2.3 Intergovernmental financing of health care, 2015–20

reform, when the SNGs were paying for the bulk of health services funded through central health grants, they had traditionally supplemented central grants with a substantial portion of local revenue, nearly 25 percent of the total health budget, as shown in table 2.3. Within this local supplement, about one-third covered utility costs, and another one-third was invested in capital costs. After the reform, subnational financing of utility costs and capital expenditures became mandatory, but the SNGs were given discretion as to whether they wanted to continue to pay the rest of their traditional budget supplement. In essence, their expenditure responsibility was reduced by about UAH 10 billion as of 2020. While there was no matching reconsideration of the tax assignment responsibility between government tiers, the MoF reduced the size of one of the three core block grants available as delegated revenue for local budgets in 2020 by UAH 4 billion. In that year, the size of the local supplementary financing decreased by UAH 6.1 billion between 2019 and the pre-COVID-19 2020 plan. In other words, having been given the discretion to do so, and having a reduced delegated revenue base, the SNGs continued to voluntarily supplement around UAH 4 billion of the PMG running costs. Moreover, facing COVID-19 costs, the

SNGs have significantly increased their contribution to health expenditures, which grew to nearly the level prior to the reform. • Local supplementation of the PMG running costs can lead to inefficiencies, but these can be addressed through a set of specific national policy tools.On the one hand, the practice of local supplementation of the PMG budget may lead to inefficiencies. Local politics in both centralized and decentralized systems tend to lead to advocacy to retain inefficient, low-occupancy, and low-quality facilities in small hospitals, usually in rural and small-town locations. It also

TABLE 2.3 Intergovernmental financing of health care, 2015–20

2015 2016 2017 2018 2019 2020 2020

HEALTH SPENDING PLAN PRECOVID PLAN POSTCOVID

Consolidated budget (UAH billions) 71.0 75.5 102.4 115.9 128.4 138.5 169.0 Central spending (state budget health expenditures, including health grants) 63.3 57.2 78.7 87.4 97.7 113.9 141.0 Local co-pay (local budget health spending, excluding health grants) 7.7 18.3 23.7 28.4 30.7 24.6 28.0 Consolidated budget (percent of GDP) 3.57 3.17 3.43 3.26 3.23 3.04 4.24 Central spending (state budget health expenditures, including health grants) 3.19 2.40 2.64 2.46 2.46 2.50 3.54 Local co-pay (local budget health spending, excluding health grants) 0.39 0.77 0.79 0.80 0.77 0.54 0.70 Consolidated budget (percent of total consolidated expenditures) 100.00 100.00 100.00 100.00 100.00 100.00 100.00 Central spending (state budget health expenditures, including health grants) 89.21 75.80 76.86 75.47 76.09 82.24 83.43 Local co-pay (local budget health spending, excluding health grants) 10.79 24.20 23.14 24.53 23.91 17.76 16.57

Source: State Treasury Service of Ukraine.

encourages inefficient competition to invest in high-tech and tertiary facilities among city hospitals in larger population centers. There is often an incentive for local politicians to advocate to retain excessive numbers of employees in their facilities—particularly in nonclinical, lower-skilled roles. On the other hand, it is important that the SNGs as hospital owners face some financial risk; this will stimulate efficiency improvements. To counteract local political incentives for maintaining inefficiency, Ukraine would benefit from introducing some specific policy instruments to address this problem. This could include, for example, conditional grants from the central government to SNGs, including potentially ones linked to progress in improving hospital performance.

Ukraine could also consider introducing limits on the level or duration of SNG subsidies for operating costs of facilities. In addition, SNGs may be less likely to retain loss-making hospitals if health facility master plans, developed jointly by national and local governments, were to become binding on public sector investment. • It may be possible to reconsider intragovernmental revenue assignment if the central government takes over responsibility for the PMG utility costs— increasing efficiency but not leading to an increase in resources available to the PMG. It has been stated in this report that the ongoing delegation to the

SNGs of the responsibility for covering utility costs creates a range of inefficiencies. This arrangement discriminates against private providers that compete for NHSU contracts without utility costs being subsidized by the public purse. It also complicates costing for estimating realistic case rates, as will be discussed in chapter 3. The current arrangement was designed as a temporary solution in December 2016 to address mounting crisis-related spending pressures at the central level—for example, covering social protection, defense, and debt servicing—in the context of a decentralization reform, which delegated a significant amount of revenue to subnational administrations. It remains possible, albeit technically and politically challenging, to reconsider this approach, concentrating full responsibility for the PMG utility costs within the central budget with a matching reduction in the amount of revenue shared with the local budgets.

