Economic slowdown shaping healthcare system

• Abstract
• Characteristics of this policy
• Purpose and process analysis
• Expected outcome
• References

Abstract

In 2009 Estonia is facing a GDP drop of 10-15% and the Government is fighting to cut another 8% of the budget after a 6% decrease 3 months ago. Dramatic drop in Estonian Health Insurance Fund (EHIF) budget could lead to closure of smaller hospitals. Patients will feel the burden of VAT increase on drugs and additional unpaid sick leave days. Employers must take over 6 days of sick leave benefits from EHIF. The unthinkable has become real in a very short time and without a grand plan in sight.

Recent developments

Economic slowdown is changing healthcare financing principles

Estonian public sector expenditure has grown 10 times in the last 14 years and 6.5 times in the last 10 years. In 2009 the economic situation of growth has changed and the Estonian Government cut public sector spending by 6.6% (420 million EUR) of the national budget (Supplementary State Budget Act, 01.03.2009). This takes the total public sector spending 100 million EUR lower than in 2008, of which ca 50 mln EUR has been cut from the health insurance expenditure.

Estonian total health expenditure decreased from 5.6% of GDP to below 5 in 2006. Having low relative spending on health services as compared to other European countries and yet a very transparent and high quality health care system, Estonia is unique in the EU. Estonian Health Insurance Fund (EHIF) revenues were 818 Million EUR and expenditure on health care 792 Million EUR in 2008. In 2008 there was an increase in spending on health care services by 90 Million EUR compared to 2007. Nominal growth of financial volume in the health sector has been 100% since 2004. Most of the increase has been absorbed by a rapid increase of health workers' salaries.

Suddenly the picture has changed dramatically. Currently 6.5% of the health care services' budget compared to 2008 has already been cut. The government intends to cut another 5% in order to balance the overall public sector deficit and prepare for even harder times in the forthcoming years.

In 2009 the world, Europe as well as Estonia are facing an economic slowdown. In Estonia, people are being laid off from their jobs, a rapid drop (20%) of salaries in private companies has occurred and unemployment is increasing. By the end of 2009 it is expected to rise up to 15% from 3% a year ago. This poses a serious threat on the revenues of the EHIF (66% of total health expenditure in Estonia is financed from earmarked social tax on salaries) as well as household budgets (21% of total health expenditure is financed through out of pocket payments by individuals). Ambulance services, emergency care for uninsured people and public health programmes are facing similar merciless cuts as government revenues are decreasing in days.

The health sector feels additionally punished as EHIF was able to collect over 250 mln EUR of reserves during the boom years. The spending on health services is relatively transparent and efficiency of the system has increased to the level that it is considered among the best in Europe. Yet the Government prohibits using of the reserves as this would necessitate additional cuts in other sectors to balance the overall public spending. The latter has been defined as the absolute short-term goal for the government in order to be able to fulfil the Maastricht criteria and join the Euro area in 2011.

Changes to the healthcare system

Apart from the budget cuts the impact of economic slowdown is felt through several changes in recent months, which shape the health system remarkably. The changes that the Government has introduced and the Parliament confirmed are:

1. From January 1st 2009 the VAT on pharmaceuticals was increased from 5 to 9% (see also HPM report 2008/12).
2. An increase in clinical staff regular work load to 8 hrs per day independent of the specific field and not accompanied by an increase in salary (2009).
3. The adoption of the new Health Insurance Act increases unpaid sick leave days from 1 to 3, days 4-8 will have to be covered by employers, starting only from day 9 the Estonian Health Insurance Fund will start compensation. Earlier the Health Insurance Fund covered expenses from day 2 of sick leave.
4. The national Health Insurance Fund budget will be reduced by 40 mln EUR and potentially another 44 mln EUR as social tax income to the state budget declines.

