MACROECONOMIC EFFECTS OF FINANCING UNIVERSAL HEALTH COVERAGE IN ARMENIA
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Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized
TECHNICAL SUPPORT FOR UNIVERSAL HEALTH COVERAGE IN ARMENIA
Hasan Dudu
Adanna Chukwuma
Muhammad Zeshan
Armineh Manookian
Anastas Aghazaryan
MACROECONOMIC
UNIVERSAL HEALTH
EFFECTS OF FINANCING
COVERAGE IN ARMENIA
© 2021 The World Bank Group, 1818 H Street NW, Washington, DC 20433. This report was prepared by World Bank staff with external contributions. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of The World Bank, its Board of Executive Directors, or the governments they represent. This report was originally published in English by the World Bank (Macroeconomic Effects of Financing Universal Health Coverage in Armenia) in 2021. Where there are discrepancies, the English version will prevail. The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of The World Bank concerning any territory's legal status or the endorsement or acceptance of such boundaries. The material in this report is subject to copyright. The World Bank encourages the dissemination of its knowledge. Hence, this work may be reproduced, in whole or in part, for noncommercial purposes if full attribution to this work is given. Any queries on rights and licenses, including subsidiary rights, should be addressed to World Bank Publications, The World Bank Group, 1818 H Street NW, Washington, DC 20433, USA; fax: 202-522-2625; e-mail: pubrights@worldbank.org. Design by Veronica Elena Gadea, GCSDE, The World Bank Group.
MACROECONOMIC EFFECTS OF FINANCING UNIVERSAL HEALTH COVERAGE IN ARMENIA Hasan Dudu Adanna Chukwuma Armineh Manookian Anastas Aghazaryan Muhammad Zeshan
M ACRO ECO NOMI C EFFECTS OF FI N A N CI N G U N I VER SA L HEA LTH COVER AG E I N A RMEN I A
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ABOUT THIS REPORT
T his report, Macroeconomic Effects of Financing Universal Health Coverage in
Armenia, is part of the World Bank’s technical support toward universal health
coverage in Armenia, which includes advisory services and analytics aimed at
facilitating the government’s efforts to expand access to high-quality health care. The
report draws on computable general equilibrium modeling and an updated social
accounting matrix to examine the potential impacts of different fiscal policy options
for financing universal coverage on macroeconomic outcomes. The analysis was
co-financed by Gavi, The Vaccine Alliance.
Modeling the Actuarial costing
Projecting impact of tax of a unified
revenues from options on growth, benefits package
alternative tax poverty, financial that meets
and non-tax protection, health population
sources and employment healthcare needs
Informing
policies to
Support for increase public Modeling
strategic plan for financing for allocations of
primary health healthcare public financing
care financing, in the benefits
organization, package to
and regulation maximize health
Support for Facilitating the Technical Reforms to Assessment of
strategic plan alignment of support towards align public public financial
for continuity service Universal Health financing for management in
of care across delivery with Coverage in health with the health
providers better health Armenia value sector
Support for Assessment of
regulating, strategic
monitoring and Knowledge purchasing in
paying providers exchanges on the health
for better quality investing in sector
Universal
Health
Coverage
Convening Harvard-World
policy and Study tours to Bank Global
technical selected Flagship Course
discussions on countries on Health
reform options Reform
v TABLE OF CONTENTS About this Report iv Table of Contents v Acknowledgments vi About the Authors vii Acronyms ix Executive Summary 1 Chapter 1. Background and Rationale 4 1.1. Political and Economic Context 14 1.2. The Case for Universal Health Coverage (UHC) Reforms 17 1.3. Purpose of this Report 111 Chapter 2. Model and Data 15 2.1. Computable General Equilibrium (CGE) modeling 115 2.2. Construction Of The 2018 Armenian Social Accounting Matrix (SAM) 116 2.3. Descriptive Analysis of the 2018 Armenian SAM 117 2.4. The Mitigation, Adaptation, and New Technologies Applied General Equilibrium (MANAGE) Model 120 Chapter 3. Simulations and Results 22 3.1. Scenarios 22 3.2. Results 25 Chapter 4. Conclusions 50 Annex 1: The 2018 Armenian SAM Statistics 53 Annex 2: The MANAGE Model 55 Endnotes 57
M ACRO ECO NOMI C EFFECTS OF FI N A N CI N G U N I VER SA L HEA LTH COVER AG E I N A RMEN I A
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ACKNOWLEDGMENTS
T his report was supervised by Sylvie Bossoutrot (Country Manager, Armenia),
Tania Dmytraczenko (Practice Manager, Health, Nutrition, and Population
Global Practice, Europe and Central Asia Region), and Andrew Burns (Global Lead,
Macroeconomic Modeling, Macroeconomics, Trade, and Investment Global Practice).
The analysis benefited from the close engagement of the Ministry of Health and
American University of Armenia. We thank Artur Khachatryan and Nairuhi Jrbashyan
for their support towards data collection for the assessment.
The team appreciates the Ministry of Finance, Ministry of Health, and Ministry of
Economy for participating in the discussion of preliminary findings of the analysis
in February 2021, and in the technical workshop on computable general equilibrium
modeling of fiscal policy options for health system reform. We also thank Hugo
Alexander Rojas Romagosa and Lulit Mitik Beyene for their expert facilitation of the
technical workshop.
The team is grateful to Arvind Nair (Senior Economist, Macroeconomics, Trade, and
Investment Global Practice), Evgenij Nadov (Senior Economist and Program Leader,
Macroeconomics, Trade, and Investment Global Practice), Israel Osorio-Rodarte
(Economist, Macroeconomics, Trade, and Investment Global Practice), and Owen
K. Smith (Senior Economist, Health, Nutrition, and Population Global Practice) for
their insightful feedback on initial drafts of the report. We acknowledge the excellent
editorial and operational assistance from Marianna Koshkakaryan and Arpine Azaryan.
