 4 5 5 5 Technical universities (specialised) 5 1 1 1 1 Veterinary universities 1 1 1 1 1 Universities of economics 1 1 1 1 1 Agriculture and forestry universities 2 2 2 2 2 Universities of education - 1 - - - Universities of the arts 4 4 4 4 4 Public non-university HEIs - - - - 1 Public HEIs in total 18 23 24 24 25 State higher education institutions 4 4 4 4 2 Private higher education institutions - 9 14 30 38 Independent faculties of education 5 - - - - TOTAL 27 36 42 58 65

d. labor market outcomes, (unemployment rate of HE graduates, earnings premium – HE over upper secondary)

We do not have any evidence about the earnings premium – HE over upper secondary.

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Table II.3. The unemployment of graduates in 1996 – 2004, data from April of each year

1996 1997 1998 1999 2000 No. Rate No. Rate No. Rate No. Rate No. Rate

TPSs 8,8% 13,8% 829 11,5%HEIs 503 1,5% 693 2,0% 1217 3,1% 2085 4,8% 25195,4%

2001 2002 2003 2004 No. Rate No. Rate No. Rate No. Rate

TPSs 1153 8,0% 1561 9,9% 1573 10,6% 1131 9,7%HEIs 2392 5,0% 3099 6,4% 3435 6,9% 3000 4,6%

TPS – tertiary professional school HEI – higher education institution.

3. Higher education finance.

a. Total public expenditure on education as % of GDP b. Total public expenditure on tertiary education as % of GDP, c. Tertiary as % of total public education expenditure, d. Extent of cost recovery: how important are fees? Student loan system? Table II.4. Higher education finance.

Total public expenditure on

education

Year

Total public expenditure

on higher education as % of GDP

TPS TPS + HEIs

Total public

expenditure on tertiary education as % of GDP

State funding

Regional funding

Total public

expenditures on

education

Total public expenditure

on education as % of GDP

Tertiary

education as % of total

public expenditure on

education

1997 0,549 454 064 10 256 990 0,571998 0,542 731 079 11 367 682 0,581999 0,668 883 243 14 519 452 0,712000

0,676 872 713 15 401 290 0,727063200

01426800

084 900 000 3,95 18,14

20010,722 839 364 17 559 899 0,76

45374000

49523000

94 897 000 4,10 18,50

20020,776 803 293 19 543 340 0,81

36836000

67926000

104 762 000

4,34 18,65

20030,817 856 841 21 690 037 0,85

26232000

84309000

110 541 000

4,33 19,62

2004 0,859 912 500 24 546 500 0,89

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Study related fees Public higher education institutionsGenerally, students do not pay any tuition fees for studies in accredited study programmes (at Bachelor’s, Master’s, and doctoral level) provided in the Czech language. In case of study programmes provided in foreign language the tuition fees are charged from all students. They differ within 1 000 – 10 000 Euro per an academic year. The amount is not limited by the legislation; it is stipulated by a respective HEI. The public HEI shall announce the amount for the next academic year before the date of submitting applications for study. The amount of this fee, its form of payment and due date shall be stipulated in the Statute of the public higher education institution. This also pays for other study related fees stipulated bellow. However, in special cases a tuition fee is required:

• Should student’s enrolment in a Bachelor’s or Master’s study programme exceed the standard length of study by more than one year, the public higher education institution shall set a fee for each commenced month of study.

• Should a graduate of a Bachelor’s or Master’s study programme be enrolled in another Bachelor’s or Master’s study programme, the public higher education institution shall set an annual study fee; this is not applicable to graduates of a Bachelor’s study programme that are enrolled in a following or Master’s study programme, or several regular study programmes not exceeding the standard length of study of one study programme.

There are also some modest administration fees – e.g. about 17 Euro for admission procedure etc. Their level is regulated by the law. The study related fees are transferred into the scholarship fund of a respective HEI. Private higher education institutionsStudy-related fees at a private higher education institution are set by the private higher education institution by means of its internal regulations. The amount is very different from 2 000 to 4 000 EURO per an academic year. Tertiary professional schoolsThe tuition fees at tertiary professional schools differ between 70 – 1100 Euro per an academic year. For more details see Item 4, headline Funding of Tertiary Professional Schools (ISCED 5B) Loans There are some loans possible for students. They are provided by most of the banks; however, they are not advantageous very much. The students can get a loan of maximum 150 000 CZK (about 4 680 EURO), however the interest is relatively high (about 12%).

4. Financing system for higher education in the Czech Republic

Funding of Higher Education Instiutions (ISCED 5A, ISCED 6) The state decisions about the rules on budget allocation are made only after the negotiation with the Representative Commission consisting of representatives of HEIs (the Czech Rectors Conference and Council for HEIs), bursaries, students, representatives of the Ministry and other stakeholders (e.g. trade unions).

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Teaching, formula based part (cca 70% of the overall public funding – incl. research part This part of the basic lump sum is derived from the volume of teaching activity (input based formula). Some changes have been implemented recently which form steps to more balance between the input and output indicators. The study programmes are ranked into the seven groups of the different tariffs. The highest tariff is 5,9 times more than the basic one (just for the imagination - the value of the basic tariff is about 1100 EUR). A higher education institution is fully free to distribute the obtained lump sum according to its own internal rules. Nevertheless, the majority of HEIs copy the model state rules of allocation. Teaching, long-term plans, other financial means Teaching dependent on the long-term plans A new important and gradually increasing role in money allocation has been played by the long term plans of development elaborated on the both state and institutional levels. Both sides are obliged to do so by the Higher Education Act. The HEIs’ plans of development should come from the careful analysis of their own abilities as well as of the expectation of the society. The plans of both the state and the institutions have been updated annually. The Ministry discusses and negotiates its plan with each single institution; these debates assure better understanding between both sides. Certain amount of the state funds (gradually increasing) is allocated on the bases of the correspondence between the state plans of development and priorities and those of a particular institution. It gives the state an instrument for creation incentives for the publicly articulated higher education system development. The ideal situation expects that the strong points of each HEI will be developed and the weak ones limited. In consequence it should lead to the improvement of the whole system of HE. For the latest changes see 5. Other financial means form the last part of the overall grant for teaching. They are divided into several categories; the size of the budget devoted to the followed items is negotiated with the Representative Commission:

• Scholarship for postgraduate students (students in doctoral study programmes) • Grant covering expenses of foreign students studying in the framework of international

agreements and programmes • Costs connected with capital investments • Special grant called Fund of Educational Policy; the Vice-Minister is responsible

to decide about the means allocated from this Fund • Fund for possible solution of any type of breakdowns and accidents • Grant devoted to the students´ accommodation and boarding (there are settled tariffs for one

student meal and average cost of accommodation). The change regarding the state support of students’ accommodation should come into reality from the academic year 2005/06. The support will be provided directly to students in the form of scholarship for accommodation.

Funding of research Research budget is the separate part of the state money devoted to the higher education. To decide about the overall volume as well as separate parts for the specific purposes is the responsibility of the Research and Development Council of the Government of the Czech Republic (RDCG) after the debate with the Ministry. Specific research A higher education institution receives grant devoted for so called specific research. The purpose of this financial means is to support any type of research, development or other creative activity closely connected with education.

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The mentioned grant is allocated to the particular institution on the basis of the formula using following indicators: sum of money received by the institution from research and development projects in open competition, the ratio of professors and associated professors to the total number of teachers, the ratio of graduates from doctoral and master study programmes to the total number of students of the institution. Institutional money for research and development plans (RDP) This grant (newly introduced in 1998) aims to increase the research support and harmonise gradually institutionally supported research and development with the relevant situation in the EU countries. An institution can ask for this money on the basis of the project which is evaluated by both the Czech and foreign experts. Taking the evaluation results into consideration the special commission decides about the project financial support. There are no priorities stated in advance and it is up to the institution to choose the proper topic and to prepare the project of a high quality. The state influence relates to the overall amount of money devoted to the institutional research and development plans which is in fact the expression of the state support of the higher education research in general. Research centres The main aim of this programme is to deepen quality of particular fields of research and development. Connected aim is to enhance the co-operation of different sectors in the field of research and development preferably institutions of Academy of Sciences of the CR, higher education institutions, other research institutions and industry. The effort is paid to the training of PhD students and young researchers. To receive money for the establishment and run of a research centre it is necessary to elaborate the project and pass successfully the selection procedure. Targeted money for research and development Research money conveyed for specific research mission are used mainly for the support of projects running within the number of programmes organised in collaboration of the Ministry the RDCG. Almost all of these programmes are open to any legal entity including HEIs. Funding of Tertiary Professional Schools (ISCED 5B) Funding of the TPSs is different. The education activities are financed on formula basis. The formula is based on the number of students and the demands of the study programme. There are also funds for operating costs and investments. All TPSs charge certain tuition fees. According to the provider there are regional, church and private TPSs.

• The regional TPSs get the formula funds through regions. The regions get these funds from the Ministry. Operating costs are financed directly from the region. TPSs are allowed to charge tuition fees 2.500 – 5 000 CZK (90 – 170 EURO) per a year. The region pays them capital investment costs from public funds.

• The church TPSs get the formula and operating funds through regions. The regions get these funds from the Ministry. No capital investments are paid from public sources. The level of tuition fees depends on the provider and is not limited by legislation. Usually it corresponds with the level charged at regional institutions (see above).

• The private institutions get on average 90% of their budget calculated on the formula (see regional TPSs) from public sources. All other costs are covered by the provider; the level of tuition fees depends on the provider and is not limited by legislation. The range is quite wide – 15 000 – 33 000 CZK (500 – 1100 EURO) per a year.

5. What problems does higher education face in the Czech Republic? Main problems:

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The HE system is underfinanced (lower % of GDP and lower GDP per capita than in developed OECD countries); The mechanism of public money allocation does not create enough space for motivation and incentives the money should be spent more efficiently the consistent social system does practically not exist though some social arrangements exist (subsidized meals, scholarships for the stays abroad, etc.) and some have been improved –scholarships for accommodation Ministry and all HEIs are preparing the new long term plans of development that should cover the period 2006-2010. The main action lines are: internationalisation, quality and socio-cultural development. The strategy is elaborated hand in hand with another important document based namely on the reform of state funding mechanism. It will introduce the output indicators and step by step balance their ratio with the input indicators up to current time solely used in the formula funding. It will also support further the development of a certain kind of contract between the state and respective HEI based on the agreement of the institutional and state long term plans of development as the supplementary mechanism to the formula for the state budget allocation. This should provide more sustainable conditions of the development of HEIs for a longer period. At the same time, it will enable the state to implement its goals and priorities indirectly through funding and to encourage the new incentives and motivation for institutions to implement changes. The innovation of the mechanism of public money allocation should lead mainly to the improvement of

- access to higher education - long lasting under financing of HEIs - quality of education and research - employability of graduates - social situation of students - competitiveness of Czech HEIs as the consequence of above mentioned improvements.

The funding mechanism reform is supposed to help to receive more state money for the higher education system. In parallel it should increase the effectiveness of spending the state funds. Consequently we expect that the new financial mechanism will lead to the development of strong points and minimising of weak points of HEIs / faculties and that the possibility to receive the money from various parts of the budget (aimed for teaching or for research) will enable a natural and gradual "profilation" of the institutions and /or their units (mainly faculties):

a) HEIs/ faculties – most study programmes based on top research b) HEIs / faculties – top research associated with a limited number of study programmes

– the other activities focused mainly on teaching c) HEIs / faculties – focused primarily on teaching (mostly Bachelor's study

programmes) connected with development and other creative activities

What role for government in all this? Ministry - decision making power. All important decision have to be negotiated with HE representation composed of two bodies - a body composed of the members of academic communities of HEIs delegated by their representative academic bodies – The Council of HEIs; - a body composed of representatives of HEIs -The Czech Rectors’ Conference.

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The Representation Commission, a body consisting of the wider range of higher education stakeholders –representatives of the Czech Rectors Conference, Council of HEIs (incl. representation of students), representatives of registrars, trade unions and the Ministry. This body serves as an important advisory body to the vice-minister for research and higher education especially in the issues regarding the state budget.�

Parliament of the Czech Republic has two Chambers. Responsibility – approval of the state budget including its part for higher education, approval of a legal norm. Each Chamber has a committee for educational matters: Chamber of Deputies - Committee for Science, Education, Culture, Youth and Sport Senate - Committee on Education, Science, Culture, Human Rights and Petitions Czech Government composed of ministers responsible for relevant ministries (among them Minister of Education, Youth and Sports) Responsibility – proposals of legal norms and budget regarding education, approval of basic national strategic documents.

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Hungary

1. Brief Description of the Hungarian Higher Education System The Hungarian Parliament is now discussing the proposed whole new Act on Higher Education, but the present system is as follows. Hungarian higher education works according to a dual system - colleges and universities. Some colleges are associated with universities and known as "college faculties" of those universities. A university may offer college-level courses, too. The undergraduate higher vocational programmes (ISCED 5B) last 2 years long. The undergraduate programmes at college level (corresponding to B.Sc./BA/Bachelor’s degree level; ISCED 5A) last 3-4 years, the graduate programmes at university level (corresponding to M.Sc./MA/Master’s degree level; ISCED 5A) last 4-5 years long (with the exception of medical universities, where courses last for 6 years). The PhD programmes (ISCED 6) last 3 years, only in universities. There are post-graduate programmes (ISCED 5A) as well. Courses may be full-time or part-time (evening, correspondence or distance learning). In addition to state (public) higher education there are private, foundation and church-owned (non-public) institutions, too. The higher education system consists of 71 HEIs – including public and non-public institutions – accredited by the Hungarian Accreditation Committee (HAC). The HAC, established in 1993 and being an independent agency and member of the International Network for Quality Assurance Agencies in Higher Education (INQAAHE), is responsible for accrediting and evaluating the quality of teaching and research carried out in the HEIs. Quality assurance is based on a periodically repeated assessment of the curricula, the requirements, and the qualification of the academic staff in each study programmes of the institutions. The proposed new act will have the well-known Bologna-type multi-cycle linear education system: higher vocational, bachelor, master, doctoral and post-graduate programmes.

2. Higher Education Statistics in Hungary Figure II.2. Higher educational attainment of population As a percentage of population of 25 years old and older with third level education completed

(1 January)1949 1960 1970 1980 1990 2001

Males 3.1 4.5 6.4 8.6 11.8 13.8Females 0.5 1.1 2.3 4.6 8.7 11.6Total 1.7 2.7 4.2 6.5 10.1 12.6

(Source: Statistical yearbook of Hungary 2003, Hungarian Central Statistical Office, 2004; p. 43)

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Figures II.3: Higher educational enrolment

All the ISCED 5A, 5B and 6 programmes Academic

year 1st year students*,

Total 1990/1991 337601991/1992 375501992/1993 435531993/1994 545611994/1995 654201995/1996 718261996/1997 748541997/1998 923991998/1999 1001991999/2000 1097762000/2001 1181122001/2002 1282372002/2003 1386422003/2004 1449982004/2005 **139176

(Source: Ministry of Education, Hungary) *: One must take into account the effect of the credit-system

**: preliminary data

All the ISCED 5A, 5B and 6 programmes Academic

year New entrants,

Total 2000/2001 880642001/2002 932022002/2003 1031052003/2004 1017172004/2005 101461

(Source: Ministry of Education, Hungary) *: preliminary data

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Figure II.4. Higher educational institutions All the ISCED 5A, 5B and 6 programmes

State Church-owned Private and foundation TOTAL Academic

year Institutions Students Institutions Students Institutions Students Institutions Students

number of 1990/91 66 107607 10 550 1 219 77 1083761991/92 66 113788 10 623 1 279 77 1146901992/93 66 122842 21 1903 4 1129 91 1258741993/94 59 135695 28 6110 4 2755 91 144560

1994/95 59 157404 28 7154 4 5382 91 1699401995/96 58 177482 28 9055 4 9049 90 1955861996/97 56 191291 28 10629 5 13195 89 2151151997/98 56 224695 28 12655 6 17343 90 2546931998/99 55 243077 28 14291 6 22029 89 2793971999/00 55 266144 28 16227 6 23331 89 3057022000/01 30 283970 26 17590 6 25729 62 3272892001/02 30 300360 26 18922 9 30019 65 3493012002/03 30 327456 26 19821 10 34283 66 3815602003/04 31 351154 26 21626 11 36295 68 4090752004/05 31 363961 26 22666 12 34893 *69 421520

(Source: Ministry of Education, Hungary) *: In 2004/05 Hungary had 2 more non-public HEIs.

Labour market outcomes Figure II.5. Unemployment rate of higher education graduates

%2000 2001 2002 2003 4,0 4,1 5,5 5,4

(Source: Statistical yearbook of Hungary 2003, Hungarian Central Statistical Office, 2004; p. 94)

Figure II.6: Average monthly gross earnings of employees by educational qualification (earnings premium), 2003

%Highest qualification

Primary school, completed 8

grades or less

Specialized secondary school or

apprentice school

Secondary school

Higher education

Combined

62.1 69.4 93.9 180.6 100.0 (Source: Statistical yearbook of Hungary 2003, Hungarian Central Statistical Office, 2004; p. 102)

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Figure II.7. Higher Education Finance in Hungary 3. a. Total public expenditure on education as % of GDP 3. b. Total public expenditure on tertiary education as % of GDP 3. c. Total public expenditure on tertiary education as % of total public education expenditure

Year 3. a. (all education) 3. b. (tertiary educ.) 3. c. (tert./all educ.) 1990 5.68 0.81 14.3 1991 6.11 0.88 14.4 1992 6.58 1.06 16.1 1993 6.53 1.07 16.4 1994 6.38 1.08 16.9 1995 5.46 0.96 17.6 1996 4.95 0.85 17.2 1997 4.98 0.94 18.9 1998 4.89 0.91 18.6 1999 5.18 0.97 18.7 2000 5.11 1.09 21.3 2001 5.19 1.05 20.2 2002 5.57 1.05 18.9 2003 5.77 1.12 19.4

(Source: Statistical Yearbook of Education 2003/2004, Ministry of Education, Hungary)

Extent of cost recovery: fees, financial aids, student loan system

On the first hand, those students, who reach the minimum number of points at the examination of final exam in a secondary school, will be financed by the state which means, that they will not pay any tuition fees during their studies (except some special cases). These minimum points are determined differently every year, and are depending on the university/college institute and the field. In general, every university/college degree has state and non state financed version. On the other hand, there are some fields (studies) which don’t have a state financed version, so everybody must pay tuition fees. In case of a student who must pay tuition fee, the tuition fee is determined by the university/college by itself. They don’t need to abide by any special rules. These students pay tuition fees since the very beginning of their studies.

There are exception, e.g. in private and foundation HE institutions usually all the students are paying tuition fees, but we have some private and foundation HEIs who have some hundred-thousand state financed students. The degrees itself and the tuition fees don’t depend on the university/college. There are financial aids for students on the first hand allocated directly for them by local governments or the Ministry of Education, on the other hand allocated for them by the HEIs: scholarships; grant for schoolbooks, course materials, compendia of studies; social aids; grant for accommodation on the basis of social position; scholarship for students of doctoral schools; students, who have children or/and have already obtained a professional qualification in teaching (one major, equivalent to MA) and want to complete a second degree in teaching will be state financed, and the student loan. There are some other types of aids, e.g. the student transportation tickets.

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A loan from the Student Loan Company is seen as increasingly necessary for more and more students. The means-testing is not examined: all students can benefit from them who attend the first tertiary level programme in a public or non-public HEI, and is not older than 35 years. The amount of the loan is limited. There is a grant for accommodation for student hostels of HEIs on the basis of students: these hostels get grant from the state for operational expenses and renovation.

3. Financing System for Higher Education in Hungary The transfers to Universities are determined on the basis of normative financing system. The Ministry of Education uses every effort to modernize the normative financing system of higher education by making it more transparent and thus more efficient. The concept is to create three main norms. These are for the normative financing of training, maintenance and scientific activity with R+D supporting training and education as part of the latter. The description of the system is given by the Government Decree No. 8/2005. (I. 19.) on financing higher education institutions based on normative (per capita) funding for training and maintenance. (Please see attached this decree in English: "Case Study of Hungary_2005-04-27_Annex.doc".) The normative system is post-financing. The training and maintenance norm consists of three subsidies. These are:

- training fund, - scientific fund, - maintenance fund.

The training fund

The training fund, as part of the normative (per capita) funding for training and maintenance, is the sum of the products of the calculated numbers (Full Time Equivalent= FTE) of students attending the fields of state financed HE institutions and the norms concerning the financing groups of fields. The financing groups of different fields are given in the following table. Table II.5. The value of norms used for determining the amount of training fund Field of

medicine and

dentistry

University level training in the course of the whole

training period

College level training in the course of the whole

training period

Financing group 1 2 3 4 5 6 7 Norm (HUF/capita/year)

670000 540000 380000 220000 480000 290000 180000

(1 � � 250 HUF)

The scientific fund

The scientific fund, as part of the training and maintenance fund, consists of the following amounts:

- the product of the calculated number of lecturers and researchers working full-time and lecturer-researcher norm which is 750000 HUF/capita/year, taking into account a

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double norm for full-time “special category” (having PhD and equivalent degrees) teaching staff;

- the product of the number of state financed PhD students and the norm of the PhD students which is 700000 HUF/capita/year in the case of natural sciences, agricultural science, technological and medical sciences. The value of the norms is 400000 HUF/capita/year in the case of social sciences, arts, theology;

- Fund of research activities calculated on the basis of Act LXXX on Higher Education of 1993, 9/E. § (1);

- Fund of research institutions.

The maintenance fund

The maintenance fund, as part of the training and maintenance fund, consist of the following amounts:

- the product of the total number of the institution’s employees except those financed by the National Health Insurance Fund and those carrying out jobs concerning public education and the value of maintenance norm concerning the employees which is 450000 HUF/employee/year;

- the product of the total number of students and the maintenance norm concerning the students which is 60000 HUF/capita/year;

- In case of specific fields, the institutions are entitled to additional maintenance fund, if the places of training are institutionally separated. The value of the additional maintenance norm is 180000 HUF/capita/year concerning the field of medicine, 75000 HUF/capita/year in the case of veterinary surgeon and the agricultural fields and at last 50000 HUF/capita/year concerning the fields of primary, secondary school teachers and kindergarten teachers. The fund is defined as the product of the calculated number of students attending the specific fields and additional maintenance norm described above.

4. Challenges and Problems in Hungary

Similarly to other European countries the new challenges, the increasing social demands and expectations urge Hungarian higher education to reconsider state involvement, the extent of fulfilling tasks from public funding and the simultaneous fulfilment of the demands of mass and elite education along with the planned changes in the course structure. The new approach requires new financing methods. At the same time the possibility of involving new types of financing sources must be created. The first step is bringing closer the strict budget system to a more entrepreneur financing system. The objectives of the planned new act are:

• To create a framework for a modern course structure that will also be able to better respond to demands of the labour market;

• To provide higher education institutions with sufficient public funding taking into account budgetary constraints and democratic (equal) access rights;

• To create more favourable conditions for private involvement in funding higher education;

• To endow institutions with sufficient flexibility to make use of the rapidly expanding service market more effectively;

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• To create the conditions for the development and the support of excellence and the possibility of long-term planning for this;

• To increase the research sources of higher education institutions and improve their independent, transparent use;

• In order to achieve the above to make institutional management structure capable of reacting to both the variable needs of the given institution and the expectations of the society. To this end effective decision making and advanced administration and financial management capacity are required;

• To create a funding system that makes the accounting of public money effective and transparent.

Preparations have been made to increase institutional autonomy not only in academic affairs but also in financial management and strategic decisions as well as matters of institutional structure, whereas all the responsibilities will be defined more transparently. In financial management the main proposed changes are:

• funding for development projects based on performance contracts, • increased support for research based on performance, • more performance based employment, • ahigher level of institutional control over assets, • easier access to loans for institutions.

The problems are similar like in the EU8 countries:

• The financial economy of the HEIs is not efficient enough. In most cases there are a lot of parallelisms regarding the programmes, courses, professorships.

• The allocation mechanism of the state funds doesn’t motivate HEIs to spend money efficiently.

• Regarding the engineering and natural sciences, in the past 15 years too few students were attending these programmes.

• The equilibrium between mass and quality education: highly expanding number of students and increasing student/staff ratio.

• The ageing of the academic and scientific staff in HEIs.

5. The Role of Central Government in Hungary As we mentioned formerly, Hungary will have a whole new Act on Higher Education this year which will resolve most of the above mentioned problems.

Regarding this, the role of the State will shift from the former maintainer, service provider and owner to a customer of services whereas a stricter control over the efficient and lawful use of public resources will be introduced. Fewer tasks will appear on the public administration level, more decisions will be delegated to lower levels. A lot more of those decisions will become institutional responsibility, at the same time the role of intermediary institutions will increase. Following the example of countries where mass higher education has been in the system for some time, the content of institutional autonomy will also change. The state has no intention to interfere with matters of academic autonomy, on the contrary, regulations are intended to increase the institutional scope to generate more flexible market oriented institutional reactions. As far as financial autonomy is concerned control will be exercised through the

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Board of Directors that will be delegated by the state, and social and economic organizations. The changes initiated in the management of institutions will enable higher education institutions to make more responsible and informed decisions similarly to other players of the market.

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Government Decree No. 8/2005. (I. 19.)

on financing higher education institutions based on normative (per capita) funding for training and maintenance Pursuant to the authorization granted in Subsection (3) of Section 9/B. of Act LXXX of 1993 on Higher Education, the Government hereby orders the following:

1. § (1) This Decree shall apply, save for those set forth in Subsection (2), to

a) state higher education institutions, b) church-owned higher education institutions, and c) private and foundation higher education institutions in accordance with a separate

agreement, (hereinafter jointly referred to as “higher education institutions”). (2) This Decree shall not apply to military and police higher education institutions.

2. § (1) State-financed students of a higher education institution shall mean state-financed students who have legal relationship with the relevant institution for

a) their first full-time or part-time (evening or correspondence) two-year higher vocational programmes, or

b) their first full-time or part-time (evening or correspondence) Bachelor’s or Master’s degree programmes, or

c) their first full-time complementary (to an already existing Bachelor’s degree) Master’s degree programmes.

(2) For the purpose of this Decree the following students shall also be considered state-financed students of a higher education institution:

a) students attending their first state-financed Bachelor’s or Master’s degree course for teaching a common knowledge subject, or for teaching religious studies in primary schools (for children aged between 6 – 14); or students taking part in joint training programmes run by several institutions but they are state-financed only for the Hungarian language component of the training programme; and students attending their second Bachelor’s or Master’s degree courses of teaching a common knowledge subject for the duration of the maximum training period defined in the qualification requirements of the second teaching degree courses that the students have taken up for the first time on a full-time or part-time (evening or correspondence) basis,

b) students having been admitted to state-financed Hungarian language higher education having a legal relationship with the relevant institution for attending any degree course the qualification requirements of which oblige them to acquire a Bachelor’s or Master’s degree,

c) a student attending any degree course who, in accordance with the decision of the institution, has been transferred from a non-state-financed degree programme to a state-financed one for a duration of time remaining from the training programme of a state-financed student who has dropped out,

d) foreign students considered on equal footing with Hungarian students pursuant to an international agreement or a legal regulation provided they meet further requirements stipulated in any Subsection of this Section

(3) In accordance with the joint proposal of the Minister of Education and the Minister of Finance the Government may extend the possibility of starting state-financed courses to certain professional higher education training programmes (offered as specialised further training to Bachelor’s or Master’s degree holders) and to the Bachelor’s or Master’s degree programmes for students acquiring their second or third degrees as well as to degree

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programmes offered in foreign languages to be funded from the budget available for the total number of state-financed students who can be admitted yearly to higher education institutions. 3. § (1) State-financed students’ higher education training is financed from the state budget through normative (per capita) funding for training and maintenance, which is complemented by additional funding for certain special tasks.

(2) The normative funding for training and maintenance consists of: a) training funds, b) scientific funds, and c) maintenance funds.

4. § (1) Training funds shall mean the total sum produced by the multiplication of the calculated number of state-financed students attending courses, course groups at higher education institutions, detailed in the Annex to this Decree, on the one hand, and the training norms as indicated in the Annex, on the other hand.

(2) The calculated number of students shall mean the statistical number of students as of 15th October of the year preceding the budgetary year, after adjusting the number of students attending programmes of odd number of semesters to the annual number of students. In respect of the calculated number of students one full-time student shall be regarded as one person, and one part-time student attending an evening or correspondence or distance course shall be regarded as 0,5 person, irrespective of the fact that a student attends one course or more than one courses. If a student attends several degree courses, he/she shall be classified on the basis of the one that gets the highest normative funding for training. 5. § (1) Scientific funds consist of four parts:

a) the total amount produced by the multiplication of the calculated number of full-time teaching staff and research staff, on the one hand, and the scientific norms, indicated in the Annex, taking into account a double norm for full-time “special category” (having Ph.D. and equivalent degrees) teaching staff, on the other hand;

b) the product of multiplication of the number of state-financed full-time Ph.D. students and the norms for Ph.D. students, as indicated in the Annex;

c) the amount of the normative research support calculated pursuant to Subsection (1) of Section 9/E of the Act on Higher Education, which is the same as the support in 2004;

d) support allocated to research institutes. (2) For the purpose of this Decree research staff and teaching staff of higher education

institutions shall mean researchers and full-time teachers filling the posts listed in Annex No. 2 of the Act XXXIII of 1992 on the Legal Status of Public Servants. The calculated number of research staff shall be established in accordance with the labour statistics of the Central Statistical Office.

(3) For the purpose of this Decree “special category” teaching staff shall mean full-time teaching staff who

a) have been granted a scientific degree or Doctor of Liberal Arts degree pursuant to Subsection (1) of Section 119 of the Act on Higher Education, or

b) have been granted prizes or places or awards pursuant to Subsection (8) of Section 123 of the Act on Higher Education. 6. § (1) The maintenance funds consist of three elements:

a) the total amount produced by the multiplication of the total number of the employees of an institution – except the employees employed from the resources made available by the National Health Insurance Fund and the employees employed in public education (performing public education duties) – and the maintenance norms, as indicated in the Annex;

b) the total amount produced by the multiplication of the total calculated number of students of an institution and the maintenance norms, as indicated in the Annex;

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c) in case of training places separated institutionally, the total amount of support is produced by the multiplication of the number of state-financed students attending the courses belonging to the course groups set out in the Annex and the complementary maintenance norms listed in the Annex.

(2) The total calculated number of students shall include, irrespective of the type of funding, all students, except those attending professional higher education further training programmes, provided that the calculated number of students taking part in non state-financed training considered in the calculations does not exceed the number of calculated state-financed students. 7. § Pursuant to the provisions of this Decree the normative funding for training and maintenance provided for higher education institutions shall be considered as post-financing. 8. § (1) Institutions shall be allocated normative training funding for the students of two-year higher vocational training programs on the basis of the training norms provided for Bachelor’s degree courses.

(2) Institutions of higher education shall be allocated complementary normative funds, as indicated in the Annex, based on the actual number of students with disabilities. The complementary normative funding shall be paid from the target funds earmarked under the chapter of the Ministry of Education in the central state budget. This funding shall be made available subject to a separate survey conducted in the course of the academic year and it shall be strictly accounted for. The complementary normative fund shall be used for financing the tasks required to improve the conditions meeting the special needs of students with disabilities. 9. § The Ministry of Education shall allocate support to the higher education institutions –under the heading of institutional budgets – pursuant to those set forth in Section 9/D of the Act on Higher Education, subject to strict accountability, which may be used according to the type of the tasks. 10. § (1) The aggregate amount of the normative funds for training and maintenance, determined for the state higher education institutions pursuant to this Decree, and the support allocated for special tasks may not be less than 98%, or more than 105%, of the actual state budgetary funding granted for 2004. The adjustment shall be effected – to the possible extent – in the program-financing target fund.

(2) For the non-state higher education institutions the amount of the normative funding for training and maintenance determined in accordance with this Decree, set out in the agreements concluded with such institutions, may not be less than 98%, or more than 105%, of the respective budgetary funding allocated for 2004.

(3) The extent of the state budgetary funding provided for the institutions may change in the course of the year, taking into account the conditions specified in the annual budget, however, no additional funding may be claimed in addition to the target funds provided in the budgets of the institutions. 11. § (1) The institutions are free to decide on the use of the state-budgetary funds allocated to them, while observing the provisions of the relevant legal regulations. These state-budgetary funds are destined to fund the core activity of the institution and are established on the basis of the legal titles specified in this Decree.

(2) The institutions shall decide on the application of the state-budgetary funds allocated for them by way of their internal regulations, while taking into account their institution’s specific characteristic features and preserving its operational stability. It is the responsibility of the boards of management of the institutions to decide on the division of the allocated state budgetary funds into centralised and decentralised parts, and on the order of forwarding the latter to organizational and financial units.

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12. § This Decree shall enter into force on the 5th day after its promulgation, and its provisions shall apply as from 1 January 2005.

Annex to Government Decree No. 8/2005. (I. 19.)

Values of Training, Scientific and Maintenance Norms

(Thousand HUF/capita/year)

Description Training norms Scientific

norms

Main-tenance norms

for universities

for colleges

Degree courses, course groups

Physician, Dentist 670

Artistic degree courses 540 480

Health 540 480

Pharmacist 540

Veterinary Science 540

Aircraft engineering 540

Agrarian 380 290

Technical 380 290

Natural Sciences 380 290

Information Technology 380 290

Body Culture 380 290

National Minorities Language Teacher 380 290

Special Education Needs, Conductor 480 480

Social Sciences, Psychology 380 290

Economics 220 180

Law, Administration 220 180

Humanities 220 180

Kindergarten and Lower Primary Teacher 180

Religious Studies 220 180

Full-time teaching staff 750

Number of calculated research staff 750

State-financed Ph.D. students

- Social Sciences, Artistic 400

- Natural Sciences and Arts, DLA (Doctor of Liberal Arts) 700

Calculated statistical number of employees 450 Number of all calculated students 60

Students of kindergarten, primary school and secondary school teacher’s courses

50

Students of the medical and dental faculty 180

Students of the agrarian degree courses 75

Complementary support for students with disabilities 100

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Latvia

6. Higher Education system

Legislation: The system of the higher education in Latvia is regulated by several legal acts: laws and Cabinet of Ministers Regulations. Some of them: The Law “On Education” (1991), new version adopted in 1998, The Law “On Higher Education Establishments” (1995), amended version in 2000, The Law “On Scientific Activity” (1992) with amendments in 1996 and 1998, new version in Parliament, Cabinet of Ministers Regulations No.370 “On Accreditation of Higher Education Establishments” (1995), Cabinet of Ministers Regulations No.238 “On Licensing of Higher Education Establishments” (1996), Cabinet of Ministers Regulations No.220 “On the Procedure of Granting, Repayment and Cancellation of Study Loans and Student Loans Paid by Credit Institutions with State Provided Guarantees” (2001). The Law on Higher Education Establishments (1995) defines the status, tasks, system of management and administration of a higher education establishment, principles of staff recruitment, fundamental financing principles, research and business activity. The law for the first time introduces accreditation and licensing of higher education institutions and study programs. The Law on Higher Education Establishments is applicable to all higher education establishments of Latvia regardless of their founders, financing and specialization. The administrative structure of the higher education in Latvia consists of: - The Saeima (Education, Culture and Science Commission) - approves the concept of education for the following four years, adopts legislation in the area of higher education, approves constitutions of universities and allocates state budget funds to higher education establishments; - The Cabinet of Ministers - establishes, reorganizes and liquidates higher education institutions and colleges; approves constitutions of non-universities, except colleges; approves and removes from office candidates to the Rector’s position in a higher education institution; carries out other functions as prescribed by the law; - The Ministry of Education and Science - the central executive institution of the state administration, which is responsible for implementing state policy in the area of higher education, research and development; - Higher Education Council - participates in the development of higher education strategy and the decision-making process, supervises the quality system of higher education, co-ordinates co-operation between higher education establishments and international institutions; - The Council of Rectors - is basically engaged in co-ordination of co-operation between higher education institutions and addresses common problems of these institutions; - The Latvian Science Council - key functions in the area of higher education refer to supervision of assigning the Doctor’s degree, delegation of the Doctor’s degree awarding function to higher education establishments, surveillance of promotion criteria and procedures; - Higher Education Quality Evaluation Centre - organizes quality assessment of higher education establishments and study programs and co-ordinates the process of accreditation; - Foundation of Studies - is responsible for crediting of students; - Academic Information Centre - carries out expert evaluation and recognition of foreign diplomas in Latvia and, within its competence, co-operates with diploma recognition institutions in other countries;

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- Higher education establishments – at the beginning of 2005 there were 56 higher education establishments, of which 5 were universities (state established).

7. Higher Education statistics

Table II.6. Attainment (source – www.csb.gov.lv – Central Statistical Bureau of Latvia)

EMPLOYED POPULATION BY EDUCATION QUALIFICATION

1996 1997 1998 1999 2000 2001 2002 2003

Higher education 19.3 17.6 19.3 20.3 21.3 21.4 21.8 20.2

Enrolment (source – Ministry of Education and Science) Figure II.8. Change of the number of students in Latvia in 1990/91 – 2004/2005

130693

126756118845

110500101270

8951076620

6494856187

46696392603750041900

4630046000

0

20000

40000

60000

80000

100000

120000

140000

��

��

��

��

��

��

��

��

��

��

��

��

��

��

��

Figure II.9. Number of students per 10 000 residents in 1990 - 2004

172 173 158 138 152183

227264

314342

386

453496

539 556

0

100

200

300

400

500

600

90 91 92 93 94 95 96 97 98 99 0 1 2 3 4

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Figure II.10: Share of students in total population of the respective age group in 2004/2005

Figure II.11. Number of Higher Education Institutions in 1991 -2004

(source – Ministry of Education and Science) Labor market outcomes Table II.6. Unemployment rate of HE graduates (source – State Employment Agency, Ministry of Education and Science) 2001 2002 2003 2004 Graduates 20308 18945 20762 22726 Unemployed persons 171 176 232 287 Rate 0,8% 0,9% 1,1% 1,3%

26

9

3628

201918171410

20

1317

1314

05

10152025303540

1990 1992 1994 1996 1998 2000 2002 2004

State institutions Private institutions

28,9%34,6%

16,5%

10,4%

3,5%

0%5%

10%15%20%25%30%35%

18-20 21-23 24-26 27-29 above 29

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Earnings premium – HE over upper secondary Table II.7. Average gross monthly earnings (without any irregular bonuses) by level of education in October 2002 (source - Central Statistical Bureau of Latvia, Results of earnings structure survey 2002) Level of education Average gross

monthly earnings, lats

TOTAL 168,20 Scientific degree 323,72 First stage of tertiary education - General 270,62 First stage of tertiary education - Technical 176,44 Post – secondary non –tertiary education 147,35 Upper secondary education 139,84 Lower secondary education or second stage of basic education

129,27

Primary education or first stage of basic education 135,50 Pre – primary education 129,38

8. Higher education finance

(source – Ministry of Education and Science, Central Statistical Bureau of Latvia) Figure II.12. Total public expenditure on education as % of GDP

6.46.86.66.4

3

4

5

6

7

8

2000 2001 2002 2003

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Figure II.13. Total public expenditure on tertiary education as % of GDP

0,52%0,61%

0,65%0,70%

0,77%0,74%

0,77%0,82%

0,90%

0,0%

0,1%

0,2%

0,3%

0,4%

0,5%

0,6%

0,7%

0,8%

0,9%

1,0%

1995 1996 1997 1998 1999 2000 2001 2002 2003

Figure II.14. Total public expenditure on tertiary education as % of total public education expenditure

Extent of cost recovery In the last ten years the number of students who study for pay is increased considerably. All part time studies and more than 60% of full time studies are for fees. Figure II.15. Share of students in state budget founded and commercial studies

8,58,69,410,210,711,413,4

02468

10121416

1997 1998 1999 2000 2001 2002 2003

77%76%73%70%67%64%

44%

32%

57%51%

23%24%27%30%33%

36%43%

49%

56%68%

0%10%20%30%40%50%60%70%80%90%

��

��

��

��

��

��

��

��

��

Commercialstudents

Statebudgetfundedstudents

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The development of loan system of students and studies becomes an important phase in the development of higher education and expansion of opportunities in condition of increasing tuition fees and the growing number of students who study for pay. Such system is in place in Latvia since 1997 with some changes in 2000 – the Cabinet of Ministers passed to a new source of funding loans from resources of the banks instead of funding loans from the state budget. General conditions for award the loans for students (including also for studies abroad) is that holder of loans must be enrolled in a recognized HEI or on recognized courses. Both full time and part time students may apply for the loans which are firstly performance based and, if performance is equivalent, means – tested based. The total number of disbursed loans is increased from 6725 in 1998 to 55212 in 2004.

9. Financing system for HE The financing system for higher education in Latvia has been widely debated in the last few years. The main reason for debates is the situation when with the massive increase in the number of study applicants the ability of the state budget to accordingly increase budgetary allocations is on the whole rather limited. In the result, approximately one fourth of the total number of students is financed from the state budget, the remaining part of students is forced to pay their tuition fees themselves thus covering cost of studies in a private or state founded higher education establishment. According to the Law on Higher Education Establishments the number of study vacancies paid from the state budget is annually declared by the Minister of Education and Science. The number of study places in commercial programs and also the amount of tuition fees to be paid is determined by each establishment individually depending on conditions in the establishment. The size of tuition fees is very different in different higher education establishments and study programs: it varies from 180 Ls till 2120 Ls per academic year at state establishments and 300 - 3500 Ls at private establishments in 2004. In total terms, financing of higher education comes from three sources – state budget, private funds (tuition fees) and other resources, which mostly consist of revenues of higher education establishments earned from scientific contracts, including international agreements and a wide range of commercial services. Figure II.16. Financing of HE from the State budget and other sources 1995-2003 (source – Ministry of Education and Science)

33,131,9

30,9

30,128,128

24,823,121,2

37,133,3

26,620,8

16,913,9

9,95,83,6 11,5

14,111,1

13,1

9,774,72,61,90

5

10

15

20

25

30

35

40

1995 1996 1997 1998 1999 2000 2001 2002 2003

State budget

Tuition fees

Other sorces

Milj.lats

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A united for the whole country system of normative funding of higher education from the state budget resources was introduced in Latvia in 2002. According to this system, financing of higher education establishments is formula-based defined in the Regulations of the Cabinet of Ministers. The amount of financing is determined on the basis of the state study vacancies identified for the respective higher education establishment, base (reference) costs of a study vacancy and indexes of costs of education by subject fields and is allocated only to full time studies on the basis of the contracts between higher education institutions and ministries which are responsible for higher education institutions. According to the Regulations of the Cabinet of Ministers the transition from the minimal factor values (indices) of study costs to the optimal values will take place gradually in the course of 10 years, augmenting the minimal value by one tenth part every year. Study cost indices in Master programs are one and a half times and in doctoral programs three times higher than the respective index value established for the same study field in Bachelor or professional programs. When the new system was introduced it was very important to correctly establish the base (reference) cost and study field index values to ensure that higher education institutions received adequate financing in line with the number of study vacancies identified by the state without deteriorating quality of studies. Transition to the new normative system of funding higher education establishments was carried out within the frames of the existing financing. This means that base costs which comprise wages of the staff, compulsory social insurance contributions, costs of utilities, etc. were estimated using wage rates, prices, etc. that were effective in 2001. Notably, that minimal wage rates established for the academic staff of education establishments in 2001 were not able to compete with average wages for the same qualification work in the private sector. Therefore, it is very important to streamline the system of wages of academic staff as established in relevant regulations, which will allow increasing the value of base costs of a study vacancy.

10. Problems

The main problem is insufficient funding of the HE. While the public expenditure on tertiary education annually slightly increases nevertheless it’s % of GDP continues to decrease (from 0,9% of GDP in 1995 to 0,52% of GDP in 2003). Although the private expenditure on tertiary education annually increases faster the total funding, it is not enough for regular renovation and modernization of HE infrastructure, funding of new study places in engineering and natural sciences, sufficient financial support to students in the form of grants (to ensure increased amounts and number of the grants), providing competitive salaries for the staff. The number of staff with PhD degree is decreasing. There are problems with age structure of academic and scientific staff at universities: in 2004 more than a quarter of academic staff is more than 60 years old and the other quarter is in the age from 50 to 59. Although there are public funded study places in engineering and natural sciences, too few students are attending these programs.

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11. Role of government Except for the fact, that the existence of the governments in Latvia in average is not longer than 9-12 months (in 2004 we had 3 governments) there are some positive features in the development of HE. The legislation in the field of HE at large is completed. The persistent procedure of the accreditation of higher education institutions is built up and operates successfully. The transition from historical funding of HEI to formula-based system was very important and gave an opportunity to provide transparent, accountable funding from the state budget according to study places set by the government for the respective higher education establishment and to reallocate public funds to the fields of study important for the development of the state such as engineering and natural sciences. The development of loan system for students and studies have an affirmative impact to growth of student population and improvement of student’s social assistance. In 2004 the government started to reform the salaries of academic staff at universities and other HEI. The EU funds for the renovation and modernization of HE infrastructure, for development of PhD studies, centers of excellence and some other objectives are coming into operation. The government has committed to provide increase of public funds for HE at least for 0,1% of GDP annually. With reference to the needs for public benefit the preparation of new Law of HE has been started.

Lithuania

12. Brief description of higher education system There are two types of higher education institution in Lithuania, universities and (non-university) colleges, most of them operated by the state, with a total enrollment of 145,700 students (Table II.8). Table II.8: Higher education institutions by level, ownership and number of students, 2002/03 Number of institutions Number of students

(’000) State Non-

state Total State Non-

state Total

Universities & university-type institutions Colleges Total

15 15 30

4 9 13

19 24 43

118.2 20.9 139.1

1.3 5.3 6.6

119.5 26.2 145.7

Source: Statistics Lithuania, Education, Vilnius 2003. Colleges, which emerged from the amalgamation of about seventy post-secondary institutions in 2000, are intended to provide a more practical/ vocational tertiary alternative to universities. The most popular specializations at this level are business and administration (49 per cent of enrollment), law (10 per cent), engineering (9 per cent), health care (7 per cent), social services (5 per cent), computing (4 per cent) and teacher training (4 per cent). University studies are organized in three cycles: first cycle (bachelor and professional), second cycle (master) and third cycle (doctoral and postgraduate art studies and medical, dental and veterinary studies). The most popular specializations among the 97,000 first cycle students are teacher training and education (18 per cent), engineering (13 per cent), law (9 per cent), humanities (6 per cent), social and behavioral sciences (6 per cent), architecture and building (5 per cent), computing (4 per cent) and health care (3 per cent).

13. Higher education statistics Lithuania’s gross enrollment rate in higher education has increased fast since 1993 and, at 64 per cent, is one of the highest among the EU8 countries. At 70 per cent in 2002, the progression rate from upper secondary general school to higher education is also one of the highest. Universities take around 79 per cent of the intake at this level, threatening the viability of non-university colleges. The number of tertiary graduates per 1,000 people in the 20-29 age group, at 63, is also well above the EU15 and EU8 averages, as is the proportion of the 25-64 age group with higher education – at 25 per cent, higher than France and exceeded only by Estonia among the EU8. Given this explosion in access to and graduation from universities and colleges, it is not surprising that Lithuanian graduates appear to gain less in the labor market from their higher education than do their counterparts in many other EU countries. As Table III.3 of Volume I shows, they earn only 46 per cent more than upper secondary school leavers in the 25-64 age group, the lowest earnings premium among the EU8 countries for which data are available, and the unemployment rate among tertiary graduates below the age of 39, at 7 per cent, is lower than that of their less educated counterparts, but by less than in all other EU8 countries

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except Estonia. Nevertheless, given the big state subsidies at this level, these figures imply a high private rate of return to higher education.

