Economic Policy Review ISSN 1313 - 0544

10% Health or 10 Reasons for Continued Bulgarian Crisis

Author: Zornitsa Slavova / 24.04.2010
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This week something unexpected and frankly said reckless happened. The government decided to increase the health insurance contribution with 2% since April this year. The cause for this move is the insufficient insurance revenue and the official reason was the national general practitioners' strike. The next year planned rise is moved forward during a started budget year thus making a precedent. The idea was to use the extra contributions to begin a health reform by including the private health insurance funds. Now the increased contribution income will directly pour into the National Health Insurance Fund (NHIF) revenue to compensate lack of liquidity.

First, the proposition contradicts the government's commitment to reduce the insurance burden. Second, the contribution rise should not end in itself because it will not solve the system problems and sooner or later will lead to a new one. Third, the international experience shows that in time of crisis the labour insurance burden should not be increased because it has many negative effects.

How the increase will slowdown the Bulgarian crisis recovery

  • 1) Unemployment. The main effect of the increased citizen and business insurance burden is the unemployment rise. The official data shows that in February the unemployment rate increased reaching 10,27%. Taking into account the labour market lag of around a year and the assumption that the crisis reached its bottom in the end of 2009, further unemployment rise could be expected in 2010.The health insurance contribution rise will strengthen this effect and 15% unemployment level is most probable till the year's end.
  • 2) More unemployment benefits expenditure and other social remuneration caused by the extra unemployment.
  • 3) Labour expenditure increase. Excessive labour taxation has a strong business influence and has a straight state employment effect. In times of crisis the best measure to preserve workplaces is the tax and insurance burden reduction. On the contrary the contribution rise would make every hired employee more expensive and the business in order to deal with the already difficult moment would prefer to cut the personnel.
  • 4) Disposable income reduction. The more expensive labour will cause disposable income reduction for business and families. Besides employees' reduction, the increased labour expenditure would affect the employers' decisions over higher salaries, remuneration and bonuses. This would have an impact on the employees' stimulus.
  • 5) Fewer investments. Higher labour expenditure causes investments reduction. The extra reduction in economic activity and internal demand during a crisis will deepen the problem. At the moment Bulgaria should attract foreign and local investments not repelling them.
  • 6) Lesser productivity. The fact that increased labour expenditure will lead to decreased business training and qualification expenditure which will decrease the labour stimulus and productivity in Bulgaria should not be ignored.
  • 7) More inefficient funds spent. It is not a secret that a lot of money leak through the health system. Now instead of correcting this issue, more money will be spent on behalf of business.
  • 8) Increase of the uninsured people. The whole inefficiency of the Bulgarian health system deters people from insuring. In practice people will receive the same thing for 10% of their income as for 6% of it because the increase to 8% contribution fee in 2009 did not aim at healthcare improvement but to accumulate reserve for subsequent reform. This will affect the individuals' decisions for greater contribution for nothing. This way the insurance burden rise will lead to increased number of uninsured people and informal sector increase.
  • 9) Absence of overall strategy. The health insurance contribution rise without healthcare system reform in Bulgaria is the easiest way to collect more money but the surest to worsen the crisis. Raising the social security burden, without being bound by an overall strategy for what needs to be done seems more like a government panic attack. Clearly it is a short term measure but without consequence consideration there could be long term negative effect.
  • 10) Lack of change. All of the present system problems will remain the same because NHIF as a monopolist has no stimulus of expenditure optimization and quality improvement. The fact that the estimated additional funds could be wrong because of the increased number of uninsured people should not be ignored. In this case the increased insurance contribution will not have the expected outcome and it will be necessary to collect more money in endless spiral of temporarily and partially filling the hole in the budget causing many negative effects.

What can be done?

The NHIF budget hole could be filled through state expenditure reduction (expenditure optimization, state withdrawal from extrinsic activities, privatization) but not through extra insurance burden for the business and the citizens. Other possible option is the government proposition civil servants to pay their contributions by themselves like everybody else, but this must be accompanied by a salary freeze this year, because otherwise it will not affect the budget. It is likely however after reducing the civil servant's maintenance, to remove the public sector optimization incentive. In any case we should not pour money in an unreformed system but commence quick action to demonopolization of the NHIF, secure the right of business to deliver the healthcare service, introduce private health insurance accounts and hospital privatization.