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Slovak Republic

Author(s):
International Monetary Fund
Published Date:
July 2007
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I. Introduction

1. Slovakia enjoys strong economic fundamentals and is well-poised to adopt the euro in January 2009, but challenges remain. To ensure a succesful experience in the euro area, a major challenge is to enhance the flexiblility of fiscal policy. This will require stregthening the medium-term expenditure framework, and increasing the efficiency of the spending. In this context, this paper focuses on the short and medium-term challenges of the health sector, a key issue in the current policy debates in Slovakia.

2. The plan of the paper is as follows. The first part of the analysis indicates that without reform it would not be feasible to contain health care spending within the financial envelope of the 2007-09 budget. Health sector entities are already accumulating debts, and there is a risk that wage increases and rising cost of pharmaceuticals will create additional pressures. The second part of the analysis highlights the sources of inefficiencies in the Slovak health sector. The paper provides policy recommendations to address these inefficiencies.

II. The Health Sector in the Slovak Republic: Efficiency and Reform1

3. The Slovak Republic finds itself at a crossroad in health care reform. The current government has rolled back the main measures of the reform package put in place during 2003–04, in the face of public disenchantment with the results of those reforms. But, changes are needed to raise the efficiency of health spending, so that the health system can be put on a financially sound footing and health outcomes can be improved. The current government has formulated some initiatives, but is still in the process of developing a comprehensive strategy for the health sector.

4. This chapter provides an analysis of key issues in the health sector and recommendations for a health reform strategy. Section A focuses on recent reforms and the fiscal challenges in the health care system. The conclusion of this analysis is that a well-defined strategy is needed to control the fiscal cost of health care over the medium term. In Section B, we turn to the question of the efficiency of health spending—a key issue for controlling health care cost and improving health outcomes. The main finding is that an immediate challenge for the Slovak health care system is to improve the mix of health care resources (e.g., doctors, hospital beds, and pharmaceuticals). The analysis also suggests that more attention should be paid to pharmaceutical costs, doctors’ consultations, bed utilization, and outpatient contacts. Finally, in Section C we present some recommendations on measures that could be part of a health reform strategy. This includes strengthening of central oversight over public hospital finances; enhancing the role of the private sector; and reforming financial arrangements.

A. Recent Health Sector Reforms and the Fiscal Challenges in Health Care

5. Reforms introduced during 2003–04 were successful in achieving a temporary improvement in the health system’s financial condition. The reform measures were aimed at increasing the role of the private sector in health care and included: (i) introduction of co-payments by patients; (ii) creation of voluntary health insurance; (iii) establishment of state-owned health insurance companies as joint-stock companies; and (iv) changing the status of several hospitals from self-managed government institutions to non-profit semi-independent entities. In addition, the government took over hospital debts, which had been accumulating at an annual rate of 0.7 percent of GDP during 2000–02. As a result of these measures, health spending declined slightly in 2004 (Table 1) while debt and arrears of the health institutions fell substantially (Table 2).

Table 1.Total and Public Health Expenditure in the Slovak Republic, 2000–07

(Percent of GDP)

20002001200220032004200520062007
Public expenditure on health4.95.05.15.25.15.25.25.3
Total expenditure on health5.55.65.75.95.8n/an/an/a
Sources: WHO Europe, IMF staff estimates after 2004.
Table 2.Outstanding Debt and Arrears of the Health Sector, 2004–06
Debt (including arrears)Arrears
20042005200620052006
(Billion Sk)
Total19.36.47.55.66.8
Health institutions17.15.27.44.46.7
Ministry of Health13.92.85.12.04.4
Regional and local governments3.22.42.32.42.3
Insurance companies2.21.20.11.20.1
(Percent of GDP)
Total1.40.40.40.40.4
Health institutions1.30.40.40.30.4
Ministry of Health1.00.20.30.10.2
Regional and local governments0.20.20.10.20.1
Insurance companies0.20.10.00.10.0
Sources: Ministry of Finance and Ministry of Health.

6. The reform measures were not sufficiently strong to resolve the financial problems of the health sector. The co-payments were relatively small (Sk20 for doctor visits and Sk50 per day of hospital stay). Because the coverage of the mandatory health insurance was left at very high levels, the demand for the newly introduced supplementary voluntary health insurance was low. The change in the legal status of hospitals fell short of efforts to privatize hospitals. Thus, public health spending started to rise again in 2005, and large state-owned and regional hospitals continued to accumulate new arrears with their suppliers, particularly pharmaceutical companies. The reforms also were very unpopular. Public opinion polls revealed widespread disapproval with the health reforms,2 and health care policy was an important issue during the 2006 electoral campaign.