14. Higher education finance Lithuania’s public expenditure on education accounts for 5.9 per cent of GDP, second only to Slovenia among the EU8, and has increased faster since 1995 than in any other EU country Lithuania is also top of the EU8 league table in the share of public expenditure on tertiary education in GDP (1.3 per cent) and in total public educational expenditure (23 per cent). However, the fast expansion in the number of students means that the country is at the bottom of the table of all EU8 and EU15 countries for expenditure per student – the � 3,582 recorded in 2001 is only slightly more than half the figure for Hungary, for instance, adjusted for purchasing power differences. As Table II.9 shows, national budget expenditure per full-time equivalent student is 47 per cent higher in universities than in colleges. The proportion of students paying fees is also higher in universities than in colleges. Since 2002, fees for higher education have been set at a nominal level (1,000 litas per year regardless of specialization) for half of the full-time students in universities, 20 per cent in colleges, while the rest are totally funded from the state budget. Thus, fee income is equivalent to less than 10 per cent of national budget expenditure per full-time university student, and less than 6 per cent in the case of colleges. Exemption from fees is awarded to students based on their academic performance. Commercial fees are paid only by extra-mural, evening and postgraduate students. This is a classic 'dual track' system of the kind described in the main body of the chapter. Table II.9: National budget expenditure per full-time equivalent student, colleges compared with universities, 2002 National budget

expenditure (’000 litas)

Number of daily

students

Number of evening students

Number of extra-mural

students

Full-time equivalent students

Expenditure per FTE student (litas)

Colleges Universities

134,849 524,320

27,427 77,792

825 9,198

20,351 32,558

38,263 101,429

3,524 5,169

Note: One evening student = 0.8 daily student; one extra-mural student = 0.5 daily student for costing purposes. Source: Statistics Lithuania, 2002 Education, Tables 1.14 and 1.25.

Full-time state-funded students are eligible for small scholarships: some, chosen on academic merit, get 250 litas per month, some, classified as disadvantaged, get 125 litas per month. The Lithuanian National Union of Students estimates that only about 35 per cent of students get scholarships. Each university is responsible for administering its own scholarships scheme. The Lithuanian State Science and Studies Foundation runs a student loan scheme, with a state-funded budget for this purpose of 18 million litas in 2004 (compared with 13 million litas two years earlier). This budget can cover a very small proportion of full-time higher education undergraduates – about 8 per cent. Colleges and universities select students for loans on the basis of academic performance and family situation: socially disadvantaged students qualify for loans if they are paying fees and their family's annual income is less than a quarter of the Lithuanian average. The standard amount of a loan is 4,500 litas per year for living expenses + 1,000 litas to meet fees (which goes straight to the institution and is available to all students paying tuition fees); those studying abroad can borrow an extra 4,500 litas per year. Interest is payable at 5 per cent per year. Payment of interest and repayment of the loan begin two years after completion and are spread over 15 years, but with incentives for early repayment: postponement is possible in the case of unemployment, illness, maternity

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leave, etc.. Repayments do not revert to the MoF but go into a revolving fund usable for future loans.

15. Financing system for higher education In 2004 an experimental student’s basket method was used to allocate funds to colleges, which are directly funded by central government, along the following lines: - funds needed for state-funded students are calculated by study area, on the basis of the

standard number of teachers and teaching-administration employees required per student, average personnel costs per staff member, funds for study-related goods and services (15 per cent of salaries per student in the case of humanities, rising to 30 per cent for veterinary medicine), funds for organization of cultural, sports and social activities (no less than 20 per cent of the minimum standard of living), with adjustments made for extra-mural and evening students (treated as 50 and 80 per cent of full-time students respectively);

- colleges have to work within the salary-fund limit set by their approved budget, so calculations may have to be adjusted;

- funds for research, publishing, conferences, seminars, in-service training etc. are based on the previous year’s pattern of allocation between colleges, with 3 per cent of the total reserved for research;

- funds for administration, housekeeping and maintenance are proportionate to the funds allocated for studies, with a minimum set for maintenance of 70 per cent of non-personnel expenditure;

- funds for student grants, investment funds and funds for the development of international exchange are allocated separately in line with normal procedures.

In addition to the above, colleges also get some money from national programs (such as the national program for information technology, and the library modernization program), from international programs (particularly from the EU), and from fees for special courses, leasing premises and equipment, commissioned research and consultancy etc.. Of these non-budget funds raised by faculties, 20 per cent goes to the college Director. For universities, the Ministry of Education and Science (MoES) introduced an experimental student’s basket system in 2004, similar to that used for colleges. The yearly cost of study per state-supported student, which varies according to type and level of program is calculated by aggregating: - salaries and social security costs for teaching and support staff per student;

- the cost of goods and services needed for study purposes per student (30 per cent or more, depending on the type and level of program, of salary and social security costs per student);

- funds for the organization of student, cultural, athletic and civic activities (7 per cent or more, depending on the type and level of program, of the sum of the first two categories).

In addition to the student’s basket, funds for research and art (apart from 18.5 million Litas for the special research-funding programs of the Lithuanian State Science and Studies Foundation) are allocated 24 per cent to humanities, social studies and art, and 76 per cent to physics, biomedicine and technology. Allocations to particular institutions depend on: - in the case of humanities, social studies, physics, biomedicine and technology, scholarly

output (publications), for which a points system is used, adjusted by a coefficient to reflect the qualification levels of members of academic staff;

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- in the case of art, assessment results. Funds for administration are partly allocated to specific items, and partly in proportion to other parts of the budget. Funds for the care of cultural assets are allocated per area of floor space of buildings listed in the registry of cultural assets, and there is a separate fund for increases in salaries of teaching and research staff, proportionate partly to the number of teaching staff and partly to the allocation for research and art. This provisional attempt at a student’s basket approach to funding universities was a welcome step towards transparency. Unfortunately, however, the logic of the formulae was not allowed to prevail – the process became politicized. The budget of each university is still subject to parliamentary approval, and Rectors at risk of losing resources from the application of the new methodology lobbied effectively to change the results. For the basket system to work properly, the role of parliamentarians should be limited to approving the total amount of public expenditure and the methodology for allocating it: they should not get into discussions about particular institutions. Since the student's basket gives an incentive to universities that are short of resources to recruit more state-financed students, the MoES tried to limit student numbers by penalizing enrolment over an agreed limit and rewarding enrolment below that limit. A university that was 5 per cent above or below the agreed figure would get the same total amount as if it had stuck to the limit. This did not have the desired effect in 2003: no university admitted fewer students than its target. One third of universities also ignored an agreed limit on the number of full-fee students. Since then the ministry has apparently gained control over the number of admissions, but resources remain inadequate.

16. Governance The extent of autonomy enjoyed by Lithuania's universities, compared with those in other European countries, is disputable. They can spend their budgets flexibly, set their academic structure and course content, and recruit and dismiss academic staff. They can, however, borrow money only with difficulty, pay above-scale salaries only with non-budget funds, and set fee levels only for a limited category of full-fee-paying students. An effective limit appears to have been imposed on the number of students they can admit. And, in contrast to their counterparts in many comparable countries, they own their equipment but not their buildings – an important constraint on their flexibility. There is less doubt about the relative lack of accountability of universities: rectors are elected by senates (consisting of members of academic staff), rather than appointed by university councils. Moreover, Lithuania is one of a number of EU8 countries in which a rector elected by academic staff does not need government approval and can be renewed for another round. While it is true that there is no mechanical connection between the method of selecting a university leader and propensity to reform, there is no denying the logic of the widespread critique that: - senates tend to elect rectors who will look after them; - Boards vary in their composition (extent and nature of external representation)6, quality,

function and energy but in general leave management to the deans;

6 One third of the members of every university council is appointed by the Rector, one third by the Ministry and one third by negotiation, but the extent to which this results in strong representation of social partners varies from institution to institution.

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- there is little involvement of social partners in active management of universities; and - academics are accountable only to themselves. Colleges enjoy less autonomy than do universities. They plan their budgets but the allocation to them is by line item and subject to central control. Limits on student numbers are set by the MoES, and the Directors stick to them. Directors are not elected by colleagues but appointed by college boards, of which two thirds of members are external (including social partners and university representatives). The decisions on amalgamation were taken by the MoES.

17. Issues Expanding student numbers, increasing student/ staff ratios and falling income per student are a threat to the quality of higher education in Lithuania, which is deteriorating because: - of pressure of numbers on staff and equipment;

- students in the lower reaches of the ability range are admitted;

- lower expenditure per student is reflected in reduced availability of books, teaching materials etc..

At the same time, the low expenditure per faculty member increases the need for supplementation of income by outside work, at the expense of time available for teaching: an international quality assessment found that teachers in the prestigious law faculty in Vilnius University were highly qualified but were not spending enough time with their students. It also makes it difficult to renew the cadre of higher education teachers: a high proportion is over the age of fifty, to the detriment of propensity to reform. A solution to these problems could be sought along the following lines. - Tuition fees would be increased from the present level of 1,000 litas per year to an

average of, say, 2,000 litas7 (but varying by type and level of course, and by type of institution – with lower fees in colleges to reflect their lower costs), and would be payable by all state-financed students.

- Grants, to cover fees and living expenses fully or partially, would be available only to students from disadvantaged backgrounds, and would be administered by the Ministry of Social Services and Labor, not by higher education institutions. Higher education institutions would be at liberty to use part of their student's basket to offer scholarships to students of high academic quality but would not be reimbursed for these.

- Student loans would be expanded, using banks as well as the existing Foundation. A package of this kind would reduce the private rate of return on higher education in general and on university relative to college education and on higher-fee relative to lower-fee specializations. It could thus be expected to reduce the number of applications for places in higher education institutions, particularly in universities, and in some faculties relative to others. Without any increase in the share of higher education in GDP, the student's baskets could be increased as the same amount of money would be spread over a smaller number of students, to the benefit of the institutions' income and the quality of their teaching; colleges would benefit differentially from this, because their share of higher education students would be likely to increase. Students from disadvantaged backgrounds would not be deterred from proceeding to higher education by the increase in fees, since they would qualify for grants – indeed (because the previous recipients of fee exemptions are likely to have been mainly from 7 This is an arbitrary, and relatively modest, figure for illustrative purposes. It would imply that less than 20 per cent of university income would come from fees paid by state-financed students.

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privileged backgrounds) the equity of the system would be improved by this combination of fees for all + means-tested grants for some. Students who have borrowed money to pay fees and living expenses would be a pressure group for maintenance of and improvement in the quality of teaching. Faculty salaries could be increased to a level that would enable academics to live entirely from their university salaries and those who did paid outside work could be expected to go off-salary for the time involved, releasing funds for hiring extra teachers – again to the benefit of the quality of teaching. Such reforms of financing could usefully be reinforced by reforms in university governance. The trend in Europe is clearly towards a redefinition of the functions and composition of university Boards or Councils, with a greater role in management and more representation from outside the world of academe. Such Boards then take over the function of appointing university leaders from shortlists that emerge from a wide-ranging search. A move in this direction would help Lithuanian universities to implement the financial reforms that are needed to overcome their current crisis. In return for a move towards greater accountability, universities could be offered greater autonomy: in particular, it would be reasonable to allow them to take over ownership of their property, to the benefit of its efficient use. Convergence in the governance systems of universities and colleges could be encouraged. At the same time, it would be useful also to clarify the role of government in relation to higher education. Universities are right to be worried about threats to their autonomy and colleges to aspire towards the same status as universities in this respect. But there is a national interest here, which the MoES should represent, in such issues as: - the proportion of secondary school leavers who should proceed to higher education, - the quality of education that is being provided at this level, and - the composition of graduates by specialization (at least to the extent of ensuring that there

are adequate numbers in specializations that are considered of national importance). Rather than detailed interference in academic processes, this can be done by a combination of standard setting and financing systems designed to ensure high-quality outcomes. Higher education would work within an assessment and quality control framework provided by the MoES, and including international peer reviews. And the methodology for allocating funds would include formulae to encourage quality in teaching as well as research. The private rate of return on higher education as a whole and on different types and specializations could be influenced by fee levels, for which the MoES would retain responsibility. The rest could be left to universities and colleges, autonomous but accountable in their governance arrangements.

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Poland

18. The Organization of Higher Education in Poland

The establishment, organization and activity of higher education institutions in Poland are governed by the 12 September 1990 Act on Schools of Higher Education (with further amendments). The vocational higher education sector is regulated by the Act on Higher Vocational Schools of 26 June 1997 (with further amendments). Currently there are two proposals on a new Act on Schools for Higher Education being discussed in the Parliament; the adopted one will replace the two currently in place. The awarding of academic degrees and titles is ruled by the 14 March 2003 Act on Academic Titles and Academic Degrees. A structure of three levels of degrees exists in the higher education system: the Bachelor’s degree, introduced by legislation in 1992, the Master’s degree and the Ph.D. The financing of Research and Development is regulated by the 8 of October 2004 Act on Financing of Science, that became effective on February 5th, 2005. Higher education in Poland is organized into: • schools of higher vocational education, • first cycle of university type courses • teacher training colleges and, • schools of higher education with uniform Master-degrees studies. Table II.10. Higher education institutions by type and the number of students in the academic year 2003/04

Higher education institutions by type Institutions Students in ‘000 Universities 17 543.4 Technical universities 22 342.4 Agriculture Schools 9 104.1 Schools of economics 93 382.3 Teacher education schools 17 137.2 Medical Academies 10 42.3 Maritime schools 2 12.2 Academies of physical education 6 24.9 School of arts 22 14.6 Schools of theology 14 10.2 Higher vocational schools 151 166.8 Other 37 78.3 Total 400 1858.7

Source: Higher schools and their finances in 2003, Central Statistical Office, Warsaw 2004.

19. Higher Education Statistics There has been a more than threefold increase in the number of students in higher education in Poland between 1990 and 2000.

Table II.11. Participation Rates in Higher Education in Poland 1990/91 1995/96 2003/04 Student # in ‘000s 403.8 794.6 1858.7 Participation Rate* in % Gross 12.9 22.3 46.4 Net 9.8 17.2 35.3

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Source: GUS, Higher Schools and their Finances in 2003. *) The gross participation rate is based on the number of students, regardless of age, enrolled at a given level of education divided by the total population that corresponds to the theoretical age group specified for that level of education. The net participation rate is based on the number of students in a specified age group (corresponding to legislated standards) enrolled at a given level of education divided by the total population in the same age group.

The rapid increase in the number of students was accompanied by a mushrooming of non-public HEIs, from approximately 15 in 1992 to more than 270 in 2003. Much of the enrolment growth in higher education has occurred in institutions classified as non-public or in paying forms of studies at public universities. The growth was made possible, in part, by some of the staff of public institutions also teaching in private institutions. Another outcome of the rapid increase in the number of students was the creation of fee-paying forms of studying at public HEIs.

Figure II.17*. Number of Higher Education Students in Poland. In fee-paying and non-paying forms of studies, 1990 – 2003.

1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 20030

100

200

300

400

500

600

700

800# of

students in

thousands

School Year starting in

Non-public Public-paid Public-free

Source: GUS, Higher Schools and their Finances in 2004. *) Figure III.2 in Main Chapter illustrates Poland’s position relative to other EU8 countries.

Figure II.18. Number of Higher Education Institutions in Poland. Public and Non-public, 1991 – 2003

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003

0

50

100

150

200

250

300

# of HEI

School year starting in

Public Non-public

Source: GUS, Higher Schools and their Finances in 2004.

Along with Lithuania, Poland, has one of the lowest per-student outlays in all the EU8 countries for which data are available. Given the growth in enrolment, public expenditures for higher education have actually declined significantly on a per student or unit cost basis. Table III.3 of Volume I shows that Polish students earn 61% more than upper secondary school leavers in the 25-64 age group; the unemployment rate among tertiary graduates below the age of 39, at 10% , is considerably lower than that of their less educated counterparts. These figures imply a high private rate of return to higher education.

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Higher Education Finance

Poland’s total public expenditure on education amounts to 5.6% of GDP. Total public expenditure on higher education equals 1.1% of GDP ( see also columns 1 and 3 in Table III.4 of Volume I). Even when differences in purchasing power of the currency have been taken into account, per-student public spending on tertiary education in Poland is less than half of the OECD average. This is not necessarily a bad thing, but a shortage of finance is a potential threat to the quality of public institutions, and long-run educational competitiveness. No statements can be made on internal efficiency because data on unit costs are generic and do not give a breakdown of costs by degree course in either public or private institutions.

The Constitution of the Republic of Poland guarantees that education is free of charge in public sector institutions. However charges are legal for certain educational services provided by public higher education institutions. This legal framework set the ground for the creation of fee-paying forms of studies in public universities and in non-public HEIs, as an overall response to the growing demand for higher education. Table III.6. of Volume I has 1998/9 data on higher education expenses borne by parents and students. Since then, as financing of tertiary institutions from the State budget did not increase in proportion to the growth in the number of students, it is generally believed that unit costs have declined and students and their parents now pay more of the indirect costs. It is also thought that savings have been made to the costs of the staff of HEIs (more students per academic employee, more working hours).8 Non-public institutions often have no proper infrastructure or libraries. Their students use the resources of public HEIs without any formal agreement or financial compensation. The costs of this indirect State support for students of non-public institutions are a burden for public universities.

In response to rising demand, there has been an increase in places as well as in the number of fee-based (paid) forms of studies in public HEIs which now have four distinct sources of financial support, of which revenue from the state budget and private sources constitute the largest shares. By contrast, non-public HEIs are almost entirely dependent on tuition fees. The increase in places as well as in the number of fee-based (paid) forms of studies in HEIs has had a strong impact on their budgets. Figure III.19 shows the degree of dependence of non-public HEIs on tuition fees.

Figure II.19. Higher Education Institutions’ Total Income Structure by Source 1995 and 2003

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

1995

2003

1995

2003

Budget Subvention for teaching Tuition fees Research Other

Non-public HEI

Public HEI

Source: GUS, Higher Schools and their Finances in 2002.

8 Dabrowa-Szefler, M., NiSW 2/20/2002.

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Fee-based forms of study programs are primarily created in areas and subjects, which are in high demand and do not require extensive capital investment in expensive infrastructure and equipment: management, economics and finance, law, social sciences, humanities, and teacher training studies. The popularity of these subject areas is also connected to the fact that some established disciplines (e.g. engineering and agriculture schools) have been losing students. In their search for a continuous supply of students HEIs have been developing new ‘fashionable’ study programs. For example, during the 1990s, almost all technical universities and many agricultural universities created management schools. While this is not, in itself, necessarily a bad development, its usefulness ultimately depends on labor market demand and whether the graduates can be absorbed in jobs that require them to use and further develop the knowledge acquired through education. Moreover, stringent quality requirements especially related to the qualification of the teaching staff have not always been enforced.

20. Allocation Mechanisms State support for higher education in Poland comes from two main sources: (i) a major part from the Ministry of National Education and Sports MoNES for the core activities of HEIs including staff salaries and infrastructure investment; and (ii) a smaller part from the Ministry of Scientific Research and Information Technology for research. In 2004, the MoNES switched back to using the funding algorithm that had been introduced in the early 1990s with encouragement from OECD and thereafter abandoned. This formula was designed to promote the expansion of enrollment and to encourage HEIs to employ greater numbers of professors with doctorates. The new version of the algorithm addresses issues of quality and includes criteria that are based on the National Accreditation Commission evaluations. The formula includes cost analysis of different programs; numbers of students, including PhD students and numbers of PhD degree faculty in both research and teaching.

Student Support Programs. According to the current law in public HEIs and since 2001 in non-public HEIs, full-time day students are eligible for participation in financial support programs. These programs include stipends to cover living expenses, special stipends for the disabled, stipends for high achievers, grant-in-aid, and subsidies for boarding and meals. The decisions regarding the granting of this aid lie with the Rector of the HEI and the self-governing student body.

Figure II.20. Share of tertiary students receiving social stipends, 1998 – 2003

0

2

4

6

8

10

12

14

1998/99 1999/00 2000/01 2001/02 2002/03 2003/04

%

Public HEI Non-public HEI % of students receiving social stipends

Figure II.21. Credits Granted in years 1998-2003 (as a % of the number of students in HEIs.)

0

1

2

3

4

5

6

7

8

9

10

1998/99 1999/00 2000/01 2001/02 2002/03 2003/04

%

Public HEI Non-Public HEI

Note: data on non-public HEI may be incomplete Source: GUS, Higher Schools and their Finances in 2002. MoNES. Kredyty Studenckie w latach 1998-2003. Internal Report

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In August 1998, a preferential Student Credit program was introduced whereby students, whose family income was low, would be eligible to receive a Government-subsided credit from commercial Banks to be paid back starting one year after graduation. The new law on higher education proposes to broaden access to these preferential student credit programs by including doctoral students and civilian students in military schools. Moreover, the new law foresees the lengthening of the grace period for repayment to two years after graduation. While the program seems to be operating satisfactorily, it is curious that the low take- up rate in 1998 has declined yet further to an almost negligible number of students in 2003 (see Fig.5). Table III.5 of Volume I shows that Poland spends the smallest percentage of its higher education budget on stipends among all the EU8 countries.

It seems that the credit and loan program is not designed to attract significant amounts of private financing into the higher education system. Because the take up rate of the program is low, however, there is still substantial private expenditure borne by the students or their families for living expenses.

21. Governance

As Table III.8 of Volume I shows, Polish Universities enjoy more autonomy than many other EU countries for a range of academic and budgetary functions. However, systems of governance are narrow, with little opportunities for outside stakeholders, such as the scientific and business communities, to exert any influence on the appointment of leaders. While the autonomy and integrity of higher education institutions must be safeguarded, there is a need to address institutional rigidities and to introduce incentives that will improve flexibility and make institutions more accountable both to Government and to stakeholders in the world of work. Closer links with the private business sector might improve institutional responsiveness to labor market requirements and attract corporate financing into universities.

22. Issues Although Poland has recognized the need to accredit new non-public institutions and has already taken steps towards a comprehensive quality assurance system through the establishment and further development of both the State Accreditation Commission and other HEI based committees, the quality of many higher education programs remains an issue. The rapid growth of non-public HEIs and increased participation rates are frequently blamed for this decline. Although there are examples of non-public HEIs which provide innovative courses of recognized quality, in many non-public institutions this rapid response to market demand has come at the expense of acceptable standards.

The re-introduction of the algorithm for allocating budgets in 2004 may make the allocation system more transparent and provide incentives to encourage institutions to be efficient and achieve economies of scale through combining courses, sharing facilities and staff between faculties, and developing cost-saving and income generating activities. However, it is currently unclear whether there is any way to ensure that capital spending is properly prioritized – i.e. by encouraging HEIs to develop strategic plans on a competitive basis.

As discussed above, the current system of charging tuition fees in both public and private HEIs is inequitable. Because the take-up rate of the student credit and loan programs is low, there is still substantial private expenditure borne by the students and/or their families for living expenses. Further analysis of these student support programs would be necessary before judgments could be made about the profile of the students who do avail of them and about the longer-term outcomes. Based on the available studies and reports, it can be pointed

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out that access to higher education for young people from uneducated families is much more limited than for their peers from families with a tradition of higher education.

Within public institutions, non-paying students tend to get priority attention, as they are the best students selected through competitive admission procedures. Often, these students come from more privileged backgrounds. Fee-paying students are academically weaker as a rule, because they enter fee-paying forms of study programs having been unsuccessful in the competition for free-of-charge study programs. Moreover, where academic staff are taking multiple teaching posts in non-public HEIs, they are unlikely to devote much time to the needs of students in these institutions who are frequently paying for these courses in distinctly inferior conditions

Means to attract additional private funding through private endowments and donations from the business community are either absent or insufficient. Financing mechanisms, such as performance based contracts, to encourage innovations; technology transfers to commercialize knowledge and a means of sharing the proceeds of consultancy work do not exist. The current legal status of universities needs to be changed in order to allow them to engage in business activities.

Reform requires Leadership: At present there is no coherent Government view of the direction in which the higher educational system should be evolving. The policy-making role of MoNES should be strengthened in order to lead the debate on education reform in general and on the development of higher education in particular. Both the General Council for Higher Education and the Conference of Rectors need to become formal partners in shaping a vision of the eventual system, and in reaching difficult decisions about the trade-offs that need to be resolved.

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Slovakia

23. The Organization of Higher Education in Slovakia Slovak higher education is governed by Act no. 131/2002 on Higher Education Institutions. The 2002 Act brought in a number of key reforms of the previous 1990 law, most notably greater independence of institutions in their financial management including dealing with their property and a shift of statutory powers from the level of individual Deans of Faculties to the level of the Rector. The Act and its subsequent amendments have introduced full legal harmonization within the Bologna process with gradual shift to a three-level degree structure and mandatory application of the European Credit Transfer System. The framework for financing is also affected by the Act no. 132/2002 on Science and Technology and the Act no. 203/2001 on the Agency for the Support of Science and Technology. Over the past year, the Ministry of Education had been trying to convince parliament to pass a new Act on Student Loans, which would have introduced fees for students of public universities but this effort has failed for now. To be recognized by the state and allowed to provide higher education, all institutions are required to undergo accreditation for each study program, at each degree level, by the Accreditation Committee, serving as an advisory body to the Government. The final decision on accreditation is made by the corresponding minister. The Accreditation Committee checks a number of input criteria to establish whether the given institution is capable of awarding the degree in the study field (staff, facilities, research activity). Before the 2002 Act on Higher Education Institutions was introduced, private universities required parliamentary approval for their activities. At present, they require consent of the Government, while public institutions are established by Parliament. The majority of higher education institutions are public higher education institutions. The 2002 Act foresees that university can acquire the status of “research university” based on a proposal of the Accreditation Committee in the process of Complex Accreditation, which is yet to be launched. As of September 2004, in addition to 20 public universities, there were three state universities (military, police and health academies) and four accredited private higher education institutions (focused respectively on economics, management, healthcare and law). Further private HEIs have since requested accreditation. In addition to accredited institutions a number of organizations, which are not recognized as higher education institutions, have begun offering degrees, awarded by foreign (mostly Czech) universities and charging tuition fees. The Ministry of Education has sought to curb the practice as it violates the notion of exclusive right to provide higher education by accredited universities. A recent amendment to the 2002 Act allows for severe fines. The students in these programs are not covered by available statistics.

24. Higher Education Statistics The higher education sector has undergone massive expansion in capacity in the course of the 1990s. Between the academic years 1990/1991 and 2004/2005, the number of students in public and private universities has risen by a factor of 2.5. While the number of full-time students has doubled, the number of part-time students has risen by a factor of 5.6 with the present share at a third of the total number of students. The ratio of 19-year olds to the

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number of newly admitted students in higher education has risen from about 20% in 1990 to 54.9% in 2004. The number of institutions has also increased, especially in the mid-90s, from 13 to the present 20 with a large public university now located in each of the eight capitals of Slovak regions. The two largest university locations are Bratislava in the West and Kosice in the East. The student/staff ratio has increased significantly as the rise in staff did not by far match the expansion in the number of students: teaching staff rose from 7,817 full-time and 1,770 part-time in 1990 to 9,935 and 1,970 in 2003. Table II.12. Number and proportion of full-time and part-time students - including public and private HEIs 90/91 91/92 92/93 93/94 94/95 95/96 96/97 97/98 98/99 99/00 00/01 01/02 02/03 03/04 04/05 Full-time 54,350 53,965 57,030 58,843 69,042 74,322 79,770 83,942 87,117 89,608 92,836 94,716 100,594 101,298 107,022 Part-time 9,434 7,307 7,281 8,351 8,279 10,457 13,323 18,040 23,590 29,240 33,073 38,980 39,042 45,192 53,018 Part-time/full-time

0.17 0.14 0.13 0.14 0.12 0.14 0.17 0.21 0.27 0.33 0.36 0.41 0.39 0.45

0.50

Part-time as share of total

0.15 0.12 0.11 0.12 0.11 0.12 0.14 0.18 0.21 0.25 0.26 0.29 0.28 0.31

0.33

Source: Own calculations at the basis of data provided by Institute of Information and Forecasting in Education There was little growth in the number of private institutions throughout the 1990s but in the last two years about 10 new institutions have emerged seeking accreditation mainly in law, economics and other social sciences. Private institutions presently account for just over 2% of all students. The government’s rejected proposal of extending public funding for private institutions would have likely led to significant further expansion. While Slovakia has a very high share of population with completed upper-secondary education it has one of the lowest shares of population with tertiary education among OECD countries. According to 2002 OECD data 86% of 25 – 64-year olds in Slovakia have completed upper-secondary or higher education, of that 11% higher compared with an OECD average of 64% and 23% respectively. This may account for the very low levels of unemployment among university graduates – in 2002 unemployment of university graduates was 4.7% compared with 14.0 – 17.6% for graduates of secondary schools with a state school leaving certificate (maturita). This in turn reduces labor market pressure towards internal reallocation of capacity.

25. Financing of Higher Education Slovakia has a fairly low level of public expenditure on education among all OECD countries – 4.0% of GDP in 2001, according to OECD data. But expenditure per student in tertiary education was fairly high - $4,949 based on PPP-adjusted exchange rate, compared with Poland’s $3,222 but lower than the Czech Republic’s $5,431 and Hungary’s $7,024. The combined public and private expenditure on tertiary education as a share of GDP reached 0.9% in 2001, well below the OECD countries’ average of 1.8% but comparable with the Czech Republic’s 0.9% and Hungary’s 1.2%. Due to the rapid expansion of capacity, per student expenditure largely stagnated during the 1990s in nominal terms and thus declined in real terms. Financing of public institutions is largely dominated by direct teaching and research funding from the state budget through the Ministry of Education. Since 2001 teaching funding is allocated on the basis of the number of students using coefficients of staff-intensity of individual fields. In the 2004 budget public funding for tuition and operation of universities

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accounted for 87% of the total funding. Funding for science and technology had to a large degree been allocated on the basis of existing research capacity rather than output but in recent years, the Ministry of Education has been gradually adjusting the funding formula to emphasize the quality of research projects proposed by HEIs. Considerable amount of additional funds for research is allocated according to the volume of research grants obtained by the HEI on competitive basis from domestic as well as foreign sources and according to the performance of the university in PhD study. Table II.13. Program structure of HE budget

in thousands 2002 2003 2004 2005 077 – 7University tuition and science 7,457,874 8,840,865 9,798,649 10,423,622

077 01 – Tuition and operation of universities

5,841,658 7,151,358 7,812,688 8,023,612

077 02 – Science and technology at universities

606,700 722,512 928,472 1,066,388

077 02 01 – Operating and development of infrastructure for R&D

442,700 497,992 570,261 616,388

077 02 02 – University basic research initiated by researchers (grant agency VEGA)

90,000 129,779 240,366 280,000

077 02 03 – University applied research 40,000 53,840 61,845 80,000

077 02 04 – International scientific and science and technology cooperation of universities

20,000 19,920 25,000 30,000

077 02 05 – University R&D tasks for education development (grant agency KEGA)

14,000 20,981 31,000 60,000

077 03 – Tertiary education development 345,786 225,537 226,333 400,000

077 04 – Regulation, coordination and assistance to tertiary education activities

18,467 20,700 89,745 73,622

077 05 – Tertiary education transformation 69,982 16,459 330 50,000

077 06 – Social scholarships and students subsidies

108,806 201,018 220,142 300,000

077 07 – Subsidy of catering, accommodation, sport and culture activities of students

466,475 503,281 520,939 510,000

Source: Ministry of Education The Constitution of the Slovak Republic stipulates that “Citizens have the right to education free of charge in primary schools and secondary schools, depending on the citizen’s ability and the society’s capabilities also in higher education institutions.” According to the Act on Higher Education Institutions, institutions are allowed to charge fees only for a very limited range of services. Students do not pay regular tuition other than in special circumstances, such as when the maximum length of study is exceeded. In part-time studies, however, many institutions charge indirect fees collected through their own not-for-profit agencies or through outside cooperating institutions. The government has fought these in the course of the 1990s but has failed to fully stamp out this practice. Demand for places in public institutions tends to exceed supply in the more popular fields (the greatest demand overhang is reported for law, fine arts and economics and management

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programs). In recent years due to continued expansion, growth in the number of students studying abroad (notably in the Czech Republic where over 7,000 Slovak students presently study free of charge), certain types of study programs, especially in higher education institutions focused on technology, have been unable to fill their capacity. With the exception of some of these institutions, the rest of public universities select students through entrance exams, which are still viewed by many as suffering from corruption. However, the increases in capacity combined with greater opportunities to study abroad and demographic factors have reduced the competition for many study programs and institutions. In the past, a portion of the unmet demand was absorbed by part-time study programs, which often charged semi-legal fees. Although exact data are not available, fresh secondary school leavers were estimated to constitute the majority of new part-time students in recent years. Student support takes the form of student loans at reduced interest rates, which are mainly allocated to students with a social need or disability, with lower priority awarded to students on the basis of merit, if funds are left over. In 2003, 5.6% of all full-time students were receiving a loan from the Student Loan Fund. In addition to loans, students receive social scholarships in cash paid by their universities from a direct state allocation. Throughout the 1990s only a very small share of students (about 1%) received these but since a change in rules governing the scholarships the share has risen rapidly. In 2003, 10% of full-time students received scholarships averaging SKK 19,958 per year. The top limit on these scholarships is fairly low, well below the average costs for students as estimated by surveys. Finally, student support is channeled through producer subsidies to universities for student housing and dining regardless of student’s means. For two years the government had been attempting to prepare and pass a new Act on Student Loans to introduce tuition fees at a level determined by each HEI between 5% and 30% of the average expenditure per student in the whole system. The proposal also contained a new system of a sort of income-contingent loans to cover tuition at interest rates corresponding to the government’s cost of borrowing repayable after the student completes his or her studies and reaches at least the minimum wage. In addition, the proposal would have significantly expanded means tested social stipends in scope and amount, to cover at least a third of full-time students. The proposal became the subject of a broad and involved public debate but was shown extremely unpopular in public opinion polls. Following several unsuccessful attempts at passage in parliament, the proposal was voted down in May 2005 and it is thus very unlikely that tuition would be introduced in the present electoral term (ending in 2006). Wage costs represent a disproportional portion of university expenditure (55% in 2001, rising from 36% in 1990 and 45% in 1995). Furthermore, these costs are mostly obligatory (based on the pay scales and mandatory insurance contributions). Pay scales, which universities can opt out of, but have chosen not to, tend to reward seniority. Resulting age structure contains almost 50% of academic staff with 24 or more years of experience. Table II.14. Distribution of wages in HEIs

March 1, 2000 March 1, 2003 Work experience by pay grade Persons Share Persons Share

0-6 1,276 14.1% 1,427 14.7%

6-9 442 4.9% 595 6.1% 9-12 441 4.9% 459 4.7%

12-15 899 9.9% 506 5.2%

15-18 634 7.0% 610 6.3%

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18-21 592 6.5% 643 6.6%

21-24 787 8.7% 658 6.8% 24-27 (2000), 28 (2003)

815 9.0% 1,145 11.8%

Over 27 (2000), 28 (2003)

3,164 35.0% 3,641 37.6%

Total 9,050 100.0% 9,684 100.0% Source: Ministry of Education

26. Governance Issues Autonomy of higher education institutions has been guaranteed by the Act 172/1990 on Higher Education Institutions since 1990. At present, universities are run by a Rector elected by the Academic Senate. The Senates have broad powers but due to their size, little accountability. This has been pointed out by the EUA9 and recently the Accreditation Commission expressed concern, that the law does not stipulate the composition of Senates and “these often become representative organs of less able employees and thus naturally inhibit the development of the school”. Governing Board is a new institution introduced by the 2002 HEI Act, to strengthen the ties to the society and involve outsiders in oversight of HEIs. The Board at each public HEI has 14 members appointed by the Minister of Education, of them six proposed by the Rector with the Senate’s approval, six proposed by the Minister and reviewed by the Rector and two proposed by the Senate (one of them nominated by the student part of the Senate). Its main powers are to vet Rector’s proposals to purchase or transfer real estate or property of high value and establish legal entities, as well as review strategic documents, budgets, and annual reports. Recent financial difficulties at a university related to mismanagement have shown that the Ministry of Education is severely limited in its influence due to the strong role of formal representative organs of the sector. The Ministry tried to use its legal power of restricting the autonomy of the institution but was unable to do so due to a veto from the organs representing Rectors, HEIs and students.

27. Current Problems Discussion has increased on the issue of quality of Slovak higher education, in particular in connection with the government’s plans to introduce tuition fees. There is a significant lack of information on quality and deficiencies in quality-assurance procedures. The Accreditation Process focused exclusively on input factors (qualification of teachers, compliance of curricula) but does not involve any interim or ex-post assessment of the quality of teaching and learning outcomes. The financing system therefore makes no distinction for quality and funds programs awarding degrees in the same field on a per student basis with adjustment for qualifications structure of staff. The Ministry of Education has hinted at plans to create a quality rating agency and private initiatives have also emerged but there is no definite system yet in place. Internally, quality assurance procedures also vary greatly within institutions and are only formal in many of them. There is special concern as to the quality of part-time education in comparison with full-time, which is highly relevant in the view of the sizable share of part-time study. 9 European University Association Reviewers’ Report – The University of Zilina, 2002.

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Although the bachelor’s degree has formally existed prior to the Bologna process, traditionally the vast majority of Slovak students have pursued mostly five-year master’s and engineer degrees. The bachelor’s apparently lacks sufficient public recognition and even after the introduction of mandatory separate BA and MA-level studies students are expected to mostly pursue MA degrees as their first terminal degrees. This is taxing on per student resources and capacity of higher education institutions, while many graduates would be sufficiently qualified for the jobs they take with a bachelor’s. The per student financing system has contributed to the expansion of capacity at universities. Step by step, this reform has been accompanied by reform in research financing, with over a quarter of the budget allocated on the basis of research capacity and quality in 2005. Nonetheless, the emphasis on teaching funding in previous years has hurt some of the leading research departments, which carry out comparatively less teaching. The government has pursued a policy of a closed system dependent largely on public financing. The excess private demand and willingness to pay has been demonstrated both by interest in part-time programs that charge hidden tuition and in various non-accredited programs awarding foreign degrees and charging fees. At the same time, the government has limited leverage to influence and control public universities because of academic autonomy. Without increasing competitiveness, Slovak higher education institutions are likely to increasingly lose the most qualified students to other EU countries. This is a challenge not only for education policy, since if these students do not return to Slovakia after concluding their degree, the quality of the labor force will suffer.

Slovenia

28. Higher education system in Slovenia 28.1 General description

Higher education together with higher vocational education forms Slovene tertiary education.

Figure II.22. Structure of Tertiary education in academic year 2005/06

Note: Post-secondary vocational education is higher vocational education.

Higher vocational education Higher vocational education is organised in parallel with higher education, and not as an integral part of it. First vocational colleges were established in 1996/97. Programmes are markedly practice-oriented and tightly connected with the world of work. In these courses, practical training accounts for around 40% of the curriculum and is completed within companies. Higher vocational education lasts for two years ending with a diploma examination, which enables graduates to start working in specific occupations. Until June 2004 when the parliament passed a new Higher vocational education Act this type of education was regulated by Vocational and Technical Education Act and Adult Education Act. In academic year 2003/04 42 vocational colleges (21 public and 21 private) enrolled 12.116 students.

Higher education Since 1993 Slovene higher education is regulated by Higher Education Act. It was first amended in 1999 and introduced a number of solutions that were a result of an open public

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discussion on the development of higher education and the functioning of higher education institutions (universities and their autonomy, funding system, participation of students) and laid new foundations for a further development of universities and other higher education institutions. Three additional amendments were adopted in 2000, 2003 and June 2004. The last amendment to Higher Education Act introduced new structure of higher education studies according to the bologna guidelines. • First cycle has binary system of academic and professional study programmes. Both studies can be offered by universities and free-standing higher education institutions. While faculties can offer both academic and professional study programmes, professional colleges can offer only professional study programmes. University members can be faculties, art academies and also professional colleges. • Second cycle offers only one type of studies. Master study programmes can be offered by universities and faculties. Professional colleges can offer this type of study programmes in cooperation with universities, faculties and art academies or by themself, if they fulfil the conditions regarding staff and research.

• Third cycle is Doctor of science. First ‘post-reform’ study programmes will start with academic year 2005/06. New study programmes will be introduced gradually, so that in academic year 2009/10 only ‘post-reform’ study programmes will be offered. Until then Slovene higher education institutions will offer both ‘pre- and post-reform’ study programmes. The last time students will be able to enrol in ‘pre-reform’ study programmes is in academic year 2008/09 and they will have to finish their studies by 2015/16. Once new study programmes are adopted, they gradually replace the existing pre-reform ones. According to the Higher Education Act from 1993 higher education institutions may be established by the state or by the private (national and foreign) natural and legal persons. Public higher education institutions are established in order to provide public services. Under certain conditions, private higher education institutions can be granted a concession for public service (and consequently public co-financing) by government decree on the basis of a public tender. In such cases private higher education institutions are co-financed under the same conditions as the state ones. In academic year 2003/04 three out of five free-standing higher education institutions delivered undergraduate programmes with concession. First two private higher education institutions were founded in 1995, another four in 1996 and

then in average by one per year until 2004. In 2003 four private higher education institutions joined newly founded public University of Primorska. In academic year 2003/04 higher education was offered by:

• 3 public universities that enrolled 68.506 undergraduate and 6.614 postgraduate students:

• University of Ljubljana, which consist of 23 faculties, 3 art academies and 1 professional college.

• University of Maribor, which consists of 12 faculties and 1 professional college and • University of Primorska, which consists of 3 faculties, 2 professional colleges and 2

research institutes and • 7 free-standing higher education institutions – 4 faculties of which only one offers

also undergraduate studies and 3 professional colleges – enrolled 3 % of all undergraduate students.

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28.2 Higher education in figures

Table II.15. Population aged 15 years or over by education attainment and sex (1991, 2002)

1991 2002 Education attainment

Total Men Women Total Men Women

1.514.722 718.867 795.855 1.663.869 804.286 859.583 TOTAL 100 100 100 100 100 100

9.848 3.611 6.237 11.337 4.092 7.245 No education

0,7 0,5 0,8 0,7 0,5 0,8 253.630 111.209 142.421 104.219 42.400 61.819

Incomplete education 16,7 15,5 17,9 6,3 5,3 7,2

451.222 169.473 281.749 433.910 169.509 264.401 Basic

29,8 23,6 35,4 26,1 21,1 30,8 652.292 358.887 293.405 899.341 487.288 412.053

Upper secondary 43,1 49,9 36,9 54,1 60,6 47,9

69.509 30.303 39.206 84.044 36.083 47.961 Higher vocational

4,6 4,2 4,9 5,1 4,5 4,6 65.240 39.146 26.094 131.018 64.914 66.104

Higher 4,3 5,4 3,3 7,9 8,1 7,7

12.971 6.238 6.733 - - - Unknown

0,9 0,9 0,8 - - - Source: Statistical Office of the Republic of Slovenia: Census of population, households and housing, 2002 According to the Population Census results in 2002 13 % of population aged 15 years or over attained tertiary education, which is 5 percentage point more then in 1991. Table II.16. Undergraduate students (1985/86, 1990/91 to 2003/04)

Undergraduate students Comparison of student growth between

the years (index) Academic year

Total Full-time students

Part-time students

Total Full-time students

Part-time students

Part-time students in total (%)

1985/1986 29.601 22.030 7.571 / / / 25,58 1990/1991 33.565 27.774 5.791 / / / 17,25 1991/1992 36.504 30.744 5.760 108,76 110,69 99,46 15,78 1992/1993 37.362 30.788 6.574 102,35 100,14 114,13 17,60 1993/1994 40.239 32.728 7.511 107,70 106,30 114,25 18,67 1994/1995 42.961 33.794 9.167 106,76 103,26 122,05 21,34 1995/1996 45.951 35.998 9.953 106,96 106,52 108,57 21,66 1996/1997 50.667 37.314 13.353 110,26 103,66 134,16 26,35 1997/1998 55.845 40.304 15.541 110,22 108,01 116,39 27,83 1998/1999 64.072 43.654 20.418 114,73 108,31 131,38 31,87 1999/2000 66.198 44.837 21.361 103,32 102,71 104,62 32,27 2000/2001 68.427 46.022 22.405 103,37 102,64 104,89 32,74 2001/2002 70.775 47.835 22.940 103,43 103,94 102,39 32,41 2002/2003 72.344 49.818 22.526 102,22 104,15 98,20 31,14

2003/2004 70.774 50.462 20.312 97,83 101,29 90,17 28,70

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Note: Undergraduate students include all enrolled undergraduates students without absolventi (To finalise undergraduate studies, an additional year of studies, called absolventsko leto, is added. Students who use this year are called absolventi.) Source: Statistical Office of the Republic of Slovenia, Rezultati raziskovanj (for academic years 1985/86, 1991/92 to 2003/04);

In 1993, when the Higher Education Act was adopted, Slovenia had 40.239 undergraduate students (81.3 % full-time and 18.7 % part-time), who were all enrolled in one of the two existing public universities – University of Ljubljana and University of Maribor. The number of undergraduate students increased by 10 % in comparison with the academic year 1991/92, the first after Slovene independence, and by 36 % in comparison with academic year 1985/86. In academic year 2003/04 the number of enrolled undergraduate students increased by 76 % since 1991/92 and by 139 % since 1985/86, but decreased in comparison with academic year 2002/03 by 2.2 %, which can be contributed to smaller enrolment of part-time students. Enrolment is increasing also in post-graduate studies in academic year 2003/04 6.774 students were enrolled, which is 125 % more then in academic year 1998/99 when 3.006 students were enrolled. Table II.17. 19-year old students (1991/92 to 2003/04)

Students aged 19 Percentage of students per cohort (%) Academic

year Population

aged 19 Total Full-time Part-time Total Full-time Part-time

1991/1992 29.189 7.965 7.346 622 27,29 25,17 2,13 1992/1993 29.286 8.087 7.429 658 27,61 25,37 2,25 1993/1994 29.088 8.524 7.704 820 29,30 26,49 2,82 1994/1995 29.745 9.305 8.101 1.204 31,28 27,23 4,05 1995/1996 30.474 9.595 8.559 1.036 31,49 28,09 3,40 1996/1997 30.012 9.735 8.486 1.249 32,44 28,28 4,16 1997/1998 30.233 10.221 8.784 1.437 33,81 29,05 4,75 1998/1999 30.216 10.664 9.081 1.583 35,29 30,05 5,24 1999/2000 30.086 11.043 9.342 1.701 36,70 31,05 5,65 2000/2001 29.244 10.759 9.347 1.412 36,79 31,96 4,83 2001/2002 28.206 10.927 9.493 1.434 38,74 33,66 5,08 2002/2003 27.321 10.650 9.367 1.283 38,98 34,28 4,70

2003/2004 26.545 10.804 9.586 1.218 40,70 36,11 4,59 Source: Statistical Office of the Republic of Slovenia: Rezultati raziskovanj – Študentje v Republiki Sloveniji (for academic years 1991/92 to 2003/04) Statistical Office of the Republic of Slovenia: Statistical Yearbook (1992 to 2004) Unemployment by school attainment in Slovenia (2002 to 2004) Unemployment did not represent a bigger problem until the 1990s. The changes in economy since 1991 brought also changes in the labour market and resulted in growth of unemployment rate. According to labour survey results conducted by Statistical Office of the Republic of Slovenia (Rapid Reports: Labour Market, No100/2004 and 85/2005) the ILO unemployment rate in the 4th quarter 2002 was 6,5 %, 6,7 % in 2003 and 6,4 % in 2004. According to the same survey the ILO unemployment rate for unemployed with higher education was 3 % in 4th quarter 2002 and in the same period in 2003 3,5% and 2,5 % in 2004. The unemployment rate for unemployed with higher education in all unemployed regardless the education was in 4th quarter 2002 4,9 %, 6,1 % in 2003 and 5% in 2004.

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Table II.18. Average monthly gross earning in enterprises, companies and organisations by level of school education in Republic of Slovenia (1999, 2002)

Year Gender

Average monthly gross earnings in

Republic of Slovenia

Average monthly gross earnings with general or technical secondary education

Average monthly gross earnings with higher vocational

education

Average monthly gross earnings with

higher education

Total 100,00 99,90 141,99 203,93 Men 100,00 101,55 154,01 214,78 1999

Women 100,00 99,98 137,67 193,01 Total 100,00 92,59 138,63 196,53 Men 100,00 92,98 143,79 207,50 2002

Women 100,00 93,77 137,16 186,29 Source: Statistical Office of the Republic of Slovenia: Statistical Yearbook 2001, 2004

Average monthly gross earning in enterprises, companies and organisations differ by level of school education. Table II.18. shows the trend that earnings increase in parallel with level of education. Table II.19.: Public expenditure on higher education (2001, 2002 and estimate for 2003)

Year

Public expenditure on education (% of

GDP)

Public expenditure on tertiary education

(% of GDP)

Public expenditure on tertiary education (%

of total public expenditure)

2001 6,13 1,33 5,32 2002 6,02 1,33 5,38

2003* 6,09 1,36 5,35 Note: *estimate Source: Statistical Office of the Republic of Slovenia: First release, Education; No. 218 – Dec. 2004 RS Ministry of finance: Annual report 2001, 2002, 2003

Share of total public expenditure for tertiary education in GDP amounted to 1,33 % in 2001 and 2002 and 1,36 % in 2003. In the Master Plan for Higher Education Slovene government made it an objective to increase this value to 1,4 %.

