Managing Health Expenditures in New EU Member States: Options for Reforms

1. Managing Health Expenditures in New EU Member States:Options for Reforms Mukesh Chawla, PhD The World Bank Gastein, October 7, 2005 Views expressed are the author’s and do not necessarily reflect those of the World Bank

2. Akshay Sethi (WB) Anton Marcincin (WB) Armin Fidler (WB) Jan Bultman (WB) John Langenbrunner (WB) Maris Jesse (WB) Marzena Kulis (then WB) Panagiota Panopoulou (WB) Paolo Belli (WB) Peter Berman (WB) Pia Helene Schneider (WB) Sarbani Chakraborty (WB) Shweta Jain (WB) Thomas Laursen (WB) Christine Blades (EIB) Imre Hollo (EIB) Andrzej Rys, Former Deputy Minister of Health, Poland Dorjan Marusic, State Secretary, Ministry of Health, Slovenia Jan Kralik, Director, Ministry of Health, Slovak Republic Laila Ruskule, Deputy State Secretary, Ministry of Health, Latvia Pawel Sztwiertnia, Deputy Minister of Health, Poland Rimantas Sadzius, Deputy Minister of Health, Lithuania Rinalds Mucins, State Secretary of Health, Latvia Inga Cabe (Consultant, Latvia) Janina Kumpiene (Consultant, Lithuania) Peter Pazitny (Health Policy Institute, Slovakia) Acknowledgements

3. The Problem Statement • Czech Republic, Estonia, Hungary, Latvia, Lithuania, Poland, Slovakia and Slovenia – have carried out extensive health sector reforms in recent years • Health expenditures are not way out of line, but the sector is in heavy debt, with expenditures consistently exceeding revenues • The pressure of expenditures appears to be relentless – seemingly out of control

4. Layout of the Presentation • Background: Essential Macroeconomics • Background: Essential Health Status • Health Expenditures • Key Expenditure Areas • The Underlying Fault Lines • Potential Solutions

5. The Economy

6. Growth Rates, 2002-2004 10 2002 2003 2004 8 6 4 2 0 Lithuania Estonia Latvia Slovakia Poland Slovenia Czech Republic Hungary The average growth in the new member states touched 5% in 2004, a full 1% above 2003 levels……

7. Unemployment Rates, 2003-2004 25 2003 2004 20 15 10 5 0 Hungary Poland Slovakia Lithuania Latvia Estonia EU15 Czech Republic Slovenia ….but unemployment rates have not changed much

8. ….and fiscal performance has improved

9. Health Status

10. New member states EU-15; High-income OECD; Middle-income high-performing; *High-income OECD countries are USA, Australia, New Zealand, Canada, Switzerland and Norway Health outcomes in new member states are as expected or better for their income level Source: IMF World Economic Outlook database; WHO Statistical Information System

11. …but a comparison of death rates from main causes shows that perhaps there is scope for reducing mortality

12. Health Expenditures

13. Health care spending in the new member states varies from 8.1% of GDP in Slovenia to 5.4% of GDP in Estonia

14. New member states EU-15; High-income OECD* *High-income OECD countries are Switzerland and Norway Health spending is comparable to other European countries, and may even be on the low side in some new member states

15. New member states EU-15; High-income OECD*; Middle-income high-performing; *High-income OECD countries are Switzerland and Norway Amongst a wider group of comparators including well performing middle-income countries health spending is not out of line …

16. Composition of health expenditures • Health expenditures in new member states are mainly financed from public sources, but ratio of public-private expenditures varies • Health expenditures in most new member states are dominated by inpatient care and pharmaceuticals, which account for 40% and 30% of total health expenditures

17. A defining feature of the health sector in almost all new member states is the widespread and growing indebtedness

18. Key Expenditure Areas in the Health Sector in New Member States

19. What is driving health expenditures in the new member states? • Pharmaceuticals • Hospital Infrastructure • Salaries

20. Pharmaceuticals are the single largest cost driver in almost all countries • The single biggest reason for rising pharmaceutical costs is increase in volume of drug use

21. The rising costs of pharmaceuticals is not a problem in these countries only…..

22. ….and neither are issues related to increase in volume of drug use

23. Most new member states have extensive hospital infrastructures that are expensive to maintain • The current oversupply of hospital infrastructure in the new member states is a legacy from yester years • Almost all countries have taken steps to reduce hospitals and acute-care hospital beds, but few have done truly enough • The problem of debts is particularly visible in regions with an excessive concentration of public hospitals

24. Salaries in the health sector in new member states are rising faster than the average salaries in the economy • Since salaries account for more than 60% of health expenditures in most countries, this trend is increasing the pressure on overall health spending • The pressure of salaries has increased since these countries joined the EU last year

25. Projected Pay Increases in Latvia and Lithuania • Lithuania and Latvia ranked first and fourth in the world in terms of pay increases, respectively • 2005 average projected pay increase in Latvia: 9.1% followed by Lithuania: 9.9 • Adjusting for inflation, the 2005 projected pay increase is Lithuania: 7.7%; Latvia: 5.6%

26. Emerging pressures on health expenditures • Absorption of available and new technologies • Ageing and changing demographics

27. 4.6 United Kingdom 1 12.9 Switzerland 3.9 4.9 Spain 0.7 2000 6.2 Germany 1.9 1990 2.6 France 0.8 2.5 Canada 0.7 10.8 Austria 1.2 0 2 4 6 8 10 12 14 MRI units per million pop Diffusion of MRI units, 1990 to 2000Source: OECD Health Data 2004

