46847 Giving More Weight to Health: Assessing Fiscal Space for Health in Indonesia Table of Contents List of Abbrevia ons and Acronyms v List of Figures vi List of Tables vii List of Boxes viii Execu ve Summary ix Sec on One: Introduc on 1 Sec on Two: Defining Fiscal Space for Health 3 Sec on Three: Health System Outcomes, Inputs and Outputs 5 Sec on Four: Health Financing Overview 9 Sec on Five: Fiscal Space and the Macroeconomics of Government Health Spending 13 5.1 Economic Growth and Government Health Spending 13 5.2 Government Expenditures and Revenue Genera on 20 Sec on Six: Fiscal Space from a Health-Sector Specific Perspec ve 23 6.1 Fiscal Space from Earmarked Taxa on and Health-Specific Borrowing/Grants 23 6.2 Fiscal Space from Mandatory Health Insurance 27 6.3 Fiscal Space from Increasing Health's Share of the Government Budget 29 6.4 Fiscal Space and Efficiency of Government Spending on Health 34 Sec on Seven: Other Issues: Fiscal Space and the Cost of Health Care 41 Sec on Eight: Policy Implica ons and Discussion 43 References 45 Giving More Weight to Health: iii Assessing Fiscal Space for Health in Indonesia Acknowledgments This paper is one input into the ongoing Government of Indonesia-led Comprehensive Health Sector Review which will inform the GoI's next five-year Na onal Development Strategic Plan 2010-2014. It is part of a broader Health Financing Economic and Sector Study (P107276) conducted by the World Bank in Indonesia and is, in part, financed by funds provided by the HNP Anchor Unit for ac vi es related to the implementa on of the new HNP strategy. This paper was wri en by Ajay Tandon (Senior Economist, HDNHE) under the guidance of Claudia Rokx (Lead Health Specialist, EASHD), George Schieber (Health Policy Advisor), Pablo Go ret (Lead Health Economist, HDNHE), and Mukesh Chawla (Sector Manager, HDNHE). Inputs were provided by Pandu Harimur (Health Specialist, EASHD) and Valerie Moran (Junior Professional Associate, HDNHE). Peer reviewers were Adam Wagstaff (Lead Economist, DECRG), Samuel Lieberman (Health Economist, Consultant EAPHD), and Daniel Dulitzky (Senior Economist, ECSHD). Comments were also provided by Ariel Fiszbein (Chief Economist, HDNVP), Wolfgang Fengler (Senior Economist, EASPR), Pu Marzoeki (Senior Health Specialist, EASHD), Camilo Gomez Osorio (Economist, Consultant EASPR) and Tim Bulman (Economist, Consultant EASPR). General guidance was provided by Joachim von Amsberg (Country Director, EACIF), Emmanuel Jimenez (Sector Director, EASHD) and William Wallace (Lead Economist, EASPR). For the Government of Indonesia, the paper was reviewed and commented upon by Nina Sardjunani and Arum Atmawikarta (Na onal Development Agency/ Ministry of Planning Bappenas); Parluhutan Hutahean and Askolani (Ministry of Finance); Untung Suseno, Chalik Masulili and Armansyah (Ministry of Health); and Hasbullah Thabrany, Ascobat Gani (University of Indonesia); Laksono Trisnantoro, Sigit Riyarto (Gadja Mada University) and their highly valuable comments were included in the final dra of the paper. This paper was edited by Chris Stewart. Josh Estey was responsible for all photography used in this report. Financing for this paper was provided, in part, by the GAVI Alliance Trust Fund and the Dutch Government. iv Giving More Weight to Health: Assessing Fiscal Space for Health in Indonesia List of Abbrevia ons and Acronyms AAA Advisory and Analy cal Ac vi es ADB Asian Development Bank ASKES Asuransi Kesehatan Bappenas Badan Perencanaan Pembangunan Nasional (Na onal Development Planning Board) DEPKES Departemen Kesehatan (Ministry of Health) DPT3 Diptheria, Pertussis, Tetanus Immuniza on Series EAP East Asia and the Pacific EC European Community GDP Gross Domes c Product GFATM Global Fund for AIDS, Tuberculosis and Malaria GoI Government of Indonesia HDNHE Human Development Network, Health and Educa on HNP Health, Nutri on and Popula on IMF Interna onal Monetary Fund IMR Infant Mortality Rate Jamkesmas Jaminan Kesehatan Masyarakat (Community Health Insurance Scheme) Jamsostek Jaminan Sosial Tenaga Kerja (Workforce Social Security) MDG Millennium Development Goals MMR Maternal Mortality Ra o MoH Ministry of Health NHA Na onal Health Accounts OECD Organisa on for Economic Co-opera on and Development Susenas Survei Sosial Ekonomi Nasional (Na onal Socioeconomic Survey) UNDP United Na ons Development Programme UNESCAP United Na ons Economic and Social Commission for Asia and the Pacific VAT Value-added Tax WDI World Development Indicators WHO-SEARO World Health Organiza on-Southeast Asia Regional Office Giving More Weight to Health: v Assessing Fiscal Space for Health in Indonesia List of Figures Figure 2-1: Visualizing Fiscal Space for Health: Hypothe cal Scenario for Indonesia 4 Figure 3-1: Trends in Key Health Indicators for Indonesia (1960-2006) 5 Figure 3-2: Life Expectancy and Infant Mortality vs Income (2006) 6 Figure 3-3: Maternal Mortality and Child Malnutri on vs Income (2000-2006) 6 Figure 4-1: Total and Government Health Expenditure Per Capita versus Income (2006) 10 Figure 5-1: Total and Government Health Expenditure vs Income (2006) 14 Figure 5-2: Health Financing Trends by Income (2005) 14 Figure 5-3: Revised Economic Growth Forecast for Indonesia (2008-2013) 17 Figure 5-4: Long-term Trends in Government Health Spending in Indonesia (1979-2007) 18 Figure 5-5: Health Expenditure vs GDP in Indonesia (1979-2007) 19 Figure 5-6: Government Total and Health Expenditure vs Revenues (2004-2006) 21 Figure 5-7: Average Revenues as Percentage of GDP (2003-2006) 22 Figure 6-1: External Resources as Share of Health Spending in Indonesia (1995-2006) 26 Figure 6-2: Formal and Informal Sector Shares of Total Employment in Indonesia (1990-2003) 29 Figure 6-3: Global Comparison of Indonesian Districts on DPT3 Immuniza on and Skilled Birth A endance (2005) 38 Figure 7-1: Health Prices vs Overall Consumer Price Index in Indonesia (1996-2006) 42 vi Giving More Weight to Health: Assessing Fiscal Space for Health in Indonesia List of Tables Table 3-1: Popula on Health Outcomes in Indonesia and Selected Countries for Comparison (2006) 7 Table 3-2: Health System Outputs and Inputs in Indonesia and Selected Countries for Comparison 8 Table 4-1: Health Expenditure Indicators in Indonesia and Selected Countries for Comparison (2006) 9 Table 5-1: Selected Macroeconomic Indicators for Indonesia: Actual (2004- 2007) and Projected (2008-2013)(%) 18 Table 5-2: Government Health Expenditure: Actual (2004-2007) and Projected (2008-2013) 20 Table 6-1: ODA for Health in Indonesia (Disbursements)(2006) 26 Table 6-2: Government Budgetary Alloca ons in Indonesia and Selected Countries for Comparison (2000-2006) 30 Table 6-3: Corrup on Percep on Index (2005) 31 Table 6-4: Selected Countries Spending Greater than 15% of Budget on Health (2005) 32 Table 6-5: Selected Countries with Health Spending Less than Indonesia and Having Higher DPT3 Coverage Rates (2005) 37 Table 6-6: Public Health Expenditures by Level of Government (2002-2008) 37 Table 7-1: Health and Overall Price Indexes in Selected Asian Countries (2005) 42 Giving More Weight to Health: vii Assessing Fiscal Space for Health in Indonesia List of Boxes Box 5-1 Fiscal Space from Economic Growth in India 16 Box 6-1 Financing the Na onal Health Insurance Scheme in Ghana with a 2.5% VAT Levy 25 Box 6-2: Fiscal Space from Introducing Mandatory Health Insurance in Colombia 28 Box 6-3: Mexico's Health Reform 33 Box 6-4: Health System Efficiency in Sri Lanka 35 Box 6-5: Designing Interfiscal Transfers to A ain Health Results in Argen na 39 viii Giving More Weight to Health: Assessing Fiscal Space for Health in Indonesia Execu ve Summary This report analyzes fiscal space issues related to government health spending in Indonesia. Fiscal space refers to the ability of a government to increase expenditures for a desired purpose. In all likelihood, and for a variety of reasons, Indonesia will need to boost health spending in the near future as it expands access to care through the expansion of Jamkesmas, the health insurance scheme for the poor and near poor. In addi on, projec ons based on demographic and epidemiological changes in the country indicate there is likely to be a significant increase in the demand and need for health services and more sophis cated care. Despite a tripling of the public budget for health over the past five years, this increased need, combined with the fact that Indonesia remains a compara vely low spender on health, indicates that there will con nue to be upward pressure on resources for the health sector in the near future. Indonesia has posted mixed results in key popula on health indicators in recent decades. There have been impressive gains in terms of increasing life expectancy (from 41 years in the 1960s to 68 years in 2006) and in reducing child mortality. IndonesiaisalsoontracktoachievetheMDGforchildhealth.However,Indonesia's performance on other health indicators is lagging: for instance, it does not do well on maternal mortality and the incidence of malnutri on among young children remains high. From a regional perspec ve, Indonesia lags behind its peers in most of its health indicators. In addi on, na onal averages mask large inequi es and distribu on problems remain significant. All health indicators are worse in the poorer, eastern provinces of Indonesia. Similarly, in terms of health outputs and health system performance indicators, Indonesia is not a high performer. Immuniza on rates are low for a low middle-income country and skilled birth a endance is far lower than the East Asian average. In the area of financial protec on, Indonesia is star ng to make progress. Health insurance coverage has increased with the introduc on of Jamkesmas, catastrophic spending on health problems has decreased, but overall health insurance coverage is s ll below 40 percent of the total popula on. Total health expenditure per capita for Indonesia in 2006 was about US$34, or approximately 2.2 percent of GDP. Health care provision is dominated by the public sector with about 65 percent of all u liza on (both inpa ent and outpa ent) occurring at public facili es and about 30 percent at private facili es. In the same year, 50.4 percent of total health spending in Indonesia was government and 49.6 percent was private spending. The Indonesian government spent about 5.3 percent of its budget on health in 2006 but total and government health expenditures per capita are low compared to regional neighbors as well as rela ve to its income level. Giving More Weight to Health: ix Assessing Fiscal Space for Health in Indonesia Indonesia's economic growth has been strong over the past year. Economic growth tends to be one of the most important determinants of fiscal space. However, at the me of wri ng this paper, the ongoing global financial crisis makes any predic on about the future course of events difficult. Nevertheless, this paper focuses more on analyzing different mechanisms by which addi onal fiscal space for health could be realized in the near future in order to respond to increasing demands. The primary purpose of the paper is to gain an understanding of these different mechanisms in order to inform policy dialogues related to this issue, rather than to define with precision the sources and extent of addi onal funding