This Selected Issues paper examines inflation dynamics over the past five years for Lithuania. A decomposition of inflation into its components provides clues to its main causes. It shows that energy price increases and convergence to European Union (EU)-wide price levels have been important factors driving inflation, but domestic demand pressures—and wage growth, in particular—have also contributed to inflation. The types of possible efficiency gains are illustrated in the context of health care and social assistance. The paper also examines migration and its long-term fiscal implications.

Abstract

This Selected Issues paper examines inflation dynamics over the past five years for Lithuania. A decomposition of inflation into its components provides clues to its main causes. It shows that energy price increases and convergence to European Union (EU)-wide price levels have been important factors driving inflation, but domestic demand pressures—and wage growth, in particular—have also contributed to inflation. The types of possible efficiency gains are illustrated in the context of health care and social assistance. The paper also examines migration and its long-term fiscal implications.

III. Issues in Health Care and Social Assistance10

A. Introduction

39. The Lithuanian authorities have made progress in modernizing and improving the efficiency of the health care and social assistance system. Measures have been taken to limit excessive demand for secondary and tertiary health care in favour of primary care; health care institutions have been consolidated and the number of hospital beds per inhabitants reduced; investment costs have been partially internalized into contractual pricing; doctors’ salaries have been increased substantially in order to check emigration; social insurance benefits entitlements have been made stricter and are now clearly conditional on a minimum duration of insurance; some benefits have been terminated (e.g., retirement benefits); and some assistance has been decentralized to local governments.

40. However, recent revenue buoyancy has increased the risks of halting, or even reversing, these positive trends. A new system of child benefits, additional to already existing tax exemptions, has been introduced and is being gradually phased in. This is estimated to cost an additional LTL 100 million per year. Some of the benefits (e.g., unemployment benefit) have been made more generous. There are also plans to increase the scope of unemployment benefits and employment subsidies.

41. Present revenue buoyancy should not obscure the need to improve the efficiency of public resources. Revenue buoyancy may be temporary, and conditions may revert in the future making it difficult to sustain present commitments. Moreover, tax reform measures introduced in 2005 are likely to result in revenue losses from 2008 onward. Expenditure pressures are also likely to continue to increase in the near future. Lithuania will need to increase investment in physical and human capital to raise the economy’s long-run growth potential while a rapidly aging population will raise social security costs. Thus meeting the authorities’ stated objective of reducing the fiscal deficit to 1 percent of GDP by 2008 will require concerted efforts to generate additional revenues while controlling the growth of expenditures.

42. In light of this background, this chapter attempts to identify policy measures to rationalize public expenditures in two areas—health care and social assistance. The rest of the chapter is organized as follows: Section B reviews the main issues in the health care sector and lays out a menu of reform options for the short and medium term. Section C discusses the main social assistance benefits and illustrates with the help of an example the disincentives to work that are inherent in the system. A proposal for consolidating these benefits so as to reduce these disincentives is then illustrated. Finally, Section D presents conclusions.

B. Health Care

Main issues

43. Public health expenditures are broadly in line with those in other European Union (EU) countries. Comparable data show that, at the beginning of the decade, Lithuania had a level of public expenditure (4.3 percent of GDP) lower than the major EU countries (more than 6 percent of GDP), but higher than neighboring countries, and in particular the other two Baltic states (see Text Figure 1). In 2005, public expenditure for health care was LTL 2.7 billion, or 3.8 percent of GDP. However, most of the public resources are absorbed by current spending, leaving little for essential maintenance of medical equipment. Consequently, the quality of medical equipment is deteriorating, and innovation is lagging.

Text Figure 1.
Text Figure 1.

Selected Countries: Public Spending on Health in Selected Countries, 1998–2002

(In percent of GDP)

Citation: IMF Staff Country Reports 2006, 163; 10.5089/9781451824131.002.A003

Source: World Bank (2006), World Development Indicators.

44. However, there is overcapacity in the health sector. The number of hospital beds and physicians per 1,000 inhabitants is among the highest in the EU (Text Figure 2). The oversupply of hospital infrastructure is partly a legacy of the past and generates an enormous fixed cost for the system. It is also a huge drain on scarce public resources. The authorities have made some progress in reducing the oversupply. However, much more needs to be done if health care costs are to be contained at manageable levels.

Text Figure 2.
Text Figure 2.