All errors and omissions are the authors.
vii ABOUT THE AUTHORS Hasan Dudu is a Senior Economist at the World Bank Group. He leads computable general equilibrium modeling in the macroeconomic modeling team of the Global Macroeconomics and Debt unit. He also supports World Bank teams and clients with the quantitative analysis of policy issues related to sustainable development, climate change, and macroeconomic stability. He worked as a Scientific Project Officer at the European Commission before joining the World Bank. Hasan holds a Doctor of Philosophy in Economics from the Middle East Technical University. Adanna Chukwuma is a Senior Health Specialist at the World Bank Group, where she leads the health team in Armenia, implementation support for a primary health care reform project in Romania, and the COVID-19 vaccine procurement and deployment team in Moldova. She has led and supported the design, implementation, and evaluation of reforms to improve access to high-quality health care, through service delivery organization, strategic purchasing, revenue mobilization, and demand generation, in Sri Lanka, Sierra Leone, India, Moldova, Tajikistan, the South Caucasus Countries, and Romania. Adanna obtained a medical degree from the University of Nigeria, a Master of Science in Global Health from the University of Oxford, and a Doctor of Science in Health Systems from Harvard University. Armineh Manookian is the World Bank Country Economist in Armenia, covering macroeconomic and fiscal issues, regular economic reports, and macroeconomic projections. She is engaged in macroeconomic policy dialogue with the client. Armineh joined Bank in 2017 and prior to that, worked for more than 10 years in the International Monetary Fund's Resident Representative office in Armenia as a Macroeconomist. Before moving to Armenia in 2005, Armineh worked with the Central Bank of Iran as a Senior Economist in the Research and Policy Department. She holds a Master of Public Administration in Economic Policy Management from Columbia University. Anastas Aghazaryan is the Head of the National Health Accounts Center at the National Health Institute of the Ministry of Health in the Republic of Armenia and a Consultant at the World Bank Group. He leads health expenditure data collection, analysis, and the development of the National Health Accounts of Armenia. He also leads statistical and analytical activities related to health economics, the global burden of disease, health financing, and Universal Health Coverage. Anastas is a Professor at the French University in Armenia and works with development partners on socioeconomic analysis and climate change, including the United Nations Development Programme, Asian Development Bank, United Nations Children’s Fund,
M ACRO ECO NOMI C EFFECTS OF FI N A N CI N G U N I VER SA L HEA LTH COVER AG E I N A RMEN I A
viii
and World Health Organization. He has served as a Board Member of the State Council
on Statistics in the Statistical Committee of the Republic of Armenia. Anastas holds a
Doctor of Philosophy in Economics from the Yerevan State University.
Muhammed Zeshan is a Postdoctoral Fellow at the Norwegian University of Science
and Technology, Norway, and a Consultant at the World Bank Group. Prior to his
current position, he worked at the Pakistan Institute of Development Economics as a
Senior Research Fellow. Muhammad is also the main contributor to the input-output
table for Pakistan in the Global Trade Analysis Project. He has research experience with
government and non-government institutions and teaching experience with multiple
universities. Muhammed holds a Doctor of Philosophy in Environmental Economics
from Pukyong National University.
ix ACRONYMS AMD Armenian Dram BBP Basic Benefits Package CDE Constant differences in elasticities CE Cross-entropy CGE Computable general equilibrium CIT Corporate income tax DALY Disability-adjusted life year ECA Europe and Central Asia GDP Gross Domestic Product GTAP Global Trade Analysis Project HPD Higher posterior density IOT Input-output table LMIC Low-and-middle-income country MANAGE Mitigation, Adaptation, and New Technologies Applied General Equilibrium MIC Middle-income-country MoF Ministry of Finance MoH Ministry of Health NCD Non-communicable disease OOP Out-of-pocket PIT Personal income tax SCRA Statistical Committee of the Republic of Armenia SAM Social Accounting Matrix UHC Universal Health Coverage UMI Upper-middle-income USD United States Dollars VAT Value-added tax
EXECUTIVE SUMMARY
Armenia has made significant progress in improving population health outcomes over the
past two decades. In 2019, the life expectancy at birth was 76.5 years, rising from 68 years in
1990. However, non-communicable diseases (NCDs) now cause 75% of deaths and significant
disability. Up to 9,834 lost years of life per 100,000 people from NCDs annually can be
prevented through effective public policies, such as tobacco exposure control, and access to
high-quality health care. However, essential health care for NCDs is underutilized in part due
to the cost of access. In 2019, over 84% of total health expenditure in Armenia was paid by
households, out-of-pocket, well above the average in Europe of 30%. While the government
has committed to financing primary and emergency care, out-of-pocket payments are required
for most outpatient medicines and inpatient care for majority of the population.
The Armenia Transformation Strategy highlights the critical role of investing in healthy and safe
citizens, for growth and poverty reduction by the year 2050. Armenia has also committed as a
signatory to the Sustainable Development Goals, to making progress towards Universal Health
Coverage (UHC). This commitment involves guaranteeing access to essential health care
for all its citizens. Armenia will need to undertake critical health financing reforms, including
increasing public financing for health through general revenue or compulsory contributions, to
reduce financial barriers to accessing health care. The Ministry of Health (MoH) has developed
a Concept Note for the Introduction for Universal Health Insurance that proposes to mobilize
additional revenue through payroll taxes or higher budgetary allocations to the sector.
However, the Ministry of Finance (MoF) has noted that revenue mobilization options should
ideally demonstrate positive returns in terms of economic growth and employment.
Therefore, at the request of the MoH, the World Bank has modeled the macroeconomic
impacts of options to increase domestic resource mobilization to finance universal access
to essential health services in the Basic Benefits Package. A computable general equilibrium
1EXECUTIVE SUMMARY 2
model was calibrated to a 2018 Armenia social accounting matrix to analyse the impacts of
taxation options, including corporate income, payroll, value-added tax, and excise taxes, on
gross domestic product, employment growth, income equality, and household welfare. The
analysis assumes that through UHC reforms that mobilize additional public spending, the
Government would cover the cost of 95% of household needs for health care from 2021 to
2050, and that the increase in the demand for care will be supported by improvements in
supply-side efficiency.
The simulation results suggest that the productivity benefits of expanding coverage would
compensate for its economic costs in the long run, eventually increasing the gross domestic
product between 0.08 and 1.36%, depending on the fiscal measure used to finance these
reforms. The reforms also increase the employment between 0.25 and 1.34%. Health sector
output increases by at least 10%, regardless of fiscal measure. A higher increase in demand
is precluded by supply-side constraints. In the long run, payroll taxes led to fall in household
welfare generally, but more so among poor households; value-added tax was associated with
welfare improvements in rich households, and welfare reductions in poor households; while
corporate income tax increases were associated with welfare improvements generally, except
for households in the richest decile.