29. Financing systems for higher education

In December 2003 Slovene government adopted the Decree on the public financing of higher education and other university member institutions (in text as Decree) 2004-2008, which replaced Standards for financing Higher Education adopted by the government in 1992. Decree regulates the public financing of study and extracurricular activities, investment and investment maintenance and development tasks at universities and free-standing higher education institutions established by the Republic of Slovenia, and the financing of certain tasks of national importance. The provisions on the financing of study and extracurricular activities and development tasks also applies to private higher education institutions with concession, while the provisions on the financing of development tasks also applies to private higher education institutions providing certified study programmes if they receive public funds.

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29.1 Funding of study activities

Public financing of study activities for a university or free-standing higher education institution is defined as total funds (lump sum). Study activities of higher education institutions comprise: • educational and related research, artistic and professional activities of higher education

teachers and staff and scientific staff, • library, information and other professional activities, and • organisational, administrative and infrastructural activities. Financing of higher education differentiates between undergraduate and postgraduate studies. Undergraduate studies Undergraduate study activities are publicly financed for all full time students, while the part time students pay tuition fees. The state allocates funds to higher education institutions based on the methodology set by the Decree. There is no division between academic and professional study programmes. The methodology for the allocation of the funds is divided into two parts:

i. Planning of the budget and ii. Allocation of the funds to higher education institutions. i. Planning of the budget on the state level The budget is planned so that the Annual budget funds for study activities from the previous fiscal year are increased each year in real terms by at least the growth in gross domestic product but not less than 2.5% with regard to the realisation for the previous year for study activities. ii. Allocation of the funds to higher education institutions. Annual funds for study activities of a higher education institution (LSZ) comprise basic annual funds (OLSZ) and standard annual funds (NLSZ). LSZ = OLSZ + NLSZ Basic annual funds for a higher education institution (OLSZ) are defined in the Decree. For the year 2004 they were fixed at the amount of 80% of the annual funds for study activities of the higher education institutions in 2003. The standard annual funds for a higher education institution (NLSZ) are determined taking account of the annual initial value (LIV), the total number of students (Š), and the number of graduates (D) multiplied by the weighting (Ud) and the factor for the study group f(s) to which the higher education institution belongs. NLSZ = LIV * Σ (( Š + D * Ud) * f(s)) The annual initial value (LIV ) shall mean the standard annual funds per student in the first study group and shall be calculated as the quotient of the difference of annual budget funds (LPS) and the basic annual funds of all higher education institutions (Σ OLSZ) and the total number of students (Š) and the number of graduates (D) multiplied by the weighting (Ud) and the factor f(s) of the study group to which the higher education institution belongs.

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LIV = (LPS - Σ OLSZ) / Σ ((Š + D * Ud) * f(s))

Students (Š) are full-time students in undergraduate study programmes excluding absolventi (graduands) at the higher education institution in the current academic year. Graduates (D) are graduates of full-time undergraduate study programmes at the higher education institution in the previous calendar year. The graduate weighting (Ud) is the ratio between standard funds for graduates of the study programme and students of the same programme. Study groups (s) combine higher education institutions by dominant study fields or subfields. Study field means one of the 22 fields defined in the Isced classification of study fields (UNESCO, November 1997). The factor of the study group f(s) expresses the ratio between the funds allocated for the provision of study in the study group compared to the first study group. There are six study groups, which value varies from 1,00 to 4,50. Postgraduate studies Postgraduate students pay tuition fees. However the state provides public funding for co-financing of these tuition fees through: a. Public tender for co-financing of postgraduate studies that finances 60-80 % of tuition fee for students whose faculties fulfilled the conditions of the tender (among others tuition fee must not exceed the one set by the state). The tender was issued first time in 1998, when 27% of students received co-financing. In academic year 2004/05 this percentage is 53%. b. Additional 9% of the postgraduate students receive co-financing through a ‘Young researches’ financing scheme, which covers full tuition fee, part of the material costs for the research in which the student is involved and salary for the young researcher.

29.2 Funding of research

Higher education institutions obtain funds for research in accordance with the provisions of the Research and Development Activities Act. In December 2003 the government established the Slovenian Research Agency. The Agency is an indirect user of the state budget in accordance with the legal provisions in the fields of public finances and public agencies. The Agency carries out the tasks entrusted by law and which are in the public interest, with the objective to provide for a permanent, professional and independent decision-making on the selection of programmes and projects that are financed from the state budget and other financial sources. The Agency also performs professional, development and executive tasks regarding the implementation of the National Research and Development Programme and of its specific components as well as other tasks for the enhancement of research and development activities. Financing of research programmes and projects is divided through a public tender. Funds for research and infrastructure projects and research programmes are calculated according to standards set by the government.

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29.3 Funding for investment

Funds for investment (building, renovation or purchase of real estate and equipment) and investment maintenance are determined pursuant to: • Act on Basic Development Programmes in the Area of Education and Science, 2003-2008 or the multi-annual investment programme of the higher education institution to which the minister has consented, • annual investment programme of the higher education institution and • adopted budget.

30. Challenges for the future

The main challenges recognised as one of the priorities by the government for the future are to ensure the quality of tertiary education and stimulate lifelong learning, which will ensure higher efficiency in the transfer and innovative use of knowledge in the economy in order to boost economical development. The funding of higher education is one of the most important tools with which the government can stimulate higher education. That is why the introduction of result-oriented lump sum financing is seen as an important step toward giving higher education institutions their financial autonomy and making them accountable for their actions. Through this the government is stimulating result-oriented management and higher responsiveness of the universities to the trends and needs of the society. References

File J. and Goedegebuure L. (2003) Real-time systems: Reflections on Higher Education in the Czech Republic, Hungary and Slovenia.

RS Ministry of education and sport: Strokovna izhodiš�a za nacionalni program visokega šolstva v Republiki Sloveniji; 1997.

RS Ministry of education, science and sport: Education system in Slovenia 2003/04; 2003.

Statistical Office of the Republic of Slovenia: First release, Education; No. 218 – Dec. 2004.

RS Ministry of finance: Annual report 2001, 2002, 2003.

Statistical Office of the Republic of Slovenia: Statistical Yearbook 1991 to 2004.

Statistical Office of the Republic of Slovenia, Rezultati raziskovanj (for academic years 1985/86, 1991/92 to 2003/04).

Statistical Office of the Republic of Slovenia: Census of population, households and housing, 2002.

Statistical Office of the Republic of Slovenia: Rezultati raziskovanj – Študentje v Republiki Sloveniji (for academic years 1991/92 to 2003/04)

ANNEX III: Health Sector

Hungary 31. Introduction

Hungary’s health system and the health status of its people have both undergone significant changes since World War II. All health care and insurance facilities were taken over by the state in 1948, and the then-government declared the eradication of infectious diseases its main health priority and provided free health care to all the country’s citizens. In 1949 the Hungarian Constitution was amended and health was declared as a right of the citizens for which the state would bear the responsibility. Statistics of infectious diseases and public health improved, mainly as a result of increased vaccination of children and a broader network of medical facilities. Until the end of the 1960’s the status of public health was comparable to that in the developed countries, in large part because of almost complete coverage by vaccination, and improved social and economic situation. In the period of socialist health care the health care budget was determined centrally and it only depended on the budget income and on political decisions. The state was exclusively responsible for financing and providing health services through hospitals, clinics and district practitioners. Private practices were not completely prohibited but were only allowed – and that too since 1972 only – as part-time occupations. The health situation started changing in the 1960s, with the centrally managed economy failing to respond to the changing environment. Inefficiencies in allocation and utilization of resources and strong political influences resulted in huge within-country differences in services provided, poor quality standards, and large inter-regional disparities. By the 1970s, health status gaps between Hungary and the rest of Europe started widening, and today the health status of the Hungarian population is considered one of the worst in the region. Health financing reforms were introduced in 1990s, following which the purchase and provision of health care were separated, the budgets were decentralized and new payment mechanisms were introduced. The system of health financing was transformed from a centrally-controlled budget-supported model to a Bismarckian model of universal health insurance, and all individuals were members of the health insurance fund. Despite all the parametric changes (and a minor paradigmatic change in the form of introduction of a health tax) huge financing gaps started to appear as the health system found itself unable to cope with a structure of expenditures dominated by drugs and hospitals, and the health insurance fund started generating deficits year after year. Hungary spends around 6.7 percent of its GDP in 2004, but continuous deficits of the Health Fund of around 1.3-1.6 percent of GDP in the last two years have begun to undermine the fiscal stability of the health system. In addition to the worries due to the relatively poor health status of the people, therefore, the health system finds its fiscal health in jeopardy as well. The continuous flux in the political situation has not helped either, and already the third Minister of Health is in charge in Hungary since the last election in March 2002 won by the socialist party MSZP. The first Health Minister was Dr. Csehák Judit, who was appointed by the Medgyessy Government on May 27, 2002. In September 2003, Dr. Kokény Mihály, her former State Secretary, took her place. The current Minister of Health, Dr. Rácz Jenõ, is a

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member of the Government reconstruction team after new Prime Minister Gyurcsány was appointed by the ruling MSZP and approved by the Parliament on September 29th 2004. The old-new Hungarian cabinet10 announced its priorities in the run-up to the elections, which included support for a fair social policy and reconstruction of the state budget to boost competitiveness of the economy. The program of Prime Minister Ferenc Gyurcsány's government from September 2004 (“New Dynamism for Hungary: The Program of the Government of the Republic for a Free and Equitable Hungary 2004-2006”) proposes bold changes in the healthcare system. Under the title "More Efficient, Better Healthcare" the program states that the problems of healthcare in Hungary can only be solved on long term by a healthcare system based on the principles of solidarity and the respect of market conditions.11 The main health priority identified by MOH is cancer, where the need to improve diagnostics and therapy are recognized. Cardiovascular diseases are also seen as a priority area, and MOH intends to enlarge the existing network of heart catheter labs. More generally, MOH proposes to promote healthy life style and sport activities in order to improve the health status and the quality of life of the population. The first issue the new Minister of Health had to deal with was the Referendum called by the opposition party FIDESZ on the legal status and privatization of hospitals. The referendum was a FIDESZ response on weakening government position after the MSZP crisis and its decreasing support by the population.12 The Referendum took place on December 5th, 2004 with a question: “Do you agree that the public health care providers, hospitals should stay in state, self-government ownership, and therefore, the Parliament is to cancel the Act that is contradictory with that.” The referendum was valid, but without a result FIDESZ wanted, because less than 25 percent of the voters supported the referendum question. Therefore, in theory at least, hospitals can be privatized starting 2005 (though this will not automatically mean that there will be demand among investors for Hungarian hospitals). It is against this backdrop that this report examines the key expenditure areas in the health sector with a view to identifying suitable action steps to address the situation of continuing fiscal imbalance. The main objectives of this report are to take stock of recent trends in health expenditure aggregates in the public sector and identify specific areas of health expenditure reform consistent with the objectives of stabilizing the fiscal situation without adversely affecting the production, delivery and utilization of health services. The rest of this report is organized as follows. Section 2 presents the macroeconomic background in order to set the context in which the fiscal situation in the health sector can be best understood. Hungary, like other countries in the region, is undergoing a demographic transition as a result of which the population is ageing rapidly, and these issues are discussed in Section 3. Section 4 presents the health status of the people of Hungary, and compares it with other countries in the region. The structural characteristics of the health care system are highlighted in Section 5. Health financing issues are discussed in Section 6, followed by a discussion in Section 7 on the structure of expenditures in the health sector. Conclusions are presented in Section 8.

10 Gyurcsány changed only 5 Ministers, among them the Minister of Health 11 The document says: “It is necessary to help those who are in need, and higher responsibility must be borne by those who can afford it.” 12 According to opinion polls in October 2004, FIDESZ would have 29 percent and MSZP 24 percent of all voters.

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32. The Economy13 Real GDP grew by 3.9 percent in 2004, but the growth rate is expected to fall to 3.7 percent in 2005 before picking up again in 2006 (Table III.1).14 Intra-year fluctuations saw the GDP growth rate fall from 4 percent in the first half to 3.7 percent in the second half, decelerating dynamics quarter by quarter during the year. Investment grew by almost 13 percent and continues to be the key growth driver, contributing 3.25 pp to growth in Q3 (of which 3 pp gross fixed capital formation alone). Investment activity has been aided in particular by ongoing motorway projects, and in the third quarter year-on-year investment growth accelerated to 12.7 percent. The sector breakdown of investment reveals strong expansion in transport, storage and communications as well as manufacturing investment (mainly electrical and optical equipment). Also, investments in construction retained its strong growth fuelled by the extensive motorway building program of the government. At the same time consumption growth slowed to less than 3 percent year-on-year due to slowing real wage growth, reductions of government preference schemes on home loans and a drop in government expenditure. Net export performance disappointed again, with export growth decelerating significantly to 10 percent year-on-year in Q3 of 2004 from 18-19 percent in the first half. Table III.1: Overview of Basic Macroeconomic Parameters of the Hungarian Economy Parameter 2003 2004 2005 2006 2007 Growth of real GDP (percent) 2.9 3.3 3.6 4.0 4.3 Growth of real private spending (percent) 7.6 1.8 3.0 3.3 3.5 Growth of the price level (percent) 4.7 6.5 4.5 4 3.5 Growth of real wages (percent) 9.2 1.0 2.0 2.2 3.0 Growth of the volume of paid nominal wages (percent) 15.8 7.9 7.4 7.4 7.7 Growth of employment (percent) 1.3 0.3 0.8 1.0 1.0 Participation rate (percent) 60.7 61.0 61.3 62.0 62.5 Unemployment rate (percent) 5.9 5.9 5.9 5.8 5.7 Public sector revenues as percent of GDP 44.5 44.2 43.4 42.9 43.2 Public expenditures as percent of GDP 50.4 48.8 47.5 46.5 46.3 Public finance balance as percent of GDP -5.9 -4.6 -4.1 -3.6 -3.1 Revenues from social contributions as percent of GDP 12.6 12.6 12.2 11.9 11.7 Gross government debt as percent of GDP 59.1 59.4 57.9 56.8 55.6 Source: Convergence Program of Hungary, EBRD Transition Report 2004. The current account continues to be the weakest part of the economy. The CA deficit for the first nine-months of 2004 amounted to over 9 percent of GDP. While the trade gap shrank in Q3, the income and tourism balance deteriorated. At the same time, however, non-debt generating financing increased to 80 percent of the current account gap in the third quarter triggered by higher FDI inflows which reached 3.4 percent GDP in the first nine months of the year. External debt is on the rise, but the state’s share in it is increasing more slowly. A rough estimate of the debt stabilizing current account deficit is around 6 percent of GDP.

13 This section draws heavily from World Bank EU-8 Quarterly Economic Report, January 2005, Country Pages, and many parts are taken as is. 14 GDP growth is expected to accelerate to between 3.6 percent and 4.0 percent in the period of 2005-2007, driven mostly by a gradual rise of employment and by a stabilized annual real growth of productivity of approximately 3 percent. As regards GDP use, growth will most likely be driven by increasing formation of fixed capital and growth of export, while growth in consumption (both private consumption and government spending) will be relatively lower.

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After high inflation rates of 7.6 percent in May 2004, a strong forint played a significant role in bringing down CPI inflation to 5.5 percent by the end of the year. Meanwhile, the “constant tax inflation rate” dropped to 3.5 percent and core inflation to 5.0 percent. In February 2005, inflation has fallen further to 3.2 percent. The decline in inflation reflects currency appreciation, slowing household consumption and wage growth, and tighter government spending. The forint, however, is expected to weaken this year, which may make further reduction in inflation rates difficult to achieve. The Hungarian economy has not been able to break the cycle of rising unemployment rates. For 2004 as a whole, the unemployment rate was 6.1 percent, compared with 5.9 percent in 2003. Despite significant job creation through new investments in construction and the services industries, the pace of jobs lost in vulnerable economic sector such as manufacturing, textiles, leather and footwear, facing increasing competition, has been much faster. These sectors have seen increasing competition and numerous plant closures as investors have moved production to countries with lower labor costs. Hungary also remains plagued by exceedingly low rates of labor force participation of 60.5 percent in 2004 among the internationally used 15-64 cohort, a full 9.5 percentage points shy of the average in the EU15. An increase in retirement age along with tighter rules for early pensions, led to an increase of 1.5 percentage points in the participation rate of those aged 50-64. Another positive sign for employment is increasing investment activity in northern Hungary, the former industrial heartland under the state socialist system. The region is home to Hungary’s most significant labor reserves, and with the ongoing motorway developments continuously improving accessibility, it has been attracting much new capital. The active policy of employment promoted last year is expected to have a positive impact on the labor market, and employment is expected to increase by approximately 1 percent per year until 2007. In the period of 2001-2003 the increase of real wages and consumption was substantially higher than the growth of labor productivity, a situation not sustainable in the long term. In three years between 2001 and 2003 (both inclusive) real wages increased by 32 percent (much more than the real growth of GDP), which reduced the competitiveness of the economy and contributed to both external and internal imbalance. In the mid-term, gross average wages are expected to increase by 6 percent to 7 percent per year, with real wages rising by 3 percent to 3.5 percent. Compensations of employees (gross wage and deductions) will be close to 53 percent of the created added value in this period (i.e., 53 percent of the GDP in base prices or 47 percent of the GDP in market prices, the highest value of the V4 group).15 Real private consumption is expected to increase by 3 percent to 3.5 percent, while real consumption of public administration is expected to decrease with continued consolidation of public finance. Fiscal policy remains a key credibility issue. During 2004 the government revised upwards the fiscal target twice to 5.3 percent of GDP from an initial level of 3.8 percent of GDP (or 3.1 percent of GDP adjusting for the effect of pension reform). Even this higher fiscal target is estimated to have been met only through additional measures of around 1.8 percent of GDP in 2004 and arbitrary postponement of expenditures into 2005. This notwithstanding, expenditures (as a share of GDP) are estimated to overrun the budgeted level by nearly 2 percent of GDP, while revenues—despite greater than expected VAT losses after accession and greater uses of tax credits in PIT—will be higher than projected in the budget by 0.4 percent of GDP. On the positive side, the fiscal position improved by roughly 1.2 percent of GDP in comparison to 2003, reflecting equally stronger revenues and lower expenditures

15 Slovakia is an opposite extreme with a proportion of 44 percent in the GDP in base prices and 40 percent in the GDP in market prices.

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(each by 0.5 percent of GDP). The budget for 2005 targets a further reduction in the deficit to 4.7 percent of GDP (3.8 percent of GDP adjusting for pension reform). Expenditure would be curtailed by 1.9 percent of GDP through more effective staff management within the public sector, a 5.5 percent nominal reduction in expenditure appropriations of central budgetary institutions, introduction of zero-base budgeting for chapter managed appropriations (0 percent growth in nominal terms), and implementation of infrastructure projects under PPP schemes (both capital and current spending will decline by 1 percent of GDP).

Additional safeguards have been built into the 2005 budget, but risks remain. A special reserve amounting to 0.5 percent of GDP has been created and new procedural safeguards – such as imposing a ceiling on appropriation of normative subsidies for social and public education purposes, introduction of possibilities for blocking, reducing or canceling appropriations by government, introduction of obligation for maintaining balance for extra-budgetary funds, and stricter control on appropriations for pharmaceutical subsidies – will be introduced. By modifying the regulatory system the government intends to limit the risk of reallocation of appropriations to operational costs within the public administration. Despite these safeguards, however, there are risks that the deficit target will again be exceeded.

33. Demography Hungary, like many other countries in the region, faces the consequences of population ageing caused by reduced fertility and mortality rates on the one hand and increasing life expectancies on the other. Total Fertility Rates (TFR) in Hungary fell from 1.81 in 1980-85 to 1.2 in 2000-2005 and is expected to increase to 1.51 by 2020-2025 (Figure III.2).16

16 TFR is the average number of children a woman is expected to have by the end of her reproductive period. Since it is measured using information from births to women aged 15-49 in a certain period, it is the average number of children a woman is expected to have between ages 15-49.

Figure III.1: General government expenditure (percent of GDP)

0

2

4

6

8

10 12 14 16

2003 2004E 2005F 2006F

454646474748484949505051

Public consumption

Social transfers other than in kind Interest

payments Subsidies

Gross fixed capital formation

Total expenditure (LHS) source: CP , December

2004

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Life expectancy at birth has been steadily rising and is expected to continue rising. Life expectancy at birth for females increased from 73 years in 1980-85 to 76 years in 2000-2005, and is projected to rise to 79.6 in 2020-2025. Likewise, life expectancy at birth for males increased from 65.3 years in 1980-85 to 67.7 years in 2000-2005, and is projected to rise to 72.1 in 2020-2025. Overall, life expectancy is projected to rise to 76.5 years in 2025, compared to 69.1 years in 1980-85 (Figure III.3).

The net result of decreasing TFR and increasing life expectancies is that the share of people aged 60 years and older, which was 18.1 percent in 1985, is projected to increase to 36.2 percent in 2025 (Figure III.4).

Figure III.2: Total Fertility Rate, Hungary, 1980-2025

0

0.5

1

1.5

2

1980-1985 1990-1995 2000-2005 2010-2015 2020-2025

TF

R

Figure III.3: Life Expectancy at birth, Hungary 1980-2025

0

10

20

30

40

50

60

70

80

90

1980-1985 1985-1990 1990-1995 1995-2000 2000-2005 2005-2010 2010-2015 2015-2020 2020-2025

Yea

rs

Male Female Total

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This will result in a dramatic “upside-down” change of the age pyramid (Figures III.5a and b).

The old age dependency ratio and total dependency ratio are also expected to rise sharply. Another challenging demographic issue is the population decline, and by 2050, there will be 8.26 million inhabitants in Hungary, almost 1.84 million less than today.17

34. Health Status The health status of the people of Hungary compares favorably with the health status of the people of the new member states of the European Union (except Malta and Cyprus), though not as favorably with the health status of the people of countries belonging to the European Union before May 1st 2004 (or EU-15). As Table III.2 shows, life expectancy in Hungary (72.59 years) is within the range of life expectancy in the new member states (70.46 to 76.52

17 Source for all data used in this section: Population Division of the Department of Economic and Social Affairs of the United Nations Secretariat, World Population Prospects: The 2004 Revision and World Urbanization Prospects: The 2003 Revision, http://esa.un.org/unpp, 11 May 2005; 10:33:11am.

Figure III.4: Hungary: Broad Age Groups (percent)

-5

5

15

25

35

45

55

65

75

1995 2000 2005 2010 2015 2020 2025

Population <15 Population 15-64 Population 60+

F igu r e II I .5 a: H u n gar y 2 0 0 5

5.14

5.44

6.47

6.62

6.92

8.84

8.32

7.19

6.28

7.43

8.09

6.49

5.36

4.03

3.31

4.06

4.42

4.71

5.66

5.84

6.15

7.86

7.43

6.50

5.80

7.06

7.98

6.69

6.03

5.29

4.79

7.78

10 8 6 4 2 0 2 4 6 8 10

0-4

5-9

10-14

15-19

20-24

25-29

30-34

35-39

40-44

45-49

50-54

55-59

60-64

65-69

70-74

75+

P er cen t age

H u ngar y 2 0 2 0

5.04

4.69

5.10

5.47

5.77

6.79

6.91

7.18

9.12

8.48

7.13

5.97

6.61

6.47

4.42

4.90

4.31

4.02

4.37

4.69

5.00

6.01

6.18

6.49

8.27

7.78

6.72

5.89

7.01

7.57

5.89

9.83

10 8 6 4 2 0 2 4 6 8 10

0-4

5-9

10-14

15-19

20-24

25-29

30-34

35-39

40-44

45-49

50-54

55-59

60-64

65-69

70-74

75+

P er cen t age

100

years), but lower than the life expectancy in EU-15 (average 79.06 years). Likewise, disability-adjusted life expectancy in Hungary is almost 7 years less than the EU-15 average. Infant deaths in Hungary – 7.29 per 1,000 live births – is also well within the range of the new member states (varying from 3.9 in the Czech Republic to 9.44 in Latvia), but is higher than the EU-15 average of 4.61. The incidence of Tuberculosis in Hungary – 24.31 per 100,000 – is much higher than the EU-15 average of 8.65 per 100,000, while the rate of clinically diagnosed AIDS – 0.2567 per 100,000 – is much lower than the EU-15 average of 1.61. Table III.2: Health Status Indicators, Hungary and other new EU Member States (2003)

a Data for 2002

Source: WHO, European Health for All Database (January 2005 update), as accessed online at http://data.euro.who.int/hfadb, on May 24th, 2005, 5pm. Tables III.3 and III.4 present the standardized death rates (SDRs) for a wide variety of causes. A comparison of the death rates from main causes between countries gives broad indications of how far the observed mortality might be reduced. SDRs in Hungary compare favorably to the other new member states, but are somewhat higher when compared with the EU-15 average. SDR from all causes in Hungary is well within the range of SDR from all causes in the new member states, but is higher than the EU-15 average of 640. Likewise, SDR from circulatory system disorders, cerebrovascular disorders, ischemic heart diseases, selected alcohol-related and smoking-related causes is higher in Hungary compared to the EU-15 average, but well within the range of new member states. Table III.3: Standardized Death Rates (per 100,000), different causes (2003) All Causes Circulatory

System Cerebro-vascular

Ischemic heart diseases

TB Alcohol Related Causes

Smoking Related Causes

Slovenia 795.49 295.29 78.76 94.37 1.05 111.42 251.08 Hungary 1047.97 508.30 134.59 232.66 2.41 149.55 491.02 Czech Republic 899.60 61.88 132.37 176.09 0.68 89.74 380.91 Estonia a 1090.58 560.35 154.06 323.00 6.10 174.29 541.74 Slovakia a 971.49 527.71 88.18 283.48 1.19 92.80 443.02 Poland a 891.55 413.89 98.57 125.78 2.33 88.95 306.79 Latvia 1113.62 593.02 206.23 291.58 8.70 160.22 566.77 Lithuania 1008.26 519.78 117.37 327.75 9.45 176.98 518.51 EU-15 average a 639.88 236.32 59.05 92.89 8.65 61.28 220.78 a Data for 2002

Source: WHO, European Health for All Database (January 2005 update), as accessed online at http://data.euro.who.int/hfadb, on May 24th, 2005, 5pm. Table III.4: Standardized Death Rates (per 100,000), different causes (2003)

Life Expectancy

Disability-adjusted life expectancy a

Infant deaths per 1000 live births

TB Incidence per 100,000

Clinically diagnosed AIDS per 100,000

Slovenia 76.52 69.50 4.04 13.77 0.3005 Hungary 72.59 64.90 7.29 24.31 0.2567 Czech Republic 75.40 68.40 3.90 10.79 0.0784 Estonia 71.24 a 64.10 5.69 a 41.15 0.7388 Slovakia 73.91 a 66.20 a 7.63 a 16.57 0.0370 Poland 74.65 a 65.80 7.52 a 25.05 0.4328 Latvia 70.46 62.80 9.44 72.51 2.4900 Lithuania 71.96 63.30 6.73 74.26 0.2606 EU-15 average 79.06 71.69 4.61 a 8.65 1.6100

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Malig-nant Neo-plasms

Trachea BronchusLung Cancer

Cancer of the Cervix

Infectious & Parasitic Disease

Respiratory System Diseases

Digestive System Diseases

Liver Diseases & Cirrhosis


Source: WHO, European Health for All Database (January 2005 update), as accessed online at http://data.euro.who.int/hfadb, on May 24th, 2005, 5pm. SDRs in Hungary due to chronic lung cancer (66.49), diseases of the digestive system (79.94) and liver diseases and cirrhosis (53.53) are the highest among new member states, and much higher than the EU-15 average. Likewise, SDRs from malignant neoplasms, and cervical cancer are higher in Hungary compared to EU-15 averages, though SDRs from infectious diseases (3.98) and diseases of the respiratory system (41.42) are lower than the EU-15 average. Overall, observed mortality can be reduced significantly in Hungary if the health system and other determinants of health are more effective in addressing health problems that account for high levels of mortality, like diseases of the circulatory system, malignant neoplasms and ischemic heart diseases.

35. Structural Characteristics of the Health System The Constitution of the Hungarian Republic guarantees all citizens the right to the highest possible level of health and social security in cases when they are unable to secure them with their own means. The current health care system of Hungary is based on the solidarity principle where contributions are derived from income and not risk. The system ensures pluralism among providers of medical services which are provided partly under contracts. Financing is based on universal health insurance; capital expenditures of the hospitals are covered by taxes. The services are operated by local governments which are the proprietors and facilitate the operation of providers who communicate with the department of administration of the Health Insurance Fund. Design and Execution of the Health Policy The National Parliament is the key decision-making player at the national level for all sectors involving health care. The parliament decides about the planned budget as well as about the final expenditures. It also decides about the annual contributions to the Fund. Most of the parliament’s decisions require a simple majority, but before a bill becomes effective, it needs to be signed by the President. The legislation in the government is coordinated by the office of the prime minister which has reference centers responsible for the coordination of sectoral administration led by chief officers. It is responsible for the administration of the national health fund. The national government executes statutory supervision of the Fund and controls the Fund. It provides capital grants for the public health sector and some tertiary services. The national government formulates the health policy and is one of the most important regulators. A

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National Health Committee was established in 1999, and is responsible for ensuring coherence of health priorities and for facilitating the implementation of health laws. The members have a 4-year mandate and are experts in various areas, representatives of associations and local governments. Since the Fund was separated from the budget, the government is no longer the main financier of health services. The government is the financial backer of the high technology sector in health care, of emergency services and medical education. It pays for the capital expenditures of local governments which have grants for the renovation of medical facilities. It transfers the hypothetical health taxes to the insurance fund to compensate for the health insurance on behalf of non-contributing groups. It also covers the costs of certain medical services and provides tax relief for the salaries of volunteers. The government directly operates some public health services through the system of national public health and medicine officer, emergency services, transfusion stations, medical education and research. The local administrations and districts are responsible for most of the health services since 1990. On the basis of contracts the local governments become owners of primary health care facilities, specialists’ ambulances and hospitals, and are the main link in providing health care. Municipalities own primary facilities and, if larger, some smaller clinics. District governments own large hospitals with prevailing secondary and tertiary care. The role of the Ministry of Health, Social Affairs and Family is to execute the health, social and family policy of the state and to provide direction to the Fund. Its entrusted areas include hygiene, prevention and public health. Its responsibilities include licensing and inspection of provided services. It operates the national emergency service, the national blood program, professional training/education and 6 state hospitals. It is responsible for primary medical education. The Medicine Research Committee provides advisory services for the ministry of health, and coordinates research activities of the government. The National Public Health and Medical Services Office is an administrative agency. It is responsible for executing state tasks, and it implements a unified system of medical administration in public health and epidemiology, regulatory licensing, supervision of the professional sector, monitoring, control and supervision of prevention, and training in health care. There are three professional chambers, including the medical chamber, pharmaceutical chamber and chamber of nurses and paramedical staff. These chambers defend professional interests, and monitor the growth of the standard of medical and pharmaceutical care. Medical education is provided through 37 medical colleges, 3 pharmaceutical colleges and 2 nurse schools. Financed by the ministry of health, these colleges are also research centers and scientific institutions. Primary Care Since 1992 primary health care is provided by family doctors. Citizens may choose their doctor freely, irrespective of their place of residence. The family physicians are remunerated according to the number of patients they serve and are hence motivated to keep their patients. This element of competition contributes to increasing the quality of the services provided. The family doctor should provide the patient as much care as possible before referring him/her to a specialist. The organization of the network follows the principle of responsibility of the local self-government for health care. The network consists of providers owned by the local administration, although in most cases there is functional privatization, i.e. the local self-

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government outsource an activity to non-state and private physicians while retaining the outpatient premises and their equipment in its ownership and bearing responsibility for capital expenditures. The local self-government is also primarily responsible for the selection of provider - if it decides to include a provider in the network, the Fund automatically concludes a contract with the provider. Table III.5: Composition of Primary Care Provision

1999 2000 2001 2002 2003 Family doctor’s services total 66 297 65 966 66 379 66 791 68 787 Adult and mixed services 52 996 53 292 53 794 54 762 56 114 Pediatrician services 10 978 10 504 10 501 10 046 10 540 Central emergency services 2 323 2 170 2 084 1 983 2 133Outpatient services total 56 598 58 775 61 469 64 166 64 868 Clinical professions 38 492 39 779 40 165 41 258 41 657 Diagnostics 16 970 17 754 19 385 20 824 21 143 Laboratory diagnostic 10 182 10 858 12 218 12 982 13 176 Imaging diagnostics 5 696 5 804 6 008 6 599 6 681 Pathology and morbid histology 1 092 1 092 1 159 1 243 1 285 Other diagnostics and therapies 1 136 1 242 1 919 2 084 2 068Inpatient services total 2 556 2 610 2 655 2 708 2 749 Active inpatient services 2 374 2 423 2 463 2 520 2 559 Chronic inpatient services 182 187 192 188 190Source: Bureau of Statistics of the Hungarian Republic, various years In primary care (‘home doctors’) the local self-government draws ‘precincts’ for first-contact physicians. The precincts are rigid and have not changed since the law was enacted. In order to ensure free access to market changes were made which support free choice of doctor for the patient and enable every first-contact physician to open a practice. Once the requirement of having at least 200 patients is met the Fund must conclude a contract with the physician (note – a practice becomes profitable with 1200 to 1500 patients). At a relatively low sensitivity of the patients to the change of doctor, however, the precincts remain an important part of the system. Firstly, they form a security network, because a doctor is never allowed to refuse a patient from his own precinct. Secondly, the law allowed the “sale of practice”. The “sale of practice” only applies to those who were chosen by the local self-government to provide health care (i.e. those with a precinct) and does not apply to those who entered the system later after the market was liberalized and have no precinct. Another provider may only enter a precinct by reaching an agreement with the local self-government and buys local health care provision monopoly from one of the current precinct physicians. The intention behind this arrangement was to increase the reputation of home doctors and reduce their average age because the older generations of doctors were self-employed and hence not required to retire at a certain age. Therefore the access to the market of precinct physicians was completely closed. It was a privilege reserved to those who had already been in the system. Hungary also applies the model of Managed Health Care under which the Fund enters into contracts with providers of health services. The system is currently used by 298 family doctors for 2 million inhabitants. On the basis of contracts the local self-governments become owners of primary care facilities and hospitals and are one of the crucial elements in providing health care.

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Outpatient Care Outpatient care is divided into general and specialized outpatient care. General outpatient care is provided close to the place of residence, on referral of a family doctor, and is rather sporadic. Specialized outpatient care is aimed at treating diseases which require extraordinary diagnostic support. It focuses on out-patient care and relieves hospitals by providing one-day surgery. It also includes specialized home care provided by qualified nurses at home. Specialists are also organized by the local self-government. In 1996 the law specified a limit of performance as the number of hours of a specialist in the territory of the local self-government. The centrally defined formula specified how many services of what type the local self-government was to order with specialists. The law was repealed in 2001 but the mechanism of ordering by hour remained the ‘status quo’. Table III.6: Outpatient Services

1999 2000 2001 2002 2003 Outpatient services total 104 98 103 114 83 Clinical professions 106 98 101 113 71 Diagnostics 101 110 112 115 99 Laboratory diagnostic 102 114 114 116 99 Imaging diagnostics 97 90 102 110 99 Pathology and morbid histology 90 79 88 109 90 Other diagnostics and therapies 101 56 52 126 88 Outpatient services total 110 94 98 109 82 Clinical professions 106 95 101 110 70 Diagnostics 122 105 102 107 98 Laboratory diagnostics 136 106 101 109 98 Imaging diagnostics 98 88 99 100 98 Pathology and morbid histology 102 79 83 102 87 Other diagnostics and therapies 96 52 34 116 89 Source: Bureau of Statistics of the Hungarian Republic, various years Inpatient Care Hospital care is provided on three levels: (i) district hospitals with basic departments and a range of 25 – 30 km; (ii) local self-government hospitals – operated as large regional centers with specialized care; and (iii) national health institutes and university centers, which mainly provide tertiary care. Owners of the hospitals are local governments, the national government (university hospitals), churches and charities. One hospital has on average 458 beds. In terms of organization, the law specifies the number of beds and their structure that the local self-government has to operate. The hours of specialists and hospital beds are defined by an upper limit. The local administration has the power to reduce the number of beds and the network of hospitals but every such decision is subject to approval of ANTSZ. Establishment of a new facility and beds must be approved by both, the Ministries of Health and of Finance.

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36. Health Financing Health care expenditures accounted for 6.7 percent of the GDP in 2004, down from 7 percent in 2003. Public expenditures on healthcare accounted for 69 percent of total health expenditures (equivalent to 4.6 percent of GDP), while private expenditures accounted for the remaining 31 percent (equivalent to 2.1 percent of GDP), a ratio that is somewhat lower than the EU15 average of 78 percent public and 22 percent private (Figure III.6).

Figure III.6: Public and Private Expenditures on Health

6.76.2 6.2 6.3 6.1 6.2 6.5 7.0

02468

1997 1998 1999 2000 2001 2002 2003 2004e

perc

ent

of G

DP

Public expenditures as % of GDP Private expenditures as % of GDP

Health Expenditures as % of GDP

Source: Bureau of Statistics of the Hungarian Republic, various years Public funding is channeled through the Health Insurance Fund (hereinafter referred to as “The Fund”), which is responsible not only for benefits in kind in health care, but also for cash benefits for sick-pay and some types of pensions (like disability). In 2004 the Health Fund spent HUF 946 billion on healthcare benefits in kind and paid HUF 422 million on benefits in cash. Revenues of the Health Fund have consistently been below expenditures, but the gap has grown considerably in the last two years. In 2003, expenditures exceeded revenues by over HUF 300 billion, equivalent to 1.6 percent of GDP. There was marginal improvement in 2004, with expenditures exceeding revenues by around HUF 277 billion, or 1.3 percent of GDP (Figure III.7).

Figure III.7: F iscal Position of the Health System

-0.2-0.4 -0.5

-1.6

-1.3

-0.7-0.7-0.5

0

2

4

6

8

1997 1998 1999 2000 2001 2002 2003 2004e

perc

ent

of G

DP

-2

-1.5

-1

-0.5

0

perc

ent

of G

DP

HIF Revenues (left axis) HIF Expenditures (left axis) Deficit (right axis)

Source: Bureau of Statistics of the Hungarian Republic, various years

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Debt settlement The government attempts to consolidate the health care and pays the accrued debts directly through hospitals. In his stabilization package, the then-Finance Minister Lajos Bokros tried to introduce hard budgetary restrictions, but subsequent governments eliminated the effects of this effort by a package of debt discharges. In effect, therefore, those who tried to save and not create more debt were actually punished. Eventually the government decided that hospitals will receive financial aid from the Fund in the form of a loan, to be paid by the hospitals later by offsetting against the payments from the Fund. This system is currently in operation. The fund operates as the hospitals’ creditor. The debt of hospitals is approximately HUF 50 billion. The debt of OEP is HUF 300 billion (the 2002 deficit reached HUF 100 billion). This debt does not arise by failure to pay for health care itself, but by outstanding payments for drugs and sickness allowances.

36.1 Public Financing of the Health System Provisions in kind In the past 15 years the system of health financing in Hungary has transformed from a centrally-controlled budget-supported model to a Bismarckian model of universal health insurance .18 All citizens are insured and contribute to the Health Insurance Fund (hereinafter ‘the Fund’) established as part of the social health insurance scheme. Citizens contributing to the Fund include: (i) employees; (ii) non-contributors, i.e., pensioners, women on maternity leave, low-income households, etc.; (iii) voluntarily insured foreigners; and (iv) others. Universal coverage of the population is ensured by these categories, with only 1 percent of the population remaining uncovered. Table III.7: Parameters of the Health Insurance System 1999 2000 2001 2002 2003 2004e Employer’s contribution as a percentage of total wages 11 11 11 11 11 11 Upper limit of employer’s contribution none none none none none none Employee’s contribution as a percentage of total wages 3 3 3 3 3 4 Upper limit of employee’s contribution, HUF per day 5,080 5,520 none none none none Upper limit of employee’s contribution, HUF per year 1,854,200 2,014,800 none none none none Percentage of hypothecated health care tax 11 11 11 11 11 11 Fixed amount of hypothecated health care tax in HUF /month/ person 3,600 3,900 4,200 4,500 3,450 3,450 Source: Bureau of Statistics of the Hungarian Republic, various years; e…estimate; The amount of the contribution to the Fund is determined on a proportional basis by the parliament, and is defined as a percentage of the gross salary for the first group of contributors

18 In 1987 the Ministry of social affairs and health announced the beginning of the reform and the insurance fund was separated from the state budget. The foundations of the current system were laid at the end of the 1980’s following changes in the political and economic system of the communist era. The 1989 Constitution declares Hungary a social-market economy, where private and public sectors had the same value. (Right to healthy environment, certain level of mental and physical health…)

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– employees and employers. Employees contribute 3 percent and employers 11 percent of the gross salary (Table III.7). Until 2000 there was an upper limit to the employee’s contribution, of HUF 5,080/5520 per month, but this limit was abolished in 2001. The government pays on behalf of the second group – the non-contributors – by transfers from tax revenues to the Fund (hypothecated health care tax). The third group of the self-employed and volunteers contribute a percentage of the minimum salary. In 1994, the hypothecated health care tax (“health tax”) was introduced. Health tax is paid by every employer on behalf of their employee as a fixed amount. This tax was later extended to all types of income which had earlier been exempt from health care taxation. Health tax was introduced by a specific law, not through the system of health insurance, since the Hungarian Constitutional Court ruled some measures of the ‘Bokros package’ unconstitutional. The Constitutional Court argued that health insurance was an insurance contract and towards citizens the state was not free to change its terms arbitrarily – including the extent of free health care. On the other hand, the Constitutional Court did not apply the same reasoning to tax cuts, and so the government did not use the health insurance act to raise funding but opted for a special “tax” law instead.19 Table III.8: Revenues of the Fund

1997 1998 1999 2000 2001 2002 2003 2004e TOTAL REVENUES 499,487 561,461 653,597 734,584 884,697 1,024,575 1,025,437 1,115,898 Revenues and Contribution 471,812 534,078 591,237 653,715 762,402 883,681 927,665 1,052,428 Employers health insurance contribution 323,483 370,621 344,570 373,047 441,869 517,978 580,650 635,284 Employees health insurance contribution 62,474 62,662 76,355 81,314 105,592 128,575 142,717 207,217 Health Tax Contribution 71,974 92,592 156,786 181,379 194,664 209,875 173,315 176,935 Employers sick pay contribution 7,658 n/a 12,348 13,387 14,625 18,066 21,383 23,177 Others 6,223 8,203 1,178 4,588 5,652 9,187 9,600 9,815 Central budgetary contributions 2,500 2,500 30,290 70,872 103,928 135,885 85,988 57,619 Other revenues 15,315 4,590 3,176 2,635 15,680 3,473 9,982 4,761 Revenues from property sales 8,200 1,925 24,385 3,885 866 75 55 35 Revenues used for operations 1,660 2,874 4,509 3,477 1,821 1,461 1,747 1,055 Revenues from arrears collection 0 15,494 0 0 0 0 0 0

Source: Bureau of Statistics of the Hungarian Republic, various years; e…estimate; Health insurance premiums are the chief source of revenue for Health Fund, followed by central budgetary contributions, though they show a sharp decline in 2003 (Table III.8). Despite all the parametric changes and a minor paradigmatic change (introduction of health tax) the system suffers from huge arrears, with the health insurance fund generating deficits year after year. The Fund is responsible also for the sickness pay and other parts of social insurance system (disability pensions) and these cash benefits are paid from health insurance.

19 This Constitutional Court ruling set a precedent which has substantially limited attempts to reduce freely provided health care, although the current government indicated such intentions in the Government Manifesto.

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The deficit is generated mainly in the sickness insurance area. The largest debtor of the Fund is the state (on behalf of the second group of citizens). Investments Health financing channeled through the dual system as described above has also meant that that the medical services and current expenditures get financed by the Fund and the capital expenditures (investments) get financed from the budgets of the individual governments. Investment costs are always paid by the founder/owner, which for the budget-financed organizations is the state budget, for self-governmental facilities the local self-government and for private companies the private owners or investors. Since health care is organized on local self-government basis, as much as 90 percent of the total capital investments are paid by local self-governments. The local self-government is the owner of the majority of outpatient and other medical facilities and is therefore responsible for all investments into instruments and equipment. Meantime, the real operator of health care can be fully private (‘functional privatization’). Local governments draw the funds for capital expenditures from: (i) tax revenue transfers (mainly income tax); (ii) local taxes; (iii) target subsidy revenues (e.g. Grants for equipment and instruments); and (iv) capital grants from the Ministry of Health (conditional and matching grants). This formulation makes taxes the most important source of long-term investments (reconstruction of buildings, equipment and instruments, other investments) into the health care system in Hungary. The greatest weakness of this system is the inefficient allocation of resources and the issues related to centralized management. MOH defends this system arguing that the providers are unevenly located geographically and that in some areas the discrepancy between the needs and the supply of medical services can only be be corrected by direct ministerial intervention. On the other hand, this construction of capital expenditure system does not permit the entry of private capital because payments from the Fund do not include amortization. The private sector has very limited access to capital expenditures. The political control over the distribution of capital expenditures is a natural attractor of lobbyist groups, and these factors combined lead to an excessive price of the procured investments and failures of allocation in both geographical and functional terms.

36.2 Private Financing of the Health System Private sources in Hungary account for approximately 31 percent of health care expenditures, while the major share (69 percent) of total direct payments has the form of a co-payment towards pharmaceutical products and therapeutic appliances (Table III.9). Direct payments of the population are divided into three categories: (i) fees for services not covered by the Fund; (ii) direct co-payment for services partly reimbursed by the Fund; and (iii) informal payments, or the ‘envelope fees’.

109

Table III.9: Annual Per Capita Expenditures on Health, 2000 (HUF)

First

Quintile Second

Quintile Third

Quintile Fourth

Quintile Fifth

Quintile Total Items 6,245 9,602 13,544 17,325 21,873 13,719 Medical products, appliances and equipment 4,501 7,270 10,170 12,528 14,167 9,727 Pharmaceutical products 4,005 6,511 8,970 10,722 11,458 8,333 Other medical products 51 44 112 89 131 86 Therapeutic appliances and equipment 444 715 1,088 1,716 2,577 1,308 Outpatient services 1,602 2,181 3,234 4,509 7,490 3,803 Medical services 533 567 816 1,490 1,850 1,051 Dental services 1,037 1,503 2,283 2,822 5,312 2,591 Paramedical services 32 112 135 198 328 161 Hospital services 143 151 150 288 217 190 TOTAL 206,738 266,783 323,979 395,240 610,697 360,668 Health consumption as percent of total consumption 3.0 3.6 4.2 4.4 3.6 3.8

Source: Bureau of Statistics of the Hungarian Republic, various years Out of pocket expenditures not covered by the Fund, or services excluded from health insurance, include payments for pharmaceuticals, therapeutic appliances, medical aids, prostheses, prosthodontics, some dental services, spa care, and “hotel” services of medical facilities, aesthetic surgery and other non-indicated medical treatments. The second group – or direct co-payment – depends on the health care provider. These may operate on the basis of contracts with the Fund or as private entities that do not have a contract. The services are reimbursed from the Fund when provided on a contractor basis and are paid by the patient when provided by a physician without a contract. Officially, co-payment does not exist in the primary, secondary and tertiary domains. Providers, however, may bill the patients for “above-the-standard services” which is awkward, because “the standard” is not defined in the law. This leaves the provider with a lot of discretion of determining what constitutes extra service and what does not. The second legal direct payment is what is paid to the provider for visits without a referral. In such case the whole cost of the provided medical care is borne by the patient. The price of drugs and medical aids is agreed every year between the Fund and the producers, and is either specified as a percentage of the market price, or as a fixed amount. Here it is also significant whether a pharmacy has a contract. The services partially paid by the patient also include long-term chronic illness treatment (HUF 400 per day). The third group of out-of-pocket payments is the informal payments. These are sometimes called ‘envelope fees’, or bribes. The amount of informal payments of the population is a controversial item. National health care accounts (OECD methodology) deny the existence of informal payments. There are various sources of data which differ in the determination of the amount and proportion of informal payments. Estimates of informal payments vary, and are usually considered to be between HUF 25 to 50 billion, equivalent to 2.5 to 4.5 percent of total health care expenditures. As much as 90 percent of the gratitude money goes to physicians and only 10 percent to nurses and other paramedical staff. The distribution of the gratitude money is not symmetric even among various professions of physicians. Only 30,000 of the total 43,000 physicians can receive it (technical and laboratory professions are excluded) and among those who can receive such payments, two-thirds goes to specialists and one-thirds to family doctors. In some cases, these informal payments amount to as much as 60 to 200 percent of the net income of a specialist or 70 to 250 percent of the net income of a

110

family doctor. There are also regional differences (with these gratitude payments higher in Budapest) and in the hierarchy of physicians in hospitals (head physician versus attending physicians). The last component of private financing sources is the nascent private supplementary insurance. Since 1993, when the necessary legislative framework was created, voluntary insurance funds have been gradually on the rise. In 2000 this form of financing accounted for 1 percent of private health care spending.