Selected EU Countries: Health Care Indicators, 1998–2001

Citation: IMF Staff Country Reports 2006, 163; 10.5089/9781451824131.002.A003

Source: World Bank (2006). World Development Indicators Database.

45. Notwithstanding the overcapacity, services are often rationed and of poor quality. The provision of free health care, as mandated by the constitution, generates a very strong sense of entitlement and, consequently, heavy demand for these services. The result is that the resources that can be allocated to health care are insufficient to cope with such high demand. Consequently, services are effectively being rationed through quotas and/or long waiting list. These rationing methods reduce the transparency and efficiency of the health care system. Moreover, the quality of services is low and informal charges are widespread (see below).

46. At the same time, the salary of specialized physicians is too low, and some of them are emigrating abroad. The propensity to emigrate is higher among younger physicians and those with knowledge of English. According to a recent study (Lovkyte, Reamy, and Padaiga, 2003), 61 percent of medical residents and 27 percent of physicians intend to leave the country. The authorities have taken a number of steps to reverse this trend. Salaries of physicians have been increased substantially in the last three years (20-30 percent in 2005). Moreover, the government has agreed to raise the wages of specialized physicians by 20 percent per year, subject to the availability of funds.

47. The level of satisfaction with health care services is among the lowest in the EU. Text Figure 3 provides information on the level of satisfaction with health care and social services in a number of European countries. The combined index of satisfaction (on a scale of 1 to 10 with 10 being the highest) is only 3.9 for Lithuania, compared with 5.6 for the EU-15 countries. It is even lower than in the other two Baltic states. Only three countries in the table have lower satisfaction indices. According to a survey carried out by Bankauskaite and Saalerma (2003), the four top reasons for dissatisfaction with health care are: (1) doctors’ attitude; (2) lack of competence; (3) no money, no service; and (4) long queues. While the last reason has clearly to do with service rationing, the first three may be attributed to low salaries for physicians.

Text Figure 3.
Text Figure 3.

Europe: Index of Satisfaction with Health Care and Social Services

(On a scale from 1 (low) to 10 (high))

Citation: IMF Staff Country Reports 2006, 163; 10.5089/9781451824131.002.A003

Source: European Foundation for the Improvement of Living and Working Conditions, 2004.

48. Informal payments for health care services are widespread.11 Informal payments are one way by which health care services are being rationed in the face of heavy demand. A survey carried out in 2001-03 found that about 80 percent of patients had been paying some sort of informal charges (in cash and in kind) for access to health care services (Text Figure 4). Unofficial fees paid for these services ranged from LTL 164 to LTL 177 during 2002-03 (see Text Table 1).

Text Figure 4.
Text Figure 4.

Lithuania: Informal Payments for Health Care, 2001–03

(In percent of patients who paid unofficial fees)

Citation: IMF Staff Country Reports 2006, 163; 10.5089/9781451824131.002.A003

Source: Statistics Lithuania.
Text Table 1.

Lithuania: Average Informal Payments

(In litai, unless otherwise specified)

article image
Sources: Statistics Lithuania; and Community Information, Empowerment and Transparency, “The Baltic States: Regional Survey on System Leakages in the Health and Licencing Sectors,” 2002.

49. Competition in the provision of health care services is lacking. More than half of non-hospital health care providers are private, but more than 93 percent of hospitals are publicly owned (Text Figure 5). Public hospitals are centralized and poorly managed. A draft Law on Health Care envisages more decentralization in investment decisions and the introduction of competitive recruitment of managers in public hospitals. This is a move in the right direction. However, property rights of buildings and lands will remain in the hands of the original owners (state and local governments, and universities), thereby relieving public hospitals the responsibility and costs of their maintenance and improvement.

Text Figure 5.
Text Figure 5.

Lithuania: The Role of Private Health Care Institutions, 2003–05

(In percent of total)

Citation: IMF Staff Country Reports 2006, 163; 10.5089/9781451824131.002.A003

Source: State Patient Fund.

50. Health care financing is complex and potentially inefficient. The State Patient Fund (VLK) is financed by a broad array of taxes and budget transfers:This financing system requires collection by three agencies (SoDra, the VLK, and the State Tax Inspectorate). It is not only complex, but also leads to widely different levies on different types of participants. As a result, there is no relationship between contributions and benefits; the system relies in fact on the principle of solidarity.

  • Half of the VLK revenue comes from the allocation of 30 percent of income taxes collected by the State Tax Inspectorate.