for health. A number of different drivers of fiscal space for health in Indonesia are discussed in this paper. These include: (i) conducive macroeconomic condi ons; (ii) repriori za on of health within the overall government budget; (iii) increasing health-specific foreign aid and grants; (iv) an increase in other health-specific resources; for example, through earmarked taxa on or the introduc on of premiums for mandatory health insurance; and (v) an increase in the efficiency of government health outlays. In addi on to laying out the possibili es for Indonesia with regard to each of these op ons, relevant interna onal experiences are also highlighted. The paper concludes that there are a number of policy op ons for Indonesia to consider in order to raise resources for health. Health is accorded a rela vely low priority in the budget and one op on would be to reduce fuel and other subsidies in favor of targeted increases in health spending. Other op ons include cross- subsidiza on within a universal health insurance system, earmarking taxes (for example taxes on alcohol and cigare es, by specific levies on income, or a VAT top-up), health-specific borrowing and grants from interna onal organiza ons, and improved efficiency in the use of exis ng resources (for example by designing interfiscal transfers that are geared towards a ainment of health outputs and/ or outcomes). It is also important to recognize that increasing resources is only one part of the overall picture. Higher resources will not solve Indonesia's health system problems if the addi onal expenditures do not translate to improvements in health outputs and outcomes. x Giving More Weight to Health: Assessing Fiscal Space for Health in Indonesia Sec on One: Introduc on This paper discusses the issue of fiscal space for health in Indonesia. More specifically, the objec ves of the paper are to define fiscal space for health, elaborate an analy cal framework for assessing fiscal space for health, and discuss some implica ons in the Indonesian context.1 The paper also highlights several country case examples on the use of different policy op ons for increasing fiscal space for health. A discussion of fiscal space specifically for health is important given the likely need for Indonesia to increase resources devoted to the health sector in the near future. Given its current health situa on and future demographic and epidemiological projec ons, Indonesia will, in all likelihood, need to expand health spending­or increase the effec veness of exis ng spending­in order to a ain further improvements in health outputs and outcomes, reduce health inequali es, as well as increase health insurance coverage. The la er, in par cular, is likely to require significant increases in government health spending given Indonesia's ongoing implementa on of the Jamkesmas program which entails provision of free health care for 76.4 million poor and near-poor individuals as well as the government's plans for eventually a aining universal coverage, either via the expansion of the Jamkesmas program to the en re popula on or via other health financing op ons. The remainder of the paper is organized as follows. Sec on Two provides a brief defini on of fiscal space and outlines a basic analy cal framework for applica on 1The analy cal framework in this note closely follows that in Lane (2007). Giving More Weight to Health: 1 Assessing Fiscal Space for Health in Indonesia of fiscal space to the health sector in any country. Sec on Three provides a brief overview of health system outcomes in Indonesia while Sec on Four briefly discusses the health financing situa on in the country. A discussion of the macroeconomic context underlying government expenditures more generally and government expenditures for health more specifically follows in Sec on Five. Sec on Six elaborates on some specific health sector issues when it comes to fiscal space. Sec on Seven discusses other issues such as the role of health price infla on and its impact in terms of poten ally eroding fiscal space for health. Where possible, the note focuses on projec ons to the years 2012-2015, with an important cau onary caveat that the informa on content of the es mates presented herein diminishes significantly the further we look into the future. Sec on Eight concludes with a brief discussion of the policy implica ons. 2 Giving More Weight to Health: Assessing Fiscal Space for Health in Indonesia Sec on Two: Defining Fiscal Space for Health Fiscal space refers to the ability of a government to increase expenditures for a desired purpose. More specifically, in this paper we use Heller's (2006) defini on of overall fiscal space as the extent to which a government can raise spending in a financially sustainable manner, namely in ways that do not jeopardize a government's current or future fiscal solvency. In general, fiscal space may be defined with respect to the availability of addi onal resources for increasing government spending more generally or for a specific sector, with the la er some mes being a func on of the former.2 For the purposes of this paper, we focus a en on on fiscal space specifically in the context of health for Indonesia, keeping in mind that-at least for the near future-fiscal space for health may be constrained as a fixed propor on of overall fiscal space for Indonesia. One way of assessing fiscal space for health is to examine the different op ons by which the sources of government financing for health could be increased. These include: conducive macroeconomic condi ons such as economic growth and increases in overall government revenue that, in turn, lead to increases in government spending for health; a repriori za on of health within the government budget; 2 It is important to note that this need not always be the case. For health, for instance, there has been a rapid increase in recent years in development assistance that is earmarked for the sector, in which case fiscal space for health could increase without an increase in overall fiscal space. This dis nc on is more relevant for countries that are highly dependent on foreign assistance, for example those in Sub-Saharan Africa, and less so for a country such as Indonesia. Giving More Weight to Health: 3 Assessing Fiscal Space for Health in Indonesia an increase in health-specific foreign aid and grants; an increase in other health-specific resources, for example through earmarked taxa on or the introduc on of premiums for mandatory health insurance; and an increase in the efficiency of government health outlays. Of the abovemen oned op ons, the first two are largely outside the domain of the health sector per se as they involve general macroeconomic policies and condi ons as well as cross-sectoral poli cal economy trade-offs. Nevertheless, despite the fact that these areas are largely exogenous to the health sector, it remains important to analyze the implica ons for government health spending of changes in the generalized macroeconomic and poli cal environment within which the health sector operates. The remaining three op ons are more in the domain of the health sector and merit par cular a en on given that they provide the poten al for resources that are sector specific. One useful means of visualizing fiscal space for health is via the use of a "spider plot" (Figure 2-1). As can be seen in the figure, there are five different axes, each represen ng a different means by which government spending on health could poten ally increase. The figure presents the percentage increase in real government health spending rela ve to that in a given base year via each of the different op ons. The figure shows a hypothe cal scenario for Indonesia whereby a 4 percent increase in real government health spending can be expected from conducive macroeconomic condi ons (for example as a result of economic growth). Similarly, a 5 percent increase could come from the repriori za on of government programs and a 1 percent increase from sector-specific sources such as the introduc on of earmarked taxes for health. It is not always easy to derive the specific percentages for a given country. Nevertheless, this visualiza on can be a useful tool to highlight some of the policy op ons that may or may not be available. Figure 2-1: Visualizing Fiscal Space for Health: Hypothe cal Scenario for Indonesia Fiscal space for health (increase as % of government health spending) Conducive macroeconomic conditions Efficiency Reprioritization 1 2 3 4 5 6 7 8 Other sector-specific resources Sector-specific foreign aid Source: Author 4 Giving More Weight to Health: Assessing Fiscal Space for Health in Indonesia Sec on Three: Health System Outcomes, Inputs and Outputs Indonesia has made impressive health gains over the past few decades. Life expectancy at birth has increased from just over 41 years in 1960 to more than 68 years in 2006. The infant mortality rate (IMR) dropped from 128 to 26 per 1,000 live births and the under-five mortality rate has dropped from 216 to 34 per 1,000 live births over the same me period (Figure 3-1). The 1997 economic crisis and the decentraliza on of government administra on in 2001 do not appear to have had a discernible impact on trends in average life expectancy, infant mortality, and under-five mortality in Indonesia. The country is on track to a ain the Millennium Development Goal (MDG) for child mortality (UNESCAP et al 2007). Based on global comparisons, Indonesia's IMR in 2006 was lower than the average for its income level and its life expectancy was about average for its income (Figure 3-2). Figure 3-1: Trends in Key Health Indicators for Indonesia (1960-2006) 70 Decentralization Economic crisis 200 tear Under-five mortality tyil y ncat 60 150 taro m pec Infant mortality ex 100 ef evfi-redn Li 50 /Utn fa Life expectancy 50 In 40 0 1960 1970 1980 1990 2000 2006 Year Source: WDI Giving More Weight to Health: 5 Assessing Fiscal Space for Health in Indonesia Figure 3-2: Life Expectancy and Infant Mortality vs Income (2006) Life expectancy vs income, 2006 Infant mortality vs income, 2006 250 80 Sri Lanka Malaysia China Philippines 100 70 Vietnam Thailand Indonesia e y rat India India Bangladesh Bangladesh anct yti 60 alt pec or 25 Indonesia Philippines ex m China ef ant Li Vietnam nfI Sri Lanka 50 Malaysia Thailand 5 40 100 250 1000 5000 25000 100 250 1000 5000 25000 GDP per capita, US$ GDP per capita, US$ Source: WDI Note: log scale By way of contrast, Indonesia's performance with regard to some other key health outcomes such as maternal mortality and child malnutri on has been rela vely poor. In contrast to its performance with regard to under-five and infant mortality, Indonesia's maternal mortality ra o (MMR) is among the highest in the region, and much higher than one would expect for its income level (Figure 3-3). Indonesia's MMR­o en considered to be one of the best indicators of the performance of a health system­was an es mated 420 per 100,000 for 2005, one of the highest in the region. Furthermore, the prevalence of child malnutri on remains high (averaging 23 percent over the period 2000-2006), and is high even in rela on to its income level (Figure 3-3)(World Bank 2008). From a regional perspec ve, Indonesia lags behind its peers in most health a ainment indicators. Its life expectancy, under-five