7. The new government that assumed office in June 2006 reversed key elements of the 2003–04 health care reform. Co-payments for doctor visits and hospital stays were abolished and co-payments for drugs were lowered significantly; profits and administrative spending of health insurance companies were limited to 4 percent of their total expenditure; and legislation was submitted to Parliament to change the legal status of the state-owned insurance companies from joint stock companies to public agencies.

8. The government also undertook measures aimed at bolstering the finances of health insurers and health care institutions, but a comprehensive reform strategy remains to be formulated. With the aim of reducing the cost of medical services, the VAT rate for most pharmaceuticals was lowered from 19 percent to 10 percent. In addition, the government increased the transfers to health insurance companies for health insurance contributions to cover the non-working population (e.g., pensioners and unemployed). For the first quarter of 2007, these transfers were raised from 4 percent to 5 percent of the minimum wage per insured person. This rate would revert back to 4 percent thereafter, unless the Ministry of Health formulated a plan for lowering the fiscal burden of health care. The health ministry has identified some 6,200 hospital beds (about 16 percent of the total number of beds) that it deems redundant and should be eliminated. However, the implementation of the targeted reductions will depend on the collaboration of subnational governments, which control most of the hospitals where these beds are.

9. Further reforms will be needed to enable the health care system to remain within the financial envelope specified in the 2007–09 budget framework.3 There is a risk that wage increases and rising cost of pharmaceuticals 4 will crowd out other health spending. This would jeopardize the quality of health services as well as likely result in additional arrears accumulation. Managing these pressures will require the implementation of reforms aimed at raising the efficiency of health spending.

B. A Comparative Analysis of Efficiency in the Health Sector

10. A strategy for enhancing efficiency in the health sector should be based on an understanding of the sources of current inefficiencies. In this section, we try to identify some of these sources by comparing health spending and outcomes in the Slovak Republic with those in the EU and OECD countries.

International comparison of health care expenditure and outcomes

11. Total health spending in the Slovak Republic is less than one-third of the EU–15 and OECD averages and above the median for the new EU-member states (NMS–10). This partly reflects the higher cost of health services and increased health care demand in countries with higher income levels. The share of the private sector in total health care spending in the Slovak Republic is among the lowest in the EU (Figure 1). Average annual per capita expenditure on health care in the Slovak Republic during 2000–04 in purchasing power parity (PPP) dollars was PPP$712, of which only 11 percent came from private sources.5 This reflects the high coverage of the public mandatory health insurance which leaves little space for private supplementary insurance. Only the Czech Republic has lower private health spending, at 9 percent of total health expenditure.

Figure 1.Health Expenditures in the OECD and NMS-10, 2000–04

(Period average in PPP dollars)

Sources: OECD and WHO Europe.

12. Compared to other countries, public health care expenditures and resources are tilted toward hospital care, pharmaceuticals, and wages. Hospital bed availability is in line with the NMS-10 average, but higher than in the EU-15 and OECD. However, the hospital bed occupancy rate and the rate of in-patient care admission are lower in the Slovak Republic than in comparable countries (Table 4). On the other hand, the use of outpatient and doctors’ services is high compared to other countries. Spending on pharmaceuticals is also higher in the Slovak Republic than in the other NMS-10 countries (Table 5). Spending is also biased toward compensation of employees, which amounted to 44.6 percent of total spending by health facilities in 2004, against an average of 27.7 percent in the EU-15 (Institute for Health Information and Statistics, 2005, and Eurostat Task Force on COFOG, 2006). Overstaffing of physicians and accompanying health staff in relation to EU-15 appears to be a key issue (OECD, 2006). However, wage levels are low, but pressure from unions for wage increases is rising and there is anecdotal evidence of health staff emigrating to EU-15 countries.

