Short-Term Policy Options to Reform Health Insurance for the Unemployed in FYR Macedonia

Short-term Policy Options to Reform Health Insurance for the Unemployed in FYR Macedonia

A Policy Note

October 15, 2008

Human Development Sector Unit EUROPE AND CENTRAL ASIA

Document of the World Bank

CURRENCY EQUIVALENTS

(Exchange Rate Effective as of July 1, 2007) Currency Unit = MKD US$1.00 = 46.52 Macedonian Denar

Fiscal Year July 1, 2007 – June 30, 2008

ABBREVIATIONS AND ACRONYMS

ALMPs Active Labor Market Programs ENP Personal Civil Registry Number ESA Employment Service Agency HIF Health Insurance Fund IMF International Monetary Fund LFS Labor Force Survey MoF Ministry of Finance MoH Ministry of Health MoLSP Ministry of Labor and Social Policy PDF Pension and Disability Fund PRO Public Revenue Office UN United Nations

Vice President: Shigeo Katsu Country Director: Jane Armitage Sector Director: Tamar Manuelyan Atinc Task Team Leader: Gordon Betcherman SHORT-TERM POLICY OPTIONS TO REFORM HEALTH INSURANCE FOR THE UNEMPLOYED IN FYR MACEDONIA

TABLE OF CONTENTS

EXECUTIVE SUMMARY...... 1

INTRODUCTION...... 4

LONG-TERM REFORM AND SHORT-TERM CONSTRAINTS...... 5

Defining the Problem...... 5

Long-term Reform Guidance: Health Insurance for the Unemployed in Other Countries...... 11

Short-term Constraints: Resources and Capacities...... 14

SHORT-TERM POLICY OPTIONS...... 17

Step 1: Restricting Health Insurance for the Unemployed...... 18 Simplify Administration of Health Insurance Coupons...... 20 Relax Registration Requirements...... 20 Restrict Eligibility for Health Insurance Provided by ESA...... 21 Include Participants of ALMPs...... 22 Include Recipients of Social Assistance...... 23

Step 2: Mitigating the Negative Impacts...... 25 Implications for HIF in the Absence of Mitigating Policies...... 26 Policy Option 1: Free Coupons from HIF for All Uninsured...... 27 Policy Option 2: Promote Voluntary Self-Insurance...... 27 Policy Option 3: Offer Tax Incentives for Voluntary Self-Insurance...... 29 Policy Option 4: Retroactive Collection of Compulsory Contributions...... 30

CONCLUSIONS...... 32

REFERENCES...... 36 INDEX OF TABLES

Table 1: Population aged 15+ by employment status (estimates according to labor force survey, 2006)___6 Table 2: Registered unemployed by category (administrative data, 2006-07 annual averages)______7 Table 3: Average number of beneficiaries of social benefits administered by MoLSP (2007)______9 Table 4: Average number of insurees, dependents, and contributions to HIF (2007)______9 Table 5: Total lives covered versus contributions paid______10 Table 6: Overview of health services for recipients of unemployment benefits or unemployment assistance in European countries______12 Table 7: Overview of health services for recipients of social assistance in European countries______13 Table 8: Policy matrix and objectives for policy evaluation______19 Table 9: Estimated distribution of insurees, dependents, and uninsured (status quo versus proposed policy change under Step 1)______25 Table 10: Policy matrix and expected outcomes______33

INDEX OF BOXES

Box 1: The Macedonian health system...... 8 Box 2: Social health insurance versus tax-financed health systems...... 15 EXECUTIVE SUMMARY1

FYR Macedonia has a significant labor market problem with high unemployment and a large informal sector. The unemployment rate in 2006 was estimated at 36 percent of the labor force, and an additional 20 percent was estimated to work informally. Only 45 percent of the labor force was formally employed.

One third of registered unemployed are either informally employed or inactive. The high level of unemployment and informal employment is reflected in the level and composition of registered unemployed. Of the 365,000 registered unemployed—18 percent of the total population—only two thirds are estimated to be active jobseekers, the rest are non-active jobseekers because they are informally employed or inactive.

Non-active jobseekers among registered unemployed constitute a significant administrative burden for the Employment Service Agency (ESA) and a significant financial burden for the formal sector. Registered unemployed are required to re- register regularly and a large number of files have to be kept up-to-date in order to ensure proper administration. In addition, registered unemployed receive benefits like unemployment benefits and health benefits. These benefits are abused by non-active jobseekers and the formally employed have to co-finance free-riding on social benefits and services by informal workers.

Free health insurance for the unemployed plays a central role in explaining the high share of non-active jobseekers among registered unemployed. Eligibility for the unemployment benefit is limited while almost no conditionality applies for registered unemployed to receive free health insurance. The only requirement to receive health insurance is to re-register as unemployed every six month. In addition, it is necessary to be registered as unemployed in order to receive social assistance, yet social assistance is subject to a means-test. Free health insurance seems to be the major incentive to register as unemployed despite not actively looking for a job.

Four policy objectives serve as guidelines to assess policy options to reform health insurance for the unemployed in Macedonia: first, to minimize the negative impact on poverty; second, to minimize the negative impact on public health; third, to minimize the distortionary impact on the informal sector; and fourth, to balance the administrative impact on the various government agencies involved.

1 This note has been prepared by Johannes Koettl (World Bank, Europe and Central Asia - Human Development Sector Unit). Valuable input has been provided by various agencies of the government of Macedonia as well as by Tamas Evetovits and Victor Macias. I am grateful to Evgenij Najdov and Jasminka Sopova for their support. I would also like to thank Gordon Betcherman, Domenic Haazen, Erika Jorgensen, Christoph Kurowski, Vladimir Lazarevik, and Milan Vodopivec for comments on earlier drafts of the policy note. This policy note is the outcome of a continuing dialogue between the government of Macedonia and the World Bank on the issue of health insurance for the unemployment. The note offers no firm policy recommendation, but outlines a series of policy options. Based on the findings of this note, the World Bank will continue to provide advice and technical assistance on this issue to the government of Macedonia.

1 This policy note focuses on the short-term and therefore parametric reform within the current framework of social heath insurance, but also investigates long-term solutions for guidance. There are two major long-term policy options, namely a reform within the current framework of social health insurance, or a transition to a tax-financed national health system. Tax-financed health systems are only marginally discussed as it would distract from the urgent need for quick reform, which can only take place within the current framework. Nevertheless, long-term solutions will be kept in mind in order to receive guidance for short-term reforms.

In other European countries, health insurance for the unemployed who do not receive an unemployment benefit is subject to a means test. Overall, Macedonian legislation is in line with legislation of other European countries in the sense that recipients of unemployment insurance benefits also receive free health insurance. Yet, for those who do not qualify for unemployment insurance benefits, free health insurance is not subject to a means test in the case of Macedonia.

Macedonia should limit free health insurance to recipients of unemployment benefits, social assistance, and possibly participants of certain types of active labor market programs (ALMPs). This would restrict free health insurance to active jobseekers (recipients of unemployment benefits, participants of ALMPs) and exclude informally employed and inactive people. In order to minimize incidents of abuse and ensure that only active jobseekers participate, any reform should carefully select the types of ALMPs that would make its participants eligible for free health insurance. In particular, this should only apply to ALPMs that require a considerable time commitment from participants and programs that have a proven impact on the likelihood of participants finding a job. Recipients of social assistance—which is subject to a means test—would receive free health insurance from the Ministry of Labor and Social Policy (MoLSP) to mitigate any negative impact of the reform on poverty.

Such a policy would leave more than 10 percent of the Macedonian population uninsured, which constitutes a public health risk and is politically not viable. ESA currently provides free health insurance for almost 600,000 people (insurees and dependents). Under the proposed reform, this number would drop to about 330,000, leaving 270,000 people uninsured.

In order to address the negative impact of the proposed reform, compulsory self- insurance with the possibility of retroactive contribution collection is recommended. Hungary has recently introduced a similar policy. Under this policy, all residents are required to become members of the Health Insurance Fund (HIF) and make monthly contributions. Nevertheless, access to health services remains open. Everyone receives health services, yet at the point of service, non-contributing members are identified and reported to the Public Revenue Office (PRO). PRO can then collect outstanding contributions—and possibly a penalty—and refer those cases where no income or assets are available to the social assistance program at MoLSP to find a solution.

2 The advantage of compulsory self-insurance with retroactive collection is that it provides equitable access to health services, reduces the incentives to work informally, and reasonably balances the administrative burden between various government agencies. Health services are provided to all members of HIF at all times, although the threat of re-paying large amounts of contributions plus a penalty could provide considerable disincentives to seek health care in a timely manner for non- contributing members. This risk could be addressed by significantly reducing contribution rates across the board, at least temporarily, and apply a sufficiently large penalty for non-contribution in order to make non-contribution less attractive. Also, provided that differences in contribution rates between formal and informal workers are sufficiently cut, under the proposed reform the possibilities for informal workers to free- ride on health insurance are significantly reduced, which should lead them to pressure their employers to formalize work contracts. The administrative burden for ESA is drastically reduced, and the additional administrative burden is reasonable balanced between HIF, MoLSP, and PRO.

In a certain sense, compulsory self-insurance is a hybrid system between social health insurance and a tax-financed national health system. Yet, the advantage is that compulsory self-insurance allows for a gradual, parametric change within the current framework, and no sudden fundamental policy change. It also allows keeping certain advantages of social health insurance, like a split between purchaser and providers of health services and explicitly earmarked contributions for health spending.

PRO’s central role in the reform can be used to provide further incentives for self- insurance and to scrutinize the informal sector. Tax reform could give (partial) tax credits for contributions to HIF, which could encourage informal workers to file taxes, familiarize them with the tax system, and build trust in the tax system. Data on retroactive contributions can also serve as an indicator for informal work. At a later stage, PRO could also start proactive (as opposed to retroactive) contribution collection.

In order to advance urgently needed reforms, the close cooperation of the involved ministries is essential. The issue of health insurance for the unemployed cuts across health and social we well as fiscal policy. Accordingly, addressing the issue requires reconciling differing views of the various agencies involved through joint analysis and drafting of joint reform options. Therefore, future efforts will require strong leadership of the ministries involved, in particular the Ministry of Finance (MoF), the Ministry of Health (MoH), and MoLSP.