mortality, and infant mortality rates are worse in comparison with selected peer countries in the region such as China, Malaysia, Philippines, Thailand, and Vietnam (Table 3-1). Figure 3-3: Maternal Mortality and Child Malnutri on vs Income (2000-2006) Maternal mortality vs income, 2005 Child malnutrition vs income, 2000-2006 50 2500 India Bangladesh Vietnam Bangladesh 25 Sri Lanka 500 Indonesia India Indonesia e Philippines etar enc Philippines al yitlatr Vietnam ev Thailand pr 100 10 Malaysia molanret Sri Lanka onitri China China nut 25 al 5 m Ma dl hi C 5 100 250 1000 5000 25000 100 250 1000 5000 25000 GDP per capita, US$ GDP per capita, US$ Source: WDI Note: log scale 6 Giving More Weight to Health: Assessing Fiscal Space for Health in Indonesia Na onal averages for health indicators mask significant geographic and income-related inequali es within the country. Indonesia is a large, diverse, and geographically-dispersed country. In poorer provinces such as Gorontalo and West Nusa Tenggara, the infant and child mortality rates are four to five mes higher than those in richer provinces such as Bali and Yogyakarta (World Bank 2007a). In addi on, health indicators for the poor are far worse than those for the rich: child mortality rates among the poorest quin le in 2003 were 3.5 mes the rate among the richest quin les (ADB 2006). Table 3-1: Popula on Health Outcomes in Indonesia and Selected Countries for Comparison (2006) Country/Region Life Under-five Infant Maternal Child Expectancy Mortality Mortality Mortality Malnutri on Rate Rate Rate per 100,000 Rate per 1,000 per 1,000 Popula on (2000-2006) Births Births (2005) (%) Bangladesh 64 69 52 570 41 China 72 24 20 45 7 India 64 76 57 450 44 Indonesia 68 34 26 420 23 Malaysia 74 12 10 62 -- Philippines 71 32 24 230 21 Sri Lanka 75 13 11 58 23 Thailand 70 8 7 110 -- Vietnam 71 17 15 150 27 East Asia and Pacific (EAP) 67 44 35 286 24 Lower middle- income Countries 68 45 34 233 11 (LMC) Source: WDI. Note: EAP and LMC numbers are unweighted country averages. Indonesia's health system outputs and inputs are rela vely low. The DPT3 immuniza on rate in Indonesia in 2006 was only 70 percent. By way of contrast, the EAP average was 83 percent and the average for lower middle-income countries was 87 percent. A similar pa ern is observed in skilled birth a endance rates: at 67 percent, this is far lower than the average for the region (81 percent) and for lower middle-income countries (86 percent). In terms of physical health system inputs, Indonesia has a low ra o of doctors and hospital beds per 1,000 popula on compared with its regional peers (Table 3-2). Health insurance coverage rates remain fairly low in Indonesia. About 26 percent of the popula on has some form of health insurance coverage based on es mates derived from Susenas 2007 household data. About 14 percent of the popula on is covered by the government-funded Jamkesmas program for Giving More Weight to Health: 7 Assessing Fiscal Space for Health in Indonesia the poor, 6 percent is covered under ASKES3, 2.4 percent by Jamsostek4, and 3.6 percent has other forms of health insurance. The government has recently extended coverage of Jamkesmas to over 76.4 million people (about one third of the popula on). There are plans to gradually extend coverage to the en re popula on of 230 million people by 2012 although the detailed modali es of this have not been finalized. Table 3-2: Health System Outputs and Inputs in Indonesia and Selected Countries for Comparison Country/Region DPT3 Skilled Birth Doctors Hospital Beds Immuniza on A endance per 1,000 per 1,000 Rate (2000- Popula on Popula on (2006)(%) 2006)(%) (2000-2006) (2000-2006) Bangladesh 88 14 0.3 0.3 China 93 97 1.4 2.4 India 55 45 0.6 0.8 Indonesia 70 67 0.1 0.6 Malaysia 96 97 0.7 1.8 Philippines 88 59 0.9 1.1 Sri Lanka 99 96 0.5 3.1 Thailand 98 98 0.4 2.2 Vietnam 94 83 0.5 1.9 East Asia and Pacific 83 81 0.7 2.6 (EAP) Lower Middle-income 87 86 1.9 3.8 Countries (LMC) Source: WDI & WHO. Note: EAP and LMC numbers are unweighted country averages. The incidence of catastrophic health spending in Indonesia-although significant-appearstobedeclining.Onesetofes matessuggeststhat1.3percent of households in 1999, 2.3 percent in 2000, and 3.6 percent in 2001 experienced catastrophic health spending­defined as household expenditure on health that was greater than 40 percent of nonsubsistence expenditure in a given year (Xu et al 2003).5 Recent data updates indicate that the extent of catastrophic spending in 2005 and 2006 has declined to 1.5 percent and 1.2 percent respec vely (World Bank 2007a).6 3 ASKES: Civil service health insurance scheme. 4 JAMSOSTEK: A state-owned pension fund that provides social security protec on to workers in the formal sector. 5 It is not clear, though, if the es mates from 1999 are comparable to those from 2000 and 2001. 6 Es mates using an alternate methodology­by recalcula ng $2.15-a-day poverty rates a er sub- trac ng out-of-pocket health expenditure­indicated that 1.7 percent of addi onal households would be below the poverty line as a result of health spending in Indonesia in 2001. Using this la er meth- odology, Indonesia's incidence of catastrophic expenditure in 2001 was about the same as that of Sri Lanka and China and far lower than that in Bangladesh and Vietnam. See Van Doorslaer et al (2006). 8 Giving More Weight to Health: Assessing Fiscal Space for Health in Indonesia Sec on Four: Health Financing Overview Total health expenditure per capita for Indonesia in 2005 was US$34, about 2.2 percent of GDP. In the same year, 50.4 percent of total health spending in Indonesia was government and 49.6 percent was private spending (Table 4- 1). WHO es mates that the government spent about 5.3 percent of its budget on health in 2006. Indonesia's total and government health expenditures per capita are low compared to its regional peers as well as rela ve to its income level (Figure 4-1). With health spending at 2.2 percent of GDP, Indonesia is a low spender rela ve to GDP even in comparison to its rela vely poorer neighbors such as Bangladesh, India, and Vietnam. In terms of sources of funding, out-of- pocket spending accounted for about 32.9 percent of total financing in Indonesia in 2006. External sources accounted for 2.3 percent and the remainder of health expenditure was financed by government sources. Table 4-1: Health Expenditure Indicators in Indonesia and Selected Countries for Comparison (2006) Country/Region GNI Total Total Government Government Per Health Ex- Health Ex- Share of Health Capita penditure penditure Total Health Spending (US$) Per Capita as Share of Expenditure Share of (US$) GDP (%) (%) Government Budget (%) Bangladesh 450 13 3.1 36.8 7.4 China 2,000 90 4.5 42.0 9.9 India 820 39 4.9 19.6 3.4 Indonesia 1,420 34 2.2 50.4 5.3 Malaysia 5,620 255 4.3 45.2 7.0 Philippines 1,390 45 3.3 39.6 6.4 Sri Lanka 1,310 60 4.2 49.2 8.3 Thailand 3,050 113 3.5 64.4 11.3 Vietnam 700 46 6.6 32.4 6.8 East Asia and 2,149 132 6.3 65.3 10.1 Pacific (EAP) Lower Middle-income 2,357 151 6.2 58.7 10.2 Countries (LMC) Source: WHO NHA database. Note: EAP and LMC numbers are unweighted averages. Giving More Weight to Health: 9 Assessing Fiscal Space for Health in Indonesia Health care provision is dominated by the public sector in Indonesia. In 2006, about 65 percent of all u liza on (both inpa ent and outpa ent) was at public facili es while about 30 percent was at private facili es and the remainder was accounted for by tradi onal healers and other categories (World Bank 2008a). U liza on of public outpa ent facili es by the poor has increased over the past couple of years (to 60 percent), most likely as a result of the Jamkesmas program. The poor are also more reliant on public facili es for inpa ent care compared to the rich.7 Figure 4-1: Total and Government Health Expenditure Per Capita vs Income (2006) Health expenditure vs income, 2006 Total Government $ S $ 2500 U 2500 S U a,t a,t apic apic 500 500 per Malaysia e per urt e Malaysia urt Thailand China Thailand Sri Lanka pendi Vietnam pendi IndiaPhilippines ex Indonesia China Sri Lanka ex 25 ht 25 ht Philippines Indonesia Vietnam Bangladesh heal heal ent India al 5 5Bangladesh otT ernm Gov 100 250 1000 5000 25000 100 250 1000 5000 25000 GDP per capita, US$ GDP per capita, US$ Source: WDI Note: log scale Given its current health situa on and future demographic and epidemiological projec ons, it is likely that Indonesia will need to expand health spending­ or increase the effec veness of exis ng spending­in order to a ain further improvements in health outputs and outcomes, reduce health inequali es, as well as increase health insurance coverage. Extending health insurance coverage, in par cular, is likely to require significant increases in government health spending given Indonesia's ongoing implementa on of the Jamkesmas program. Es mates indicate that, in 2006, spending on this program amounted to Rp2.9 trillion, or 22 percent of central government health spending (World Bank 2008a). In addi on, this amount does not take into account the supply-side subsidiza on of health care through the payment of health worker salaries and infrastructure on the part of the government. Indonesia's plans for eventually reaching universal insurance coverage are likely to require even more resources: preliminary analyses suggest that this ini a ve alone would require addi onal resources equivalent to 1.6 percent of GDP by 2015 and 2.7 percent of GDP by 2020.8 7See World Bank 2008a for more details on u liza on pa erns. 8See ADB 2007a. These numbers are based on an analysis done by the Asian Development Bank (ADB) that projects the cost of reaching universal health insurance coverage in Indonesia. 