Efficiency gains Improved spending efficiency is an important source of extra resources for the health sector in both developing and advanced economies. For poorer countries with a low level of government health spending, enhanced efficiency is an obvious opportunity to achieve better outcomes. But even among OECD countries, the fast-growing level of public investment in health in the past decade was one reason to critically assess the value for money in the health budget and seek ways to achieve more with less through better system management. Even now, richer countries remain highly diverse in their health spending efficiency levels.

Ukraine’s health care system relies on an excessive and inefficient network of health care facilities and excessively relies on expensive hospital care. Despite visible reorganization during 2008–19, especially for tuberculosis (TB) care, hospitals are still abundant and inefficient. The total bed density in Ukraine declined significantly in the past decade, bringing it closer to the EU13 average, but bed density is still excessive, as is the number of hospitals.21 Even for acute hospitals, excluding TB and psychiatric care, there are more hospitals per 1 million

population in Ukraine than in the neighboring countries, including the EU13.22 However, Ukraine’s hospitals are relatively large, and their occupancy is comparatively high, especially in the cities. This reflects the high rate of hospitalizations in Ukraine and the high average length of hospital stay. The hospital discharge rate fell by 16.2 percent in the past decade, bringing Ukraine close to the Slovak Republic and Poland. The decline in hospitalization rates was especially visible in non-acute TB and psychiatric care. The average length of stay (ALOS) is also decreasing, but the reduction is marginal for psychiatric care, obstetric care, and especially TB. Despite the recent decline, ALOS in Ukraine is still much higher than in the European comparator countries such as Poland, Estonia, the Slovak Republic, and Romania.

Hospitals in Ukraine are poorly equipped, and the level of utilization of key medical procedures is low.The number of computerized tomography (CT) scanners and magnetic resonance imaging (MRI) units per 1 million population is remarkably lower than in EU13 countries.23 The utilization of surgical procedures in Ukraine is substantially lower than in comparator countries, and the number of inpatient surgical procedures per one surgical group specialist in Ukraine is also substantially lower than in other countries of Europe. Operations that are most common in Europe—cataract surgery and coronary angioplasty— are performed much less frequently in Ukraine.

The weak role of the PHC and lack of effective integration between care levels prevent earlier and cheaper treatment of NCDs. One of the reasons behind the overreliance on hospital care in Ukraine is the weakness of the PHC sector, which has been historically underfunded and underutilized. The lack of integration between lower and higher levels of care to facilitate upward and downward patient referral and the weak role of the PHC also play a part. This contributes to the late detection of NCDs and prevents patients from receiving treatment and staying in care at a sufficiently early stage when providing relevant services is cheaper and more effective.

The introduction of the PMG opens an opportunity for significant efficiency improvement through greater spending flexibility, output-based contracts, and provider autonomy. The overarching lesson from other countries is that extracting more value from a given expenditure envelope requires budgeting rules that ensure sufficient flexibility, policy orientation, and accountability. In Ukraine, prior to the 2017 health reform, even though the budget was approved by programs formally linked to results, spending units were constrained by rigid inputbased spending norms. The introduction of the PMG is opening an opportunity to finally apply program-based budgeting in a meaningful way. Within this newly created massive program, the NHSU has received an unprecedented degree of discretion in the appropriation of funds, including the flexibility to reallocate resources across major service types and purchase services based on performance-oriented contracts. Importantly, the shift to contracting services from autonomous providers (public not-for-profit enterprises and private facilities) released spending units from centrally mandated, inputs-based norms, such as staff salary schedules.

Another tool for the NHSU to stimulate hospital rightsizing and productivity is to gradually transition toward case-based payments for inpatient care.The 2017 reform has opened an opportunity for the NHSU to use a wide range of new payment methods for PMG services to increase spending efficiency. In particular, the 2017 Law on Financial Guarantees for Health Care Services introduced the possibility of case-rate reimbursement for services, which is a highly promising tool to