# **1. Introduction**

The health sectors of the countries of the Western Balkans are all undergoing major reforms. One of the major challenges is to generate sufficient revenue to provide high quality healthcare, while still protecting households from incurring too onerous a financial burden in terms of healthcare payments.

The financial implications of ill health can be severe and major illness is widely acknowledged to be one of the most sizeable and least predictable shocks to the economic well-being of households. It imposes both a direct cost, in terms of the price of accessing healthcare, and an indirect cost, in terms of the loss of income associated with reduced labor supply and productivity. Since out-of-pocket payments are the most important means of financing health care in most developing countries, large and unpredictable health payments can expose households to considerable financial risk. In the absence of an adequate system of social protection, illness can take a large toll on household well-being: resource-poor households may be compelled to trade the future welfare of all its members against current access to healthcare for one of them, or opt for inappropriate, ineffective care or an insufficient quantity of care, and in so doing, risk a vicious circle of poverty and illness (Gertler and Gruber 2002).

The objective of this paper is to assess the extent to which the current health systems of the countries of the Western Balkans are able to protect households from the impoverishing effects of adverse health events. Recent household surveys from Albania, Bosnia and Herzegovina, Montenegro, Serbia and Kosovo<sup>1</sup> are used to estimate the effect of healthcare expenditures on economic status and poverty, as well as to explore economic inequalities in health status, healthcare utilization and healthcare expenditure.

The evidence of the effects of healthcare expenditure on consumption and poverty in low- and middle-income countries has been growing over the past decade. Gertler and Gruber (2002), for instance, studied the impact of health shocks on households’ consumption patterns in Indonesia, providing evidence that illness reduced labor supply and household income. Similarly Wagstaff (2005) finds evidence that health shocks are associated with a reduction in consumption in Vietnam, in particular for uninsured and better-off households. Dercon and Krishnan (2000) show that in Ethiopia the consumption risks associated with health shocks are not borne equally by all household members. In addition, estimates are available for at least six Latin American countries<sup>2</sup> (Baeza and Packard 2005), China (Lindelow and Wagstaff, 2005), Thailand (Limwattananon 2007), and fourteen Asian countries and territories<sup>3</sup> (Van Doorslaer _et al._ 2007). A recent WHO article, using survey data from 89 countries, finds that 3% of households in low-income countries, 1.8% of households in middle-income countries and 0.6% of households in high-income countries incur catastrophic health expenditures (Xu _et al._ 2007)<sup>4</sup> . To the best of our knowledge, the estimates presented here are the first available for the Western Balkans.

> 1 Kosovo is a province of Serbia, administered by the United Nations, under UNSC resolution 1244. For the purposes of this paper, it is treated as a separate unit of analysis. The Former Yugoslav Republic of Macedonia was excluded from the analysis because its last LSMS-type household survey was conducted in 1996. Since then, only household budget surveys have been completed but they do not contain the type of health expenditure data needed for comparative analysis.

> 2 These include Argentina, Chile, Columbia, Ecuador, Honduras and Mexico.

> 3 These include, among others, Bangladesh, China, India, Nepal, Vietnam, Sri Lanka, Thailand, Malaysia and Kyrgyz Republic.

> 4 They consider catastrophic expenditure as having occurred when a household spends 40% of its capacity to pay (defined as total spending minus estimated food needs) on out-of-pocket health payments.