ES TABLE 1 • Summary Table in 2050 under different tax policy regimes, percentage
change from Business-as-Usual
DIRECT
TAX ON
CORPORATE VALUE
NON-WAGE PAYROLL EXCISE ALL
INCOME ADDED TAX
HOUSEHOLD
INCOME
Gross domestic product 1.36 0.50 0.05 0.39 0.08 0.70
Total employment 1.34 1.29 0.25 0.85 0.86 1.00
Health sector output 11.53 12.02 10.28 10.73 11.41 11.10
Source: Authors
The results suggest that increasing direct taxes is better than increasing indirect taxes as the
former are less distortionary and cause smaller allocative inefficiencies. Secondly, the broader
the tax base is, the higher the positive impact on gross domestic product. That is, when the
burden of financing UHC is spread throughout the economy, such as through value-added tax
increases for all commodities, this is relatively better for economic growth. Finally, a payroll
tax that is paid by employers on behalf of employees appeared to significantly harm economic
growth, total employment, and household welfare. These findings are consistent with
experiences in other emerging economies seeking to raise public revenue to support social
spending through broad-based consumption taxes.M ACRO ECO NOMI C EFFECTS OF FI N A N CI N G U N I VER SA L HEA LTH COVER AG E I N A RMEN I A
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UHC reforms and the fiscal policy measures used to fund them will create a trade-off between
economic growth and income equality. In the model, funding UHC by increasing corporate
income taxes, increased both gross domestic product and income inequality. On the other
hand, increasing taxes on household non-wage income, deteriorated equality while yielding
the highest growth effect. Indirect taxes performed worse in terms of growth and equality.
Higher payroll tax, excise taxes, and VAT reduced gross domestic product and harmed equality,
although payroll taxes had the most negative impacts. Adjusting all taxes appeared to be
the second best for inequality after corporate income tax and had a non-negative growth
effect. Hence, although financing UHC reforms with direct taxes is better than indirect taxes,
spreading the tax burden as much as possible balances the trade-off between growth and
equality better.
To make progress towards UHC, guaranteeing access to high quality and essential health care,
Armenia will need to go beyond tax policy changes. Additional revenue may also be mobilized
through increasing priority for health in the national budget and health sector efficiency
gains. Furthermore, successful UHC reforms often involve a suite of policy changes beyond
mobilizing pre-paid revenue for health that should be considered in Armenia. These include
pooling financial risk across social groups to address individual uncertainty in health spending;
allocating pooled resources strategically through a competent, politically-independent
third-party payer to providers, benefits, and payment mechanisms that facilitate quality and
efficiency; and strengthening service delivery organization and governance, particularly at the
primary health care level, to ensure the highest standards of care.CHAPTER 1. BACKGROUND AND
RATIONALE
1.1. POLITICAL AND ECONOMIC CONTEXT
The Republic of Armenia, a former Soviet Socialist Republic, is in the South Caucasus. The
country is bordered in the North by Georgia, in the South by Iran, in the East by Azerbaijan,
and in the West by Turkey. The country occupies a land mass of 29,743 km2 and is divided into
ten provinces and Yerevan, the capital city. The country has experienced significant political
transitions over the past 20 years. The first decade following the dissolution of the Soviet
Union was characterized by fiscal constraints and socioeconomic polarization, with public
protests over the economic challenges and the lack of political transparency.
However, in 2018, the Velvet Revolution led to another political transition, and the ascendancy
of Nikol Pashinyan, a member of the parliamentary opposition, as the prime minister. The new
government has committed to the ambitious Armenia Transformation Strategy 2050, focused
on poverty reduction and an increase in real wages, through the establishment of a green,
knowledge-driven economy.1 Among the 16 development objectives under the Transformation
Strategy, the government identifies the importance of investing in a healthy and safe citizenry
as the primary focus for the health sector over the next three decades.
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FIGURE 1 • Per capita Gross Domestic Product (GDP) trends in Armenia, 2000-17
2000
(constant 2018, in thousand AMD)
1500
Per Capita GDP
1000
500
0
2000 2003 2006 2009 2012 2015 2018
Year
Source: World Economic Outlook (2019)
In 2018, Armenia also transitioned from being a lower-middle-income to an upper-middle-
income (UMI) economy.2 Between 2000 and 2008, the annual per capita economic growth
rates averaged at 12.6% (Figure 1). However, from 2009 to 2017, growth rates fell to 2.0%
annually due to the global financial crisis in 2008 to 2009 and the Russian financial crisis in
2014 to 2015. By 2019, the gross national income per capita was United States Dollars (USD)
4,680 (Table 1).3 Poverty rates have also reduced over the past 20 years. Between 2001 and
2018, the proportion of the population living below the UMI poverty line of USD 5.50 fell from
81.0 to 42.5%.4 The COVID-19 pandemic has put these economic gains at risk. In 2020, the
economy contracted by about 8%. Furthermore, the poverty headcount ratio could increase by
up to 12.8 percentage points, relative to the UMI poverty line of USD 5.50.5
Pre-pandemic, the general government expenditure as a proportion of GDP in Armenia was
below the UMI average, varying between 20 and 29% of GDP from 2000 to 2017.6 However,
in response to the COVID-19 pandemic, the government increased the general government
expenditure by an estimated 2.3% of GDP to finance policy measures to support vulnerable
households and firms.7 In 2017, government revenue (excluding grants) as a proportion of
GDP, at 22.5%, exceeded the UMI average of 16.3%. Taxes constitute almost 90% of general
government revenue.8 Broad-based taxes on goods and services brought in 51% of tax revenue
in 2019, above the 40% accruing from income, profits, and capital gains, or the 2% from
property tax.9C H A P T E R 1 . B A C KG R O U N D A N D R AT I O N A L E 6
TABLE 1 • Comparing Armenia and selected countries, indicators as of 2018-19
TOTAL TAXES PER CAPITA
PUBLIC
TAX REVENUE ON MOST SOLD LIFE GROSS
SPENDING ON
COUNTRY AS A SHARE CIGARETTES AS EXPECTANCY IN NATIONAL
HEALTH PER
OF GDP A % OF RETAIL YEARS INCOME IN
CAPITA IN USD
PRICES CURRENT USD
Armenia 22.2 38.1 75 4,680 52
Belarus 13.6 50.9 74 6,290 251
Croatia 22.2 78.8 78 14,980 844
Estonia 21.0 79.4 78 23,260 1143
Georgia 19.6 71.2 74 4,780 123
Kazakhstan 11.8 52.4 73 8,820 168
Kyrgyzstan 17.7 48.6 71 1,240 37
Russia 10.9 57.7 73 11,260 362
Tajikistan N/A 42.3 71 1,030 16
Turkey 16.5 81.4 77 9,690 302
Turkmenistan N/A 32.4 68 6,740 83
Ukraine 19.2 74.7 72 3,370 109
Uzbekistan 13.1 44.7 72 1,800 31
Source: World Development Indicators; World Health Organization Tobacco Free Initiative
Population and employment trends have implications for revenue mobilization in Armenia.