Parties affected

1. The VAT increase from 5% to 9% affects mainly the elderly (ca. 17% of population aged 65+) or socially disadvantaged people, who usually consume more medicines than the healthy working people. The result of it will be more cases that end up in a hospital rather than in preventive activity.
2. The increase in working hours from 5 to 8 hours of health sector workers (over 9%, of 18 513 employees) exposed to radiation or doing very intensive work without increasing the budget is a complicated situation as the contracts with all individuals have to be renegotiated. Even if agreements will be achieved, the exposure to radiation (for radiology department people) or longer working days (for surgeons, anesthesiologists, ICU workers, etc.) will in the first case increase risk for radiation induced illnesses and in the second case increase risk for mistakes in treatment caused by tiredness.
3. The introduction of 2 unpaid sickness-leave days increases employee responsibility but also increases probability of not staying at home when sick but going to work and infecting others as well as taking the risk for serious health complications. Placing the responsibility of sickness payment for days 3-8 on the employer increases employer responsibility and makes them influence people to get well in maximally 2 days or not file sick-leave at all. This change has been introduced without accompanying measures (e.g. tax exemption of employer investment on workers' health). The change has an effect on all employed people in Estonia.
4. Reducing the EHIF budget, which is used to pay for medical services in the country for every insured person, is the most significant of the changes described here. The NHIF and the service providers managed to negotiate a cut of about 40 mln EUR and agreed that such a cost cut is possible to carry out with only ca 5% reduction of in-patient care cases. The reduction of another 44 mln EUR is very much controversial and neither service providers nor the EHIF can see possibilities to execute such a change. Potentially this would result in closure of smaller hospitals in rural areas. At the same time access to primary health care is also getting worse in rural areas and long-term and nursing care is heavily lagging behind the targets set by the respective development plan. Thus, a short but sharp budget cut may have a strong systemic impact on the health care sector.

Degree of Innovation	traditional		innovative
Degree of Controversy	consensual		highly controversial
Structural or Systemic Impact	marginal		fundamental
Public Visibility	very low		very high
Transferability	strongly system-dependent		system-neutral
current    previous

The changes have been made in a hurry and are not based on any analysis but the budget expenditure, which has been the sole driver behind the changes. No alternatives have been put on the table (at least in public) and no long term policy cost analysis has been conducted. The impact of these changes will become evident in some years in public health. These changes (except for abolishing the VAT differentiation) are not listed in the Government coalition activity programme.

Purpose and process analysis

Current Process Stages

	Idea	Pilot	Policy Paper	Legislation	Implementation	Evaluation	Change
Implemented in this survey?

Initiators of idea/main actors

• Government: The Government has initiated all changes listed above. Government is motivated to provide a balanced state budget and in the situation where tax revenues are rapidly falling public sector expenditure has to be reduced.

• Providers: Health care service providers have agreed to cut a total of 40 mln EUR but oppose sharply to any additional budget cuts as this would leave their employees unemployed or lead to salary cuts. They suggest using reserves to fill the budget gap.

• Payers: The national Health Insurance Fund has opposed budget cuts and is suggesting the use of reserves in the amount of 20 mln EUR. The Government has banned the use of reserves to try to fit into the EURO area (Maastricht) criteria.

• Private Sector or Industry

• Media

Stakeholder positions

All 4 changes affecting health care funding or public health in Estonia have been initiated by the national government based on the general economic slowdown and resulting budget income decreases.

• The VAT increase on medicines has been adopted by the Estonian Parliament (Value Added Tax Act).
• The abolishment of any restrictions to working hours to below 8 hrs per day has been approved by the Parliament (Working and Rest Time Act).
• The introduction of unpaid sickness days has been approved by the Parliament (Health Insurance Act).
• The EHIF budget cut by 40 mln EUR has been approved by the Parliament (2009 supplementary budget and the associated acts changing act) and 44 mln EUR is still being negotiated between the Government, the Ministry of Social Affairs, the EHIF and the service providers.

In general, the government is reducing public expenditure in all fields of activity.

Rating stakeholders' opinions is somewhat difficult because their opinion changes depending on which measure (VAT increase, working hours increase, change in sickness leave days compensation and reduction of NHIF budget) is being referred to. Therefore some stakeholders appear more than once in the figure on actor position and influences and their position and influence is explained below.

