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Ten Years of Health Sector Reforms: an Armenian Experience

By Arman Vardanyan

Since its independence in 1991, Armenia adopted the path of transition from a centralized and planned governance system to a market economy. The health sector reform process started in 1995 and during the last decade several reform policies were launched. Despite this, the health sector still remains one of the most problematic. The reform policies failed to succeed and are perceived controversially. The distribution of the resources is still uneven. Still, a major part of state budget allocations are channeled to hospital services instead of redistributing them to primary health care, which is more accessible for general population. The health services are mostly not accessible even in urban areas due to the financial limitation.

Overview of reform policies
During the last years the health care system of the Armenia has accumulated a number of serious issues that influenced the balanced development of the sector. First of all this is the extremely large number of hospital beds with over-staffing inherited from Soviet times and very low utilization rates. As a result, hospitals were extremely inefficient from the point of view of cost efficiency and the ambulatory-policlinic system was extremely under-utilized. In the meantime, deep gaps have emerged between different levels of health care (national, regional, rural) with respect to types of medical services provided and quality of those services.

Limited state budget financial resources and increasing need in qualified health care and services were major factors influencing the government to seek new policies to reform the sector. These reforms were and still are mainly directed to:
- the introduction and strengthening of primary health care level,
- ensuring effective financing mechanisms, included for socially targeted groups,
- the improvement of the quality and accessibility of medical care.

First changes in the health system of Armenia appeared in 1994 with the process of privatization of state-owned enterprises. But this process was limited to pharmacies and dental enterprises and was rather part of general privatization policy than structured health sector reforming policy. First policy of reforms of health sector was introduced in 1995, when the Ministry of Health of Armenia developed strategic program of reforms. The main directions of reform defined by that policy were:
- decentralization of the system,
- structural reforms,
- reform of the health care financing system.
These directions with certain amendments continued to play a key role during the whole decade in the process of Armenian health sector reforms.

In 1996 with the adoption of the Law on Medical Care and Services for the Population, the legislative framework for reforms was provided. In particular, it foresees that the health facilities might have multiple and diversified ownership and the will be independently governed and funded. In 1997 the World Bank launched its first health sector reform program in Armenia to support the 1995 reform. This program had two major components:
- introduction of the system of primary health care (the institute of family doctors)
- support to the governmental reform of the health care financing system.

The 1995 policy did not envisage the rationalization of the health facilities at large. Only in 2000 the Government adopted the strategy of privatization of health institutions. Later, in 2001 the Government launched two-stage optimization policy. In 2001 it was foreseen to rationalize health facilities in the regions and in 2002-2003 in Yerevan. Recently, the second WB project "Modernization of the Health System" started, targeting merging of hospitals and improvement of primary health care and public health services based on the institute of family doctors.

Legislative framework
The most important legislative basis for state policy in health sector is the Law "On the Provision of Medical Care and Services to the Population" of 1996. In fact, this law still regulates the health care system. This law stipulates that each person has the right to receive free medical care and services in the scope of state target programs guaranteed by the state. Each person has the right to receive medical care and services outside the scope of the mentioned program financed by medical insurance, payments or other sources stipulated by the legislation of RA.
For the first time the health legislation stipulated diverse sources of financing for the sector, including state budget allocations, insurance contributions, direct payments and other sources.
From state budget allocations the Government implements guaranteed financing for medical care and services provided in the scope of state target health programs to health care providers irrespective of their legal-organizational structure and type. Although, this Law provided necessary framework, some provisions remained on paper, particularly in setting the insurance system.

After several years of controversial developments and long discussions in 2005 the Government approved the draft Law on Health Care and sent it to the National Assembly for adoption. This draft law will become the main law regulating the health sector of Armenia. The adoption of this Law is also the component of the government Anti-Corruption Policy. It is foreseen that after the adoption of this new law, the Law on the Provision of Medical Care and Services to the Population will lose its legal force.

