The paper examines macroeconomic and structural factors potentially explaining the country's underperformance. A comparison between the reform and baseline policy scenarios underscores maintaining a strong fiscal position, early reductions in primary expenditures, and reducing fiscal vulnerability. Assigning the financing and management of the health care system to the regions may increase the efficiency and the productivity of the health care system. The information on Italy's economy and legal as well as regulatory environment is available on the worldwide web, and the paper lists the related sites.

Abstract

The paper examines macroeconomic and structural factors potentially explaining the country's underperformance. A comparison between the reform and baseline policy scenarios underscores maintaining a strong fiscal position, early reductions in primary expenditures, and reducing fiscal vulnerability. Assigning the financing and management of the health care system to the regions may increase the efficiency and the productivity of the health care system. The information on Italy's economy and legal as well as regulatory environment is available on the worldwide web, and the paper lists the related sites.

The Evolving Role of Regions in Italy: The Financing and Management of Health Care Services54

A. Introduction

111. The previous chapters argued that reducing the tax burden and improving public sector efficiency would have a central role to play in reinvigorating growth; and that these growth supporting fiscal policies called for reining in aging-related increases in public expenditure—a challenge far from unique, but particularly daunting for Italy in view of relatively adverse population aging trends. Following an assessment of the Italian pension system in last year’s background studies (Chapter I in SM/99/115, 5/20/99), this chapter focuses on the second major expenditure area affected by population aging, health care.

112. Health care currently accounts for some 13 percent of general government primary expenditures in Italy and could potentially increase by as much as 2½ percent of GDP as a result of the projected population aging. When the National Health Service (NHS) was established in 1978, the responsibility for providing public health care services was assigned to the regions; nonetheless, the NHS has in effect been centrally managed and financed. The recent reform of intergovernmental relations will bring about a major change in this regard, and increase the responsibility of regional governments in the managing, and their resources for financing, of the public health care system. This chapter focuses on the evolving role of regional governments, describes the recent reform of intergovernmental fiscal relations, and its implications for health care financing—assessing how these reform steps fit into the broader policy challenges outlined in the previous chapters. The discussion attempts to put Italy’s experience in a broader cross-country perspective, by comparing the institutional setup and the expenditure trends to those prevailing in other industrialized countries.

113. The rest of the chapter is organized as follows. Section III.B gives a brief description of the regions in Italy and Section III.C describes their expenditure assignments. Section concentrates on health care services, by far the most important expenditure assignment of the regions. Section III.E describes and assesses the tax assignment of regions and the future equalization mechanism. Section III.F gives a brief description of the rules limiting borrowing by regional governments, whose fiscal responsibilities are also covered by the Internal Stability Pact (Section III.G). Finally, Section III.H concludes.

B. Key Characteristics of Italian Regions

114. The principle of decentralization of powers was already established in Italy’s Constitution of 1948, which divided the Italian Republic into regions, provinces, and municipalities (Article 114). There are 20 regions (listed in Article 131), 5 of which, namely Sicilia, Sardegna, Trentino Alto Adige, Friuli-Venezia Giulia, and Valle d’Aosta are special statute regions, that is, regions that enjoy a higher degree of autonomy and whose statutes are approved with constitutional laws (Article 116). The remaining 15 are ordinary statute regions, and their statutes are approved with simple parliamentary laws.

Geographic and demographic characteristics

115. The 20 Italian regions form an extremely varied universe. They differ widely in size, ranging from the 25,000 sq km of Piemonte and Sicilia (each 8½ percent of the national territory) to the 3,000 sq km of Valle d’Aosta (1 percent of national territory). The population is also very unevenly distributed, with nearly 9 million people living in Lombardia (15½ percent of the total population) and less than½ of 1 million in Valle d’Aosta and Molise. Population density also varies considerably (see Table 1), and is on average 20 percent higher in the Center-North than in the South.

Table 1.

Italy: Key Characteristics of Regions

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Source: ISTAT.

Inhabitants for square kilometers.