Since 1990, the total Armenian population has reduced by 16%, primarily due to economic
emigration and below-replacement fertility rates.10 Of the current population of 2.9 million,
36% live in rural communities, 33% in the capital, and the remainder in other urban areas.
However, downward pressures on population growth have contributed to a fall in the urban
share of the population from 69 to 64% since 1990.11 In 2018, the proportion of the population
above 15 years that was employed in Armenia was 46%, below the average in UMI countries
of 57%.12 The proportion of non-agricultural employment in the informal sector is also high
at 33%.13 The population aged 65 years and above increased as a proportion of the total
population, from 6% in 1990 to 11% in 2019, with an equivalent rise in the old-age dependency
ratio.14 Strategies for sustainable revenue mobilization in Armenia to finance social sector
reforms under the Transformation Strategy will need to account for secular trends in
population growth and current employment patterns.M ACRO ECO NOMI C EFFECTS OF FI N A N CI N G U N I VER SA L HEA LTH COVER AG E I N A RMEN I A
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1.2. THE CASE FOR UNIVERSAL HEALTH COVERAGE
(UHC) REFORMS
Armenia has made significant progress in improving population health outcomes over the past
two decades. In 2018, the life expectancy at birth was 75 years, equivalent to the average in
UMI countries, rising from 68 years in 1990 (Table 1).15 This rise was driven by improvements in
child, maternal and adult health. Between 2000 and 2019, the infant mortality rate decreased
from 15.6 to 6.1 deaths per 1,000 live births, due to lower fertility and improvements in child
survival.16,17 At the same time, the probability of dying between 15 and 60 years fell from 14.3
to 11.6%.18 Since 2000, maternal mortality per 100,000 live births has fallen from 52.5 to 33.3
deaths.19
Non-communicable diseases (NCDs), including cardiovascular diseases and cancers, now
cause 75% of deaths and significant disability.20,21 The World Health Organization estimated that
the annual economic losses from NCDs are Armenian Dram (AMD) 362.7 billion, equivalent to
the 6.5% of GDP in 2017.22 Of this amount, AMD 55.6 billion is the annual public spending on
health care, while lost productivity is estimated at AMD 294.9 billion. The burden of NCDs and
the COVID-19 pandemic are linked. Since March 1, 2020, when Armenia reported the first case
of COVID-19, the cumulative case incidence per million people has risen above the European
average (Figure 2). Aging and NCDs predict severe COVID-19, providing a further rationale to
reduce the burden of NCDs in Armenia.23
FIGURE 2 • Cumulative confirmed COVID-19 cases per million people in Armenia and
selected comparators
Estonia
80,000
Croatia
Georgia
Armenia
60,000
Ukraine
40,000
Belarus
Russia
Azerbaijan
20,000 Kazakhstan
0
Jan 31, 2020 Apr 30, 2020 Aug 8, 2020 Nov 16, 2020 Feb 24, 2021 Apr 27, 2021
Source: John Hopkins University. Note: The number of confirmed cases is lower than the number of actual cases; the main reason for
that is limited testing.C H A P T E R 1 . B A C KG R O U N D A N D R AT I O N A L E 8 Access to high-quality health care is essential to the prevention, detection, and appropriate management of NCDs. Hence, it is unsurprising that underutilization and poor quality of essential care contributes to significant preventable complications and mortality, globally and in Armenia. A recent analysis revealed that 9,008 years of life per 100,000 people that were lost globally due to NCDs in 2017 could have been prevented through effective public policies, such as tobacco exposure control, and access to high-quality health care. In Armenia, the premature avertable mortality from NCDs in 2017 was 9,834 years of life per 100,000 people, exceeding the global average, and pointing to gaps in access to care.24 Armenia has committed politically to addressing this challenge. Having adopted the Sustainable Development Goals, the Republic of Armenia has committed to achieving UHC by ensuring “financial risk protection, access to quality essential healthcare services and access to safe, effective, quality, and affordable essential medicines and vaccines for all.” However, much progress remains to be made. The UHC health coverage index monitors national progress towards ensuring access to health care, measured as the mean across 14 health services, including for NCDs. In 2017, Armenia’s score on the UHC health coverage index was 69 (out of 100), below the average in Europe and Central Asia (ECA) of 75. For reproductive, maternal, and child health services, Armenia scored 67, with performance falling to 55 for services for NCDs.25 These findings on summary indexes of coverage are reflected in indicators of health care utilization. In 2018, the proportion of people who consulted a health care provider when ill was only 32.7%, varying from 29.1% in Yerevan to 39.4% in rural areas.26 There is a relatively high level of utilization of health services for maternal and child health, and lower use of essential care for NCDs. For example, in 2019, over 98.8% of eligible children received vaccinations against tuberculosis, while 97.2% were vaccinated against hepatitis B. Similarly, almost 100% of childbirths are attended by a skilled provider, an indicator that monitors access to maternal health care.27 In contrast, only 24% of people above 15 years have been screened for type 2 diabetes mellitus, while 43.5% have been screened for hypertension.28 These patterns of health care use may partially explain the improvements in maternal and child health as well as the growing burden of NCDs. The predominant drivers of underutilization of essential health care are self-management and the lack of finance to cover health care costs. In over 50% of cases where the respondent in household surveys chose to forgo skilled health care despite being sick, the condition was self-managed. However, in approximately one in five cases, a lack of finance was the reported reason for not consulting a health care provider.29 Proximity to health facilities is not a reported constraint to health care access in rural areas, Yerevan, or other urban areas. The reported adequacy of physical access to service inputs is consistent with Armenia’s score of 98 (out 100) on the UHC index of service capacity and access, which assesses among other things, hospital beds per capita, health professionals per capita, and the International Health Regulations core capacity index.30
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Challenges in health financing, including mobilizing, pooling, and purchasing health services in
Armenia, may contribute to the underutilization of essential care. A review of global experience
indicates that countries make progress towards universal access to essential care by raising
funds predominantly through general revenue or compulsory contributions, pooling the
financial risk across groups, and allocating pooled funds to providers in a manner consistent
with improvements in access.31,32 In contrast, in 2019, over 84% of total health expenditure in
Armenia was paid by households, out-of-pocket (OOP), well above the average in Europe
of 30% (Figure 3).33 This is because public expenditure on health as a percentage of GDP in
Armenia, at less than 1.5%, is one of the lowest in ECA (Table 1).34 With its UMI status, external
assistance as a proportion of current health spending has fallen from a peak of 18.0% in 2001 to
1.2% in 2018, and is projected to fall further.
