are the collecting agents. Bosnia and Herzegovina, however, has moved the collection function from the health insurance fund to the national tax authority. It is believed that this move substantially reduced the incentive to collect contributions because the link between collection efforts and revenues was broken (Langenbrunner _et al._ forthcoming) and the taxation authority lacks the power and inter-ministerial coordinating ability needed to impose sanctions on firms and workers that do not pay contributions. Recent data reveal that in Bosnia and Herzegovina, collection rates vary from 30% to 84% across cantons.

_<u>C2.5 Co-payment policies: widespread exemptions, low levels of co-payments and poor collection</u>_ One revenue source is the charges levied at the point of service, whether these are co-payments for services covered by health insurance, fees for services provided to those who are not covered by insurance, or fees for services that lie outside of the benefit package. The purpose of such fees is generally twofold: first, to generate revenue, and second, to curb excess demand for services by combating moral hazard.

Out of equity concerns, the countries in the sub-region allow exemption from co-payments or reduced co-payments through either income-testing or categorical targeting of people who are more likely to be poor, such as the elderly. Exemptions from co-payments are also often introduced for particular categories of health services for which it is desirable to induce demand, such as immunization, treatment of infectious diseases, and other preventive care.

However, co-payment exemptions that are too widespread and co-payment levels that are too low may threaten the financial sustainability of health insurance funds and health systems. In the FYR of Macedonia, it is estimated that, at any given time, almost 50% of the population is exempt from co-payments and in Serbia, prior to co-payment reform, about 65% of the population was exempt from co-payments, although this has now been reduced to about 25% (through removing exemptions for the registered unemployed, most age-based exemptions, and exemptions for particular categories of diseases).

In those countries, such as Macedonia and Albania, where health care providers are required to submit the co-payments that they collect to the health insurance funds, the poor revenue stream flowing from co-payments is further reduced by weak collection incentives. Since the budget of an individual institution is not affected by the volume of fees collected, there is not a strong incentive to collect co-payments. Alternatively, it may create an incentive for the provider to collect, but not to remit, the fees. In Macedonia, for example, Health Insurance fund (HIF) data show that while 96.4% of the co-payments that should have been collected by the healthcare providers were collected, only 8.1% of these co-payments were remitted to the HIF. To better align incentives, Macedonia intends to change its policy from 1<sup>st</sup> January 2008 so that providers can keep the co-payment income.

# **D. ENCOURAGING EFFICIENT EXPENDITURES**

Achieving health system objectives requires substantial expenditure. In order to contain these expenditures and maximize their impact, it is essential that money is spent efficiently.

In this section, we describe the current levels of health expenditure, trends in expenditure patterns, and the allocation of expenditure across different healthcare categories. Then we discuss 14