Case study C: Transforming healthcare financing in Central and Eastern European countries
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Case study C: Transforming healthcare financing
in Central and Eastern European countries
Mirella Cacace
1 INTRODUCTION
This case study examines the changes in healthcare financing in Central and Eastern European
Countries (CEECs) after the end of the communist rule. Based on the definition of the
Organisation for Economic Co-operation and Development, the country sample includes
Albania, Bulgaria, Croatia, the Czech Republic, Hungary, Poland, Romania, Slovakia,
Slovenia, and the Baltic States: Estonia, Latvia and Lithuania. All these countries profoundly
reformed healthcare financing with the principal aims to increase funding levels and to gener-
ate more stable and independent public revenue streams. With these goals in mind, this paper
assesses key changes in health system financing using data provided by the World Health
Organization (WHO). These macro-level data offer the opportunity to explore general trends
in the level and structure of healthcare financing in these twelve countries.
2 LEGACY OF THE SOCIALIST PAST AND CHANGES IN THE
EARLY TRANSITION PERIOD
Under communist rule, two types of healthcare financing models existed in CEECs. In
Albania, Bulgaria, the Czech Republic, Hungary, Poland, Romania, Slovakia, and the Baltic
States the Semashko model was established, named in honour of the Soviet Union’s first
health minister, in which healthcare was mainly funded by general taxes. Formally, this model
provided the population with universal coverage and free and equal access to comprehensive
services. In reality, however, it was chronically underfunded, resulting in systematic neglect
of hospital buildings and medical equipment, and long waiting times. As a consequence, a per-
sistent market for illegal payments to service providers to obtain more immediate and better
treatment evolved. In Croatia and Slovenia, as parts of the former state of Yugoslavia, a man-
datory social health insurance (SHI) system financed by earmarked, wage-based contributions
from employers and employees was established. These were collected and distributed by
local community-based associations. Officially, there were only small private co-payments in
CEECs, but it is very likely that these were far exceeded by informal payments (Davis 2010).
In the early years after transition, all CEECs experienced high unemployment rates, a dra-
matic decline in gross domestic product (GDP) and a marked decrease of public revenues
because of economic destabilization, and – in some regions – also due to war and other
humanitarian crises (Sheiman et al. 2010). With regard to healthcare systems, a major concern
of the CEECs and the consulting international organizations was to establish a cost-effective,
sustainable, and economically stable method of financing. In this situation, the establishment
of SHI was the favorite choice in almost all CEECs. Important motives for this decision were
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ideological, i.e., a departure from the socialist past and a return to the Bismarck model, which
had already been established in CEECs in the pre-Soviet period, and, in order to bring funding
levels in line with international standards, a desire to limit the ability of politicians to divert
funds from the healthcare system (Cerami 2006; Rechel and McKee 2009).
By the end of the 1990s, all CEECs were organized according to some sort of Bismarckian
SHI model, based on earmarked contributions, deducted from payroll.
However, the SHI models developed in CEECs differed markedly from the German or
Austrian blueprint, in particular with respect to the role of the state. Even today, instead of
self-regulating corporate actors, state governments play a major role in regulation and organ-
ization in most CEECs. Furthermore, there is wide variation with respect to the role of the
state in revenue collection. While in some states tax authorities are collecting the funds (e.g.
Estonia and Latvia), others established one (Bulgaria) or several competing (Czech Republic,
Slovakia) sickness funds. Until today, the contribution rates vary widely, from 3.4 per cent of
payroll in Albania to 15 per cent in Croatia, reflecting rather ‘what is feasible’ and politically
acceptable than an actuarial calculation of expected expenditures (Sheiman et al. 2010). The
distribution of contributions on employers and employees also differs, from no employer
contribution in Poland to completely employer-borne in Croatia (for an interpretation from
an economic perspective, see Chapter 7). In some countries, e.g. in Bulgaria and Slovakia,
a contribution ceiling was imposed. It should be noted that the coverage of individuals by the
public system in CEECs is still quite broad today, ranging from 93 to 100 percent of the popu-
lation, including all nationals (in the country or temporarily absent) and permanently resident
foreigners (OECD 2020). However, there are large gaps in the public benefit package
Services that are typically excluded from reimbursement are pharmaceuticals, dental treat-
ment, hearing aids for adults, visual aids, psychotherapy, rehabilitation, and physiotherapy. In
Albania, even only the most basic primary and hospital care services are covered, exposing the
population to high financial risks (World Bank 2006).
