Learning to Crawl: Can a Health Financing Reform Unshackle Ukraine’s Growth Potential?

Guest blog written by Dzhygyr Yuriy

This is a blog series written by the alumni of the Leading Economic Growth Executive Education Program at the Harvard Kennedy School. Participants successfully completed this 10-week online course in July 2020. These are their learning journey stories.

Through past two decades, Ukraine has been steadily descending the Atlas economic complexity ranking list, going down from #30 in 2001 to #50 in 2016. At the lowest border of the second highest quintile, it is a relatively advanced economy and was assessed by Ricardo Hausmann’s international complexity simulations as having a significant potential to “move in all directions”. However, it currently remains invariably focused on agriculture and metals, exporting mainly to the immediate neighbors (Russian Federation and Poland), and has been gradually retreating from the more complex markets such as for vehicles, industrial machinery, optical and medical equipment. 

The 2013-2014 social, political and economic crisis – which inspired the Revolution of Dignity, a change of government and a reversal of the geopolitical orientation – has created a hope for a new development strategy. However, five years down the road, many of the post-Maidan reforms are losing traction, calling for an audit of what went wrong.

In the hindsight, the problems targeted by the post-Maidan policies strike as remarkably astute. Most of these policies tried to address the low quality of public services – one of the core issues which enraged taxpayers and illustrated the state’s failure in 2013. But these reforms were not only in popular demand; they also happened to intuitively react to strong price signals of an extreme growth constraints. 

The most striking example was the system of government-funded healthcare. By 2013, 92% of Ukrainians reported being terrified of catastrophic out-of-pocket costs if they get ill. Although the bulk of medical services in the country were tax-funded and provided by public facilities, de facto more than a half of costs were paid out of pocket through an entirely unregulated black market. Given the extreme information asymmetries, lack of competition and conflicts of interest, actual prices for healthcare in Ukraine have skyrocketed, exceeding the EU countries. Furthermore, while the state was failing to ensure quality control and continuous professional development of medical workers (reflected in the rapidly deteriorating health outcomes in the general population), selected categories of doctors were able to enjoy unusually high informal incomes despite the uncertain quality and safety of their services. The overpriced and unreliable healthcare was not only diverting private resources from productive investment, but also failed to provide the sense of economic security, social cohesion, and a robust state, ultimately depressing “animal spirit” throughout the society. This system of healthcare funding was also intrinsically obstructive to labor mobility within the country since access to services strictly dependent on the place of official residence. 

But while the post-Maidan health financing reform, launched in 2016, was probably targeting the right constraint, the approach might have not matched the level of problem complexity and needs to be modified in the future. 

At the time, it seemed highly collaborative and in tune with the needs of most stakeholders. The strategy was designed and taken forward by a large group of champions, cutting across several ministries, refreshingly inclusive of the civil society, very skillfully advertised among the general public. The international community, which was perceived as one of the key partners at that time, glorified the reform design as the most ambitious health financing reform ever declared. 

Implementation started successfully with a first set of changes which intentionally focused on low hanging fruits and creating public support: a new funding scheme for primary healthcare. The change helped to dramatically increase salaries of family doctors (who never enjoyed large informal payments or much respect) and to set up a key new institution – the National Health Service of Ukraine (NHSU), which was expected to become the country’s single health purchaser as the reform extends. 

When time came to extend changes to the more challenging task of introducing a new payment rule for specialized and highly specialized care, the young reform met an avalanche of problems. 

First, pouring most hospitals with extra money to lure doctors and patients (as it happened for the family doctors) was never going to be possible: in specialized care, the reform meant to get the new funds primarily from increasing efficiency – namely by closing inefficient facilities and firing redundant staff. These closures and redundancies have threatened the stakeholders who benefited excessively from the previous funding model – those doctors and medical managers who enjoyed extremely overpriced informal payments. While this was always expected, there was no strategy to mitigate the risk (e.g. through negotiating a smoother transition to the new model; arranging redundancy packages and retraining; convincingly defending the benefit of the painful change in the eyes of the population through showing a clear reform-induced improvement in the efficient facilities). Instead, the reform plan implicitly assumed that a sufficient determined and reform-oriented government should face the losing stakeholders head-on by swiftly adopting the new model, absorbing whatever political costs it would take. When the threatened hospitals did attack further reform, neither a determined government nor a public awareness of the need for closures was there to help. To the contrary, the new government submitted to the attack by promising an unaffordable blanket salary increases to all doctors, which intimidated both the health reform and the country’s macro-fiscal stability. 

Secondly, the public sobered up to the fact that the reform will not be able to quickly eliminate out-of-pocket payments. With half of the health budget coming from private pockets, the country needed time to reorient funding flows by collecting some of the needed amount from inefficient hospitals and gradually increasing the overall budget allocation to health (through cuts in other sectors, economic growth or new taxes). None of this could ever be done overnight. However, the reform champions committed to a swift improvement without honestly consulting with the society on the realistic speed of changes, especially given the trade-offs. 

Third, a newly elected government inspired a wave of hesitation over the architecture of the reform. The reform always presumed that the central problem was lack of financial protection and the need to instill universal health coverage. A change of government uncovered layers of politicians, academics and activists who believed that the real problem is poor service quality and lack of productive engagement of the private sector in the healthcare area. Empowered with the possibility to challenge the reform, these groups started advocating for new funding models with a significant role for private co-payments for healthcare and to question the role of the single purchaser. The disagreement quickly grew into a war of models, missing the stage of discussing the problem. In the meantime, the initial swift schedule for the continued change started to crack, spreading ambiguity, conspiracy theories and eroding morale in the key ministries and the health workforce. 

Finally, and perhaps most importantly, the failure to continue changes to the initially designed model through the initially intended trajectory has alienated and embittered the reform champions. This large group of professionals and politicians has gradually shaped into a cohesive camp with a sharply antagonistic view on the possibility of modifying the initial approach. This stand-off left no possibility for any movement across the reform design space, even at a crawling speed.

For Ukraine, the COVID-19 crisis has coincided with the health reform crisis with a surgical precision. While the reform is legally on-going, it remains highly vulnerable because of the on-going controversies embedded in the approach. This approach needs to develop, becoming more nuanced and more iterative. Ideally, it requires a new process to take stock of the problem complexity and to develop a theory of change truly owned by a wider circle of stakeholders. Fortunately, there is a solid argument that could be used to inspire this dialogue despite the reform fatigue. For Ukraine’s economy, getting out of this storm will require not only new winds, but also stronger sails. Moving to new places, investing in new ventures, and trusting new professionals would be much easier in a society where people are not afraid to fall ill and to entrust their lives to doctors they cannot personally control. Equally, a country which learns to implement truly complex changes would get unique level of social and political confidence. At the end of the day, Ukraine’s health reform may still prove to be one of the most ambitious and successful globally, but probably not because it would be quick and simple.   

To learn more about Leading Economic Growth (LEG) watch the faculty video, and visit the course website.

One thought on “Learning to Crawl: Can a Health Financing Reform Unshackle Ukraine’s Growth Potential?”

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    On Tue, Mar 23, 2021, 22:55 Building State Capability | Blog wrote:

    > Salimah Samji posted: ” Guest blog written by Dzhygyr Yuriy This is a blog > series written by the alumni of the Leading Economic Growth Executive > Education Program at the Harvard Kennedy School. Participants successfully > completed this 10-week online course in July 2020. Thes” >

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