3 INTRODUCTION FYR Macedonia2 has a significant labor market problem, with high unemployment and a large informal sector. The estimated unemployment rate is 36 percent, 20 percent of the labor force works in the informal sector, and only 45 percent of the labor force is formally employed. These numbers are also reflected in the level and composition of registered unemployed. Of the 365,000 registered unemployed—18 percent of the total population—only two thirds are estimated to be active jobseekers. The rest are either informally employed or inactive. These non-active jobseekers among registered unemployed constitute a major administrative burden for Macedonia’s Employment Service Agency (ESA). They also constitute a major financial burden on the formal sector because formal employees and self-employed have to co-finance social services for free-riding informal workers and inactive people.

Health insurance for the unemployed plays a central role in explaining the high share of non-active jobseekers among registered unemployed. In Macedonia, everyone who registers as unemployed receives free health insurance. The only requirement is to re- register every six months, but there is no conditionality with regard to job search or income.

This policy note aims to investigate short-term policy options on how to reform Macedonia’s health insurance policy for the unemployed. In doing so, it will focus on parametric changes within the current framework of social health insurance. It abstains from discussing more fundamental policy changes like tax-financed national health systems. The policy note finds that there is no ideal or straightforward short-term reform policy to solve the problem, but there are a number of policy options—with important tradeoffs and implications for the long-term reform—to share the immediate administrative burden of health insurance for the unemployed among various government agencies. Limiting eligibility for health insurance to only recipients of unemployment benefits, social assistance, and possibly participants of ALMPs should be the cornerstone of any short or long-term reform. This would drastically increase the number of uninsured, which is neither desirable form a social welfare planner’s point of view, nor politically viable. Various policy options are discussed to address this issue. The policy option with the most favorable outcome seems to be compulsory self-insurance with retroactive collection of contributions. A similar system has been successfully introduced in Hungary. Such a policy represents a reasonable approach to balance competing concerns about (i) the impact on poverty; (ii) the impact on public health; (iii) the impact on distortionary incentives for the informal sector; and (iv) the administrative burden for the various government agencies involved.

The next section defines the problem and discusses guidance for long-term reform from other European countries as well as Macedonia-specific short-term constraints. This is followed by a presentation of the various short-term policy options. The last section concludes.

2 In the following, Macedonia.

4 LONG-TERM REFORM AND SHORT-TERM CONSTRAINTS The current legislation with regard to health insurance for the unemployed causes significant problems for the ESA at a time when ESA should put all its efforts in combating high unemployment. About a third of the registered unemployed seem not to be active jobseekers, but register with ESA to receive health insurance. This puts a considerable administrative burden on ESA.

With regard to long-term reform, most European countries with social health insurance provide health insurance for recipients of unemployed benefits, but apply means-testing to those who do not qualify for unemployment benefits or have exhausted eligibility for unemployment benefits. In Macedonia, though, there is no connection between means- testing and the right to health insurance. The question then is, can Macedonia reform its system in a similar way?

In the short-term, this seems unlikely due to resource and capacity constraints. It seems that most policy options will either leave any single agency overwhelmed, or leave many people without health insurance, or create unintended incentives for the informal sector. The only short-term solution seems to be to share the administrative burden as much as possible between different agencies, while keeping the long-term solution in mind and minimizing adverse incentives for the informal sector. This means decreasing the administrative burden for ESA while at the same time increasing the roles of the Ministry of Labor and Social Policy (MoLSP), the Health Insurance Fund (HIF), and also the Public Revenue Office (PRO). At the same time, active leadership to champion reform efforts is necessary from all ministries involved, namely the Ministry of Finance (MoF), the Ministry of Health (MoH), and MoLSP.

The following subsections will elaborate on these findings by starting with defining the problem and subsequently investigating guidance for long-term solutions and short-term constraints.

Defining the Problem Macedonia has a significant labor market problem, with high unemployment and a large informal sector. The unemployment rate according to the 2006 Labor Force Survey (LFS) was estimated at 36 percent (see Table 1). An additional 20 percent of the labor force were employed in the informal sector, while only 45 percent were formally employed. These large numbers are reflected in the levels of registered unemployed. According to the LFS, about 380,000 workers were registered as unemployed with ESA.

Roughly one third of the registered unemployed seems either to be employed in the informal sector, or is inactive and should therefore not be registered as unemployed. In particular, the LFS estimates suggest that about 70,000 informally employed workers are registered as unemployed. The Macedonia LFS allows this estimation because it asks— maybe somewhat counterintuitively—employed persons if they are registered as unemployed with ESA. Only informally employed can do so because all formally

5 employed are registered as contributing members with the Pension and Disability Fund (PDF), and it is not possible to register with both, ESA and PDF. Therefore, the Macedonia LFS estimates that about 70,000 employed are registered with ESA. All of these 70,000 are informally employed because none of them are registered with PDF. In addition, about 50,000 inactive people register as unemployed with ESA. Of these, about 10,000 are so-called discouraged jobseekers. Discouraged jobseekers are available and willing to work, but make no efforts to find a job. The other 40,000 are not looking for jobs at all.

Table 1: Population aged 15+ by employment status (estimates according to labor force survey, 2006)

Informally Formally Inactive - Inactive Percen Unemployed Total t of employed employed discouraged - other total Registered as unemployed 260,950 71,343 -- 10,143 38,693 381,129 23.6% Percent of total 68.5% 18.7% 2.7% 10.2% 100.0% Not registered as unemployed 60,324 102,463 -- 10,558 666,498 839,843 5.9% Percent of total 7.2% 12.2% 1.3% 79.4% 100.0%

Formally employed -- -- 396,227 -- -- 396,227 24.5%

100.0 Total 321,274 173,806 396,227 20,701 705,191 1,617,199 % Percent of total 19.9% 10.7% 24.5% 1.3% 43.6% 100.0% Percent of labor force 36.0% 19.5% 44.5% ------Note: -- for not applicable; Source: Macedonia LFS (2006)

Therefore, only two thirds of the registered unemployed seem to be active jobseekers. The 260,000 unemployed who register with ESA can be assumed to actively look for a job. According to the LFS, these 260,000 have no job, are available to work, and have taken actions related to job search within the last two weeks. Their motivation to register with ESA is at least to some extent related to job search.

One third of the registered unemployed, on the other hand, are non-active jobseekers. These 120,000 are either informally employed, or discouraged, or inactive. Their motivation to register with ESA is most likely related to receiving benefits from ESA, but not related to job search.

The available administrative data from ESA more or less confirms these estimates. According to ESA, on average about 360,000 Macedonians registered as unemployed in 2006 (365,000 in 2007, see Table 2).3 Since 2007, ESA asks registered unemployed to reveal if they are actually seeking a job. The result is that about 76,000 registered unemployed declare that they are nor looking for a job. This is probably an underestimation. Registered unemployed are asked to reveal their status on a voluntary basis, and some might not declare their true statues for fear of future sanctions. In any

3 This means that the LFS overestimates the number of registered unemployed by about 20,000. For more details on the insights from the Macedonia LFS, see also Angel-Urdinola and Macias (2008).

6 case, both LFS data and administrative data confirm that a significant share of the registered unemployed is actually not looking for jobs.

Health insurance for the unemployed seems to play a central role in explaining the high level of non-active jobseekers registered as unemployed. Registering as unemployed is a hassle because it requires people to regularly re-register with ESA, so non-active jobseekers have no incentive to register unless they can expect a benefit. The possibility of abusing the unemployment cash benefit could be one incentive for non-active jobseekers to register, but in the case of Macedonia the eligibility is narrow, and only about 7 percent of registered unemployed receive an unemployment benefit. Health insurance, on the other hand, is provided to every registered unemployed by ESA, unless someone is co-insured with a formally employed spouse. This means that virtually anyone can get free health insurance in Macedonia simply by registering as unemployed with ESA. There are no further eligibility criteria attached. Not surprisingly, in 2006 and 2007, ESA provided health insurance for about 245,000 unemployed, or 68 percent of all registered unemployed (see Table 2).

Table 2: Registered unemployed by category (administrative data, 2006-07 annual averages)

Share of Share of 2006 total 2007 total Unemployed registered with ESA 359,251 100.0% 365,402 100.0% of which recipients of health insurance from ESA 242,924 67.6% 247,694 67.8% of which recipients of cash unemployment benefits from ESA 34,832 9.7% 27,144 7.4%

voluntarily declaring "no jobseeker" n.a. n.a. 76,151 20.8%

Annual transfer from ESA to HIF (million MKD) 2,144.0 2,144.0 Annual transfer from ESA to HIF (million EUR) 35.0 35.0 Note: n.a. for not available Source: ESA and International Monetary Fund (IMF, 2008)

Health insurance for the unemployed is the largest expenditure of ESA and costs almost as much as the total social assistance program of the government of Macedonia. Macedonia has a contribution-based, statutory social health insurance system, which means that ESA pays contributions to HIF on behalf of registered unemployed (see Box 1). In 2006 and 2007, ESA paid about MKD 2.1 billion (EUR 35 million) annually to HIF. This compares to total expenditures on unemployment benefits in 2007 of MKD 1.6 billion, and a total budget of MKD 2.8 billion for social assistance benefits administer by MoLSP (see Table 3). Also, ESA’s contributions on behalf of registered unemployed represent about 14 percent of revenues for HIF (see Table 4).

7 Box 1: The Macedonian health system The Macedonian health system is a social health insurance system based on compulsory contributions. Contributions are tied to salaries, with contribution rates between 8.6 percent of pre-tax income for public and private employees (8.6 percent of the reference wage for farmers and self-employed) to 14.694 percent of net pensions for pensioners. The Ministry of Health (MoH) provides the framework of operation for the health system, monitors it, and formulates health policies. The Health Insurance Fund (HIF) collects contributions, allocates resources, and contracts and supervises health care providers.

Macedonia has a comprehensive basic benefit package, which applies to all HIF members. Legal provisions for a voluntary supplementary health insurance are in place, but have not been implemented yet.

Total health expenditures in 2004 were estimated at 7 percent of GDP, which is significantly lower than in neighboring countries and EU countries (8.9 percent average). Health care in 2004 amounted to US$ 411 per capita (in purchasing power parities), and roughly 84 percent of these expenditures were provided from public sources. There is, though, only very limited data available on out-of-pocket expenditures on health care. In addition, there is some evidence on informal cash payments to public providers.

Health care is delivered though health care centers, general and specialized physicians at the primary level, general hospitals with specialized and inpatient care at the secondary level, and specialized hospitals at the tertiary level. The Macedonian health system is an interesting case as it went through considerable centralization after independence, but has recently started to re-decentralize its health infrastructure to the municipal level. Resource allocation was initially based on fee-for-service, but was later replaced by a budget system that covered the basic needs of health facilities. In 2003, it was decided to introduce a payment system based on diagnosis-related groups (DRG), which is scheduled to be rolled out in 2008.