3 LEVEL AND STRUCTURE OF HEALTHCARE FINANCING
IN CENTRAL AND EASTERN EUROPEAN COUNTRIES
In line with the political goal, average healthcare spending in former Semashko systems
increased from 5.6 per cent of GDP in 2000 to 6.6 per cent in 2017 (WHO 2020). The increase
is remarkable, in particular when considering the low initial levels of some countries, e.g. in
Romania (from 4.2 per cent of GDP to 5.2 per cent). However, this was no linear development
as average spending levels dropped from a temporary peak of 6.8 per cent in 2009/10 in the
aftermath of the financial crisis, which affected in particular the Baltic States and Romania.
In Croatia and Slovenia, the initial spending levels of around 7.7 per cent indicate that these
countries were suffering less from underfunding compared to other CEECs. Croatia is the only
country in the sample where healthcare spending decreased between 2000 and 2017 (–0.9 per
cent). Overall, although the increase across CEECs was substantial, the average share of GDP
devoted to healthcare (6.8 per cent) is still considerably below the European Union (9.9 per
cent).
Turning now to the financing structure, the public and private shares of total healthcare
expenditure (THE) are shown in Table C.1. Public funding distinguishes government schemes,
collecting revenues from general taxation, and SHI schemes, with employment-based ear-
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Table C.1 Changing financing structure in Central and Eastern European countries (in
percentage of total healthcare expenditure)
(1) Public expenditure (2) Social health (3) Government (4) Voluntary (5) Out-of-pocket
Country (1) = (2) + (3) insurance (general taxes) health insurance payments
2000 2017 Changes 2000 2017 2000 2017 2000 2017 2000 2017
Bulgaria 60 52 −7.5 8 43 52 9 − 0.6 40 47
Croatia 86 83 −3.6 84 76 2 6 − 6.5 14 11
Czech
90 82 −7.7 83 69 7 13 − 0.1 10 15
Republic
Estonia 77 75 −2.1 68 64 9 10 − 0.3 20 24
Hungary 70 69 −0.4 62 61 8 8 0.6 2.0 27 27
Latvia 51 57 6.6 0 0 51 57 1.6 0.6 48 42
Lithuania 69 67 −2.0 64 58 5 9 0.1 1.1 27 32
Poland 69 69 0.2 62 59 7 10 − 5.7 31 23
Romania 81 79 −1.9 69 63 11 15 − 0.5 19 20
Slovakia 89 80 −9.2 81 78 9 2 − − 11 19
Slovenia 73 72 −0.7 70 69 3 3 13.0 14.3 13 12
Note: No data available for Albania.
Source: WHO Global Health Expenditure Database (WHO 2020).
marked contributions. On the private financing side, sources are split into voluntary health
insurance (VHI) and out-of-pocket (OOP) payments.
Looking at the overall changes between 2000 and 2017, the share of public spending
on THE has decreased in almost all CEECs, in particular in Bulgaria, Czech Republic and
Slovakia (>5 per cent), while the share of private financing has increased. This was due in
particular to a declining share of SHI financing. SHI covers the working population and
usually also the unemployed. Two problems are particularly salient with this source of funding
in CEECs. First, contributions are collected only from formal employment, but the informal
sector in the region is large, accounting for about 25 per cent of all workers, according to the
International Labour Organization (ILO 2018). Second, with unemployment prevailing at high
levels in CEECs, the financial basis for contributions is eroding. Governments therefore are
forced to look for alternative funding sources, such as taxes, or private payments. From an eco-
nomic perspective, payroll-financed contributions increase labour costs and may lead to higher
unemployment and reduce international competitiveness (Cacace et al. 2008). While all coun-
tries, with the notable exception of Bulgaria and to a minor degree also Slovakia, increased
SHI funding, this source of funding is contracting in all countries, particularly in Czech
Republic and Croatia. Latvia, after encountering problems with the decentralized planning and
financing of the multiple insurance funds established in the early 1990s, switched entirely to
financing by non-earmarked general taxes in 2003. Recent changes have reintroduced a small
wage-based component (Behmane et al. 2019).