28. Almost 30 percent of population in new member states will be above 65 years of age by 2025

29. Demographic Distribution in the Czech Republic 2010 2050

30. It is difficult to quantify the impact that an ageing population will have on health expenditures….. • But there is little doubt that an increasing proportion of people over 65 will exert some upward pressures on health care costs • A critical issue is long-term care for the very old, which can become a huge financial burden as informal family-based care begins to decline

31. The Underlying Fault Lines

32. The demand side Marginal costs of providing health care are very close to zero (regardless of individual risks) Consequence 1 Misuse of the solidarity principle Consequence2 Insufficient motivation of citizens to protect their health Consequence 3 Overconsumption of health goods & services, including drugs Consequence 4 Attempts to obtain extra advantages corrupt the market

33. The supply side Absence of fundamental market principles, pricing mechanism, and cost-containment incentives Consequence 1 Absence of competition for patients results in decline of quality Consequence2 Oversupply of health services; inefficient providers are not eliminated Consequence 3 High fixed costs and continual growth of indebtedness Consequence 4 Absence of efforts to improve technical efficiency

34. Health Financing Health “insurance companies” actually “redistribution companies”; plurality does not lead to competition; absence of strategic financial management Consequence 1 Limited concern by “insurees” of where they seek “insurance” Consequence2 Nothing to distinguish “health insurance companies”(except level of debt) Consequence 3 No incentives to strive for greater allocative efficiency Consequence 4 Absence of ownership & accountability “so why bother?”

35. Thinking of Solutions

36. The customer and half a lettuce head… • Complex and complicated problems demand complex and complicated solutions • The problems in the health sector are not as complex and complicated as they seem • Health sector problems have simple solutions

37. Greater patient responsibility Increase marginal costs for patients (regardless of individual risks) Step 1 Very modest copayments at all levels of care Step 2 Annual stop-loss at the level of the family Step 3 Financial transfers to safeguard the poor & vulnerable populations Step 4 Increased information for patients to facilitate informed choice

38. Fixing the hospital sector Full autonomy for all health facilities (including financial, procurement, personnel, etc.) Step 1 Withdraw protection, except for the bare minimum in underserved areas Step 2 Performance contracts for hospital managers Step 3 Mandatory annual exercise of strategic financial management Step 4 Strict solvency requirements and regular monitoring on that basis

39. Change incentives in the insurance sector Convert “health insurance companies” to health insurance companies and allow (regulated) competition Step 1 Health insurance companies to become informed third-party purchasers Step 2 Solvency rules developed and regularly monitored Step 3 Minimum 4.33% deposit requirement Step 4 Annual public reporting of state of business

40. Strengthen regulation and stewardship Ministry of Health to focus on stewardship and regulation Step 1 Develop regulation framework and strong regulatory capacity Step 2 Enhanced stewardship role Step 3 Manage patient complaints and redress grievances Step 4 Facilitate and manage information flows across patients and providers

41. There is no escape from greater cost-sharing by patients…. • ….which translates to patient copayments at all levels of care • Copayments for pharmaceuticals are a good and effective demand-side measure to control unnecessary consumption • Of course, the poor and the vulnerable have to be offered financial protection

42. Managing pharmaceutical expenditure is critical, but difficult….. • Price controls and regulation are necessary but by no means sufficient • Controlling consumption is key to controlling expenditures on drugs

43. Hospital restructuring is critical in many countries… • Many countries have successfully consolidated many hospitals into one, and then reduced beds in this network • Others have simply shut down hospitals • Whatever works…..

44. But most importantly…. …..the fact that the health systems in three new member states do not have any debts is remarkable, and it is worth exploring why the same set of issues that have been the bane of fiscal balance in some countries have not been a problem for others

45. These three countries are Estonia, Slovenia and Latvia…… • These countries face the same financial pressures, but have found simple but effective ways to address these problems. • Slovenia found the answer in good governance, close scrutiny and informed oversight. • Estonia found the solution in strict adherence to financial rules and in maintaining financial reserves to meet unforeseen expenditures. • Latvia contained its expenditures to the resource envelope, and simply did not spend what it did not have.

46. The most important message from the experience of these countries is that there is no substitute for fiscal discipline….. • …..and that the best way of not running up arrears is to stay within the available resource envelope. • The resource envelope available for the health sector is usually sufficiently elastic to accommodate expenditures such that fiscal balance is maintained • Such accommodation is possible and sustainable only if backed by a fundamental adherence to good budgetary practices and fiscal prudence.

47. In brief…

48. To recap…. • The heavy indebtedness in the health system in many new member states presents a huge challenge for the fiscal health of these countries • These countries cannot carry the health sector debts for long • Main pressures on expenditures come from pharmaceutical expenditures, rising salaries, expenditures associated with maintaining the existing hospital infrastructure • Potential expenditure areas include ageing populations and proliferation of expensive medical technology

49. Social health insurance alone will not be able to bear the full costs of medical care in these countries • Need a combination of stricter supply-side measures – such as hospital restructuring and controlling drug costs – and demand-side measures – such as greater patient responsibility for own health and greater patient contributions, including cost sharing for pharmaceuticals

50. Managing Health Expenditures in New EU Member States:Options for Reforms comments and suggestions: mchawla@worldbank.org Views expressed are the author’s and do not necessarily reflect those of the World Bank