First steps of reforms
The first steps of the reform process were made from re-organization of the health enterprises. Until 1995, the health facilities legally remain "budget-institutions", a status, which allows them to use only state budget sources. The state budget financing were made according to the approved "budget lines" and limited financial resources were spent ineffectively, or even wasted. In 1995 the Government started to change the legal status of health enterprises and by the end of 1997 all health facilities acquired the status of state enterprises (later, in 1999-2000 they became state closed joint stock companies). This enabled the health care facilities to attract other than state budget sources. It was planned that health care providers would be the first to make the transition from financing by state budget lines to the system of financing based on actual service provision on a contractual basis.
At the same time the ambulatory-policlinic institutions have been freed from the administrative subordination of hospitals and acquired independent legal status, which resulted in separation of functions. Starting from the time, the policlinics are mainly involved in primary health care, whereas the hospitals are providing services at secondary and tertiary levels of health care.
In 1996 the government of RA adopted the Program of Development and Reforms of the Health system of RA 1996-2000. Along with structural changes, decentralization of management and financing reforms were lying at the heart of that policy.

The management and structural decentralization reform of 1995 aimed at independence of facilities, more effective solutions to address local needs, as well as to develop and promote diversified funding led to an undesirable outcome - non-efficient use of financial resources and increase in the already large number of beds and staff.

Before 1996 the health system at regional level was mainly represented by regional medical units, consisting of hospitals, ambulance stations and ambulatory-policlinic services, including rural posts. As a result of the decentralization, 40 hospitals, 14 maternity hospitals, 9 ambulance stations, 40 adults' and 22 children's policlinics, 49 rural health posts, 221 rural ambulatories and a number of women's consultation posts emerged as independent legal entities and replaced 40 former regional health units. Thus, in the regions (marzes) /excluding the towns of Gyumri and Vanadzor/ 40 regional health units have been replaced by 378 medical organizations with the status of a state closed joint company.

The decentralisation brought other significant structural and management changes. The management of health facilities was delegated to marz and, in some cases, community authorities. 10 marz authorities, Yerevan municipality and Ministry of Health were running health institutions. Marz authorities being the state bodies placing state order, were inclined toward placing the state order in health facilities under their supervision and the quality of services provided was becoming uncontrollable. Thus a situation of confusion and lack of management was prevailing in the financing system of that time because of existence of a variety of financing bodies.

State Health Agency
In 1997 the Government the State Health Agency of the Government of RA (SHA) was established. The SHA becomes an indnependet from both national and reginal health authorities body, which had a madate to allocate state budget funding. The idea was that SHA creation allow to:
- separate the functions of provision of medical care and services and financing for these by clarifying the purchaser-provider relationship in the scope of state order
- create a new information and reporting system for the services delivered and compensation provided
- improve the mechanisms of control over the placement and impementation of state order.

In order to address solve these issues it is necessary to create an independent body which should not pursue the interests of any authority or state body and would implement financing for medical services provided in the scope of state target programs and control the volumes and quality of services. The creation of SHA really helped to solve some problems related to manageability of financial flows and create control mechanisms in place. Meanwhile, SHA failed to provide transparent framework for allocation of state funding. Significant financial portion of WB loan was spend to create and strengthen financial and organizational capacity of SHA as an independent body. From the very begininig of the creation of SHA, the Ministry of Health was attempting to bring the SHA under its auspices. In 2000-2001 it was planned to transform SHA into state medical insurance company. Later on, in 2002 the government transferred the SHA to the Ministry of Health and currently it is a departnmnet in the structure of the Ministry.

Reform of Financing System
The health care system mostly is financed by the state from tax revenues. During 1995-1997 various models of financing of health care has been tested in the country. In July 1997 the principle of provision of medical care and services based on state order was introduced. Health allocations apply the following principles of financing:
- per capita financing for primary health care
- financing based on medical care and services actually provided - for secondary and tertiary levels, hospitals
The Government approved the prices of health care and services provided in the scope of state order, order of placement of volumes of state order, reporting and payment mechanisms, etc. Thus starting with 1997 the principle of payment for medical services on a contractual bases based on services actually provided was introduced. Compensation is stated to be implemented based on each case actually completed, service delivered by prices approved for medical services in the scope of state order. This was the first step in bringing the medical care and services guaranteed by the state in compliance with the scope of financing provided for by the state budget. By means of contractual relationship implemented for the first time purchaser-provider relations were clarified. The introduction of this mechanism of financing has the aim of using its advantages, which are:
- limiting the possibilities of extensive development of the system
- rational utilisation of financing provided by the state budget
- compensation for the work done
- limiting administrative expenses
- certain improvement of control over work done.
Nevertheless the introduction of this financing mechanism revealed a number of drawbacks related to the placement of state order, ensuring the effectiveness of provision and utilisation of financial resources, current control over the quality and volume of medical services provided.

