World Bank Document

Documentof The World Bank

Report No: 19855 LT Public Disclosure Authorized

PROJECTAPPRAISAL DOCUMENT

ONA

Public Disclosure Authorized PROPOSEDLOAN

IN THE AMOUNTOF US$ 21.2 MILLION EQUIVALENT

TO THE

REPUBLICOF LITHUANIA

FORA

HEALTH PROJECT

Public Disclosure Authorized November 5, 1999

lHum-anDevelopment Sector Unit Country Unit for Poland and Baltic States Europe and Central Asia Region Public Disclosure Authorized CURRENCY EQUIVALENTS

(Exchange Rate Effective October 5, 1999)

Currency Unit = Lithuanian Litas (LTL) LTL 1 = US$ 0.25 US$ 1 = LTL 4

FISCAL YEAR January I - December 31

ABBREVIATIONS AND ACRONYMS

ALOS Average Length of Stay MD Medical Doctor apskritis Administrative Unit (County) MIS Management Information System in Lithuania CAS Country Assistance Strategy MOF Ministry of Finance CEE Central and Eastern Europe MOH Ministry of Health CVD Cardio-Vascular Diseases NHB National Health Board DPH Department of Public Health PAD Project Appraisal Document DRG Diagnosis Related Group PHC Primary Health Care DSU Day Surgery Unit PHRD Population and Human Resources ECA Europe and Central Asia Development (Japanese Grant) EOP End of Program PIP Project Implementation Plan EU European Union PMR Project Management Report FSU Former Soviet Union PMU Project Management Unit GDP Gross Domestic Product SAL Structural Adjustment Loan GP General Practitioner SIDA Swedish International Development HCE Health Care Expenditures Agency HCI Health Care Institution SODRA Social Insurance Agency HIC Health Information Center SOE Statement of Expenditures HIS Health Information System SPF State Patient Fund ICB International Competitive Bidding TPF Territorial Patient Fund IFC International Finance Corporation TOR Terms of Reference IT Information Technology WHO World Health Organization

Vice President: Johannes Linn Country Director: Basil Kavalsky Sector Leader: Annette Dixon Program Team Leader: Toomas Palu LITHUANIA HEALTH PROJECT

CONTENTS

A. Project Development Objective ...... 2

1. Project development objective and key performance indicators ...... 2

B. Strategic Context ...... 2

1. Sector-related CAS goal supported by the project ...... 2 2. Main sector issues and Government strategy ...... 2 3. Sector issues to be addressed by the project and strategic choices ...... 12

C. Project Description Summary ...... 15

1. Project components ...... 15 2. Key policy and institutional reforms supported by the project ...... 15 3. Benefits and target population ...... 17 4. Institutional and implementationarrangements ...... 17

D. Project Rationale ...... 17

1. Project alternatives considered and reasons for rejection ...... 17 2. Major related projects financed by Bank and/or other development agencies 18 3. Lessons learned and reflected in the proposed project design ...... 18 4. Indications of borrower commitment and ownership ...... 19 5. Value added of Bank support in this project ...... 19

E. Summary Project Analyses ...... 20

1. Economic ...... 20 2. Financial ...... 21 3. Technical ...... 21 4. Institutional ...... 22 5. Social ...... 23 6. Environmental assessment ...... 23 7. Participatory approach ...... 23

F. Sustainability and Risks ...... 24

1. Sustainability ...... 24 2. Critical risks ...... 25 3. Possible controversial aspects ...... 26

G. Main Loan Conditions ...... 26 1. Effectiveness conditions ...... 26 2. Other ...... 26 H. Readiness for Implementation ...... 27

I. Compliance with Bank Policies ...... 27

Annexes

Annex 1. Project Design Summary ...... 28 Annex 2. Detailed Project Description ...... 34 Annex 3. Estimated Project Costs ...... 49 Table 1. Components Project Cost Summary ...... 50 Table 2. Expenditure Accounts By Components ...... 51 Table 3. Components by Financiers ...... 52 Annex 4. Economic Analysis Summary ...... 53 Annex 5. Financial Summary ...... 58 Annex 6. Procurement and Disbursement Arrangements ...... 59 Table A. Project Costs by Procurement Arrangements.60 Table B. Schedule of Procurement Arrangements.61 Table C. Summary of Procurement Arrangements.66 Table D. Allocation of Loan Proceeds...... 68 Table E. Schedule of Loan Disbursements.69 Annex 7. Development of Project Financial Management System 70 Annex 8. Project Processing Budget and Schedule .72 Annex 9. DocumentsDocuments in ProjectFile .73 Annex 10. Statement of Loans and Credits .74 Annex 11. Country at a Glance .75