Table 3.Slovak Republic: Public Spending on Health Care, 2005–10

(In percent of GDP)

EstimateProjection
200520062007200820092010
Health insurance companies
Revenues5.05.05.04.94.94.9
Insurance contributions from budget1.51.41.51.41.31.3
Other insurance contributions3.43.53.53.53.53.5
Other revenues0.10.10.10.10.00.0
Expenditure 1/5.05.05.04.94.94.9
Health care spending4.54.64.7
Pharmaceuticals1.81.91.8
In-patient care1.11.11.3
Out-patient care0.80.80.8
Other0.70.70.7
Non-health care spending0.50.30.4
Administrative expenses and profit0.30.30.3
Other0.20.00.0
State budget (excluding transfers to insurance companies)
Expenditure0.20.20.20.10.10.1
Current spending (administration, medical education, etc.)0.10.10.10.10.10.1
Capital spending0.10.00.00.00.00.0
Subnational governments and EU funds
Expenditure0.00.00.00.10.10.1
Public expenditure on health 2/5.25.25.35.15.15.1

Includes profits.

Public expenditure is estimated as the sum of insurance contributions and spending by the state, subnational governments, and EU funds. This excludes spending from co-payments and other nonpublic financial sources.

Sources: Health Policy Institute (2007) and IMF staff estimates.

Includes profits.

Public expenditure is estimated as the sum of insurance contributions and spending by the state, subnational governments, and EU funds. This excludes spending from co-payments and other nonpublic financial sources.

Table 4.Selected Real Health Resources 1/
ResourcesUtilization Rates
Hospital beds (per 1,000)Physicians (per 1,000)Physicians (per 1,000)Pharmacists (per 100,000)Doctors’ consultations (per capita)Bed occupancy (percent)In-patient care admissions (per 100)Average length of stay (days)Outpatient contacts (per capita)Measles immunization (percent)
Slovak Republic7.23.110.649.012.768.618.58.913.098.0
Bulgaria6.33.68.312.521.08.181.0
Czech Republic8.83.513.456.313.074.622.110.815.297.0
Estonia6.03.29.862.668.419.28.06.896.0
Hungary7.83.211.952.712.175.725.58.112.999.0
Latvia7.83.08.222.110.05.299.0
Lithuania8.74.012.470.278.623.810.26.898.0
Poland5.62.57.758.15.917.66.96.097.0
Romania6.61.96.24.824.68.05.995.6
Slovenia5.02.39.442.570.117.67.17.294.0
NMS-10 average7.03.09.845.410.972.721.28.68.897.0
EU-15 average5.53.213.082.55.974.317.98.45.489.7
OECD average6.13.012.574.46.976.218.68.47.091.8

Data are from latest year available, except for the data on doctors’ consultations which are the average over 2002–03 and immunization from 2004.

Sources: WHO and the World Bank’s World Development Indicators database.

Data are from latest year available, except for the data on doctors’ consultations which are the average over 2002–03 and immunization from 2004.

Table 5.Expenditure on Pharmaceuticals, 1999–2002 1/

(Period average)

Public pharmaceutical expenditure (as a percent of public health expenditure)Public and private pharmaceutical expenditure (as a percent of public and private health expenditure)Public pharmaceutical expenditure (PPP$ per capita)Public and private pharmaceutical expenditure (PPP$ per capita)
Slovak Republic31.834.8180.8220.8
Czech Republic19.022.2178.5232.0
Estonia23.3
Hungary24.928.1165.3293.0
Poland15.028.467.5208.0
Slovenia19.8
NMS-1022.726.1148.0238.4
EU-1513.415.4200.4334.6
OECD14.117.4184.9330.9

Includes other medical non-durables. Data on pharmaceutical expenditure in Bulgaria, Latvia, Lithuania, and Romania are not available.

Sources: OECD and WHO.

Includes other medical non-durables. Data on pharmaceutical expenditure in Bulgaria, Latvia, Lithuania, and Romania are not available.

13. Health outcomes in the Slovak Republic are close to the average for the NMS-10 but significantly worse than the average for the EU-15 and OECD. According to the latest available data health adjusted life expectancy (HALE) in the Slovak Republic is 66 years, five years less than the EU-15 and OECD averages (Table 6). Death rates (standardized by population demographics), infant and child mortality rates, and the incidence of tuberculosis are also worse. However, maternal mortality rates are relatively low in the Slovak Republic compared to other NMS-10 countries and comparable to EU-15 and OECD averages.