37. Structure of Health Expenditures As discussed earlier, the Health Fund is responsible not only for benefits in kind in health care, but also for cash benefits for sick-pay and some types of pensions (like disability). Overtime, the proportion of the Health Fund’s expenditures on provision in cash has increased at the expense of provisions in kind, such that while in 1997 the benefits in kind amounted more than 70 percent of all expenditures, in 2004 benefits in kind are lower than 68 percent. In the same time period, the weight of provisions in cash rose from 25.5 to 30.3 percent. Table III.10 presents the complete picture of public expenditures on health in Hungary. Table III.10: Expenditures of the Fund 1997 1998 1999 2000 2001 2002 2003 2004e TOTAL EXPENDITURES 555 586 632 052 701 290 798 199 914 976 1 111 232 1 325 550 1 393 650 Provisions in kind 389 964 458 449 504 069 556 016 623 358 750 326 910 236 946 521 Curative-preventive health provisions 265 779 299 092 338 877 376 069 410 304 502 852 622 766 657 068 GPs’ and GPs’ emergency

service 35 355 36 608 41 138 45 453 58 106 59 572 MCH service, mother,

child and youth care 7 816 8 334 9 235 9 978 13 790 14 148 Dental care 9 679 10 410 12 076 16 199 20 496 21 144

Service of dispensaries 7 269 8 157 9 501 8 616 10 107 10 465 Transport of patients and corpses on medical order 3 451 3 687 4 174 4 812 6 014 23 594

Outpatient special care 46 608 51 620 61 260 72 923 96 529 102 425 CT, MRI 6 484 7 058 7 842 8 492 10 735 10 519

Kidney dialysis 8 736 10 143 11 606 13 061 15 896 16 119 Home special nursing 1 120 1 274 1 463 1 587 2 236 3 134

Inpatient care 211 456 222 795 249 944 294 576 373 832 379 100 Others 712 15 782 1 797 26 923 15 027 16 848

Balneological services, breast milk supply 1 574 2 010 2 445 3 235 4 071 4 347 4740 6024 Subsidization of Medicaments 100 876 135 474 139 461 150 753 179 465 209 033 241 972 238 905 Subsidization of therapeutic equipments 16 782 19 618 20 589 22 668 25 002 28 915 34 957 37 997 Refunding of travel expenses 2 561 2 255 2 697 3 291 3 836 4 274 4 750 4 906 Expenses resulting from international agreements n/a 0 0 0 680 905 1 051 1 622 Provisions in cash and retirement provision 141 809 149 657 174 739 221 061 270 772 335 753 386 383 422 710 Retirement provision (disability and accident disability pensions) 97 982 99 927 115 949 132 243 157 964 194 284 213 888 238 617 Sick pay 36 138 41 255 49 205 56 140 64 206 80 864 98 936 101 480 Child care fee 0 0 0 20 381 29 646 37 807 45 589 53 019 Pregnancy and 6 013 6 924 7 768 10 047 12 470 15 777 20 207 21 348

111

confinement benefit

Accident benefit n/a n/a n/a n/a 4 249 4 986 5 605 5 911 Others 1 676 1 551 1 817 2 251 6 486 7 021 2 158 2 335 Other expenditures 4 803 2 614 3 219 3 290 2 156 2 631 4 791 3 573 Asset management n/a 141 n/a n/a 564 531 413 16 Operational costs 19 010 21 332 19 263 17 832 18 126 21 991 23 726 20 830

Source: Bureau of Statistics of the Hungarian Republic, various years Health expenditures – i.e., those classified as expenditures on “provision in kind” – are dominated by expenditures on inpatient care and on subsidizing pharmaceuticals and medical equipment. Expenditures on inpatient care have fallen marginally from 41.9 percent of total public expenditures on health in 1999 to 41 percent in 2003 and are expected to be around 40 percent in 2004. Likewise, expenditures on pharmaceuticals have fallen marginally from 31.8 percent of total public expenditures on health to 30.4 percent in 2003 and are expected to be 29.3 percent in 2004 (Figure III.8).

Figure III.8: S tructure of Public Expenditures on Health

0%

20%

40%

60%

80%

100%

1999 2000 2001 2002 2003 2004e

Others

Outpatient Primary Care (includingdental)

Outpatient Specialist care

Subsidization of Drugs and Medicalequipment

Inpatient Care

The Health insurance fund is divided into more than twenty sub-budgets (kaszas) according to the type of provided services. These sub-budgets are unified on the national level, and are not mirrored on the regional level. Every year the National Assembly specifies a (prospective) ceiling for each sub-budget and the system of methods of payment to the providers guarantees that the ceiling will not be exceeded. The sub-budgets are sequestered and no transfers between them are possible. The only exceptions are the pharmaceutical budget, into which (since 1999) the Minister of Health may reallocate resources from the sub-budgets to cover excessive expenditures of the pharmaceutical budget, and the benefits in cash “kasza”, whose expenditures and deficits can be covered from health insurance and the state budget. Providers of medical services need to conclude contracts with the Fund in order to get reimbursed for the services provided to the insurees. The contracts define the capacities of the providers in acute or chronic hospital beds, consulting hours of outpatient specialists, etc. On the basis of these contracts individual health care providers receive reimbursement from the sub-budgets using several methods. The reform process in the 90’s brought many changes to hospital and outpatient care. The payment system was initially built on the performance principle and payment mechanisms focused on the type of service instead of type of institution. In 1992 a capitation system was introduced for family physicians and in 1993 a

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point-based catalog for outpatient specialists was followed by DRG payments for acute hospital care and payments for hospitalization days in chronic care. Primare Care Primary care is provided by family doctors. These may conclude a contract with the Fund or the local government or they can operate a private practice. Private practitioners without a contract with a Fund are financed by direct payments of the patients for the provided services, while the fees are not regulated by state. Table III.11 presents the expenditures of the Health Fund on primary care. Table III.11: Expenditures of the Health Fund on Primary Care (HUF million) 1999 2000 2001 2002 2003 2004e Curative-preventive provisions in kind 338 683 375 869 410 036 502 622 622 766 657 068 GPs’ and GPs’ emergency service 35 355 36 608 41 138 45 453 58 106 59 572 Financing of practice 31 288 32 416 36 276 40 275 51 572 54 164 Fixed amount 7 352 7 558 8 178 8 445 10 941 Area allowance 432 434 585 2 247 2 250 Performance remuneration ("card money") 23 504 24 425 27 513 29 583 38 381 54 164 Remuneration of episodic care 249 256 330 368 468 477 Duty service 3 818 3 936 4 532 4 810 6 065 6 431 Source: Bureau of Statistics of the Hungarian Republic, various years Contract physicians are paid on the basis of capitation which was introduced as a payment mechanism in 1992. Citizens can choose their family physician freely and the number of registered citizens is the basis for basic financing. The income of general practitioners consists of the capitation payment for the patient and a fixed amount depending on the size of the practice, and a payment for visits of non-registered patients. The capitation payment is based on the number of registered patients. The patient list must be regularly updated and adjusted to the age structure of the registered, and the profession and practical experience of the family physicians. The population is divided into 5 groups and different levels of points are allocated to each age group:

• infants aged 0 – 4 years: 4.5 points • children aged 5 – 14 years: 2.5 points • persons aged 15 – 34 years: 1 point • 35 – 60 years: 1.5 points • more than 60 years: 2.5 points

Above a specified level (2400 points for adults or children, 2600 for mixed practice) the family doctor does not receive a full value of the capitation. The total number of points is multiplied by a coefficient depending on the expertise and experience of the physician (1.2 if the physician has a relevant qualification, 1.1 if the physician does not have relevant qualification but has 25 years of experience in primary medicine, and so on). If the physicians have contracts directly with the Fund, they receive payments from the Fund; if the physicians are employed by local governments, however, the Fund transfers payments to these governments which then pay the physicians.

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Specialized Outpatient Care The majority of specialized outpatient services are reimbursed by a point-based system. Every procedure is assigned a number of points depending on its experience requirements and resource intensity. Specialists report the number of points monthly to the appropriate Fund authority. Before 2000 the performance points were added up on the national level and the monthly value of the point was calculated as the quotient of a pre-determined budget divided by the total number of points. The payment was then determined as the product of the adjusted point value and the number of ‘collected’ points. From the second half of 2000, the point value is defined as a fixed preliminary amount. A part of the sub-budget is laid aside at the beginning of the year to compensate for performance growth and seasonal differences. The value of the point is only recalculated when these reserves are spent. Hospital Care In-patient services are refunded according to the individual types of cases: a prospective payment system based on DRG is employed for the reimbursement of most acute care and rehabilitation, except for some tertiary care services that are paid by the national government. High-cost cases – like bone marrow transplants – are financed on a per-case basis. Chronic, long-term care is paid by the number of days of hospitalization. Table III.12 presents the expenditures of the Health Fund on inpatient care. Table III.12: Expenditures of the Fund on Inpatient Care (HUF million) 1999 2000 2001 2002 2003 2004e Inpatient care 211 456 222 795 249 944 294 576 373 832 379 100 Acute inpatient care 182 477 191 141 214 863 254 713 327 211 327 526 Task financed under special rules 7 063 7 802 8 303 10 369 10 591 13 538 Chronic inpatient care 21 132 22 949 25 754 28 359 34 854 39 623 Other 718 753 805 860 953 1 113 Extra financing 65 150 218 275 222 300 Source: Bureau of Statistics of the Hungarian Republic, various years The basic principle of the DRG system is that it classifies the individual cases in a manageable number of categories derived from complexity and costs. The current Hungarian version of DRG (homogenous disease groups – HDG) contains 736 categories. Each has its weight or number of points which is higher for more demanding and costly cases. Every month the hospitals report executed cases which are classified using the DRG system at the Information Center for Health Care, the administrator of the system. The second important element of DRG in addition to the relative weights is the standard day, which is used to determine the length of hospitalization. Every DRG group has a lower and upper limit for the length of stay in hospital, expressed as the minimum and maximum number of days spent in the hospital. The lower level is important to prevent under-treatment. The upper level enables an increase of the DRG payment. The payment for a patient who spends less than the minimum limit in the hospital is not refunded fully, but at 80 percent only. For many of these reasons, the Hungarian system has a tendency to overproduce while minimizing costs and providers have all incentives to reduce the length of stay of patients to as close as possible to the lower limit for hospitalization. The hospitals are paid monthly by the Fund according to the total number of DRG points multiplied by the monetary value of the point (nation-wide fee). This value is determined by the Fund preliminarily at the beginning of the year and applies to all hospitals equally. Part of the sub-budget is held aside to compensate for performance growth and seasonal differences.

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The value of the point is only adjusted when these reserves are spent – just like in the system for specialists.20 At the beginning of 2004 a new mechanism was introduced in hospital and specialized outpatient care. In this system, providers receive only a full-value refund for 98 percent of their performance in the previous year, 60 percent for performance exceeding this level by 5 percent, 30 percent for performance exceeding the level by 5-10 percent, and only 10 percent of the monetary value of the point for any services exceeding the benchmark by more than 10 percent. Expenditures on Pharmaceuticals The pharmaceutical industry is mostly privatized and several large pharmaceutical companies have gained prominence. Approximately 2,000 pharmacies, owned by professional pharmacists, operate on the Hungarian market. According to WHO Hungary annually spends $280 per citizen on drugs, more than UK ($240) and the Czech Republic ($242). The prices of drugs continue to grow: in 2002 the price of drugs increased by 6.2 percent and in 2003 by 3.6 percent. Spending on drugs decreased on the previous year after a one-time hard-hitting administrative measure was adopted by the ministry, reducing payments for drugs by 15 percent across the board. Coverage of drugs by health insurance has two forms. The Fund pays a percentage of the drug’s price, ranging between 10 and 100 percent of the price. There is also a system of fixed coverage based on a nominal HUF value. A special commission at the Ministry of Health decides how much of the price will be covered by insurance, a decision which is subsequently issued as a government decree. In cases where the commission specifies a percentage of the price, it also specifies the retail price. The percentage-based system of refunds from health insurance leads to a higher consumption of more expensive drugs – and higher margins in the logistic chain. About 500,000 persons get drugs for free under the ‘Kozgyogyellátás’ system, which establishes public provision of drugs and aids for selected groups of citizens. This system gives some groups of people access to drugs and medical aids for free, even if they would normally have to be paid for in full. The local self-government decides who will be included in the group and issues a special identification document. This system naturally leads to a huge abuse of resources because the identification documents are used to obtain prescription drugs for friends and family members. The drugs policy is one of the weakest links of the Hungarian health care. It is the only Fund sub-budget without a macro limit. The other sub-budgets for primary care, secondary care and hospitals have limits and are obliged to create reserves throughout the accounting period. When the reserves are not sufficient, and this happens every year, the ministry responds by decreasing the value of the point system as well as of the DRG base rate price, so that the planned budget of the sub-budget is met. Drugs, however, have no capped budget and regularly cause Fund deficits, which the government then pays from the state budget.21 The

20 A major disadvantage of this system is that DRGs do not include amortization and so the relative weights do not reflect wear and tear on instruments or dissolving production to fixed costs. To this extent, the DRG system does not reflect the break-even point in producing individual diagnoses. 21 The greatest strength of the drugs policy is that it provides the Fund total control of the drugs chain from prescription of the drug, using a unique and special prescription form, to its issue and refund. The Fund knows

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second reason for a permanent deficit of the drugs ‘treasury’ is the introduction of new products and drugs to the market. Every drug released on the internal market must be registered with the National Institute of Pharmacy, but this registration does not provide for any controls. New drugs increase the prices, and where refunds are percentage-based, the financial burden for health insurance increases too.

38. Conclusion The main channel of health financing in the Hungarian system is the Health Insurance Fund which, for a number of reasons, has been in deficit for several years now. The Fund has no real responsibility, it only distributes resources. Health insurance is administrated solely by the Fund. Collection of premiums, however, is performed on behalf of the Fund by the tax authorities. All non-eligible insurance payers pay their contributions to the tax authorities from where the resources are transferred to the Fund. The collection rate of insurance premiums is rather low, with poor application of receivables management and controlling, leading to high amounts of claims and unpaid premiums. On the side of premium collection, the Fund remains passive and depends on the success rate of the tax authorities. The Fund is not responsible for unpaid premiums or the arising deficit, and all deficits are covered by the state budget. The Fund is effectively a re-distributor of public resources without the necessary motivation for rational and efficient purchasing of health care. The health care system as a whole faces even more fatal consequences. The Fund becomes the administrator of the system. Health care is not purchased efficiently, it is only paid regularly. Clearly, the health system will continue to generate debts upwards of 1% of GDP if no stabilization measures are introduced. Furthermore, these measures need to either have a systemic focus or be accompanied by systemic changes if they are to be potentially sustainable beyond the immediate short run. First and foremost, the health insurance and the sickness insurance activities need to be separated on both revenue as well as expenditure sides, as there are no logical cross-subsidization mechanisms between the two. It is also a question whether the Fund has enough administrative capacity to handle both, the payments in benefits in cash and also the ability to effectively purchase health care services. Second, the current dual system of financing – in which the Health Fund provides the running expenditures and the state budget supports capital expenditures – should be abolished. This dual system is one of the main reasons why no private investors enter the health market, because the DRGs in the hospital sector do not cover amortization, which will thus leave the private hospitals without recourse to any funding to cover depreciation. In many ways, therefore, the dual system de-motivates the private providers and investors. In fact, capital expenditures could perhaps be transferred from the state budget to the Health Fund, though this may have implications for the role and responsibility of the municipalities in the health care system. Third, legal copayments need to be introduced in primary, secondary and tertiary care and for prescriptions in order to instill a greater sense of responsibility among people for their own health. Patients are already making informal copayments, and it is important that these copayments are legalized and the structure changed so that the effect of this is felt through the public system of health care provision. Instead of being accompanied by exceptions, which

who drew the prescription, to whom it was drawn, when and where it was used by the patient, and when the Fund paid for it.

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are difficult to manage, the introduction of copayments should be accompanied by special allowances for the poor and the vulnerable from the Social Security System. Fourth, a limit needs to be set for the pharmaceuticals sub-budget, the only one currently without a macro limit. Like the other sub-budgets, the pharmaceutical sub-budget should also be obliged to create reserves throughout the accounting period. Further, the current system of subsidizing drugs based on percentages sets in place incentives for the more expensive drugs to be prescribed and consumed. The percentage system of reimbursement should be replaced by an absolute limit, which will correct the incentive framework. And finally, the current system of providing free drugs for selected groups of citizens under the ‘Kozgyogyellátás’ system should be done away with, given the widespread misuse of this privilege. Instead, as is suggested in the case of copayments, special allowances could be given to the poor and vulnerable, which will serve the same purpose but eliminate at least one possibility of misuse. Fifth, there is an urgent need to realign incentives in the management of hospitals so as to enhance accountability and improve efficiency. Presently, expenses on inpatient care in Hungary are high and hospitals have few incentives to focus on efficiency. The rules governing the administration of hospitals leave the managers with little desire to change anything and little room for experimentation. This arrangement is unsatisfactory for a variety of reasons, including the non-responsiveness to the changing demands of the user-population, and the lack of any accountability of the management of the hospital. Granting the facilities greater administrative, personnel, financial and operational autonomy is a necessary first step in improving efficiency and creating a basis for accountability. The autonomy would permit the hospitals to have greater freedom to manage health production and delivery, innovate and determine local priorities, determine the balance and pattern of services to be provided for local communities from within available resources, and determine the most cost effective configuration of services. At the same time, greater autonomy would facilitate the involvement of hospitals in contributing more meaningfully to the shaping of national policies and priorities, developing new models of service delivery in partnership with the primary care, community care and social care sectors, and be in a fair “competitive” environment with other hospital providers, including private sector providers.

Summary Hungary’s health care system is in a crisis, both on account of expenditure overruns year after year, creating huge debts in public financing, and on account of the continuing poor status of the people of Hungary relative to other countries in the EU8. In order to address the deep-rooted structural problems, a set of immediate stabilizing measures and more systemic structural measures need to be put in place to guide the health system toward a better fiscal and health status outcome. Some of these directions of reform are outlined above. The latest Government manifesto also speaks about effective, better healthcare, based on solidarity principles with respect to market mechanisms. Strengthening patient rights is given a priority in the government’s approach, which also recognizes the importance of enhancing managerial and decision-making decentralization, eradicating informal payments and perhaps even redefining the minimal health benefit package As regards health status, the Hungarian government has prepared a multidisciplinary and intersectoral strategic program (“Johan Béla National Program for the Decade of Health”) in the area of public health to fill the gap between Hungary and EU15 countries in life expectancy, which was passed by the Hungarian parliament in 2003. This program aims at

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primary prevention and control of the burden of most frequent chronic diseases, such as cardiovascular diseases, tumors, mental and locomotor diseases. The main health priority identified in the government program is cancer, and emphasis is laid on improving both the diagnostics and the therapy. Cardiovascular diseases are also recognized as a problem area, and the enlargement of the network of heart catheter labs is proposed.

Latvia 39. Introduction

Latvia is a small urbanized country with a population of 2.3 million (2004), located in the middle of the three Baltic states. Following periods of high inflation and sharp decline in incomes during the initial years of independence in 1991, the economy has stabilized and during the last several years, Latvia has seen significant economic growth. The political situation in Latvia, however, has remained in flux ever since independence. The minority government, headed by Indulis Emsis of the Union of Green and Farmers, collapsed after its coalition partner rejected the draft 2005 national budget. The President of Latvia appointed the twelfth government since 1991, which is headed by Aigars Kalvitis, who leads a four-party right wing coalition. Solving the health care crisis and developing a well functioning health care system is the first priority in the new government’s broad reform plans. The immediate health care crisis that the new government faces – demand from medical personnel for higher wages and reduced working hours – has actually occupied the government’s attention for several years now. Administrative increases in salaries of medical have been taking place almost regularly since 2002, but still remain below the expectations of the medical personnel. In a recent proposal, currently under discussion by senior policy-makers, the Ministry of Health suggests raising physicians’ salaries by 2010 to levels two times higher than the average salary levels, but it is not clear from where the needed financial resources would come from. In any case, this proposal has considerable implications for the fiscal health of the system, especially in an environment in which real wages are projected to increase by over 5 percent in 2005, which will put further pressure on the health system. More important than the potential financial burden of increasing salaries are the relatively low health outcomes in Latvia. Life expectancy at birth in Latvia is lower than the other Baltic States, and is one of the lowest in the European Union. Infant mortality (17 per 1,000 live births) is more than double that of Lithuania and about 4 times higher than the levels prevailing in Estonia, and is the highest among all countries in the European Union. The incidence of tuberculosis has increased 50 percent over the past 10 years and the current epidemiological situation is worrisome by international comparisons. In terms of risky health behavior, over half of the male population and about one-fifth of the female population smoke daily; there is high prevalence of high blood pressure (6.54 percent of males and 12.9 percent of females report hypertension and almost 20 percent of the population reports elevated cholesterol); and obesity is a serious problem with almost one third of the population overweight based on the Body Mass Index. Another problem facing the Latvian health cares system is excess capacity in hospitals, which is estimated to vary between 40 to 50 percent of all hospital beds. Most facilities are poorly maintained and have old, outdated equipment. Average length of stay in hospitals continues to be in double digits, which further increases the cost of delivery of hospital-based services. The pharmaceutical market is small but growing rapidly at an annual rate of almost 10 percent and has reached a level of US$220m in 2004. In fact, almost all the increase in health funding in the last 5 years is explained by increase in consumption of pharmaceuticals. The pressure to raise remuneration levels of health sector employees, maintenance of expensive hospital infrastructure, rising consumption and costs of pharmaceuticals, managing new expensive technology in the health sector – all present a huge challenge for fiscal health

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as well as for production and delivery of health services in Latvia. Even though the present position does not look serious, largely because of high growth rates of the economy, the cumulative effect of cost pressures are very likely to upset the balance in the health sector at the first sign of weakness of the economy. Indeed, improving the policy mix by continuing to ensure fiscal sustainability is a priority for the government, especially as Latvia seeks to meet the Maastricht criterion of 3 percent of GDP in the next few years, a prerequisite for joining the European Monetary Union. Meeting this challenge will require bold structural reforms aimed at reducing the current and potential fiscal pressures in the health system, and ensuring that debts are not accumulated while improving the effectiveness of service delivery. In this context, the main objectives of this report are to take stock of recent trends in health expenditure aggregates in the public sector and identify specific areas of health expenditure reform consistent with the objectives of stabilizing the fiscal situation without adversely affecting the production, delivery and utilization of health services. The rest of this report is organized as follows. Section 2 presents the macroeconomic background in order to set the context in which the fiscal situation in the health sector can be best understood. Latvia, like other countries in the region, is undergoing a demographic transition as a result of which the population is ageing rapidly, and these issues are discussed in Section 3. Section 4 presents the health status of the people of Latvia, and compares it with other countries in the region. The structural characteristics of the health care system are highlighted in Section 5. Health financing issues are discussed in Section 6, followed by a discussion in Section 7 on the structure of expenditures in the health sector. Major expenditure items are highlighted in Section 8, and conclusions are presented in Section 9.

40. The Economy Latvia continues to be at the forefront in the European Union in terms of GDP growth. Real GDP growth in the third quarter of 2004 accelerated to 8.5 percent year on year, underpinned by booming domestic demand. On the supply side, the shift towards the service sector continued, while on the expenditure side the fastest growth has been recorded in fixed capital formation. Private consumption has remained strong, increasing by 8.7 percent year-on-year in the third quarter while the growth of government consumption has been much more subdued. Growth in 2004 was broad-based, with services output rising by 13 percent, and manufacturing output rising by 7.9 percent. The main origins of GDP in 2002 were services (70.9 percent), manufacturing (14.9 percent), construction (6.1 percent), agriculture, hunting and forestry (4.5 percent), and utilities (3.4 percent). The main component of the GDP was private consumption (63 percent), followed by investment (24.4 percent) and public consumption (20.8 percent). Table III.13: Macroeconomic Indicators, 2000-2004 2000 2001 2002 2003 2004 GDP at market prices (LVL bn) 4.7 5.2 5.7 6.3 6.9 GDP (US$ bn) 7.7 8.2 9.2 11.1 12.7 Real GDP growth ( percent) 6.9 8.0 6.4 7.5 8.5 Consumer price inflation (av; percent) 2.7 2.5 1.8 2.9 6.2 Population (m) 2.4 2.4 2.3 2.3 2.3 Exports of goods fob (US$ m) 2,080 2,243 2,545 3,171 4,185 Imports of goods fob (US$ m) -3,123 -3,578 -4,024 -5,174 -6,935 Current-account balance (US$ m) -354 -625 -621 -917 -1,673

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CPI inflation in December hit 7.3 percent year-on-year, affected also by higher fuel and energy prices. The largest price increases were registered in some regulated prices such as health care (where annual inflation was 10.8 percent) and transport (12.9 percent). Inflation is expected to decelerate, as prices of food, oil and raw materials trend downwards and private consumption growth continues to decelerate. Despite the remarkable growth rates, unemployment has remained fairly stable during 2004 indicating that the benefits of growth may not be shared equally among all groups of the population. The unemployment rate in January 2005 was 8.6 percent, the same as the year before. There are large regional differences in Latvia, implying high rigidity in the labor market. In December 2004, the registered unemployment rate in the capital, Riga, was 4.5 percent, whereas some eastern districts had unemployment rates in excess of 25 percent. After a period of deceleration, nominal wage growth increased in the final quarter of 2004. Average monthly gross wages increased by 11.9 percent year-on-year, to US$434. Wage increases were roughly equal in the public and private sectors. Relatively high inflation reduced real wage increases to close to zero in mid-2004. The general government recorded a surplus for the first eleven months of 2004, and the deficit for the year stood at only 1.1 percent of GDP (or 79 million LVL). This result has been better than expected due to strong revenues throughout 2004, and represents an improvement from the 1.8 percent deficit in 2003. Central government expenditure increased by 18.6 percent and revenue expanded by 19.9 percent. Rapid economic growth boosted tax intake, and curtailed the growth of expenditure. The level of government debt remains low. At the end of 2004, central government debt stood at US$1.89bn, or 13.2 percent of GDP, which is one of the lowest debt levels in the European Union. The budget for 2005 was approved in late December 2004 and the central government deficit is set to be US$260m, or 1.7 percent of GDP.

Latvia’s chances of joining the Euro Zone in 2008 are adversely affected by the inflation and interest rate convergence criteria, though it could meet the public deficit and debt criteria. Inflation poses the main risk to Latvia's efforts to adopt the euro by 2008, as it will require that inflation remain below 2.5 percent, if not lower.

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41. Demography Latvia, like many other countries in the region, faces the consequences of population ageing caused by reduced fertility and mortality rates on the one hand and increasing life expectancies on the other. Total Fertility Rates (TFR) in Latvia fell from 2 in 1980-85 to 1.1 in 2000-2005 and is expected to increase only marginally to 1.39 by 2020-2025 (Figure III.9).22

Life expectancy at birth has been steadily rising and is expected to continue rising. Life expectancy at birth for females increased from 74.2 years in 1980-85 to 76.2 years in 2000-2005, and is projected to rise to 79.8 in 2020-2025. Likewise, life expectancy at birth for males increased from 64.5 years in 1980-85 to 65.6 years in 2000-2005, and is projected to rise to 71 in 2020-2025. Overall, life expectancy is projected to rise to 75.8 years in 2025, compared to 69.3 years in 1980-85 (Figure III.10).

22 TFR is the average number of children a woman is expected to have by the end of her reproductive period. Since it is measured using information from births to women aged 15-49 in a certain period, it is the average number of children a woman is expected to have between age 15-49.

Figure III.9: Total Fertility Rate, Latvia, 1980-2025

0

0.5

1

1.5

2

2.5

1980-1985 1990-1995 2000-2005 2010-2015 2020-2025

TF

R

Figure III.10: Life Expectancy at birth, Latvia, 1980-2025

0

10

20 30 40

50 60 70

80 90

1980-1985 1985-1990 1990-1995 1995-2000 2000-2005 2005-2010 2010-2015 2015-2020 2020-2025

Yea

rs

Male Female Total

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This will result in a dramatic “upside-down” change of the age pyramid (Figures III.12). The old-age dependency ratio and total dependency ratio are also expected to rise sharply. Another challenging demographic issue is the population decline; by 2050, there will be 1.68 million inhabitants in Latvia, almost 0.63 million less than today.23

23 Source for all data used in this section: Population Division of the Department of Economic and Social Affairs of the United Nations Secretariat, World Population Prospects: The 2004 Revision and World Urbanization Prospects: The 2003 Revision, http://esa.un.org/unpp, 11 May 2005; 10:33:11 AM.

Figure III.11: Broad Age Groups in Latvia (percent)

-5

5

15

25

35

45

55

65

75

1995 2000 2005 2010 2015 2020 2025


F igure III.12. L atvia 2005

4.58

4.39

6.29

8.87

8.39

7.05

7.34

7.53

8.10

8.01

6.86

5.82

5.15

4.96

3.43

3.34

3.72

3.56

5.18

7.44

7.20

6.07

6.31

6.39

7.36

7.61

6.96

6.23

5.99

6.39

5.18

8.50

10 8 6 4 2 0 2 4 6 8 10

0-4

5-9

10-14

15-19

20-24

25-29

30-34

35-39

40-44

45-49

50-54

55-59

60-64

65-69

70-74

75+

Percentage

Latvia 2020

4.85

4.74

5.06

4.85

4.64

6.64

9.38

8.75

7.27

7.48

7.48

7.80

7.06

5.48

3.90

4.74

3.95

3.86

4.13

4.04

3.86

5.57

7.99

7.72

6.55

6.82

6.82

7.81

7.81

6.82

5.66

10 8 6 4 2 0 2 4 6 8 10

0-4

10-14

20-24

30-34

40-44

50-54

60-64

70-74

Percentage

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42. Health Status

The health status of the people of Latvia does not compare favorably either with the health status of the people of the new member states of the European Union (excluding Malta and Cyprus), or with the health status of the people of countries belonging to the European Union before May 1st 2004 (or EU-15). As Table III.14 shows, life expectancy in Latvia (70.46 years) is the lowest amongst the new member states, and lower than the life expectancy in EU-15 (average 79.06 years). Likewise, disability-adjusted life expectancy in Latvia is almost 9 years less than the EU-15 average. However, infant deaths in Latvia – 9.44 per 1,000 live births – and the rate of clinically diagnosed AIDS – 2.49 per 100,000 - are the highest amongst the new member states, and much higher than the EU-15 average of 4.61 and 1.61 respectively. The incidence of Tuberculosis in Latvia – 72.51 per 100,000 – is also much higher than the EU-15 average of 8.65 per 100,000. Table III.14: Health Status Indicators, Latvia and other new EU Member States (2003)

a Data for 2002

Source: WHO, European Health for All Database (January 2005 update), as accessed online at http://data.euro.who.int/hfadb, on May 24th, 2005, 5pm. Tables III.15 and III.16 present the Standardized Death Rates (SDRs) for a wide variety of causes. A comparison of the death rates from the main causes between countries gives broad indications of how far the observed mortality might be reduced. SDRs in Latvia do not compare favorably to the other new member states, and are much higher when compared with the EU-15 average. SDR from all causes in Latvia is the highest amongst the new member states, and higher than the EU-15 average of 640. Likewise, SDR from circulatory system disorders, cerebrovascular disorders, ischemic heart diseases, TB, selected alcohol-related and smoking-related causes is higher in Latvia compared to the EU-15 average, and on the higher end of the range of the SDRs of the new member states.

Life Expectancy






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Table III.15: Standardized Death Rates (per 100,000), different causes (2003) All Causes Circulatory





Slovenia 795.49 295.29 78.76 94.37 1.05 111.42 251.08 Hungary 1047.97 508.30 134.59 232.66 2.41 149.55 491.02 Czech Republic 899.60 61.88 132.37 176.09 0.68 89.74 380.91 Estonia a 1090.58 560.35 154.06 323.00 6.10 174.29 541.74 Slovakia a 971.49 527.71 88.18 283.48 1.19 92.80 443.02 Poland a 891.55 413.89 98.57 125.78 2.33 88.95 306.79 Latvia 1113.62 593.02 206.23 291.58 8.70 160.22 566.77 Lithuania 1008.26 519.78 117.37 327.75 9.45 176.98 518.51 EU-15 average a

639.88 236.32 59.05 92.89 8.65 61.28 220.78

a Data for 2002

Source: WHO, European Health for All Database (January 2005 update), as accessed online at http://data.euro.who.int/hfadb, on May 24th, 2005, 5pm. Table III.16: Standardized Death Rates (per 100,000), different causes (2003) Malig-

nant Neo-plasms

Trachea Bronchus Lung Cancer







180.50 37.05 2.35 8.38 48.31 30.81 12.62

a Data for 2002

Source: WHO, European Health for All Database (January 2005 update), as accessed online at http://data.euro.who.int/hfadb, on May 24th, 2005, 5pm. SDRs in Latvia due to chronic liver disease and cirrhosis (12.98) and diseases of the digestive system (36.68) are the lowest among new member states, but higher than the EU-15 average. SDRs from malignant neoplasms, lung cancer, cervical cancer, and diseases of the digestive system are higher in Latvia compared to EU-15 averages, though SDR from diseases of the respiratory system is lower than the EU-15 average. Overall, observed mortality can be reduced significantly in Latvia if the health system and other determinants of health are more effective in addressing health problems, such as diseases of the circulatory system, ischemic heart diseases, cerebrovascular disorders, and malignant neoplasms, which account for high levels of mortality.

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43. Structural Characteristics of the Health System In accordance with the Article 111 of the Constitution of the Republic of Latvia, the state guarantees a minimum of medical assistance to all Latvian citizens. The main principle of state financing for the health care system, as determined by Health Care Financing Regulations, derives from the assumption that the state pays for all services, except those that are explicitly excluded from the scope.24 This means that there is no positive list of benefits provided by the statutory health care system. The statutory health care system does not pay for cosmetic and plastic surgery, and for treatments considered to be either “exclusive” (higher service in hospitals, higher medical technologies etc.) or “alternative” (homeopathy, spa treatment). In addition, other services such as routine dental care (except children), abortions, and sexology-oriented health services are excluded from the scope of statutory financing.25 The scope of the negative list of the statutory health financing also covers services or expenses not covered in the scope of purchasers’ contracts with providers, which provide a possibility in an indirect way to broaden the scope of exclusion. The actual amount of statutory health care financing de facto is determined by the Compulsory Health Insurance State Agency, which in turn depends on the annual budget. The Compulsory Health Insurance State Agency concludes agreements with service providers, either directly or through sickness funds, who build budgetary limitations for heath care service providers and also allows them to deny access to patients even for statutory health care services (except for emergency services) and to establish waiting lists. Patients receiving statutory benefits need to participate with co-payments. For out-patient visits, copayments are set at 0.50 LVL per office visit and 2 LVL for home visits. For inpatient visits, patient co-payments are set at 5 LVL fee for admission, and 1.50 LVL per day from second day onward subject to a maximum of 25 LVL per hospital admission (except for psychiatric, oncological, and hematological patients, who pay 0.45 LVL per day), as well as copayments set according to a list for various medical treatments.26 Children, pregnant women while receiving medical treatment services related to pregnancy, postnatal observance and delivery, as well as those who require emergency treatment are exempted from copayments.27 Further, total annual co-payments for hospital treatment in one calendar year cannot exceed 80 LVL (excluding the purchasing of drugs, spectacles and dental services). Finally, statutory reimbursement of pharmaceuticals is based on a positive list of drugs determined by the Ministry of Health pursuant to the conditions and diagnoses determined by the Cabinet of Ministers.28,29 Main stakeholders The main function of the government is to set the regulatory framework of the health system. Moreover, the Ministry of Health must also prepare the annual budget and submit the request to the Ministry of Finance. The budget proposal is based on data provided by the State

24 The Cabinet of Ministers of the Republic of Latvia Regulations Nr. 13, “Health Care Financing Regulations”, January 12, 1999. 25 Health Care Financing Regulations, Article 30. 26 Health Care Financing Regulations, Articles 24-27. 27 Health Care Financing Regulations, Article 27. 28 The Ministry of Welfare was restructured in 2002, establishing a separate Ministry of Health. Hereinafter, the term Ministry of Health is used also for the period when there was no separate Ministry of Health. 29 Regulations Nr. 428 of 4 November 1998 of the Cabinet of Ministers “On reimbursement of medicines and medicinal products for primary care.”

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Compulsory Health Insurance Agency (hereinafter referred to as the Agency), which prepares information on necessary health care financing for the whole system. The budget is then discussed in the Cabinet of Ministers and after clearance, is submitted to the Parliament for approval. Following approval, the amount is disbursed to the Agency, which distributes it to the regional sickness funds and its branches according to their respective populations and age structures, as well as directly to the service providers. The Compulsory Health Insurance State Agency is the public agency that operates under the supervision of the Ministry of Health, and receives the centrally collected statutory health financing. The Agency transfers a portion of these nationally pooled revenues to regional branches and sickness funds, and a portion directly to the service providers.30 The Agency is ultimately responsible for the realization of the state policy to ensure availability of health care services to the population. The Agency purchases health services on behalf of the insured, and enters into contracts with health services providers for this purpose. The Agency operates through territorial branches and sickness funds, whose main responsibilities include registration of sickness fund participants, collecting population data on health needs, entering into contracts with health providers, and cooperating with local self-governments. The ten private insurance companies in Latvia provide voluntary health insurance schemes. Some insurance companies cover dentistry, spa treatment, rehabilitation and drug expenditures; others also cover patient co-payments for outpatient and inpatient care. Most buyers of private insurance policies are companies, which purchase group policies for their employees as incentives. Some private insurance companies contract private health care institutions with advanced technical equipment and standards, which do not have contracts with sickness funds and which are believed to provide a better quality of care. Pursuant to the Law on Medical Treatment, health care services are provided by registered medical institutions or inpatient and outpatient clinics. Most of the outpatient practices are privately owned, while most inpatient facilities are publicly owned. The main criterion for provision of statutory health care services is an agreement with the Agency, and thus statutory health care services may be provided by both public as well as private health care service providers. All persons need to be registered with gate-keeping general practitioners (GP) in order to have access to the statutory health care services, except emergency care. People may freely choose their primary care physicians (family doctor, general practitioner), and change their physicians up to two times a year (excluding change of address). Patients need to have referrals from a GP to receive specialist or secondary level care, without which the treatment costs are not covered by health insurance. Exceptions to the requirement of a referral include: dentistry for children, visits to psychiatrists, tuberculosis specialists, venereal disease specialists, gynecologists, endocrinologists for diabetics, and specialists for emergencies. Hospital visits also require referrals, and patients may freely choose from any of the contracted hospitals, irrespective of regional constraints.

30 As of 2005, there are 5 territorial departments of the Agency, which ensure payments for health care services in the defined territories. The departments work as structural units of Agency and execute the directions given by the Agency. Two separate juridical structures – the Territorial Departments and the Sickness Funds (developed by several self-governments and set up as non-profit organizations) – ensure settlement of accounts for health care services rendered in regions. Sickness funds conclude contracts with the Agency for provision of minimum of health care services for own sickness fund participants.

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44. Health Sector Financing The main sources of health funding in the Latvian health care system are allocations from income tax collected at the central level and subsidies from general revenues, followed by out-of-pocket payments. Data on out-of-pocket spending is not very authoritative, but estimates suggest that public funding constitutes between 55 and 65 percent of total health sector funding, with out-of-pocket expenditure accounting for the balance. Statutory Health Care Services The term “statutory health care resources” refers to the mandatory funding of the health system in Latvia, and consists of 28.4 percent of the income tax collected at the central level, subsidies from general revenues (which are also financed by tax revenues at the central level), and of mandatory copayments by patients. Statutory health care resources envelope is financed from the state budget resources in accordance with the annual Law on the State Budget and programs and financial volumes fixed by this Law. Table III.17: Statutory Health Budget, 1992-2004

Statutory health budget, million LVL

Year GDP

million LVL

State basic

budget subsidy

State special health care

budget

Local govt.

budget

Financial assistance

from abroad

Total Population

Health care expenditures as percent of

GDP

Health care expenditures per capita,

LVL (statutory resources)

1992 1004.6 12.4 15.9 28.3 2,631,567 2.82 10.8 1993 1467.0 28.0 1.1 31.4 60.5 2,586,015 4.12 23.4 1994 2042.6 32.0 2.2 46.0 80.2 2,547,699 3.93 31.5 1995 2349.2 33.2 13.9 44.4 91.5 2,515,602 3.89 36.4 1996 2829.1 46.9 5.8 63.2 115.9 2,490,765 4.10 46.5 1997 3275.5 55.7 67.6 123.3 2,469,137 3.76 49.9 1998 3589.5 59.7 79.9 139.6 2,408,376 3.89 58.0 1999 3897.0 12.0 134.3 146.3 2,388,746 3.75 61.3 2000 4685.7 11.8 132.2 0.2 144.2 2,373,033 3.08 60.8 2001 5168.3 11.3 144.3 0.9 156.5 2,366,131 3.03 66.2 2002 5691.1 11.8 163.5 0.8 176.1 2,366,131 3.09 74.4

2003 6322.5 12.5 189.5 0.0 202.0 2,331,480 3.20 86.7

2004 7198.4 234.4 2.1 236.5 2,331,480 3.28 101.4

Source: Ministry of Finance, Department of Financial prognosis and Development, October 2004 Notes: In 1993 the Ministries of Health, Labor and Social Welfare were united to form the Ministry of Welfare. In 2003 the Ministry of Welfare was restructured, establishing separate Ministry of Health. In 2004 the State Special Health Care budget was abolished. GDP data actualized in accordance with data provided by Ministry of Finance, Department of Financing Prognosis and Development, October, 2004, which are different from the data published earlier by MOF: Concept of Fiscal policy and Macroeconomic Development 2004-2008, March 2004; and by MOF: Concept of Fiscal policy and Macroeconomic Development, September, 2003.

Statutory health care resources increased at a rate of 11 percent year on year in 2001, 14 percent in 2002 and 11 percent in 2003. As percent of GDP, statutory health care resources

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have increased from 3.08 percent in 2000 to 3.2 percent in 2003 and to 3.28 in 2004 (Figure III.13).31 In per capita terms, statutory health care resources amounted to LVL 101.4 in 2004.

Figure III.13: Health Expenditures as Percentage of GDP

0

2000

4000

6000

8000

1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004

mill

ion

LVL

0

1

2

3

4

5

perc

ent

of G

DP

GDP million LVL Health care expenditures as percent of GDP

Source: Ministry of Finance, Department of Financial Prognosis and Development, October 2004 Statutory health care services are mainly financed through the program called “Payment for Services,” but other sources are also involved.32 These include: resources from the Russian Federation transferred for health care of military persons, subsidies from the budgets of local self-governments, and resources from the subprogram called “Reserve Fund.” The Agency channels resources for payment of health care services on the basis of population number, age, peculiarities of social groups and other criteria. In 2001, the cabinet of ministers determined, for the first time, price elements and calculation formula for health care service price. 33 The Ministry of Health determines the values for the elements forming the health care service price. 34 The expenses on health care services are covered from the state budgetary resources as well as payments. Such amendments were introduced in order to avoid the common practice of health care service providers to not calculate patient payments as statutory health care resources.35 Statutory health care resources also include allocations by local self governments, which are typically made as support for low-income families. For example, the city of Daugavpils purchased private health insurance policies for 777 low-income individuals in 2003, and reimbursed 100 percent or 50 percent or 25 percent of the insurance premium, depending on the economic status of these individuals. The city covered half of all costs of medication and co-payments on behalf of the insured. Out-of-pocket spending There are wide disparities among different sources of information concerning the size of out-of-pocket spending on health. According to the WHO Regional Office for Europe, Health for

31 Different data sources treat the GDP figure differently, which affects the ratio of health expenditures to GDP (varying between 3.57 percent and 3.20 percent). 32 These resources are anticipated for provision of the minimum of health care services for emergency, out-patient and in-patient medical assistance guaranteed by the state. 33 Regulations Number 169 “On Amendments in the Health care financing regulations”, issued by the Cabinet of Ministers on April 10, 2001. 34 Regulations Number 158 “On forming of health care service prices from July 1, 2001”, issued by the Ministry of Welfare on July 6, 2001. 35 Sickness funds are required to use the price of accordant service for payment of health care services, from which the patients’ payment is subtracted. See Sickness Fund News, 2001.

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All Database, out-of-pocket payments account for 21 percent of total health spending. However, another WHO source – World Health Report 2000 – estimates out-of-pocket payments to be 39 percent of total. The latest data provided by the Ministry of Health for 1997-2001 estimates out-of-pocket payments to have been as high as 47.5 percent of total health expenditures in 2001 (Figure III.14).

Figure III.14: Public and Private Expenditures on Health

56.8 60.7 59.755.8

52.5

47.544.240.339.343.2

20

30

40

50

60

70

1997 1998 1999 2000 2001

per

cen

t

Public Expenditures on Health Private Expenditures on Health

Source: Ministry of Health, Latvia A study based on surveys carried out in 1999 (Corruption Perceptions Index, Transparency International Annual Report 2000) provides some indications of the current magnitude and extensiveness of informal payments. Of the total number of respondents in the study, 69.5 percent stated that they never had to make an unofficial payment or gift to state or local health care institutions. By contrast, 24.8 percent of respondents said they sometimes made a payment or gift, while 5.7 percent claimed that an unofficial payment or gift was made on almost every visit. Overall, the average unofficial payments made per visit amount to LVL 29, and are more common in the area of surgery than in primary care.36 The average informal payment physicians received per patient was LVL 22.39 for surgeons, LVL 7.36 for gynecologists, LVL 5.90 for pediatricians, LVL 4.98 for internists, LVL 3.83 for GPs, LVL 2.55 for dermatovenerologists, and LVL 7.14 for other physicians.37 Patients seeking inpatient care in hospitals are more likely to report informal payments (12 percent) than those treated in other health care facilities (5 percent).38 A regional breakdown of respondents indicates that Riga has the highest proportion of persons who make unofficial payments, amounting to 46.1 percent of total Riga respondents.39 Since 2002, several court cases have been initiated in Latvia by patients claiming that health care providers demanded illegal out-of-pocket payments from them for providing services that fall within the scope of statutory health care. Surveys conducted by NGOs confirm that patients are often denied statutory health care services, allegedly because of the fulfillment of the quota (contracted services). In effect, patients do not know the actual position but end up having to make payments for services which are supposed to be provided free of charge. The

36 Transforming the Latvian Health System: Accessibility of health services from a pro-poor perspective, German Development Institute, 2004 at p. 35. 37 Babarykin Survey, 2002. 38 CIET International Survey, 2002. 39 European Observatory on Health Care Systems, 2001.