FIGURE 3 • OOP expenditure versus public expenditure on health in Armenia and
comparator countries in 2018
90
Armenia
80
Turkmenistan
Azerbaijan
70 Tajikistan
OOP as % of Current
Health Expenditure
60 Uzbekistan
Kyrgystan
50 Ukraine
Georgia
40
Kazakhstan
30
20
Sweden
10
Germany
R² = 0.7618 France
0
0 2 4 6 8 10
Domestic General Government Health Expenditure as % GDP
Source: WHO Global Health Expenditure Database
The high levels of OOP payments increase the financial risk facing Armenian households. This
includes catastrophic and impoverishing health expenditures, in addition to foregone health
care when the costs are prohibitively high. The most recent globally comparable data shows
that in 2013, 16% of Armenian households allocated over 10% of total household consumption
expenditure to health care, which is more than 200% of the average in ECA of 7%.35 Between
2010 and 2013, the average annual change in catastrophic health spending at the 10% levelC H A P T E R 1 . B A C KG R O U N D A N D R AT I O N A L E 10 was 3.3%, the highest increase in the world.36 Furthermore, about 4.1% of Armenian households are pushed below the UMI poverty line annually due to health care expenditures.37 Financing health care predominantly through OOPs is inconsistent with global evidence on revenue raising and pooling for UHC. With respect to purchasing, or the allocation of health financing to service delivery, state funding for health care within the basic benefits package (BBP) significantly influences access to care. In Armenia, the government commits legally to covering access to primary health care and emergency services for 100% of the population. However, OOP payments are required for most outpatient medicines, including for NCDs, outside a few conditions of interest that are covered by the state, such as tuberculosis, cancers, and mental health disorders.38 In addition, retail medicine prices in Armenia are weakly regulated and, as a result, these prices are among the highest in the Commonwealth of Independent States. For about 30% of the population, including some state employees, low-income earners, and social groups of interest, the state covers hospital, and selected expensive diagnostic services.39 In 2020, the government increased the scope of groups prioritized for expanded coverage even further. Nevertheless, for majority of households, OOP payments remain the predominant means of financing access to care, driven by limited state coverage and the high cost of medicines. Higher coverage under the BBP, including the services included, prioritized groups, and funding levels, predict increased health care utilization in Armenia. A 2006 analysis showed that groups eligible for expanded benefits coverage had 36% higher rates of using outpatient care than other groups.40 Even among beneficiaries of expanded coverage under the BBP, there are anecdotal indications that the cost of excluded outpatient medicines and care introduces financial barriers to outpatient health care use. Further, some services in the package are reimbursed at levels that are below the cost of delivery, owing in part to the low public health financing, contributing to the demand for informal payments among providers.41 In 2018, the monthly health expenditure in the richest quintile per adult (AMD 21,784) was about 21 times the level in the poorest quintiles (AMD 1,055), which may be in part an indication of the extent to which the ability to pay, determines access to health care in Armenia.42 From the foregoing, the relatively low public financing for health care is a key constraint to achieving UHC in Armenia and addressing the high NCD burden with its attendant economic costs. While there are other countries in the region with high levels of OOP expenditure as a proportion of total health spending, Armenia is an outlier both regionally and globally, with rates comparable to those seen in fragile and conflict-affected states. To expand coverage of essential services under the BBP, including for essential outpatient medicines medicines, Armenia will need to undertake health financing reforms that mobilize additional domestic revenue for health and improve financial protection.
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1.3. PURPOSE OF THIS REPORT
The Ministry of Health (MoH) has developed the Concept Note for the Introduction of Universal
Health Insurance and published a proposal that includes public revenue mobilization, pooling,
and purchasing reforms to facilitate progress towards UHC. The proposed reforms include an
increase in prepaid, pooled public expenditure for health, mobilized through payroll taxes or
higher budgetary allocations to the sector; purchasing of essential services in a BBP that is
uniform across the population and includes coverage for outpatient medicines and for NCD
care; and establishing an accountable and independent third-party agency to undertake
purchasing decisions for the state. An actuarial costing exercise is ongoing to support policy
discussions on additional public financing needed for increased health care coverage.
Significant public debate on the reform proposal within the MoH Concept Note has centred
around revenue mobilization options to finance these UHC reforms. In 2019, the Ministry of
Finance (MoF) developed a Strategy for the Implementation of Tax Reforms, with the objective
of improving tax compliance and ensuring investment attractiveness, relative to the status
quo (Box 1).43 These reforms broadly included a range of changes to reduce direct taxation
and increase indirect taxes. In part reflective of the relatively low total taxes in Armenia, the
proposal also included an increase in excise rates on tobacco and alcohol (Table 1). Hence, in
contrast to the proposal in the MoH Concept Note, the MoF Strategy proposes reductions in
payroll taxes and increases in taxation on consumption.C H A P T E R 1 . B A C KG R O U N D A N D R AT I O N A L E 12
BOX 1 • A short primer on recent developments in tax policy in Armenia
Armenia consolidated its tax laws and regulations and adopted a unified Tax Code at
the end of 2016, which became effective in January 2018. This was followed by several
amendments to streamline the tax policy and reduce the tax burden on businesses.