Source: European Observatory on Health Care Systems (2000) and Gjorgev at al. (2006).

8 Table 3: Average number of beneficiaries of social benefits administered by MoLSP (2007)

of which receive Number of health insurance Percentage beneficiaries Benefit type from MoLSP Cash benefits Social assistance 63,882 do not qualify -- Care allowance 19,295 640 3.3% Permanent assistance 5,030 3,550 70.6% Disability 368 26 7.0% Other cash benefits 2,036 do not qualify --

Benefits in kind Foster care n.a. 620 Shelter n.a. 273

Other n.a. 301

Total 90,611 5,410 6.0% Average monthly cash benefit per beneficiary (MKD) 2,599 Average monthly HIF contribution per beneficiary (MKD) 727 Total annual cost (million MKD) 2,826 47 1.6% Source: MoLSP and author’s calculations.

Table 4: Average number of insurees, dependents, and contributions to HIF (2007) Average Contributions Dependents monthly Insurees Dependents Total (million paid by per insuree contribution Insurance MKD) category per insuree Formally employed 424,231 407,583 0.96 831,814 8,948.4 1,758 Employer Self-employed 11,649 10,074 0.86 21,723 234.9 1,681 Self Farmers 17,609 15,475 0.88 33,084 59.8 283 Self Retirees and pensioners 322,206 104,511 0.32 426,716 3,715.1 961 PDF Registered unemployed 268,672 323,992 1.21 592,664 2,145.1 665 ESA Veterans 3,870 1,652 0.43 5,522 0.4 10 MoLSP Social assistance beneficiaries 6,214 1,890 0.30 8,104 68.8 923 MoLSP Others 14,643 18,795 1.28 33,437 164.2 934 Mainly self Total 1,069,092 883,971 0.83 1,953,064 15,336.8 1,195 Uninsured ------123,123 122.5 83 MoH Total population ------2,076,187 -- -- Source: HIF and United Nations (UN, 2007).

9 In addition to considerable costs, health insurance for the unemployed signifies a major administrative burden for ESA staff. Registered unemployed who receive no unemployment benefit and do not participate in any ALMPs are required to re-register with ESA every six months. In addition, records and funds have to be transferred to HIF every 4 months. HIF, in return, sends coupons for every unemployed to ESA for distribution to beneficiaries. These coupons—also called Blue Cards—confirm that contributions to HIF have been paid on behalf of the beneficiary and serve as a proof of eligibility when requesting health care services. The coupons are sent to beneficiaries by ESA through expedited mail. ESA estimates that the administration of health insurance requires up to 40 percent of total staff time.

Therefore, the current legislation with regard to health insurance for the unemployed causes significant problems for ESA at a time when ESA should put all its efforts in combating high unemployment rates. ESA seems to act as the residual health insurance provider for many informally employed and inactive people and their family members. According to ESA, many of the non-active jobseekers registered as unemployed seek health insurance for their whole family because either their spouses work in the informal sector, or the whole family lives from subsistence farming and/or remittances. The unusual high number of dependents per insuree (1.21 as opposed to a national average of 0.83, see Table 3) seems to confirm this observation.

Table 5: Total lives covered versus contributions paid

Total lives covered Contributions paid paid by Insurance category (% of population) (%of total) Formally employed 40,1% 57,9% Employer Self-employed 1,0% 1,5% Self Farmers 1,6% 0,4% Self Retirees and pensioners 20,6% 24,0% PDF Registered unemployed 28,5% 13,9% ESA Veterans 0,3% 0,0% MoLSP Social assistance beneficiaries 0,4% 0,4% MoLSP Uninsured 5,9% 0,8% MoH Others 1,6% 1,1% Mainly self Total 100,0% 100,0% Source: HIF and UN (2007).

Finally, the current situation puts a considerable financial burden on the formal sector. The formal sector is currently subsidizing free health insurance for the informal sector. As can be seen from Table 4, average contributions are much higher for formal employees than contributions made by ESA on behalf of registered unemployed. This is due to the fact that formal employees pay income-related contributions, while ESA’s contributions on behalf of the unemployed seem to be subject to a base (reference wage) or a flat rate (see also Leibfritz 2008). Looking at total numbers, formally employed and self-employed constitute 41 percent of the total population, but have to finance 60 percent of contributions to social health insurance (see Table 5). Because of the large informal sector, the financial burden on the formal sector to co-finance social services, including

10 health, is considerable. This puts pressure on contributions rates for social security and creates distortions between contributions and level of benefits.

The question is how Macedonia could reform its legislation to address the problem. In doing so, it will be useful to look at the experience of other countries, in particular to get guidance for long-term solutions. For the short-term, though, the specific constraints of the Macedonian situation have to be acknowledged.

Long-term Reform Guidance: Health Insurance for the Unemployed in Other Countries Most European countries with social health insurance provide health insurance for the unemployed. The majority of countries follow the same basic rule that Macedonia applies, meaning that unemployment insurance pays social security contributions on behalf of eligible unemployed persons (Austria, Bulgaria, Czech Republic, Estonia, Germany, Lithuania, Romania, Slovak Republic, and Slovenia, see Table 6). In a number of other countries the same rule applies, yet with a slight modification in the sense that the unemployed remains the principal responsible for paying social security contributions. In these countries, social security contributions are deducted directly from unemployment benefits (Hungary, Liechtenstein, the Netherlands, Norway, Portugal, and Spain).

The difference, though, between most European countries and Macedonia is that health insurance is only provided to those who receive an unemployment benefit, not to just any registered unemployed. Although Macedonia does have an unemployment benefit, most registered unemployed have exhausted their eligibility for the benefit. Only 27,000 or 7 percent out of the total registered unemployed received an unemployment benefit in 2007 (see Table 2). All others do not qualify for the unemployment benefit, but nevertheless still qualify for health insurance benefits.

In most other countries, free health insurance for those unemployed who do not receive an unemployment benefit is subject to means-testing. This is usually done in conjunction either with unemployment assistance (administer by the national Public Employment Services, PES), or social assistance (administered by Ministry of Social Policy, MoSP), or both. Again, some countries simply let PES or MoSP pay social security contributions on behalf of beneficiaries (Austria, Germany, Liechtenstein, Lithuania, Luxembourg, the Netherlands, Romania, and Slovenia, see Table 7). Others have provisions to either directly cover any health-related expenses for social assistance recipients or other people with no or low income (Estonia, Poland, and Sweden, see Table 7), or simply grant free access to public health care services for the very poor (Cyprus, Czech Republic, Malta, and Spain), or take health expenses into account when determining benefits (Finland and Norway).

11 Table 6: Overview of health services for recipients of unemployment benefits or unemployment assistance in European countries Unemployment Agency pays contributions on behalf of unemployed persons receiving benefits from unemployment Austria insurance (Arbeitslosenversicherung) and participants of vocational rehabilitation. Belgium Unemployed persons have access to health care. Contributions for recipients of unemployment benefits are paid by the State Unemployment Fund (Фонд "Безработица”) Bulgaria based on the amount of the benefit. State pays contributions on behalf of certain groups of insured persons, like jobseekers registered at a Labor Office. This Czech Republic contribution amounts to 13.5% of the assessment base; the assessment base is 25% of the national average monthly salary. Free health care services for all residents (not an associated right). Denmark Supplement possible for dental costs or pharmaceutical products to cover the insured person's participation in these costs (see "Assistance in special cases"). Social Tax (sotsiaalmaks) paid by State on behalf of some categories of non-active persons, like recipients of State Estonia Unemployment Allowance (töötutoetus) or Unemployment Insurance Benefit (töötuskindlustushüvitis), Public health care services available to all residents (not an associated right). Finland Substantial medical expenses are taken into consideration while determining the amount of the social assistance. Unemployment assistance: no contributions (generalized social contribution or contribution for the repayment of the social France debt). All residents have access to health care. Unemployed, receiving benefits of unemployment insurance, have access to health care. The beneficiary is not required to Germany pay social security contributions. However, the Federal Employment Agency (Bundesagentur für Arbeit) pays contributions for retirement, sickness and long-term care insurance for the beneficiaries of unemployment insurance benefits. Hungary Beneficiaries of various benefits and allowances have to pay health insurance from benefit (compulsory). Iceland Public health care available to all residents. No direct rights; however, persons in receipt of the allowance are usually entitled to a full range of medical services on the Ireland basis of their low income. Health care is guaranteed to all citizens via the National Health Service (Servizio Sanitario Nazionale, S.S.N.). Persons with Italy an income less than the social pension (assegno sociale) are exempted from participation in costs. Latvia Health care is guaranteed to all citizens. Unemployment benefit in the case of total unemployment is subject to contributions for state pension insurance, invalidity Liechtenstein insurance, the families' compensation fund (AHV/IV/FAK) and occupational benefit plans. Persons who are fit for work but are unemployed for valid reasons specified by law are insured by State means (State pays Lithuania benefits on their behalf): Luxembourg Unemployment benefits are subject to contributions for health care, long term care insurance and pension insurance. Social insurance contributions are deducted from the unemployment benefit. The contributions deducted for the Health The Netherlands Insurance Act have to be refunded by the body that administers the payment of this social security benefit.

Norway All residents have access. Unemployment benefits are subject to normal rate of social security contribution (7.8%). Social Assistance (Pomoc społeczna) covers the cost of health care where a person does not have the necessary resources Poland and is not covered by health care insurance. Unemployment Allowance (Zasiłek dla bezrobotnych): Portugal Contributions for health care, old-age, invalidity and survivors' insurance. The State budget pays contributions amounting to 6.5% of 2 times the national minimum gross wage on behalf of some Romania categories of persons, including persons in receipt of unemployment allowance and beneficiaries of the guaranteed Minimum Income and pensioners with pensions less than the income taxation base; The State also pays contributions to the health insurance system on behalf of unemployed persons registered at the Labour Slovak Republic Office. The amount of the state contribution is 4% of an assessment base of SKK 17,274 (€ 515) (average monthly national wage in 2005), which results in a contribution of SKK 691 (€ 21) per person per month. State pays contributions on behalf of certain groups of insured people (e.g. recipients of non-contributory unemployment Slovenia cash benefit, social assistance) Spain Social security contributions paid from unemployment benefit. In the event of sickness, all residents have a right to treatment. The majority of the expenses in connection with sickness are Sweden paid by the public authorities. But there are certain charges which the individual must pay to cover a minor part of the expenses. United Kingdom Free access to NHS for all residents. Source: European Commission (2007)

12 Table 7: Overview of health services for recipients of social assistance in European countries

Austria Coverage of illness-related expenses or of expenses for sickness insurance by social assistance (Sozialhilfe). Belgium Free voluntary sickness insurance. Persons who have received permission from the Ministry of Health (Министерство на здравеопазването) for treatment Bulgaria abroad can be granted a single allowance for covering the costs for their personal needs and the needs of people accompanying them. Health care (e.g. medical care, pharmaceuticals etc.) in public hospitals is free for recipients of Public Assistance (Δημόσιο Cyprus Βοήθημα). Czech Republic Health care is free of charge. Free health care services for all residents (not an associated right). Denmark Supplement possible for dental costs or pharmaceutical products to cover the insured person's participation in these costs (see "Assistance in special cases"). First aid for persons not covered by health insurance is provided from the general budget revenues. For access to services, a Estonia guarantee letter from the local municipalities may be required. Public health care services available to all residents (not an associated right). Finland Substantial medical expenses are taken into consideration while determining the amount of the social assistance.