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Ministry of Health has confirmed such practices, pleading inability to ensure the fulfillment of the demand for statutory health care services pursuant to the law. Private Health Insurance Private health insurance accounts for between 7.5 and 8 percent of non-public sources of funding, equivalent to between 3 and 3.6 percent of total spending on health. Private health insurance is typically provided by non-life insurance companies (Table III.18). Table III.18: Private Health Insurance Premiums and Claims

1999 2000 2001 2002 2003 LVL percent LVL percent LVL percent LVL percent LVL percent

Gross premiums written

83,731,664 100.0 91,098,268 100.0 92,802,755 100.0 97,798,287 100.0 117,499,267 100.0

Health insurance

7,551,470 9.0 8,729,805 9.6 10,428,929 11.2 11,830,449 12.1 14,025,010 11.9

Gross claims paid

29,611,149 100.0 31,461,951 100.0 35,181,548 100.0 39,064,417 100.0 39,740,929 100.0

Health insurance

4,421,190 14.9 6,422,722 20.4 7,967,857 22.6 9,099,520 23.3 9,387,466 23.6

Data source: Financial and Capital Market Commission, Latvian Insurance Markets, 1999-2003 External Sources of Funding Latvia started a health care reform program in 1998 with direct support from the World Bank. The main aim of this project was the improvement of quality, efficiency and accessibility. Supported by a US$2 million grant from the Swedish International Development Agency (SIDA) and US$3.6 million from the government of Latvia, the project was designed to be implemented in two stages. The first stage was implemented between 1999 and 2001, and the loan for the first stage was US$12.0 million. The second stage, earmarked for the hospital restructuring program, was scheduled to start in 2001 but was cancelled by the government in 2002. The Government of Latvia has obtained LVL 6.7 million from the European Regional Development Fund for the implementation of the National Health Care Fund 2004-2006. Of this, LVL 6.5 million has been allocated to the financing of emergency care service development and the remaining LVL 0.2 million allocated for the development of primary health care services. The National Health Care Program does not cover the issue of hospital restructuring, and there remains a funding gap should hospital restructuring be taken up as a health reform measure. Total Spending on Health Total spending on health has increased in both nominal and real terms in the last five years (Figure III.15). Total spending on health increased by only 1.6 percent in real terms in 2000, relative to 1999, but since then has increased at rates of 12.9 percent, 8.8 percent and 10.9 percent annually between 2000 and 2003. In terms of percentage of GDP, total spending actually fell from 6.3 percent of GDP in 1999 to 5.5 percent in 2000, but then recovered to 5.8 percent in 2001, 5.9 percent in 2002 and 6.1 percent in 2003.

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Figure III.15: Total Spending on Health

050

100150200250

1999 2000 2001 2002 2003

mill

ion

LVL

0%

5%

10%

15%

perc

ent,

rat

e of

gro

wth

Public SpendingOut-of-Pocket SpendingPrivate InsuranceTotal Health Spending (% of GDP)Real Growth of Total Spending on Health

45. Health Care Expenditure Overall, about 80 percent of the health care budget is spent on health services, about 5 percent for centralized activities, about 6 percent for separately marketed activities (including state programs) and 1.5 percent for administration. Detailed information is available only for statutory health care resources, which indicates that inpatient services account for 59.4 percent of total statutory health care resources, followed by outpatient care (39.6 percent), emergency medical care (6.69 percent) and tertiary care (1.58 percent). These ratios have remained more or less constant over the years (Figure III.16).

Figure III.16: Health Expenditure by functions

0%

20%

40%

60%

80%

100%

1999 2000 2001 2002 2003

In-patient Out-Patient Emergency Medical care Others

In real terms, expenditures on inpatient services have had the largest increase in the last few years, increasing from LVL 88.67 million in 1999 (at 2003 prices) to LVL 129.25 million in 2003. Expenditures on outpatient care fell slightly from LVL 49 million in 1999 to LVL 39 million in 2000, but then picked up to LVL 47 million in 2001 and to LVL 67 million in 2003 (all at 2003 prices, Figure III.17).

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Figure III.17: Health Expenditures (by function, 2003 prices)

-

20

40

60

80

100

120

140

1999 2000 2001 2002 2003

mill

ion

LV

L

Emergency Medical care Out-Patient In-patient Others

There is no authoritative data on functional breakdown of private out-of-pocket expenditures, except that pharmaceuticals account for over 50 percent of total out-of-pocket expenditures. Pharmaceuticals accounted for 59 percent of total out-of-pocket expenditures in 1999, but fell to 49 percent in 2001 and 51 percent in 2003.

46. Major Expenditure Items Salaries of Medical Personnel In 2002, the financing of sickness funds for health care services increased by 18.4 percent in nominal terms, an increase dictated largely by an increase in minimum salary. Most of the additional funding came from the subprogram “Reserve Fund” (the rest came from the subprogram “Payment for Services”). As prescribed by the law “On the State Budget for 2002,” these resources were allotted to different subprograms, as a result of which the Agency could not include these resources in the pricing of services. This money was paid out as additional money (i.e., in addition to the regular salaries) on the basis of workload of medical personnel in medical institutions. The additional salary component was settled between the salary levels included in the price of contracted services and salary demanded by medical personal during strikes, and translated to LVL 53.00 for physicians, LVL 9.00 for paramedical staff, and LVL 7.00 for junior paramedical staff. In 2003, the financing by sickness funds for health care services increased by 16.5 percent compared to 2002, which, like in the previous year, was also connected with an increase in minimum wages, and covered both the salary element as well as the social insurance element. Unlike the previous year, the increase in salary in 2003 was included in the contract price of services. The health care system in Latvia employs 22,600 medical personnel, equivalent to 3.03 percent of the total number of employed persons. In January 2005, there were 7,055 doctors according to the Register of Medical Personnel, up from 7,097 in 2004 and 6,596 in 2003. On average, Latvia has 30.6 doctors per 10,000 people, compared to 30.8 in Estonia and 39.9 in Lithuania. However, since almost 25 percent of the doctors registered in the Register of Medical Personnel do not work in health care, the available number of doctors for medical purposes is significantly lower. At the same time, the number of family physicians and primary care physicians is increasing over time, and a little over half of all doctors in Latvia are family physicians or primary care physicians (as in 2003). As regards inter-regional distribution, Riga has around 60 doctors per 10,000 people, which is almost double of the

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national average. Over 15 percent of all doctors are 63 years of age or older and a further 16 percent of all doctors are between 55 and 62 years of age. In effect, almost 32 percent of the presently employed doctors are of pre-retirement or retirement age and who will retire within the coming 10 years. These doctors will be gradually replaced by doctors from the age-group below 35 years, which is smaller in number. In order to maintain the existing number of doctors, 1,446 new doctors have to be trained, assuming that the economic and social conditions remain unchanged and that all trained doctors will start and continue working in the health care system. According to the data of Latvian Doctors’ Association, 120 doctors have expressed interest in the opportunities of going to work abroad and have been arranging the documents necessary for such work.

As regards other medical personnel, Latvia has 13,162 nurses – equivalent to 56.8 nurses per 10,000 people - which is much lower than 63.9 nurses in Estonia, and 77.6 nurses per 10,000 people in Lithuania. More than 32 percent of all nurses are of pre-retirement or retirement age and will retire within the coming 10 years. They will gradually be replaced by nurses belonging to the age group younger than 29, which is numerically the smallest. The distribution of nurses is also uneven, being denser in Riga and its vicinities. The ratio of nurses to doctors was 1.7 nurses per one doctor in 2003, which is much lower than the European Union average of 5. Emergency health care is provided by 173 doctor teams in daytime and 140 doctor teams at nighttime. However, the distribution of the emergency health care teams is not balanced and a large number of areas (especially rural areas) are not well served. In order to ensure “complete” teams with two certified medical specialists, 400-500 additional medical personnel would be needed. If the existing trends in the training of specialists persist, then by 2010 as many as 880 additional medical personnel would be needed. According to the 2003 Data of the Disaster Medicine Center, only 4.2 percent of emergency health care personnel are of retirement age while 55 percent are in the middle aged group. The dynamics of the number of doctors and nurses in the health care system in Latvia is not obviously negative; however, considering the age structure and the forecasts about specialists leaving the labor markets due to retirement, it appears that Latvia will face a serious human resources constraint in the next ten years or so if there is no upward change in the number of new physicians and nurses entering the health care market. Salaries Even though the average remuneration of medical personnel employed in the health care system has gradually increased since 2002, the low levels of remuneration appear to be one of the main obstacles in the development of human resources in the health care system in Latvia. In 2001, the average remuneration for medical personnel was LVL 86.6, with doctors earning LVL 129, medium level medical personnel LVL 75 and junior medical personnel LVL 62. The average remuneration was increased by LVL 43.64 to LVL 130.24 per month from June 1, 2002. The average salary of doctors went up to LVL 198, of medium level medical personnel to LVL 116 and of junior medical personnel to LVL 83. In order to secure a gradual increase in remuneration for medical personnel, the Trade Union of Health and Social Care Workers put forward a demand in 2002 to link the salaries of medical personnel to salaries in the public sector. This resulted in a further increase of average salaries to LVL 141 from October 1, 2002, raising the doctors’ salaries to LVL 214, medium level medical personnel to LVL 125 and junior level medical personnel to LVL 90.

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Since then, the salaries have increased almost every year and the average remuneration at the end of 2003 was LVL 190, with doctors earning LVL 291 and medium and junior level medical specialists earning LVL 169 and LVL 122 respectively. In order to increase the number of medical personnel in the age group 25-40 years by at least 5 percent and to decrease the number of patients per doctor, the Ministry of Health, in a cabinet memorandum submitted in May 2005, suggests increasing the remuneration to medical personnel to levels twice the average salary in the economy. Five variants are suggested, which essentially vary only with the speed at which the ratio of 2:1 is achieved. The average salaries in the economy are expected to rise to LVL 265 by 2010, implying that doctors’ remuneration will be set at LVL 430. Whichever variant is finally adopted, it will increase total spending on health by between 5 percent and 7 percent, equivalent roughly to 0.18 and 0.25 percent of GDP. Pharmaceuticals Pharmaceuticals account for about 29 percent of total expenditures on health during 1999-2003, most of which is out-of-pocket expenditure. Expenditure on pharmaceuticals increased from 80.8 million in 1999 to 111.2 million in 2003 (all at 2003 prices), representing a growth of 37.6 percent in 5 years, during which total spending on health (at 2003 prices) increased by 38.5 percent (Figure III.18).

Figure III.18: Total Expenditure on Pharmaceuticals (2003 prices)

0100200

300400

2000 2001 2002 2003

mill

ion

LVL

-5%0%5%

10%15%

rate

of

grow

th

Total Spending on HealthTotal Expenditures on PharmaceuticalsRate of Growth of Total Health ExpendituresRate of Growth of Expenditures on Pharmaceuticals

The share of reimbursable medicines in total expenditure on pharmaceuticals is small, but has increased from 11.3 percent in 1999 to 16.7 percent in 2003. In 1999 the system of reimbursable medicines was based on 2 different models: (i) social groups-based reimbursement of medicines; and (ii) diagnoses based reimbursement of medicines.40 Transition to the single diagnoses-based model was implemented gradually by 2002. Resources from the subprogram “Payment for Medicine Remedies” are channeled to the sickness funds following agreements between the Agency and sickness funds. Regardless of the increase of resources over the years, the consumption of reimbursable medicines has been higher than allocated resources and has had a tendency to increase. This is

40 Cabinet of Ministers, Regulations Nr. 102 (On advantages for acquisition of medical resources for ambulatory treatment of patients, March 18, 1997) and Regulations Nr. 428 (On reimbursement of medicines and medicinal products for primary care, November 4, 1998).

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confirmed not only by calculations of the Ministry of Health, regular patients’ and physicians’ claims received by Ministry of Health, the Agency and regional sickness funds, but also by amount of debts of the sickness funds. On January 1, 2000 the debts for utilized but unpaid pharmaceuticals stood at LVL 105,387, rising to LVL 805, 21 on January 1, 2002 and to LVL 1,563,119 as on January 1, 2002.41 The unpaid accounts for utilized reimbursable drugs in Riga District Sickness Fund formed most of the debt.42 Health Facilities and Infrastructure Inpatient health services account for over 60 percent of statutory health care expenditures, a proportion that has increased from 57.2 percent in 1999 to 64.9 percent in 2003. The share of outpatient care expenditures has fallen from 34.7 percent in 1999 to 29.2 percent in 2003, while the share of emergency care expenditures has fallen from 8.1 percent to 5.9 percent during this period. These figures would not be a cause for concern, except that inpatient care costs may be steadily rising on account of the excessive number of hospital beds in Latvia, despite the significant reductions achieved in recent years. Current estimates about remaining excess capacity in hospitals vary from 6,000 to 8,000 beds (40-50 percent), and more half of the 132 community hospitals are probably not needed as acute health care facilities. The occupancy rate is a little less than 80 percent nation-wide, but is likely to fall considerably if the average length of stay in hospitals is further reduced. Even so, bed utilization in some specialties, like obstetrics, infectious diseases and neurology, is particularly low.

Figure III.19: Statutory Health Expenditures (by function)

0%

20%

40%

60%

80%

100%

1999 2000 2001 2002 2003

Inpatient Services Outpatient Services Emergency Services

Many hospitals in Latvia, especially those built during the last years of the Soviet regime, are excessively large, so that in the winter a large portion of their running costs consists of heating bills. Most facilities are in a fairly poor state of repair, often with equipment that pre-dates independence. The more modern equipment and facilities that are available are often in specialized areas (e.g., ICU, operation theaters, pediatrics), and are the result of humanitarian aid, municipal contributions and very limited government capital financing.

41 It should be highlighted that Sickness Fund News, 2002 provides quite different data for the same period, namely – on January 1st, 2001 the debt for utilized, but unpaid medicaments was LVL 805,121, but on January 1st 2002, the debt has reduced to LVL 309,090. 42 Sickness Fund News, 2001.

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The Government strategy to improve health facilities and infrastructure focuses on the rationalization of secondary and tertiary health care services through Regional Master Plans. The strategy proposes that state hospitals will be consolidated through developing multi-specialty hospitals; closing or transforming small hospitals into nursing care hospitals, primary health care centers or social care institutions; and transforming single specialty hospitals into long-term hospitals by moving current services to multi-specialty hospitals or outpatient settings. Master Plans for Outpatient and Inpatient Service Providers Structure for 8 regions and the whole country have been developed and a pilot project implemented in the Latgale region. The Master Plans developed envision a reduction from 132 to 60 community hospitals in Latvia, plus 10 multi-profile emergency hospitals. The number of acute care hospital beds is scheduled to be reduced from 8.5 to 4.8 per 1,000 people. A number of complementary adjustments are also proposed to be made to the health system, since simply closing hospitals is likely result in reduced access to services and continued inappropriate utilization patterns, especially in rural and remote areas. The complementary adjustments involve strengthening of the network of primary care through additional training and the establishment of additional 350 primary health care practices throughout the country. The emergency medical services system is proposed to be reorganized and strengthened to ensure that emergency care and access to hospital care are maintained despite the removal of the hospital emergency department. This will be accomplished by replacing the current 62 local dispatch locations with 5 regional dispatch centers and organizing the ambulance resources on a regional basis. In addition, 20 more ambulance teams will be added to communities that currently have limited access to EMS services. Finally, a number of existing hospitals will be converted to either community health centers or social care beds to meet needs for these services that are currently being met through high-cost hospital services.

47. Conclusions There is no doubt that many positive achievements have been recorded in the health sector in recent years. Cognizant of the low salary levels in the health sector, the government has taken several steps to bring salary levels at par with international standards. In an effort to improve health facilities and infrastructure, the government has focused on rationalization of secondary and tertiary services through regional master plans. The approach comprises consolidation of state hospitals, closing or transforming small hospitals into nursing care hospitals, primary care centers or social care institutions; and transforming single specialty hospitals into long term hospitals. The Ministry of Health has recently proposed an action plan for the implementation of the master plan for the whole country, which proposes to reduce the number of community hospitals in Latvia from 132 to 60 and reduce the number of acute care beds from 8.5 per 1000 people to 4.8 per 1000 people. At the same time the Ministry of Health proposal envisages strengthening of the network of primary care through the establishment of additional 350 primary care practices throughout the country. These measures are expected to have a positive effect on efficiency as well as equity and will also provide relief to the fiscal balance in the health care system. The Government is also implementing strategies to improve the country’s health status indicators. A “Public Health Strategy” has been developed, which sets as the basic goal rapid improvement of the overall health status of the population of Latvia and encourages individuals to take more active part in safeguarding, improving and promoting their own health and that of their family. This is complemented by a separate “Strategy for Health Care of a Mother and a Child in Latvia” which defines guidelines for establishing an efficient and

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stable system to ensure good quality, effective and appropriately funded mother and child health. Similarly, the “Strategy for Psychiatric Aid” defines key principles of psychiatric aid and sets specific targets that would ensure provision of optimum psychiatric aid to the patients irrespective of the degree of severity of his/her illness, as well as improve the treatment process and quality. Finally, the “Strategy to Control HIV/AIDS” in Latvia has an overall long-term goal to limit the spread of the HIV infection and AIDS epidemic and to reduce the effects of this disease on individuals, families, groups of society and the society at large. However, the medical personnel wage bill, health infrastructure and pharmaceuticals continue (and will continue) to put pressure on the fiscal balance of the health care system. Salaries of medical personnel, which have been increasing since 2002, are projected to continue increasing, and whichever variant suggested by the Ministry of Health is finally adopted, the adjustments in salaries alone will lead to an increase of between 5 and 7 percent in total health spending, equivalent roughly to between 0.18 and 0.25 percent of GDP. These estimates are conservative, since the wage bill is likely to put further pressure on the fiscal balance in the health system as salaries in the health system in Latvia start converging more rapidly with salaries in the health systems in the neighboring EU15 countries. Consolidation of the health infrastructure will yield tangible savings, but not all the savings will appear in the short term of 0-5 years. As the Ministry of Health proposal in this regard also acknowledges, the consolidation of hospitals would need to be accompanied by improvements in the primary health services production and delivery system as well as in the emergency health services system, all of which will require new financial investments, further delaying the time period when the net savings from hospital consolidation can be realized. Likewise, significant savings in the statutory health budget cannot be expected from rationalizing pharmaceutical consumption and pricing, simply because the statutory health budget only reimburses 16 percent of total consumption of drugs. An aspect not considered so far but one that is rapidly growing in importance in terms of its potential effect on fiscal balance is Latvia’s aging population. Latvia is experiencing a period of falling fertility rates and rising life expectancies, the net result of which is that the share of people aged 60 years and older, which was 16.6 percent in 1985, is projected to increase to 38.3 percent in 2025. This will also result in higher old-age dependency ratios, such that a smaller cohort of working population will have to support a larger cohort of the elderly. Health care costs are likely to rise as the ratio of the elderly in the population rises, and as the system may need to make some adjustments to cater to the specific needs of the elderly. There is no doubt that finding the extra resources – or freeing some of the existing resources – to meet these new pressures on the health care system is going to be a challenge. The most obvious place in order to find these savings is the hospital sector but, as discussed earlier, not all of these savings will be realized in the short term. Restructuring of hospitals would need to be accompanied by such other measures as increasing ambulatory day care surgeries, completely separating acute care and long-term care beds, and rationalizing the use of hospital beds so that only severe cases are treated in tertiary hospitals – all of which will also potentially lower costs, some sooner than others, but the effects would be more tangible in the medium term (5-10 years) only. Private out-of-pocket expenses are already substantial and further increases are probably going to have an adverse impact on equity. Even at existing levels, there is some evidence that many people are deterred by the high out-of-pocket costs and do not seek care when needed.

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In fact, in a survey conducted a few years ago, a little over 25 percent of those surveyed indicated that they had not accessed some medical services in the last year because of inability to pay. This percentage went up to almost one-third for those earning LVL 50 per month or less and 31 percent for those earning LVL 51-70. Over 62 percent of those interviewed indicated that they were not prepared or were not able to pay more for either outpatient visits or hospital stays. It is tempting to suggest that public funding of the health care system in Latvia should be increased to at least 4 percent of GDP, but eventually the additional public resources would have to come from somewhere as well. Likewise, increasing the scope and spread of private insurance may also offer opportunities for new resources. However, a strong case for additional funding can only be made after all possible savings options are exhausted, and this would require concentrating on the key expenditure areas as discussed above. Some areas of increasing expenditure are probably inevitable, such as the new demands likely to be placed by aging populations. To some extent, upward adjustments in salaries of medical personnel are also unavoidable, but these increases should be accompanied by changes in the incentive structure to one that rewards higher and better performance. Restructuring hospitals and consolidating hospital beds offer medium-term opportunities for savings, and the process can perhaps be expedited. Revitalizing and strengthening primary health care services will also take some pressure off the fiscal balance. In all cases, it is clear that constant and opportunistic adjustments will be needed year after year as the health system struggles to meet the demands and to stay afloat. It is also clear that a substantial infusion of new resources will be needed – perhaps as a one-time public investment to jump-start the process – just to bring about the structural changes in the system that will eventually result in savings over a longer time period.

Poland 48. Introduction

Poland introduced wide-ranging health sector reforms in 1999, bringing about significant changes in financing, delivery, management and organization of the health sector. The package of systemic reforms included the introduction of social health insurance, which brought about a separation between payers and providers of health care and created the need for evolving new and innovative ways of paying the providers of health services. In all, 16 regional sickness funds (plus one health insurance fund for military services) were created with the specific responsibility of purchasing and paying for health care on behalf of the subscribers. These funds were merged into one national level fund in April 2003, which carries out its functions and responsibilities through a number of regional branches. Financed by a percentage of payroll tax (8.25 percent in 2004), the National Health Fund (or NFZ) contracts with a wide variety of individual and institutional providers of preventive, ambulatory, specialist and in-patient care to supply health services for the insured. This centralized National Health Fund operates via regional branches, which are based on the “voivodship” structure of old sickness funds. As regards organization of health services, the reforms aimed at restructuring and downsizing health facilities, and granting wide-ranging managerial autonomy to public hospitals. On the delivery of health services, the reforms have focused on the introduction and spread of family medicine as the basis of primary health care. Many positive achievements have been recorded in the years following the introduction of social health insurance. On the financing side, the health insurance system has done fairly well in raising resources and collecting premiums, exceeding the targeted premium collection almost every year since 2000. By changing the incentives governing provider behavior and strict enforcement of physician contracts, the reforms succeeded in bringing about desirable changes in utilization patterns, by encouraging primary care visits, constraining the number of referrals and reducing the use of specialist services. On delivery of services, family medicine coverage has increased impressively in the last few years. Efforts to restructure and downsize health facilities have been generally successful, and the number of hospital beds has been significantly reduced and a large number of hospital staff has been laid off. Similarly, hospital autonomy has proceeded rapidly, with almost all hospitals enjoying a large degree of autonomy with respect to personnel and financing decisions. Although the recent reforms brought changes to the way that health care is produced, delivered and financed, a number of issues have remained unresolved. First, there exists little or no competition among health service providers, and while, in theory, health facilities compete with each other to get business from Sickness Funds, in practice the NFZ contracts with almost all health facilities. Second, the linkage between hospital payments and patient services continues to be weak, as a result of which the most cost-effective means of production and delivery are not adopted. Third, despite a great deal of progress with hospital autonomy, both financial accountability and discipline among hospital managers has remained weak. Symptomatic of these systemic inefficiencies, debts have continued to accumulate in the sector, highlighting not only the shortcomings in the allocation of resources and in the flow of financing within the system, but also the characteristics of reform which were aimed at stabilizing resources rather than shifting incentives for improvements in the efficiency and affordability of the health system, and in improved quality of care. In addition, the reforms have not done well on the equity front, and the level and scope of informal payments that patients make for health services has remained high. This constitutes a serious financial

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burden for many households and dilutes the effectiveness of reform measures. Finally, the reforms thus far have not focused in any meaningful way on improving the clinical quality of care, which remains quite variable. The heavy amount of indebtedness in the health system, the adverse impact of informal payments in the health sector on equity, and variable clinical and perceived quality of care – all present a huge challenge for fiscal health as well as for production and delivery of health services in Poland. Indeed, improving the policy mix by continuing to bring the fiscal deficit to more sustainable levels is a priority for the government, especially as Poland seeks to meet the Maastricht criterion of 3 percent of GDP in the next few years, a prerequisite for joining the European Monetary Union. Meeting this challenge may require sustained reductions in the share of public expenditures in GDP, which in turn may require deep structural reforms in key areas of public sector involvement, including the health sector, so as to prevent further accumulation of debts while improving the effectiveness of service delivery. The main objectives of this report, therefore, are to take stock of recent trends in health expenditure aggregates in the public sector and identify specific areas of health expenditure reform consistent with the objectives of stabilizing the fiscal situation without adversely affecting the production, delivery and utilization of health services. The rest of this report is organized as follows. Section 2 presents the macroeconomic background in order to set the context in which the fiscal situation in the health sector can be best understood. Poland, like other countries in the region, is undergoing a demographic transition as a result of which the population is ageing rapidly, and these issues are discussed in Section 3. Section 4 presents the health status of the people of Poland, and compares it with other countries in the region. The structural characteristics of the health care system are highlighted in Section 5. The structure of revenues in the health sector is presented and discussed in Section 6, followed by a discussion in Section 7 on the structure of expenditures in the health sector. Section 8 examines debts in the health system. Major expenditure items are listed in Section 9 and conclusions are presented in Section 10.

49. The Economy Poland’s GDP grew at a brisk 5.4 percent in 2004, which has been the strongest performance of the economy since the late 1990s. The first half of 2004, supported in part by the stockpiling ahead of EU accession in May 2004, grew at over 6 percent year-on-year, followed by a slowdown in the second half, to between 4 percent and 5 percent year-on-year. Net exports grew faster than domestic demand, especially in the first two quarters of 2004. Investment picked up in the second half of 2004, suggesting that a recovery was gaining momentum, while consumer spending slowed toward the end of 2004. Early trends for 2005 indicate a recovery in retail sales, along with industry output and construction, and GDP growth is expected to continue at a healthy rate through 2005 as well, though at rates closer to the second half of 2004 than to those in the first half. The main origins of GDP in 2002 were financial, transport and markets services (28.9 percent), industry (23.9 percent), trade (21.3 percent), public administration and other services (16.2 percent), construction (6.7 percent) and agriculture (3.2 percent). Table III.19: Macroeconomic Indicators, 2000-2004 2000 2001 2002 2003 2004 GDP at market prices (Zl bn) 723.9 760.6 781.1 814.9 884.2 GDP (US$ bn) 166.6 185.6 191.4 209.5 241.9 Real GDP growth ( percent) 4 1 1.4 3.8 5.4 Consumer price inflation (av; 10.1 5.5 1.9 0.7 3.5

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Poland, registered unemployment

18.0

18.5

19.0

19.5

20.0

20.5

I II III IV V VI VII VIII IX X XI XII

s ource: CS O

2002

2003

2004

percent) Population (m) 38.3 38.3 38.2 38.2 38.2 Exports of goods fob (US$ m) 35,902 41,663 46,742 61,007 80,917 Imports of goods fob (US$ m) -48,209 -49,324 -53,991 -66,732 -87,083 Current-account balance (US$ m) -9,980 -5,372 -5,007 -4,603 -3,640

Productivity grew at over 4 percent in 2004, and average earnings grew at a broadly comparable rate, suggesting a limited scope for increase in consumer expenditure. Over 2004 as a whole, consumer prices increased by an average 3.5 percent, up significantly from the rate of just 0.7 percent recorded in 2003. The year-on-year inflation rate rose sharply in mid-2004 as a result of one-off price effects linked to Poland’s entry to the EU and the rise in world oil prices. However, year-on-year inflation rate fell to 4 percent in January 2005, helped in part by a good harvest, and by the strong zloty which reduced external inflationary pressures. The price shocks linked to EU entry in 2004 are not likely to be repeated in 2005, and inflation is expected to slow down to 3.2 percent in 2005 and 2.7 percent in 2006. Already, the year-on-year growth of consumer prices in March 2005 was just 3.4 percent, significantly lower than the rate of 4.4 percent recorded at the end of 2004. Cost pressures from the labor market continue to be weak, in part because of the high unemployment that prevents a sharp acceleration in wage inflation, and nominal wages in enterprises rose by just 2 percent year on year in the first two months of 2005.

At the same time, the headcount unemployment rate is on a downward trend, though the absolute level of joblessness continues to be very high (Poland has the highest unemployment rate of any EU member). There are considerable regional variations in the labor market, which exhibits tightness in the Warsaw region (average end-December unemployment rate of 15 percent), and in Krakow and Poznan, while regions such as Warminsko-Mazurski (average end-December unemployment rate of 29 percent), Zachodniepomorskie and Lubuskie face the greatest difficulties. Fiscal performance in 2004 was better than budgeted on the back of strong revenues, and in 2004 the state budget deficit was PLN 41.5bn (US$11.3bn; 4.7 percent of GDP), almost PLN 4

bn lower than the original target. Revenues evolved more or less in line with stronger than expected output growth, while expenditures were held at budgeted levels. Nevertheless, the expansionary 2004 budget raised the deficit by 1.5 percent of GDP compared to the year before. However, the figures exclude off-budget borrowing, and under the European System of Accounts (ESA 95) methodology used by the EU the 2004 deficit is estimated to have been around 5.3 percent of GDP. The 2005 state budget targets a deficit of PLN 35bn (around 3.7 percent of GDP), and, although off-budget borrowing will continue in 2005, the overall budget deficit is projected to be significantly lower than in 2004. Approval of further elements of the Hausner plan stalled in the last quarter of 2004. Most importantly, the reform of the farmers’ pension system (KRUS) remains on the agenda. Also, plans to unify the VAT have apparently been put on hold. KRUS reform means higher social security contribution for

Figure III.20: Poland registered unemployment

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farmers, and VAT rate unification means higher food prices, both highly sensitive political issues. However, this situation may rapidly change, with elections scheduled in September 2005 and with the departure of Jerzy Hausner, the deputy prime minister responsible for putting together the plan for public finance reform, from the ruling Democratic Left Alliance (SLD) to join the new Democratic Party. Political support to restrict government spending is likely to wane, which may limit progress on implementation of the Hausner plan before the election. In fact, even if political pressures to increase spending on sensitive social programs are contained, statutory indexation of many social benefits for inflation will make it much more difficult to limit the growth of public spending. The present government’s medium-term budget plans envisage a further fall of around 0.5 percent of GDP in the budget deficit in 2006, which is unlikely to happen since it depends on the full and complete implementation of the Hausner plan. Table III.20: Performance of Hauser Program (expenditures and revenues, percent of GDP) 2004 2005 2006 2007 Savings in total expenditures 0.06 0.79 0.62 0.93

1. not requiring legislative changes 0.01 0.05 0.07 0.07 2. requiring legislative changes 0.05 0.74 0.55 0.87

Total additional revenues 0.07 0.71 0.76 0.75 1. not requiring legislative changes 0.00 0.40 0.39 0.38 2. requiring legislative changes 0.07 0.31 0.37 0.36

Source: Convergence Program, November 2004

The current government has set a target of 2009 for Poland's entry to the euro zone, which will require the government to bring down the overall government deficit to less than 3 percent of GDP (on the EU's European System of Accounts, or ESA 95, definition) by 2007. The Ministry of Finance estimated in November 2004 that the 2004 deficit on the ESA 95 measure would be around 5.4 percent of GDP. This figure classes the private pension funds as part of the government sector, and the task of bringing down the deficit to less than 3 percent of GDP by 2007 would be made even more difficult if, as expected, the EU finally decides that the pension funds should be excluded, which would increase the deficit by another 1.8 percent of GDP.

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50. Demography Poland, like many other countries in the region, faces the consequences of population ageing caused by reduced fertility and mortality rates on the one hand and increasing life expectancies on the other. Total Fertility Rates (TFR) in Poland fell from 2.33 in 1980-85 to 1.26 in 2000-2005 and is expected to increase only marginally to 1.41 by 2020-2025 (Figure III.21).43

Life expectancy at birth has been steadily rising and is expected to continue rising. Life expectancy at birth for females increased from 74.3 years in 1980-85 to 78.7 years in 2000-2005, and is projected to rise to 81.4 in 2020-2025. Likewise, life expectancy at birth for males increased from 67.2 years in 1980-85 to 72.2 years in 2000-2005, and is projected to rise to 75.3 in 2020-2025. Overall, life expectancy is projected to rise to 78.4 years in 2025, compared to 70.7 years in 1980-85 (Figure III.22).

The net result of decreasing TFR and increasing life expectancies is that the share of people aged 60 years and older, which was 13.8 percent in 1985, is projected to increase to 37.9 percent in 2025 (Figure III.23). 43 TFR is the average number of children a woman is expected to have by the end of her reproductive period. Since it is measured using information from births to women aged 15-49 in a certain period, it is the average number of children a woman is expected to have between age 15-49.

Figure III.21: Total Fertility Rate, Poland, 1980-2025

0

0.5

1

1.5

2

2.5

1980-1985 1990-1995 2000-2005 2010-2015 2020-2025

TFR

Figure III.22: Life Expectancy at birth, Poland, 1980-2025

0

10

20

30

40

50

60

70

80

90

1980-1985 1985-1990 1990-1995 1995-2000 2000-2005 2005-2010 2010-2015 2015-2020 2020-2025

Years

Male Female Total

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This will result in a dramatic “upside-down” change of the age pyramid (Figures III.24a and III.24b).

The old age dependency ratio and total dependency ratio are also expected to rise sharply. Another challenging demographic issue is the population decline, and by 2050, there will be 31.92 million inhabitants in Poland, almost 6.6 million less than today.44

51. Health Status


Figure III.23: Poland: Broad Age Groups ( percent)

0

10

20

30

40

50

60

70

1995 2000 2005 2010 2015 2020 2025


Figure III.24a: Poland 2005

5.14

5.44

6.47

6.62

6.92

8.84

8.32

7.19

6.28

7.43

8.09

6.49

5.36

4.03

3.31

4.06

4.42

4.71

5.66

5.84

6.15

7.86

7.43

6.50

5.80

7.06

7.98

6.69

6.03

5.29

4.79

7.78

10 8 6 4 2 0 2 4 6 8 10

0-4

5-9

10-14

15-19

20-24

25-29

30-34

35-39

40-44

45-49

50-54

55-59

60-64

65-69

70-74

75+

P ercent age

Poland 2020

5.04

4.69

5.10

5.47

5.77

6.79

6.91

7.18

9.12

8.48

7.13

5.97

6.61

6.47

4.42

4.90

4.31

4.02

4.37

4.69

5.00

6.01

6.18

6.49

8.27

7.78

6.72

5.89

7.01

7.57

5.89

9.83

10 8 6 4 2 0 2 4 6 8 10

0-4

10-14

20-24

30-34

40-44

50-54

60-64

70-74

P er cent age

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The health status of the people of Poland compares favorably with the health status of the people of the new member states of the European Union (except Malta and Cyprus), though not as favorably with the health status of the people of countries belonging to the European Union before May 1st 2004 (or EU15). As Table III.21 shows, life expectancy in Poland (74.65 years in 20020) is within the range of life expectancy in the new member states (70.2 to 75.8 years), but lower than the life expectancy in EU-15 (average 79.06 years). Likewise, disability-adjusted life expectancy in Poland is almost 6 years less than the EU15 average. Infant deaths in Poland – 7.52 per 1,000 live births – is also well within the range of the new member states (varying from 3.9 in the Czech Republic to 9.44 in Latvia), but is higher than the EU-15 average of 4.61. The incidence of Tuberculosis in Poland – 25.05 per 100,000 – is much higher than the EU-15 average of 8.65 per 100,000, while the rate of clinically diagnosed AIDS – 0.43 per 100,000 – is much lower than the EU-15 average of 1.61. Table III.21: Health Status Indicators, Poland and other new EU Member States (2003)

a Data for 2002

Source: WHO, European Health for All Database (January 2005 update), as accessed online at http://data.euro.who.int/hfadb, on May 24th, 2005, 5pm. Tables III.22 and III.23 present the standardized death rates (SDRs) for a wide variety of causes. A comparison of the death rates from main causes between countries gives broad indications of how far the observed mortality might be reduced. SDRs in Poland compare favorably to the other new member states, but are somewhat higher when compared with the EU-15 average. SDR from all causes in Poland is well within the range of SDR from all causes in the new member states, but is higher than the EU15 average of 640. Likewise, SDR from circulatory system disorders, cerebrovascular disorders, ischemic heart diseases, selected alcohol-related and smoking-related causes is higher in Poland compared to the EU15 average, but well within the range of new member states. Table III.22: Standardized Death Rates (per 100,000), different causes (2003) All

Causes Circulatory System

Cerebro-vascular




Slovenia 795.49 295.29 78.76 94.37 1.05 111.42 251.08 Hungary 1047.97 508.30 134.59 232.66 2.41 149.55 491.02 Czech Republic 899.60 61.88 132.37 176.09 0.68 89.74 380.91 Estonia a 1090.58 560.35 154.06 323.00 6.10 174.29 541.74 Slovakia a 971.49 527.71 88.18 283.48 1.19 92.80 443.02 Poland a 891.55 413.89 98.57 125.78 2.33 88.95 306.79

Life Expectancy






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Latvia 1113.62 593.02 206.23 291.58 8.70 160.22 566.77 Lithuania 1008.26 519.78 117.37 327.75 9.45 176.98 518.51 EU-15 average a 639.88 236.32 59.05 92.89 8.65 61.28 220.78 a Data for 2002


nant Neo-plasms








180.50 37.05 2.35 8.38 48.31 30.81 12.62

a Data for 2002

Source: WHO, European Health for All Database (January 2005 update), as accessed online at http://data.euro.who.int/hfadb, on May 24th, 2005, 5pm. SDRs in Poland due to chronic liver disease and cirrhosis (12.98) and diseases of the digestive system (36.68) are the lowest among new member states, but higher than the EU15 average. Likewise, SDRs from malignant neoplasms, lung cancer, cervical cancer, and diseases of the respiratory system are higher in Poland compared to EU15 averages, though SDR from infectious diseases is lower than the E15 average. Overall, observed mortality can be reduced significantly in Poland if the health system and other determinants of health are more effective in addressing health problems that account for high levels of mortality, like diseases of the circulatory system, malignant neoplasms and ischemic heart diseases.

52. Structural Characteristics of the Health System The Polish health care system has undergone many changes over the last few decades. Before the regional sickness funds were introduced in 1999, health services were financed by the Ministry of Health and Social Welfare, the Ministry of Finance, the voivods and the local governments. All facilities were under state ownership and central financing through budgetary transfers. Based on the Siemaszko model of organization and delivery, the health care system in Poland emphasized access and offered free universal public health care to all. The national budget, either directly through the Ministry of Health, or through other ministries like Defense, Interior, Transportation and Industry, supported a huge network of state-financed hospitals and clinics. Primary health care in this system was produced and delivered by a network of over three thousand service centers. Administered by provincial Voivodship or independent local government gminas, primary health care was provided by multi-specialist teams of physicians trained in internal medicine, pediatrics, and gynecology, and by dentists, nurses, midwives

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and ancillary support staff. However, due to significant budgetary pressures and amidst drastic economic restructuring, the health standards which at one time were comparable to levels in Western Europe started declining. Thus in January 1999, the Polish government introduced the social health insurance system, its most significant health sector reform to date. In 1999, the national health care system came to be financed by common health insurance institutions, called the sickness funds (which were initially 16 in number but were later consolidated into one). All citizens automatically became members of one of the 16 Sickness Funds organized on a regional basis (including one health insurance fund for employees of military services). Regardless of the source of income, the obligatory premium – currently 8.25 percent of income – charged on the income of each citizen is used to finance the budget of the health insurance funds. Farmers are exempt from taxation and do not have to pay for health insurance, while the state budget supports for the unemployed and the homeless. Some medical services, particularly expensive tertiary services, are also financed directly by the state budget. Though attempts are being made to introduce private and additional state insurance, none exist as of now. With introduction of social health insurance and creation of the health insurance funds, the role of the Ministry of Health and Social Welfare as the major source of funds in the health system declined considerably, in favor of the health insurance funds. Similarly, the other sources of funds that were prominent till 1998 lost their pre-eminent position after January 1999. The health insurance funds contracted with primary care physicians on a capitation basis and with specialists on a fee-for-service basis. While the financial outlays in the capitation contracts were easy to monitor, in the sense that both the amount per enrollee per year and the number of enrollees were known to payers as well as providers and there were no uncertainties in the system, the fee-for-service payment mechanism was “open-ended.” It did not take long for the health insurance funds to figure out that left unmonitored, the fee-for-service payment system would provide all incentives for the specialists’ physicians to increase service contacts and thereby increase their revenues. The fact that the primary care physicians were paid on a capitation basis did not help either, for it provided incentives to the primary care physicians to, within limits of course, do less for the patient – since that would not affect their revenues – and refer the more costly patients to the specialists. Realizing that effective monitoring would be almost impossible, the health insurance funds responded by setting limits to the number of patients a specialist could examine, and in this way entered into “closed” contracts with specialists. In addition, the health insurance funds laid down specific provisions in the contracts ensuring that the specialists uniformly spread their contracted number of patient visits over the year. In effect this meant that the specialists under contract to the Sickness Funds could examine only a fixed number of patients per day and no more, even if the specialist had time left over after meeting the required quota. Such limits, no doubt placed with the best of intentions, soon translated into long queues for specialist services, something that even the most ardent proponents of the health reform had not bargained for. Patients who could not get appointments in a reasonable time frame had few options left: seek care in the private sector, jump the queue by making an informal payment, or not seek care at all. Besides consciously reducing utilization of specialists’ services, the way that the contract system was organized thus made it challenging for the patient to see a specialist even when the visit was justified, referrals were obtained and the specialist was identified.

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The 16 fairly autonomous health insurance funds that were set up as part of this social health insurance reform also translated into many different ways of financing health services and organizing delivery. Even though the differences were more pronounced in detail rather than in principle, they were quite visible and noticeable, and their prominence was magnified by the stories and experiences recounted in the media. Portability across the health insurance funds was restricted in practice, and patients often faced problems in seeking treatment in regions outside their own. For these and a variety of organizational-specific reasons, health sector reforms initiated in 1999 had a mixed reception and the social perception of the operation of the health care system following the changes remained somewhat compromised. In part as a response to these problems, and in part driven by ideological considerations, the new government that came to power in 2003 eliminated the autonomous and decentralized Sickness Funds, and consolidated all the regional funds into one central fund. Founded in April 2003, the National Health Insurance Fund (Narodowy Fundusz Zdrowia or NFZ) operates in the entire country via 16 regional branches which were once the independent regional funds. The NFZ contracts with all providers for health care services to all citizens in the country.

53. Health Sector Financing The main source of health funding in the Polish health care system is social health insurance premium contributions, followed out-of-pocket payments and general taxes. Public funding, including health insurance contributions and small portion of central government and local governments funding, accounted for around 71 percent of total health expenditure (in 2003), while out-of-pocket expenditure represented around 29 percent of total health expenditure. An examination of the total expenditures over the six-year period 1999-2004 shows that expenditures have increased steadily in nominal terms, from 38 billion PLN in 1999 to 49.5 billion PLN in 2004. Table III.24: Expenditures on Health, 1999-2004 (million PLN) Health Care Expenditure (current prices) 1999 2000 2001 2002 2003 2004

Health Insurance 22,651.00 23,722.20 27,511.70 29,909.70 29,833.30 31,176.56 State Budget 2,399.00 2,228.40 2,356.80 2,551.70 2,432.60 2,931.20 Local Governments 838.60 998.70 1,058.40 756.90 760.70 917.00 Other Public 1,134.50 1,294.60 1,525.80 1,412.70 1,166.00 Total Public Health Care Expenditure 27,023.10 28,243.90 32,452.70 34,631.00 34,192.60 35,024.76 Out-of-Pocket 11,025.56 12,202.12 12,700.79 13,034.16 13,910.68 14,462.80 Total Health Care Expenditure 38,048.66 40,446.02 45,153.49 47,665.16 48,103.28 49,487.56 Public: Private Ratio 71:29 70:30 72:28 73:27 71:29 71:29 Debts 2,744.40 501.00 1,484.30 979.00 Total Health Care Expenditure including debts 38,048.66 40,446.02 47,897.89 48,166.16 49,587.58 50,466.56

Source: Poland Ministry of Health (2004): Finansowanie ochrony zdrowia w Polsce - Zielona Ksi ga 53.1 Public Expenditures on Health

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Public expenditures on health increased in nominal terms from 27 billion PLN in 1999 to 35.0 billion PLN in 2004. In real terms, however, the increase in public health care expenditure has been very small, from 27 billion PLN in 1999 to 28.7 billion PLN in 2004 (at 1999 prices), with the exception of year 2000 when public expenditure expenditures on health actually dropped. The main items of public expenditures on health are premium revenues, state budget and sub-national government budgets.

Figure III.25: Pubic Expenditures on Health

26.2

2930.9 30.5

32.5

35.236.9

4.094.06

4.11

3.87

3.983.99

3.96

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Public expenditures on health care (left scale) Proportion of public expenditures of health care in GDP (right scale)

Source: Poland Ministry of Health (2004): Finansowanie ochrony zdrowia w Polsce - Zielona Ksi ga (i) Premium Revenue Since 1999, health insurance premiums have constituted the main and dominating source of funds to the health sector. The base health insurance rate has been systematically growing since 1999, when the rate was 7.5 percent, and is planned to reach the level of 9 percent by 2007. The rate of increase in the premium rate is higher than the rate of growth of GDP – during the period 2000-2006, the planned increase in premium rates is 1.45 percentage points faster than GDP – thereby increasing the relative availability of resources. The premium levels operate like a revenue-adjusting factor, and are effectively seen as the basis for ensuring balance in the entire system. In 2006, premiums are expected to be greater by 55 percent compared to the 2000 level, while the GDP would have grown only by 43 percent.45 Table III.25: Average rate of increase in HP growth in comparison with rate of GDP Average Rate of Growth 2000-2003 2003-2006 2000-2006 GDP (current prices) 4.02 percent 8.21 percent 6.09 percent HI premium 6.66 percent 8.42 percent 7.54 percent Source: Poland Ministry of Health (2004): Finansowanie ochrony zdrowia w Polsce - Zielona Ksiga The share of private incomes in the financing of health insurance premiums amounted to 1 percent in 2000, which increased to 4.3 percent in 2003 and is expected to reach the level of 12.9 percent in 2006 and 15 percent in 2007.

45 All rates of growth quoted relate to nominal values.

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Table III.26: Health Insurance Premium Dynamic (percentages) Item 2001 2002 2003 2004 2005 2006 Last year = 100 GDP (current prices) 105.1 102.7 104.3 108.6 107.7 108.4 Total Health Insurance (HI) Premium

112.1 99.5 108.8 108.2 108.1 109.0

HI premium covered by PIT 108.6 102.5 106.2 104.5 105.1 106.1 HI premium covered by other public funds

148.1 71.9 100.8 113.9 107.1 106.6

HI premium covered by individuals 141.0 137.6 360.25 177.8 148.2 137.5 Year 2000=100 GDP (current prices) 105.1 107.9 112.5 122.2 131.6 142.6 Total HI Premium 112.1 111.5 121.3 131.2 141.9 154.7 HI premium covered by PIT 108.6 111.3 118.1 123.5 129.7 137.6 HI premium covered by other public funds

148.1 106.5 107.3 122.2 130.9 139.5

HI premium covered by individuals 141.0 194.0 698.6 1242.1 1840.9 2530.4 Structure of Premium HI premium covered by PIT 88.2 90.95 88.6 85.6 83.2 81.0 HI premium covered by other public funds

12.1 8.7 8.0 8.5 8.4 8.2

HI premium covered by individuals 1.0 1.4 4.6 7.5 10.3 12.9 Source: Poland Ministry of Health (2004): Finansowanie ochrony zdrowia w Polsce - Zielona Ksi ga (ii) State Budget Since 1999, state budget resources have financed specialist medical procedures, health care programs, medical rescue services, public blood service and sanitary inspection. The budget also finances a portion of health insurance premiums for those with no incomes. State budget expenditures in health have fallen by 40 percent during 1999-2003, and the share of the state budget in total public health expenditures declined from 86.9 percent in 1996 and 78.4 percent in 1998 to 14.1 percent in 1999 to 7.3 percent in 2002. In nominal terms, state budgetary allocations fell from 6312.6 million PLN in 1999 to 3714.5 million PLN in 2003.