The amendments became effective in 2020 and were expected to shift the burden of
taxation from direct to indirect taxes.
The profit tax rate was reduced from 20 to 18%. A flat personal income tax rate of 23%
was introduced, with the intention to lower it by one percentage point annually, to 20%
by 2023. An annual increase in excise rates for the main tobacco products and alcoholic
beverages was proposed to compensate for the loss of income taxes. Improvements in
tax administration were also envisaged to compensate for these losses. The number of
tax regimes was lowered from five to three regimes, including regular, turnover tax, and
microentrepreneur regimes. The amendments also include generous tax exemptions for
small businesses with less than AMD 24 million annual revenue and kept the threshold
above which the state collects value-added tax (VAT) high at AMD 115 million annual
revenue.
Since 2010, the tax revenue as a percentage of GDP in Armenia has risen from 17.1 to
22.2% in 2019 (Table 1). While tax rates are comparable to those in peer countries,
legislative loopholes, exemptions, and weak tax administration significantly reduce tax
revenue. These losses have been assessed by the MoF to be about 7% of GDP. Hence, tax
policy reforms in Armenia should prioritize addressing these loopholes and exemptions
and strengthening administrative mechanisms for ensuring compliance.
Unlike high-income countries, low-and-middle-income countries (LMICs) tend to document
higher levels of tax exemption and evasion, relatively higher informal employment, and lower
levels of employment. As noted above, Armenia has a relatively high levels of unemployment,
informal employment, and aging. The trend in LMICs seeking to modernize their tax systems
is to expand consumption taxes, that are less vulnerable to tax evasion and have a broader
base, over increases in payroll taxes (Figure 4).44 Options include VAT and excise taxes on
carbon, alcohol, and tobacco, which are administratively feasible and have positive population
health impacts. The MoF has also noted that revenue mobilization options to support social
spending, should ideally also demonstrate positive returns in terms of economic growth and
total employment.M ACRO ECO NOMI C EFFECTS OF FI N A N CI N G U N I VER SA L HEA LTH COVER AG E I N A RMEN I A
13
FIGURE 4 • How have LMICs raised tax revenue?
Tax levels and composition
The composition of taxes in richer countries differs from that of poorer countries, with
greater emphasis on broad-based consumption and excise taxes.
30
revenue, percent of GDP
25
20
15
10
5
0
1990-99 2010-16 1990-99 2010-16 1990-99 2010-16 1990-99 2010-16
High income Upper middle income Lower middle income Low income
Trade Corporate income tax (CIT) Personal income tax Excise tax Consumption
Source: International Monetary Fund
Beyond introducing or expanding sector-specific taxes, domestic resource mobilization to
support additional health spending can be supported through conductive macroeconomic
conditions that increase general government revenue, a rise in the share of the health sector
in the state budget, and improvements in the efficiency of spending in the health sector. Given
the constraints that LMICs face in improving revenue collection, the main source of additional
budgetary space for health tends to be the national budget. In this regard, advocacy for a
higher share of the state budget to be allocated to health may be facilitated by addressing
potential sources of efficiency.45
To support the ongoing dialogue on financing UHC, at the request of the MoH, the World
Bank has modeled the macroeconomic impacts of options to increase domestic resource
mobilization to finance universal access to a uniform BBP. This analysis complements a
separate assessment of options for mobilizing additional revenue for health, including through
reprioritization of the state budget and efficiency gains. In this report, a computable general
equilibrium model is calibrated to a 2018 Armenia social accounting matrix to analyse the
impacts of taxation options, including corporate income, payroll, VAT, and excise taxes, on GDP,
employment, income equality, and household welfare. The rest of the report is structured as
follows. Chapter 2 describes the model and data. Chapter 3 presents the scenarios and results.
Chapter 4 concludes.CHAPTER 2. MODEL AND DATA
2.1. COMPUTABLE GENERAL EQUILIBRIUM (CGE)
MODELING
UHC reforms to facilitate universal access to a uniform BBP would affect the Armenian
economy through direct and indirect channels, where the latter may be as important as the
former. The economy has a complex structure that is also influenced by social and political
constraints. CGE models can take into account for all these effects on the economy and
explicitly consider the interactions between different economic agents, using a set of standard
assumptions.46
CGE models rely on behavioural assumptions regarding how economic agents react to
changes in the economy, including prices, income, and taxes, under well-defined constraints
based on the availability of resources. The standard economic agents in a CGE model are
households, production activities, the government and the rest of the world. More than one
type can be introduced for each of economic agent. Generally, multiple types are introduced
for households, defined based on socioeconomic status, and for production activities, defined
based on the sectors.
The economic agents in the CGE model are representative, in the sense that an agent is
constituted by aggregating actual individual units. For example, the household type for
the first income decile represents all households in the first income decile. Thus, it owns all
the endowments, including labor and capital, of the individual households it represents; its
consumption equals the sum of consumption of these households; it receives all the transfers
they receive from the government and rest of the world; and it pays all the taxes they pay.
14M ACRO ECO NOMI C EFFECTS OF FI N A N CI N G U N I VER SA L HEA LTH COVER AG E I N A RMEN I A
15
This representative household behaves like an individual household in making decisions about
supplying endowments or consuming goods. This is equivalent to assuming that the behaviour
of a household in the model is a weighted average of all households it represents. For example,
while the share of food consumption in total household consumption is different for each
household in the first income decile, for the representative household, it is the average among
households in the group.
These assumptions generally make CGE models suitable for long-term analysis. CGE models do
not incorporate the costs of short-term adjustments, such as price inflation or unemployment,
that are incurred as economic agents adjust to new market signals. In exploring fiscal policy
options, the model does not capture tax avoidance but models the effective tax rate. CGE
models assume that agents adjust almost immediately without facing any frictions in the price
formation for goods or factors of production such as labor or capital. This assessment uses
CGE modeling to assess the potential impacts of using different fiscal policy options to finance
the UHC reform on the Armenian economy.