  • Another 24 percent of VLK revenues are transfers from the budget (LTL 264.4 a year per person) for the “state-insured,” which include pensioners, full-time students, registered unemployed, disabled, and women on maternity leave.

  • A 3 percent levy on wages earned under a labor contract; these contributions are collected by Social Insurance Fund (SoDra) (20 percent of VLK revenue).

  • Contributions from farm workers and self-employed workers paid directly to the VLK. The contributions vary from LTL 8.25 per month for small farmers (1.5 percent of the minimum wage) to LTL 126 in 2005 for the self-employed (about 10 percent of average wage).

51. Co-payment is limited. Formal co-payments exists only for drugs, some medical aid for ambulatory treatment, and spa services. Patients pay the providers the subsidized price of medicines and then providers claim reimbursement from the VLK. The reimbursement is based on the reference price of the medicine which is the average price of the medicine in six comparable countries (Estonia, Latvia, Poland, the Slovak Republic, Czech Republic, and Hungary) less 5 percent. The criteria for listing reimbursable pharmaceuticals are not always transparent. Out of 5,000 registered drugs, reimbursements apply to only about 1,400 (less than one-third). Reimbursements range from 100 percent to 50 percent (depending on the disease treated). Moreover, some social groups are eligible for higher reimbursement than others.

Reform options

Short-term options

52. At least four options could be considered over the short term. First, the authorities could introduce co-payments for medical services to ease pressures on State Patient Fund resources and help in managing the demand for health services. Increasing co-payment reduces government spending directly by redirecting some costs to individuals and away from taxpayers. It also reduces demand for services, saving additional resources. Although modest co-payments would not force consumers to bear the full cost of their usage of the health care system, they would cause consumers to consider more carefully how best to use the system. In most OECD countries, co-payment for health care services is a normal practice.12 The danger of co-payments is that they could curtail access to the system for lower-income families. However, a number of steps could be taken to ensure that these families continue to have access to health care. For example, co-payments should not be applied to clearly cost-effective preventive services; a limit should be set on any family’s out-of-pocket expenses; and the lowest-income families should be exempted. Co-payments that average 10 percent of the cost of services would raise about LTL 190 million, or 0.3 percent of GDP. This would be roughly equivalent to LTL 45 (about 3 percent of the average monthly wage) per service unit, which is well below the average informal payment for health care (between LTL 164 and LTL 177).

53. Second, consideration could be given to increasing the contribution levels to the VLK for small farmers and, if necessary, creating an explicit subsidy. Currently, small farmers contribute only LTL 8.25 per month, as compared with LTL 264.4 per month paid by the state for the uninsured. The contribution rate for both groups could be equalized, and explicit subsidies instituted for those who cannot afford to pay the full contribution. This would increase both equity and transparency.

54. Third, administrative costs could be reduced. The authorities should look for ways to improve efficiency in both the collection of contributions and the distribution of benefits. One possibility would be to give the State Tax Inspectorate responsibility for collection, as is the case in many countries. This would enable SoDra to concentrate on more efficient delivery of benefits.

55. Fourth, the financing structure of the VLK could be revamped. The current structure for financing the VLK is overly complicated. Moreover, there is no connection between the taxes paid into, and benefits derived from the system. The authorities should consider one of the following two options:

  • One would be to institute a premium-based system. The VLK could calculate the cost of providing coverage, and participants could be charged according to this cost. Practice could likely deviate from this paradigm in two ways. First, premiums would probably not be perfectly risk adjusted. In other words, society is unlikely to want people who are sure to have higher costs—for instance, diabetics—to bear the full cost of a condition that was beyond their control. Second, premiums for lower-income households would have to be subsidized. With these caveats, it should still be possible to establish a premium-based system in which costs were (approximately) internalized.

  • Alternatively, health care could be organized on a pure tax-and-transfer basis, as it is now, but without earmarking revenues. Earmarking existing revenues does not provide the efficiency gain of a premium-based system; instead, it imposes unnecessary costs. The public sector provides a wide range of critical services—from national security, to education, to health care. All are critical to the nation, but each should compete for resources so that public funds are allocated to their most productive use. The government should be free to reallocate resources to best meet the needs of the citizens. Moreover, the existing wage tax adds to the already heavy tax burden on workers, creating counterproductive labor market incentives.

