Health Finance Reforms in Southern Europe: Lessons from Croatia

1. Health Finance Reforms in Southern Europe: Lessons from Croatia European Health Forum September 27, 2002 Akiko Maeda, Lead Health Specialist The World Bank amaeda@worldbank.org

2. Health Finance Reform in Southern Europe – Unfinished Agenda • Evolution of Croatian Health Financing System examined for effectiveness in: • Revenue mobilization • Risk pooling and redistribution • Expenditure management • Effectiveness of the new reform initiatives

3. Measuring Health System Performance • Revenues /Inputs • Redistributive (prog./reg.) • Administrative Efficiency • Risk-pooling/ management • Health Services Throughputs • Allocative Efficiency • Microecon. efficiency • Efficacy/ Effectiveness • Health Outcomes • Aggregate • Disease specific • Socio-economic factors

4. Croatian Health Financing System – Last decade • Croatia: 1993 Health Reforms established the foundations of the current health financing system: • Consolidation of fragmented public financing under a single fund (Croatian Institute of Health Insurance - HZZO) • Establishment of revenue source from high payroll tax rate • Broad categories of exemptions, generous benefits including sick /maternity leave

5. Health Finance Reform in Croatia – Unfinished Agenda • Croatia: 1993 Health Reforms on provider system • Legislation establishes private providers and private insurance market • New provider payment systems: • capitation for primary care practices • point system for specialists/ combined per diem / fee for service for hospital

6. Croatian Health Finance Reform – Unfinished Agenda • A decade after the first round of reforms,Croatia continues to face high cost of care • Health expenditures (accrual basis) estimated at 9% of GDP, US$400 per capita • Persistent recurrent deficits and growing arrears of the Croatian Institute of Health Insurance (19% of revenues in 2002) • High payroll tax rate adds to labor costs

7. Health Expenditure Trends in Central Eastern Europe and Newly Independent States, 1998

10. Croatia Health Finance – Managing Risk Pooling and Redistribution • Managing risk pooling and redistribution: • Broad exemptions on copayments and premiums results in untargeted subsidies • Central budget transfers made retroactively to cover deficits • Actuarial analysis needed to estimate impact of the projected changes in the beneficiary composition, contribution levels and expected health service utilization rates

11. Croatia Health Finance – Managing expenditure • Provider payment systems do not encourage efficiency or quality: • GP capitation system does not provide incentives to rationalize referrals or drug prescriptions • Point system for physician reimbursement encourages cost escalation among specialists • Point-based hospital payment system does not encourage efficiency

12. Croatia Health Finance – Managing Expenditure • Cost Containment Measures 1999 – 2002 • Global capping of hospital budget and reduction in hospital bed capacity • Introduction of partial case-based payment systems • Restriction on number of prescriptions per beneficiary, introduction of drug reference price • Restriction on number of referrals per beneficiary

13. Croatia Health Finance – Managing Expenditure • Initial Results of Cost Containment Measures • Hospital expenditures contained, but with growing waiting lists • Restrictions on referrals and prescriptions • not effective in controlling volume and cost of services • raises quality and equity concerns

15. Croatia Health Finance Reform Initiatives 2002

16. Croatia Health Finance Reform Initiatives 2002 • Revenue base • Consolidation of budget under Treasury: improve collection compliance and debt management • Payroll tax rate reduced from 18 to 16% • Increase in copayment rates • Introduction of “Supplementary Health Insurance”

17. Croatia Health Finance Reform Initiatives 2002 • Improved targeting and risk pooling? • Central and local government contributions are more clearly linked to benefits and target population • But exemptions remain broad • Estimation of costs not based on actuarial analysis

18. Health Insurance Act 2002 • “Supplementary Health Insurance” • Provides complementary financing to cover copayments for services covered under the statutory health insurance • Primarily viewed as an instrument for raising revenues • Tax exemptions and discounts on premiums given to pensioners as inducements • Private health insurers are kept out of the SHI market until 2003

19. Health Insurance Act 2002 • Issues with the new “Supplementary Health Insurance” • Moral hazard - undermines the demand moderating effects of copayments • Selection bias – high risk groups likely to purchase SHI, encouraged by discounts given to the high risk groups (pensioners)

20. Health Insurance Act 2002 • Net effect of “Supplementary Health Insurance”: • Increased spending may not be compensated by additional SHI subscriptions • Negative equity impact: only those who can afford to pay SHI will receive extra coverage • Private insurers will likely cherry-pick beneficiaries when the market is opened in 2003

21. Next Steps in Health Finance Reform • Focus on improving macro and microeconomic efficiency on the provider side by aligning incentives to improve productivity and quality of care • Target subsidies better and provide better protection for vulnerable groups • Revenues – reduce burden on payroll tax, improve allocation of general revenues from central and local governments