Slovak Health Care Reform – Is the Dream Over?

In this paper the author - Juraj Karpiš - criticizes Mises theory of monopoly prices from an Austrian perspective. He attempts to show, that the purpose of identifying monopoly prices in an unhampered market isn’t worth following, because the concept of hurt consumer supremacy by not acting on the side of producers is not compatible with universal property rights. Further He argues that lack of knowledge about the demand elasticity and the real purpose of the supply restriction (which are two main monopoly price creating factors) make the quest for monopoly prices identification a highly subjective venture, on which no antitrust action can be based.

When the new reformist government of Prime Minister Mikulas Dzurinda came to power in 2002, Rudolf Zajac, a former urologist, entrepreneur and vigorous nonpartisan critic of the Slovak health care system, became Minister of Health. He and his team knew that the right medicine had to involve more market and less state. It sounded easy, but the reform of the healthcare system was more difficult that the well-known Slovak flat tax reform.

Unlike in the rest of the economy, where profit-making is accepted, profit-making in the health sector is still considered immoral by the Slovak public. Sixteen years after the official end of socialism in the country, there is still an article in the Slovak Constitution granting universal coverage and access to free healthcare services to every citizen. The public uproar over Zajac’s introduction of direct payments for doctor visits and medical prescriptions was huge. To sidestep the constitution he declared that direct payments were “fees for electronic processing of patients’ data.”

Although they were symbolic (Sk20 – approximately 0.5 euro or the price of a bottle of Coke), the payments worked. The main purpose was to educate the public that health care isn’t really free and that the resources aren’t unlimited. The payments aimed at decreasing massive demand for medical care (number of Slovak out-patients in 2003 was two times the average in OECD countries) and move it closer to the capacity allowed by modest resources available to the health sector. The fees made lonely grandmothers, who strove for human contact, look for alternatives to doctor visits and the number of out-patients fell by 11 percent in just one and a half year since the introduction of the fees.

But fees were only one piece of the reform puzzle. One of the most important steps was to transform health insurance companies into joint-stock companies and allow them to make profit. Until that reform, insurers acted exclusively as passive distributors of public insurance contributions. They couldn’t really compete and differentiate their products because of the strict regulation. After the changes introduced by the reform team, the insurance companies had the freedom to act as an effective buyer of services for their clients. They can negotiate the prices with healthcare providers, freely choose whom to do business with and push the whole system towards higher efficiency and higher quality.

Healthcare providers did not like the reforms, because there were too many of them and some would have to close down. As such Zajac had to face the wrath of both the public and healthcare workers. He didn’t care, which was even more annoying to his opponents.

Other reforms included changes in the prescription policy. Although Slovak health care system was collapsing and there were no money even for basic medical material like rubber gloves, doctors, heavily motivated by pharmaceutical companies (from all the incentives let’s name just the conference tourism), kept ignoring the cheap generics and prescribed expensive alternatives. So it happened that the share of drugs as a percentage of the entire health expenditure in the year 2002 was the highest of all OECD countries.

The reform also initiated transformation of the inpatient health care facilities into joint-stock companies – although those were left in the hands of state. The idea behind the reform was to make the hospitals responsible for their own debts; before the reform, the state always had to pay the bills at the end of the year. The reforms, combined with the new threat of bankruptcy (until the reform, state-owned healthcare providers were protected by law from insolvency proceedings initiated by their lenders), helped to change the behavior of hospital managements. They were suddenly cut off from unlimited state funding. Cases of corruption, like when the hospital manager of a heavily indebted hospital bought an unnecessary MRI machine at an inflated price from his brother in law were consigned to the past.

Alas, Robert Fico, the socialist who won the summer parliamentary elections in June 2006, replaced the people at the Ministry of Health. With Zajac leaving, the view on how the health sector should work changed. The early statements of the new Minister, Ivan Valentovič, don’t leave much space for doubt. According to the new Minister, the state is the best owner and manager of the healthcare system. That the health care system produced massive debts, was of poor quality and totally corrupt was not the fault of the system but of the people who were managing it – he said.

The new Minister immediately cancelled the fees, stopped the hospital transformation process, prolonged the state protection for health providers from their creditors and increased state health insurance contributions for the unemployed, old and young. The next steps aren’t clear, but it is clear that everyone who was dreaming about a working health care system has to wake up.

The reform of Zajac and his team was painful and not without mistakes, but it was necessary. The biggest mistake of the reform team was that they didn’t manage to complete it. The last planned step was to introduce direct out-of-pocket payments to share the costs of less serious diagnosis such as flu or broken arm. That step would have led to the birth of private coinsurance. It would have meant more money for life threatening diseases, enabled healthcare provider differentiation, put an end to informal payments and contributed to better prevention. It is also unfortunate that even after Zajac’s reforms the share of private contributions to the overall healthcare expenditure is only 19 percent, whereas the OECD average is 28 percent.

In spite of those shortcomings, the accomplishments of Rudolf Zajac and his colleagues deserve gratitude. Their endeavor to introduce market forces into the healthcare system is even more striking when we consider that healthcare remains largely socialist in the rest of Europe.

Juraj Karpiš
INESS – Institute of Economic and Social Studies

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