expenditures in the first half of the 90s, by increasing pharmaceutical expenses, and by extra wage increases of health sector employees.'<sup>8</sup> The continued increase on these fronts has not been off-set by any observable productivity gains, and thus indicates that the current institutional and incentive structures of the health care system are flawed. Table 3.6 shows the budgeted balance and actual deficits of the Health Fund for 1992-97. In addition, hospitals have accumulated a large debt in the past few years, rolled on from one year to another. **19**

# **Table 3.6 Deficits of the Health Fund 1992-1998**

|**Health Finances**|**19**|**92**|**199**|**3**|**199**|**4**|**19**|**95**|**19**|**96**|**19**|**97**|**19**|**98**|
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
||**Budget**|**Actual**|**Budget**|**Actual**|**Budget**|**Actual**|**Budget**|**Actual**|**Budget**|**Actual**|**Budget**|**Actual**|**Budget**|**Actual**|
|**Revenues**<br>HUF bn|238|235|271|280|336|380|436|423|490|465|521|481|573|574|
|**Expenditures**<br>HUF bn__|238|257|287<br>___|306|336|398<br>_|436<br>_<br>_<br>_|445<br>_<br>_<br>__|491|509|525<br>_<br>__|537|595|621<br>_|
|**Deficit**|**0**|-22|-17|-26|0|**-18**|0|-22|-1|-44|-4|_-56_|-22|-47|
|H U F bn|_<br>_|_<br>_|_<br>_<br>_|_<br>_|_<br>_|_<br>_|_<br>_|_<br>_|_<br>__||_|_<br>_|_<br>_||
|**Deficit**|**0**|0.7|0.0|0.7|0|**0.4**|**0**|0.4|0|0.6|**0**|0.7|**0.2**|0.5|
|% of GDP|**_**||||||||||||||
|Sourc|e: Minist|ry of Fin|ance||||||||||||

# **Policy, institutional and demographic risks**

The increasing deficits and arrears in the system can be expected to continue. In absence of any major reform, the present system is not sustainable for three main reasons. First, related to policy, the benefit package is large if at all limited, pharmaceutical expenditures are rapidly increasing, salaries of doctors and other health employees are lower than sustainable while the number of doctors remains very high, and eventually, amortization of health infrastructure will need to be covered. Second, on the institutional front, the responsibility and accountability of the Health Fund are not well defined in operational spending nor are local government obligations clearly articulated in

- 18 According to the national wage agreements, part of the wage increases should be financed through a downward adjustment of the number of employees in the sector. The wage appropriations for the laidoff personnel could be used for wage increase of others. This arrangement has had a limited success for the past few years, hence wage increases resulted in increasing deficits.

- 19 With the exception of 1992-93 when the Health Fund deficits have been financed from a special bond issue by the central government and written off by end of each fiscal year. The deficits of the Health Fund have been particularly meaningful since 1997. Until 1997 the social security system employed an opaque cross-financing mechanism. For example, the Health Fund paid for pension contributions of people on child care leave while the pension fund financed health care for disabled under retirement age. Moreover, until 1998, the Health and Pension Funds reported directly to the Parliament and State Audit Office, bypassing the government oversight.

At the end of 1996, the government launched a hospital debt consolidation program. This program required HfUF4 bn from the state budget in 1997. Despite the effort to reconcile systemic difficulties at the hospital levels, however, the Final Account for year 1997 indicates that hospitals have accumulated new debt during the same year. The 1998 budget made separate appropriations to cover hospital debt, which can hardly be seen as a one-for-all rescue program.

_35_