Table 6.Health Outcome in OECD and NMS-10 1/
HALE (years)Standardized death rates (per 100,000)Infant mortality rate (per 1,000)Child mortality rate (per 1,000)Maternal mortality rate (per 100,000)Incidence of tuberculosis (per 100,000)
Slovak Republic66.2945.06.08.510.018.8
Bulgaria64.61056.412.315.032.036.1
Czech Republic68.4837.63.94.49.010.8
Estonia64.1993.65.78.038.045.9
Hungary64.91015.57.28.011.026.0
Latvia62.81107.29.811.961.067.7
Lithuania63.31081.67.58.319.062.7
Poland65.8872.07.17.510.028.5
Romania63.11076.417.319.958.0146.0
Slovenia69.5729.44.04.317.015.2
971 5
NMS-10 average65.38.19.626.545.8
EU-15 average71.3628.94.34.99.913.6
OECD average70.7672.24.65.39.516.1

HALE data are from 2002, death rates are the latest year available between 2001-05, infant and child mortality and incidence of tuberculosis are from 2004 and maternal mortality data are an estimate from 2000.

Sources: WHO and the World Bank’s World Development Indicators database.

HALE data are from 2002, death rates are the latest year available between 2001-05, infant and child mortality and incidence of tuberculosis are from 2004 and maternal mortality data are an estimate from 2000.

Relative spending efficiency analysis

14. Efficiency analysis assesses whether expenditures are higher than needed to achieve prevailing health outcomes. Like other NMS-10 countries, the Slovak Republic combines relatively low health spending with relatively poor health outcomes. However, by increasing expenditure efficiency, it may be possible to raise health outcomes without increasing spending or, vice versa, to reduce spending without compromising outcomes. Figure 2 illustrates the concept of spending efficiency. Overall spending efficiency links health expenditure with health outcomes. The link between spending and health outcomes can be broken down into two stages. The first stage measures cost effectiveness—i.e., the efficiency of spending on intermediate outputs or real health resources such as hospital beds, number of health workers, etc. The second stage measures system efficiency—i.e. how well the intermediate outputs or real resources are used to achieve health outcomes such as improved life expectancy and lower mortality rates.

Figure 2.The Efficiency Relationship Between Health Expenditures, Resources, and Outcomes

15. The Slovak Republic’s overall spending efficiency is on par with OECD countries and other NMS-10 countries. On average, the Slovak Republic ranks in the 54th percentile of the efficiency score ranking of OECD and NMS countries for public health expenditure (Table 7).6 If private health expenditures are taken into account, the Slovak Republic ranks lower at the 22nd percentile in the efficiency score ranking for total spending on health. The Slovak Republic’s ranking indicates that there is scope for improving outcomes without increasing spending.

Table 7.Output-Oriented Efficiency Relative to the OECD and NMS Countries (Distribution by quartiles of the ranking of OECD bias-corrected output-oriented efficiency scores) 1/
Percentile
1-2526-5051-7576-100
Public expendituresBulgariaCzech Republic

Latvia
Estonia

Poland

Slovak Republic

Slovenia
Hungary

Lithuania

Romania
Public and private expendituresBulgaria

Czech Republic

Slovak Republic
Estonia

Romania

Poland
Lithuania

Slovenia
Hungary

Latvia

The rankings are based on each country’s average of the individual point estimates of the bias-corrected output-oriented efficiency scores for various outcome indicators, including infant, child, and maternal mortality the incidence of tuberculosis and HALE.

Source: IMF staff calculations.

The rankings are based on each country’s average of the individual point estimates of the bias-corrected output-oriented efficiency scores for various outcome indicators, including infant, child, and maternal mortality the incidence of tuberculosis and HALE.

16. Inefficiencies in the Slovak health system occur mostly in the process of transforming intermediate health resources into health outcomes (Table 8). In other words, system efficiency is relatively low in the Slovak Republic. This reflects a general feature of NMS-10 countries, which achieve relatively low health outcomes with high real resource combinations. In part, this is due to inertia—for instance, hospital structures may still reflect old standards and a significant part of current health workers were educated in the pre- and early transition period. On the other hand, higher levels of cost effectiveness in the Slovak Republic and NMS-10 countries reflect relatively low prices for labor and other inputs for health services. As a result, despite spending levels, real resources in the health sector are relatively high.