10 Giving More Weight to Health: Assessing Fiscal Space for Health in Indonesia Given the need for addi onal resources, the next two sec ons outline some of the key drivers and op ons for fiscal space for health in Indonesia. Sec on Five begins with a discussion of some of the macroeconomic determinants of fiscal space and the implica ons for the health sector in Indonesia. Sec on Six outlines some sector-specific op ons and country examples for iden fying fiscal space from within the health sector. Giving More Weight to Health: 11 Assessing Fiscal Space for Health in Indonesia 12 Giving More Weight to Health: Assessing Fiscal Space for Health in Indonesia Sec on Five: Fiscal Space and the Macroeconomics of Government Health Spending 5.1 Economic Growth and Government Health Spending One of the most important determinants of fiscal space for health is economic growth. For all countries, in general, total health expenditure­and the government's share of total health expenditure­tends to rise with income. This can be seen from the cross-country data in Figure 5-1 from which the elas city of both total and government health spending to income can be derived. The elas city of total health spending is about 1.1 (implying that a 1 percent rise in income raises total health spending by 1.1 percent) while the elas city of government spending is higher at about 1.2 (implying that a 1 percent rise in income on average leads to a 1.2 percent rise in government health spending) Giving More Weight to Health: 13 Assessing Fiscal Space for Health in Indonesia Figure 5-1: Total and Government Health Expenditure vs Income (2006) 00 $ 25 US,atip 0 50 car pe Total health expenditure e urit nd Indonesia (total) 25 pexe Indonesia (government) ht al 5 Government health expenditure He 100 250 1000 5000 25000 GDP per capita, US$ Source: WHO & WDI Note: log scale There are several reasons why both total health spending and the government share of health spending tend to rise with income. These reasons include, inter alia,thefactthatrisingincomesareo enassociatedwithagreaterdemandfor,and supply of, health care. Richer countries tend to have older popula ons with more noncommunicable diseases and a greater need for chronic care, the rela ve price of health care rises with income driving up spending, and the revenue-collec on capaci es of governments increase with income, as do societal preferences for more public financing for health. Figure 5-2, for instance, shows the rising share of government financing and a declining share of private out-of-pocket spending for health with income. Figure 5-2: Health Financing Trends by Income (2005) Health financing trends by income, 2005 0 10 Private pooled e urit 80 Private out-of-pocket nd pexe ht 60 al hel ta to 40 oftn Government rce Pe 20 0 Lower income Lower middle Upper middle High income Source: WHO 14 Giving More Weight to Health: Assessing Fiscal Space for Health in Indonesia There are many examples of countries where economic growth has resulted in improved fiscal space for health. India is a recent example of a country that is planning to significantly boost government health spending, this being facilitated at least in part by its extremely robust economic growth rates over the past few decades (see Box 5-1). Although it is too early to precisely assess how the current global financial crisis will impact on Indonesia's future growth prospects, precrisis indica ons suggested that the country's macroeconomic fundamentals were rela vely robust and the financial sector resilient. Nevertheless, the likelihood of a nega ve impact of the recent global financial crisis on the Indonesian macroeconomy and on growth projec ons cannot be discounted, especially if export demand, foreign investment, and capital inflows are adversely affected. The World Bank projects that Indonesia's growth rate is expected to decline to 4.4 percent in 2009 before rebounding to 6 percent in 2010 (World Bank 2008b). During the course of 2008 the Indonesian stock exchange fell by 56 percent while the Indonesian rupiah has also lost over 25 percent of its value as a result of the crisis. Since the outbreak of the crisis, the IMF has also revised down its growth and infla on forecasts for the country. A precrisis IMF report projected economic growth to remain in the 6-7 percent range per annum over the period 2008-2013 (IMF 2008a). Post crisis projec ons indicate a decline in growth to 5.5 percent in 2009 followed by a slow rebound to over 6 percent in subsequent years (Figure 5-3). The outlook for infla on appeared to be a bit more problema c: infla on was expected to increase from 6.6 percent in 2007 to 12 percent by the end of 2008, primarily as a result of increases in food and fuel prices. Giving More Weight to Health: 15 Assessing Fiscal Space for Health in Indonesia Box 5-1: Fiscal Space from Economic Growth in India India has ambi ous plans to increase its government health spending from less than 1 percent of GDP to 2-3 percent of GDP during its eleventh Five-Year Plan (2007-2012). Most of the addi onal funding for health is expected to be channeled through the Na onal Rural Health Mission (NRHM) which was ini ated in 2005 for the en re country, with a par cular focus on 18 poorly- performing states. There is preliminary evidence that total government health expenditure in India over the period 2004/05 to 2006/07 has already risen in real and nominal terms: from 0.97 percent of GDP to 1.05 percent of GDP. India's plans for increasing government spending on health are occurring at a me when the country's performance on economic growth has been very impressive. India's GDP has grown on average by 6 percent over the past 25 years, with growth being in excess of 8 percent per year over the past 5 years or so. The country's tax and other revenues, a er a period of decline as a share of GDP in the 1990s, have been growing steadily post-2000 and are projected to con nue to grow in the short to medium term (see figure). The government's expenditure levels have also kept pace with the rise in revenues although part of the rise in government spending has been due to a rise in interest payment. GDP per capita, 1950-2006 Expenditure and tax revenues, 1970-2007 Economic reforms 50 25000 India 40 Expenditure )s R antt 15000 P 30 onsc( GD of at ent apic erc 10000 P 20 per Tax revenues P GD 10 Interest Payments 0 5000 1940 1960 1980 2000 2020 1960 1970 1980 1990 2000 2010 Year Year Note: y-axis log scale Note: Aggregate central and state expenditure Source: Handbook of Statistics on Indian Economy Economic growth is only part of the story behind the proposed plans to increase government health spending in India. In large part, the priori za on accorded to health in the country is a result of the 2005 elec ons which saw an unexpected rise to power of a coali on of par es, including the communists, that considered the elec on outcome to be a mandate for increasing social spending programs for the poor. 16 Giving More Weight to Health: Assessing Fiscal Space for Health in Indonesia There are concerns, however, that, even in a most op mis c scenario with a projected annual real growth rate in GDP of 7 percent, it will be difficult for the government to realize its health spending goal. Under India's decentralized governmental structure, the bulk of health spending is made by the states, not all of whom are realis cally expected to increase health spending by the amount needed to increase overall government health spending to 2-3 percent of GDP by 2012. In addi on, the IMF believes that in order to take advantage of the fiscal space from economic growth for investments in the health sector, the government will need to reduce subsidies on food and fuel as well as accelerate debt reduc on. Source: Government of India 2006; Berman et al 2008; and IMF 2008b. Despite a recent reduc on in the global price of oil, government expenditure on fuel subsidies in Indonesia remains high, with the IMF es ma ng the cost at 3 percent of GDP in 2007 with a projec on of 5 percent of GDP for 2008. The decline in fuel subsidies created some fiscal space in 2008, part of which was being used to reduce government debt and fund cash compensa on programs for the poor. Overall, at least based on precrisis projec ons, Indonesia's fiscal posi on appeared to be strong with central government revenues projected to be in the range of 17-20 percent of GDP to 2013. The fiscal deficit was es mated at 1.9 percent of GDP in 2008 and projected to remain in this range to 2013. Central government debt levels are expected to decline from 31.2 percent of GDP in 2008 to 25.2 percent of GDP by 2013. Figure 5-3: Revised Economic Growth Forecast for Indonesia (2008-2013) 8 te Pre-crisis forecast ar 7 th wor g P 6 GDl Post-crisis forecast ae R 5 4 2003 2005 2007 2009 2011 2013 Year Source: IMF Giving More Weight to Health: 17 Assessing Fiscal Space for Health in Indonesia Table 5-1: Selected Macroeconomic Indicators for Indonesia: Actual (2004- 2007) and Projected (2008-2013)(%) Year Real GDP CPI Growth (%) (Infla on) (%) 2004 5.0 6.4 2005 5.7 17.1 2006 5.5 6.6 2007 6.3 5.6 2008 6.1 12.0 2009 5.5 7.5 2010 6.3 6.5 2011 6.4 5.5 2012 6.5 5.0 2013 6.7 4.5 Source: IMF 2008a. Although consistent long-term me series data are not readily available for Indonesia,long-termtrendsingovernmenthealthspendinghavebeenfollowing trends in GDP growth. Figure 5-4 shows trends of central government health spending from a WHO-SEARO study as well as total government health spending from WHO and from the World Bank over me. Although not readily apparent from the graph, there has been a tendency for government health spending to increase as a share of GDP in Indonesia over me across all three series. Figure 5-4: Long-term Trends in Government Health Spending in Indonesia (1979-2007) Govt health expenditure and GDP, 1979-2007 0 00 50 GDP 12 0 ah piur 00 Govt (PER) 50 of ns 00 iolli Govt (WHO) 50 B 00 Central Govt 10 0 25 Decentralization 1979 1984 1989 1994 1999 2004 2007 Year 18 Giving More Weight to Health: Assessing Fiscal Space for Health in Indonesia Based on an analysis of trend data from 1995-2006, the es mated elas city of government spending to GDP in Indonesia is of the order of 1.11. By way of contrast, over the same me period, the elas city of total health expenditures was about 1.05.9 Although part of the responsiveness of nominal health expenditures to nominal GDP may also be a result of differen al price changes in health versus the average for the economy, analysis of the health component of the consumer price index (CPI) for Indonesia for 1996-2005 suggests that both the health price index and the general price index grew at the same average annual rate of about 15 percent over this me period (World Bank 2008b). A similar magnitude of responsiveness was found for central government spending versus GDP over the period 1979-2001. More recent data from the World Bank suggest that the elas city of government spending has been even higher, in the order of 1.5 (Figure 5-5). Figure 5-5: Health Expenditure vs GDP in Indonesia (1979-2007) Health expenditure vs GDP in Indonesia, 1979-2007 1995-2006 1979-2007 2006 2005 2003 2004 50000 2001 2002 2006 50000 2005 Govt 1999 Total1998 20002003 2004 2005 2003 2001 2002 )sno 1996 1997 )sn 1995 19982000 1999 2001 1996 1997 illib( 5000 1995 1999 Govt illiort( 5000 2001 ah ah upir 1997 1995 1993 upir 1000 1000 Central govt 1991 ure,t ure,t 250 250 1985 1989 1981 1983 1987 pendi pendi ex ex 50 ht 501979 ht eal healt H Gov 25000 75000 250000 750000 2500000 25000 75000 250000 750000 2500000 GDP, rupiah (billions) GDP, rupiah (trillions) Source: WHO & WDI Note: log scale Government health spending could poten ally rise from 0.99 percent of GDP in 2007 to 1.07 percent of GDP in 2013, if the elas city of government health spending to GDP in Indonesia remains at the rate it has been over 1995-2006 (that is 1.11), and if the economy were to grow at the rates recently projected by the IMF. Table 5-2 reports the projected trends for government health spending­ in levels and as a percentage of GDP­using the IMF growth and nominal GDP forecasts for Indonesia to 2013. As can be seen in the table, based on economic growth-related projec ons of government health spending, Indonesia will more 9The corresponding elas ci es with respect to nominal GDP using a global sample for 2006 were: 1.09 for total health spending and 1.21 for government health spending. Giving More Weight to Health: 19 Assessing Fiscal Space for Health in Indonesia than double its nominal health spending levels over the period 2007-2013. Table 5-2: Government Health Expenditure: Actual (2004-2007) and Projected (2008-2013) Indicator 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 Nominal GDP 2,296 2,774 3,339 3,957 4,608 5,287 6,012 6,775 7,590 8,481 (trillions Rupiah) Government 16.7 19.1 31.2 39.0 46.1 53.7 61.8 70.5 80.0 90.4 Health Expenditure (trillions Rupiah) Government 0.73 0.69 0.93 0.99 1.00 1.02 1.03 1.04 1.05 1.07 Health Expenditure (% of GDP) Source: IMF 2008 and WB staff es mates. 