VAT increase:

The government initiated VAT increase on medicines from 5% to 9% and agreed on that with coalition parties. 

EHIF - opposed; weak
Estonian Medical Association - opposed; neutral
Estonian Employers' Confederation - opposed; weak
Estonian Hospitals Association - opposed; weak

Increase in working hours of health sector workers

Estonian Medical Association - strongly opposed; weak
Ministry of Social Affairs - very supportive; strong
Service providers - strongly opposed; weak 

Introduction of 2 unpaid sickness-leave days and placing the responsibility of sickness payment for days 3-8 on the employer. This is instead of EHIF payment from the 1st sickness leave day.

EHIF - supportive; very strong
Estonian Employers' Confederation - strongly opposed; neutral
Ministry of Social Affairs - neutral; strong
Estonian Medical Association - opposed; weak
Ministry of Finance - very supportive; strong 

Reducing EHIF budget by 40 Million EUR

EHIF - Opposed; weak
Ministry of Social Affairs - supportive; strong
Ministry of Finance - very supportive; very strong
Estonian Medical Association - supportive; neutral 

Reducing EHIF budget by another 44 Million EUR

EHIF - Opposed; neutral
Ministry of Social Affairs - supportive; strong
Ministry of Finance - very supportive, very strong
Estonian Medical Association - supportive; weak

Actors and positions

Government
Ministry of Social Affairs (on working hours increase)	very supportive		strongly opposed
Ministry of Social Affairs (on sickness leave days)	very supportive		strongly opposed
Ministry of Social Affairs (on budget cuts)	very supportive		strongly opposed
Ministry of Finance (on budget cuts)	very supportive		strongly opposed
Ministry of Finance (on sickness leave days)	very supportive		strongly opposed
Providers
Estonian Medical Association (on VAT increase)	very supportive		strongly opposed
Estonian Medical Association (on working hours)	very supportive		strongly opposed
Estonian Medical Association (on sickness leave days)	very supportive		strongly opposed
Estonian Medical Association (on budget cuts)	very supportive		strongly opposed
Estonian Hospital Association (on VAT increase)	very supportive		strongly opposed
Payers
EHIF (on VAT increase and budget cuts)	very supportive		strongly opposed
EHIF (on unpaid sickness leave days)	very supportive		strongly opposed
Private Sector or Industry
Estonian Employers' Confederation (on VAT increase)	very supportive		strongly opposed
Estonian Employers' Confederation (on sickness leave days)	very supportive		strongly opposed
Media
Media	very supportive		strongly opposed
current    previous

Influences in policy making and legislation

The original proposal of reducing the EHIF budget by 40 mln EUR in 2009 was accepted and implemented in consensus with all parties involved - vested in the state budget act by the parliament. Another 44 mln EUR cut is negotiated and the situation is very controversial.

The VAT increase on medicines has been vested into a VAT act by the parliament.

Pension payment freezing for 2 years has been approved by the Government and is yet to be passed by the Parliament.

The increase of working hours has been passed by the Parliament.

Legislative outcome

Enactment

Actors and influence

Government
Ministry of Social Affairs (on working hours increase)	very strong		none
Ministry of Social Affairs (on sickness leave days)	very strong		none
Ministry of Social Affairs (on budget cuts)	very strong		none
Ministry of Finance (on budget cuts)	very strong		none
Ministry of Finance (on sickness leave days)	very strong		none
Providers
Estonian Medical Association (on VAT increase)	very strong		none
Estonian Medical Association (on working hours)	very strong		none
Estonian Medical Association (on sickness leave days)	very strong		none
Estonian Medical Association (on budget cuts)	very strong		none
Estonian Hospital Association (on VAT increase)	very strong		none
Payers
EHIF (on VAT increase and budget cuts)	very strong		none
EHIF (on unpaid sickness leave days)	very strong		none
Private Sector or Industry
Estonian Employers' Confederation (on VAT increase)	very strong		none
Estonian Employers' Confederation (on sickness leave days)	very strong		none
Media
Media	very strong		none
current    previous

Positions and Influences at a glance

Adoption and implementation

All changes have been rapidly introduced within 6 months and implemented in a very short time frame. The main stakeholder with most power in all processes has been the National Government. The parliament or political parties have not interfered. The Ministry of Social Affairs has kept a low profile following unanimous Government decisions. It has mainly acted as an implementing body not a policy making and analytical body.