116. The regions also differ significantly in the age distribution of their population—an important determinant of future outlays on health benefits. The South is relatively “younger,” with 15 percent of the population aged 65 and older compared to 19 percent in the Center- North (and to a nationwide average of 17½ percent). Liguria is the “oldest" region, with one- fourth of the population aged 65 and older, followed by Emilia-Romagna, Toscana, and Umbria with 21½ percent, whereas Campania is the “youngest,” with only 13 percent.

Economic characteristics

117. Recorded labor force participation rates are markedly higher for the Center-North (62 percent) than for the South (52 percent); Emilia-Romagna has the highest participation rate with 68 percent, whereas Puglia and Calabria are at the bottom, with participation rates barely above 50 percent, and Lazio is the only region in the Center-North with a participation rate below 60 percent (see Table 2). Perhaps the most dramatic difference between the Center-North and the South lies in the unemployment rate, which in 1999 averaged 22 percent for the South versus 7 percent for the Center-North.

Table 2.

Italy: Regional Labor Market Indicators

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Source: ISTAT (1996).

118. Other economic disparities across regions are equally significant. The characterization of Italy as a “dual economy” can easily be understood by noting that 75 percent of Italy’s GDP is produced in the Center-North (with Lombardia alone accounting for 20 percent) and only 25 percent in the South—this proportion has remained virtually unchanged over the last 20 years (Table 3).

Table 3.

Italy: Regions’ Contributions to GDP, 1980-96

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Source: ISTAT

119. Divergences in per capita GDP are equally stark. In 1996, when nationwide per capita income stood at Lit 32 million, four regions of the Center-North, that is, Valle d’Aosta, Lombardia, Trentino Alto Adige, and Emilia-Romagna, had a per capita income above Lit 40 million, while at the other end of the spectrum Calabria was the poorest region with just Lit 18 million, and Campania, Basilicata, and Sicilia were around Lit 20 million. Overall, the South had a per capita GDP of Lit 21 million, or only⅔ of the national average, whereas per capita income in the Center-North was 20 percent higher than the national average, at Lit 38 ½ million (Table 4).

Table 4.

Italy: Regional Per Capita GDP, 1996

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Source: ISTAT

C. Expenditure Assignments of Regions

Expenditure responsibilities of regions

Historical perspective

120. While the Constitution approved in 1948 already provided for the establishment of regions as autonomous entities and with directly elected regional governments, only special statute regions were quickly established. The first regional councils for ordinary statute regions were only elected in 1970, and two more years elapsed before the transfer of powers, personnel and funding necessary for these governments to operate took place. In 1977, the “616 decrees” transferred to the regions large portions of the state bureaucratic apparatus (with several thousands of employees being moved from the central administration to the regions), delegated to them legislative authority in important fields such as territorial planning and social agencies, and transferred to them almost full responsibility for provision of health care services. The regions thereby assumed responsibility for approximately one quarter of the national budget—in large part as a consequence of the transfer of responsibility over the health care sector, which by 1989 already accounted for over one-half of regional spending.’55

121. The competencies and responsibilities of the ordinary statute regions are determined by Article 117; they include health services, social assistance, labor training and professional instruction, transports of regional importance, tourism, road maintenance and construction, public works, and agriculture. The areas of action of the special statute regions are broader and vary from case to case; in addition to those of the ordinary regions they often include partial responsibility for primary and secondary education, subsidies to industry, commerce and agriculture, and financial support for culture and the arts. The regions can in turn delegate some of their administrative activities to the lower levels of governments, that is, provinces and municipalities (Article 118).

122. The regions are granted financial autonomy within the limits determined by the national laws, which coordinate the regions’ financial autonomy with that of the state, the provinces and the municipalities (Article 119). The regions are given (i) own revenues; and (ii) conditional and unconditional state transfers, in amounts sufficient for them to carry out their regular functions. Moreover, regions have their own patrimony. The state assigns by law special contributions to individual regions for specific purposes, in particular to foster development in the South and in the islands (Sicilia and Sardegna). Finally, regions are allowed to borrow to finance investment (see below).