Chart Project Organizational Chart Map IBRD 30122 Lithuania Health Project Project Appraisal Document

Europe and Central Asia Region Poland and Baltics Country Unit (ECC09)

Date: NOVEMBER 5, 1999 Program Team Leader: Toomas Palu CountryDirector: Basil Kavalsky Sector Director: Annette Dixon Project ID: LT-PE-35780 Sector: Health Program Objective Category: Financial Lending Instrument: Program of Targeted Yes X N SPECIFIC INVESTMENT LOAN Intervention:

Project Financing Data [X] Loan [] Credit [] Guarantee [] Other ISpecify]

For Loans/Credits/Others:

Amount: US$ 21.2 Million Proposed terms: [] Multicurrency [] Single Currency Grace period (years): 5 [] Standard Variable [X] Fixed Spread [X] LIBOR-based Years to maturity: 17 Commitment fee: 0.85% on undisbursed loan balances, beginning 90 days after signing, for the first 4 years, 0.75% thereafter, less any waiver Service charge: 1% of loan amount

Financing plan (US$m): Source Local Foreign Total Government 8.4 0.8 9.2 IBRD 7.1 14.1 21.2 EU Phare - 0.9 0.9 SIDA 0.6 1.8 2.4 Other International Donors 0.1 0.3 0.5 Total 16.2 17.9 34.2

Borrower: Government of Lithuania Guarantor: N/A Responsible agency: Ministry of Health

Estimated disbursements (Bank FY/US$M): 2000 2001 2002 2003 2004 Annual 1.7 3.4 3.7 4.8 7.6 Cumulative 1.7 5.1 8.8 13.6 21.2

Project implementation period: 4.5 years; Expected effectiveness date: January 2000 Expected loan closing date: 09/30/04 Page 2

A: Project Development Objective 1. Project development objective and key performance indicators (see Annex 1):

The project development objective is to improve the efficiency, equity and access of the Lithuania health care system. Key performance indicators measure: (i) improved equity of resource allocation among health regions (apskritis), (ii) cost-containment through effective contracting between the State Patient Funds and health care providers; (iii) efficiency gains through hospital services consolidation and restructuring in four pilot regions; and (iv) improved access to General Practitioner services in four pilot regions.

B: Strategic Context 1. Sector-related Country Assistance Strategy (CAS) goal supported by the project (see Annex 1): CAS document number: 13677-LT Date of latest CAS discussion: May 11, 1999 The project supports the Bank's objectives to design cost-effective, financially viable social safety net and human development program and to help reorient public services and infrastructure in order to provide adequate and cost-effective social services. In the health sector it translates into orientation of medical services towards a general practice-based primary health care system, optimization and improvement in quality of hospital services, and introduction of appropriate financial incentives and efficient management into the health financing system.

2. Main sector issues and Government strategy:

Lithuania is a small, urbanized (68 percent) Baltic state with a population of 3.7 million (1997) bordered by Latvia, Belarus, Poland, Russia and the Baltic Sea. Ethnic Lithuanians make up about 82 percent of the population, Russians 8 percent and others 10 percent. Major towns include the capital, Vilnius (580,000), Kaunas (419,000), Klaipeda (203,000), Siauliai (147,000) and Panevezys (133,000). After high inflation and sharp declines in income and social indicators during the initial years of independence (1991), the economy has stabilized and growth has resumed. GDP per capita in 1997 was US$2,128 (based on exchange rate) or US$4,245 (based on purchasing power parity). Lithuania is implementing reforms for transition to a market economy and membership in the European Union (EU) (see Annex 10).

The main health sector issues are similar to other CEE/FSU countries. Aggregate health indicators have deteriorated compared to the pre-transition period (pre- 1991), leaving Lithuania with a significant gap in health status in comparison with the EU countries Lithuania wants to join. The health system does not proactively address the root causes of ill health because of the lack of effective public health policies and programs. The health system is also not able to reactively cope with the increased burden of ill health because of an inefficient health care delivery and health financing system. Declining public funding for health services and poor maintenance of investments in health care infrastructure exacerbates the situation. Lithuania is implementing a health reform and facing the challenges of restructuring its health sector to adjust to changing socio-economic, epidemiologic, and demographic realities.