Table 8.Rank of Health Efficiency Scores Relative to the OECD 1/
System Efficiency 2/Overall Efficiency 3/
Intermediate Resources to outcomesPublic expenditures to outcomesPublic and private expenditures to outcomes
Slovak Republic1.71.10.4
Bulgaria2.00.50.5
Czech Republic1.40.70.5
Estonia1.91.40.7
Hungary1.91.51.4
Latvia2.21.01.5
Lithuania2.01.61.1
Poland1.61.00.5
Romania2.01.50.6
Slovenia0.71.11.0
NMS-10 average1.71.10.8
EU-15 average0.91.01.1

Ratio of output-oriented efficiency rankings of NMS-10 and EU-15 countries and the average ranking in the sample of OECD countries. The ratio is 1 if the country is as efficient as the average for the OECD, and is higher if the country is less efficient (see Verhoeven, Gunnarsson, and Carcillo (2007).

Based on output-oriented efficiency rankings using as inputs the average ranking of various real resources (Table 3) and as output various outcome indicators, including infant, child, and maternal mortality, the incidence of tuberculosis and HALE.

Reflecting the output-oriented efficiency rankings of Table 7.

Source: IMF staff calculations.

Ratio of output-oriented efficiency rankings of NMS-10 and EU-15 countries and the average ranking in the sample of OECD countries. The ratio is 1 if the country is as efficient as the average for the OECD, and is higher if the country is less efficient (see Verhoeven, Gunnarsson, and Carcillo (2007).

Based on output-oriented efficiency rankings using as inputs the average ranking of various real resources (Table 3) and as output various outcome indicators, including infant, child, and maternal mortality, the incidence of tuberculosis and HALE.

Reflecting the output-oriented efficiency rankings of Table 7.

17. Although cost effectiveness may currently be high, sustainability is an issue. Over the longer term, producing the mix of intermediate resources that is compatible with a modernized system of health care would likely require substantially higher spending levels, for example for reorganizing hospital care and employing high-quality health workers.

18. These results are broadly consistent with the findings of other studies, although their methodology and data differ. A study of public sector efficiency on the Czech Republic ranks the Slovak Republic among the average of NMS-10 countries for overall input- oriented health efficiency but substantially lower in converting real health resources into outcomes (International Monetary Fund, 2007). Furthermore, similar work on Slovenia ranks the Slovak Republic among the worst of the sample of 22 OECD and other NMS countries although this study uses public only health spending in percent of GDP as the input (Mattina and Gunnarsson, 2007). Afonso and St. Aubyn (2006) rank Slovak Republic and other NMS countries in the bottom third of the efficiency distribution of a wide sample of countries using output-oriented overall health efficiency scores and second to last when assessing system efficiency.

Correlation analysis

19. It is important to understand the reasons for differences in efficiency between the Slovak Republic and comparator countries. Many policy-related factors and factors out of the direct control of policy makers (environmental variables) affect the relationship between health expenditures and health outcomes. We examine what factors determine the variation in the link between health spending and outcomes across countries by simultaneous multi-correlation analysis.7 Lessons are drawn on which policy factors are important to consider for improving health sector efficiency in the Slovak Republic.

20. Efficiency is associated with a wide range of factors. This is summarized in Table 9. GDP per capita is highly and negatively correlated with overall relative efficiency, reflecting changes in relative prices of health care as income increase.8 Because of the pervasive impact of GDP, all reported correlations in the table are independent of GDP per capita differences between countries.9 The key correlations include:

Table 9.Correlations of Relative Efficiency with Associated Factors 1/
HALEStandardized death rateInfant mortality rateChild mortality rateMaternal mortality rateIncidence of tuberculosis
Overall efficiency: public expenditures to outcomes
Exogenous factors
Alcohol intake (liters per capita per year)-----
Average schooling years in the population----
GINI Index--
Expenditure composition
Collective care expenditure (percent of public health exp.) 3/----
Collective care expenditure (PPP per capita) 3/----
Out-of-pocket expenditure (percent of private health exp.)+++++
Health resource composition
MRIs per million capita+++
Overall efficiency: public and private expenditures to outcomes
Exogenous factors
GDP per capita (PPP dollars)--------
GINI Index----
Average schooling years in the population---
Expenditure
Pharmaceutical expenditure (PPP per capita) 3/----
Collective care expenditure (percent of total health exp.) 3/----
Collective care expenditure (PPP per capita) 3/----
Personal care expenditure (PPP per capita) 3/----
Administration and insurance (percent of total health exp.) 3/-----
Administration and insurance (PPP per capita) 3/----
Out-patient expenditures (PPP per capita) 3/----
Out-of-pocket expenditure (percent of private health exp.)++++++
System efficiency: intermediate resources/services to outcomes
Exogenous factors
GDP per capita (PPP dollars)+++++++++++
Population over 65 years (percent of total population)++
Expenditure composition
Pharmaceutical expenditure (% of total health exp.) 3/----------
Administration and insurance (% of public health exp.) 3/----------
Health resources 2/
Doctors’ consultations per capita per year-------
In-patient care admissions per 100 capita 4/---------
Outpatient contacts per capita per year 4/--