Benefits in kind from the general regulations of sickness-maternity insurance (general system) or of the basic Universal France Health Coverage (Couverture Maladie Universelle, CMU) and benefit from the complementary CMU. Comprehensive protection in case of sickness by taking over sickness insurance contributions. Equalization of non-insured Germany social assistance recipients in respect to benefits with statutorily insured persons and taking over statutory medical treatment by the statutory sickness funds at the charge of social assistance.

Greece Unemployed have access to health care. Iceland Public health care available to all residents. No direct rights; however, persons in receipt of the allowance are usually entitled to a full range of medical services on the Ireland basis of their low income. Health care is guaranteed to all citizens via the National Health Service (Servizio Sanitario Nazionale, S.S.N.). Persons with Italy an income less than the social pension (assegno sociale) are exempted from participation in costs. Latvia Health care is guaranteed to all citizens. Liechtenstein There is the liability for Health Insurance. The basic insurance contributions are met by the social welfare. Lithuania Persons entitled to means tested Social Benefit (Socialinė pašalpa) are insured by state means. Luxembourg Membership of sickness insurance. Recipients of social assistance (Ghajnuna Socjali) are entitled to free hospital services and free pharmaceutical products. Malta

Beneficiaries who fall under the Health Insurance Act (Zorgverzekeringswet, Zvw) pay a contribution of 6.5% of the general The Netherlands old-age pension (Algemene Ouderdomswet, AOW) and 4.4% of eventual wages or supplementary pensions. Next to the health insurance contributions, all insured persons aged 18 and older pay a nominal premium. Public health care services available to all residents (not an associated right). Norway Health care expenses are taken into consideration when determining the amount of the financial assistance. Social Assistance (Pomoc społeczna) covers the cost of health care where a person does not have the necessary resources and Poland is not covered by health care insurance. Portugal Guaranteed protection from the National Health Service. Romania Social Aid (ajutor social) beneficiary is covered by the health care scheme. Health care services are available to all residents free of charge. Health Care Allowance (Príspevok na zdravotnú starostlivosť) only for those receiving Benefit in Material Need (Dávka v Slovak Republic hmotnej núdzi). Payments are reduced for persons in material need residing in hospitals. Recipients of permanent Financial Social Assistance (denarna socialna pomoč) enjoy the right to compulsory health Slovenia insurance. Spain Health care benefits in kind for persons without resources provided by state regulation. In the event of sickness, all residents have a right to treatment. The majority of the expenses in connection with sickness is Sweden paid by the public authorities. But there are certain charges which the individual must pay to cover a minor part of the expenses. United Kingdom Free access to NHS for all residents. Source: European Commission (2007)

13 In Macedonia, there is no connection between means-testing and the right to health insurance. Although Macedonia does have a means-tested social assistance benefit, receiving free health incurrence is not conditional on low income because everyone can receive health insurance by simply registering as unemployed. All 64,000 recipients of the means-tested social assistance benefit are registered as unemployed because unemployment serves as a principle requirement to qualify for social assistance.

Alternatively to social health insurance, a number of European countries rely on a tax- financed national health system.4 Such a system grants access to health services to all residents and is financed through general tax revenues as opposed to payroll taxes. Registration might be required at the national health system, but eligibility does not depend on employment status, only on resident status. Means-testing is only applied if health services are not free of charge and require cost-sharing with the patient. For a summary of the current discussion on social health insurance versus tax-financed systems, see Box 2.

The focus of this policy note, though, is on short-term policy options and therefore parametric changes within the current framework of social health insurance. Changing to a tax-financed national health system requires a fundamental policy change with important implications on all levels of social policy and will only be discussed marginally as it is beyond the scope of this policy note.

Therefore, having in mind a parametric reform within the current social health insurance framework and drawing on the experience of other European countries, it seems that Macedonia should guide its short-term reforms towards making health insurance for the unemployed subject to a means test.

The next question that arises then is what can be achieved in the short-term within the current framework of social health insurance?

Short-term Constraints: Resources and Capacities As was pointed out in the previous section, most European countries with social health insurance provide health insurance to recipients of unemployment insurance or a means- tested benefit like unemployment assistance or social assistance. Such a policy requires (i) capacities to grant unemployment benefits to those who qualify and disqualify those who have exhausted their rights; and (ii) capacities to perform a means-test to grant unemployment or social assistance.

Can Macedonia reform its system in such a way? That is, could Macedonia introduce a system that entails a comprehensive unemployment benefit, strict disqualification from unemployment benefits for non-active jobseekers, and means-tested unemployment or social assistance?

4 For example, in Denmark, Iceland, Ireland, Italy, and the United Kingdom (see Table 7).

14 Box 2: Social health insurance versus tax-financed health systems The discussion about social health insurance in Western Balkan countries is driven by concerns about high payroll taxes and their impact on employment. High payroll taxes are the main reason for the relatively high average labor tax wedge of 87 percent in Western Balkan countries. Given high unemployment, low labor force participation, and substantial informal employment, it is frequently argued that the Western Balkans should introduce tax-financed health systems in order to reduce the labor tax wedge. Such a transition would have important effects on (i) labor market outcomes; (ii) equity and financial sustainability of health policies; and (ii) health sector performance:

Labor Markets: Empirical evidence seems to suggest that reducing labor taxes has modest effects on employment: a 10 percentage point decrease in the tax wedge increases employment only by 1 to 3 percent, although the effect could be larger for low-wage workers. It seems that reductions in labor taxes targeted to low-wage workers are most effective, and also more cost-efficient. In the short-term, compensating revenue losses in terms of health financing with direct and indirect taxes could be challenging.

Equity and Sustainability of Health Financing: Since most countries have (mildly) progressive income tax systems, tax-financed health systems perform well on equity of health financing. Social health insurance contributions, on the other hand, are almost always subject to a ceiling and a base, and therefore mostly regressive. Social health insurance, though, provides health systems with a stable and predictable income base because payroll taxes are explicitly earmarked for health spending. In tax-financed health systems, on the other hand, health spending is subject to annual budget negotiations and therefore vulnerable to unpredictable changes in health budgets. At the same time, the hard budget constraints—due to earmarked payroll taxes—of social health insurance systems could limit health sector reforms, but also have a positive impact on cost-efficiency. In tax-financed systems, rapidly increasing health expenditures could crowd out other important public investments form the central budget.

Health Sector Performance: There is no clear correlation between sources of financing and health outcomes, quality of care, and efficiency in the health sector. Although social health insurance systems are characterized by a purchaser-provider split—which is favorable in terms of greater equity, efficiency, and responsiveness in the health sector—some tax-financed systems were able to implement the same institutional set up (like, for example, Latvia, Poland, and the U.K.). In terms of efficiency, social health insurance systems tend to spend slightly more than tax-financed health systems. In terms of risk-pooling, both systems achieve strong results.

Source: Chakraborty (2007).

15 In the short-term, this seems unlikely due to resource and capacity constraints. The current extent of registered unemployment is overwhelming and is not met with adequate resources and capacities for ESA. As already pointed out, ESA staff is mainly occupied with administrative work related to registry. The number of ESA staff has been significantly reduced in recent years. In 2007, ESA occupied about 525 persons, which resulted in 680 registered unemployed per ESA staff. Actual job counselors had to deal with an average caseload of 1,300 registered unemployed.5

Under such circumstances, it seems difficult to reform unemployment benefits quickly and strengthen disqualification from benefits for non-compliant unemployed—like those rejecting job offers or not actively seeking jobs. The current unemployment benefit only applies to a fraction of registered unemployed: about 27,000 on average in 2007, currently about 25,000. Of these 25,000, about 21,000 receive the benefit beyond the maximum duration of 12 months due to special regulations related to age and historic rights. This means that less than 4,000 registered unemployed are currently subject to potential disqualification.6 In practice, though disqualification never happens, so that ESA staff has no tangible experiences and capacities to implement disqualification.

Similarly, it seems unlikely that ESA or any other government agency could quickly build up capacities to implement adequate means-testing. The only government agency that has experience with means-testing is the Social Protection department of MoLSP, but capacity constraints at MoLSP are even more severe than at ESA. MoLSP employs social workers in 27 Social Welfare Centers throughout the country. According to MoLSP, 60 percent of staff time of social workers is spent on administrative work, and future reform projects will increase administrative requirements even further. In addition, the adequacy of current means-testing procedures is questionable. One of the principle requirements to qualify for social assistance is to be registered as unemployed, so effectively social assistance administered by MoLSP is a form of unemployment assistance. It is not clear how accurately MoLSP tests for other sources of income and wealth. In any case, it seems unlikely that MoLSP would be able to deal with a significant increase in applications if registered unemployed were to receive health insurance from MoLSP. Finally, another agency that is frequently mentioned to administer health insurance for the unemployed is HIF itself. Again, it seems unlikely that HIF could quickly develop capacities to perform means-testing and grant health insurance for those in need, in particular not for lager numbers of applicants.

As an alternative to unemployment benefit reform and means-testing, the government of Macedonia could also consider simply continuing to offer health insurance for the unemployed for free, but let another agency—like HIF—administer the registration. This would free up considerable resources at ESA. At the same time, non-active jobseekers would have no more incentives to register with ESA, so that ESA would be able to spend considerable more resources on those who are really looking for jobs.

5 See Kuddo (2008). 6 See Kuddo (2008).

16 For HIF, there would be no immediate budgetary implication, but the administrative burden could be considerable. Most of the contributions HIF receives from ESA are a subsidy from the central budget to ESA. Instead via ESA, HIF would simply receive these funds directly form the central budget. Yet again, it is difficult to imagine how HIF would be able to handle a sudden inflow of application for health insurance for several hundred thousand people.

