Igor Sheiman
For decades the Soviet health sector developed using the Beveridge model—that is, a tax−financed and highly organized system with an emphasis on universal access to comprehensive care. In the early 1990s a countrywide reform of the health care system began, the core of which was a transition to a payroll tax−based mandatory health insurance approach known as the Bismarck model. This shift is not limited to the method of raising health revenue, and entails profound changes in the way the system is managed and financed. This new approach is a reaction to the negative features of the former command and control system, the most important of which were chronic underfunding, government dominance of health care finance and provision, top−down noncontractual resource allocation, no consumer choice, and input−based funding of health care providers. These characteristics led to considerable inefficiencies and irrational structures in health care provision. Moreover, comprehensive and universal coverage were undermined by inadequate funding and inefficient utilization of health resources.
The main goals of reform are to:
Raise additional funds
Increase the internal and allocative efficiency of health care provision by moving toward a system based on contractual relationships between health care consumers and providers using new payment incentives Enhance the quality of care and ensure consumer protection through third−party payers
Maintain social solidarity and equity while increasing consumer choice.
The conceptual basis of the reform is regulated competition, which combines market incentives and regulation in the purchase and provision of health care. The Health Insurance Act, passed in June 1991 and amended in early 1993, is the legal basis for health sector reform. The Act mandates universal coverage for all citizens, including a comprehensive package of medical benefits defined by the basic (national) and territorial programs of mandatory From Beveridge to Bismarck: Health Finance in the Russian Federation 87
health insurance. The system is financed by an earmarked payroll tax and general budget revenue. Employers make income−based contributions to the newly created territorial mandatory health insurance funds (3.2 percent of payroll) and the federal mandatory health insurance fund (0.4 percent) to cover their employees. Local governments make contributions to the territorial funds for the nonworking population and directly finance a number of health programs and providers.
The system is highly decentralized. Each of the Federation's eighty−eight regions (oblasts ), with populations ranging from 500,000 to several million residents, is responsible for its mandatory health insurance system. This approach reflects the country's general move toward political and economic decentralization.
Each territorial fund pools the premiums and allocates them to insurers based on a weighted capitation formula.
Some oblasts have developed a pluralistic system of health care purchasing with a few competing insurers; others use a one−purchaser model acting through the local branches of the territorial fund. Since community rating restricts risk selection, competition among insurers is focused on increasing market share. Insurers, acting as third−party purchasers of health care,
Igor Sheiman is an assistant professor at the Moscow Medical Academy and senior health economist at Kaiser Permanente International in Moscow.
contract health providers and pay them according to the method determined by each oblast's mandatory health insurance regulation. Rates are set by multilateral tariff agreement with the involvement of the oblast health committees, mandatory health insurance fund, and medical associations (for details on the design see Sheiman 1994 and Klugman and Schieber 1996).
Three and a half years of reform implementation provide some indicative outcomes that are the subject of hot debate in Russia. Evaluations of the reform range from deep frustration to high enthusiasm and often depend on the vested interests of the evaluators.
The international community is increasingly interested in the process and outcomes of Russia's transition to mandatory health insurance. Although recent reports from the World Bank, the U.S. Agency for International Development (USAID), and other donors evaluate health reforms in a number of countries in Central and Eastern Europe and Central Asia (Ensor 1993; Klugman and Schieber 1996; Langenbrunner and others 1996; Goldstein and others 1996), their multicountry approach makes generalizations difficult and sometimes misses essential characteristics of health reform in individual countries.
This paper reviews recent developments in the Russian health sector and appraises their impact using traditional criteria. Thus the emphasis is on the reform's successes and failures in securing additional funding, achieving higher equity, providing efficient and quality care, and overcoming structural distortions. The main problems of the reform and potential ways of resolving them are then discussed. The paper concludes with health policy implications for transition economies.
The Reform's Impact on Health Finance
Current debates on health care reform focus on how to raise additional revenues to strengthen the health sector.
This section assesses the new revenue−raising model's effects on health revenues and identifies the relative contribution of different sources of finance.
The Reform's Impact on Health Finance 88
Public Health Expenditure Trends
It is important to choose the right benchmark when estimating trends in health expenditures. Klugman and Schieber (1996, p. 20) use 1990 as a benchmark for Russia and Central Asia. Here 1992 is used—the last year before reform and a starting point for big structural changes in the Russian economy.
Considerable changes in health spending occurred during 1992−95, with two opposing trends (table 1). During 1992−94 the share of public health spending in the economy increased substantially, from 2.6 to 4.1 percent of GDP. In 1994 real public health expenditures were 24 percent higher than in 1992. This increase is overstated, however, because the GDP deflator seems to understate growth in the prices of health goods and services, particularly pharmaceuticals. Still, even when a more reasonable price deflator for medical goods and services is used, real health spending in 1994 was 20 percent higher than in 1992.