Medium-term options

56. In the longer run, allowing more private participation in the provision of health care services can promote efficiency and reduce health care costs. Currently, less than 5 percent of hospitals (about 6 percent of total hospital capacity in 2005) are privately owned. However, various charity organizations provide social and health care services worth several hundred million litai annually (or 0.3 percent of GDP). To allow more private initiatives (profit and nonprofit), a level playing field, in terms of regulations and accounting rules, should be provided to ensure fair competition between public and private institutions. For example, the ownership (and the costs of maintenance) of public hospital buildings (presently in the hands of the government) could be assigned to the hospitals, or, alternatively, sold or leased to the private sector.

57. Also, a role for private insurance companies could be considered. Participation by private insurers could follow two possible tracks. First, to the extent that the health funds mimic traditional insurers, it would be possible to allow private insurers to compete directly in the health market. Alternatively, private insurers could be allowed to provide supplemental insurance to cover services that are not covered by the public health funds. Whichever option is selected, it is important that the insurance regulatory system in general—and the health insurance regulatory system in particular—be in place before private participation is introduced.

C. Social Assistance

58. This section discusses the main issues in social assistance and possible areas for reform. The discussion focuses on unemployment benefits, family benefits, and social benefits. These are administered by the SoDra, the Labor Exchange, the central government, and local governments.

Main issues

59. Social benefits are fragmented and costly to administer. There are several family and child benefits as well as a number of other social assistance benefits (including consumer subsidies for utilities), and unemployment benefits. Table 2 provides information on the main social assistance benefits in Lithuania. The budgetary cost of providing these benefits is about 2 percent of GDP. However, the large number of benefits impose substantial administrative costs on the system (about 0.1 percent of GDP). In particular, the administrative costs of the Labor Exchange, which administers the unemployment benefits, are too high: in 2005, out of LTL 230 million of total expenditures of the Labor Exchange, LTL 59 million (26 percent) were for administrative costs.

60. While each single benefit is small, cumulatively they create work disincentives. A low-income family, with one spouse unemployed and three children, is entitled to social assistance benefits, child benefits, unemployment benefits, housing support, and other benefits (Text Table 2). If both spouses worked, the family would lose the social assistance benefit while other subsidies would be reduced. At the same time, the family would incur additional costs related to employment (such as cost of transportation to work, out-of-house meals, etc.). Therefore, there would be an incentive to work only if the second spouse’s wage was higher than the sum of forgone subsidy and additional costs.

Text Table 2.

Lithuania: Social Benefits, 2005

article image
Source: Ministry of Social Security and Labor.

Lump sum.

The eligibility requirement is that FI < N x SSI.

61. Text Table 3 illustrates the argument by considering the case of a family with three children. Only one of the spouses works and one of the children is under three years old. Three cases are considered. Under the current benefit system, when the earning member of the family is long-term unemployed,13 the only sources of cash income for the family are the family benefit and the child benefits. Since the family income is well below the poverty line, the family will also receive the social assistance benefit and heating and water subsidies (estimated at their average). When the earning member of the family is unemployed and entitled to the unemployment benefit, the family receives the (minimum) unemployment benefit, but the social assistance benefit as well as water and heating subsidies are smaller than in the previous case. If one of the spouses is employed at the minimum wage, the family income exceeds the poverty line. Consequently, the family is no longer entitled to the social assistance benefit. Furthermore, water and heating subsidies, which are negatively correlated to the family income, are also smaller than in the two previous cases. As the figures in Text Table 3 show, under the current benefit system, the total family income is higher when the earning member of the family is unemployed rather than working at the minimum wage, illustrating the negative work incentive of the system.

Text Table 3.

Lithuania: Monthly Income of a Couple With 3 Children (aged 7, 5, and 2)

(In litai)

article image
Sources: Ministry of Social Security and Labor; and IMF staff estimates.

Reform options

62. One option would be to consolidate social benefits to reduce work disincentives and contain administrative costs. For example, consumer subsidies to utilities could be phased out while the state-supported income could be increased, so that the social assistance benefits, which are means-tested, would increase. The centralized data base for benefits of the SoDra and the local governments (to be soon joined by the Labor Exchange) will facilitate such consolidation. Consolidation of benefits should be based on considerations such as poverty alleviation and social insurance.