Figure III.26: State Budget Allocations, 1999-2003

01000

2000 3000

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1999 2000 2001 2002 2003

Mill

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PL

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151

Source: Poland Ministry of Health (2004): Finansowanie ochrony zdrowia w Polsce - Zielona Ksi ga (iii) Sub-National Government Budgets Revenues of Sub-national governments are calculated in accordance with algorithm determining their respective shares in general taxes, and are generated by charges imposed by such sub-national governments and are provided by subventions and subsidies of the state budget. Since 2001, the local government’s share of total public expenditures on health care has dropped from 10.8 percent on average during 1996-1998 to 7.6 percent in 1999 and 6.5 percent in 2002.

53.2 Private Out-of-Pocket Expenditures on Health Private out-of-pocket expenditures, including formal and informal payments, increased from 11 billion PLN in 1999 to 14.5 billion PLN in 2004. In the early nineties the share of direct household expenditures in health care financing amounted to only 10 percent of the total financing of the health sector. However, direct expenditures by population, amounting to at least 13.9 billion PLN accounted for about 30 percent of the total health care expenditures in 2003.46 Average monthly health care expenses per household member, estimated on the basis of the results of the household budget surveys, amounted to 30.24 PLN in 2003, while average monthly spending in health care per household member estimated on the basis of module survey in health care, per household member, amounted to 38.80 PLN.47

46 According to household budget surveys 47 The former average, unlike the latter, does not contain the so-called informal payments, gratuities etc., or expenses for treatment of persons from outside of the household.

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54. Health Care Expenditures, by uses The introduction of social health insurance and the subsequent departure from predominance of the state budget as source of health care financing towards financial resources of sickness funds based on the universal health insurance premiums has not contributed to a considerable increase in public finances for health services. As a percentage of GDP, health expenditures fell from 4.8 percent in 1994 to 4.3 percent in 1999 to 4.29 percent in 2002. The area that has seen the largest increase in public expenditures on health in the last five years is pharmaceuticals, which has grown by 81 percent during 1999-2004. Expenditures on outpatient care have grown by 25 percent, while expenditures on hospitals have grown by 19 percent during this period. Table III.27: Public health care expenditure by uses, 1999-2003, in million PLN 1999 2000 2001 2002 2003

Hospitals 11,716.00 11,928.70 13,419.30 14,138.80 13,897.10 Long-term care 505.60 584.60 313.80 417.80 453.90 Outpatient care 6,329.10 6,844.10 8,073.10 8,253.90 7,940.10 Public health 1,048.00 1,262.70 1,478.30 1,503.00 1,527.10 Administration 1,707.20 1,067.60 1,356.80 1,529.60 953.90 Drugs 3,707.60 4,750.40 5,484.20 5,806.00 6,715.80 Other 2,009.50 1,805.80 2,327.30 2,982.00 2,704.70 Total 27,023.00 28,243.90 32,452.80 34,631.10 34,192.60 Source: Poland Ministry of Health (2004): Finansowanie ochrony zdrowia w Polsce - Zielona Ksi ga Share of hospital expenditure in total public expenditures ion health has fallen over the years, from 43.3 percent in 1999 to 40.6 percent in 2993. Share of outpatient care expenditures has remained more or less constant at 23 percent, while the share of expenditure on drugs increased from 13.7 percent to 19.6 percent.

Source: Poland Ministry of Health (2004): Finansowanie ochrony zdrowia w Polsce - Zielona Ksiga Projections of public expenditures on health care indicate a steady growth of expenditures in the short-run, by almost 25 percent in 2006 as compared to 2002. In fact, public expenditures on health care are expected to double within the next twenty years, with a conspicuous period in between during 2010-2020 due to the growing share of population over 65.

Figure III.27: Functional Share of Public Expenditures on Health (percent)

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Long-term care Public health AdministrationOther Drugs Outpatient careHospitals

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Source: Poland Ministry of Health (2004): Finansowanie ochrony zdrowia w Polsce - Zielona Ksi ga In 2001, the difference between expenditures and revenues was slightly lower than in 2000. In 2002, the difference between revenues and expenditures grew again to the level similar to that of the year 2000, with a significant decrease until the year 2007. In 2010 the overrun of expenditures relative to revenues is expected to amount to slightly more than 2.5 billion PLN, while in 2020 it is expected to grow to 18.3 billion PLN, nearly 25 percent of the total revenue. Pharmaceuticals are the most conspicuous and increasing item in the structure of household expenditures on health, accounting for 43 percent of total out-of-pocket expenditures on health in 1999 and 53.5 percent in 2003. Expenditures on outpatient care, including dental care, are the next biggest item of out-of-pocket expenditures on health. Expenditures related to hospital treatment are the last big-ticket item, but have been decreasing in recent years, from 32 percent of total out-of-pocket expenditures in 1999 to 22 percent in 2003.

55. Debts Debts refer to payments outstanding and past due, not liabilities which are natural consequences of financial management of health facilities. The health sector debt figures as announced each year are cumulative figures, representing the total debts accumulated at the end of the year under consideration. Accordingly, debts for each year are obtained as the difference in the current end-of-year debt figure and the previous year’s end-of-year debt figure. The health sector in Poland has been generating debts for over a decade now. In the 1990s, debts were written off by the state several times, with a major bail-out that took place just before the implementation of reforms in 1999. Outstanding debt accounts for over 66 percent of all health care facilities liabilities. As the Table III.28 shows, matured debts rose by PLN 501 mn (from PLN 2,744.4 mn at the end of 2001 to PLN 3,245.4 million) over 2002 whereas in 2003 the growth of liabilities was over 2.9 times greater than the year before (PLN 1,484.3 million – or an increase of matured debts

Figure III.28: Comparisons of revenues of health insurance from premiums and current expenditures

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to 4,729.7 million PLN). In the 1st half of 2004, matured debts rose by PLN 779.2 million, to a level of PLN 5,508.9 million.

Table III.28: Matured debts of autonomous public health establishments (million PLN)

Growth rate (percent)

2001 2002 2003 2004 (1st half)

2002/ 2001

2003/ 2002

June 2004/ Dec. 2003

Autonomous public health care establishments created by local government units

2,279.2 2,714.3 4,021.2 4,600.8 119.1 148.1 114.4

Autonomous public health care establishments created by central units

465.2 531.1 708.5 908.1 114.9 133.4 128.1

TOTAL 2,744.4 3,245.4 4,729.7 5,508.9 118.3 145.7 116.5 Source: Poland Ministry of Health (2004): Analysis of Debts There are significant variations in debts across the regions of Poland. According to a poll carried out by the Ministry of Health (June 2003), 80 percent of matured debts originated from 15 percent of establishments, while half of the matured debts were shown by 5.5 percent of the total number of establishments. The most indebted facilities are located in Wroclaw region (Dolnoslaskie Voivodship), a region that generates almost 20 percent of all debts (1,097.8 mln PLN). Other regions with debts above the average are Lodz region (721.6 mln PLN), Warsaw region (528.8 mln PLN) and Gdansk region (438.2 mln PLN). On the other side, Opole region is the least indebted, with accrued outstanding debts at the level of 84.1 mln PLN. It is worth noting that the Wroclaw region also has the largest health care infrastructure in Poland, while Opole has the smallest one. Also, only 2 regions out of 16 were able to stop the escalation of debts and in 2004 reduced their outstanding debt as compared to 2003. These were the Krakow region (reduced debts by almost 8.5 mln PLN between August 2004 and August 2004) and Rzeszow region (reduced debts by over 15 mln PLN between August 2004 and August 2004).

The largest share of hospital-based debts is towards the public sector, mostly for local taxes, real estate tax and social insurance on behalf of the employees. This constitutes 31.2 percent of all outstanding debts in the sector. Health care facilities are subject to the highest rate of real estate tax as it is applied for any business activity. This, however, is not accompanied with treating the health care facility as a business entity in other fields for example issue of VAT where the health care providers pay VAT while purchasing goods and services however, since health care is exempt from VAT, hospitals cannot deduct it in their cost accounting system. This leads to unbalance and the estimated amount for year 2004 is 955 mln PLN.

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Source: Poland Ministry of Health (2004): Analysis of Debts The second item on the list of debts is debt towards the suppliers of drugs and medical consumables, which is nearly 20 percent of all outstanding debts and the third largest item of 18.5 percent is debt towards the employees. According to the Act of 22 December 2000 on Amendments to the Act of 16 December 1994 on the Negotiation System of Modeling Wage Growth with Entrepreneurs and on Amendments to Certain Acts and the Act on Health Care Establishments (also known as the “203 Act”), health care establishments were obliged to pay employees wage raises in 2001 of not less than PLN 203 including derivatives, and in 2002 at a level not lower than the average wage growth in the national economy. It is estimated that in 2001 only about 55 percent of health care establishments raised wages, of which 45 percent only covered the full amount of PLN 203. Implementation of wage raises was worse in 2002. The main reason cited by public health care establishments for not implementing the statutorily imposed obligations is limited financial resource s. After implementing the wage raise in the full amount, most health care establishments ran into debt.

Figure III.29: Structure of Hospital Debts

31.20%

18.50%1.10%

19.90%

3.90%

25.40%

Debt towards the public sector (taxes, social insurance etc.)Debt towards employeesDebt due to investment and renovationDebt towards the suppliers of drugs and medical utilitiesDebts towards medical equipment suppliersOther

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Table III.29: Debts of SPZOZ by type (as on August 31, 2004) Debts in ‘000 PLN

Specification Total

of which matured

Proportion of matured debts in total (percent)

Structure of all debts (percent)

Structure of matured debts (percent)

Total debts 8,405,252 5,557,975 66.13 100.00 100.00 Debts to employees (in this payroll fund and social benefits fund of the workplace)

1,522,729 1,030,249 67.66 18.12 18.54

Public-law debts (in this ZUS) 2,342,505 1,732,657 73.97 27.87 31.17

Debts from the purchase of drugs and medical materials. Debts from the purchase of medical equipment

1,602,017 368,292

1,104,700 218,650

68.96 59.37

19.06 4.38

19.88 3.93

Debts from repairs and upgrading

62,082 29,230 47.08 0.74 0.53

Debts fixed assets under construction

124,015 34,407 27.74 1.48 0.62

Other debts from conducting operations

2,383,612 1,408,082 59.07 28.36 25.33

Source: Data sent to the Ministry of Health by Voivods The total principal amount owed to employees from the implementation of the "203 Act" in the years 2001-2002 is estimated at about PLN 2.2 billion, on the basis of data of the Central Statistical Office (GUS) concerning the average employment in autonomous public health care establishments employing over 49 persons, with the number of employees being 394,100 in 2001 and 329,300 in 2002.48 According to the data of polls of the Ministry of Health (which were answered by 919 SPZOZ employing over 50 workers), indebtedness resulting from the "203 Act" as on 31 March 2004 totaled PLN 1.93 billion. Other causes of the increase in hospital debts are the state of hospital infrastructure, status of medical equipment and lack of resources for repairs and investments. The resources allocated by local governments for investment purposes have decreased systematically and health care facilities have had to cover these costs out of their own resources, often using external financing such suppliers’ credits, on which the hospitals have defaulted. The problem of debt growth has been particularly visible in regions with an excessive concentration of public hospitals. One explanation for such high levels of debt is that establishments are required (as an implicit agreement) to provide services irrespective of the value of contracts concluded with the sickness funds, bearing costs that are not refunded either from health insurance or from the state budget. Further, the prices proposed by the Fund are often inadequate to cover the real costs of providing the individual services. And finally, the allocation of funds between the voivodship branches of the NFZ do not fully take into account the flow of patients to health care establishments located beyond the borders of the voivodship of the place of residence of patients.

48 GUS communication dated 19 August 2004, ref. DUI-06-3089/04.

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But there are several other reasons for these debts as well, which are in somewhat greater control of the hospitals. For one, there is an excess supply of hospital beds, and it is expensive to maintain the huge infrastructure, particularly if it is idle. Second, there is near-absence of effective management and supervision in public hospitals, and nobody seems to be concerned too much about that because the founding bodies of these hospitals face a very soft budget constraint. And finally, the dynamic development of secondary trading in health care liabilities, carried out by private entities specializing in buying out debts, particularly from entities of the public finance sector in the long run, has generated additional financial costs in the form of interest on the taken over debts, and the “help” offered by them has acquired a negative meaning, leading public health care establishments to ever greater financial collapse. Recently there has also been an intensification of debt collection from SPZOZ by way of seizure by court order, directly from assets of the SPZOZ, as well as through NFZ.

Figure III.30: Seizure of SPZOZ Liabilities by Court Orders

0200400600800

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Source: Data of former UNUZ (Health Insurance Supervisory Office) and NHF

56. Major Expenditure Items Drugs Drugs are the single largest cost group in the entire healthcare system, and over the past few years have been the most dynamically growing element in overall costs of healthcare services. The Polish market is dominated by imported drugs, which account for 63 percent of the market share, and most of which are original drugs. The total value of imported drugs has grown annually at a rate of over 15 percent per annum during 2001-2003, while the value of domestically produced drugs grew at a rate of 10 percent per annum. Both, the retail price of pharmaceuticals as well as quantity of drugs consumed (especially expensive drugs) have grown during this period. Table III.30: Public Expenditures on Refunded Drugs Items 1999 2000 2001 2002 2003 2004 Expenditure of NFZ and health services on drugs (billions PLN)

3.5 4.5 5.2 5.6 6.2 6.1

Increase dynamic, previous year = 100 - 127.9 115.9 108.1 110.3 -1.2 Ratio of drug costs to costs of insured services

16.4 19.6 19.7 19.7 22.2 21.0

Source: Poland Ministry of Health (2004): Finansowanie ochrony zdrowia w Polsce - Zielona Ksi ga

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A characteristic feature of Polish healthcare system is both very high share of drugs in total healthcare expenditures (over 30 percent), and high share of drugs in cost of services financed by NFZ, which is now over 20 percent, significantly more than the share 16.4 percent, the share of drugs in the first year after introduction of public health insurance. Cost of drugs displays high dynamics, clearly exceeding the dynamics of total cost of healthcare. NFZ currently allocates over 6.2 billion PLN for drug refunds.49 Drug refunds expenditures in 1999-2003 display a very high, though decreasing, growth dynamics, with the strongest growth being noted in 2000 (almost 28 percent). This was followed by a relative slowdown, but has again picked up in 2004. Costs of drug refunds are still high, and over 20 percent of NFZ expenditures on healthcare and about 19 percent of public funds allocated to healthcare are used for drug refunds. If hospital use drugs are added to this list, the share of drug refunds in total public expenditures for healthcare grows to over 25 percent. This high share should be seen in the context of very few savings, since the possibility of achieving simple savings by broader use of generic drugs has largely been exhausted already. High share of private expenditures in financing drug costs (almost 60 percent with respect to all drugs and 35 percent with respect to refunded drugs) makes it difficult to further encumber family budgets with cost of drugs. It would possible to change the structure of patients’ co-payments to drugs, and perhaps should be considered as well, but it would be unrealistic to believe that increasing the level of co-payments would be either simple or that it would bring spectacular cost reduction results.

Figure III.31: Expenditures on Drugs and Medical Supplies

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Total cost of drugs sold on the outpatient basis accounts for over 18.3 billion PLN of which 6.7 billion were drugs paid/reimbursed by the Sickness Funds/National Health Fund. The remaining 11.6 billion were covered by the population from out of pocket either as co-payment for drugs or for OTC drugs. Salaries of medical personnel Salaries of medical personnel constitute about 60-80 percent of total payroll, and 50-90 percent of the costs of operation of healthcare units are expenditures for salaries. However, 49 In 2004 a decrease in cost of refunds is expected, which is confirmed by results of first half of 2004.

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remuneration in the health sector is lower than in other areas, and was about 23 percent below the average wages in the public sector in 2002.

Source: Poland Ministry of Health (2004): Finansowanie ochrony zdrowia w Polsce - Zielona Ksiga

As discussed earlier, “Act 203” which required health care establishments to raise employee wages could not be fully enforced due to lack of financial resources. As a result of the autonomy of the sickness funds and health care units, higher expenditures by sickness funds have not translated into higher salaries for health sector employees. Non-medical costs of patient stay in health facilities Non-medical costs of patient-stay in health facilities – which includes cost of management, maintenance and heating of the building, cleaning, insurance (of buildings, vehicles, third party liability insurance of the service provider) – account for about 11 percent of total cost of providing health care, and is steadily growing. Seeking savings and cost reduction, many service providers introduced outsourcing for tasks like laundry, cleaning, meals and renovation, as a result of which the cost of externally-provided services has grown by as much as 38 percent. However, costs of non-medical supplies have not decreased as a result of this outsourcing, and the net effect has been that of increasing total costs. The market came to be captured by a small group of service contractors, who were able to dictate higher prices.

57. Conclusion There is no doubt that many positive achievements have been recorded in the two years following the introduction of social health insurance. The reform has generally done well in bringing about a desirable change in utilization patterns, by encouraging primary care visits and reducing use of specialist services. Changes in the utilization of hospital services also show an improvement since 1999 compared to previous years. By strictly implementing the policy on referrals and by contracting for limited number of specialist services, the Sickness Fund has succeeded in keeping the utilization of specialist services low. By paying primary care physicians on the basis of capitation, often making them fund-holders for specialist care as well, the Sickness Fund has introduced incentives for the physician to reduce referrals and increase her own effort. And finally, by paying hospitals on a reducing scale vis-à-vis the number of patient days, the Sickness Fund has introduced incentives for hospitals to reduce the length of stay.

Figure III.32: Monthly Salaries of Full-Time Employed (October, years)

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At the same time, however, the health sector reforms have not always been received well by the public or by many of the providers themselves. Taking everything into consideration, perhaps the main reasons for the general discontentment with the health financing reform are not financial; rather, the fundamental source of the problem is the way in which the reforms have been implemented. Set against a rhetoric that raised people’s expectations to levels that were untenable (and probably unrealistic), the reform process was short of preparation and lacking in efforts at information-sharing, resulting in low acceptability among the people at large. Changes in the financing of the health sector brought about by introduction of social insurance have been accompanied by significant changes in the organization, management and delivery of health care. The Sickness Funds contract directly with public and non-public integrated health care organizations, and individual private providers; in turn, these organizations contract with independent physicians and private health care units to provide health services. Managers of health units deal directly with the insurance funds, negotiating rates, terms of financing, service focus and delivery hours. All in all, the system of health insurance has spawned an entirely new way of not only financing health care, but also of managing, organizing and delivering health services. Changes in the organization and flow of funds in the health system following the introduction of social health insurance brought about significant changes in the incentive systems affecting provider behavior. Centralized ownership and financing prior to the introduction of social health insurance established a system of incentives and a system of practice in response to these incentives. First, given the nature of allocation of funds, the management of health facilities in the provinces, municipalities and counties had few incentives to develop fiscal and strategic planning functions. The predictability of budgetary allocations undermined the need to improve managerial and organizational capacity, which effectively slowed down the process of innovation and ability to respond to environmental changes. Second, the system of compensation based on salaries undermined the importance of effort and productivity. As a consequence, there was little effort to improve efficiency and quality of care, and patients faced erratic service. In addition, physician salaries were low, and they looked to other sources to augment their salary incomes. However, public physicians enjoyed professional stability, personal job security through long-term assignments and a respected position in the medical society and among the patients, especially for hospital-based physicians. Most physicians also had the opportunity to share work between an ambulatory and a hospital ward, and thus get better access to the superior equipment, advanced medical technology and modern treatment procedures. And third, there was little reorganization and restructuring of the public sector over time, resulting in the public health care system becoming characterized by overstaffing, widespread misallocation of resources, under-utilization of capacity in most areas and under-supply in some. There was some reorganization and innovation in the mid-1990s following the creation of independent large cities and autonomous municipalities, which implemented an impressive variety of innovations in financing and management of health. Using the instrument of contracts to achieve the separation of functions of provision and finance, these independent units introduced new methods of paying physicians that included fee-per-visit, fee-per-procedure, and capitation. Since paying public physicians by any other method except salaries was not possible under existing regulations governing state employees, this meant that any physician accepting alternative methods of payment first had to resign from government service. This led to the creation of a whole new class of private physician practices supported

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by public funds. At the same time, the growth in private physician practices supported entirely by out-of-pocket payments by patients accelerated both in terms of the number of physicians practicing privately and the number of patient visits. Health financing reform was not the only major change that took place in 1999. Poland’s decentralized system of local government was launched at the start of the year, with sixteen large regions replacing the previous forty-nine. Pension reform was also launched in January 1999, opening the way for certain groups, depending on their age, to enhance state pensions by opting for additional private contributions. Accompanying health reforms, all public health facilities were transformed from budgetary units under the federal, provincial or local government to autonomous health producing units, an arrangement that effectively enabled the government to stand apart from day-to-day health sector management. In effect, therefore, all these changes taking place concurrently meant that health care providers, who were used to a position of security (and probably complacence) earlier, now faced a market-like situation in which they had to compete with other providers, often like themselves, for a share of the total health budget envelope. Many private providers also found themselves in the market, openly competing with public and other private providers for patients. In such a situation, only the most prepared could survive, and these providers quickly took the lead in establishing the new rules which they would use to participate in the reform game. For other providers, like the anesthetists, protests and strikes were the only viable options, while for others (for instance gynecologists and psychiatrists) forming politically powerful alliances was the best course.50 Efficiency The systemic overhaul of the health sector in Poland included organizational and management reforms aimed at improving overall efficiency. While some of these reforms have produced results in directions desired, others have not. Efforts to restructure and downsize health facilities were successful, in that the number of hospital beds has been significantly reduced and a large number of hospital staff has been laid off. Similarly, hospital autonomy has proceeded rapidly, with almost all hospitals enjoying a large degree of autonomy with respect to personnel and financing decisions. Reform measures that have been less successful include those associated with increasing the role of competition and market forces. First, there is little or no competition among health service providers. In theory, health facilities compete with each other to get business from Sickness Funds; in practice, however, the Sickness Funds have been supporting nearly all health-providing facilities. Tough decisions to let the inefficient units close down have not been taken, and competition between health facilities is not especially marked. Similarly, while there have been some efforts to contain the growth of institutions producing tertiary health care, these have been largely piecemeal. And finally, while a number of new institutions have been created to support social health insurance, by and large they have not been very effective either in providing leadership and guidance, or in supervising and monitoring the Sickness Funds. Second, incentives to encourage cost-containment have not been adequate. Cost containment has not been the focal point of reforms. For outpatient care, physicians are paid on the basis of 50 Many of the arguments presented in this section and subsequent discussions n efficiency and equity are also made in the Health Chapter of the World Bank (2002): Public Expenditure Review.

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a fixed capitation fee per enrollee for all outpatient services, regardless of the extent and nature of treatment sought. Since physicians participating in this scheme bear most of the risk of treating a patient, they are likely to be conservative in the amount of health care they provide, and more likely to over-refer patients to costlier specialist care. This often becomes a beneficial arrangement for both the physician and for patients, who prefer specialist care even if the primary care physician can equally well provide the required treatment. This, however, increases the costs to the health system since specialist care is relatively more expensive.

For hospital care, hospital managers have not faced proper incentives for reducing costs and improving financial management. The system of paying per bed-day encourages longer hospital stays, thus providing perverse incentives for cost increases among the providers. For acute hospital care, too, Poland has not satisfactorily been able to reorient service provision from this relatively expensive care to lower levels of care. For medicines, the normal practice of using brand name drugs even when much cheaper generic drugs are available not only keeps health costs high, but because brand name drug inflation is generally higher than that for generic drugs, it also leads to higher growth of pharmaceutical costs. A series of recommendations follow from the above. These include: - Introduce meaningful competition among health service providers Health facilities need to compete with each other to get business from Sickness Funds, who should not feel obliged to support any facility. Inefficient units unable to compete with others in the market should be allowed to close down and other facilities should be permitted to take over their clientele. - Establish a direct linkage between hospital payments and patient services Linking services provided to compensation and ensuring that the “money follows the patient” will promote the most cost-effective means of production and delivery. Theory and international experience suggest the use of prospective payments for inpatient care. Prospectively determined payments for a set of services necessary by established clinical protocols to treat a particular diagnosis rely on the fact that services associated with a particular treatment are reasonably predictable and can be bundled into a group to which a monetary value can be attached. Such payment mechanisms discourage excessive use, since the hospital generates surplus by carefully employing its resources and controlling lengths of stay. - Extend the system of family medicine to cover 100% of the population The introduction of family medicine in Poland – a system in which physicians provide health services for the whole family, treating common illnesses across such medicine domains as internal medicine, gynecology, pediatrics, prevention and health propagation – has been synonymous with both enhanced patient satisfaction and cost containment. Family medicine needs to be extended to cover outpatient care for 100% of the population. - Strengthen incentives for improved hospital financial management In the short-run, this requires enforcing a hard budget constraint on hospital managers so as to provide the necessary incentives for accountability and financial discipline. Over the more medium-term, the Government needs to think about a strategy for further reducing the number of hospitals and hospital beds through a system of hospital consolidation with a well-defined strategy for closures. This would also require the development of bankruptcy procedures to

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facilitate enforcement of hard budget constraints and improve financial discipline in the public sector health care facilities. - Promote use of generic drugs, where they exist, and rationalize prescription practices. This is essential to contain the growth of prescription costs, particularly since this is the largest item of private expenditures. One way could be to set reimbursement levels for drugs based upon use and pricing of generic drugs, and to establish control triggers and benchmarks for monitoring unnecessary and excessive prescriptions.

Equity In the absence of accurate estimates of utilization and of costs, it is difficult to assess the equity impact of public expenditures on health. However, an examination of the structure of the equalization formula that redistributes part of the premium collections and of the burden of out-of-pocket expenditures on health care suggests that equity is not a major problem in the health sector in Poland. During the days of multiple Sickness Funds, part of the funds collected by ZUS and KRUS was subject to “equalization” based on the principles of equity and solidarity.51 The guiding principle of the equalization was that if financial resources were to be distributed on the basis of need, with equal resources being allocated for equal need, it would be followed by a fair distribution of personnel, drugs and supplies, all of which together will lead to an equitable delivery system. In accordance with the provisions of the Health Insurance Law, the Sickness Funds retained 80 percent of their collection, and set aside the remaining 20 percent for redistribution and “equalization” across all funds. The equalization algorithm redistributed funds on the basis of allocations adjusted by age-distribution of the Fund’s population. Since the elderly (over 60 years of age) consume more health care, and providing health care to them is more expensive compared to the other age-groups, the equalization algorithm considered a 2.4 times larger allocation for the elderly population compared to others. The algorithm also used an adjustment by income, but allowed the Funds to retain some of their income advantage. In practice, the equalization formula effectively transferred funds out of the richer funds to the poorer funds.52 However, there was no provision in the algorithm in its present form to redistribute resources according to population needs and health care utilization other than as predicted by age, which only captured about 25 percent of the variation in use. There is, therefore, an urgent need to redistribute resources according to fiscal effort, population needs and utilization, in addition to the adjustments for age and income that are presently available. Thus, the algorithm used for equalization of insurance premium collections needs to be amended to include provisions to redistribute resources based on fiscal effort, population needs and utilization, in addition to the adjustments for age and income that are presently available. Out-of-pocket Payments Out-of-pocket payments have emerged as an important source of health care financing, and take two forms: formal copayments and informal out-of-pocket payments. Formal copayments were almost non-existent prior to the transition, reflecting the constitutional guarantee to free

51 Many other countries, like England, Netherlands and Germany, also redistribute resources among different geographical regions and population subgroups on the basis of income differences, age and gender distribution. 52 There is transfer of funds from the richer funds, such as Dolnoslaska (Wroclaw), Mazowiecka (Warsaw), Slaska (Katowice) and Branzowa (the Special Fund for Railway, Army, Police, etc.) to the poorer ones, of whom the biggest beneficiaries are Podkarpacka (Rzeszow), Swietokrzyska (Kielce), Podlaska (Bialystok), Lubuska (Jelenia Gora) and Warmisko-Mazurska.

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Figure III.33: Out-of-Pocket Household Expenditures on Health (monthly, in zlotys) 2000

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health care for all citizens, but now apply to many services, like dental care, and to pharmaceuticals and medical prosthesis and have assumed significant proportions over time. Informal payments, in cash or in kind, made by patients or others on behalf of the patients, to public health care providers for health services received or expected to be received, existed even during the socialist times, and are all-pervasive even now. The latest burden of incidence analysis that is available is for the year 2000, based on the 2000 Household Budget Survey. An analysis of this survey data shows that an average Polish household spent about 82.7 zlotys on health (or 26 zlotys per capita), equivalent to about 4.5 percent of its total expenditure. Overall, total private expenditure on health amounted to PLN 12,279 million a year, equivalent to 1.8 per cent of GDP. On average, urban households spent a little more than rural households – both in absolute (88 zlotys versus 73 zlotys per month) and relative terms (4.6% versus 4.4% of the total household expenditure). Expenditures on drugs and medicines constitute between 60 to 80 percent of total health expenditure of a household, and medical consultations account for almost 15% of total out-of-pocket health expenditures. The analysis shows that there is a positive correlation between living standards, as measured by equivalent consumption, and health expenditures—that is, the higher the standard of living, the higher the health expenditure. Thus, richer households spend considerably more on health care compared to the poorer ones; in terms of share of total household expenditures, the differences range between 3 and 5 percent. These payments cover both formal co-payments and informal payments. While it is not possible to un-bundle out-of-pocket payments into formal and informal, the latter have potentially far-reaching implications everyone in the country’s health care system. By their very nature, informal payments are unauthorized and contribute to the general environment of corrupt practices and the growth of a parallel health care financing system. Variously referred to as “envelope payments” or “gray payments” in Poland, informal payments introduce perverse incentives in the health system and compromise governments’ efforts to improve efficiency, accountability and equity in the public sector. The non-transparent and discretionary nature of informal payments have adverse effects on equity and access to health care, with the more vulnerable segments of the population having to pay disproportionately large amounts for the health services that should otherwise be available free of charge. The act of asking for and receiving informal payments cannot be entirely pleasant for all physicians as well, and it is reasonable to expect that many would be concerned by the unethical nature of this practice Given the adverse effects on equity and access to health care, the government must come down heavily on the practice and institution of informal payments in the health sector.

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Solutions to this problem are not straightforward, and can only be addressed by changing the culture of giving and accepting such payments in the existing system.

Summary In order to address the existing problems in the health sector and to consolidate the gains made so far, several changes need to be brought about on many fronts. The most immediate of these are:

• Reimburse hospitals in a way that ensures a direct linkage between compensation and services provided to the patient;

• Introduce case-mix payment systems, like DRGs etc. for payments to hospitals; • Contain hospital debts by imposing hard-budget constraints; • Control expenditures on pharmaceuticals by promoting use of generics where they

exist and by rationalizing prescription practices; • Institute mechanisms to eradicate informal payments; and • Address inefficiencies in collection and redistribution of premiums so as to

improve allocations among health funds; Key expenditure areas that need immediate attention are hospitals and pharmaceuticals, which combined account for almost 75% of total health expenditures. Cost containment in hospitals can be effected by introduction of case-mix payment systems and ensuring that hospital managers face a hard-budget constraint. Linking services provided to compensation and ensuring that the “money follows the patient” will promote the most cost-effective means of production and delivery. As far as delivery of health services is concerned, the reform measures should concentrate on extending the family physician system to cover 100% primary care, and instituting a system of heavy penalties to dissuade violation of the referrals system. And finally, in the area of organization and management, there is an urgent need to reduce the number of hospitals and hospital beds through a system of hospital consolidation with a well-defined strategy for closures. This would also require the development of bankruptcy procedures to facilitate enforcement of hard budget constraints and improve financial discipline in the public sector health care facilities.

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References: Poland Ministry of Health (2004): Finansowanie ochrony zdrowia w Polsce - Zielona Ksi ga, MOH, Warsaw Poland Ministry of Health (2004): Analysis of Debts, MOH, Warsaw World Bank (2005): Options for an equalization mechanism in the funding allocation of the National Health System in Poland, Washington DC. World Bank (2002): Poland - Informal Payments in Health, Washington DC. World Bank (2002): Public Expenditure Review, Washington DC. World Bank (2001): Evaluating the impact of health care reforms in Poland: The challenges of systemic changes in a transforming environment, Washington DC.

Slovakia 58. Introduction

The Slovak Republic has the unique distinction of being the only country among the new European Union member states to have launched comprehensive and systemic health sector reforms, which address all the key aspects of the health system, including production, financing, delivery, quality, organization and management. That the reforms are being driven by a minority coalition government, which has twice succeeded in passing difficult and contentious legislation in the parliament, is testimony not only to the determination with which this government is addressing the problems in the health sector, but also to the widespread acceptance among the population in general of the importance and urgency of finding of resolving the fiscal crisis and improving the delivery of health services. Started in real earnest in 2003, the first two years of the reform program have been hugely successful in meeting the narrowly defined objectives for this phase of the reform. Stabilization measures – the first of the three steps in the reform program – aimed at controlling the growing indebtedness of the health system, and consisted essentially of introduction of nominal copayments for patients, simple but effective changes in pharmaceutical policies and pilot projects of hospital restructuring. In two years since the introduction of fees in the health care system, Slovaks have paid a total of SSK 2.7 billion to doctors, pharmacies, and hospitals, and the number of visit to physicians has decreased by 8 percent. Initial survey reports and public opinion polls do not provide any evidence of adverse effects on access and utilization of health care following the introduction of copayments, with less than 2 percent of those surveyed claiming that copayments deterred them from seeking care. While this has had little or no impact on costs of outpatient services – since primary care providers are paid on a capitation basis per enrollee while specialists are paid for services with limits on the number of points reimbursed – fewer visits has meant fewer prescriptions for drugs, and thus savings in pharmaceutical expenditures, which together with changes in procurement principles, dropped the growth rate of expenditures on drugs in 2004 to low single digits compared to 12 to 15 percent increases annually in the previous years. Restructuring and rationalizing of health facilities has started, and the first wave of mergers and consolidation is already underway in the big cities of Bratislava, Kosice and Banska Bystrica. The net result of the stabilization measures is that annual systemic debt fell from SSK 9 billion (almost 1 percent of GDP) in 2002 to SSK4.8 billion (0.4 percent of GDP) in 2003 to SSK 2.4 billion (0.2 percent of GDP) in 2004. System measures – the second of the three steps in the reform program – intend to increase the efficiency of the system and mobilize resources, and supporting legislation for this step of the reform program has already been passed in the parliament. The system measures place emphasis on reforming the health insurance system and reducing the benefit package covered by mandatory social health insurance. Legislation with respect to these measures has taken the form of six Acts – on health insurance, on health insurance companies, on providers, on emergency care, on health care and on treatment – which are presently in the stage of implementation. Network measures – the third of the three steps in the reform program – aim at improving the quality and efficiency of health care providers. A Health Care Surveillance Authority has recently been set up for this purpose, and is expected to be fully operational soon.

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However, the pace of the reforms is slowing down somewhat in recent months, partly as the affected stakeholders get reorganized and partly as the novelty of the measures starts wearing off. Implementation worries are also beginning to set in, especially as attention shifts from conceptual elegance and design consistency to operational details and legal challenges. At the same time, there is growing concern that public restlessness with tangible results might force some short-cuts which could potentially compromise the foundations of a sustainable reform program. This hiatus in the momentum also provides an opportunity to reflect on the acts of commission and omission that led to this situation of huge fiscal imbalances in the health system in the first place. In this context, the main objectives of this report are to take stock of recent trends in health expenditure aggregates in the public sector, identify the key areas of health expenditures, and trace the progress of specific areas of health expenditure reform consistent with the objectives of stabilizing the fiscal situation without adversely affecting the production, delivery and utilization of health services. The rest of this report is organized as follows. Section 2 presents the macroeconomic background in order to set the context in which the fiscal situation in the health sector can be best understood. Slovakia, like other countries in the region, is undergoing a demographic transition as a result of which the population is ageing rapidly, and these issues are discussed in Section 3. Section 4 presents the health status of the people of Slovakia, and compares it with other countries in the region. Section 5 contains a brief background on the health sector in Slovakia and highlights some of the structural characteristics of the health care system. Health financing issues are discussed in Section 6 and major expenditure areas are highlighted in Section 7. Conclusions are presented in Section 8.

59. The Economy Real GDP has risen steadily from 4.5 percent in 2003 to 5.5 percent in 2004, topping 5.8 percent in the fourth quarter of 2004 (Table III.31). Real GDP revisions for the period since 2002 in December 2004 revealed higher output growth in 2003 and stronger contribution from consumption. Net exports contributed negatively by 3.7 percent, but stocks and consumption continued to rise. Household consumption increased by 3.5 percent year-on-year recovering much faster than expected. Although gross fixed investment recorded growth of only 2.5 percent, an almost 20 percent increase in stocks indicates that a large number of investments await completion. Fixed capital formation is therefore expected to be a major contributor to growth in 2005-06. Export growth at 15.3 percent was the weakest of the last four quarters. Average consumer price inflation for the 2004 settled at 7.5 percent after experiencing much volatility during the year. Despite high inflation rates, further cuts in interest rates, and several rounds of market intervention, the koruna has continued to appreciate (5.5 percent year-on-year at end-December 2004). Table III.31: Macroeconomic Indicators

2000 2001 2002 2003 2004

GDP at market prices (SSK billion) 934 1,010 1,099 1,201 1,325

GDP (US$ billion) 20.3 20.9 24.2 32.7 41

Real GDP growth ( percent) 2 3.8 4.6 4.5 5.5

Consumer price inflation (average; %) 12 7.1 3.3 8.6 7.5

Population (million) 5.4 5.4 5.4 5.4 5.4

Exports of goods fob (US$ million) 11,915 12,629 14,368 21,838 27,752

Imports of goods fob (US$ million) -12,822 -14,764 -16,500 -22,479 -29,208

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Current-account balance (US$ million) -704 -1,756 -1,939 -277 -1,447

The main origins of GDP in 2003 were services (66.6 percent), industry (29.7 percent), and agriculture (3.7 percent). The main components of the GDP were private consumption (56.6 percent), followed by investment (24.7 percent) and public consumption (19.4 percent). The current account deficit, despite an increase in Q3 to 2.4 percent of GDP, remains within comfortable margins. Foreign direct investments have regained their movement upwards with many new contracts in the automotive, electronics and engineering sector, although the levels are still lower than in 2002. The expansion in exports halved, from 22.5 percent in 2003 to 11.4 percent in 2004, below the 12.7 percent growth rate of imports. The negative contribution of net exports to overall economic growth, caused primarily by the retooling of the German-owned Volkswagen Slovakia car assembly plant, Slovakia’s major exporter is expected to be temporary occurrence. Rising technology imports and recovering domestic demand is expected to further fuel the rapid rise in imports. The registered unemployment rate stabilized at over 14 percent for 2004, lower than the reported 15.2 percent for 2003. Regional disparities remain deep, with registered unemployment rate at just 3.1 percent in the capital, Bratislava, but approaching 30 percent in eastern districts. According to Ministry of Labor, four of Slovakia's eight regions recorded above-average unemployment in March 2005. Meanwhile, the duration of unemployment continues to rise. The fourth quarter of 2004, fuelled by rapid GDP growth and tightening labor market conditions, reported the fastest rate of annual wage growth recorded in any quarter during the year. The average gross nominal monthly wage in the economy as a whole stood at US$587 in the fourth quarter, which represents a 4.4 percent real increase y-o-y, bringing the cumulative annual gain in 2004 to 2.5 percent. Telecommunications recorded a 14.3 percent growth rate, with gains of 11 percent in the service sectors as well. Real wage growth in industry was below the economy-wide average in 2004, at 2.3 percent, while real wages in retail trade rose by 3.8 percent in 2004, after shrinking by 4.4 percent in 2003. The fiscal outcome for 2004 was better than expected, supported by strong revenue performance. While expenditures grew by only 0.7 percent, the revenues of the State budget exceed plans by 4.5 percent, reflecting better than expected personal income tax collections (36 percent), corporate income tax collections (35 percent) and value added tax (2 percent). The 2004 consolidated budget deficit (including local budgets and off-budget costs) was 3.3 percent of GDP, lower than the 3.9 percent prediction, aided largely by the government’s recent tax reform. The 2005 public finance deficit is targeted at 3.8 percent of GDP, including the costs of pension reform, which will divert a portion of payroll taxes from the state-run pay-as-you-go scheme to private accounts. Adjusted for pension reform, however, the deficit would decline to 3.4 percent of GDP (the pay-as-you-go pillar revenue shortfall is projected at 0.4 percent of GDP in 2005, 1.0 percent of GDP in 2006 and 1.1 percent of GDP in 2007). According to the government's EU convergence program, the deficit is expected to fall further to 3.5 percent of GDP in 2006 and 3 percent of GDP, which is in line with the Maastricht treaty's requirements for adoption of the euro in 2007.

60. Demography Slovak Republic, like many other countries in the region, faces the consequences of population ageing caused by reduced fertility and mortality rates on the one hand and

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increasing life expectancies on the other. Total Fertility Rates (TFR) in Slovak Republic fell from 2.28 in 1980-85 to 1.28 in 2000-2005 and is expected to increase somewhat to 1.63 by 2020-2025 (Figure III.34).53

Life expectancy at birth has been steadily rising and is expected to continue rising. Life expectancy at birth for females increased from 74.7 years in 1980-85 to 77.6 years in 2000-2005, and is projected to rise to 79.9 in 2020-2025. Likewise, life expectancy at birth for males increased from 66.8 years in 1980-85 to 69.8 years in 2000-2005, and is projected to rise to 73.4 in 2020-2025. Overall, life expectancy is projected to rise to 77.4 years in 2025, compared to 70.6 years in 1980-85 (Figure III.35).



Figure III.34: Total Fertility Rate, Slovak Republic, 1980-2025

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This will result in a dramatic “upside-down” change of the age pyramid (Figures III.37a and 37b).

The old age dependency ratio and total dependency ratio are also expected to rise sharply. Another challenging demographic issue is the population decline, and by 2050, there will be 4.61 million inhabitants in Slovak Republic, almost 0.53 million less than today.54


Figure III.36: Slovakia: Broad Age Groups (percent)

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61. Health Status The health status of the people of Slovak Republic compares favorably with the health status of the people of the new member states of the European Union (except Malta and Cyprus), though not as favorably with the health status of the people of countries belonging to the European Union before May 1st 2004 (or EU-15). As Table III.32 shows, life expectancy in Slovak Republic (73.91 years in 2002) is within the range of life expectancy in the new member states (70.46 to 76.52 years), but lower than the life expectancy in EU-15 (average 79.06 years). Likewise, disability-adjusted life expectancy in Slovak Republic is almost 5 years less than the EU-15 average. Infant deaths in Slovak Republic – 7.63 per 1,000 live births – is also well within the range of the new member states (varying from 3.9 in the Czech Republic to 9.44 in Latvia), but is higher than the EU-15 average of 4.61. The incidence of Tuberculosis in Slovak Republic – 16.57 per 100,000 – is much higher than the EU-15 average of 8.65 per 100,000, while the rate of clinically diagnosed AIDS – 0.0370 per 100,000 – is much lower than the EU-15 average of 1.61. Table III.32: Health Status Indicators, Slovak Republic and new EU Member States (2003)

a Data for 2002

Source: WHO, European Health for All Database (January 2005 update), as accessed online at http://data.euro.who.int/hfadb, on May 24th, 2005, 5pm. Tables III.33 and III.34 present the standardized death rates (SDRs) for a wide variety of causes. A comparison of the death rates from main causes between countries gives broad indications of how far the observed mortality might be reduced. SDRs in Slovak Republic compare favorably to the other new member states, but are much higher when compared with the EU-15 average. SDR from all causes in Slovak Republic is well within the range of SDR from all causes in the new member states, but is higher than the EU-15 average of 640. Likewise, SDR from circulatory system disorders, cerebrovascular disorders, ischemic heart diseases, selected alcohol-related and smoking-related causes is higher in Slovak Republic compared to the EU-15 average, but well within the range of new member states. Table III.33: Standardized Death Rates (per 100,000), different causes (2003) All

Causes Circulatory System

Cerebro-vascular




Slovenia 795.49 295.29 78.76 94.37 1.05 111.42 251.08 Hungary 1047.97 508.30 134.59 232.66 2.41 149.55 491.02

Life Expectancy






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Czech Republic 899.60 61.88 132.37 176.09 0.68 89.74 380.91 Estonia a 1090.58 560.35 154.06 323.00 6.10 174.29 541.74 Slovakia a 971.49 527.71 88.18 283.48 1.19 92.80 443.02 Poland a 891.55 413.89 98.57 125.78 2.33 88.95 306.79 Latvia 1113.62 593.02 206.23 291.58 8.70 160.22 566.77 Lithuania 1008.26 519.78 117.37 327.75 9.45 176.98 518.51 EU-15 averagea 639.88 236.32 59.05 92.89 8.65 61.28 220.78 a Data for 2002


nant Neo-plasms







Slovenia 203.66 41.23 4.11 4.31 62.05 53.33 31.31 Hungary 263.81 66.49 7.16 3.98 41.42 79.94 53.53 Czech Republic 234.22 45.27 6.05 2.55 42.35 38.50 16.66 Estonia a 200.60 40.43 6.67 8.43 36.26 42.82 21.72 Slovakia a 213.32 38.11 6.58 3.81 55.20 52.86 26.55 Poland a 216.67 53.22 8.41 6.18 37.62 36.68 12.98 Latvia 193.40 36.85 6.76 13.32 29.32 38.07 14.00 Lithuania 193.57 36.20 10.64 13.23 39.10 41.99 20.98 EU-15 averagea 180.50 37.05 2.35 8.38 48.31 30.81 12.62 a Data for 2002

Source: WHO, European Health for All Database (January 2005 update), as accessed online at http://data.euro.who.int/hfadb, on May 24th, 2005, 5pm. Likewise, SDRs from malignant neoplasms, lung cancer, cervical cancer, diseases of the respiratory system, diseases of the digestive system and liver diseases and cirrhosis are higher in Slovak Republic compared to EU-15 averages, though SDR from infectious diseases (3.81) is lower than the EU-15 average. Overall, observed mortality can be reduced significantly in Slovak Republic if the health system and other determinants of health are more effective in addressing health problems that account for high levels of mortality, like diseases of the circulatory system, malignant neoplasms and ischemic heart diseases.

62. General Characteristics of the Slovak Health System Prior to its split from the Czech Republic in 1993, the Slovak health system was financed by general taxes, along the lines of the former Soviet model that was characterized by strong central government control in all aspects of health care finance and provision. In 1994, this tax-based system was replaced by a Bismarck-style social health insurance model, in which economically active individuals are expected to make health insurance premium contributions calculated on the basis of their wage-income, while the state finances the premiums on behalf of the economically inactive population. The new system, based on the principles of universality and solidarity, introduced radical changes on the health financing side but left virtually intact the structure of the supply side as well as the type and number of services covered by public health insurance. The network of health care providers was physically available, but its ability to provide health care services to the entire population was compromised by the lack of adequate funds to finance an infinite health care package and inefficiencies in the allocation of existing resources within the health care production per se.