2.2. CONSTRUCTION OF THE 2018 ARMENIAN SOCIAL
ACCOUNTING MATRIX (SAM)
To analyse the effects of policy changes on the economy, we draw on a snapshot of the
economy in the form of an input-output table (IOT) to develop a SAM that accounts for all
transactions in the economy as defined in the System of National Accounts. The latest IOT
available from the Statistical Committee of the Republic of Armenia (SCRA) is for 2006 and
reports data for 17 sectors. However, this IOT neither accounts for the changes in economic
structure since 2006 nor includes the health care and basic pharmaceuticals sector. Hence, the
2006 IOT was updated.
We estimated an updated IOT by using the data available from SCRA, including national
accounts, household surveys, international trade, government accounts, and sector data. To
develop an updated SAM, our starting point was the Global Trade Analysis Project’s (GTAP)
SAM in the GTAP version 11 database, which underlies most applied global general equilibrium
models. The GTAP 11 SAM relies on an IOT compiled based on 2002 data.47 While constructing
the GTAP 11 SAM, the macroeconomic totals, including GDP, consumption, investment,
government savings, and trade data, were updated to 2017.48
We estimated the 2018 Armenia SAM using a hybrid cross-entropy (CE) higher posterior
density (HPD) algorithm.49,50 Starting with the GTAP 11 SAM, we updated the macroeconomic
totals to 2018 to match the GDP, consumption, investment, government aggregates and
trade aggregates (An. Table 1). We introduced the intermediate consumption of aggregate
sectors reported by the SCRA as a constraint to the CE-HPD algorithm.51 We then usedC H A P T E R 2 . M O D E L A N D DATA 16
household surveys to split the single household type in the GTAP 11 SAM to ten groups based
on expenditure. Finally, we split the labor to four groups based on the skill level (skilled and
unskilled) and formality (formal and informal).
The intermediate consumption of individual sectors was estimated by the CE-HPD algorithm
consistent with the rest of the SAM which matched the 2018 national accounts, trade,
government and household data. Following the estimation of a balanced SAM, we undertook
adjustments based on the data available from the SCRA. These adjustments ensured that OOP
spending on health, public spending on health, the share of health care industry in total gross
value added, tax revenues, and tax rates matched the observed data as much as possible.
The final Armenian SAM was different from the GTAP 11 SAM with over 10% of the cell entries
changing more than 10%.
2.3. DESCRIPTIVE ANALYSIS OF THE 2018 ARMENIAN
SAM
We aggregated the 2018 Armenian SAM to include 27 activities and commodities (An. Table
2). The primary sectors, food processing, beverages, and tobacco, and construction had the
highest contributions to value added (Figure 5). Health services constituted approximately 4%
of the economy. The primary sectors’ value added was mostly sourced from unskilled labor
with higher shares of informal labor in agriculture and forestry. On the other hand, the capital
value added formed a significant part of the construction sector. Health services were mostly
labor intensive with high share of formal skilled labor.
FIGURE 5 •Sectoral value-added and distribution across factors of production
1200
1000
billion AMD
800
600
400
200
0
Trade
Finance
Other Services
Textiles
Water Transport
Hotels and Restaurants
Road Transport
Communications
Insurance
Public Administration
Chemicals
Basic Pharmeceuticals
Water
Construction
Agriculture
Forestry
Food Processing
Beverages and Tabacco
Paper and Pulp
Metals and MetalProducts
Other Manufacturing
Electricity
Gas Distribution
Education
Air Transport
Mining
Health Services
Capital Land Natural Resources Skilled Formal Skilled Informal Unskilled formal Unskilled Informal
Source: Authors’ calculations from the 2018 Armenian SAMM ACRO ECO NOMI C EFFECTS OF FI N A N CI N G U N I VER SA L HEA LTH COVER AG E I N A RMEN I A
17
In the 2018 Armenian SAM, the richest decile household’s share in consumption, at 27%,
was significantly higher than other deciles. The consumption shares for households in other
deciles increased steadily, from the poorest decile, at 4.5%, to 11% for households in the second
richest decile. The composition of consumption was also significantly different for the richest
households. Most of their consumption was on services while expenditure in other households
was mostly on food.
Expenditure on health services was also distributed unequally (Figure 6 and Figure 7).
However, its share in household total expenditures was almost the same for all households
indicating an inelastic demand. Households in the poorest three deciles had negative savings,
amounting to almost -10% of total consumption for the poorest households. Savings were a
significant share of expenditure in households in the richest three deciles. The distribution
of household income across sources was as expected. Richer households received most of
their income from skilled labor and capital, while poorer households relied on unskilled labor,
remittances, and government transfers (An. Figure 1).
FIGURE 6 • Household consumption patterns by income decile
1,600
1,400
1,200
1,000
billion AMD
800
600
400
200
-
)
t)
4
9
6
8
3
5
2
7
st
(200)
es
ile
ile
ile
ile
ile
ile
ile
ile
he
or
ec
ec
ec
ec
ec
ec
ec
ec
ic
po
(r
D
D
D
D
D
D
D
D
1(
10
ile
ile
ec
ec
D
D
Food Manufacturing Services Health Saving
Source: Authors’ calculations from the 2018 Armenian SAMC H A P T E R 2 . M O D E L A N D DATA 18
FIGURE 7 • Household consumption patterns by income decile, as percentage of total
consumption
100%
6.0 5.8 5.6 5.2
4.6 5.0 7.1 5.2
6.7 7.2
80%
60%
40%
20%
0%
-20%
Decile Decile Decile Decile Decile Decile Decile Decile Decile Decile
1 2 3 4 5 6 7 8 9 10
(poorest) (richest)
Food Manufacturing Services Health Saving
Source: Authors’ calculations from the 2018 Armenian SAM
The government’s revenue in the 2018 Armenian SAM was mostly from VAT and payroll
tax. Production taxes, that is taxes on production activities, was the next highest at 22% of
government revenue. The share of CIT was relatively low, at 13%, while excise tax and tariffs
were 7% and 5% of revenue, respectively. Hence, 37% of government revenue was from direct
taxes and 63% was from indirect taxes (Figure 8).M ACRO ECO NOMI C EFFECTS OF FI N A N CI N G U N I VER SA L HEA LTH COVER AG E I N A RMEN I A
19
FIGURE 8 • Composition of government revenue
1%
13%
29% Other Household Direct Tax
CIT
23% Payroll
Production
7% Tariffs
Excise
5% 21%
VAT
Source: Authors’ calculations from the 2018 Armenian SAM
2.4. THE MITIGATION, ADAPTATION, AND NEW
TECHNOLOGIES APPLIED GENERAL EQUILIBRIUM
(MANAGE) MODEL
The World Bank’s MANAGE model is a recursive-dynamic single-country CGE model originally
designed for analysis focused on energy, emissions, and climate change. In addition to the
standard features of a single-country CGE model, the MANAGE model includes a detailed
energy specification that allows for capital, labor, and energy substitution in production, intra-
fuel energy substitution across all demand agents, and a multi-output, multi-input production
structure.