Such growth was a rare positive trend in a declining economy, however. Mandatory health insurance started at a time of relatively good funding and high hopes. But by 1995 the opposite trend had started, and is still under way.
Health spending has fallen in both absolute and relative terms. The share of health spending in GDP dropped to 3.3 percent in 1995 and, according to preliminary estimates, to 3.1 percent in the first nine months of 1996. Real health expenditures fell to pre−reform levels. Thus the drop in health spending was more substantial than was the decline in the country's overall economy. As a result the overall trend for the entire period is positive in terms of the relative weight of public health expenditures but negative in terms of the absolute volume of real health expenditures (with a 10 percent drop).
Expectations for mandatory health insurance were based on two assumptions. First, that local governments, after being liberated from centralized resource allocation, would reorient their budgets toward health and other social services. Second, that economic decline would not last long. Both assumptions were wrong. Regional and local governments
Table 1
Public health spending in the Russian Federation, 1992−95
1992 1993 1994 1995
Public spending/GDP 2.60 3.77 4.08 3.29
Real health expenditure index
100 135 124 90
Source Estimate based on Korchagin 1996 and Shishkin 1996.
face increasing fiscal difficulties and often cannot afford their new health care responsibilities. They also tend to support agriculture, new road construction, and other more tangible and visible services and projects. The economy has been declining for six years, and only in recent months have there been signs of improvement. As a result much less money has been infused into the health sector than was anticipated.
Still, the decline in real public health expenditures should be seen in the context of changes in other sectors. A 10 percent drop in real spending is somewhat tolerable given that education has lost 27 percent of its funding and culture has lost 31 percent. In relative terms the health sector is doing better than other social services, all of which have been funded for decades using the residual method—that is, after priority allocations to defense, agriculture, and other major sectors have been made. The new payroll tax protected the health sector from a more dramatic fall. To be more precise, substantially decreasing public resources have been redistributed toward the health sector with very little value added for health care providers and their patients.
Public Health Expenditure Trends 89
Comparisons with other transition economies support the view that the new payroll tax has helped stabilize the health care system. For example, during 1990−94 all Central Asian countries experienced a much more substantial drop in health care funding, in both absolute and relative terms, than did Russia (Klugman and Schieber 1996, pp. 17, 20). Similarly, the shift to national health insurance systems has had a positive impact on public health funding in Croatia, the Czech Republic, Hungary, and the Slovak Republic (Goldstein and others 1996, p. 34).
Public Health Expenditure Structure
The relative contribution of the two sources of public health funding is shown in table 2. The contribution of the payroll tax is increasing, but not to the extent that might have been expected. In 1995 it provided just 26 percent of public health revenue; general budget revenue (mostly from local budgets) is still the main source of health finance. This outcome is contrary to the design of health revenue under the Bismarck model, in which a payroll tax is supposed to be the main source of revenue, with the government providing small subsidies. A payroll tax provides 90 percent of public health revenue in France and the Netherlands, and 78 percent in Germany. Even in Belgium, where state subsidies are more important, the payroll tax is still the main source of revenue—58 percent.
The reason the payroll tax accounts for such a small percentage of public health revenue in Russia is that,
according to the legislation, workers are not supposed to contribute to mandatory health insurance. Thus, contrary to declarations about the transition to a mandatory health insurance model, the health system is still financed mainly by taxes. Moreover, local governments are reluctant to allocate resources to mandatory health insurance funds. Their contributions cover just 24 percent of mandatory health insurance enrollees, although they are supposed to pay for 56 percent of the population. In twenty−three regions local governments make no contributions for nonworking populations (Federal Fund of Mandatory Health Insurance 1995; Kravchenko 1996)—a clear violation of the legislation, which states that such contributions are mandatory and much be equal to per capita contributions for employees. The transition to mandatory health insurance has given local
governments an excuse to underfund the health system, with the share of health expenditure coming from local budgets dropping from 18 percent in 1993 to 12 percent in 1996.
Total Health Expenditure Structure
One of the goals of health reform in Russia was to enable citizens with high living standards to purchase health care using voluntary health insurance and direct out−of−pocket payments. This goal can be achieved by explicitly specifying the package of medical benefits under mandatory health insurance—that is, by determining a clear−cut border between public and private finance.