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These phenomena, accompanied by the ageing of the population, spreading of non-infectious and chronic diseases and the development and use of advanced technologies resulted in a financially unsustainable health system. Serious financing problems started to emerge in the form of increasing arrears and informal out-of-pocket payments by patients, which had a regressive nature and created access barriers. Accumulated arrears of health institutions (health insurance companies and health care providers) stood at SKK 26.6 billion at the end of 2002, representing 40 percent of the annual health budget or 2.5 percent of the GDP for that year.55 In an effort to cope with increased expenditure, the government has repeatedly cleared arrears of health insurance companies and health care providers, using, amongst others, privatization resources. These extra-budgetary resources have grown rapidly and for the period of 2000-2003 a total of SKK13.9 billion were injected in the health system.56 At the same time, throughout the 1990s, a number of reform measures encompassing a wide range of initiatives – from privatizing providers to changing reimbursement mechanisms and decentralizing management – have been introduced, though not all proposed measures were always realized. Almost all GPs have been privatized and 83 percent of the specialists are private. The transformation of hospitals into autonomous for-profit organizations, such as shareholder owned companies, has proceeded to a more limited extent. Several reforms have been made to the provider payment mechanisms in an attempt to improve incentives for efficiency. GPs in private practices were initially paid a mix for fee-for-service and capitation, but now receive a capitation payment. Since the introduction of social health insurance, payments for hospitals have been changed several times, with different governments moving back and forth from per diem payments to prospective payments (budgets). Currently, tertiary care is financed on a broadband Diagnoses Related Group (DRG) basis. Some devolution of responsibilities for hospitals from the state to local municipalities has taken place, although the process of decentralization has not progressed in a fast pace. Overall, however, reforms in the 1990s lacked a systematic approach, and non-recurring revenues continued to be used to fund recurring expenditures (debts), underscoring the weakness in the financing of the health system.

63. Structure of Health Financing The main source of health funding in the Slovak system are social security contributions, followed by general taxes and out-of-pocket payments. Public funding including government and individuals health insurance contributions accounted for 89 percent of total health expenditure, well above the OECD average of 72 percent in 2000.57 Out-of-pocket expenditure is the main source of private financing, as private health insurance is virtually non-existent. Formal out-of-pocket payments represented around 11 percent of total health expenditure, compared to the OECD average of 18.7 percent in 2000. This is, however, a low estimate since it does not take into account informal payments which, according to some estimates of the Ministry of Health, might be as high as SKK 6.5 billion per year. In 2003, public to private ratio of health care expenditure remained very close to 2000 levels, with public funding representing 87 percent of total health expenditure and private funding the balance 13 percent (Table III.35).

55 Zajac and Pazitny, power point presentation ‘Debt reduction strategy’ presented at World Bank workshop in Warsaw, May 2003. 56 Zajac et al. (2004). 57 OECD (2003).

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Table III.35: Structure of main sources of finance, 1998-2003 (billion SKK) 1998 1999 2000 2001 2002 2003e

Total health expenditure 51.5 54.1 56.7 61.9 68.5 72.9 Public 47.4 48.7 50.8 55.6 61.7 63.4 Contributions 28.6 29.3 31.7 34.6 37.2 41.8 Taxes 18.8 19.4 19.1 21 24.5 21.6

Private 4.1 5.4 5.9 6.3 6.8 9.5 Out-of-pocket 4.1 5.4 5.9 6.3 6.8 9.5

Private insurance 0.0 0.0 0.0 0.0 0.0 0.0

A s percent of total health expenditure

Public 92.0 90.0 89.6 89.8 90.1 87.0 Contributions 55.5 54.2 55.9 55.9 54.3 57.3 Taxes 36.5 35.9 33.7 33.9 35.8 29.6

Private 8.0 10.0 10.4 10.2 9.9 13.0 Out-of-pocket 8.0 10.0 10.4 10.2 9.9 13.0

Private insurance 0.0 0.0 0.0 0.0 0.0 0.0 Notes: 1. ‘Taxes’ are calculated as ‘Public’ - ‘Contributions’; 2. e denotes estimated. Source: Author’s calculations using data from the Ministry of Health.

Overall, total expenditure on health care in 2003 was SKK 72.9 billion or SKK 13,500 per capita. Total health expenditure represented 6.9 percent of the GDP, while health revenues were equal to 6.5 percent of GDP (Figure III.38). Both expenditure and revenues as percentage of GDP have fluctuated moderately in the past few years. New annual debts in the health sector were about SKK 5 billion in 2003, as a result of about SKK 4 billion savings following the stabilization measures. The debts are expected to drop to SKK 2.4 billion in 2004 and to zero by 2005, according to the estimates of the Ministry of Health.

Figure III.38: Fiscal position of the health sector (% of GDP)

6.56.56.1

6.9

6.4 6.4 6.4

6.87.0

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7.27.6 7.6

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1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005

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enue

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-0.8

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0.0

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1.0D

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it

Revenues (left axis) Expenditures (left axis) Deficit (right axis)

Source: Ministry of Health of the Slovak Republic. Note 1: Figures for 2004 are estimates; for 2005 are forecast Note 2: Revenues and expenditures in 2004 and 2005 reach relatively lower shares of GDP because of the high growth rate of the Slovak economy. Note 3: The revenues in years 2003 and 2004 do not include the bailing out of hospitals and HIC approx. SKK 15 billion) via state owned company Creditor

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Table III.36 presents the revenues and costs of the health system. The stock of debts, which stood at around SKK 26.6 billion at the end of 2002, is expected to be bought by the Creditor, a special public entity created to absorb this cumulative debt. The Creditor will purchase total debt (receivables) from creditors, but paying only for its nominal part, that is excluding fines and penalties. The Creditor is expected to buy receivables equal to SKK 26.6 billion by 2005 using resources of the National Property Fund (privatization resources) and the Ministry of Finance (which will issue bonds). The debt reduction strategy will be carried out in three phases.58 In the first phase, receivables belonging to decentralized inpatient facilities will be purchased, amounting to SKK 6 billion; in the second stage the Creditor will purchase receivables related to public finances and primary and secondary care, as well as the ones belonging to pharmacies, in total SKK 10.5 billion. In the third and final phase, receivables belonging to state-owned inpatient facilities equal to SKK 10 billion will be purchased. However, the possibility that resources for debt reduction might be limited suggests that a certain amount of debt might still be outstanding by 2005; at the same time, it cannot be guaranteed that new debts will not appear in the system. At present, the government believes that the full introduction of a number of reform measures, such as the transformation of health insurance companies and hospitals to autonomous entities, independent from the state budget, will be the solution to the problem of continuous indebtedness. Although such transformation is expected to establish the basis for reduction of debts in the health system in the future, it would be a little difficult for insurers and providers to operate as private companies in a year’s time, and the state will most likely be forced to bail out many of them.

Table III.36: Revenues and Costs of the Health System, 1998-2003 (billion SKK) 1998 1999 2000 2001 2002 2003e

REVENUES

Individual contributions 28.6 29.3 31.7 34.6 37.2 41.8

From employers 19.7 20.1 21.9 23.6 25.2 28.5 From employees 7.3 7.5 8.1 9.2 10.2 11.4 From self-employed 1.3 1.4 1.4 1.5 1.5 1.6 From non-residents 0.0 0.0 0.0 0.0 0.0 0.0 Others 0.3 0.3 0.3 0.3 0.3 0.3

Government contributions 10.5 11.1 11.2 13 15.3 16.5

NLO contributions1 0.5 0.6 0.5 0.4 0.5 0.0

Penalties, fines, etc. 0.1 0.3 0.4 0.2 0.3 0.3

Other resources 1.7 1.9 1.4 1.4 1.7 0.0

Total resources of HIC2 41.4 43.4 45.2 49.6 55.0 58.6

Revenues of MOH chapter 4.7 4.4 4.5 4.9 4.8 4.8

SIA resources for treatment3 1.3 1.3 1.0 1.1 1.2 0.0

Out-of-pocket payments 4.1 5.4 5.9 6.3 7.0 10.2

Total revenues 51.5 54.5 56.6 61.9 68 73.6

COSTS

Primary outpat. care 4.2 4.4 4.7 4.9 5.1 5.2

Secondary outpat. care 1.5 1.8 1.9 2.1 2.2 2.3

Inpatient care 25.6 25 26 28.1 30.1 30.5

Drugs & med. devices 16.1 18.8 20.6 22.8 24.1 25.5

Others 5 4.1 6.9 7.7 8.3 10.2

58 Zajac and Pazitny, power point presentation ‘Debt reduction strategy’ presented at World Bank workshop in Warsaw, May 2003.

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Expenditure from MOH chapter 4.7 4.4 4.5 4.9 4.8 4.8

Total costs 57.1 58.5 64.6 70.5 74.6 78.5 Surplus-deficit -5.6 -4 -8 -8.6 -6.6 -4.9 Notes: 1. NLO denotes National Labor Office; 2. HIC denotes Health Insurance Companies; 3. SIA denotes Social Insurance Agency; 4. e denotes estimated. Source: Zajac and Pazitny (2002)

63.1 Social Health Insurance Health Insurance Companies According to the law, all permanent residents in Slovakia should be covered by the social health insurance scheme and be enrolled with a health insurance company.59 At the time that social health insurance was introduced in 1994, more than ten public non-profit insurance companies operated in the system.60 However, stricter legal requirements for running a health insurance company adopted in 1995 resulted in the reduction of the number of insurance companies to five at present. The largest is the General Health Insurance Company that covers around 66 percent of the population. Three sector health insurance companies covering military employees and the employees of the Ministry of Interior and the National Railway, merged in 1998 to form the Common Health Insurance Company, which is the second largest insurer with around 13 percent of the population. The Common Health Insurance Company insures individuals working in the three above-mentioned sectors, but allows for any citizen to be insured with them. The other three health insurance companies (Apollo, VZP-Dovera and Sideria) insure around 7 percent of the population each. Under the current system, all insurance companies offer the same state guaranteed package of benefits and contract with all health care providers. Prices for health services are set by the Ministry of Health and health insurance companies have no control over this process. Reimbursement rates for outpatient and inpatient care are defined in terms of global budgets, which in turn are based on historical data. The fact that health insurance companies cannot do any selective contracting or participate on the price setting procedures is evidence of their rather weak role as active purchasers of health care services. Furthermore, although health insurance companies set global ceilings for contracts with health care providers, the latter always challenge these ceilings and demand payments for services, such as emergency care, that exceed the contracted volume. Since hospitals have been bailed out in the past for providing services higher than total contracted services, they have no incentives in controlling their service volume or curtail costs. Health insurance companies, therefore, have little or no control over both volume and price of services and operate more as quasi-governmental organizations. Until recently the state guaranteed the solvency of the General Health Insurance Company and the Common Health Insurance Company, but not of the three ‘private’ insurance companies. The Health Insurance Act and the Health Insurance Companies and Surveillance Authority Act envisage major reforms in the operation of health insurance companies, and many of these

59 Only those who are abroad for more than 12 months and are insured in their country of temporary residence are excluded. In addition, individuals who are employed or self-employed but they do not have permanent residence in Slovakia should be compulsory insured (European Observatory on Health Systems and Policies, 2000). 60 Exact numbers vary between 12 insurance companies (European Observatory on Health Systems and Policies, 2000) and 13 insurance companies (Zajac and Pazitny, 2002).

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changes are already in advanced stages of design and implementation.61 According to the government’s reform strategy, health insurance companies will be granted greater organizational and managerial autonomy in order to become active purchasers of health services on behalf of the insured. Health insurance companies will continue to be responsible for collecting insurance contributions. They will be permitted to retain only 5 percent of their collections and would be required to deposit the rest in an equalization pool, which will then be redistributed among the insurers on the basis of a risk-adjusted formula taking into account the age and gender of the insurees. The health insurance companies will be allowed to selectively contract with a number of providers, with the law defining the minimal provider network, while they would also be able to implement new provider payment systems in an effort to address cost containment and increase efficiency and quality of services. The state will no longer guarantee the solvency of any of the health insurance companies, which will become joint-stock companies. Health insurance companies will be subject to mandatory independent audits, financial reporting and strict solvency requirements. After the transformation of health insurance companies to joint-stock companies takes place, the state will become the owner of the General Health Insurance Company, the transformation of which is estimated to cost around SKK 40 million. This amount is planned to increase the equity capital of the company to the minimum required volume of SKK 100 million. The supervision of both health insurance companies and health care providers will be the responsibility of a special supervised authority, the Health Care Surveillance Authority, which has recently been set up and is now functional. Initial costs to start the operation of the Health Care Surveillance Authority are estimated to be around SKK 100 million and are being financed by the state budget. After the first year of operation, this authority will receive its resources from health insurance contributions. The annual budget of the Authority is estimated to be SKK 350 million. The Ministry of Health will also support institutional and organizational capacity building, including training of staff of health insurance companies, the development of health information systems to maintain patient records and monitoring costs and quality of services. Table III.37: Expected Number of Insurees, 2000-2006 Type of insuree 2000 2001 2002 2003 2004 2005 2006

Total population 5,402,547 5,378,951 5,379,161 5,379,371 5,379,581 5,379,791 5,380,001

Employed individuals 2,101,700 2,132,700 2,127,000 2,150,400 2,150,400 2,165,500 2,198,000

Self-employed 233,472 233,472 233,472 233,472 233,472 233,472 233,472

State insurees 3,067,375 3,021,779 3,018,689 2,955,499 2,984,909 2,980,819 2,948,529

As a percent of total population

Employed individuals 38.9 39.6 39.5 40.3 40.2 40.3 40.9

Self-employed 4.3 4.3 4.3 4.4 4.3 4.3 4.3

State insurees 56.8 56.1 56.1 55.4 55.5 55.4 54.8 Source: Statistical Office of the Slovak Republic, MESA 10 prognosis.

Contributions Table III.37 presents the breakdown of the number of insurees in the health system. Health insurance contributions are mandatory for the entire population and are collected and administered by health insurance companies. Health insurance in Slovakia is offered on an individual basis and does not provide family coverage. Contributions rates are defined by law and relate to wages. Under the new reform process, economically active individuals (around

61 Ministry of Health, Health Care in the Slovak Republic – Concept, April 2004.

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2.4 million) pay 14 percent of their monthly wage, otherwise called assessment basis. Employees pay 4 percent of their wage, while their employers cover the remaining 10 percent. The self-employed pay the full 14 percent of their wages. The maximum assessment basis for the calculation of insurance contributions equals three times the average wage, giving the system a regressive nature. Employers of the disabled contribute only 2.6 percent of the assessment basis, and the rest is made up by the state. Contributions for the economically inactive population, such as children, pensioners, persons caring for children or disabled persons, soldiers in military services, prisoners, refugees, etc. (around 3 million individuals) are also paid by the state and equal 4 percent of the average wage for each insuree. Until recently, the National Labor Office contributed for unemployed individuals; however a change in legislation resulted in such contributions being made directly by the state from 2003 onwards. In 2003, health insurance premiums paid by the state represented around 28 percent of total health insurance revenues, while contributions paid by the economically active population represented around 71 percent of total health insurance revenues (Table III.38). Table III.38: Resources of Health Insurance Companies, 1998-2003 (% of total resources of HIC) 1998 1999 2000 2001 2002 2003e

Individual contributions 69.1 67.5 70.1 69.8 67.6 71.3 From employers 47.6 46.3 48.5 47.6 45.8 48.6 From employees 17.6 17.3 17.9 18.5 18.5 19.5 From self-employed 3.1 3.2 3.1 3.0 2.7 2.7 From non-residents 0.0 0.0 0.0 0.0 0.0 0.0 Others 0.7 0.7 0.7 0.6 0.5 0.5

Government contributions 25.4 25.6 24.8 26.2 27.8 28.2 NLO contributions 1.2 1.4 1.1 0.8 0.9 0.0

Penalties, fines, etc. 0.2 0.7 0.9 0.4 0.5 0.5

Other resources 4.1 4.4 3.1 2.8 3.1 0.0 Notes: 1. NLO denotes National Labor Office; 2. e denotes estimated. Source: Zajac and Pazitny (2002)

Although contributions are defined by the law, on several occasions in the past, the National Council had amended the level of contributions paid by the state.62 In 1994, while the contributions were 13.7 percent of minimum wage, the state only paid on 10 percent of the minimum wage. In 1995, the 13.7 percent contributions payment applied to 54 percent of the minimum wage, which increased to 75 percent in 1996 and this level has been preserved until recent years. Such frequent changes bring about an element of uncertainty, and have an adverse effect on the public finances of the system. Debts created because the health insurance companies do not receive all contributions are then transferred to the rest of chain, resulting in a situation in which the health insurance companies do not pay providers in full, who then do not pay the suppliers of goods and services in full. Redistribution mechanism among insurers Individuals can freely enroll with any of the health insurance companies. Since the very beginning of the implementation of social health insurance, evidence of adverse selection was noted in the financial administration of the health insurance companies. Because insurance companies had a wide range of enrollees, belonging both to the economically active and inactive population and with varying health care utilization patterns, the revenues and expenditure of each insurance company varied and certain companies, mainly the ‘public’

62 European Observatory on Health Systems and Policies (2000)

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ones, faced the highest arrears. In order to deal with this issue, a mechanism was introduced in 1995 under which 60 percent of all contributions were pooled into a special account of the General Health Insurance Company. The pooled revenues were, in turn, redistributed among insurance companies based on the age structure of the insurees. In a new mechanism put into force in 1999, all 100 percent of insurance contributions collected were redistributed on the basis of a risk index based on a more sophisticated age grouping.63 A central registry of insured persons was also created in order to introduce more transparency and accountability in the whole process.64 The General Health Insurance Company was responsible for administering this register, but due to a number of complaints, the Ministry of Health took over responsibility for the central registry in 1999. Given though that the redistribution mechanism caused tension among insurers until recently, new changes were introduced under the reform process that started in 2002.

Figure III.39: Redistribution by Risk-Adjusted Index

0

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Source: Pazitny and Zajac, power point presentation ‘Health Reform in Slovakia,’ September 2004. Based on the reform agenda of the government as expressed in the Health Insurance Act, the rules of redistribution change. The basis of redistribution is now 95 percent of compulsory insurance premiums, and the risk-adjusted index is refined to take into account both age and gender of the insurees (Figure III.39). The new legislation aims at eliminating selection on the basis of health conditions (cream skimming), as high-risk groups are assigned more resources than low-risk groups. In addition, no special account exists for the redistribution, but every single payer (individual or state) pays the premium directly on the account of the relevant health insurance company to which the insuree is enrolled. In turn, insurance companies whose total premiums exceed the sum of risk-adjusted per capita payments transfer funds to insurance companies with insufficient resources.

63 The initial age adjusted risk index assigned a higher coefficient only to individuals over 60 years old, while the mechanism introduced in 1999 separated insurees into five-year age groups and assigned different coefficients to each group (Pazitny and Zajac, 2002). 64 The registry aimed at solving the problem of ‘double souls’, where for three consecutive years before the introduction of the registry, Slovakia registered 200,000 more insurees than the actual number of inhabitants (Pazitny and Zajac, 2002).

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63.2 Complementary Sources of Financing Although the main source of finance for the health system is health insurance contributions from employees, employers and the self-employed, the state also contributes through various channels. It pays premiums on behalf of the economically inactive population; it supports capital investment; and it finances the system of so-called budgetary organizations. The latter includes a network of 37 public health institutes, the National Health Promotion Center, the Institute for Health Information and Statistics, the State Institute for Drug Control, the Slovak Medical Library, and educational institutes such as the secondary health schools and the Slovak Postgraduate Academy of Medicine. In all, the state contributed SKK 21.6 billion to the health care system in 2003 (Table III.38). From these resources, SKK 16.5 billion represented contributions for the economically inactive population, while the rest SKK 5.1 billion formed part of the state budget and were used inter alia for capital investment, prevention, public health and administrative costs. However, the share of total health expenditure financed through taxes has decreased every year. In 1998, 36 percent of total health expenditure was financed through taxes, which fell to 29 percent by 2003. The gap created by the reduction in tax-financed expenditure was partially covered by an increase of 60 percent in private spending. Out-of-pocket payments increased from 8 percent of total health expenditure in 1998 to 13 percent in 2003, while contributions of employees, employers and the self-employed remained relatively stable, at around 57 percent of total health expenditure in 2003 as compared to 55 percent in 1998. The increasing share of private financing has provided space for the government to reduce its participation in health expenditure financed through general taxation. The fact that the Slovak health system is financed through a combination of insurance contributions and taxes thus creates a situation where the amount of available resources depends not only on the contributions generated in the real economy, but also on the political decision regarding the amount of resources financed by the state. Out-of-pocket payments Before the introduction of the reform process of 2002, cost-sharing arrangements for patients for services included in the guaranteed state benefit package were rather limited. These arrangements included mainly dentistry, some types of elective surgery and a relatively small portion (about 6 percent to 10 percent) of drugs.65 Expectedly, the absence of co-payments provided no incentive to patients to decrease the use of health care services. In an effort to modify patient decisions on service utilization and raise additional (albeit limited) revenue for health care providers, patient co-payments were introduced in June 2003. Co-payments apply to all levels and types of care, except for emergency care, preventive care and health services for children under the age of six years. Under this arrangement, patients are required to pay SKK 20 per outpatient visit and SKK 50 per day for every inpatient service day (the last day being free), in addition to a prescription fee of SKK 20 (Table III.39). The Ministry of Health estimates that these co-payments will increase formal out-of-pocket spending by patients by SKK 50 per month.

Table III.39: Co-payments introduced as of June 2003 (SKK) Patient Health Insurance

Company Provider/ Pharmacy

Primary outpatient care 20 0 20 Secondary outpatient care 20 0 20 Accommodation and food in inpatient care 50 per day 0 50

65 World Bank (2003)

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Transport 2 SKK/km - - Prescription fee 20 15 5 Source: Pazitny and Zajac, power point presentation ‘Health Reform in Slovakia,’ September 2004.

According to survey data and opinion polls, the introduction of co-payments was followed by a 10 percent reduction in outpatient visits and individuals perceive that there is also a drop in corruption from 32 percent of respondents associating health care with corruption in November 2002 to 10 percent in January 2004.66 There was also a drop in the frequency of bribes and gifts, which fell from 18 percent in 2002 to 14 percent in 2003 for specialists from 14 percent to 11 percent for the same period for hospitals. As far as co-payments are concerned, there are no exemptions as such for the poor and the vulnerable (except that they pay a maximum of three days inpatient stay only).67 However, individuals identified as poor and vulnerable receive a monthly subsidy of SKK 50 per person towards out-of-pocket medical expenditure which is paid to them irrespective of whether or not they incur that expenditure that month. Further on the issue of co-payments, the Act on the Scope of Health Care Covered by Public Health Insurance mandates the creation of a priority list of diagnoses covered by public health insurance.68 This is a positive list of diagnoses on which there can be no additional co-payment other than what was introduced in June 2003. Diagnoses not included in this list can be the subject of additional co-payments. At present, the list of priority diagnoses comprises approximately 6,700 diagnoses, which is almost two thirds of the total list of diagnoses (11,000) listed in International Classification of Diagnoses-10 (ICD-10).69 Under the assumption of constant prices and present utilization patterns for health care services, patients are expected to pay in total almost SKK 3 billion (Table III.40). According to estimates of the Ministry of Health, the average additional co-payment per patient per case would not exceed SKK 200. Table III.40: Priority List Diagnoses and Other Diagnoses Priority Other Total

Present volume of payments by insurers (million SKK) 19,990 9,989 29,979

Percent of total cases 41 59 100

Percent of total costs 67 33 100

Percent of new payments from public insurance 100 0-95

New volume of payments by insurers (million SKK) 19,990 6,992 26,982

New volume of payments by patients (million SKK) 00 2,997 2,997

Average annual payment by patients (SKK per diagnosis) 0 50-200 Source: Zajac et al. (2004).

Although official co-payments did not exist for the majority of health care services before the introduction of the 2002 reform, informal payments were and still are widespread in the system. According to a 1999 survey by the World Bank/USAID, 71 percent of GP visits and

66 Zajac et al. (2004). 67 The definition of the poor and vulnerable includes, besides the poor, individuals in a health state that does not allow them to provide consent (e.g. coma), mothers with children under 6 years of age, blood donors, psychiatric patients, and chronically-ill patients. 68 Ministry of Health, Health Care in the Slovak Republic – Concept, April 2004. 69 Zajac et al. (2004).

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59 percent specialist visits involved informal payments. It is also estimated that at least three in 10 hospital patients make informal payments to providers.70 Informal payments aim at obtaining faster access to care, selecting preferred providers or gaining access to treatment that is otherwise unavailable. Although public health insurance (until the recent reforms) offered coverage over a comprehensive package of health care services in theory at least, a paucity of resources has resulted in reduced services, thus creating non-explicit rationing of care. Despite the absence of official waiting lists, delays and barriers in accessing services do exist, and in many cases can be reduced through some form of direct and immediate payment. Private health insurance71 At present, private health insurance represents a very small proportion of health care spending in Slovakia. There is only one insurance company providing private health insurance on a commercial basis to persons that they are not covered by public health insurance – usually foreigners. This insurance covers medical and hospital costs and its share of total insurance market was less than 0.2 percent in the year 2000. In addition, some commercial companies offer some types of sickness insurance – often in the form of cash benefits providing income replacement. The Financial Market Authority is the entity supervising and regulating the market of private insurance companies. The Health Insurance Act distinguishes for the first time public health insurance from private health insurance in Slovakia. There are a rather small number of issues clearly stated in the Act. The Act includes limited requirements with respect to the operation of insurers offering private health insurance, given that regulation of private insurance is expected to be minimal. The Act states that insurers will not face restrictions on premiums rates and explicitly permits insurance companies to determine the scope of covered benefits on the basis of medical examinations. The Financial Market Authority is set as the agency supervising the solvency and capital adequacy of insurers. On the other hand, the Act leaves a number of unanswered questions. The Act does not specify whether private coverage may duplicate services covered by public insurance. From discussions with stakeholders of the health sector, some duplication is envisioned with respect to coverage of fast access to care. Nevertheless, private health insurance is anticipated to serve primarily as supplementary insurance, by covering additional benefits to those covered by the mandatory public insurance. Insurers will also be permitted to offer products that cover co-payments of services included in public insurance and other out-of-pocket costs. It is expected that private health insurance would be offered by both, health care companies offering public health insurance and commercial insurers, although further clarification is needed. Tax advantages regarding the purchase of private health insurance are not envisaged. External Sources of Financing72 Foreign governments, the European Union, as well as international organizations and agencies have offered valuable resources to the Slovak health system. In particular, the Government of Switzerland has offered assistance to Slovakia for the purchase and utilization of medical equipment for intensive care units, while the European Union has offered assistance under the PHARE program. Substantial technical assistance has been provided from the World Health Organization Regional Office for Europe under the EUROHEALTH program, mainly in

70 Murthy and Mossialos (2003), in OECD (2004). 71 The OECD Report on ‘The Slovak Health Insurance System and the Potential Role for Private Health Insurance: Policy Challenges’, (2004), provides a comprehensive analysis of private health insurance issues. 72 This section draws heavily on the Health Care Systems in Transition, Slovakia, European Observatory on Health Systems and Policies, 2000.

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environmental health, prevention of non-communicable diseases, AIDS prevention and health promotion programs under the Healthy Cities and Health Promotion Schools. USAID has also substantially supported the establishment of a cardiac surgery center for children in Bratislava. Their help has taken the form of technical assistance and human resource training and development, aimed at strengthening professional and management capacity within the health sector. Furthermore, foreign agencies and domestic private firms provided assistance equal to SKK 203 million in 1997 and SKK 218 million in 1998 to individual health care providers. It is not clear to which extent these resources are included in total health expenditure. Resources have also been allocated to the health sector through the State Health Fund, an institution created by the government by collecting resources from privatization, penalties, gifts, etc. to support priority programs in the health sector. These resources amounted to SKK 504 million in 1996, SKK 180 million in 1997 and SKK 56 million in 1998. The municipalities contributed the lump sum of SKK 200 million in 1996, SKK 199 million in 1997 and SKK 176 million in 1998 to health care from their budgets. Substantial privatization resources have also been injected in the system during the period 2000-2003. In particular, SKK 3.5 billion were allocated to the health system in 2000, SKK 3.4 billion in 2001, SKK 3.6 billion in 2002 and SKK 3.4 billion in 2003.73

64. Major Expenditure Items This section highlights the major expenditure areas in the health sector as of beginning of the current reform program. As the Slovak health care system is undergoing significant changes almost on a daily basis, it is important to note that improvements in the last two years may have changed the situation quite a bit. Subject to this caveat, the major expenditure areas in the health sector as of mid-2002 were hospitals and hospital infrastructure, pharmaceuticals, and the broad and generous scope of covered services.

64.1 Hospitals and Hospital Infrastructure A disproportionate share of public resources is devoted to hospital care as compared to primary and secondary level outpatient care. In 2002, inpatient care costs represented 40 percent of the total health costs, as compared to 7 percent of total costs for primary care and 3 percent of total costs for secondary outpatient care (Table III.41). Table III.41: Health Sector Costs, 1998-2003 (type of care as percentage of total health costs) 1998 1999 2000 2001 2002 2003

(estimated)

Primary outpatient care 7.4 7.5 7.3 7.0 6.8 6.6

Secondary outpatient care 2.6 3.1 2.9 3.0 2.9 2.9

Inpatient care 44.8 42.7 40.2 39.9 40.3 38.9 Drugs and medical devices 28.2 32.1 31.9 32.3 32.3 32.5

Others 8.8 7.0 10.7 10.9 11.1 13.0

MOH Expenditure 8.2 7.5 7.0 7.0 6.4 6.1

Total costs (SKK billion) 57.1 58.5 64.6 70.5 74.6 78.5 Source: Pazitny and Zajac (2004), Table 9.

73 Zajac et al. (2004).

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Part of the problem, in 2002 and even now, is infrastructure, since there is large excess hospital capacity in Slovakia. There are 92 hospitals, including 7 faculty hospitals, 4 specialized hospitals, 75 general hospitals and 6 psychiatric hospitals. The number of hospitals as well as hospital beds is very high by international comparisons, though government efforts in recent years have resulted in a decrease in the number of hospital beds per 1,000 inhabitants from 7.6 in 1991 to 6.5 in 2000, which is still higher than the EU average of 5 (Table III.42). Hospitals in Slovakia continue to be underutilized, and most operate at less than 70 percent of the bed capacity compared to 80 percent and more in most OECD countries. Average length of stay in acute hospitals is 8.9 days, which is relatively high compared to other countries of the region, like Hungary (7.0) and Austria (6.8). In line with the emphasis on hospital care in Slovakia, the number of physicians in hospitals has increased by 23.7 percent in the last 10 years. Table III.42: Hospital indicators, 1991-2000

1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 Beds per 1,000 7.6 7.9 7.1 7.5 7.5 7.3 6.7 6.6 6.5 Average Length of Stay 12.9 13.4 12.7 11.2 11.5 11.3 11.2 10.1 9.1 8.9 % Capacity Utilization 75.6 75 73.4 76.6 79.3 79.5 78.4 77.9 69.5 70.7 Number of employees .. .. .. .. 77,137 62,506 72,178 72,197 69,789 71,605 Source: Pazitny and Zajac (2002), Table 2, 14 and 17.

In terms of economic classification of hospital expenditures, 51 percent of all hospital expenditure in 2001 went to the payment of salaries of personnel. In the period 1996-2001 and despite decreases in the number of hospital employees, including doctors, the share of salaries has increased by 9.5 percent of total hospital costs, which is partly explained by higher salaries.74 Approximately 20 percent of total hospital costs are on medical supplies (drugs, blood and special medical material), 8.5 percent on administration, 4.6 percent on utilities, 3.2 percent on maintenance and 5.7 percent on depreciation (Table III.43). Table III.43: Structure of costs, 1996-2001 (percentage of total costs) 1996 1997 1998 1999 2000 2001 Fixed costs 72.0 73.3 75.1 77.5 76.1 76.6 Salaries 46.3 48.8 49.0 50.2 48.6 50.7 Depreciations 4.7 5.0 5.4 6.0 6.2 5.7 Maintenance 3.7 3.3 3.1 3.2 3.1 3.2 Utilities 4.7 4.6 4.3 4.4 4.6 4.6 Administration 7.5 7.5 8.9 9.6 9.7 8.5 Other 5.1 4.2 3.9 4.0 3.9 3.9 Variable costs 28.0 26.7 24.9 22.5 23.9 23.4 Drugs 10.3 10.0 9.7 8.4 8.9 8.5 Blood and blood products 1.4 1.3 1.2 1.2 1.2 1.4 Special medical material 10.7 10.4 9.3 8.8 9.7 9.6 Laundry 1.4 1.3 1.2 0.8 1.2 1.1 Medical transport 0.5 0.8 0.8 0.8 0.8 0.7 Meals for patients 3.7 2.9 2.7 2.4 2.3 2.1 Source: Pazitny and Zajac (2002), Table 14.

74 In 2001, the ratio of a physician’s salary to the nominal salary was 1.95 as compared to 1.56 in 1995. Pa� itný – Zajac, 2002

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The majority of hospital expenditures are on staff (treated here as fixed costs), which leaves few resources for variable costs. This has implications for the quality of care, and buildings and medical equipment are not maintained. In addition, hospitals have limited resources to buy other variable inputs. From a physical perspective, old buildings designed for different purposes in a different era characterize the hospital system. Typically, these buildings have amounts of dysfunctional or dead space, e.g., large, empty corridors, and multiple-bedded patient rooms without washrooms, and are expensive to heat and maintain. The only way to consolidate the efficiency gains in this situation is to rationalize the number of hospitals and hospital beds by closing a number of hospitals and consolidating the rest. High fixed costs, over-employment, high number of beds etc. are the symptoms and not the reason for poor technical and allocative efficiency of public hospitals. Institutional and organizational economics suggest that one of the main reasons for lack of efficiency is the lack of appropriate incentives and accountability mechanisms. All hospitals are still owned and operated by the MOH, and the employees remain civil servants. There are few strong administrative imperatives to manage these facilities effectively and efficiently. No hospitals have been closed or liquidated for debts and no directors sacked for financial mismanagement. None of the hospitals has seen any significant reduction in staffing levels; at the same time, individual hospitals are not able to hire or fire staff and makes changes in salary levels. Within hospitals, medical professionals predominantly occupy management positions, and have little management training. In 2002, hospitals in Slovakia had accumulated debts of US$300 million to suppliers of drugs, medical supplies and equipment. Although health insurance funds (HIFs) set a budget constraint for hospitals by specifying the total amount that hospitals will receive for services provided under compulsory medical insurance, hospitals routinely treat more cases and in the process generate debts. Hospitals fulfill their social function of providing health care to the community, but have little or no incentives to operate in an efficient manner. Reform Measures, 2003 Rationalize the number of hospitals and hospital beds by consolidating hospitals and reconfiguring the mix of hospital beds is a priority item in the ongoing reform program of the Ministry of Health. A detailed assessment of all hospitals has been carried out and a master plan of hospitals is close to finalization. A network of essential hospitals is being determined and will be strengthened during the rationalization process. Hospitals and hospital beds identified as excess capacity in three big cities of Bratislava, Banska-Bystrica and Kosice are included in the first round of the consolidation process. The Ministry of Health has also established a Hospital Restructuring Fund to support specific capital investment in the hospital sector in the near future. In addition, steps are being taken to corporatize the public hospitals and make them fully autonomous in their functions. Corporate hospitals will not have an implicit government guarantee, which will send an important signal to suppliers that they cannot simply continue to lend to hospitals. This is expected to create hard budget constraints for hospitals and compel them to accord high priority to efficiency. Corporate hospitals will be allowed to retain savings and keep revenues, which may then re-invest in the hospital operation, thus generating additional incentives for hospitals to change their input mix and align inputs more closely with outputs. For hospitals that continue to build arrears, there will be the prospect of

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bankruptcy or the possibility of selected bailouts by the Government or commercial backs in exchange for a rationalization plan. Since the hospital restructuring program is focusing on the three big cities of Bratislava, Banska-Bystrica and Kosice where overcapacity is most severe, the rationalization process of hospitals facilities is not likely to have a negative impact on access to health care services. However, the Ministry of Health recognizes that rationalization of hospital services in rural areas will need to be conducted with caution. This is particularly true for mountainous areas, where travel time to the nearest facility might be severely extended in case of a hospital closure. These facilities are proposed to be included in the network of essential hospitals and protected from closure.

64.2 Pharmaceuticals After hospital expenditure, which accounted for 40 percent of total health expenditure, drugs and medical devices are the second-biggest expenditure items, and accounted for 32 percent of all expenditure in 2002. The dramatic increase in the cost of drugs is also reflected in the drug share in the overall costs of health insurance companies, which reached 40 percent in 2002 (Table III.44). Table III.44: Drug Expenditures, EUR million 1996 1997 1998 1999 2000 2001 2002 Drug expenditures 165.2 193.6 229.0 239.0 309.9 360.9 383.5 Annual growth in percent 17.2 18.3 4.3 29.7 16.5 6.3 Source: IMS, 2004 (NB: HIC uses another methodology, so the data may not be fully comparable) A number of reasons are behind the high expenditures on pharmaceuticals. First, the prescription rates are very high, and each year an estimated 52 million prescriptions are made out, containing as many as 92 million items, and which until recently were fully or partly reimbursed by health insurance companies. Second, the pricing policy of the government was not very transparent and often resulted in the determination of higher prices. And finally, imports of drugs grew by 16.8 percent between 1999 and 2000, which was greater than the 10.1 percent growth in overall consumption and 4.8 percent growth of resources in the health system, which resulted in an increase in drug costs. Reform Measures In order to control pharmaceutical expenditures, the government launched an ambitious drug policy in 2003, employing a series of measures dealing both with the demand and the supply side.

• Introduction of a flat prescription fee (SKK 20); • Introduction of fixed ratio after the categorizing has taken place. Thus, if the

pharmaceutical company decreases the price of a drug after the positive list is published, then the ratio between the reimbursement, paid by the health insurance company, and the co-payment, paid by the patient, remains the same;

• Introduction of a mechanism where insurance companies reimburse patients on the basis of the lowest price in every therapeutic category. The lowest price, in turn, is determined on the basis of daily dose requirement and published in a handbook that is

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widely circulated among pharmacies.75 The pharmacies are required under the law to explain to the patient the substitutability and availability of drugs and the different co-payments associated with them. Patients choosing the higher priced drug make the higher co-payment as determined in the handbook;

• Open competition among pharmaceutical providers, which is conducted on line so that all bidders have complete information about the bids of their competitors as well;

• Introduction of a flat prescription fee; • Changes in the process of setting maximum prices; • Changes in the staffing of the Categorizing Committee –setting co-payments for

procedures and drugs- favoring economists compared to doctors; • Frequent updating of the cataloguing and categorizing processes, which take place

four times a year compared to once a year before 2003; • Introduction of the ‘fast track’ process, whereby if a pharmaceutical company

decreases the price of a product by 10 percent or more compared to the cheapest drug in the cluster, then no evaluation takes place at the Categorizing Committee. The reimbursement rate, paid by the health insurance companies, in the cluster is automatically decreases with a 25 percent bonus (compared to fixed ratio). The 25 percent bonus means that the fixed ratio is changing in favor of the patient.

Figure III.40: Growth of Expenditures on Drugs

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Data supplied by health insurance companies show a substantial slowdown in the growth of expenditures allocated to drugs. While in previous years that growth was regularly in the double digits, in 2003 it dropped to 8.9 percent. Figures for the first half of 2004 were also encouraging, with drug expenditures falling by 11 percent year-on-year (Figure III.40).

64.3 Scope of Services The Constitution of the Slovak Republic guarantees free health care for all its citizens, and the current range of covered services as evolved over time is too generous both in terms of the content (range of benefits offered) and volume (number of benefits paid) considering resources available for health care. It is very difficult to define what health services are not included, except some usual omissions such as cosmetic surgery. Virtually all mainstream

75 Drugs are classified in 600 Anatomical Therapeutical Chemical Groups (ATC). The drugs are further separated in three broader croups. Croup A is free of charge and includes around 1,700 drugs (30 percent of total number of drugs). Group B is partially covered by public health insurance and Group C are drugs over the counter for which the patient pays the full price and accounts for around 5 (10 percent of total number of drugs).

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services provided by health care providers qualify for health insurance reimbursement. Patients have little incentive to limit their use of health services, since there is no official cost sharing at the point of service (although informal payments are common).76 Capitation-based payment for primary health care has increased referrals to specialist care. Hospitals and specialist outpatient clinics have been interested to increase volumes given incentives embedded in reimbursement schemes, even when overall contract amount is capped.77 Expectedly, therefore, service volumes are high, and Slovaks average 10-15 outpatient visits per year. At the same time, the wide scope of the health care services covered by public insurance has contributed to the health sector deficit. Reform Measures Within the framework of the government’s health sector reform strategy, the Act on the Scope of Health Care Covered by Public Health Insurance defines the basic benefit package as a positive list of illnesses, based on ICD-10.78 This list, also called priority list, includes approximately 6,700 diagnoses that are subject to no additional co-payment other than the low, flat co-payments defined in June 2003. The priority list is expected to be approved by the Parliament based on a proposal by the Government and reflects the citizens’ preferences with respect to the diagnoses that they believe should be fully covered by public health insurance (Table III.45). Additional to the priority list, two more mechanisms are established; the mechanism of cataloguing and the mechanism of categorizing. The first mechanism involves a process where a list of interventions (standard diagnostic and therapeutic procedures) is assigned to each disease, priority or not. The Catalogue shall be compiled by the Cataloguing Committee, which includes predominantly physicians and is nominated by the Minister of Health. The second mechanism refers to the diseases not included in the priority list, where categorizing determines the level of co-payments paid for the interventions assigned to these diseases. The entity responsible for categorizing is the Categorizing Committee, which includes predominantly economists and is also nominated by the Minister of Health. Table III.45 : List of Citizens’ Priority Diseases Disease Percentage

Cardiovascular diseases 74.2

Cancer 68.8

Diabetes, metabolic disorders 26.2

Orthopedic diseases 16.6

Mental and psychiatric diseases, stress, disorders of the nervous system 16.1

Influenza 12.1

Allergies 10.9

Respiratory diseases 8.6

Infection diseases, hepatitis, TB and AIDS 6.3

Incorrect diet, obesity 6.2

Alcoholism, smoking, drug addiction 4.6

Dental problems 1.4

76 Exceptions include dentistry, which involves significant co-payments, some types of elective surgery, and a relatively small portion (about 6-10 percent) of drug costs. 77 Providers hope to get payments for overprovided services at later term as part of a bail-out package and also have in the past succumbed to prisoner’s dilemma when sliding fee schedules were applied. 78 Ministry of Health, Health Care in the Slovak Republic – Concept, April 2004.

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Skin diseases 0.9

Gynecological diseases 0.8 Source: FOCUS, Public Opinion Poll, January 2004.

In addition, as discussed earlier, copayments were introduced in June 2003 at all levels of care except for emergency care, preventive care and health services for children under the age of six years. Patients are now required to pay SKK 20 per outpatient visit and SKK 50 per day for every inpatient service day (the last day being free), in addition to a prescription fee of SKK 20. Following the introduction of copayments, utilization of outpatient services has dropped about 8 percent compared to earlier levels. Data on private household expenditure for health care collected by the Statistical Office show that following the introduction of copayments, private household expenditure on health increased from 1.35 percent of total consumption in 2002 to 1.53 percent in 2003 and 2.17 percent in 2004. As already mentioned although the poor and the vulnerable are not exempted from co-payments; however, they receive a monthly subsidy of SKK 50 per person, which is paid to them irrespective of whether or not they incur out-of-pocket expenditure on health care.

Figure III.41 a: Access to Health Care

22%

2%

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Did not visit doctor

Stopped

Less than before

Same behavior as before

Figure III.41 b: Use fo Pharmaceuticals

23%

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Stopped

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Source: FOCUS, Public Opinion Poll, January 2004.

Initial survey reports and public opinion polls do not provide any evidence of access and utilization of health care services being adversely affected by the introduction of co-payments. In particular, as far as medical consultations are concerned, only 1.5 percent of the interviewees responded that they have stopped visiting a doctor because of the introduction of co-payments (Figures III.41a and 41b). More than 50 percent of the interviewees responded that they had the same utilization pattern as before, while 18 percent responded that they consulted a doctor less than before. There were similar results as regards utilization of drugs. Only 2 percent of all interviewees reported that they stopped buying drugs because of co-payments, while 21 percent reported buying less. However, from the results of the opinion polls it is not evident if more poor people reported having stopped going to the doctors or buying drugs as compared to non-poor people. The same applies for other vulnerable groups as the Roma, whose health status is widely believed to be worse compared to the non-Roma and who are believed to have limited ability to access utilities and public services.

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65. Conclusions Faced with a huge structural crisis punctuated by massive and growing debts, the Government of Slovakia has launched comprehensive and systemic reforms that touch almost all aspects of the health care sector. Realizing that piecemeal solutions would not be effective in combating a deep-rooted problem, the reform program chose to employ structural and systemic solutions to address structural and systemic issues. In order to set in place the conditions needed for ensuring fiscal sustainability over time and managing fiscal discipline as part of day-to-day business of managing the health sector, the sector-wide reforms aim at improving the efficiency and effectiveness of public expenditures on health care, enhancing quality of services, and increasing the regulatory, planning and policy-making capacity in the Ministry of Health. The strategy governing the design of reforms has been straightforward and the approach business-like. Three key expenditure areas have been identified – hospitals and hospital infrastructure, pharmaceutical costs and costs of provision of services due to excessive utilization – and specific measures have been designed to address each of the three expenditure areas, which are being implemented as part of the stabilization phase of the reforms. Mindful of the integrated nature of a health system and in order to sustain the stabilization effect over time till the system itself becomes stable, deep-rooted changes are being brought about in order to reorient the underlying incentives so that the behaviors of the key players in the system – patients, providers, payers, and the government – adjust in ways that optimize not only their own objective functions but also of the health system as a whole, which is to provide health services for all in a fiscally responsible manner and in ways that guarantees protection of catastrophic costs. The reform program leaves untouched the basic parameters of the pre-2002 system in terms of coverage (which remains universal), premium contributions (which remain wage based for the economically active population and state responsibility for the economically non-active), and free choice (people are free to choose their insurer and subject to rules of gate-keeping, their provider). However, several changes are sought to be brought about in the institutional design of health insurance companies, determination of premium contributions, purchasing of services, regulation and market exposure of the health system. In a bid to convert the so-called health insurance companies to real health insurance companies, the legal basis of the existing health insurance companies is being changes from that of a public fund to that of joint-stock companies. Bankruptcies – very complicated in the pre-reform system – are now allowed, which effectively translates to hard budget constraints for the health insurance companies. Incentives in the health insurance companies are sought to be realigned, and the companies are being permitted to make and retain profits, as opposed to surpluses in the pre-reform system. This is accompanied by a system of solvency monitoring in order to protect the interests of the citizens and the requirement that the health insurance companies have an independent audit as per rules in force for commercial ventures. As regards the determination of premiums, the definition of economically active population is left unchanged, but the minimum contribution base is increased from SKK 3,000 to the current minimum wage of SKK 6,000. At the same time, the maximum contribution base has been increased to SKK 45,000 from the current level of SKK 32,000. In order to remove the uncertainty of state contributions for the economically non-active population, the determination of state contributions is fixed at the level of 4% of average wage. This is a

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departure from the earlier practice in which the state contributions were determined by the parliament every year and were subject to political positioning and bargaining. On purchasing, the reforms stress the use of patient management as the basis for all purchasing, and empower the health insurance companies to become active purchasers of services from providers, as opposed to the earlier system when the health insurance companies were simply passive payers of bills. Payment mechanisms are deregulated, and the health insurance companies can selectively choose the providers with whom they wish to contract, as along as they adhere to the minimum network as defined by the regulator. A Health Care Surveillance Authority has been set up as the chief regulating body, with wide powers raging from overseeing the functioning of health insurance companies to overseeing the production of quality services by health providers. Perhaps the most fundamental change introduced in the system, no doubt guided in a big way by the prevailing ideology, pertains to the market exposure of the health system. The health insurance companies, previously protected and guarded as public entities, are now subject to market rules, with competition in the purchasing of care and clear transparent rules for entry of new companies in the market. Likewise, the providers of healthcare are also subject to market exposure, and are no longer guaranteed contracts with the payers (except for providers in the minimal network). The scope of services available to the patients is no longer undefined (in practice, defined as being comprehensive), but is defined and has a close correspondence with a national list of priorities. How far these reforms will succeed in ensuring that quality health care is provided to all in a fiscally sustainable manner depends much on the implementation successes of the ongoing measures. As noted earlier, the pace of the reforms has slowed in recent months, partly as the affected stakeholders have begun to organize to protect their interests and partly as the novelty of the measures has started to wear off. The continuing fragility of the political balance and simmering public restlessness are further causes for concern. Irrespective of how it all plays out in the end, however, the sheer boldness and comprehensiveness of the health reforms in Slovakia set an example for other countries in the region – facing or likely to face – similar problems in their health systems.