Correlations were run on bias-corrected output-oriented efficiency scores. This table summarizes the results of the correlations of associated factors with the level of efficiency. ++ (+) indicates that the associated factor is positively correlated with level of efficiency (negatively correlated with output-oriented efficiency scores) at the 5 (10) percent significance level. - - (-) indicates that the associated factor is negatively correlated with level of efficiency (positively correlated with output-oriented efficiency scores) at the 5 (10) percent significance level. Several of the associated factors in the table are highly correlated with GDP. When a factor is correlated with GDP only correlations that are significant after conditioning on GDP are considered.

Only real health resources/services not included in the DEA (hospital beds, number of physicians, health workers, pharmacists and measles immunization rate) are considered.

Excludes non-OECD countries due to missing data.

Excludes the non-European countries Australia, Canada, Japan, Korea, New Zealand, and U.S. due to missing data.

Sources: WHO Europe, World Bank World Development Indicators, and the OECD.

Correlations were run on bias-corrected output-oriented efficiency scores. This table summarizes the results of the correlations of associated factors with the level of efficiency. ++ (+) indicates that the associated factor is positively correlated with level of efficiency (negatively correlated with output-oriented efficiency scores) at the 5 (10) percent significance level. - - (-) indicates that the associated factor is negatively correlated with level of efficiency (positively correlated with output-oriented efficiency scores) at the 5 (10) percent significance level. Several of the associated factors in the table are highly correlated with GDP. When a factor is correlated with GDP only correlations that are significant after conditioning on GDP are considered.

Only real health resources/services not included in the DEA (hospital beds, number of physicians, health workers, pharmacists and measles immunization rate) are considered.

Excludes non-OECD countries due to missing data.

Excludes the non-European countries Australia, Canada, Japan, Korea, New Zealand, and U.S. due to missing data.

  • Countries with relatively large out-of-pocket health spending by patients appear more efficient. Out-of pocket expenditure as a share of private health expenditures is highly associated with higher overall health expenditure efficiency. But out-of-pocket spending is not related to the size of private health expenditures (i.e., out-of-pocket spending does not seem to drive the level of private spending). In the Slovak Republic, where private health expenditures are extremely low, virtually all of private health expenditures are out-of-pocket payments. Higher co-payments for health services in Slovak Republic may thus help reduce inefficiencies between health care utilization and outcomes.10
  • Expenditures on collective care and on administration are associated with lower efficiency. These expenditures (e.g., for research activities, community campaigns, and preventative health care) contribute less to improving health outcomes than other types of spending.
  • Spending on pharmaceuticals is associated with lower system efficiency. High pharmaceutical expenditure tends to crowd out other health resources and reduces the efficient use of real health resources.
  • System efficiency is negatively correlated with the number of doctors consultations and both in-care admissions and outpatient contacts. A likely reason for this association is that a large number of doctor and hospital visits drives up prescriptions for pharmaceuticals and medical tests. As the number of doctors’ consultations, especially outpatient contacts, is very high in the Slovak Republic containing these may help reduce some inefficient spending and resource use.

21. These results suggest that changing the mix of real resources is key for improving system efficiency of health spending in the Slovak Republic. System efficiency may be raised from current low levels by containing pharmaceutical costs, doctors’ consultations, bed utilization, outpatient contacts, as well as the number of hospital beds.

C. Conclusions and Recommendations

22. The immediate challenge for the health care system in the Slovak Republic is to improve health sector outcomes while containing public health spending. Medium-term fiscal consolidation objectives imply limited room for increasing health spending. At the same time, health spending may come under pressure from demands for wage increases and rising prices of pharmaceuticals. Therefore, in order to prevent a deterioration in the financial condition of health care institutions and achieve further gains in health outcomes, the efficiency of spending will need to be increased.