In addition, any continuation of a policy that offers free health insurance to a large portion of the population will undermine any effort to decrease the informal sector. Free, unconditional health insurance for the unemployed creates disincentives for formal employment while at the same time it increases the financial burden on formal workers. Through taxes and contributions, formal workers implicitly co-finance informal workers who free-ride on health insurance.

Hence, it seems that there is no ideal and straightforward short-term policy to achieve reforms, mainly because of the extent of unemployment, but also because of implications for the informal sector. It seems that most policy options will either leave any single agency overwhelmed, or leave many people without health insurance, or create unintended incentives for the informal sector.

The only short-term solution seems to be to share the administrative burden as much as possible between different agencies, while keeping the long-term solution in mind and minimizing distortionary incentives for the informal sector. This means decreasing the administrative burden for ESA while at the same time increasing the roles of MoLSP, HIF and the Ministry of Health (MoH), and maybe also the Public Revenue Office (PRO) at the Ministry of Finance (MoF).

SHORT-TERM POLICY OPTIONS For a comprehensive long-term reform, eligibility for health insurance provided by ESA should be drastically reduced, and this should also be the cornerstone and first step for any short-term reform. Although there are some minimal reform options—like simplifying the administration of health coupons and relaxing registry requirements for the unemployed—the expected outcome would not be sufficient to ease the administrative burden for ESA. Rather, short-term reform should be based on drastically reducing the role of ESA in administering health insurance for the unemployed. At the same time, the role of other government agencies should be increased to mitigate the negative effects of such a drastic policy change on the number of uninsured, on public health, and on poverty. This will require leadership and close coordination by MoF, MoH, and MoLSP. In doing so, the incentives provided for informal sector workers and employers and inactive people have to be born in mind.

Therefore, in order to implement a meaningful short-term reform, the following two steps are proposed: Step 1 is to decrease the role of ESA in administering health insurance for the unemployed; Step 2 is to mitigate the negative effects of such a drastic policy change.

17 Various policy options are discussed for Step 2 and in order to evaluate these policy options, four objectives serve as useful guidelines. Objective 1 is to minimize the impact on poverty. This is discussed in the context of how expensive it will be for the poor to gain access to health insurance. Objective 2 is to minimize the impact on public health, that is, to minimize the negative impact on the number of uninsured and equitable access to health services. Objective 3 is to minimize distortionary incentives that could favor informal employment and are a financial burden for formal employment. Objective 4, finally, is to balance the administrative burden between various government agencies.

Taken the impacts and tradeoffs of various policy options into account, the short-term policy with the most favorable outcome would considerably decrease the number of people receiving health insurance from ESA. Registered unemployed eligible for health insurance would be limited to recipients of unemployment benefits and participants of certain ALMPs. MoLSP could extend health insurance to recipients of social assistance (Step 1). In order to mitigate the negative impact of such a policy, four policy options are discussed (Step 2). Policy Option 1 is that HIF provides free health insurance to all uninsured, therefore effectively taking over ESA’s current role of the residual health insurance provider. Policy Option 2 is that instead of HIF providing free health insurance for all, HIF promotes voluntary self-insurance, either by decreasing the price for voluntary self-insurance, or by introducing a minimum health benefit package, or both. Policy Option 3 is providing tax incentives to promote voluntary self-insurance. Policy Option 4, finally, is to allow access to health services to everyone at the point of service, but retroactively collect contributions from those health care consumers who have failed to contribute in the past, thus making self-insurance compulsory. Table 8 below gives an overview of the various steps, policy options, and objectives for policy evaluation.

The following subsections detail the various steps and policy options and evaluate them according the four policy objectives. The discussion concludes that the most favorable outcome is expected from a mix of Policy Options 2 to 4, with an emphasis on Policy Option 4. This would make self-insurance compulsory (as opposed to voluntary), but everyone has open access to health services. Those health service consumers who fail to contribute are identified at the point of service, and contributions will be collected retroactively (and after health services have been provided). This should be combined with decreasing contribution rates for health insurance across the board, a penalty for non-contribution, and maybe also tax credits for compulsory self-insurance.

Step 1: Restricting Health Insurance for the Unemployed ESA’s should limit providing health insurance to recipients of unemployment benefits and possibly participants of ALMPs. This would ensure that only active jobseekers register with ESA and receive benefits. At the same time, this would leave more than 500,000 people without health insurance with large negative effects on public health and poverty.

18 Table 8: Policy matrix and objectives for policy evaluation

Policy Objectives for policy evaluation Objective 1: Objective 2: Objective 3: Objective 4: Step Description Minimize impact Minimize impact Minimize distortionary Balance administrative impact on poverty on public health impact on informal sector

Restrict health insurance to Step 1: recipients of unemployment Restrict health benefits, participants of ALMP insurance for (administered by ESA), and the recipients of social assistance unemployed (administered by MoLSP)

Policy Option 1: Free coupons from HIF for all uninsured

Policy Option 2: Promote voluntary self- Step 2: insurance Mitigate negative Policy Option 3: impacts Tax incentives for voluntary self-insurance

Policy Option 4: Compulsory retroactive contributions

19 With regard to negative effects on poverty, this could be mitigated by providing health insurance to social assistance recipients. This would make access to free health care subject to a means test. Health insurance for social assistance recipients could be administered either by ESA, HIF, or preferably by MoLSP. In addition, the administration of health insurance for the unemployed could also be eased by some minor reforms, but the expected impact would be limited. These minor reforms are discussed blow, before going into the discussion of a more far-reaching reform.

Simplify Administration of Health Insurance Coupons In order to receive heath care services, Macedonians have to produce a coupon—the so- called Blue Card—at the point of service to prove that contributions to HIF have been paid on their behalf. In the case of registered unemployed, HIF sends these coupons—one for each unemployed—three times a year to ESA, which distributes them to all registered unemployed via expedited mail.

This policy could be changed such that registered unemployed receive health services by producing a confirmation of their unemployment status, not by relying on the coupon. A similar system is currently applied for more than 280,000 pensioners, who provide evidence for receiving a pension (like the pension check) instead of the coupon when requesting health services.

Such a policy change would save ESA the administrative burden and costs of distributing the coupons. At the same time, HIF would save the costs of printing the coupons. It would be relatively easy to implement, and since a similar policy applies to pensioners, HIF and the health sector could rely on previous experiences and adjust relatively easily.

This reform would also make a large part of data and fund transfers from ESA to HIF redundant, further decreasing the administrative burden for ESA. ESA would still be required to keep a detailed registry of the unemployed, but the frequency of data transfers could be reduced. If this policy changes were done without any other reform, ESA would still pay HIF contributions for those unemployed receiving cash benefits since these contributions are financed from unemployment insurance. Yet, contributions for the large majority of the registered unemployed could be paid directly from the central budget— that is, MoF—to HIF.

Relax Registration Requirements ESA could relax the requirement to re-register as unemployed every six months. Participants of ALMPs and receivers of unemployment benefits have to re-register every three months, and other active jobseekers demand services provided by ESA on a regular basis. Yet, there seems to be no good reason to ask non-active jobseekers to re-register every six month. Accepting the idea that many of them only register in order to receive free health insurance, it might be useful to extend the requirement to re-register to 12 months. This could further decrease the administrative burden for ESA significantly.

20 In addition, there seems to be a requirement for some spouses to register as unemployed in order to qualify for co-insurance, which could also be relaxed. It seems that spouses of registered unemployed, who receive health insurance from ESA, also have to register as unemployed in order to be co-insured. This requirement could partially explain the high number of inactive among registered unemployed, and could be dropped.

Reforming the administration of coupons and relaxing the registry requirements are two relatively easy to implement reform options, yet with a limited expected impact on ESA’s administrative burden and on informal employment. In particular, without any additional reform, these two reform options would continue to offer free health insurance to the inactive and informally employed and therefore would not decrease the number of registered unemployed. To the contrary, it would even decrease the formal requirements and the distortionary incentives for employers and informally employed would be exuberated.

Restrict Eligibility for Health Insurance Provided by ESA A more far-reaching possibility to decrease the administrative burden for ESA is to limit eligibility for health insurance strictly to recipients of unemployment cash benefits. This would be in line with current policies in most European countries, but in the case of Macedonia it would leave more than half a million people—a quarter of the population— without health insurance. As already mentioned, in 2007 there were on average 27,000 recipients of unemployment benefits. Assuming an average of about 1.21 dependents per insuree,7 ESA would provide health insurance for only about 60,000 people under such a policy. All other registered unemployed and their dependents—about 533,000 people— would lose their right to receive health insurance from ESA.

Such a policy would obviously drastically change the administrative requirements for ESA. The large majority of registered unemployed would lose any benefit from registering with ESA. Only those who receive an unemployment benefit, participate in ALMPs, or are genuinely looking for work would have an incentive to register at ESA or demand services from ESA. In particular, the estimated 120,000 inactive and informally employed would have no incentive to register as unemployed.

Limiting eligibility for health insurance to recipients of unemployment benefits would almost completely remove distortionary incentives for the informal sector, yet the high number of uninsured would have substantial negative effects on poverty and public health. Under such a reform, the possibility to receive free health insurance for informally employed would be largely removed. This should increase pressures on employers, workers, and self-employed to formalize their economic activities. The resulting high numbers of uninsured—more than a quarter of the population—would not only be politically difficult to defend, but would also constitute a poverty and public health problem. The majority of those losing health insurance would not be informal or inactive, but in fact unemployed, and potentially poor. For these people and their families, losing health insurance could put them at serious risk of high health expenditures in case of

7 See Table 4.

21 hospitalization. In addition, usage of health services, including vaccination and preventive health care, could decrease, with negative consequences for public health.

Nevertheless, restricting health insurance to recipients of unemployment benefits seems to be the better option with regard to the long-term reform, but the negative consequences have to be mitigated. This would mean to provide health insurance for more then 500,000 people by other means and trough other agencies, in particular for the poor. Some of these mitigation strategies are discussed below in other sections. Yet, in the spirit of sharing the administrative burden with other agencies as opposed to rolling over the burden, potential mitigation strategies should also consider how ESA itself could maybe mitigate the negative consequences of such a far-reaching reform.

One mitigation strategy would be to simply relax eligibility conditions for the unemployment benefit, so not only 27,000 plus dependents would qualify for health insurance, but many more. The majority of registered unemployed, though, are long-term unemployed, and even a considerable relaxation of eligibility criteria would probably not have much effect. In addition, such a policy change would again be likely to capture some informally employed and inactive people.