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References: European Observatory on Health Systems and Policies (2000), Health Care Systems in Transition, Slovakia, EOHSP, Brussels. Ministry of Health (2004), ‘Health Care in the Slovak Republic - Concept,’ Ministry of Health, Bratislava. OECD (2004), ‘The Slovak Health Insurance System and the Potential Role for Private Health Insurance: Policy Challenges,’ OECD Health Working Paper, OECD, Paris. Pazitny, P. and Zajac R. (2002), ‘Health Policy,’ Internal Report. World Bank (2003), ‘Health Sector Modernalization Support Sectoral Adjustment Loan to the Slovak Republic,’ Program Document, Human Development Unit, Europe and Central Asia, The World Bank, Wahsington D.C. Zajac R., Pazitny, P. and Marcincin, A. (2004), “Slovak Reform of Health Care: From Fess to Systemic Changes,” Czech Journal of Economics and Finance, 54.

Slovenia 66. Introduction

Maintaining fiscal balance in the health sector has been at the core of all health sector reforms in Slovenia ever since it gained independence in 1991. In response to challenges and opportunities brought about by the transition away from central planning towards a market-based economy following independence, Slovenia introduced a number of reforms in the finance, delivery and management of the health sector, the most far-reaching of which was the establishment of a social health insurance system that brought about a separation between payers and providers of healthcare. At the same time, the health care system was reorganized and a wide variety of systemic and specific issues were sought to be addressed through such measures as decentralization, greater autonomy for public health institutions, greater choice for patients and the establishment of new provider payment mechanisms. The initial years of the reform were marked with a continuation of the huge losses and threats of insolvency, with the system being grossly underfinanced (only 5 percent of GDP was dedicated to the health sector) and with not even all the earmarked finances reaching the health sector. These teething problems were rapidly resolved by 1994, with the state intervening and allowing a temporary increase in insurance contributions. Despite the widespread decentralization and deregulation, the state maintained control over the establishment of the maximum level of contributions for compulsory health insurance and on the definition of the network of health care providers. In this way, the state maintained the ability to directly monitor public expenditures on health care and also keep a close watch on the contracting and purchasing of health services. Communication was emphasized between the different partners of the health care system – as embodied by the Health Insurance Institute of Slovenia (HIIS), the Association of Public Providers of Health Care, the various medical chambers etc. – and all agreements on goals, directions and processes continue to be finalized through negotiations. The fiscal balance in the health system received a jolt in 1996, following a strike by doctors demanding increased compensation. The strike was resolved with the government committed to link doctors’ pay to that of judges’ overtime, a move that has since been completed. Another fiscal pressure came with the introduction of the value-added tax, which also increased the price of health services, drugs and equipment. These two unanticipated increases in expenditures could not be buffered within the system itself and state intervention was again needed to re-establish the fiscal balance. The turn of the century has seen new and rising losses in the accounts of HIIS, with expenditures rapidly increasing due to the rising costs of pharmaceuticals. The doctors again went on strike in 2002, and while there was broad agreement that there was a shortage of doctors in Slovenia and that doctors were generally overworked, the then government of Prime Minister Drnovsek was not inclined to agree to yet another pay increase. Further, it was felt that additional increases in pay would trigger demands and pressures from other streams of professionals as well, threatening the government’s efforts to maintain balanced public finances. To prevent any erosion of competitive capacity of the economy as pay in the non-commercial sector was already growing at a rapid rate, the government started preparing for a law on public sector pay to correct the imbalance between the different professions and regulate salaries in the whole public sector. The problem of shortage of doctors continues, however, and the Health Minister Andrej Brucan recently announced that Slovenia was

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actively considering importing doctors from the EU, particularly Czech Republic and Slovakia. The directions of health sector reforms have also been at the center of political debates. In 2003, the then Health Minister Dusan Keber, in a White Paper on health reforms, suggested ways and means of improving fairness, accessibility, quality and efficiency in the health care system. The White Paper proposed to end additional payments required for voluntary medical insurance and substitute them by new mandatory health contributions of 1.95 percent of salaries. Concerned over the long waiting periods, the White Paper proposed setting a maximum limit and specifying that limit for all sorts of surgeries, reducing waiting periods on elective surgeries to a maximum of eighteen months within 4 years. The White Paper proposed increased efficiency in the use of the finance system, suggesting that standard prices would be set for all hospitals based on groups of comparable cases and linking payments to treatments. These proposals came in sharp criticism by the then opposition parties, the Social Democrats (SDS) and the National Parties (SNS), which essentially argued that the suggested measures would cover losses only at the expense of quality medical treatment while spending the scarce resources in non-essential areas. The current governments’ basic strategic development document, the Slovenian strategy for economic development, highlights the need to continue the structural reforms to stimulate the strengthening of the economy’s competitive capacity and increase financial investment. One of the priorities of the structural reform program is to bring about internal rationalization in the health sector so as to improve efficiency in the use of existing resources. The strategy for economic development underscores the need to stabilize the operations of HIIS and to stabilize public finances. The strategy also focuses on adopting measures in the area of public finance so as to ensure the long term stability in the light of the ageing of the population, and issue that is rapidly becoming very important in the context of demographic changes in Slovenia. Slovenia is one of the few countries in the EU-8 in which there are no significant arrears and debts in the health sector. Further, Slovenia also has the distinction of being perhaps the only country in the region to have faced many expenditure-side pressures – from salaries, from pharmaceuticals – and found ways to address those problems and rapidly regain equilibrium. In many ways, therefore, the example of Slovenia provides important lessons for other countries experiencing similar problems at this point of time. In this context, the main objectives of this report are to take stock of recent trends in health expenditure aggregates in the public sector and trace the progress of specific areas of health expenditure reforms consistent with the objective of maintaining fiscal balance. The rest of this report is organized as follows. Section 2 presents the macroeconomic background in order to set the context in which the fiscal situation in the health sector can be best understood. Slovenia, like other countries in the region, is undergoing a demographic transition as a result of which the population is ageing rapidly, and these issues are discussed in Section 3. Section 4 presents the health status of the people of Slovenia, and compares it with other countries in the region. Section 5 contains a brief background on the health sector in Slovenia and highlights some of the structural characteristics of the health care system. Health financing issues are discussed in Section 6. Slovenia has undertaken several reforms aimed at managing expenditures, and some of these are discussed in Section 7. Conclusions are presented in Section 8.

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67. The Economy Real GDP growth increased from 2.5 percent to 4.6 percent year-on-year between 2003 and 2004, which is the highest recorded growth rate since 1999. Industrial production growth accelerated to 4.8 percent year-on-year, but the primary driver of economic growth was the much improved external performance. Inflation fell steadily, with restrained wage growth and decreasing unemployment rates. Strong credit and wage growth, along with the one-off-effect of accession to the EU, led to high domestic expenditures in the first half of 2004. In the second half of the year, decelerating growth in fixed investment outweighed an upturn in public consumption (in line with EU funding inflows) to pull domestic expenditure growth below 4 percent by the end of the year. Table III.46: Macroeconomic Indicators

2000 2001 2002 2003 2004

GDP at market prices (SIT bn) 4,252 4,762 5,314 5,747 6,191

GDP (US$ bn) 19.1 19.6 22.1 27.7 32.2

Real GDP growth ( percent) 3.9 2.7 3.3 2.5 4.6

Consumer price inflation (average; percent) 8.9 8.4 7.5 5.6 3.6

Population (m) 2.0 2.0 2.0 2.0 2.0

Exports of goods fob (US$ m) 8,808 9,343 10,471 12,913 15,778

Imports of goods fob (US$ m) -9,947 -9,962 -10,723 -13,538 -16,753

Current-account balance (US$ m) -548 31 325 -99 -213

The main origins of GDP in 2004 were services (59 percent), manufacturing (29 percent), construction (5.8 percent), utilities (2.9 percent) and agriculture and forestry (2.7 percent). The main component of the GDP was private consumption (54 percent), followed by investment (24.7 percent) and public consumption (19.8 percent). Employment is rising and the unemployment rate stabilized at 6.0 percent in the third quarter. Inflation, after falling for several months, rose to 3.6 percent year-on-year in November 2004, reflecting seasonal price increase of food, clothes, and shoes as well as the higher prices of oil, refined petroleum products and gas. The beginning of 2005 saw very volatile inflation figures and the Statistical Office reported year-on-year first quarter inflation as 2.7 percent. As the government prepares for its goal of euro adoption in 2007, a longer-term disinflationary trend is clearly in place, and the Bank of Slovenia expects inflation to come down by almost 1 percent in the next year. Real wages are growing at almost 2 percent year-on-year, well behind productivity growth which is at levels around twice this rate. Nominal wage growth in manufacturing reached 7.1 percent, suggesting real wage growth of around 3.5 percent, also well below the pace of real growth in value added in the sector last year. Inflation was very low in the first quarter of 2005, in part owing to base-year effects, as import duties in place in early 2004 were removed when Slovenia joined the European Union.

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The current account deficit remained low at 0.3 percent of GDP in the first nine months of 2004. Despite strong recovery in the exports sector, with merchandise exports rising by 11.5 percent year-on-year in euro terms, growth in imports was even stronger at 13.4 percent, increasing the trade deficit substantially. Meanwhile, the net financial outflow amounted to 2.5 percent of GDP. The fiscal deficit in 2004 is estimated at around 2.1 percent of GDP, slightly higher than envisaged in the May 2004 Convergence Program, due to the inclusion of the activities of two extra-budgetary funds within the general government and the change in the composition of expenditures and revenues in 2004. For example, custom duties represented 7 percent of all budget income in 1996, but fell to 1.5 percent of revenue by 2004 and are expected to fall further in coming years. In 2004 customs revenue shrank by more than 30 percent in real terms compared with 2003, primarily due to Slovenia’s access to the EU. The general government deficit is expected to fall to 1.8 percent of GDP by 2006, due to cyclical factors as well as the continuing restructuring of expenditures. The government intends to adopt the euro in 2007. To maintain this schedule the government will have to maintain tight fiscal discipline over the forecast period, and bring down still further the rate of inflation, which has fallen considerably in the past two years. Limited room for fiscal maneuver and constraints on monetary policy are making the public-and private-sector wage policy increasingly important for meeting the inflation criterion and for maintaining a stable exchange rate.

68. Demography Slovenia, like many other countries in the region, faces the consequences of population ageing caused by reduced fertility and mortality rates on the one hand and increasing life expectancies on the other. Total Fertility Rates (TFR) in Slovenia fell from 2 in 1980-85 to 1.14 in 2000-2005 but is expected to increase to 1.46 by 2020-2025 (Figure III.42).79

Life expectancy at birth has been steadily rising and is expected to continue rising. Life expectancy at birth for females increased from 75.5 years in 1980-85 to 79.8 years in 2000-


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Figure III.42: Total Fertility Rate, Slovenia, 1980-2025

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2005, and is projected to rise to 83.2 in 2020-2025. Likewise, life expectancy at birth for males increased from 66.9 years in 1980-85 to 72.6 years in 2000-2005, and is projected to rise to 76.4 years in 2020-2025. Overall, life expectancy is projected to rise to 79.4 years in 2025, compared to 71.1 years in 1980-85 (Figure III.43).


This will result in a dramatic “upside-down” change of the age pyramid (Figure III.45a and b).

Figure III.43: Life Expectancy at birth, Slovenia, 1980-2025

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Figure III.44: Slovenia: Broad Age Groups (%)

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The old age dependency ratio and total dependency ratio are also expected to rise sharply. Another challenging demographic issue is the population decline, and by 2050, there will be 1.63 million inhabitants in Slovenia, almost 0.25 million less than today.80

69. Health Status The health status of the people of Slovenia compares favorably with the health status of the people of the new member states of the European Union (except Malta and Cyprus), though not as favorably with the health status of the people of countries belonging to the European Union before May 1st 2004 (or EU-15). As Table III.47 shows, life expectancy in Slovenia (76.52 years) is the highest amongst the new member states but lower than the life expectancy in EU-15 (average 79.06 years). Likewise, disability-adjusted life expectancy in Slovenia is almost 2 years less than the EU-15 average. Infant deaths in Slovenia – 4.04 per 1,000 live births – are also on the lower end of the range of the new member states (varying from 3.9 in the Czech Republic to 9.44 in Latvia), and are lower higher than the EU-15 average of 4.61. The incidence of Tuberculosis in Slovenia – 13.77 per 100,000 – is higher than the EU-15 average of 8.65 per 100,000, while the rate of clinically diagnosed AIDS – 0.3 per 100,000 – is much lower than the EU-15 average of 1.61.


Figure III.45a: Slovenia 2005

4.76

4.87

5.38

6.63

7.45

7.97

7.56

7.66

7.87

8.18

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6.21

5.38

4.55

3.62

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4.23

4.43

4.92

5.91

6.69

7.19

6.89

7.38

7.48

7.68

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5.91

5.31

5.12

5.02

8.17

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7.07

4.72

6.32

3.98

3.88

4.18

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4.59

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6.12

6.94

7.45

7.04

7.55

7.55

7.55

7.14

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Table III.47: Health Status Indicators, Slovenia and other new EU Member States (2003)

a Data for 2002

Source: WHO, European Health for All Database (January 2005 update), as accessed online at http://data.euro.who.int/hfadb, on May 24th, 2005, 5pm. Tables III.48 and III.49 present the standardized death rates (SDRs) for a wide variety of causes. A comparison of the death rates from main causes between countries gives broad indications of how far the observed mortality might be reduced. SDRs in Slovenia compare favorably to the other new member states, but are somewhat higher when compared with the EU-15 average. SDR from all causes in Slovenia is the lowest amongst the new member states, but is higher than the EU-15 average of 640. Likewise, SDR from circulatory system disorders, cerebrovascular disorders and selected alcohol-related causes are higher in Slovenia compared to the EU-15 average, but well within the range of new member states. Table III.48: Standardized Death Rates (per 100,000), different causes (2003) All Causes Circulatory







nant Neo-plasms

Trachea BronchusLung Cancer






Slovenia 203.66 41.23 4.11 4.31 62.05 53.33 31.31 Hungary 263.81 66.49 7.16 3.98 41.42 79.94 53.53

Life Expectancy






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Czech Republic 234.22 45.27 6.05 2.55 42.35 38.50 16.66 Estonia a 200.60 40.43 6.67 8.43 36.26 42.82 21.72 Slovakia a 213.32 38.11 6.58 3.81 55.20 52.86 26.55 Poland a 216.67 53.22 8.41 6.18 37.62 36.68 12.98 Latvia 193.40 36.85 6.76 13.32 29.32 38.07 14.00 Lithuania 193.57 36.20 10.64 13.23 39.10 41.99 20.98 EU-15 average a 180.50 37.05 2.35 8.38 48.31 30.81 12.62 a Data for 2002

Source: WHO, European Health for All Database (January 2005 update), as accessed online at http://data.euro.who.int/hfadb, on May 24th, 2005, 5pm. SDRs in Slovenia due to cerebrovascular (78.76), ischemic heart diseases (94.37) and smoking related causes (251.08) are the lowest among new member states, but higher than the EU-15 average. Likewise, SDRs due to diseases of the respiratory system (highest amongst the EU-8 at 62.05), diseases of the digestive system and liver diseases and cirrhosis are higher in Slovenia compared to EU-15 averages, though SDR from infectious diseases (4.31) is lower than the EU-15 average and the lowest among the new member states. Overall, observed mortality can be reduced significantly in Slovenia if the health system and other determinants of health are more effective in addressing health problems that account for high levels of mortality, like circulatory system, malignant neoplasms and smoking related causes.

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70. Structural Characteristics of the Slovene Health System Compulsory health insurance, administered by the Health Insurance Institute of Slovenia (HIIS), is at the cornerstone of health financing in Slovenia, and is defined by the 1992 Law on Health Care and Health Insurance. HIIS is the sole provider of compulsory health insurance and is autonomous in its operation, although the government has influence over some elements of the structure of the scheme, such as the contribution rate and scope of benefits. By design, the health insurance scheme covers the entire population, and opting out is not permitted. There are 21 categories of insured people, and there are two main groups. The first group is employees (and their non-earning dependents) who pay contributions based on income, at the rate of 13.5 percent of gross salaries and wages. Contributions are shared between employers (6.89 percent) and employees 6.36 percent). Additional contributions may be required from employers to adjust for claims that are excessive as a result of occupational diseases and injuries. The second group covers unemployed persons, other persons without a fixed income who are not registered as unemployed, pensioners, farmers and the self-employed, who pay a fixed contribution to the national fund. The National Institute for Employment pays fixed amounts for the registered unemployed, and self-governing communities are required to pay for persons without any income. Pensioners pay a fixed contribution of 5.65 percent of their gross pension. Benefits Package Beneficiaries are entitled to a very comprehensive package of primary, secondary and tertiary health services, as well as non-medical (cash benefits such as salary compensation after absence from work for 30 days). Essential services – which include services for children and adolescents, family planning and obstetric care, preventive care, diagnosis and treatment of infectious diseases (including HIV), treatment and rehabilitation of a range of diseases including cancer, muscular and nervous diseases, mental diseases and disability, emergency care (including transport), nursing care visits and home care, donation and transplantation of tissues and organs, long-term nursing care – are covered in full, while “less essential services” are subject to co-payments, ranging from 5 percent to 50 percent. Co-payments are paid by the patient, and can also be covered through voluntary health insurance. There are several population groups that are exempt from co-payments. Drugs are classified according to three lists: positive, intermediate and negative. Pharmaceuticals, which are on the positive list, are reimbursed at 75 percent by the compulsory scheme (the remaining 25 percent can be covered through voluntary health insurance), while drugs in the intermediate list are covered 25 percent by compulsory insurance. Negative list drugs are not eligible for reimbursement. Drugs for children and particular diseases are covered in full by the compulsory scheme. Co-payments were introduced in 1992 for most services (in-patient, outpatient, pharmaceuticals). Voluntary (complementary) health insurance was mainly introduced to cover the cost of co-payments. The large coverage of voluntary health insurance – covering 94 percent of the population – is most likely due to the relatively high co-payments for drugs in the mandatory health insurance and the high risk for citizens related to consumption of drugs, which are the most commonly and widely used form of health services. There are three providers of voluntary health insurance, one of which is a branch of the HIIS, but they all offer the same package. There are about 3,000 pharmaceutical entities approved for the market, of which about 2,000 are chosen for the drug list. The drug list is made by a committee of the Health Insurance Institute, and all pharmaceuticals on the positive list are evaluated for safety and efficacy

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following rigorous procedures put in place about 10 years ago (though there are still a few drugs available for the market that are holdovers from previous times, but that list is steadily shrinking). For about five years, the drug regulatory program has been harmonized with the European Union process. The Health Council, which is appointed by the Minister of Health, advises the Ministry on such issues as health technology use. These issues may be reviewed following the submission of applications for investment from providers or the review may be asked directly by the Ministry of Health. The Health Council members serve on a voluntary basis and do not do health technology assessment in any systematic sense. No systematic search for evidence is carried out, and neither is any systematic review of the literature done. Costs or estimated expenditures are considered, but the review of these issues is not rigorous. The Health Council has developed a protocol of issues to be covered in an application from a provider, and even though the number of applications is not very large, the requested sum far exceeds the available resources for investment in any particular year. The Health Council has no mechanisms for setting priorities for investments in the health care sector, and to this extent decision making by the MOH on investments may be ad-hoc. Purchasers of health services are different from providers of health services in the Slovene health system, and the purchaser of services – HIIS – negotiates contracts with health care providers for services on a collective basis each year. Annual contract negotiations between the HIIS and the health care providers, represented by the Society of Health Institutions of Slovenia, take place at three levels. First, the general agreement is negotiated, which defines types of services (capacity, needs and extent) to be provided within the agreed funding framework. Second, an agreement is negotiated for each type of provider (for example, hospitals), covering the rights and responsibilities of each provider, method of payment and so on. And third, the HIIS holds negotiations and contracts with each individual with respect to type and volume of services, prices and payments. Health Care Delivery Historically in Slovenia, as in the other former Yugoslav countries, all health facilities were state owned and private practice was forbidden. Physicians were salaried employees of the state. Many of these features are still reflected in the current health care delivery system, which is still mainly public, with most practitioners employed as salaried employees of the state.

The Law on Health Services classifies health care as follows: (i) Primary level (including basic health and dispensary services); (ii) Secondary level (including specialist outpatient and hospital services); (iii) Tertiary level (including management services of clinics and institutes and other authorized health institutions); and (iv) Socio-medical, hygiene, epidemiological and health-ecological services are performed as particular specialist services at secondary and tertiary levels. The 1992 health insurance legislation created the scope for the privatization of health care providers, and privatization is taking place gradually, especially at the level of primary care. Primary care Primary care in Slovenia is delivered by public and private providers. Public providers include health care centers and health stations that serve rural and dispersed populations. Health care centers provide integrated preventive and public health services, including to

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populations that are at a high risk from the public health point of view. A primary health care facility (health care center or health care station) is available within 20 kilometers from almost all locations in Slovenia. In rural areas, physicians largely practice as family physicians, with as many as 3,000 patients, where as in the capital city of Ljubljana, a physician may have as few as 750 patients. The average number of patients per general practitioner is about 1,800 (which normally includes only up to 10 percent of all children since their care is typically organized through primary care pediatricians). Public sector employees are salaried, although physicians and dentists have obtained the right to a special contract, giving them a separate negotiations position with the health insurance funds and an opportunity to supplement their salaries. Doctors with good patient registers earn greater incomes than those on public salaries. Most private practitioners work in private health care centers or rent public premises for individual or group practices. Private providers can obtain a concession from the local community to provide services (and therefore receive financing) under the compulsory health insurance scheme, which gives the same rights as any public provider (except that a private provider cannot apply for public funds for capital investments). Those with no concession must charge patients directly for services, and receive no financing from the public system. The increasing number and share of private clinics has brought competition into the market, which appears to have had a positive impact on the professionalism and efficiency of publicly-operated primary care clinics. The majority of those practitioners who are licensed for private practice are contracted by the health insurance fund. About 550 physicians operate outside the public system, and these are largely dentists. Under compulsory insurance, patients are allowed to choose their doctor, who then acts as a gatekeeper to higher levels of care. Secondary and Tertiary Care Although the primary care physician acts as a gatekeeper to secondary and tertiary care, patients referred are entitled to choose their specialist and hospital. Specialist secondary care is performed in hospitals, polyclinics and spas. University hospitals and university institutes provide more complex tertiary health care services. Secondary outpatient medical services are provided at the polyclinics affiliated with hospitals or in community health centers contracted through a hospital specialist or consultant. As of 2000, most hospital polyclinics worked within the public health network of health care services. These polyclinics also organize outpatient consultation for self-paying patients under regulations certified by the Ministry of Health. There are also a few purely private health care providers of secondary specialist care and diagnostic services, but most work on contract with the HIIS. Slovenia has no combined public-private polyclinics yet, but the medical and dental professions aspire to move in that direction. Treatment in spas can be suggested by the personal physician or by a physician in the hospital who is treating the patient. Hospitals provide about 75 percent of secondary care, either as inpatient or outpatient care. There are 26 hospitals, including nine regional and three local general hospitals and the main tertiary and teaching hospital, the University Medical Center in Ljubljana. In addition, there are 12 specialized hospitals, which provide orthopedic, pulmonary, gynecological and psychiatric care as well as care for children and youth with severe chronic diseases and disorders. Apart from the Clinical Center in Ljubljana, there are two other national tertiary institutions: the Institute of Oncology and the Institute for Rehabilitation. All hospitals are state-owned, but there have been some initiatives for private hospital care. Private hospitals may be

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established out of the network of publicly financed providers. There are also opportunities for private investment in new hospitals, although this has not as yet taken place. Table III.50 presents data on utilization of inpatient services and hospital performance in Slovenia as compared with EU25 countries. While Slovenia’s indicators meet the European averages, there may be opportunities for further efficiency gains without compromising quality and access to care. Occupancy rates are on the lower side, and there is scope for lowering hospital length of stays even further. As regards outpatient care, the number of outpatient visits per capita in Slovenia is 7.4, which is on the high side. Referrals to specialists have been steadily increasing, from only 55 per 1000 visits in 1990 to 145 per 1000 visits in 2001, which suggests that there are opportunities to constrain unnecessary demand. Table III.50: Performance of Acute-Care Hospitals in the European Region (2002 or latest available year)

Country Hospital beds per 1000 population

Admissions per 100 population

Average length of hospital stay

Occupancy rate (percent)

Austria 6.2 27.2 6.3 75.5 Belgium 5.5 18.8 8.7 79.9 Czech Republic 6.3 18.7 8.8 70.7 Denmark 3.3 19.1 5.5 79.9 Estonia 5.6 18.7 7.3 66.1 France 4.1 20.0 5.5 77.4 Germany 6.4 20.3 10.7 81.6 Greece 3.9 14.5 NA NA Hungary 6.6 22.4 NA NA Ireland 3.0 14.1 6.5 83.0 Italy 4.5 17.1 7.1 74.1 Latvia 6.1 20.0 NA NA Lithuania 6.3 20.9 8.3 76.0 Luxembourg 5.5 18.4 7.7 74.3 Netherlands 3.3 9.1 7.7 58.4 Portugal 3.1 11.9 7.3 75.5 Slovakia 6.9 18.9 9.4 71.0 Slovenia 4.6 16.1 7.6 73.2 Spain 3.0 11.2 8.0 77.3 United Kingdom 2.4 21.4 5.0 80.8 Source: WHO Health for All Database, 2004 Access to Care Patients interviewed in Slovenia on their satisfaction with health services mention waiting time as a critical problem. Waiting lists are a feature of any well performing health system, but their management is essential to ensure that perceived or actual access barriers do not create life-threatening or incapacitating circumstances for patients posed by the existing system. In Slovenia, the number of patients on the waiting list for elective surgery has been steadily increasing and in 2000, 14 percent of all patients requiring elective surgery were on a waiting list compared to zero percent in 1998. Public Health Public health services are the responsibility of the municipalities and the Institute of Public Health (IVZ). The IVZ is responsible for planning and implementing health protection and promotion programs. It maintains several national databases, including the national death register, hospital statistics database, outpatient statistics database and the database on national health care providers. The IVZ has also gone through a reform process, not providing

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extensive rough morbidity and mortality data but providing information relevant for public health ad policy making, including information about effective interventions and covering also non-infectious diseases.

Social Care Social care in Slovenia is organized through community nursing services which are part of self-governing communities and are based in health care centers. Homes for elderly and disabled people provide long-term care. Access to long-term health care is through the local community social agency based on the recommendation of a physician. A full-time, registered physician combined with nurses provides care in long-term care facilities. Specialists are brought in on a need-be basis. Nearly all homes are public and there is growing demand as the Slovene population ages. Health Policy and Regulation The Ministry of Health (MOH) is responsible for policy-making and priority-setting. Its role in the health sector has been quite weak till recently, though it has gotten actively involved in recent years in setting the agenda for health reforms. There are other regulatory agencies such as the Office of Medicinal Products, which is responsible for implementing the national policy on drugs and medicinal devices. The Institute of Pharmacy and Drug Research is responsible for controlling the quality of medicinal products. However, MOH and the HIIS are in need of expanding their capacity and getting an adequate regulatory framework for decision making on new health technologies to be included into the benefits package of HIIS as well as on the distribution of these technologies over the various levels of care and over the country.

Human Resources In 2003, there were 21.6 physicians in Slovenia for 10,000 population, which is higher than the EU15 average of 10.2 physicians. There were 71 registered nurses per 10,000 population in Slovenia as compared to the EU15 average of 67, 6 dentists (EU15 average 6.4) and 3.9 pharmacists (EU15 average: 7.9). In addition to the numbers, there are concerns related to the inter-regional distribution of health personnel, and a much lower number of physicians operate in rural areas.

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71. Health Expenditures and the Performance of the Health Sector Health is a constitutional right in Slovenia and is based on strong egalitarian principles. The implementation of social insurance as well as policy reforms in health financing reflects the core principles of equity and access to health care for all Slovenians. The main sources of financing for the health sector are public, which comprise about 87 percent of total spending on health and include compulsory health insurance contributions and direct state budget transfers. Private spending comprises the remaining 13 percent and includes including voluntary health insurance and out-of-pocket payments.

Public spending on health constitutes around 14 percent of total general government spending, third after government spending on social protection and general public services (Figure III.46). This amounts to about 6.8 percent of GDP in 2003 (up from 6.75 percent in 2002).81 Inclusive of private out-of-pocket spending, total spending on health in Slovenia amounts to about 7.82 percent of GDP.

Figure III.46: Struture of General Government Expenditures

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The state budget (MOH) pays for capital investments for all secondary and tertiary facilities from the state budget. Budget financing also covers public health programs, including prevention and promotion, medical education and training, national health information, reform projects and health care coverage for specific groups such as soldiers, prisoners and refugees. Communities are supposed to be responsible for capital investments for primate health care facilities with funding collected at the local level. In reality, some funds are received from the state budget and the MOH.

Direct out-of-pocket spending includes co-payments for services covered under compulsory insurance, where the patient does not have voluntary insurance, payments to private practitioners who have not received a concession or for purchasing services not covered under compulsory or voluntary insurance, and informal payments to shorten the waiting list (although efforts are being made to formalize these payments).

81 Data for 2004 will be available end of 2005 only.

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Health Insurance Institute of Slovenia Besides the payment of health services, compulsory health insurance also guarantees sick pay during temporary absence fro m work, death benefits, funeral costs refunds, and reimbursement of travel expenses related to obtaining health services. In 2003, the amount of paid contributions amounted to SIT 367.53 billion, an increase of 8 percent compared to 2002, while total spending of the HIIS from all public sources, including budgetary sources, was approximately SIT 378.9 billion in 2003. This amount refers to the expenditure of (public) funds, collected on the basis of contributions paid by employers and employees, and by several other categories of contribution obligors. Premium contributions constitute 99.6 percent of the income of HIIS, most of which comes from contributions paid by employers and the employees (SIT 284.72 billion in 2003, or 77.5 percent of total). Contributions to the pension fund account for SIT 58.85 billion followed by the contributions of pension fund, equivalent to 16 percent of total, and contributions of farmers and others account for SIT 19.31 billion, or 5.3 percent of total. Calculation of contributions Contributions to HIIS are calculated either as a percentage of a specified basis or as a flat sum charge. Articles 50-57 of the Law on Health Care and Health Insurance (subsequently broadened in 1998 by the Law on Contributions for Social Security) provide the bases for computing contributions for different groups of insured persons and flat charges for specified groups of persons. HIIS contributions depend on the salary or other income earned by the insured person, which ensures a high degree of solidarity within the system. Health insurance contributions are paid directly by national or local community budgets for some groups of insured persons, such as the unemployed and the recipients of the social security allowances.

Box III.1: Negotiating A Common Scope of Health Programs The representatives of the health care service providers (chambers, associations), of the Ministry of Health Care and of the Health Insurance Institute of Slovenia (Institute) take part in negotiations and agree upon the common scope of the programs of health care services and the funds necessary to cover the program, at the national level. As the result of the negotiation process, a written agreement is signed, which then represents a legal basis for the concluding of contracts with public health care institutions and private service providers. The significance of the negotiations lies with a responsible determination of the “upper limits” for the public funds for health care, and responsible spending of financial means collected in a solidarity manner in the form of contributions for compulsory health insurance from all insured persons in Slovenia. In Slovenia, this upper limit is set to approximately 6.9 percent of the GNP. Observing the general economic potential, the Agreement determines the overall extent of the health care service program, priority areas, necessary capacities and elements (prices) to be applied in valuation of the services. Each year, based on the adopted Agreement, Institute publishes a public competition open to all health care service providers eligible (concessionaires) to perform their services within the network of the public health care service network. In 2003, the Institute concluded contracts with 1.356 health care service providers. Of these, 210 were public institutes and 1.146 private practitioners, including pharmacies. Thus, in 2003, of the total compulsory health insurance budget, the Institute designated a sum of approximately SIT 260 billion for health care services, SIT 68 billion for medication, medical aids, blood and social medicine and SIT 40 billion for various financial benefits. Source: http://www.zzzs.si/zzzs/internet/zzzseng.nsf/dok_ste/72, June 5, 2005, 11am. HIIS pays providers in a number of different ways, depending upon the type of health care activity. Physicians providing primary health care, including pediatricians and gynecologists, are paid on the basis of capitation combined with fee for services. Health education and some prevention programs are funded by the Institute in the form of fixed sums. Outpatient specialists are paid for a fee-for-service basis, and standards are specified to determine the

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annual planned number of visits per team. For some services, like dialysis, prices are set for different types of services (e.g., 5 types for dialysis services). Inpatient care is paid on the basis of reimbursement payment per Australian-type Diagnostic-Related Groups, combined with a fee for service system for some high cost services and materials. The same compensation system is used for ambulatory providers as well. Subscription medicines and technical aids issued by pharmacies are separately invoiced to HIIS, which also has specific contracts with suppliers of technical aids. For health resorts, the price of a non-medical daily charge is set, which covers the services of residence and daily rations. The system of the average daily charge is used to compensate social care and social habilitation institutions. Emergency transport services are valuated on the basis of a planned budget for emergency transports, while a price per kilometer is used for non-emergency transports. Separate prices are used for transport services for special treatments, like dialysis, etc. Health Expenditures by Function Salaries and wages account for almost 40 percent of total public spending on health, followed by social benefits in cash and kind, intermediate consumption and investments (Figure III.47).

Figure III.47: Public Expenditure on HealthFunction and Type

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2003

Over 80 percent of all health personnel are in the public sector. In the late 1990s, the Government increased physicians’ salaries so as to bring about parity with other professions, but this has led to a huge increase in the wage bill, which threatens the fiscal sustainability of the health sector. Inpatient care accounts for over 31 percent of total public spending on health, followed by pharmaceuticals at 18 percent. Expenditures on inpatient care as a percentage of total health expenditures is low in Slovenia in comparison to EU15 (average of 38 percent) and the majority of Europe and Central Asia countries where expenditure on inpatient care can average between 40-70 percent of total health expenditures. Expenditures on pharmaceuticals are slightly on the high side, since the majority of EU15 countries spend between 9.8 to 12 percent on pharmaceuticals and medical supplies. Expenditures on pharmaceuticals have been steadily increasing in recent years, partly due to increasing consumption of medicines in hospitals and outpatient care in parallel with uncontrolled prices increases for medicines. In 1995, the government intervened to manage drug prices in the wholesale and retails sectors by

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establishing a new agency (the Office for Medicinal Products) and taking control over price-setting. However, the impact on overall expenditures has been minimal so far due to the increase in bulk consumption of several drugs as well as the high prices of innovative drugs.

72. Managing Health Expenditures in Slovenia In 2002, Slovenia began a process of health system improvements aimed at improving the long-term performance of the health sector. The underlying motivation for the reforms was the continuing growth in health expenditures largely fueled by rising costs of pharmaceuticals, medical personnel and other consumables and the ongoing demographic and epidemiological changes in the country and the potential for continuing growth in health expenditures in the context of joining the EU (growing consumer and provider expectations regarding improving the quality of care). The reforms have focused on managing pharmaceutical costs, improving provider payment mechanisms, and improving quality of care improvements. The underlying objective was to improve the cost-effectiveness of care and limit unnecessary consumption of health services while mitigating any problems with access and quality. Each of these areas is discussed below.

72.1 Pharmaceutical Costs Concerned with increasing pharmaceutical costs – due to increasing consumption levels as well as rapid increases in the price of medicines – the government, in 1995, intervened under special legislation to control the drug prices in the wholesale and retail sectors, and took over control of price-setting. The price of all pharmaceuticals, including; ethical pharmaceuticals, medicines for hospital use, generics and OTC products, are determined by the state, and on behalf of the state, by the Agency for Medicinal Products, set up as a department of the Ministry of Health. The wholesale price of the drug is set in accordance with the law and in such a way that it does not exceed 85 percent of the average wholesale price of an identical or similar product within a reference basket of three countries (Germany, France and Italy). The only exemption to this law is for innovative products and some orphan drugs, in which case the price cannot exceed 96 percent of the average set by the three countries listed above. HIIS is fully responsible for the reimbursement of prescribed pharmaceuticals. HIIS reimburses each pharmacy a fee for their services. The pharmacy margin is between 8-9 percent. Pharmacies also paid a duty, but only in regional centers. The VAT for all pharmaceuticals is 8 percent (lower than the normal rate of 19 percent), and is applied to the wholesalers' prices. Pharmacies earn extra income from the sale of medical aids, cosmetics and other items. The agreements between wholesalers and retailers are not monitored or regulated. Reimbursement According to the Law (Decision on the Classification of Medicines to Lists, 1996), all drugs are classified into a “positive” drug list or “intermediate” drug list. The positive drug list contains about 1250 pharmaceuticals, and includes: (i) Medicines applied in prevention and in therapy for certain groups of insured persons (children under 18 years, students, pregnancy and motherhood) and medicines for the diseases and health states defined in paragraph 1 of Article 23 of the Law on Health Care and Health Insurance (medicines for the treatment of most important contagious diseases including AIDS and STD's, diabetes mellitus, major psychiatric diseases, epilepsy, muscular dystrophy, multiple sclerosis and psoriasis); (ii) those medicines in particular pharmacological groups that are most effective, professionally most

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justified and essential for the therapy of particular diseases and population groups not specifically provided in paragraph 1 of Article 23 of the Law; (iii) those medicines provided in paragraphs 1 and 2 herein being mono-component as a rule (there are some exceptions); and (iv) ambulatory medicines designed for self-administration by the insured persons suffering from diabetes and are specially trained in self-management of the disease. Drugs on positive drug list are reimbursed 100 percent by HIIS for medicines applied in prevention and in therapy of the specified groups of insured persons and of the diseases and health states defined in paragraph 1 of Article 23 of the Law on Health Care and Health Insurance, and 75 percent for all other medicines. The intermediate drug list contains about 350 pharmaceuticals, and is reimbursed at 25 percent by compulsory health insurance. There is no official negative drug list, and non-reimbursed medicines are primarily OTC pharmaceuticals. These medicines may be covered by voluntary health insurance scheme. Monitoring Prescriptions In order to contain the growing costs of pharmaceuticals, the Health Insurance Institute has begun to monitor prescriptions of pharmaceuticals at the national and individual level. Pharmacies are required to send all prescription data to the Health Insurance Institute where the data is processed and analyzed. The data on pharmaceutical consumption is compared to international data and published in the Rational Pharmacotherapy, a Slovenian drug bulletin which is distributed free to every physician. Further, physicians are allowed to prescribe only one pharmaceutical on each prescription, and no more three months supply can be prescribed. Since the price differences between original pharmaceuticals and generics are usually not significant, prescribing of generics is not generally promoted (though HIIS does try to encourage the prescribing of generics). The reason for this is that most generics are “branded generics” produced by Slovenian firms (45 percent of the market).

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72.2 Provider Reimbursement Systems and Provider Contracts In the last 3 years, payment mechanisms, especially for acute care hospitals, have undergone several changes. Prior to 1993, hospitals were paid according to a global budget defined on a costliness factor based on previous expenditures. There were many problems with this system: (i) it did not generate incentives for efficiency or quality; (ii) hospital tended to over-provide items of service and items of high payment values; and (iii) it did not encourage fair payment for nursing or physical therapy. In 1993, this system was changed to inpatient days of stay as the unit for payment. The strengths of this model were that it provided more useful information about the care being provided to patients, and it generated incentives for efficiency (reduce the provision of items of service). However, this system did not generate any incentives for reducing the average length of stay. In 2000, Slovenia introduced a per-case method of paying hospitals, the basis of which was cost per case. Since then (2002-04) Slovenia has developed a Diagnostic Related Group (DRG system) to define cases, and has developed a base rate and relative values (to adjust for case complexity). Currently, all 19 acute care hospitals in Slovenia have a DRG system. The focus during the early implementation phase has been very much on refining this method of payment by building the capacity of the HIIS and hospitals in coding and billing and improving hospital product costing. The availability of more and better information is considered critical for improving transparency and accountability in payment mechanisms. Application of DRGs for resource allocation is being carried out in an incremental manner. As Table III.51 shows, the mean length of stay in hospitals implementing DRGs has fallen, with the mean length of stay for some conditions falling by as much as 50 percent.

Table III.51: Mean Lengths of Stay (selected DRGs, 2001 and 2003, Ljubljana Clinical Centre)

2001 2003 DRG

Cases Days ALOS Cases Days ALOS

N62B Mnstrl&Oth Fem Repr Sys Dis-Cc 3,317 14130 4.26 4,336 35035 8.08

O63Z Abortion-D&C,Asp Crtg/Hystromy 341 767 2.25 2,254 2434 1.08

I68B N-Surg Neck,Back-Pn Pr A<75-Cc 1,687 16482 9.77 1,353 9173 6.78

F71B N-Mjr Arythm&Condctn Dsrd-Cscc 1,237 5455 4.41 1,138 3084 2.71

J67B Minor Skin Disorders – Cc 1,364 6602 4.84 1,075 5827 5.42

K64B Endocrine Disorders – Cscc 1,322 7390 5.59 1,010 5262 5.21

G67B Oesphs,Gastr&Mis Dg D A>9-Cscc 827 4648 5.62 991 3964 4.00

F65B Peripheral Vascular Dsrd –Cscc 427 4620 10.82 936 5054 5.40

B70C Stroke - Other Cc 993 22273 22.43 841 12935 15.38

G68B Gastroenteritis A<10 – Cc 787 2259 2.87 835 1912 2.29

J65B Trauma To Skn,Sub Tis&Bst A<70 286 1301 4.55 717 1893 2.64

F62B Heart Failure & Shock – Ccc 825 8324 10.09 678 6495 9.58

E62C Respiratory Infectn/Inflamm-Cc 860 8858 10.30 667 5343 8.01

J66B Moderate Skin Disorders – Cscc 676 3995 5.91 642 4391 6.84

D63B Otitis Media & Uri – Cc 1,186 3878 3.27 614 1578 2.57

L64Z Urinary Stones & Obstruction 663 4130 6.23 592 3209 5.42

G66B Abdmnl Pain/Mesentrc Adents-Cc 926 3148 3.40 579 1691 2.92

F66A Coronary Atherosclerosis + Cc 61 650 10.66 575 3973 6.91

L63C Kidny & Urnry Tract Infcs A<70 559 3360 6.01 560 3259 5.82

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F72B Unstable Angina – Cscc 1,838 15127 8.23 555 2769 4.99

F66B Coronary Atherosclerosis – Cc 486 4102 8.44 543 2574 4.74

C63B Other Disorders Of The Eye –Cc 1,125 6615 5.88 517 3490 6.75

I69C Bone Dis & Specfc Arthrop A<75 408 5312 13.02 501 2505 5.00

T64B Oth Infectous&Parstic Dis-Cscc 668 2565 3.84 482 1745 3.62

B76B Seizure A>2 – Cscc 637 3625 5.69 465 3274 7.04

F69B Valvular Disorders – Cscc 837 9215 11.01 455 2707 5.95

F74Z Chest Pain 123 592 4.81 447 1350 3.02

72.3 Reducing Inappropriate Admissions Another area where changes were introduced was in reducing the number of inappropriate admissions. The contracts between the HIIS and providers stated that hospitals with unsatisfactory levels of inappropriate admissions would have to undertake additional work to reduce their waiting time for targeted case types. The inclusion of this contracting requirement has eliminated the problem of inappropriate admissions thereby contributing to improved cost-effectiveness. In addition to addressing payment methods for specific levels of care (primary, acute care, tertiary care), under the health reforms, substantial work has been undertaken on introducing payment mechanisms that encourage quality and cost-effectiveness across the spectrum of care (primary, secondary, etc.). The idea of Episode Management Units had been developed and is being explored. This reflects the view that in order to really bring about fiscal sustainability in personal care, issues such as continuity of care and patient compliance need to be addressed. Therefore, while individual payment methods may improve efficiency and quality at a particular level of care, the challenge was to link across the spectrum of care.

72.4 Improving Quality of Care The health reform strategy realized early on that improving quality and coordination of care is critical for improving fiscal sustainability in the health system without compromising the health of the population or patient satisfaction. In the last three years, a Slovene manual for the development and introduction of clinical guidelines, adapted for Slovenian circumstances, was developed and adopted by all the stakeholders, including the medical community. This was due to a broad participatory process, involving also the medical association, and creates favorable conditions for the implementation of the protocols in daily practice. Clinical pathways, which are multidisciplinary plans of best clinical practice for specified groups of patients with a particular diagnosis that aid the coordination and delivery of high quality care, have been introduced in many health care settings and the plan is next to link clinical pathways to payment mechanisms.82 Clinical practice guidelines and clinical pathways are

82 Clinical Pathways are multidisciplinary plans of best clinical practice for specified groups of patients with a particular diagnosis that aid the coordination and delivery of high quality care. Wigfield & Boon (1996, p.732) claim that Clinical Pathways are able to standardize care for 60-70 percent of patients with a similar diagnosis, procedure or symptom. Clinical Pathways are more easily applied to surgical procedures where the plan of care may span a few hours or days. Some Clinical Pathways may extend to other healthcare facilities such as rehabilitation units or out into the community for continued care. They may even span a lifetime of care in such chronic conditions as multiple sclerosis or congestive heart failure. Clinical Pathways differ from practice guidelines, protocols and algorithms as they are utilized by a multidisciplinary team, can even go across levels of

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used for optimization of services delivery and provide the opportunity for improving clinical governance. More than 40% of all cases are expected to be covered by clinical pathways in a few years time (Figure III.48). Figure III.48: Estimated Percent Cases Covered by Pathways (selected EU countries, 2004 and 2009)

0 30 60 90

France

Slovenia

The Netherlands

Austria

Belgium

Ireland

Estonia

Germany

UK

20092004

Source: Ministry of Health, Slovenia, 2004

73. Conclusions Slovenia has made significant progress in the management of several health sector issues, including financing, production and delivery off health services, but continues to face several challenges in improving fiscal sustainability of the health system. The exponential growth in pharmaceutical expenditures has yet to be controlled and there are pressures on account of both pricing of pharmaceutical products as well as number of pharmaceutical prescriptions. The issue of salaries of physicians is bound to come up again, as comparisons with salaries of physicians across the border in EU15 countries begin to distract the fragile equilibrium. There is vast improvement in the hospital sector, where accountability levels are still low and where the existing incentives lack strength. Finally, Slovenia is going through impressive demographic changes, which are dramatically going to increase the number and proportion of the elderly in the country.

care and institutions and have a focus on quality and coordination of care. There are four essential components of a Clinical Pathway: a timeline, the categories of care or activities and their interventions, intermediate and long term outcome criteria, and the variance record

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The Government is aware of these challenges, and is constantly exploring opportunities to identify measures that would help meet the objectives of fiscal balance and effective delivery of care. In a recent enunciation of the Government’s plans, Health Minister Andrej Brucan outlined his ministry’s objectives of the year as establishing a balance between public and private health care, improving breast cancer treatment and replacing outdated diagnostic and treatment devices. In an attempt to motivate private investors to invest in public health care, the ministry is drafting new legislation for awarding concessions to the private sector and realigning the public-private balance. The Government is planning infusion of resources into investment, particularly to improve treatment of life-threatening conditions. In order to improve breast cancer treatment, the ministry’s program is to combine outpatient clinics and mammography clinics, and ensure that all eligible women will be examined as necessary and as per protocol. Overall, the ministry's objectives are increasing the overall efficiency of the system, ensuring high-quality services, investing in health care management and promoting healthy living.

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References: Albreht, Tit, 2002: Health Reforms in Slovenia, Twelve years after, time to re-evaluate, Institute of Public Health of the Republic of Slovenia, Trubarjeva 2, 1000 Ljubljana. European Observatory on Health Systems, Health in Transition Reports, Slovenia. The European Observatory, Brussels. International Monetary Fund. 2003. Article IV Consultations. Ministry of Health. 2005. Presentations: New Directions in Health Care Workshop, Center for Excellence in Public Finance, Ljubljana, Slovenia. Republic of Slovenia: Official Website of Slovene Government, http://www.uvi.si/eng/slovenia/background-information/budget-memorandum-2001/June 5, 1pm. World Bank. 1999. Health Sector Management Project. Project Appraisal Document, The World Bank, Washington DC. World Bank. 2004. Implementation Completion Report: Slovenia Health Sector Management Project, The World Bank, Washington DC.

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