23. In order to meet this challenge and raise the efficiency of health spending, the mix and quality of real resources needs to be improved. Like other NMS-10 countries, the Slovak Republic has relatively high cost effectiveness, but low system efficiency. System efficiency may be enhanced by containing the cost of pharmaceuticals and reducing the reliance on hospital care. In addition, spending efficiency can be raised through higher out-of-pocket expenditure and more cost-effective administrative arrangements.

24. Introduction of the right incentives will be critical for improving health care spending efficiency. The Slovak health care system is decentralized, and the central government has limited control over decisions by insurance companies and health care institutions.11 Therefore, a successful framework for health reform needs to include incentives for implementation, together with enhanced transparency and improved accountability.

25. The following measures could contribute to raising efficiency and containing health cost:

  • Restrain pharmaceutical spending. This could involve: (i) introducing a national procurement system for pharmaceuticals in order to enhance bargaining power of public hospitals against pharmaceutical companies; (ii) introducing incentives for generic substitutes—for example, by allowing pharmacies to share the spread between the discounted price on generic substitutes and the full price of branded pharmaceuticals; and (iii) improving the pharmaceutical pricing and reimbursement policy of the Ministry of Health and making it more transparent. For instance, the Pharmaceutical Reimbursement Commission could be made more independent.
  • Reduce the reliance on hospitals and contain the cost of hospital care. This could involve various actions:Eliminate excess hospital beds. Government plans for eliminating 6,200 beds are an important step in the right direction.Impose hard budget constraint on public hospitals. The Ministry of Health and the regional governments should be made responsible for taking immediate measures to reduce hospital deficits. Measures would include changing the hospital management (this would often mean substituting doctors in management positions with professional managers), the adoption of time-bound action plans for improved financial management, closing down inefficient units, and comprehensive and regular reporting by hospitals on their debts and arrears. Hospitals could share resources obtained by cost reduction and penalties for inaction should be taken. In the medium term, health care providers and insurance companies should be encouraged to define Diagnostic Related Group protocols to ensure adequate compensation for expensive treatments.Restart hospital privatization. The majority of hospitals are still controlled either by the Ministry of Health or by regional governments. They are poorly managed and lack incentives to enhance efficiency as well as resources for needed investments. Private investors may bring managerial competence and resources. It may be needed to introduce subsidies for hospitals located in the poorest regions and retain government control over a limited number of “hospitals of last resort”, which would ensure that treatments which are critical but unprofitable (for local governments or private health providers) remain available.
  • Reintroduce co-payments for doctors’ visits and hospital care. Containing the number of doctors’ visits and prescriptions would help contain the consumption of pharmaceuticals. The co-payments for hospital stays may help to optimize the utilization of hospital beds, which are an abundant resource, as well as reduce the in-care admissions rate may also help increase health system efficiency.
  • Enhance incentives for competition and more cost-effective administrative arrangements. This could include the following:Introduce incentives for practitioners to be cost-effective. General practitioners could be reimbursed a lump-sum amount per patient to cover all health care that the patient requires (capitation) rather than fee-for-service or by salary. This would reduce incentives for health practitioners to oversubscribe. Alternatively, practitioners may become virtual purchasers from the insurance companies which would allocate a budget to each of them according to the number of patients and their characteristics. In this case, sharing resources obtained by cost reduction and penalties on over-prescribing could provide the right incentives.Define a stricter basic health care package, allowing some variations in basic insurance premiums. This measure would also create more room for private insurance companies for providing supplementary insurance, increasing private expenditures on health-care, and increasing competition.Increase the power of the Antitrust authority and enhance the autonomy and independence of the Health Care Supervisory Board. Tight supply and information asymmetries often hinder effective competition in health service provision (OECD, 2003). As both insurance companies and hospitals are still largely government owned and due to the particular relationship between patient and doctor (based on information asymmetries and trust), competition in the health sector is structurally lower than in other sectors of the economy. The authorities should closely monitor the sector (including the Pharmaceutical Reimbursement Commission), sanction anti-competitive and unethical behavior (like collusion among public sector agencies or in the relationship between pharmaceutical companies and health care providers), and enhance transparency. The Health care Supervisory Board should become independent from the Ministry of Health (which is directly or indirectly a supervised institution) and appointment to the Board should be shifted from Government to Parliament or to the President.Refrain from introducing new limitations on profits of private insurance companies. The government has introduced limits on administrative costs of insurance companies and submitted proposals to regulate their profits with the aim of diverting resources to health care providers. However, forcing more expenditure on direct health care providers through regulations is unlikely to achieve enduring cost saving. Instead, it is likely to reduce private sector involvement and provide disincentives for efficiency enhancement. By allowing profit making (both for insurance companies and health care providers) in an appropriate regulatory environment, incentives for providing better health care at lower costs would increase.
References