The Bassanini reform

123. The recent reform of intergovernmental fiscal relations is part of an overall reform of the state in Italy, known as the Bassanini reform,56 comprising two framework laws, Laws 59 and 127 of 1997, and subsequent implementation decrees. The goal of the reform is to create a service-oriented state providing high quality services at the lowest cost (including compliance costs). The reform is to be carried out within the context of the existing constitution—though decentralization is a central part of the reform, the unitary nature of the Italian state will remain unchanged.

124. The basic idea behind the reform is to redefine the role of the state, divest noncore activities, and reallocate core activities across levels of government and different parts and agencies of the central government in order to achieve the above-stated goal. The reform involves decentralization of the retained functions of government, deregulation, simplification of administrative procedures, contracting out of government services, a new approach to human resource management, and a reform of the budget process.

125. Concerning decentralization, the first step has been to identify those functions that should stay with the central government. These include justice, national security, defense, international relations and trade, relations with international organizations and coordination of EU relations, macroeconomic policy, national energy policy, industry, telecommunication, transport, education, and research, as well as setting the national policy objectives and standards in areas such as agriculture, employment, public housing, public works, and consumer protection. The remaining core functions have been assigned to subnational governments according to the principle of subsidiarity. Trade and industrial development policies have been devolved to the regions. The final step in the process of decentralization, which has been designed as a five-year process, will be the transfer of financial and human resources to the subnational governments. The modalities of the process will be agreed upon at the central state-regions and the central state-municipalities conferences, established to foster cooperation between the different levels of government.

Overall trends in public expenditure at the subnational level

126. Expenditure responsibilities of subnational governments expanded substantially in the second half of the 1970s, when total expenditures of subnational governments came to account for about 10 percent of GDP, or roughly one-fourth of total expenditures of the general government (Figure 1). As the size of government expanded, so did the role played by subnational governments—within a few years their total expenditures increased to over 14 percent of GDP. Their share in total expenditures of the general government was close to 30 percent for much of the 1980s. As a percent of GDP, total expenditures of subnational governments declined over the following decade, from a peak of 15 percent in 1991 to about 13½ percent at the end of the 1990s.

Figure 1.
Figure 1.

Italy: Public Expenditures, 1977-99

(In percent of GDP)

Citation: IMF Staff Country Reports 2000, 082; 10.5089/9781451819793.002.A003

Source: Fund staff calculations.

127. The decline in expenditures over the 1990s reflected the contribution of subnational governments to Italy’s fiscal consolidation effort in the run-up to stage three of EMU: the overall deficit of subnational governments dropped from an average of 1 percent of GDP over 1981-90 to an average of 0.2 percent of GDP over 1991-98 (as the deficit of the consolidated general government declined from an average of 11 percent of GDP to an average of 7 percent of GDP). In 1990, the general government deficit stood at 11 percent of GDP, and subnational governments recorded a deficit of 1.3 percent; by 1997, the year when compliance with the criteria for EMU accession was assessed, the deficit of the general government had declined to 2.8 percent of GDP, and that of subnational governments to 0.3 percent (Figure 2)

Figure 2.
Figure 2.

Italy: Composition of General Government Deficit, 1977-99

(In percent of GDP)

Citation: IMF Staff Country Reports 2000, 082; 10.5089/9781451819793.002.A003

Source: Fund staff calculations.

128. The increase in total expenditures mentioned above was accompanied by a near- doubling of revenues from 7½ percent of GDP in 1976 to 14½ percent of GDP in 1991-92 (see Table 5, which summarizes the consolidated budget of subnational governments—regions, provinces, and municipalities—over the period 1976-98). Transfers from the state and other public institutions increased rapidly at the beginning of the period, from 4Y2 percent of GDP in 1976 to a peak of 10 percent in 1983; tax revenues increased steadily, from less than 1 percent of GDP in the late 1970s-early1980s to 3-3½ percent of GDP in the mid-1990s, and then jumped to 5½ percent of GDP in 1998 with the introduction of IRAP. On the expenditure side, wages and salaries quickly increased from 3½ percent of GDP in the late 1970s to an average of 4½ percent of GDP over 1980-98; social transfers, which accounted for only⅓ of 1 percent of GDP in the late 1970s, increased to 2-2½ percent in the 1980s and 1990s; whereas capital expenditures, which between 1980 and 1991 had hovered at about 3 percent of GDP, thereafter declined to between 2 and 2½ percent for the remainder of the decade. The share of social transfers in total expenditures quickly increased from just 3 percent of total expenditures in the late 1970s to about 15 percent on average over 1980-98 (Table 6).