In order to comply with the requirements of the WHO Ljubljana Declaration and ensure the equality, fairness and accessibility in receiving medical care and services, the Government approved the list of basic health services provided free of charge to the population and guaranteed by the state were developed and endorsed by RA government. The government also approves the list of the socially vulnerable groups of population, which are entitled to the guaranteed health services.
Since 1997 the basic benefit package (BBP) includes:
- list of medical services of public importance
- list of certain groups of population - socially vulnerable groups.
Persons involved in these groups are entitled to use these services free of charge or at privileged terms. The BBP has been reviewed regularly since its introduction, services and population groups have been changed. Because of the shortage of financial resources health services funded by the state have been reduced and only certain priorities and priority groups were covered.

The privatization of health enterprises started in 1994. Since that time the health sector permanently facilities started to be included in the process of privatization of state property. The privatization in health sector started with pharmacies, facilities servicing medical equipment and dental policlinics. But until 2000, except the above-mentioned facilities, the privatization process was very slow. In 2000 the government of RA adopted the policy of privatization of health institutions. Although privatization processes were taking place in the system since the beginning of 90s, now the conceptual approach was adopted in order to regulate the process of state policy targeted at ensuring the multiplicity of ownership in health sector. The privatization mainly was implemented through providing the shares to the staff of the hospitals. However, in the reality directors of the enterprises become principal share-holders. The process of privatization in health sector, actually as in other sectors, was perceived controversially by the majority of population. Media coverage revealed some controversial commercial privatization deals. These and other allegations remained unanswered by the authorities. The National Assembly (the Parliament of Armenia) several times addressed the issue. At some point the privatization process was even frozen by the Armenian Parliament. Recently, head of the World Bank office in Yerevan Roger Robinson stated, that "all of us witnessed how during privatization process some hospitals in Yerevan were sold for very low prices" .

The need of the efficient use of financial resources has been permanently placed at the focus of the attention of state governance bodies, given the large under-utilized capacities inherited from Soviet period. The health system of Armenia the republic was also characterized by issues of over-staffing of medical organizations, especially in towns, whereas in rural areas there was an obvious shortage of staff. It should be noted that 65% of doctors and 41% of nurses in Armenia work in Yerevan. The city of Yerevan was also overwhelmed with various medical enterprises, most of which were even located close to each other, used to accomplish the same function and operate in an under-utilized mode. Medical organizations operating in the system exceed the demand for medical care posed by the population by the number of facilities, their capacities and human resources. It also exceeds the demand for free medical care and services guaranteed by the state and its financial possibilities. That is why the financial resources allocated for programs guaranteed by the state were directed not at the provision of quality medical care but largely at the maintenance of the system. They primarily supported the rather low and unevenly paid salaries of extremely under-utilized staff. This pattern of covering current expenses by any means and settling salary debts could not ensure availability of necessary equipment and medication as well as decent salaries for doctors.

In February 2001 the Government approved the Decree On Carrying out the Activities of Optimization of the Health System of RA, which was a concept of optimization of the health system developed and submitted Ministry of Health. The schedule defined by the Decree and other decrees of the government stipulated the program of optimization of the health system of the republic in marzes and the city of Yerevan. These programs laid down the staged process of optimization. Year 2001 was set as the first stage and years 2002-2003 were defined as the second stage of the program. The policy of optimization of the health system foreseen the following core activities:
- inventory recording of the properties of health sector enterprises,
- reducing the under-utilized capacities of medical organizations
- reorganization or changing of profiles and, if necessary, liquidation of medical organizations (those functioning ineffectively and not complying with health care norms and standards)
- merging medical organizations for optimal use of areas,
- regulation and planning of staff potential,
- implementation of a targeted process of privatization of medical organizations (especially hospitals and spas).