63. Text Table 3 (second panel) illustrates this argument using the three cases discussed above. Here it is assumed that the water and heating subsidies have been phased out, while the poverty line (state supported income) has been increased by 48 percent, on the assumption that resources allocated in 2006 to consumer subsidies are instead allocated to the social assistance benefit. As the poverty line is now higher than in Text Table 1, the social assistance benefit to which the three families are entitled to is also higher, and more than compensate for the loss of income from subsidies. As can be seen from the figures in Text Table 3, the family income is now highest when the spouse is working and lowest in the case of long-term unemployment. With improved design and better targeting of the subsidies, there are no longer disincentives to work.

64. Another option would be the provision of efficient social services, both public and private, as an alternative to cash benefits. Cash benefits, particularly if fragmented as in Lithuania, have high administrative costs and do not necessarily make the beneficiaries responsible toward the society: cash benefits may be spent not only on necessities but also on cigarettes or alcohol. Furthermore, social vulnerability arises not only from lack of cash income or life cycle events (childbirth, unemployment, sickness, and death), but also from the lack of access to certain goods and services or unpredictable contingencies of life (separation, overtime work, moonlighting, and working on weekends). Social services (child care, old-age care, transportation, etc.) provided at the local level may better address some of these problems and encourage private participation through charitable nonprofit organizations and volunteer work.

D. Conclusions

65. Public resources allocated to health care and social assistance in Lithuania are broadly in line with other European countries. However, there is scope for improving the efficiency of these expenditures. Some steps taken by the authorities have improved efficiency; nevertheless, many challenges lay ahead. On the one hand, access to health care services is being rationed through quotas, long queues, and/or informal payments even though there is overcapacity in hospital infrastructure. On the other hand, the current system of social assistance benefits is fragmented, costly to administer, and creates work disincentives.

66. Several options can be considered for enhancing the efficiency of the health care system. Expanding the scope of co-payments can generate some revenue while helping to manage demand for health care services. Increased private participation in the sector can facilitate greater price and quality competition thereby contributing to improved efficiency. This would require appropriate changes in the legal and regulatory framework to provide an enabling environment for private participation. Leasing or selling public facilities to private enterprises and providing a larger role for private insurance services are actions that could be considered in this regard.

67. Social assistance can be made more effective through consolidation and improved targeting. The centralized database for the benefits by the Social Insurance Fund and the local governments (to be joined soon by the Labor Exchange) would be useful in this regard by providing a unified view of benefits. Moreover, phasing out utility subsidies while raising the state-supported income can help mitigate disincentives to work that are inherent in the current system. Provision of efficient social services at the local level, in lieu of cash benefits, can also help in this regard while simultaneously encouraging private participation.

References

  • Bankauskaite, Vaida and Osmo Saarelma, 2003, “Why Are People Dissatisfied with Medical Services in Lithuania? A Qualitative Study Using Responses to Open-Ended Questions,” International Journal for Quality in Health Care, Vol. 15 (No. 1), pp. 239.

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  • Esmail, Nadeem and Michael Walker, 2005, How Good is Canadian Health Care? 2005 Report,Vancouver: The Fraser Institute.

  • Lovkyte, Liudvida, Jack Reamy, and Zilvinas Padaiga, 2003, “Physicians Resources in Lithuania: Change Comes Slowly,” Croatian Medical Journal, Vol. 44 (No. 2), pp. 20713. Available via the Internet: http://www.cmj.hr/.

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10

Prepared by Sergio Lugaresi (FAD expert).

11

Informal payments are defined as payments in cash or in kind by patients to health care providers that the latter are not authorized to receive, either under the terms of their contract or under the rules governing their organizations.

12

This is the case in the other Baltic countries, the new EU members, Germany, Italy, and France. The few exceptions are Canada, Spain, and the United Kingdom (Esmail and Walker, 2005).

13

A long-term unemployed is defined as a worker who has been seeking a job for six months or more and is no longer entitled to unemployment benefits (either because he is not insured or because the benefit has already expired).

Republic of Lithuania: Selected Issues
Author: International Monetary Fund
  • View in gallery

    Selected Countries: Public Spending on Health in Selected Countries, 1998–2002

    (In percent of GDP)

  • View in gallery

    Selected EU Countries: Health Care Indicators, 1998–2001

  • View in gallery

    Europe: Index of Satisfaction with Health Care and Social Services

    (On a scale from 1 (low) to 10 (high))

  • View in gallery

    Lithuania: Informal Payments for Health Care, 2001–03

    (In percent of patients who paid unofficial fees)

  • View in gallery

    Lithuania: The Role of Private Health Care Institutions, 2003–05

    (In percent of total)