Include Participants of ALMPs A better mitigation strategy could be to extend health insurance to those unemployed who participate in certain types of ALMPs, bearing in mind that the selection of which types of ALMPs would qualify seems crucial. ALMPs could be an effective screening device to filter out active jobseekers among registered unemployed. Some programs require more time investments by participants than others, so their effectiveness as a screening device might differ significantly. Job clubs, for example, seem to require considerably less time commitment from participants than public works, so that they could be less suitable as a screening device and prone to abuse. Also, any policy change should ensure to not provide incentives to increase demand for low quality ALMPs or programs with a questionable impact on the probability to find jobs.

Also, providing health insurance to participants of selected ALMPs might considerably increase demand for these programs, which makes the decision of what types of ALMPs would qualify even more important. In fact, such a policy could be used as a steering tool to guide registered unemployed to the most useful and effective ALMPs. Nevertheless, additional resources might be necessary to meet increased demand and to guarantee high quality of programs. At the same time, the decreased administrative burden should make more resources available to ESA—resources that maybe should be spent on additional ALMPs anyway.8

According to ESA, about 57,000 registered unemployed participated in ALMPs like public works, training, counseling, and job clubs.9 This number, though, could potentially include double-counting, so the number of beneficiaries is unknown. It is therefore

8 For an in-depth discussion of the potential of ALMPs in Macedonia, see Kuddo (2008). 9 See Kuddo (2008).

22 difficult to assess how many participants of ALMPs would benefit from free health insurance—also because it is not clear which programs would qualify—but 57,000 appears to be a reasonable upper limit to assume as the maximum number of beneficiaries.

Include Recipients of Social Assistance Another mitigation strategy, finally, would be to extend health insurance also to recipients of social assistance. In 2007, there were on average 64,000 recipients of social assistance (administered by MoLSP), all of them being registered as unemployed and receiving health insurance from ESA (see Table 3). The clear advantage would be that social assistance is a needs-based benefit and recipients are subject to a means test. Linking health insurance for the unemployed with a means test should substantially mitigate potential poverty-increasing effects. It is also very much in line with long-term reform as other European countries with social health insurance also apply means-testing for those who do not qualify unemployment benefits.

The administrative burden for ESA could be further decreased by shifting the administration of health insurance for social assistance recipients to MoLSP. This raises the principle question of integrating social assistance and unemployment administration. The social assistance benefit that is currently provided by MoLSP seems to crucially hinge on registration as unemployed, so in some sense the social assistance benefit is very similar to a means-tested unemployment assistance. In the future, the administration of social assistance could either be integrated with ESA, including the capacity for means-testing; or, the administration of social assistance is left with MoLSP, but will also include health insurance.

Alternatively, if neither ESA nor MoLSP are capable of administering health insurance for the poor, HIF could take on this task. A similar policy has been introduced in Serbia. This would require HIF to build up capacities for means-testing. Uninsured, poor households would apply directly to HIF for free (or subsidized) health insurance. Given that MoLSP already has existing capacities for means-testing, though, it might be more efficient to build on these existing capacities rather then building up new capacities from scratch. HIF and MoLSP both performing means-testing raises questions on duplication of tasks and inefficiency of spending on public services.

MoLSP currently administers cash and in-kind benefits for about 91,000 people, but only 5,400 of them receive health insurance from MoLSP (see Table 3). Social assistance is by far the largest benefit MoLSP administers with 64,000 benefiting households. Recipients of social assistance do not qualify for health insurance from MoLSP. According to MoLSP, all recipients of social assistance are registered as unemployed and receive health insurance through ESA.

Social assistance is a means-tested cash benefit for low-income people able to work. MoLSP assess monthly household income from labor (if any) and wealth and tops up income to a defined minimum household income. Depending on family size, the defined

23 minimum household income is between MKD 1,825 for a single household to MKD 4,506 for a five-member household per month. The top-up amount is paid in full for the first two years, 70 percent after two years, and 50 percent after 5 years. Assuming that ESA restricts providing health insurance to recipients of unemployment benefits and participants of ALMPs, MoLSP could provide health insurance for recipients of social assistance and their dependents.

It is difficult to assess how many recipients of social assistance would qualify for health insurance from MoLSP under such a policy change. It was not possible to obtain data on how many of the 64,000 principal recipients of social assistance receive an unemployment benefit or participate in ALMPs. The benefiting 64,000 households represent more than 220,000 individuals or more than 10 percent of the Macedonian population. Nevertheless, it is unlikely that health insurance would be extended to all of them. Health insurance is only extended to dependents, that is, spouses and children below the age of 21. A more likely assumption would be that the number of dependents would be in line with the average number of dependents of currently registered unemployed, that is, 1.21 (see Table 4). This means that 141,000 people (recipients plus dependents) would be covered by health insurance from MoLSP.10

Therefore, ceteris paribus, 64,000 principal social assistance recipients is the upper limit that MoLSP can expect to administer for additional health insurance. At average monthly costs of MKD 665 per insuree for health insurance (the same amount that ESA pays, see Table 4), MoLSP could experience a cost increase of up to MKD 511 million for paying contributions for 64,000 social assistance recipients. This would be an increase in the amount of benefits paid by MoLSP of 18 percent. Again, it could very well be that MoLSP experiences a considerable increase in overall applications for social assistance under such a policy change.

The accuracy of means-testing of MoLSP is unknown, but it is the only government agency that has experience with means-testing. MoLSP’s social protection program has not been evaluated, but current reform programs build on MoLSP’s experiences and could considerably improve capacities in the future. These reforms should take into account the increased administrative burden for MoLSP in the case that social assistance recipients will qualify for health insurance in the future.11

Granting health insurance to social assistance recipients would considerably mitigate the negative impact of the suggested policy on poverty. As MoLSP’s capacities for means- testing are improved, the accuracy of targeting should also improve, and eligibility

10 A potential problem could be members of households who receive social assistance, but are not the principal recipient and do not qualify as a dependent of the principal recipient. These could be, for example, grown-up children of recipients of social assistance. They could not apply for social assistance as principals, but would not be covered by health insurance provided to the principle either. They could therefore be left without health insurance although they are living in a poor household. MoLSP could consider extending health insurance to all members of poor households to remedy this problem. 11 The World Bank is currently providing assistance for two projects (SPIL and a conditional cash transfer project).

24 criteria can be adjusted as needed to ensure that the poor have adequate access to health care.

Nevertheless, the proposed policy changes would still leave a large number of people uninsured. The policy reform proposed under Step 1 would result in ESA providing health insurance for at most 85,000 registered unemployed (27,000 recipients of unemployment benefits and up to 57,000 participants of ALMPs, see Table 9). MoLSP would provide health insurance for up to 64,000 recipients of health insurance. Including dependents, ESA and MoLSP would provide health insurance for up to 326,000 of current registered unemployed and their dependents.

Table 9: Estimated distribution of insurees, dependents, and uninsured (status quo versus proposed policy change under Step 1) Estimated number Estimated number Agency Total of insurees of dependents Status quo: Insurees and dependents currently receiving health insurance from ESA ESA 268,672 323,992 592,664

Policy changes under Step 1: ESA and Insurees and dependents with coverage MoLSP 147,935 178,396 326,331 Recipient of unemployment benefit ESA 27,144 32,733 59,877 ALMP participants ESA 56,909 68,627 125,536 Social assistance recipients MoLSP 63,882 77,036 140,918

Additional uninsured ? 120,737 145,597 266,333 Source: ESA, HIF, and MoLSP; Kuddo (2008); and author’s calculations.

Comparing the 326,000 people that would receive health insurance from ESA and MoLSP with the 593,000 that currently receive health insurance from ESA, the estimated number of additional uninsured would be around 266,000 people. This is more than 10 percent of the Macedonian population and constitutes a major public health issue.

The next section discusses how the negative impacts for these estimated 266,000 additional uninsured people could be addressed. In doing so, the impact on poverty, on the informal sector, and on the various government agencies involved are take into account.

Step 2: Mitigating the Negative Impacts In addressing the negative impact of the proposed policy changes of Step 1, two government agencies can play key roles: HIF and PRO, and their respective ministries, MoH and MoF. In the absence of any mitigating policies, the number of uninsured in the Macedonian population would triple. This would mean a substantial administrative and financial burden for HIF and MoH. Alternatively, HIF could provide health insurance for free to everyone, financed from savings by ESA (which would not have to provide health insurance for a large number of unemployed any more). A better solution, though, would

25 be to promote voluntary self-insurance. PRO, either by providing tax incentives for voluntary self-insurance, or by retroactively collecting health insurance contributions, could complement such an effort.

This subsection starts with an assessment of implications for HIF in the absence of mitigating policies, followed by a discussion of the four mitigating policy options.

Implications for HIF in the Absence of Mitigating Policies Currently, HIF has to finance emergency health services for an estimated uninsured population of 123,000 people at annual costs of MKD 245 million (EUR 4 million). This corresponds to average annual costs of MKD 1,990 per uninsured person (MKD 166 or EUR 3 per month and person). MoH reimburses HIF for only about 50 percent of costs of health services for the uninsured (see Table 4). HIF receives contributions of about MKD 83 per uninsured and month from MoH. The gap between costs and contributions is financed from HIF’s budget.

Under the proposed policy change, the number of uninsured is expected to triple, from 123,000 to about 389,000, which besides a public health risk also constitutes a substantial financial risk for HIF (and MoH, which partially finances health expenditures for the unisured). Revenues would drop by about MKD 1,860 million (about 12 percent of total revenues) under the proposed policy change.12 Although expenditures are also likely to decrease significantly, the potential gap between costs and contributions would be escalated by an additional MKD 265 million.13

At the same time, ESA would save significant financial resources under the proposed policy change, and these savings could be made available to HIF to finance emergency services for the uninsured. ESA’s and MoLSP’s combined contributions to HIF would drop by MKD 964 million.14 These contributions are currently financed from the central government budget—that is, MoF—and are effectively a subsidy for HIF. Instead of channeling the subsidy from MoF to HIF through ESA, MoF could simply directly transfer it to HIF.

The estimated savings in contributions by ESA exceed the additional costs of providing emergency services to the uninsured by far, so the question arises if these savings could be used to offer a better solution for the many uninsured and to address the associated public health risk. ESA—or more accurately, MoF—would save about MKD 964 million in contributions, while emergency health services for an additional 266,000 people would cost about MKD 265 million. As already pointed out, though, the high number of

12 This estimate is based on the assumption that HIF would receive only MKD 83 per month for the 266,000 new uninsured for which it now receives MKD 665 from ESA per month and insuree. 13 This estimate is based on the assumption of a financing gap of MKD 83 per uninsured per month for an additional 266,000 people. 14 This estimate is based on the assumption that ESA and MoLSP would not have to provide health insurance for about 121,000 people at monthly costs of MKD 665 per insuree under the proposed policy change.