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1Prepared by Sergio Lugaresi (fiscal expert), Victoria Gunnarsson, and Marijn Verhoeven (both FAD).
2An opinion poll found that 74 percent of respondents disagreed with the introduction of the health care reforms, compared with 35 percent of the respondents opposing pension reform (Jevčák, 2006).
3Public expenditure on health care as ratio to GDP is projected at 5.3 percent in 2007 and expected to decline to 5.1 percent during 2008-09 (see Table 3).
4After declining slightly in 2007, owing to the reduction in the VAT rate for most pharmaceuticals, the cost of pharmaceuticals is likely to resume its upward trend from 2008 onward, in line with envisaged trends of international pharmaceutical prices.
5Spending is measured in PPP terms in order to be able to compare expenditure levels across countries. More conventional measures of spending would bias such a comparison. For example, spending measured as a percent of GDP underestimates the purchasing power of spending in richer countries relative to poorer countries (because a comparable package of health services will cost less as a percent of GDP in the richer country). At the same time, richer countries should be expected to spend more on health care in PPP terms; as populations grow wealthier, they are likely to consume a larger and more varied package of social services leading to increased spending (Wagner effect).
6The international comparison of efficiency is carried out using Data Envelope Analysis (DEA). DEA estimates overall spending efficiency of the use of inputs (i.e., health expenditure) in ‘producing’ outputs (i.e., health outcomes). The methodology derives from the literature on the estimation of production functions (See Verhoeven, Gunnarsson, and Carcillo (2007) for a description of the methodology). DEA has the advantage of being sparse in its assumptions about the characteristics of the production technology. This is particularly important for assessing spending efficiency, because little is known about the nature of the relationship between spending, intermediate outputs, and outcomes. The sample of countries included in the analysis are OECD countries (except Mexico and Turkey as their level of health outcomes and spending make them outliers), the EU new member states Bulgaria, Cyprus, Estonia, Latvia, Lithuania, Malta, Romania, Slovenia as well as Croatia, for which data are available. By using average health expenditures over 2000–03 and health outcomes in 2002 and 2004 in the DEA we allow for a time lag between when spending takes place and when health outcomes are measured. The exceptions are maternal mortality where the latest outcome data available are for 2000 and standardized death rates where two countries have data available only for 2001.
7It should be noted that simultaneous correlation analysis does not provide estimate of causality. Policy and environmental variables may drive efficiency, but the reverse may also be true, and unobserved variables may drive policy and environmental variables as well as efficiency.
8Afonso and St. Aubyn (2007), using bootstrap procedures to assess the impact of exogenous factors on the variation of health efficiency across countries, also find that higher GDP levels are associated with higher system efficiency. They also find that a high level of education attainment in a country improves health system efficiency while the prevalence of obesity and tobacco consumption lower health system efficiency.
9Several of the factors that are correlated with relative efficiency are also significantly correlated with GDP. For instance, countries with higher income levels spend more on pharmaceuticals and have higher out-of-pocket expenditures, and better access to medical technology, such as MRI equipment. Simultaneous correlations between these factors and relative efficiency levels may thus simply reflect the strong association between GDP and the efficiency level. Thus, in order to separate the effects between the associated factor and efficiency from the relationship with GDP in cases where the associated factor is significantly correlated with GDP, we ran simple regressions of relative efficiency on the associated factor and GDP per capita. In those cases, the reported correlations are the regression coefficient of the associated factor, and are only reported when the coefficient is statistically significant.
10A World Bank and USAID (2000) study and a report by International Business Strategies (2006) show that the Slovak health system suffers from corruption and that individuals may be willing to pay for better health services. However, this is unlikely without an improvement in the quality of health services.
11Large hospitals connected to universities are still under central government control and are the main exception.

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