Table 5.

Italy: Consolidated Fiscal Accounts of Subnational Governments, 1976-98

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Sources: Bank of Italy, Relazione Annuale, various issues.
Table 6.

Italy: Expenditures of Subnational Governments

(In percent of total)

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Sources: Bank of Italy, Relazione Annuale, various issues.

129. Provision of health care services is currently by far the single most important function in the regions’ budgets (Table 7).57 In 1999, outlays on health care (both current and capital) accounted for over 60 percent of regions’ total cash expenditures.58 Almost the totality of the regions’ expenditures on health care consist of transfers to local health units and hospitals.

Table 7.

Italy: Expenditures of Regions, 1997-991/

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Source: Ministry of the Treasury, Budget, and Economic Planning, Relazione Trimestrale di Cassa.

Data are on a cash basis.

D. The Management and Financing of the Public Health Care System

130. The Italian public health care system has been highly centralized and integrated—even though most of the responsibilities for providing health care services were assigned to the regions when the NHS was established in 1978. The central government (Ministry of Health) determined in detail the services all regions had to provide and the budget allocated earmarked resources based on the cost estimates of the Ministry of Health. The regions have enjoyed very little freedom in this respect, and consequently had very little incentive to contain costs. While this arrangement made the decentralization of the management of the NHS a notional one, it made it possible to maintain a highly uniform level of per capita expenditure across regions. This, however, did not ensure equal access to and quality of services, because the efficiency of local health units varied greatly across regions.

131. The system was also characterized by recurrent budgetary overruns on health outlays, often financed through accumulation of arrears to suppliers. The regions have argued that (i) expenditure overruns were the unavoidable consequence of unrealistic budget allocations set by the central government; and that (ii) given that health services were largely mandated by the state, they had little or no control over the evolution of health expenditures. The constitutional court agreed on the latter point, and a large part of the responsibility for repaying the outstanding arrears has been borne by the central government. More recently, the central government and the regions have jointly agreed on what they consider a more realistic budgetary allocation for health expenditures—a move that the government hopes will increase “ownership” on the part of the regional authorities, at the same time as a major reform of health care expenditure is underway.

132. Previous reforms of intergovernmental fiscal relations concerned almost exclusively the revenue assignments of the regions. The reform being presently carried out on the basis of the 1997 framework law completes this process. However, the reform includes a new element which could fundamentally change the way the NHS is managed: starting in 2004, the regions will be free to allocate their revenues and a new system of centralized monitoring of health care services delivered by the local health units will be set up. Regions failing to meet the defined minimum standards can be sanctioned; the transfer they get from the equalization fund can be reduced.

133. Within a cross-country framework, the remaining part of this section gives a brief analysis of public health care expenditure and financing in Italy. A detailed analysis of micro efficiency or incentive structures, even at the national level, is beyond the scope of the paper.59

Macroefficiency

134. The share of total health care expenditure in GDP in Italy grew rapidly (Figure 3), and reached the EU average by 1990 (Figure 4). During the 1990s, however, public health care expenditures in Italy slowed down compared to the rest of the EU. Driven by the need for fiscal consolidation, current public health care expenditure was reduced in real terms between 1990 and 1995 (Figure 5); as a result, the share of public health care expenditure in GDP fell by 1.2 percentage points between 1991 and 1995. Part of this reduction was offset by a rapid increase in private health care expenditure, a clear indication that the reduction was not demand driven.60 Besides the Scandinavian countries, no other country within the EU managed to reduce the share of health care expenditure in GDP during this period—between 1990 and 1995, it increased by 0.9 percentage point in the rest of the EU, and by 1.7 percentage points in Germany. This would suggest that Italy was rather successful in containing health care costs, in particular given the rapid increase in the elderly as a proportion of the population (Figure 6). In the 1990s, population aging was one of the most important factors explaining the continued increase in the share of health care expenditure within the EU (Figure 7), in spite of numerous attempts to arrest this tendency (OECD, 1994).