26 additional uninsured is not desirable in terms of public health, and probably also politically not feasible.

In addition, some human resource capacities will become available to HIF in the near future. PRO is currently taking over collection of social security contributions, including collection of HIF contributions. This centralization of collection should decrease the administrative burden for HIF and enable HIF to increase its role in administering health insurance for the unemployed. It could do so by either offering free health insurance to everyone, or by promoting voluntary self-insurance.

Policy Option 1: Free Coupons from HIF for All Uninsured HIF could take over ESA’s current role of a residual health insurance provider and offer free health insurance to all. Everyone who does not qualify anywhere else could get free coupons from HIF. HIF could get reimbursed for its costs from the central budget, either from MoH or directly from MoF.

Such a policy, though, would incur higher costs than the current subsidy that is channeled to HIF via ESA for health insurance for the unemployed. Under such a policy, HIF would not only end up providing health insurance for an additional 266,000 people who now receive health insurance from ESA, but also to the currently 123,000 uninsured. Even if HIF were to receive directly the whole subsidy that MoF currently provides via ESA, HIF would most likely incur substantial additional costs. It is not clear who the currently uninsured are in terms of socio-economic characteristics and why they do not register as unemployed to get coverage. Nevertheless, explicitly offering free health insurance directly from HIF for everyone and without any conditionality is certainly likely to increase enrollment among the currently uninsured.

At the same time, such a policy would keep the flawed incentive structure for inactive and informally employed to free-ride on health insurance. If HIF were to provide free coupons for health insurance, efforts to formalize labor would be undermined. Formally employed workers would have to continue to finance a large share of free-riders on health insurance through their social security contributions.

Policy Option 2: Promote Voluntary Self-Insurance A better way to provide health insurance for the unemployed or uninsured might be to promote voluntary self-insurance instead of providing free health insurance, either by simply advertising the option, or more proactively by decreasing its price or by introducing a differentiated benefit package.

The monthly charges for voluntary self-insurance are relatively expensive with 12.465 percent of reference income. Reference income—used in lieu of a minimum wage—is defined as 65 percent of Macedonian average wage. At a current average income MKD 15,320 per month, the monthly price for voluntary self-insurance is MKD 1,241 (EUR

27 20). This compares to an overall average monthly contribution that HIF receives per insuree of MKD 1,195 (see Table 4).

HIF could offer voluntary self-insurance at a much lower price. ESA currently pays MKD 665 per insuree to HIF which is entirely subsidized from the central government budget. If this subsidy was made available to HIF directly, HIF could decrease the price for voluntary self-insurance to MKD 576 (EUR 9) per month.

Decreasing the price for voluntary self-insurance would somewhat mitigate the flawed incentive structure for the informal sector, but it would still be substantial. Decreasing its price is a common strategy to extend social security to informal workers. It makes social security more affordable for informal workers and should result in higher take-up rates. At the same time, offering cheap social security to informal workers could also reinforce the incentive to stay informal. The need for social security can help employees to pressure their employers to formalize them. Yet, if social security is available at low prices through voluntary self-insurance, both employees and employers might prefer to share the costs of self-insurance and keep the employee informal.

A more aggressive price policy would be to introduce low flat-rate contributions across the board, for formal workers and for self-insured. If such a policy was implemented, the contribution base could be considerably widened and revenues would increase. The current policy to use 65 percent of the average wage as the base for minimum social security contributions makes health insurance relatively expensive for low-skilled formal workers. In fact, the labor tax wedge for low-income workers (earning 50 percent of the average wage) is estimated at 39 percent, which is relatively high compared to other Western Balkan countries.15 Decreasing contribution rates across the board—for formal workers and for self-insured—could considerably improve incentives for the formal sector while at the same time make health insurance affordable also for the uninsured.16 Such a policy would eventually increase enrollment and revenues, similar to the successful flat income tax rate model. Put to the extreme, contributions could even be reduced to a low fixed amount affordable for everyone, at least for a limited period of time.

Alternatively, HIF could also consider introducing a minimum benefit package that offers emergency and some curative health services at a lower price. This would allow HIF to offer voluntary self-insurance at low prices while also being able to differentiate the associated health benefit. In other words, the lower price indicates less service.

A minimum health benefit package would somewhat mitigate the flawed incentive structure, but raises concerns about health equity and risk selection. Such a policy would create two classes of patients in the health system with different levels of access to health services. Limited access to health services, in particular preventive health services, would induce a large share of the population to seek suboptimal levels of health care, which

15 See Leibfritz (2008). 16 For a more detailed discussion on the prospects and potential effects of reduced social security contributions in Macedonia, see Leibfritz (2008).

28 could in the long-run have negative effects on overall health care expenditures. Also, differentiated benefit packages provides incentives for the relatively healthier population to switch from the better, but more expensive, benefit package, to the more limited, but cheaper benefit package, resulting in adverse risk selection.

Risk selection is, indeed, a concern for both options—decreasing the price for self- insurance and introducing a minimum benefit package—because both options rely on voluntary self-insurance. If insurees could freely join and cancel membership to HIF, incentives are high to join when sick (or join the better benefit package), and cancel membership (or switch to the cheaper benefit package) when healthy. This has to be addressed by designing appropriate waiting periods and minimum contribution periods.

A better option, though, might be to introduce affordable, but compulsory health insurance for everyone. It seems that public health concerns can only be addressed at the expense of providing better and more affordable access to health services to everyone, which in turn makes it easier to free-ride on health insurance and undermines efforts to formalize informal worker. In addition, relying on voluntary self-insurance creates concerns about risk selection. If health insurance was compulsory for everyone, independent of employment status, public health and risk selection concerns as well as concerns about the informal sector could all be addressed at once.

PRO could play a central role to enforce such a policy. No matter if policy reform would rely on promoting voluntary self-insurance or expanding compulsory contributions, PRO could take advantage of centralized contribution collection and databases and support policy reform, as discussed in the next subsection.

Policy Option 3: Offer Tax Incentives for Voluntary Self-Insurance PRO is currently centralizing all collection of income taxes and social security contributions under its responsibility. PRO is in a central position where information on income tax, corporate tax, firm registry, and labor taxes are coming together. It is therefore in an excellent position to support ESA, HIF, MoLSP, and MoH in administering health insurance for the unemployed. There are two particular ways in which PRO could do so. First, it could provide tax incentives to promote self-insurance. Second, if health insurance is made compulsory, it could support HIF by retroactively collecting health insurance contributions.

PRO could provide tax incentives to partially reimburse costs for self-insurance. This could be done in different ways, depending on what kind of incentives the government would like to provide. In particular, it could provide a tax credit, either fully or partially refundable or nonrefundable, to either only self-insured or to everyone. If everyone were to receive a fully refundable tax credit, the Macedonian social health insurance would basically be converted to a tax-financed health system. Social health insurance contribution would be counted towards income taxes due and would reduce income taxes accordingly. If social health insurance contributions exceeded income tax due, the difference would be paid out as a negative tax. The tax credit, though, could be made

29 nonrefundable so that no negative taxes were paid out, or only partially refundable. Also, the tax credit could be limited to contributions made for self-insurance, not for contributions made on behalf of formal employees, unemployed, social assistance recipients, or pensioners.

The impact on public health, poverty, and incentives for the informal sector would depend on the targeting and the generosity of the tax credit, but the tradeoff between public health and poverty on the one side and incentives for the informal sector on the other would persist. If the tax credit were applied to everyone and fully refundable, the impact on public health and poverty would be positive because health insurance would be essentially free. Of course, in return, income tax would have to be increased substantially to finance public health insurance, which again would create adverse incentives for tax evasion and the informal sector. Similarly, if tax credits were targeting only self-insured, it would effectively decrease the price for self-insurance and therefore create adverse incentives for the informal sector.

One advantage might be that informal workers would have incentives to declare taxes. In order to receive the tax credit for health insurance contributions, informal workers have to declare taxes. If the tax credit were at least partially refundable, informal workers would most likely receive a negative tax payout, if they declare no other taxable income. If the tax credit was nonrefundable, they could even declare income up to a certain level without having to pay income tax. In any case, informal workers would have incentives to declare taxes, which would bring them in contact with the formal process of declaring taxes. In the long run, people might gain trust into the tax system, which could increase incentives over time to pay taxes. This might be a more promising policy than just reducing the price of contributions or granting free health insurance.

Nevertheless, as already mentioned, the basic tradeoff between public health and poverty on one side and incentives for the informal sector on the other side would persist. The last policy option to be discussed tries to reconcile these tradeoffs further.

Policy Option 4: Retroactive Collection of Compulsory Contributions HIF could replace the currently used coupons with an ID card that serves as a proof of eligibility to receive health care. Instead of sending out coupons on a regular basis—like once every month or every three months—HIF could simply issue an ID card which is valid for an extended period of time, like five or even ten years.

Every resident would be eligible for a HIF ID card. It might be advisable to link every issued HIF ID card with the unique and personal civil registry number (ENP). PRO also uses ENP in its records to identify tax payers, and it would ease linking records if HIF had the same number on file. If HIF does not have the ENP of its insurees and dependents on file, it might require every Macedonian to register with HIF once. If it has ENP already on file, it can simply send the new ID card to all its members for which it currently receives contributions. All others, in particular the uninsured, have to register with HIF and pay contributions for compulsory self-insurance for at least one month.

30 Everyone with a HIF card can receive health care services anytime, but PRO would be notified if a patient has not made contributions. In such a case, PRO would be entitled to retroactively collect contributions for the last two to five years, back to the point in time when contributions were made for the last time. This way, everybody has full and equitable access to health care services, but at the same time free-riders on health services are detected, and PRO can actively pursue free-riders and ensure compliance. Such a policy might even turn out to serve as a valuable indicator for informal employment, which could ease PRO’s efforts to scrutinize the informal sector.

Hungary has implemented a similar policy successfully over the last years. It combined a general decrease of contribution rates with retroactive collection of compulsory contributions. Apparently, about 400,000 people enrolled into the Hungarian HIF last year. Everybody has to contribute to HIF, yet at a relatively low rate. Even unemployed have to pay contributions on their own, unless they participate in pubic works programs for more than 100 days a year. If someone requests health services, but has not paid contributions, the Hungarian Tax Office is entitled to retroactively collect contributions for the past five years, up to the point when contributions were made the last time.