Mostly affected groups are all employers, all employees, all people with health insurance. All of them have been allocated more direct responsibility and more financial and health risks.

Monitoring and evaluation

None of the policy changes have foreseen evaluation or monitoring procedures. No strategy has foreseen such dramatic expenditure cuts, and no political party has expressed a strong vision that any of the current policy measures would fit in. As the decisions have been adopted in a rush and accompanied by thin analysis, but also lacking serious consideration of alternatives or mitigation measures, it is difficult to predict the end result. Most probably there will be a series of follow-up policy initiatives, which makes the proper evaluation of current policies relatively complicated.

Expected outcome

The intended objective is a balanced national budget. This has been/will be achieved. At the same time the impact on public health has not been evaluated at all. The main risk is the rise of unemployed and thus uninsured individuals (10-15% of the working-age population), who have limited access to health services. Reduced capacity of service providers exaggerates the negative effect even further. Local health experts have made serious attempts to treat social expenses equal to other public expenditure categories. Nevertheless, the Government has a very limited room to maneuver, because Estonia has one of the lowest public sector (40.9% of GDP in 2008 and 35.5% respectively in 2007) and the revenue is largely based on consumption taxes.

The care quality might even stay the same, provided that the quantity will be reduced and less people served. In case all people will still be served the quality will also suffer. People who can afford it will seek medical treatment in private settings or abroad and will not be affected. The long-term impact of higher medicine prices, unpaid sickness days and reduced care availability (longer waiting lists due to less financing for service providers) on Estonians' public health has not been assessed, but the experience from previous periods of economic downturn during 1991-1994 and 1997-1998 predict that population health will react relatively rapidly in a negative way. Especially vulnerable are children and elderly people. If the slowdown lasts more than 2 years, all age groups are in a risk to fall back in their health.

Within 2 years (there will be new parliamentary elections in 2011) different options for increasing health financing are on the table. The Social Democratic and the Center Party are openly talking about increased and progressive taxation to fund social expenses. The Reform Party (a right-wing liberal party) and Pro Patria (a conservative party) have been pushing for private schemes for health financing. Regardless of the final results of the Government decisions during the current crisis, the Estonian health system most probably needs additional funds. Yet, due to path dependency the options may be partially prescribed by the events of 2009 and 2010.

Impact of this policy

Quality of Health Care Services	marginal		fundamental
Level of Equity	system less equitable		system more equitable
Cost Efficiency	very low		very high
current    previous

References

Sources of Information

• Saluse, Janek and Ain Aaviksoo (2008). "Impact of taxation policy on pharmaceutical policy". Health Policy Monitor,  www.hpm.org./survey/ee/a12/5
• The Parliament of Estonia (2009). Health Insurance Act, 02.01.2009. www.riigiteataja.ee/ert/act.jsp?id=13116491
• The Parliament of Estonia (2009). Supplementary State Budget Act, 01.03.2009. www.riigiteataja.ee/ert/act.jsp?id=13152060
• The Parliament of Estonia (2009). Value Added Tax Act, 01.01.2009. www.riigiteataja.ee/ert/act.jsp?id=13114742
• The Parliament of Estonia (2009). Working and Rest Time Act 01.01.2009. www.riigiteataja.ee/ert/act.jsp?id=13098104

Reform formerly reported in

Incremental increase in healthcare financing Process Stages: Implementation, Legislation, Change

Author/s and/or contributors to this survey

Läänelaid, Siret and Ain Aaviksoo

Suggested citation for this online article

Läänelaid, Siret and Ain Aaviksoo. "Economic slowdown shaping healthcare system". Health Policy Monitor, April 2009. Available at http://www.hpm.org/survey/ee/a13/1