and selected country groups, 2000–18

FIGURE 1.2

Out-of-pocket spending as share of total current health spending in Ukraine and selected country groups, 2000–18

60

Percent of total health care spending 55

50

45

40

35

30

25

20

15

10 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018

Ukraine

High-income countries (global) High-income countries (Europe) Upper-middle-income countries (global) Upper-middle-income countries (Europe) Low-income countries (global) Low- and middle-income countries (Europe) Low-income countries (global)

Sources: State Statistics Service of Ukraine (for Ukraine); World Development Indicators database; Global Health Expenditure Database. Note: Regional averages are population-weighted.

WHO Europe’s “capacity to pay” threshold increased from 11.5 percent to 16.7 percent.3 Catastrophic spending is heavily concentrated in the bottom consumption quintile. The PMG can also potentially address the large unmet need for health care, which has grown by a factor of 1.4 since 2009, to affect an average of 24.5 percent of households in 2017 and 2018, according to the State Statistics Service of Ukraine’s Household Living Conditions Surveys.

In recent years, the political and technical processes for determining, updating, and budgeting the PMG have been marked by increasing discretion and decreasing transparency. In 2020, the Law on Financial Guarantees for Health Care Services 2017 was revised such that the PMG benefit package specification (including service pricing) is no longer voted on by the Parliament (Verkhovna Rada) and approved as part of the annual Budget Law but is instead approved at the discretion of the Cabinet of Ministers (CabMin). The rules for the technical development of the PMG are very broad, and the methodology of the Ministry of Health (MoH) for defining and updating the National Health Priorities on which the PMG is based is not made public, giving the MoH wide discretion in defining the scope of the PMG and preventing scrutiny of its decisions. In particular, PMG costing and pricing processes lack clear and transparent methodologies.

A compounding challenge is the government-wide, medium-term budgeting process. This process was introduced in 2018 but suspended in 2020. As result, the CabMin did not approve the planned three-year horizon for PMG development. It could be argued that this decision was an appropriate pandemic response, providing the government with flexibility in a rapidly

changing environment. But it also created uncertainty about the future of PMG package development.

For the 2021 budget, the MoH and the NHSU requested funding equivalent to 6 percent of gross domestic product (GDP), almost three times as much as was budgeted for the PMG in the 2020 amended budget. Although not a realistic budget expectation, this request was indicative of the intention to continue to implement the shift from supply-side to demand-side financing that “follows the patient” and provides an increasingly generous benefit package over time. In the approved 2021 budget, NHSU expenditures on the PMG were approved at a level that represents a 2.3 percent increase over the amount approved in 2020.

Options for increasing the funding allocated to the PMG

It is vital that the annual budget allocations to the PMG be sufficient to cover the provision of services included by law in the PMG benefit package; if they are not, service rationing will be necessary, undermining the guarantee to care provided by the government to the Ukrainian people. Six options could be considered for finding the resources to expand the PMG, as envisaged as part of the reform process. Not all of them are likely to be equally effective in terms of revenue generation prospects, and some (such as cost-sharing) may entail risks for health sector goals of access and financial protection. The six options are as follows: 1. Expanding the fiscal envelope through higher growth and increased tax revenues. Stronger growth and higher revenues could be a potential source of additional resources for the health sector. Prospects for this option appear limited, however. In the past, procyclical fiscal policies in Ukraine led to the accumulation of large macroeconomic imbalances, requiring debt restructuring in 2015. Following a sustained period of fiscal consolidation, the fiscal deficit increased to 6 percent of GDP in 2020, in large part because of

COVID–related outlays, including for medical procurement, higher wages for health workers, and pension top-ups. Fiscal financing needs were estimated at 16 percent of GDP in 2021 (up from 15 percent in 2020), partly because large debt repayments on past borrowing were coming due.

Ukraine’s external public debt service burden is expected to average about

US$10 billion a year during 2020–25, up from less than US$6 billion a year over 2015–19.4 Medium-term spending pressures, related to large minimum wage increases and pension spending, are also increasing. Fiscal contingent liabilities are large, particularly in the energy sector, and will eventually have to be recognized. In addition, new sources of fiscal risk have emerged, related to GDP-linked guarantees that may potentially lead to large fiscal costs and exceed the initial debt write-off when certain growth thresholds are exceeded. There is some scope for additional revenue mobilization measures—through better tax and customs collection or pro-health taxes on sugar and tobacco, for example. However, Ukraine already collects significantly more taxes than its regional peers, with total tax collection averaging 35 percent of GDP over the last five years, compared with a 22 percent regional average. This rate of tax collection is higher than the average for upper-middle-income countries and some high-income countries in the region. Together, these factors point to constrained fiscal space in the medium term. They will require strong control over expenditure pressures and fiscal deficits to keep Ukraine on a sustainable macro-fiscal path.