MANAGE is a dynamic model, using the neo-classical growth specification. Labor growth is
exogenous. The model tracks population by age based on United Nations projections. The
labor force is calculated as the number of working-age people, that is aged 15 to 64 years,
multiplied by the labor force participation rate for 2018. Labor supply was calculated as the
total labor force multiplied by the employment rate.
In the model, capital accumulation derives from savings and investment decisions. The model
allows for a wide range of productivity assumptions that include autonomous improvementsC H A P T E R 2 . M O D E L A N D DATA 20 in energy efficiency that can differ across agents and energy carriers. Household demand is modeled with a two-level utility nest where aggregate consumption such as food, energy, and manufactured goods enter the upper nest with a constant difference in elasticities (CDE) utility function. Demand for aggregate bundles are distributed to individual commodities with a constant elasticity of substitution utility function at the lower level. In the model, we assume that health services consumption is at the upper nest of the utility function with non-linear demand in household income and prices, i.e. a non-linear Engel curve. Finally, the model has a vintage structure for capital that allows for putty or semi-putty assumptions with sluggish mobility of installed capital. We describe the MANAGE model in detail in Annex 2. For this analysis, the MANAGE model was calibrated to replicate the base year of the 2018 Armenian SAM. As described above, the 2018 Armenian SAM was based on 2018 macroeconomic aggregates, an IOT compiled based on 2002 data, which was updated to 2018 to match the data from SCRA, and 2018 household surveys. Like any model, the CGE model has limitations. First, the model is a simplified representation of reality. For example, increasing taxes on income or commodities may cause tax evasion and erosion to increase. Also, increasing taxes affects tax compliance to the extent that substitution of informal with formal labor allow. However, such effects are not captured in the model. Further, the tax rates in the model are effective rates rather than statutory rates and hence an increase in a tax rate in the model includes both tax base expansion and rate increase simultaneously. That is, the same effects can be obtained by increasing the tax rate or expanding the tax base and the model cannot distinguish between them. Third, the model relies on assumptions that may not hold due to the social, economic, and political environment. Lastly, the model is based on economic theory and its stylized findings and does not aim to predict the future. Therefore, the results presented in the report aim to highlight the main impact channels, constraints, and synergies related to different policies.
CHAPTER 3. SIMULATIONS AND
RESULTS
3.1. SCENARIOS
UHC reforms to introduce universal access to a uniform BBP will make health care more
accessible and require additional funds from the budget. Improved health care access will
increase the average labor productivity, life expectancy, and quality of life. To meet the surge in
demand, health care services will need to scale up including by improving efficiency, such that
supply-side constraints do not limit the benefits of UHC reforms.
We assumed that under the UHC reforms the state would pay for 95% of household’s
health care needs throughout the simulation period, starting in 2021 and ending in 2050.
We introduced this coverage as a subsidy on health care. Hence, we include the ambitious
assumption that post-reform households would pay for only 5% of the cost of health care,
which corresponds to co-payments or other small contributions from the households. These
payments from the budget would significantly increase the government’s overall spending. We
then assumed that the government would increase other taxes in a budget-neutral way, that is
keeping the budget deficit constant.
The modeling scenarios were defined following discussions with the MoH on the proposal in
the Concept Note, the MoF’s Tax Reform Strategy, and trends in LMICs seeking to modernize
their tax systems. We considered impacts from raising (a) payroll tax; (b) CIT; (c) direct taxes
on other or non-wage household income (which excludes payroll tax but includes all other
direct taxes paid by households); (d) VAT on commodities; (e) excise taxes on beverages and
tobacco; and (f) a proportionally-equal increase in all of the above taxes.
21C H A P T E R 3 . S I M U L AT I O N S A N D R E S U LT S 22 To fix terms, we define payroll taxes as taxes paid by the production activities for employing labor and which are part of social contributions and income taxes paid by the employer on behalf of the employee. CIT is tax paid by firms on capital income. By construction, capital income is paid to the firms in the model. Firms pay corporate taxes, make savings and transfers to rest of the world, and redistribute the remaining income to the households according to their share in capital ownership. The tax increases were endogenously calculated by the model by keeping the government budget balance constant at the baseline levels. The analysis is not aimed at proposing optimal tax rates for the reform. By endogenizing the tax increases to pay for the cost of the UHC reforms, we accounted for the endogenous change in the demand for health services, with changes in the relative prices of other commodities or disposable income of households, as the tax rates changed. This allowed us to estimate the costs and benefits simultaneously. The endogenously calculated tax rates also captured pass-through as a function of demand elasticities, such as for VAT to households. The UHC reforms were assumed to lead to reductions in the frequency of illness and absenteeism in the working age population and a reduction in the mortality rates across all age groups.52 This assumption is consistent with a recent analysis, undertaken with World Bank support, in which an hypothetical increase in public spending on health by AMD 63.2 billion averted an additional 46,000 disability-adjusted life years (DALYs), where each DALY is a summary metric that accounts for disability and death. The 2018 working-age population in Armenia was estimated at 2 million people, of which 1.5 million were employed. The above estimate of averted DALYs imply a 3% increase in time spent at work among the working-age population. Hence, we introduced a 3% growth in the labor force exogenously to the model. The benefits of the UHC reforms for labor productivity were endogenously introduced to the model. We used a simple law of motion equation for that purpose: where is labor productivity at time t, Ht is private health spending, and is the elasticity of labor productivity to health spending, which is assumed to be 0.5. The equation linked health spending with labor productivity, assuming decreasing returns. That is, the higher the health spending, the lower the labor productivity gains per unit of health spending. Our analysis does not account for the additional health benefits in terms of DALYs due to the reduced consumption of beverages and tobacco, for excise taxes.
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