In CEEC social health insurance systems, tax financing is typically used to cover
non-contributing population groups such as pensioners, minors and students, and the disa-
bled. Funding from general taxation in some countries is also used to cover SHI deficits. In
contrast to SHI financing, the share of tax financing in public spending has increased in most
CEE countries. Nevertheless, the increase in general tax financing could not compensate for
the decline in contribution financing, which ultimately led to (significant) declines in overall
public financing in the countries observed.
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Coming now to private financing sources, the proportion of CEECs having established VHI
almost tripled between 2000 and 2017. In particular Slovenia, but also Croatia and Poland, rely
to a notable degree on that source of funding. In Slovenia, almost 90 per cent of the population
purchases VHI, mainly for complementary coverage of co-payments, or to receive faster access
to treatment or higher quality of materials. In Poland, VHI is frequently employer-sponsored,
appearing as a ‘fringe benefit’, concentrated on the working population. Besides facilitating
faster access to inpatient and outpatient services, occupational health services such as periodic
check-ups and preventive care are covered.
OOP payments in CEECs are usually a combination of user charges, taking either the form
of a fixed amount or a fixed proportion (co-insurance rate), and full direct payments for ser-
vices. Direct payments are frequently made for pharmaceuticals. User charges are regularly
incurred for outpatient services or inpatient care. From an equity perspective, OOP payments
are a particularly problematic source of financing since they do not imply risk pooling and
because they impose an over-proportional burden on lower-income segments of the popula-
tion. In most CEECs OOP-spending increased, partly from already high levels, amounting to
shares of 40 per cent of THE and above, for example in Latvia (42 per cent) or in Bulgaria (47
per cent) or, as estimated by the World Bank, also in Albania (ca. 60 per cent). In comparison,
OOP-spending is rather moderate in Croatia and Slovenia (around 12 per cent) and in Czech
Republic (15 per cent). However, the reader must keep in mind that informal payments are not
recorded in official statistics in any of the countries, so private spending on healthcare is still
much higher than indicated.
4 CONCLUSION
Major reform objectives in CEECs after the end of communist rule were to increase healthcare
funding levels, and to create stable and independent public revenue streams. The analysis
conducted in this case study, based on WHO healthcare financing data, allows us to identify
some general trends and compare them with the targets set. A limitation of this study is that it
is not able to map detailed country-specific developments. However, a fairly clear change can
be identified in terms of improved financial resources for health systems. All CEECs, except
Croatia (a country with high initial spending levels), increased healthcare financing in terms
of GDP between 2000 and 2017. On average, spending rose by 1.2 percentage points, although
the financial crisis also limited the expansion path. Less successful were the countries with the
aim to stabilize social health insurance financing and to establish the related institutions, inde-
pendent from state governments. SHI funding contracted in all CEECs, but it is a clear limita-
tion of this study that it is not able to map detailed country-specific developments to describe
and explain the specific circumstances under which this development occurred. One obvious
conclusion, however, is that linking the funding of healthcare to formal employment raises
problems, in particular when unemployment rates are high and if there is a large ‘shadow
economy’ (cf. Chapter 7, Table 7.1; see Chapter 3). What is more, particularly OOP spending
increased as a funding source. The changing public/private mix in healthcare financing in
CEECs, therefore, is deteriorating affordability and access to care. Low-income groups have
to carry a double load as they are poorer, but also as they have a higher need for healthcare due
to lower health status.
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