Constraints and opportunities beyond 2021

by the PMG central allocation, undermining incentives for facilities to be more efficient. Inefficient management of the PMG allocation leading to a financial gap is a fiduciary risk, and there is no clarity about which government level is expected to deal with it. For example, while the central government has no direct obligation to address facility-level losses, in 2019 and 2020, the central government provided grants to cover subnational losses arising from the transition to new financing and payment arrangements.

As long as the PMG continues to be developed, budgeted, and costed without clear rationing criteria, rationing of care will continue implicitly, despite the intention of moving toward a more explicit benefit package guaranteed to all Ukrainian residents. The discretion in how explicitly the PMG will be rationed leaves the government with a complex political trade-off. While explicit rationing is more open, transparent, and direct, it is usually more challenging politically as it makes it easier to identify winners and losers. Allocating resources by implicit rationing is an easier approach technically because there is no need to develop rationing criteria and politically because the outcomes are less visible to the public. At the same time, as long as the government continues to fund the PMG without clearly expressed criteria for exclusion and inclusion of individuals and services, rationing within the PMG components will continue implicitly at the level of service providers.

FINDING RESOURCES FOR MAINTAINING AND EXPANDING THE PMG: CONSTRAINTS AND OPPORTUNITIES BEYOND 2021

The overall level of government financing of health care in Ukraine is relatively high for its income level but much lower than in neighboring European Union (EU) countries. The total government spending on health in Ukraine is higher than what would be predicted for its income level. At 3.7 percent of GDP in 2018, the latest available year for Ukraine NHA data, government health spending is higher than the LMIC average of 2.78 percent and close to upper-middle-income countries (UMICs) at 4.0 percent and non-OECD high-income countries (HICs) at 3.86 percent. At the same time, this level of public health funding is lower than Ukraine’s EU neighbors, most of which are OECD HICs (6.51 percent in 2017). For example, public health spending is 4.5 percent of GDP in Poland, 4.8 percent of GDP in Estonia, and 5.3 percent of GDP in the Slovak Republic.

Expanding the PMG will require additional funding, but not all of the available resource generation options would be equally effective and some may entail risks. It is vital that the annual budget allocations to the PMG are sufficient to cover the provision of services included by law in the PMG benefit package, or there will inevitably be service rationing, undermining the guarantee to care provided by the government of Ukraine to the Ukrainian people. Several options may be considered individually or in combination to secure additional resources for the PMG. First, there is the possibility of expanding the overall fiscal envelope either through new taxes or new debt. Second, it may be possible to reallocate resources from other functions or programs by deprioritizing other sectors. The third option is to deprioritize other (non-PMG) health spending within the health sector. Fourth, it might be possible to reconsider the intergovernmental revenue-sharing arrangement. However, if the government decides to shift the responsibility for PMG utility financing from SNGs to the central level and

revises the intergovernmental revenue arrangement to reflect the change, this will not expand the financing envelope but merely shift financing responsibilities across government tiers. Fifth, it would be possible to expand the PMG by efficiency gains, including better PFM. Finally, if the government considers introducing a cost-sharing arrangement—co-payments for services covered by the PMG and supplementary payments for noncovered services—this may entail considerable risks of worsening Ukraine’s heavy reliance on OOPs; it may involve high administrative costs and may weaken strategic purchasing if not strictly regulated. Each of these options is discussed in turn below.

The government has committed to spending significantly more on health, and the PMG particularly, in 2020–21, but it remains to be seen whether this trend will be sustained in the longer term. Despite the economic recession associated with the COVID-19 pandemic, the government significantly increased consolidated budget spending on health in the 2020 budget, bringing it up to 4.24 percent of GDP. This does not include health expenditures accounted outside the health function in the Classification of the Functions of Government, which would make the NHA total even bigger—the highest level in Ukraine’s recent times. Stronger prioritization of health was expected to continue in 2021. Although there were no data on subnational budget plans for 2021 when this report was being prepared, the central budget health allocation, including health transfers to the SNGs, was approved at a level that is 14.2 percent (Ukrainian hryvnia [UAH] 20 billion) higher than the 2020 plan and corresponds to 3.6–3.8 percent of GDP, depending on GDP growth scenario. In the approved 2021 budget, the PMG was funded at a level that represents a 20.3 percent increase compared to 2020 for the services accounted for in the PMG—services purchased by the NHSU, the health grant used by the SNGs to pay for specialized and emergency care in the first quarter of 2020, and the transitional grant to support loss-making facilities. These increases were expected to be funded from new borrowing in 2020–21 and an increase in the health spending share in the central budget in 2021. In addition, in 2020, the NHSU started to use the PMG contract specifications and tariffs to increase efficiency gains in the provision of services within the program—a new policy facing a range of technical and political challenges that are discussed in the next sections.

Expansion of the fiscal envelope (new debt and new taxes)

Even before the COVID-19 pandemic, Ukraine’s economic growth rate was insufficient to sustain its debt without a tight fiscal policy in the medium term. Between 2012 and 2015, Ukraine experienced an economic recession, culminating in a deep macro-fiscal crisis with GDP falling by −17.2 percent year-on-year in 2015 (see figure 2.6).

Before 2015, the government maintained large deficits to boost pensions and salaries—including in health care—rapidly building up public debt (see figure 2.7).

As the crisis hit in 2014–15, this debt grew to 99.9 percent of GDP, resulting in a sharp depreciation of currency and bank recapitalization needs. The government restored stability by removing major structural imbalances, such as quasi-fiscal deficits in the energy sector, and shifting to a flexible exchange rate regime to reduce the current account deficit. It also sharply reduced the general government deficit from 4.9 percent of GDP in 2014 to 1.8 percent in 2017, as presented in figure 2.8.