The Macedonian PRO seems to have the capacity to enforce retroactive collection of contributions. For example, PRO currently has the capacity to identify the ENP of a salaried person who shows up in the tax statement of a company because he or she received additional income as a contract worker. If this person failed to declare the additional income, PRO sends a letter to remind the person about declaring the additional income and paying taxes. It seems that with the right technical equipment in place at health service providers, PRO could enforce a similar policy with regard to retroactive collection of health insurance contributions. At a later stage, when capacities have further developed, PRO could even start to enforce proactive (as opposed to retroactive) collection by using its central databases to detect persons who fail to contribute to health insurance.

In terms of public health, the advantage of retroactive contribution collection would be that access to health services is open and that no risk selection takes place. Everyone could get access to health services anytime, even if the bill might turn out to be substantial. Collecting contributions for as many as five years into the past also effectively avoids adverse risk selection because paying contributions only while sick— as could be done under voluntary self-insurance—is not a viable option. Knowing this, informal workers might as well decide to contribute on a regular basis and pressure employers to formalize their contracts.

Nevertheless, retroactive contributions can deter non-contributors from seeking adequate care, so low contribution rates combined with a penalty for non-contribution seem essential to avoid large numbers of non-contributors. HIF members who have failed to contribute for a protracted period of time potentially face a high co-payment from seeking care. In particular, non-contributors are likely to avoid seeking non-catastrophic health care services like preventive care, vaccinations, and other primary care services if

31 they face re-payment of a large amount of monthly contributions. Such behavior can result in significantly higher follow-up health costs, in particular in the secondary care sector. In order to avoid suboptimal outcomes, it seems essential to provide the right incentive structure such that expected payoffs from not paying contribution vis-à-vis paying contributions becomes negative. Lowering contribution rates is an important element and has already been discussed above, yet it might be necessary to combine lower contribution rates with a sufficiently large penalty for non-contribution, so that non-contributors not only have to re-pay missing monthly contributions, but also a penalty.

In terms of poverty, those who can genuinely not afford health insurance should be able to receive health insurance form MoLSP via social assistance. Yet, in case someone failed to apply for health insurance from MoLSP in time, PRO can refer cases where no resources are available to pay contributions to MoLSP to jointly seek a solution.

CONCLUSIONS Macedonia has various options at hand to reform health insurance for the unemployed. Taking other European countries as guidance, the key in the long-term seems to lie in the ability to provide a comprehensive and well-implemented unemployment benefit that includes health insurance. Health insurance for those unemployed who do not qualify for unemployment benefits should be subject to a means test.

In Macedonia, the sheer extent of unemployment aggravates short-term reform. If reforms are not carefully formulated, any single government agency could easily be overwhelmed by the burden of administering health insurance for the unemployed—just like ESA is overwhelmed right now. Therefore, in the short-term, it seems to be reasonable to aim at sharing the administrative burden between different agencies instead of rolling over the burden to one single agency. The agencies that come to one’s mind are ESA, MoLSP, HIF, and PRO as well as the associated ministries of HIF and PRO, MoH and MoF.

There are a number of policy options that could address the problem, and all of them seem to struggle with a persistent tradeoff between public health and poverty on the one side, and adverse incentives for the informal sector on the other side. The policy matrix in Table 10 illustrates the various policy options discussed in this policy note, and the associated tradeoffs.

32 Table 10: Policy matrix and expected outcomes

Policy Expected outcomes on Objective 1: Objective 2: Objective 3: Objective 4: Step Description Minimize impact Minimize impact Minimize distortionary Balance administrative impact on poverty on public health impact on informal sector

Restrict health insurance to Step 1: recipients of unemployment Considerable worsening for HIF, Restrict health Considerable benefits, participants of ALMP Some worsening Drastic improvement worsening for MoLSP, insurance for worsening (administered by ESA), and Ranking: 5 Ranking: 1 considerable improvement for the Ranking: 5 recipients of social assistance ESA unemployed (administered by MoLSP)

Considerable worsening for HIF, Policy Option 1: No change No change No change worsening for MoLSP, Free coupons from HIF for all Ranking: 1 Ranking: 1 Ranking: 5 considerable improvement for uninsured ESA Policy Option 2: Worsening for MoLSP, HIF, Some worsening Worsening Some improvement Promote voluntary self- considerable improvement for Ranking: 4 Ranking: 4 Ranking: 4 Step 2: insurance ESA Mitigate negative Policy Option 3: Worsening for MoLSP, HIF, Some worsening Worsening Some improvement impacts Tax incentives for voluntary PRO, considerable improvement Ranking: 2 Ranking: 3 Ranking: 3 insurance for ESA

Policy Option 4: Worsening for MoLSP, HIF, Some worsening Some worsening Improvement Compulsory retroactive PRO, considerable Ranking: 3 Ranking: 2 Ranking: 2 contributions improvement for ESA

Note: Policy Option 4 (in bold) renders preferred expected outcome.

33 Limiting eligibility for health insurance to only recipients of unemployment benefits should be the cornerstone of any short or long-term reform. This would drastically improve incentives for the informal sector, but at the same time also drastically worsen conditions with regard to public health and poverty. This seems neither desirable from a social welfare planner’s point of view nor politically viable, so some middle ground has to be found. This can be done by a series of mitigating policy options. One should be to include participants of certain types of ALMPs in health insurance provided by ESA. In addition, MoLSP (or maybe HIF, as done in the case of Serbia) should take on the important task of providing a means-testing mechanism for health insurance and provide health insurance to social assistance recipients. This would considerably mitigate the negative impact on poverty of the proposed policy reform, but it cannot address the associated public health risk.

Addressing the public health risk could be the task for HIF. There seem to be two basic policy options to extend health insurance to a large number of uninsured: either by offering free health insurance to all uninsured, but at the cost of considerably undermining efforts to decrease the informal sector (Policy Option 1); or by promoting voluntary self-insurance (Policy Option 2). The latter option would have much less adverse effects on incentives for the informal sector. In promoting voluntary self- insurance, HIF could either rely on decreasing the price for self-insurance, or rely on introducing a cheaper minimum benefit package. Both options, though, run the risk of adverse risk selection among HIF members and still provide significant distortionary incentives for the informal sector.

The latter two issues could be addressed through retroactive collection of compulsory contributions by PRO (Policy Option 4). A similar system has been successfully introduced in Hungary. Such a policy represents a reasonable approach to balance competing concerns about (i) the impact on poverty; (ii) the impact on public health; (iii) the impact on distortionary incentives for the informal sector; and (iv) the administrative burden for the various agencies. It would mean that every Macedonian is obliged to contribute to health insurance, but it also means that everyone has open access to health services. Those health service consumers who fail to contribute are identified at the point of service, but are not denied service. Rather, PRO is responsible to follow up and collect outstanding contributions. This policy is best combined with an overall decrease in contribution rates to make health insurance more affordable, but also to decrease the differences in contribution rates between the formal and the informal sector. This could help to eliminate distortionary incentives for the informal sector and reduce the financial burden on the formal sector of co-financing free-riders. In addition, a penalty for non- contribution might be necessary to provide the right incentive structure and avoid large numbers of non-contributors. Such a policy could also be combined with providing tax incentives for self-insurance. This could further reduce the price for self-insurance and at the same time provide incentives to the informal sector to declare taxes (Policy Option 3).

These policy options by and large ignore the potential costs and benefits of a fundamental policy change towards a tax-financed national health system. The focus of this policy note is on short-term policy options within the current framework of social health insurance. A discussion on tax-financed health systems would distract from the urgent reform need that the Macedonian labor market faces at this point in time and is also

34 beyond the scope of this policy note.17 Nevertheless, such a tax-financed health system could also be replicated within the current framework, as briefly discussed under Option 3. If Macedonia decides to implement some of the reform options discussed in this policy note, a gradual change towards a tax-financed health system—or even a hybrid system in- between social health insurance and a tax-financed system—would still be compatible with current reform efforts.

In the short-term, though, a balanced approach that shares the administrative burden among various agencies and takes into account concerns about poverty, public health, and the informal sector might be the most viable way to implement urgent labor market reforms in Macedonia. Making social health insurance contributions compulsory for the whole population, yet with contributions collected retroactively for those who fail to contribute, seems the best approach at hand for Macedonia at the moment. The issues related to health insurance for the unemployed cut across health and social we well as fiscal policy, which is why any reform effort will require strong leadership and coordination by MoF, MoH, and MoLSP.

17 Such a policy is discussed to some extent in Leibfritz (2008).

35 REFERENCES

Angel-Urdinola, Diego and Victor Macias (2008). “FYR Macedonia Labor Market Profile 2004-2007.” Draft ECA Policy Note. Washington, D.C.: World Bank. Processed.

Chakraborty, Sarbani (2007). “Options for Health Financing Reforms in the Western Balkans: the Role of Social Health Insurance (SHI) and Tax Financing.” Draft ECA Policy Note. Washington, D.C.: World Bank. Processed.

European Commission (2007). Mutual Information System on Social Protection (MISSOC) Online Database. Brussels, Belgium: Director-General for Employment, Social Affairs and Equal Opportunity.

European Observatory on Health Care Systems (2000). Health Care Systems in Transition. The Former Yugoslav Republic of Macedonia. Copenhagen, Denmark: WHO Regional Office for Europe on behalf of the European Observatory on Health Care Systems.

Gjorgev, Dragan, Angelina Bacanovic, Snezana Cicevalieva, Zlate Sulevski, and Susanne Grosse-Tebbe (2006). “The Former Yugoslav Republic of Macedonia. Health System Review.” Health Systems in Transition, Vol. 8 No. 2.

Government of FYR Macedonia, Ministry of Finance (2007). Bulletin. Skopje, FYR Macedonia: Ministry of Finance.

International Monetary Fund (IMF, 2008). Balance of Payments Online Database. Washington, D.C.: IMF.

Kuddo, Arvo (2008). “FYR Macedonia: Employment Service Agency, Active, and Passive Labor Market Programs.” Draft ECA Policy Note. Washington, D.C.: World Bank. Processed.

Leibfritz, Willi (2008). “Increasing Employment in FYR Macedonia – the Role of Labour Taxation.” Draft ECA Policy Note. Washington, D.C.: World Bank. Processed.

United Nations (UN, 2007). World Population Prospects. The 2006 Revision. New York, N.Y.: United Nations.

United Nations Development Programme (UNDP, 2006). Blue Ribbon Commission Report. Skopje, Macedonia: UNDP.

World Bank (2003). FYR Macedonia Country Economic Memorandum. Tackling Unemployment. Washington, D.C.: World Bank.