Table 2
Public health revenue in the Russian Federation by source, 1992−95 (percent)
Source 1992 1993 1994 1995
General budget revenue 100.0 88.9 76.5 73.9
Federal budget 17.8 9.5 9.1 6.3
Regional and local budgets
82.2 79.4 67.4 67.6
Payroll tax — 11.1 23.5 26.1
Total 100.0 100.0 100.0 100.0
Source: Estimate based on Korchagin 1996.
Public Health Expenditure Structure 90
The main source of private spending—direct payments by enterprises that run their own medical facilities—has fallen dramatically (by half over the past four years) as the result of the economic crisis. This decline in direct health provision by employers has not been compensated by the growth of voluntary health insurance. Moreover, direct social services from employers have decreased substantially.
More than 500 private insurance companies underwrite voluntary insurance plans that provide enrollees with additional services and access to the best hospitals and polyclinics. But coverage is limited to 3−5 percent of health care expenditures. Voluntary plans are popular in Moscow, St. Petersburg, and other big industrial centers with well−equipped teaching hospitals and high living standards, but are less developed in the rest of the country.
Most medical facilities are not involved in these plans because insurers prefer to work with the medical elite.
The role of formal private out−of−pocket health funding is negligible—no more than 1.5 percent of total health spending. Most private money comes to the health system through the black market as under−the−table payments, particularly in big hospitals in urban areas. Patients are increasingly charged for drugs, materials, and surgery. In addition, most pharmaceuticals for outpatient use are purchased out of pocket, although some groups are
exempted from direct payment. Thus private spending is substantially understated because it is impossible to measure informal private (out−of−pocket) payments for items that are not fully covered by national health finance statistics. There has been no attempt to conduct a large−scale household expenditure survey to assess the scale of out−of−pocket health expenditures.
Table 3
Total health revenue in the Russian Federation by source, 1992−95 (percent)
Source 1992 1993 1994 1995
Publica 73.5 84.5 88.3 83.5
Privateb 26.5 15.5 11.7 16.5
Total 100.0 100.0 100.0 100.0
Total
revenue/GDP
3.7 4.5 4.8 3.9
a. Sum of general budget revenue (federal, regional, and local) and mandatory health insurance contributions of employers
b Sum of consumer health expenditure and direct health expenditure of enterprises.
Source Estimate based on Korchagin 1996.
The private sector's role in total health expenditure has been declining (table 3). The health system still lacks an effective mechanism to raise private money. The main reason is that public commitments to the coverage,
eligibility, and comprehensiveness of health care under mandatory health insurance are too declarative and are not based on an actuarial approach. The lack of specification for the package of medical benefits under mandatory health insurance also limits the development of formal private finance.
In summary, the expectations of additional funding have not been met. The payroll tax has brought insignificant growth to health sector resources. There has been no shift in the formal public−private mix of health finance.
Private finance and provision are not structured as a component of national health policy, and have been developing in an unregulated, chaotic manner.
Public Health Expenditure Structure 91
Impact on Equity
The transition to mandatory health insurance raises the issue of its effect on the equity of health care provision for different groups and on the redistribution of income. A prevailing attitude in the literature is that the general revenue approach ensures a higher degree of income redistribution and social solidarity than do social insurance models. Two arguments are usually presented. First, an income tax is more progressive than a payroll tax. Second, the Beveridge model tends to pool risks more equitably than the Bismarck model, which has trouble pooling risks among multiple sickness funds (Ensor 1993; Klugman and Schieber 1996; WHO 1996 ).
However, the effect a health care financing model has on equity is more dependent on the design of the system, particularly the way resources are allocated, than on the mode of fund raising. The Beveridge and Bismarck models may or may not be designed to pool risks by equalizing financial resources across groups and areas.
Health insurance systems in Germany, the Netherlands, and elsewhere used risk−adjusted capitation formulas to ensure equitable allocation of resources (Van Vliet and Van de Ven 1992; Files and Murray 1995). Yet some countries with the Beveridge model have not made much progress in equalizing resources, and for seventy years the Russian health care system (using the Beveridge model) failed to achieve equitable health care
provision for different groups. The elite of communist society had access to high−quality medical facilities, employees of big enterprises enjoyed high standards of health care in the facilities owned by their enterprises, and high−income groups had better access to the best medical facilities.
The effect a transition to a payroll tax has on income redistribution also depends on a country's structure of taxation. If the earmarked tax replaces a highly progressive income tax, the impact on equity is clearly negative.
But the replacement of highly regressive indirect taxes may increase social solidarity. In Russia the structure of tax revenue is skewed toward indirect taxes. The value added tax provides 44.1 percent of consolidated budget revenue and excise taxes provide 19.8 percent, while the profit tax supplies 18.3 percent and personal income taxes just 2.6 percent (Izvestia 1996). Given this taxation structure, the new payroll taxes may have a neutral or even slightly progressive effect.