Figure 3.
Figure 3.

Italy: The Share of Health Care Expenditure in GDP, 1960-97

Citation: IMF Staff Country Reports 2000, 082; 10.5089/9781451819793.002.A003

Source: Fund staff calculations.
Figure 4.
Figure 4.

Italy: The Share of Total Health Care Expenditure in GDP, 1970-97

Citation: IMF Staff Country Reports 2000, 082; 10.5089/9781451819793.002.A003

Source: Fund staff calculations.
Figure 5.
Figure 5.

Italy: Average Annual Growth Rates of Real Current Health Care Expenditure, 1961-95

Citation: IMF Staff Country Reports 2000, 082; 10.5089/9781451819793.002.A003

Source: Fund staff calculations.
Figure 6.
Figure 6.

Italy: Health Care Expenditure and Aging, 1970-97

Citation: IMF Staff Country Reports 2000, 082; 10.5089/9781451819793.002.A003

Source: Fund staff calculations.
Figure 7.
Figure 7.

Italy: Health Care Expenditure and Aging in the Rest of the European Union, 1970-97

Citation: IMF Staff Country Reports 2000, 082; 10.5089/9781451819793.002.A003

Source: Fund staff calculations.

135. However, a part of the reduction in public health care expenditure achieved in the first half of the 1990s may not have been sustainable. The share of public health care expenditure in GDP started to increase after 1995, offsetting one-fourth of the reduction achieved earlier. This increase was partly related to weak growth and the continued increase in the share of the elderly population, but also to the way the reduction in health care expenditure was achieved and, as described below, the way health care costs were budgeted and financed. In 1996 and 1997, the overruns in public health care expenditure were sizable,61 mostly financed by unpaid obligations to private suppliers. As Table 8 shows, wage costs accelerated rapidly after 1995, clearly indicating that earlier wage cost reduction was not achieved in a sustainable manner; the same was true for contracted services and pharmaceuticals. The rapid increase in the arrears of the local health units and in expenditure62 on contracted health care services during this period were also very closely related developments, again indicating that the way the earlier reductions were achieved was not sustainable. The experience of 1995-97 suggests that it is not possible to achieve sustained reduction in public health care expenditure without properly designed reforms aimed at increasing efficiency.

Table 8.

Italy: The Structure and Growth of Regional Current Health Care Expenditure

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Source: Corte dei Conti (1999).

Microefficiency and regional pattern of public health care expenditure

136. A detailed analysis of microefficiency at the regional level is well beyond the scope of this paper. A partial analysis commissioned by the technical expert group on public expenditure of the Ministry of Treasury (CTSP, 1999) suggests that relatively uniform levels of public health care expenditure did not result in uniform levels of health services provided by the local health care units (output), or the same improvement in health outcome across the regions.

137. During 1980-97 regionally financed health care expenditure increased by 2.5 percent per year in real terms, considerably faster than real GDP. Correcting for population growth, which was faster in the South, and aging, which was more pronounced in the North, average growth in real expenditure was below average in the regions in the North East and the Center (Table 9). This reflected a catch-up process, as the levels of per capita health care expenditure in the regions with lower average growth rates were still above the national average in 1997 (Table 10).

Table 9.

Italy: Growth of Real Health Care Expenditure, 1980-97

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Source: Fund staff calculations based on data from CTSP (1999).
Table 10.

Italy: Regional Health Care Expenditure, 1994-97

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Source: Fund staff calculations based on data from Corte dei Conti (1999) and from MOP (1991).