5.2 Government Expenditures and Revenue Genera on Higher revenues can be an important source of overall fiscal space. As men oned earlier, one key factor underlying higher government spending is improved revenue genera on which-in addi on to economic growth-could result from improved administra on of exis ng tax and nontax collec on efforts or from the introduc on of new taxes and other revenue sources, the poten ally distor onary effects of the la er on the overall macroeconomy being a key considera on (World Bank 2006). As would be expected, overall government spending is closely related to revenue genera ng capabili es in a country: there is a ght correla on between the government budget as a share of GDP and revenues as a share of GDP. On average, the rela onship between government health spending as a share of GDP versus revenues as a share of GDP is similar to that of total government spending. However, the variability of government health spending to revenue is higher, sugges ng fluctua ons in the budgetary priori za on of health. Indonesia's government health spending as a share of GDP is far lower than its average revenue share of GDP (Figure 5-6). 20 Giving More Weight to Health: Assessing Fiscal Space for Health in Indonesia Figure 5-6: Government Total and Health Expenditure vs Revenues (2004-2006) Government spending vs revenues, 2004-2006 50 ) P Government spending (% GDP) ) D 25 P G D Indonesia G %( %( 0 ng ng pendis 51 Government health spending (% GDP) pendis htl ent hea mnrevo ent G mnre Indonesia ov G 10 20 30 40 50 Revenue share of GDP (%) Source: WDI Indonesia's revenues as a percentage of GDP are lower than the average for its status as a lower middle-income country. In general, revenues as a percentage of GDP rise with income (Figure 5-7). Indonesia collects revenues that are about 19 percent of its GDP, lower than the average 23 percent of GDP for its income group.10 There is some poten al for raising revenue levels and a recent World Bank Public Expenditure Review (2007b) for Indonesia predicts that nonoil domes c tax revenues as a percentage of GDP would rise by about 0.4 percent per year in the near term. To what extent this increase in revenue would lead to an increase in government spending is not clear: both the IMF and World Bank predict a fairly flat trend for government spending as a share of GDP in the short term, in part because oil and gas revenue shares are projected to decline, so offse ng any improvements in other revenue collec on efforts. A recent country report for Indonesia (IMF 2007) has suggested that an addi onal revenue yield of 1 percent of GDP annually could be realized if VAT exemp ons were limited, property taxes were increased, and fringe benefits taxes were introduced. If these revenue gains were realized, and assuming the health share of the budget remained at 5 percent, this could poten ally lead to addi onal fiscal space for health of 0.05 percent of GDP per year for the next few years. 10The World Bank's Country Performance and Ins tu onal Assessment (CPIA) score for efficiency of revenue mobiliza on for Indonesia was 4 in 2005 on a 6-point scale with 1=lowest and 6=highest. In a recent assessment of revenue poten al, Indonesia was categorized as falling short of its revenue poten al See Gupta (2007). Giving More Weight to Health: 21 Assessing Fiscal Space for Health in Indonesia Figure 5-7: Average Revenues as Percentage of GDP (2003-2006) Revenues (% of GDP), 2003-2006 Lower income Lower middle Upper middle Higher income 0 10 20 30 40 Revenue (% of GDP) Source: WDI Local revenue-genera on capacity is low in Indonesia. Local revenues make up only about 8.5 percent of total government revenues in Indonesia. Electricity taxes, taxes on hotels and restaurants, health service user charges, building permit fees, motor vehicle taxes, and public market fees are some of the prominent sources of local revenues at the district and provincial levels. Improvements in local revenue genera on are a poten al source of addi onal fiscal space but the magnitude of the impact may be limited given the expected con nuing dominance of central revenue genera on and the weakness and inefficiency of local tax administra ons (World Bank 2007b). 22 Giving More Weight to Health: Assessing Fiscal Space for Health in Indonesia Sec on Six: Fiscal Space from a Health- Sector Specific Perspec ve The previous sec on examined fiscal space from a macroeconomic perspec ve. Economic growth, revenue genera on, and other macroeconomic factors have a strong bearing on overall fiscal space and, by deriva on, on fiscal space for health. However, these drivers of fiscal space are largely exogenous to the health sector. This sec on examines some alterna ve policy op ons for iden fying fiscal space from a more health sector-specific perspec ve. 6.1 Fiscal Space from Earmarked Taxa on and Health-Specific Borrowing/ Grants The health sector is somewhat different in the sense that there are a number of possible ways in which fiscal space could be generated by earmarked taxa on or health-specific borrowing/grants. For instance, one source of fiscal space that is specific to health would be borrowing and grants from interna onal organiza ons such as The Global Fund to Fight AIDS, Tuberculosis and Malaria (GFATM) and the GAVI Alliance (formerly The Global Alliance for Vaccines and Immuniza on). In addi on, taxa on of alcohol and cigare e consump on could be earmarked so that the revenues go directly to the health budget. Even if this does not prove to be a major source of revenue­which is unlikely given Indonesia's high rates of cigare e consump on­it may help reduce morbidity and mortality related to these risk factors. There do, however, appear to be poli cal obstacles to taxing tobacco. Indonesia is the only Asian country not to have signed WHO's Framework Conven on for Tobacco Control. One cited reason is that excise taxes on tobacco produc on account for almost 10 percent of government revenues, and es mates indicate Giving More Weight to Health: 23 Assessing Fiscal Space for Health in Indonesia that the sector employs almost 7 million people (The Economist 2007). Taxes on cigare es in Indonesia are amongst the lowest in the region: amoun ng to only about 31 percent of the price of cigare es. Studies have suggested that a 10 percent rise in the price of cigare es could lower consump on by 3.5-6.1 percent and increase government revenues from cigare e taxa on by 6.7-9 percent (Achadi et al 2005). However, this has to be offset by concerns that cigare e and alcohol taxa on is o en regressive and may result in evasion and the development of underground markets. Thailand is an example of a country that has successfully implemented an earmarked tax that directly funds health promo on ac vi es. In 2001, Thailand ins tuted the Thai Health Promo on Founda on (ThaiHealth), funding for which comes directly from a 2 percent earmarked tax on tobacco and alcohol consump on that provides an es mated annual revenue stream of US$50 million (WHO/SEARO 2006). Thailand has also steadily increased cigare e taxa on over the years­from 55 percent in 1993 to 75 percent in 2001­leading to declining consump on rates but increased government revenue from tobacco taxes. Other examples of earmarked taxa on to create fiscal space for health come from Ghana and Zimbabwe. In Ghana, an addi onal 2.5 percent VAT (see Box 6-1) was implemented to help pay for its na onal health insurance program. Similarly, Zimbabwe introduced an addi onal 3 percent levy on personal income and corporate taxes to help fund AIDS-related interven ons. Although earmarked taxes can help add to fiscal space, they may also displace exis ng funding and thereby end up having no significant net impact on overall resources for health. They can also contribute to reducing the flexibility for spending budgets and these factors need to be taken into account when considering the implementa on of any earmarked taxes (McIntyre 2007). 24 Giving More Weight to Health: Assessing Fiscal Space for Health in Indonesia Box 6-1: Financing the Na onal Health Insurance Scheme in Ghana with a 2.5% VAT Levy In 2003, Ghana passed its Na onal Health Insurance Act with a goal of eventually providing universal coverage for all Ghanaians. The plan is to cover 30-40 percent of the popula on by 2010 and 50-60 percent by 2015- 2020. The insurance system includes several district mutual health schemes, private mutual schemes, and commercial schemes providing a basic benefits package defined by the government. Ghana has a Na onal Health Insurance Fund, the purpose of which is to subsidize the cost of care for the poor as well as to finance health service delivery improvements. The Fund is financed by a 2.5 percent levy on all goods and services (both those produced in Ghana as well as imports), a 2.5 percent wage-related premium on those in the formal sector, as well as general tax-funded budgetary transfers. The 2.5 percent levy on goods and services and wages provides 77 percent of the financing for the fund. Unlike the use of earmarked taxes on consump on of products such as cigare es and alcohol, Ghana's VAT levy is rather unusual, at least among low-income countries, in its use of a broad-based earmarked VAT on the consump on of goods and services as a means for crea ng fiscal space for health care coverage. Concerns remain, however, regarding the financial sustainability of the insurance program-which will also depend, in part, on the enrollment of premium-paying informal sector workers-as well as the progressivity of the tax in raising revenues for health. Source: Sulzbach et al 2005; McIntyre 2007; Ramachandra and Hsiao 2007. As men oned above, another way to generate fiscal space for health­especially in low-income countries­is for governments to seek addi onal health-specific foreign aid and grants from interna onal donors such as the GFATM and GAVI Alliance and the like. Official development assistance (ODA) disbursements for health in Indonesia for 2006 amounted to US$70.6 million from bilateral sources and US$34.4 million from mul lateral sources. Australia and Germany were the largest bilateral donors and the European Community (EC) and GFATM were the largest among the mul laterals (Table 6-1). Giving More Weight to Health: 25 Assessing Fiscal Space for Health in Indonesia Table 6-1: ODA for Health in Indonesia (Disbursements)(2006) Source Amount (US$ millions) Bilateral Total 70.6 Australia 28.6 Germany 22.3 UK 2.8 Mul lateral Total 34.4 GFATM 19.2 EC 12.5 UNICEF 2.7 Source: OECD CRS. WHO es mates that about 2.3 percent of total health expenditure in Indonesia in 2006 was financed by external sources, and this propor on­following an increase in the postcrisis period 1997-2000­has generally been declining over me (Figure 6-1). The current propor on for Indonesia is somewhat lower than the average for lower middle-income countries (7.7 percent) and for the EAP region as a whole (17.5 percent), although the la er average, in par cular, is biased upwards because of the inclusion of small Pacific countries. Figure 6-1: External Resources as Share of Health Spending in Indonesia (1995-2006) External resources share of total health spending, 1995-2006 15 g) in s nd rceu pes 10 so hlt rela eah rne al ott Ext of 5 %( 0 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 Source: WHO Given recent declining trends and Indonesia's lower middle-income status, it does not appear as though foreign aid is a viable op on for genera ng fiscal space for health in Indonesia par cularly since, unlike the previous Indonesian crisis, the current crisis has originated in the United States and is having an impact on most of the donor countries. There are expecta ons that foreign aid budgets will face some ghtening in the coming year or two at the very least. 