Thus, during 2002 as a result of the optimization of marz health system, there were a number of buildings released, organizations liquidated or reorganized, hospital beds reduced in number, under-utilized departments liquidated or merged and a number of redundant staff positions released. As a result a 12% decrease in expenditures has been recorded in 2001 compared to 2000.

In 2002 the Decree of the government of RA approved the master plan of optimization of medical facilities in Yerevan for 5-8 years. In 2003 the government of the RA approved the establishment of 10 state hospital and policlinic units in Yerevan. These units were created as a result of mergers of different enterprises.

International Donor Support
International humanitarian aid and credit funds still represent the considerable portion of external sources of financing of the health sector programs. The international donor agencies are largely involved in the health sector reforms in Armenia, including the World Bank, World Health Organization (WHO), USAID, UN agencies, as well as Armenian Diaspora. Some foreign governments, including Japanese, German and others support different health reform policies with grants. The main aspects of cooperation are related to reforms of the system and support to policies implemented, strengthening of material and human resources of the system as well as smoothing social issues.

Since 1997 the World Bank is the major supporter of health reform programs in Armenia. The first loan program focused on the introduction of the system of primary health care and the improvement of the financing system of health care. Based on the first component, large-scale activities were undertaken for the training of family doctors, development of the system of ambulatory-policlinic institutions, their renovations, rebuilding and equipping. In the second component, the methodology of the basic package of health services provided by the state, the contractual system were improved. The SHA was established and received institutional support. After completion of the first program, the World Bank evaluated it as successful. However, no external independent evaluation of the program has not been carried out. In 2003 the WB launched its second program named "Modernization of the Health System". This program is intended for the support of optimization of the hospital system. It is targeted at merging of hospitals and improvement of primary health care and public health services based on the institute of family doctors. The project deals with optimization of hospital system and human resources, improvement of management of medical facilities, cost effectiveness and improvement of financial compensation mechanisms. The objective of current World Bank program is to improve the quality and accessibility of health services, increase the efficiency of the performance of the system, and ensure matching of health services with existing needs. One of the project components envisaged the support of optimization Yerevan Medical University Clinic. This USD 3.5 m cost agreement was frozen due to the resistance of the University and University clinic staff, which even organized rallies and pickets.

Poverty Reduction Strategic Program (PRSP)
Recently the Armenian Government launched its Poverty Reduction Strategic Program (PRSP), which underlines the governmental policy for 2005-2015. PRSP focuses, inter alia, on health sector. Particularly, the PRSP pursues the objective of turning back the negative trends observed in the development of the health sector recently. It seeks to increase the accessibility and quality of health care services guaranteed by the state. Special measures are suggested for implementation in the health sector by PRSP in line with the UN within the Millennium Developments Goals framework. In the context of poverty reduction and increased targeting of publicly funded health care programs PRSP's priority for the sector is to increase the accessibility of health services, with a major emphasis on the primary health care system. According to PRSP, "enhancing accessibility will become possible by virtue of increased public funding, an appropriate redistribution of intra-sectoral allocations, optimization and increased efficiency as a result of sector management and administrative reforms" . PRSP's health sector program priorities include enhancing efficiency and accountability of the health sector. As a result of sector optimization, services should shift towards a more accessible and relatively cheap primary health care network and away from relatively expensive hospital care.

Anti-Corruption Policy
Another important policy of the Armenian Government, which has been launched recently, is the Anti-Corruption Policy. All surveys show that the health sector is regarded by the general population as the most corrupted sector. Unofficial payments to doctors and other medical personnel, unavailability of declared free services, direct and indirect corruption are in the center of general population concerns. In its part related to the health sector, the governmental Anti-Corruption Policy foreseen implementation of the following measures:
- to encourage the formation of a private sector based on fair market competition
- to take into consideration the uniqueness of each health facility in the process of their privatization
- to continue the provision of medical care and services for the socially vulnerable groups of population in the scope of the state order by clearly regulating it with separate legislative acts
- to change the system of placement of the state orders in health facilities and place the state orders based on tenders according to disease types and geographical criteria, define qualitative and technical standards for the medical services provided
- to strengthen the guarantees of realization of obligations of state and state health facilities by developing transparent mechanisms
- to adopt a law on health insurance, which will create favorable conditions for the reduction of cash flows for the payment of medical services thus reducing the likelihood of corruption-related phenomena
- to make the preventive measures a priority in state health measures. This will enable the state to avoid large future expenditures.
- to strengthen the role of medical associations in the development and implementation of the policy of the sector. As the example of developed countries shows, the involvement of medical associations in the development and implementation of sector policies will greatly enhance the effectiveness of the system.
- to adopt a Law on Health Care which will define the mechanisms for management and control over the quality of medical services
- to improve the information system of health care by introducing a unified information network.