In addition, it is easier to collect payroll taxes than profit taxes in transition economies with weak tax collection capacity, because it is harder for entrepreneurs to hide payroll than profits. In Russia mandatory health insurance tax collection provides about 90 percent of expected revenue (Federal Fund of Mandatory Health Insurance 1995), while the rate of income tax collection is so low that in late 1996 a presidential decree on emergency measures to collect taxes was required. However, the amount of payroll taxes actually collected is reduced by a number of factors inherent to transition economies, such as nonpayment of formal wages and underreporting of actual wages, particularly in small businesses.
One feature unique to Russia is that the health payroll tax has not increased the tax burden of employers. Instead, it replaced a portion of the old−age payroll tax when it became clear in 1993 that the pension fund had surplus funds. Although a basic package of medical benefits was estimated to require 7.2 percent of payroll, the health sector receives only 3.6 percent; the rest is covered by general budget allocations for health. The share of social costs in payroll is 41 percent—lower than in some Western European countries, but high for a transition economy that is starving for investment resources. High labor costs have narrowed resources for investment and growth.
Moreover, this burden discourages employers from creating additional jobs, thus forcing jobs into the black market or increasing the number of unemployed. Although it is unrealistic to expect an increase in the tax burden, tax revenue sources could be restructured, with a shift from a general to an earmarked health tax.
The negative effect reform has had on equity in health care provision is evident from data on the geographic distribution of health funds. There has been a sharp turn from highly centralized, top−down resource allocation to excessive decentralization of health finance and management. The Ministry of Health does not subsidize the
Impact on Equity 92
oblasts. Moreover, the subsidies provided to the oblasts by the Ministry of Finance are not earmarked for health, and are usually allocated by oblast governments according to traditional budget priorities. Given the great differences between regions' industrial bases and taxation revenues, the gap between rich and poor regions is growing. Per capita health expenditures range from 720,000 rubles in Moscow to 470,000 rubles in Far East oblasts to 130,000 in Northern Caucuses oblasts (Kravchenko 1996, p. 54).
To some extent these inequities are offset by the federal mandatory health insurance fund, which provides small subsidies to seventy of the eighty−eight oblasts. But these resources are insufficient to fund the equalization program.
At the oblast level, territorial mandatory health insurance funds provide some equalization of health funding across areas using capitation formulas to allocate resources to insurance carriers. However, the equalization capacity of these funds is limited because they control less than one−third of health revenue. The remaining funding is allocated by local governments, with little or no risk pooling between local areas. Few oblasts collect enough taxes in the mandatory health insurance fund to implement the equalization program.
The lack of a uniform oblast funding policy and management strategy has limited access to health care in rural areas and small towns. Major city governments have no interest in providing specialty care to residents from areas where such capacity does not exist. They make their budgets with no regard to the needs of outside residents within the oblast.
Growing inequity in the Russian health system cannot be attributed to the transition to mandatory health insurance. It is the result of the excessive decentralization and
fragmentation of health systems that started before implementation of mandatory health insurance. Federal and territorial mandatory health insurance funds are looking for ways to equalize financial resources, but they cannot offset the isolationist strategies adopted by local governments.
Mandatory Health Insurance, Contracting Arrangements, and the Efficiency and Quality of Care The recent innovations in the Russian health sector reflect the shift to contractual interactions between health funding authorities and health care providers. Acting as third−party purchasers of health care, insurers change the performance of providers. Although contractual arrangements are possible under the Beveridge model, the scope for contracting is higher under the Bismarck model. First, an independent insurer can interact with providers (or groups of providers) only through a contractual mechanism. Second, a third−party payer is more flexible in its purchasing policy, since it has no obligations to state−owned medical facilities and may reject the services of inefficient providers.
In theory, the division between finance and provision is clear−cut. Moreover, contracting has the potential to improve health sector performance by decentralizing management, improving health care planning and management, and increasing local choice of health providers. In practice, the effects of contracting depend on many preconditions, the most important of which are the role of purchasers in encouraging competition among providers, the design of contracts and methods of payment, the adequacy and stability of funding, and the skills to manage the contracts (Savas and Sheiman forthcoming).
In Russia contractual relationships are a growing part of the health system. The main outcome of this transition has been increased operational autonomy of providers. Providers are still owned by the state but are now self−governing entities that can sell their services to different purchasers. Hospitals and polyclinics can keep surplus funds, hire and fire medical personnel, reduce bed capacity, deploy new units (like outpatient clinics), and determine employees' pay without authorization of the health administration. After seven decades of the Soviet Mandatory Health Insurance, Contracting Arrangements, and the Efficiency and Quality of Care 93