26 Giving More Weight to Health: Assessing Fiscal Space for Health in Indonesia 6.2 Fiscal Space from Mandatory Health Insurance One poten al mechanism for genera ng fiscal space is via introduc on of mandatory universal health insurance. This is a poten al strategy by which high out-of-pocket payments may be "captured" by the public sector in the process of introducing health insurance for all via the collec on of mandatory premiums. The basic economics behind any insurance mechanism is the idea that individuals would prefer payment of a predictable (and rela vely small) dedicated tax or premium in order to avoid unpredictable (and poten ally large) payments when a health or other shock materializes. There is some evidence that individuals may be more willing to pay earmarked taxes or premiums as long as there are clear benefits a ached to the payment of such a tax or premium (Buchanan 1963). Colombia is an example of a country that was able to generate increases in public sector health spending and a reduc on in out-of-pocket expenditure when it introduced mandatory health insurance in 1993 (see Box 6-2). Giving More Weight to Health: 27 Assessing Fiscal Space for Health in Indonesia Box 6-2: Fiscal Space from Introducing Mandatory Health Insurance in Colombia In 1993, Colombia introduced health sector reforms aimed at achieving universal health insurance. The reforms introduced two regimes for insurance: (i) a mandatory contributory regime covering formal workers and their families as well as those who were self-employed and able to pay the premiums, and (ii) a subsidized regime covering the poor and indigenous popula ons. One key aspect of Colombia's health sector reform that is important from a fiscal space perspec ve is that it has a solidarity subfund whereby 1 percent of all the contribu ons from the contributory regime are transferred to the subsidized regime. The solidarity contribu ons accounted for 34.4 percent of the subsidized regime's resources in 2003. The remainder came from na onal government transfers (56.3 percent), local "sin" tax revenues (8.8 percent), and from other family benefit funds (0.5 percent). The reform has been redistribu ve from richer to poorer households and insurance coverage increased from 23 percent of the popula on in 1993 to 62 percent of the popula on in 2003. Catastrophic spending has declined, as have out-of-pocket payments more generally: from 2.7 percent of GDP in 1993 to 0.6 percent of GDP in 2003. Over the same period, total health spending rose from 6.2 percent of GDP to 7.8 percent of GDP. Government spending on health­including social security contribu ons­more than doubled from 3.0 percent of GDP to 6.6 percent of GDP. Hence, in Colombia out-of-pocket spending was in a sense "captured" by the government in the process of introducing mandatory universal coverage. Source: Masis 2008; Baron-Leguizamon 2007 and Escobar 2005. The success of such a mechanism to create fiscal space is dependent on the size and ability to enroll the premium-paying segment of the popula on. Indonesia's Jamksemas program­which provides insurance without payment of a premium for the poor and near poor­covers 76.4 million individuals with plans to extend this to all ci zens. Indonesia's success in genera ng fiscal space from mandatory insurance would be dependent on the extent to which the remainder of the popula on can be encouraged to enroll in any na onal health insurance program so that some of the addi onal resources collected can be used to subsidize the nonpremium paying popula on. One of the big issues in Indonesia has to do with the extent of the informal sector: employing more than two thirds of the workforce, it remains a large and essen ally stagnant sector despite rapid economic growth (Figure 6-2)(Sugiyarto et al 2006). With such a large share 28 Giving More Weight to Health: Assessing Fiscal Space for Health in Indonesia of employment in the informal sector, ensuring enrollment with some form of prepayment so as to generate fiscal space in any mandatory health insurance schemes is likely to be extremely challenging. Figure 6-2: Formal and Informal Sector Shares of Total Employment in Indonesia (1990-2003) 0 10 80 Informal sector share 60 agetnec er P 40 Formal sector share 20 0 1990 1995 2000 Year Source: Sugiyarto et al (2006) 6.3 Fiscal Space from Increasing Health's Share of the Government Budget As men oned earlier, the Indonesian government currently (2006) allocates about 5.3 percent of its budget­about 0.98 percent of its GDP­on health. This is slightly higher than the average expenditure for the 2000-2006 period (4.6 percent) but is s ll much lower than the average for EAP and lower middle-income countries which spent about double that amount as a share of the government budget during the same period (Table 6-2). Cross-sectoral budgetary alloca ons are determined by the Na onal Development Planning Board (Bappenas) in consulta on with the Ministry of Health (MoH). The MoH has recently argued (GoI 2007) for health spending to increase to 5 percent of GDP, ci ng this as a WHO recommenda on.11 Indonesia's government health sector does appear to be underfunded and accorded a rela vely low priority. Unlike the case of countries such as India and China, Indonesia's low alloca on for health does not appear to be related to higher alloca ons to military spending (Table 6-2) but is likely to be related to the high amounts spent on fuel and energy subsidies which amounted to 18 percent of total expenditures in 2001-2006. Educa on also takes up a high propor on of spending, averaging almost 15 percent of the budget over the period 2000-2005. 11It is important to note that WHO has never officially endorsed the figure of 5 percent of GDP as a spending target for health. See Savedoff (2007). Giving More Weight to Health: 29 Assessing Fiscal Space for Health in Indonesia Table 6-2: Government Budgetary Alloca ons in Indonesia and Selected Countries for Comparison (2000-2006) Country/Region Government Share of Budget (%) Health Military Educa on Bangladesh 6.2 13.9 15.2 China 9.8 19.0 -- India 3.3 18.0 11.7 Indonesia 4.6 7.8 9.4 Malaysia 7.2 11.4 24.0 Philippines 5.7 5.2 15.9 Sri Lanka 7.4 14.1 -- Thailand 11.0 7.3 27.8 Vietnam 5.9 -- -- East Asia and Pacific (EAP) 9.9 11.2 17.1 Lower Middle-income Countries (LMC) 10.1 9.3 16.7 Source: WHO NHA Database. Note: EAP and LMC averages are unweighted. There is wide varia on at the district level in health spending as a share of the district budget. Some kabupaten/kota such as Kota Gorontalo in Gorontalo Province spent more than 20 percent of their budget on health in 2005. Other kabupaten/kota spend less than 1 percent of total public expenditure on health. In principle, such varia ons in health expenditure are to be expected as decentraliza on ought to allow for a be er matching of local expenditure with local needs. However, it is not clear whether this has indeed been the case in Indonesia as there appears to be a posi ve associa on between district health spending and income. Public health expenditures are higher in districts with larger budgets and higher per capita incomes (World Bank 2008a). 30 Giving More Weight to Health: Assessing Fiscal Space for Health in Indonesia Analy calresearchoncross-countrydeterminantsofsectoralexpenditureshares tends to emphasize the importance of broader ins tu onal and sociopoli cal factors. Higher levels of corrup on have been found to be nega vely related to governmentspendingonhealth,forinstance.Onehypothesizedconnec onisthat the size of kickbacks that are related to projects in the health sector tend to be low. Delavallade (2006) found that­in a sample of 64 countries, including Indonesia, over the me period 1996-2001­higher levels of corrup on were indeed strongly related to lower levels of budgetary alloca ons to health, educa on, and social protec on and higher budgetary alloca ons towards spending on defense, fuel and energy, and public service order. Mauro (1998) made a similar finding but also found that corrup on impacted more nega vely on educa on spending than health. Table 6-3 compares the Corrup on Percep on Index of Indonesia to other EAP countries.12 In 2005, Indonesia had a score of 2.2 which suggests that it was viewed as being quite corrupt and ranked last among a selected group of East Asian countries. Other factors that have been found to be correlated with higher levels of government spending on health include greater democra za on and lower levels of ethno-linguis c frac onaliza on (ADB 2006). Table 6-3: Corrup on Percep on Index (2005) Country Corrup on Percep on Index China 3.2 Indonesia 2.2 Malaysia 5.1 Philippines 2.5 Thailand 3.8 Vietnam 2.6 Source: h p://www.transparency.org/policy_research/surveys_indices/cpi Recent interna onal agreements have called for governments to spend a greater share of their na onal budgets on health. However, such poli cal commitments have tended to not be very effec ve in raising health's share of the government budget. For example, the Abuja Declara on of 2001 signed by 53 African heads of state pledged to increase health's share of the government budget in signatory countries to 15 percent. In 2005, few countries in Sub-Saharan Africa­Rwanda, Burkina Faso, Malawi, Liberia, and Somalia being notable excep ons­came close to spending 15 percent of their budget on health (Center for Global Development 2007). Table 6-4 reports selected low-income, lower middle-income, and upper middle-income countries that spent more than 15 percent of their budget on health in 2005. Several La n American countries are prominent in this group, reflec ng their health financing arrangements based on formal sector social insurance combined with subsidized or free care for the poor, not unlike the model that Indonesia is planning to implement. 12 Transparency Interna onal developed the Corrup on Percep on Index to measure the degree of corrup on in a country as perceived by business people and country analysts. Countries are assigned a score between 0 and 10, with 0 being seen as most corrupt and 10 judged as least corrupt. Giving More Weight to Health: 31 Assessing Fiscal Space for Health in Indonesia Table 6-4: Selected Countries Spending Greater than 15% of Budget on Health (2005) Classifica on Country Low-income Burkina Faso; Hai ; Liberia; Malawi; Rwanda; Somalia Lower middle-income Brazil; Colombia; Guatemala; Honduras; Paraguay; El Salvador Upper middle-income Costa Rica; Croa a Source: WHO NHA Database. Mexico is a recent example of a country that has begun to implement plans to achieve universal health insurance coverage and has increased government alloca onstohealthintheprocess.Mexico'shealthreforms-whichcommenced in 2004-were designed to extend coverage to about 50 million addi onal individuals, largely represen ng the poorer segments of the popula on who were not covered by any of the exis ng schemes. Mexico plans to have universal coverage by 2010, with an addi onal 14.3 percent of uninsured families being covered each year between 2004 and 2010 (see Box 6-3 for addi onal details). 