The Anti-Corruption Policy was adopted by government decree on 06.11.2003. Since that several sector Committees were set up to monitor the implementation of the program. The Committees are overseen by the Advisor to President. The past experience shows that the health sector is in the focus of the activities of the Anti-Corruption Policy and its Committees and will significantly influence the health sector reform policies.

Current situation
As a result of socio-economic transformations in recent years, the indicators describing the health of the population showed negative trends. Furthermore, the consumption of health care resources by the population substantially contracted. Analyses show that the affordability of services for certain groups of the population widely differs depending on the type of service.

It should be mentioned that the situation of health sector funding and the general economic situation of Armenia are consistent with the general pattern of macro- and micro- economic problems caused by the transition period further influenced by the characteristics of the directions of the sector's activities:
- inadequate level of accessibility, fairness and equality,
- limitations of the varieties of funding forms,
- existence of a system of direct medical expenditures made by population,
- imperfection of economic governance,
- absence of regular infrastructure of provision of services in the emerging market environment,
- low level of management and utilisation of financial flows.

In 2002-2004 significant improvements of health sector financing are observed. Each year the state budget financing grows by 25-28% compared to the previous year with a higher growth of financing for primary health care. In the coming years the stable growth of financing of health care by the state budget is also planned.

However, the growth of volumes of state financing does not ensure efficiency of state policies, which is caused by the impact of a number of factors. The reason for this is the mechanisms of monitoring the use of financing and the quality of information dissemination and work with the public in a timely and accessible manner.

At present, even given the significant annual growth of health budget funds, the development of an efficient health care system, improvement of the quality and accessibility of health services is considered of vital importance. Processes aiming at the improvement of the financing of the health sector should result in the emergence of a comprehensive and effective health system. It should clearly specify:
- sources of funding of the system (state budget, insurance funds, community budgets, direct payments and co-payments)
- price policies optimal for market economy conditions (also promoting development of the system),
- clear separation of health programs with regard to sources of compensation (funding) of their expenses and parties responsible for their implementation (levels and structures),
- sound information system of funding of the sector,
- development of optimal health system, which will ensure the most efficient use of existing financial resources and enhancement of effectiveness of performance of health facilities.

From organizational perspective even at this stage it has to be stated that several health sector reform policies failed to meet the intended objectives. For example, the experience of the establishment and implementation of mechanisms of basic benefit packages (BBP) financing has shown that they:
- do not guarantee free medical service,
- do not promote the development of health care system,
- do not create trust and loyalty of the population and health workers.

This means that the expenditures for free medical care guaranteed by the state are not used for their exact purpose and in an efficient manner. In reality, given inadequate financing, ineffective management and corruption even population included in socially vulnerable target groups are often partially or fully paying for medical services.

It should also taken into account that so far the system of health care funding is still dominated by state budget allocations, payments made directly by the population, humanitarian programs and health expenses born by the population. The volume of the latter according to expert estimates is rather high (up to 1.5-2 times the volume of state budget allocations). It should be mentioned that even the official direct payments by the population are considered an undesirable phenomena.

All attempts to develop and introduce state health insurance system so far have not been succeeded. The health insurance system is currently limited to some small scale private activities, which do not seriously influence the health sector.

The corruption in health sector remains a serious area of concern. On grassroots level, the unofficial payments to doctors and other medical personnel are widespread phenomena. On policy level, the state funding is still allocated without proper transparent mechanisms (i.e. open tenders). The past experience of privatization raises fair questions among different layers of the society. It still needs careful examination in order to evaluate the past and current situation from different perspectives, including the multiplicity of the ownership.

Meanwhile, it is worth mentioning that in the current situation of transition to new market relations there are no mandatory educational and training requirements in the field of training on health economics for health managers.

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