32 Giving More Weight to Health: Assessing Fiscal Space for Health in Indonesia Box 6-3: Mexico's Health Reform It is envisioned that by 2010 everyone in Mexico will be covered by one of three insurance schemes: the Ins tuto Mexicano del Seguro Social (IMSS) scheme covering salaried employees in the private sector, the Ins tuto de Seguridad y Servicios Sociales de los Trabajadores del Estado (ISSSTE) for salaried workers in the public sector, and the Seguro Popular scheme for nonsalaried workers, self-employed, and families outside the labor force. Each of these schemes has, or is expected to have, a fixed tax-financed federal contribu on per family (social quota). This was set at 15 percent of the mandatory minimum wage and currently amounts to US$259 per year per affiliated family. In addi on, there are financing components on the part of the beneficiary as well as the cocontributor (private employers for IMSS, public employers for ISSSTE, and a solidarity contribu on split between the stateandfederalgovernmentsforSeguroPopular).Thesolidaritycontribu on was set at 1.5 mes the social quota with some adjustments upwards for poorer states. The state contribu on-funded out of state revenues-was set at half the federal social quota. For the Seguro Popular, family contribu ons are based on a family's capacity to pay, with an upper limit of 5 percent of disposable income. Families in the bo om two deciles are exempt from contribu ons. The benefits package includes a set of essen al primary and secondary care interven ons provided at the state level and a package of higher-cost ter ary care interven ons, the la er being pooled at the na onal level and provided for at the regional and na onal levels. A key aspect of the reform is that enrollment in Seguro Popular is voluntary. However, states have a strong incen ve to enroll families given that federal alloca ons to state budgets are designed to be a func on of number of enrollees in that state. In addi on, states have an incen ve for maintaining quality of care or risk losing enrollees. Those families that choose not to enroll are eligible to seek care at public providers but would have to pay for services at the point of delivery. Financing es mates for a aining universal coverage by 2010 suggest that government health spending would need to increase by 1 percent of GDP: up from about 2.8 percent of GDP in 2003. Mexico is an example of a country where health reforms have triggered an increase in the government's alloca on to the health sector. In real terms, the Ministry of Health's budget has increased by 69 percent over the period 2001-2006, in part due to the mobiliza on of resources for implementa on of the health reform. Some funding also comes from earmarked taxes on cigare e sales. Source: Gakidou et al 2006; Knaul et al 2006; Frenk 2006; Knaul and Frenk 2005. Giving More Weight to Health: 33 Assessing Fiscal Space for Health in Indonesia 6.4 Fiscal Space and Efficiency of Government Spending on Health In addi on to increasing budgeted amounts for health, effec ve fiscal space may be generated by increasing the efficiency of spending. Improvements in the efficiency of health systems can be an important source of fiscal space. Originally conceptualized in terms of the economics of firms and farms, efficiency is typically defined as maximizing output(s) from input(s). Although its applica on to defining the efficiency of a health system is not perfect, one component of efficiency is alloca ve: achieving the op mal mix of inputs given rela ve prices. A second component is technical: given input levels, maximizing the level of output that can be a ained. Alloca ve and technical efficiency combined together are o en referred to as economic efficiency (Jacobs et al 2006). Sri Lanka is o en presented as an example of a country that has been able to a ain excellent health outcomes with rela vely low levels of resources, in part because of the underlying efficiency of its health system (see Box 6-4). 34 Giving More Weight to Health: Assessing Fiscal Space for Health in Indonesia Box 6-4: Health System Efficiency in Sri Lanka Sri Lanka is one of the best-performing countries in its health outcomes rela ve to resources. The figure shows the a ainment of child mortality and maternal mortality outcomes rela ve to income and total health expenditure in Sri Lanka and other countries in 2005. As can be seen from this figure, Sri Lanka is one of the most posi ve outliers. Indonesia is above average for child mortality but not for maternal mortality. Sri Lanka's Child and Maternal Mortality Rela ve to Income and Total Health Spending (2005) Performance relative to income and health spending, 2005 Under-five mortality Maternal mortality 3 3 ng 2 ng age 2 age er er pendis av pendis av ht ow ht ow al 1 el 1 el he B heal B al al ott ott ot 0 ot 0 Indonesia evi evi at at elr Indonesia elr e -1 age e -1 age er er anc av Sri Lanka anc av Sri Lanka e e orm orm erf -2 bov erf -2 bov P A P A -3 Above average Below average -3 Above average Below average -3 -2 -1 0 1 2 3 -3 -2 -1 0 1 2 Performance relative to income Performance relative to income Source: WDI Although health outcomes are also a func on of nonhealth system related factors such as educa on, in Sri Lanka's case there is some evidence that part of its good performance in health may be due to the fact that its health system has been rela vely efficient. Its expansion of health coverage post- 1960 has occurred during a period when government health spending as a share of GDP has actually been declining. In the case of some tradi onal efficiency indicators, Sri Lanka has rela vely low cost per GDP per capita ra os for inpa ent and outpa ent care, has high produc vity of human resources in the health sector, as well as high bed turnover rates and a low average length of stay in hospitals. The health-care delivery modality in the country is oriented towards the use of hospitals for providing both inpa ent and outpa ent primary care and there is some evidence that this has been more cost-effec ve than the use of stand-alone primary care facili es, possibly due to economies of scale. Source: Rannan-Eliya and Sikurajapathy 2008. Giving More Weight to Health: 35 Assessing Fiscal Space for Health in Indonesia Health system efficiency can be defined at a more micro level (for example at the level of health facili es) or at a more macro level (for example at the level of a subna onal or na onal health system). Macro-level measurement of efficiency tends to be problema c. WHO (2000) a empted to es mate the performance of na onal level health systems by rela ng a composite index of health levels, health inequality, responsiveness, responsiveness inequality, and fairness in financial contribu on against total health expenditure, with a control for the level of educa on in a country. Indicator es ma on problems aside, such macro-level measures of health system efficiency can be misleading given that they assume that health expenditure is a causal factor underlying health system outcomes. Health outcomes are clearly a func on of many other factors­educa on, water and sanita on, housing, and income, to name a few­making the a ribu on of causality to health expenditures alone difficult.13 Effec ve coverage rates for given levels of health resources can be an indicator fores ma ngmacro-levelhealthsystemefficiencyproblems.Effec vecoverage­ defined as the propor on of the popula on that has a given health care need that receives quality care­is a more direct output measure of a health system (Shengelia et al 2005). Health care needs may be defined based on popula on characteris cs (for example the need for immuniza on among children) or by the presence of a disease or health problem for which an effec ve interven on is available. Rela ng effec ve coverage to health resources can be a crude es mate of possible efficiency problems in a health system. DPT3 immuniza on coverage, for instance, is o en considered to be a good indicator of the coverage of a health system. Table 6-5 lists several countries in 2005 that spent less on health care than Indonesia but a ained higher DPT3 coverage rates. Clearly, Table 6-5 does not show that Nepal's health system is more efficient than Indonesia's: one would need to look at a more composite measure of effec ve coverage or only look at resources devoted to DPT3 immuniza on in each of the countries to reach such a conclusion. It does suggest, however, that there might be some efficiency-related problems in Indonesia that merit further study given its poor performance on a key public health measure such as DPT3 immuniza on in light of the net health resources at its disposal. 13See ADB (2007) for a cri cal overview of methods for measuring macro-level health system efficiency. 36 Giving More Weight to Health: Assessing Fiscal Space for Health in Indonesia Table 6-5: Selected Countries with Health Spending Less than Indonesia and Having Higher DPT3 Coverage Rates (2005) Total Health DPT3 Immuniza on Country Expenditure Per Capita Coverage Indonesia $26 70% Uganda $22 84% Rwanda $19 95% Tajikistan $18 85% Tanzania $17 90% Nepal $16 75% Pakistan $15 80% Bangladesh $12 88% Source: WHO NHA Database & WDI. Micro-level es mates of efficiency tend to be based on unit costs. This can also be an incomplete characteriza on of efficiency given that such measures tend not to control for quality of health care and differences in input costs due to cost-of-living differences (for example differences in rural-urban costs that are unrelated to the health system per se). Ideally, a mix of macro- and micro-level indicators should be examined to assess the poten al for improvement due to efficiency-related problems in any health system. Es ma on of facility costs is ongoing as part of the broader health financing AAA for Indonesia and will be reported at a later stage. Following decentraliza on in 2001, up to half of all public health expenditure in Indonesia has been spent at the district level. In 2006 the central government contributed about 39 percent of all public expenditures on health with the provinces funding the remainder (see Table 6-6)(World Bank 2008a). However, district health spending remains, for the most part, nondiscre onary or rou ne. In addi on, there remains some confusion as to the roles of the different levels of government with regard to accountability and responsibili es. The clarifica on of these issues could poten ally help improve efficiency of the health system in Indonesia. In addi on, there is a startling varia on in health outputs across districts in Indonesia, sugges ng that there may be lessons to be learnt from be er-performing districts (Figure 6-3). Table 6-6: Public Health Expenditures by Level of Government (2002-2008) 2002 2003 2004 2005 2006* 2007** 2008*** Rp (bn) % Rp (bn) % Rp (bn) % Rp (bn) % Rp (bn) % Rp(bn) % Rp(bn) % Central 2,907 26 5,752 36 5,595 33 5,837 31 12,190 39 17,467 45 16,768 42 Province 2,372 22 2,821 18 3,000 18 3,316 17 5,100 16 5,600 14 5,924 15 District 5,725 52 7,473 46 8,108 49 9,948 52 13,900 45 15,900 41 16,972 43 Total 11,004 100 16,046 100 16,703 100 19,101 100 31,190 100 38,967 100 39,664 100 Source: World Bank, SIKD database, based on data from MoF. Note: * = alloca on, ** = es mated, *** = es mated. Giving More Weight to Health: 37 Assessing Fiscal Space for Health in Indonesia Figure 6-3: Global Comparison of Indonesian Districts on DPT3 Immuniza on and Skilled Birth A endance (2005) Global comparison of Indonesian districts, 2005 DPT3 immunization Skilled birth attendance 100 Japan Kota Kediri Kota Padang Panjang 100 Ukraine China Kab. Tana Toraja Vietnam Kab. Kediri Kab. Semarang Turkey Kab. Madiun Bangladesh Uganda 80 Pakistan 80 Kab. Bantul Kab. Kuningan Kab. Ciamis Kota Ambon Nepal Kab. Morowali Kab. Lombok Barat e onitaz Kab. Subang Kab. Konawe Selatan Kab. Barito Selatan Kab. Barru Papua New Guinea 60 60 Kab. Parigi Moutong Kota Singkawang Timor-Leste India endanct uni at Bhutan Senegal m Kab. Hulu Sungai Utara Kab. Purbalingga mi Tanzania Kab. Bombana Kab. Bangka Tengah 3T htrib Cambodia P 40 Niger 40 D Somalia dellik S Kab. Nias Selatan Kab. Wonosobo Burundi 20 Chad 20 Ethiopia 0 0 Indonesia Other countries Indonesia Other countries Source: SUSENAS & WDI One possible avenue for improving the effec ve fiscal space in a decentralized context would be to design interfiscal transfers such that they are geared towards a ainment of health outputs and/or outcomes. Such mechanisms have recently been found to be quite successful in the cases of Argen na (see Box 6-5) and Rwanda and may be something that could be considered in the Indonesian context as only a small percentage of transfers are currently ed to specific sectors and even those are not ed to the a ainment of specific outputs or outcomes. 38 Giving More Weight to Health: Assessing Fiscal Space for Health in Indonesia Box 6-5: Designing Interfiscal Transfers to A ain Health Results in Argen na Argen na's Plan Nacer was ini ated in 2004 in order to provide coverage for the poor in provinces located in the northern part of the country. The program is designed to provide results-based financing to provincial governments based on the number of enrollees in the program as well as performance on a set of basic health indicators. About 60 percent of interfiscal transfers from the central government to the provincial governments are based on the number of enrollees and the remaining 40 percent is ed to a ainment of ten tracer indicators such as immuniza on rates and average weight at birth of newborns. Service delivery is contracted out by the provincial governments to cer fied public and private providers with pa ents free to choose among the providers. The program finances a condi onal matching grant from the central government to provinces which pays half the average per capita cost of a basic benefit package covering 80 cost-effec ve maternal and child health interven ons to uninsured mothers and children up to 6 years of age. The program has built-in incen ves for increasing enrollment rates as well as for provision of quality care. Capita on-based and unit-costed payments encourage nego a on with providers and efficiency in delivery of services. Results are independently audited and have so far been quite encouraging. Source: Johannes, L. 2007. Giving More Weight to Health: 39 Assessing Fiscal Space for Health in Indonesia In addi on to efficiency gains from be er coordina on across all levels of government, several studies have indicated other avenues by which efficiency gains may be realized in Indonesia. For instance, a recent IMF analysis argues that Indonesia­by ra onalizing its spending and elimina ng energy subsidies­ could expand overall fiscal space by almost 1.5 percent of GDP. This would entail moving the bulk of expenditure away from personnel, interest payments, subsidies,andgovernmentapparatusasitcurrentlystands(whichallowli leroom for investment in infrastructure, health, and educa on)(IMF 2007). In addi on, the recent Public Expenditure Review by the World Bank (2007b) shows that public health expenditure is dominated by spending on salaries of personnel and primarily benefits the richer quin les: some efficiency gains may be actualized by be er targe ng and increasing the discre onary elements of health spending. Another example that shows room for efficiency gains comes from a study of health worker absenteeism in Indonesia.Based on unannounced visits to primary health care facili es in Indonesia, the study found a 40 percent absenteeism rate among medical workers (Chaudhury 2006). Absenteeism rates tended to be higher among doctors than other types of health workers. This clearly demonstrated the need to reevaluate incen ves and governance issues related to delivery of health services given that­in "real" terms­expenditure outlays may not be transla ng effec vely into human resource inputs in the health system. 40 Giving More Weight to Health: Assessing Fiscal Space for Health in Indonesia Sec on Seven: Other Issues: Fiscal Space and the Cost of Health Care Rising health prices can significantly erode fiscal space for health. If the cost of health care provision rises faster than general price movements in the economy, this can be a major impediment to actualizing, in real terms, any nominal increases in fiscal space for health. In general, given the prominence of (nontradable) labor inputs in the provision of health care, the cost of health care provision is likely to rise at a faster rate than prices in general as economic growth occurs: there is a general tendency for convergence between the prices of tradable and nontradable goods and services as economies become richer.14 On the flip side, government regula ons and policies­including provider payment mechanisms and supply- side incen ves­can be u lized to control spiraling medical price infla on. Health prices have tended to track the overall consumer price index (CPI) quite closely in Indonesia. As can be seen in Figure 7-1, from 1996-2003, the index of health prices rose at a slightly faster pace than the general CPI for the country. In 2004/05, health prices grew at a somewhat slower rate than the general CPI. If these trends are maintained then the threat to fiscal space due to differen al price changes in the health sector versus those for the overall economy will remain minimal. However, it is not easy to predict what the demand and supply-side reac ons would be to plans for universal health insurance coverage in Indonesia. The behavior of health prices would need to be carefully monitored so as not to jeopardize the financial sustainability of Indonesia's health financing plans. 14 Lower rela ve prices of nontradable goods and services are a prominent reason why purchasing- power parity (PPP) es mates of GDP are significantly higher than market exchange-rate converted measures of GDP. Giving More Weight to Health: 41 Assessing Fiscal Space for Health in Indonesia Figure 7-1: Health Prices vs Overall Consumer Price Index in Indonesia (1996-2006) 0 35 0) 0 10 30 6= 991( Consumer price index (health) 0 xedni 25 eci 0 pr Consumer price index (total) 20 er mu 0 nso 15 C 0 10 1996 1998 2000 2002 2004 2006 Year Source: BPS Based on interna onal comparisons, health price levels tend to be high in Indonesia. The recent Interna onal Comparison Project es mated health price levels in 2005 based on a basket of medicine prices and costs of assorted health service consulta ons across several countries in the Asia-Pacific region. Indonesia's health prices were found to be comparable to those in Malaysia and Philippines, but significantly higher than health prices in Thailand, Vietnam, and India (Table 7-1)(ADB 2007b). Table 7-1: Health and Overall Price Indexes in Selected Asian Countries (2005) Country Overall Price Index Health Price Index Bangladesh 48 27 Cambodia 43 18 China 58 22 Hong Kong 100 100 India 45 18 Indonesia 55 49 Lao PDR 38 16 Malaysia 63 45 Mongolia 47 19 Nepal 43 21 Pakistan 44 23 Philippines 54 44 Singapore 89 89 Sri Lanka 48 24 Thailand 54 36 Vietnam 41 19 Source: ADB 2007. Note: Hong Kong = 100. 42 Giving More Weight to Health: Assessing Fiscal Space for Health in Indonesia Sec on Eight: Policy Implica ons and Discussion Demographic and epidemiological projec ons as well as economic growth project rising demand for health care in Indonesia. In addi on, its plans for a aining universal health insurance coverage are likely to require substan al addi onal resources. Given this backdrop, this paper has outlined some op ons for assessing the extent to which fiscal space for health might become available in the Indonesian context in the near future. Indonesia has an advantage over many countries in that it has a fairly posi ve prognosis with regard to economic growth in the short term. The key is u lizing the resource envelope flexibility that comes with economic growth in order to expand government health expenditure to meet growing demands on the health system, both for improvements in health care as well as for a aining financial protec on from catastrophic health spending. There are several op ons for increasing fiscal space for health in Indonesia. As Indonesia plans to move to universal coverage, one op on would be to consider some form of cross-subsidiza on such that some propor on of the resources raised from the premium-paying popula on could be u lized for subsidizing health care for the poor. Indonesia may also consider earmarked taxa on and a reduc on in fuel and energy subsidies, although more detailed analyses of the impact of such op ons on the poor would need to be undertaken before a final considera on could be made. One key point to note is that fiscal space is not just about increasing nominal spending amounts. Improving the efficiency of exis ng expenditure outlays is an important source of effec ve fiscal space and must be included in any discussions or policy dialogue on increased health spending. Indonesia has significant diversity in health system outputs and outcomes which may be related to differences in efficiency of the health system across districts. This would be an important area for further research in terms of learning from be er performing districts. Giving More Weight to Health: 43 Assessing Fiscal Space for Health in Indonesia Absorp ve capacity constraints can hinder the actualiza on of fiscal space for health. This is a cri cal issue in the case of Indonesia given its decentraliza on with the locus of decision-making and implementa on authority substan vely devolved to the district level. One key indicator that suggests there are absorp ve capacity constraints is the level of unspent reserves held by local governments which is es mated at 3.1 percent of GDP (World Bank 2007b). There are other constraints­for example large personnel expenditures and the difficulty of hiring and firing civil servants­that can pose significant problems to realiza on of fiscal space. Any analysis of fiscal space should also examine constraints to actualiza on that may occur along the chain of health service delivery modali es in Indonesia. 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