Lack of effective public health policies and programs to address large preventable burden of disease. The natural growth of the population has been negative since 1991, because of declining birth rates and increased mortality.' Life expectancy for men fell from 66.9 years in 1988-1990 to 63.8 in 1994- 1996 and for women from 76.3 to 75.4 years. Life expectancy at 15 years of age has declined over the past 15 years and the gap with developed countries increased. In 1994, it was 55.2 years overall (declined 4

I Birth rate per 1,000 population declined from 14.3 in 1992 to 10.4 1997; mortality increased from 1 1.1 in 1992 to peak 12.5 in 1994 and subsiding to 11.1 in 1997. Page 3 percent from 1981),but only 49.2 years for men (6 percentdecline from 1981).2 There is a significant health status gap betweenthe men and womenas well as betweenurban and rural men. However,in terms of aggregatehealth status indicators,Lithuania has performedbetter than its Balticneighbors (Table 1).3

As one of the main contributorsto avoidablemortality status, mortalityfrom coronaryheart diseasebefore age 64 has increased 1.5 times since 1981,and is 3 times higher LV LT EM . FS D than the Europeanaverage. Other All Causes circulatory diseases, external injuries and male 2,041 1,640 1,836 798 1,064 1,028 malignant tumors are the other top female 972 830 888 502 601 610 causes of mortalityin Lithuania. In CVD 1994, Lithuania's standardized mortality Male 1,040 746 907 377 490 452 rate from external causes was Female 570 494 524 217 280 287 191/100,000compared to a European Cancers averageof 97, CEE averageof 80 and Male 295 299 307 186 218 266 NIS average of 164. Infant mortality, Female 142 142 140 137 131 159 another proxy for health status, increased Injuries in the beginning of the 1990s from the Female 82 69 76 30 37 25 lowest in the Former SovietUnion to 16.0per 1,000births in 1993but has Table1. Age-standardizedmortality rates for variousdiseases been decreasingsince, reaching 12.4in 1995. Source:Information on HealthStatus in Latviafor Rational 1995 due to interventionsto improvethe DecisionMaking. Riga, 1997. quality of the perinatal case management.

Contributingfactors to this negativetrend in health statusare: (i) deterioratingsocio-economic conditionsduring transition;(ii) behavioralrisk factors of mediumand long term impact (tobacco, alcohol, diet, physical activity);(iii) behavioralhealth determinantsof immediateimpact (alcoholrelated injuries, poisonings,suicides); and, to some extent (iv) increasedmortality from health conditionsamenable to health care interventions(perinatal mortality, CVD mortality,TB).

Socio-economicconditions. GDP fell by 30 percentbetween 1990 and 1994.Average annual decline of real wages was between 11.7percent and 45.3 percent between 1991 and 1993. Inflationhas come down from a staggering 1100percent in 1992 to singledigit numbers by 1998. Socioeconomic changesare likelyto be the main factor behind extraordinarilyhigh suiciderates reaching46.4 per 100,000population in 1996.

Poverty is among the factors which affecthealth statusof population. It shouldbe noted that the povertylevel duringthe periodfrom 1990- 1997 has remainedroughly at the same level. Accordingto the poverty line of 50 percent of averageexpenditure per householdmember in 1997,the poor made up 16.6percent of the total population,the GINI co-efficientis 31%. To contrastthe officialpoverty line, 27 percent of the populationperceives themselves as poor. Variationof poverty among different groups of the populationreveals that poverty is the highest among: (i) familieswith small children(37.2 percent of familieswith 3 or more children);(ii) pensioners(22 percent);(iii) rural populations(prevalence of poverty 25.9 percentcompared to 9.7 percentin the five largest cities). A study in the Kaunas region revealedstatistically significant differences in health status betweenurban and rural populationsin favor of the former.4 As childrenand the elderlyare conventionallythe biggest consumersof health services, health systemis an importantpart of safetynet to protect the poor. Improved access, equity and quality of national health service, in particularin rural areas, would disproportionatelybenefit the poor in Lithuania.

2 Life expectancyat age 15 in Lithuaniacompares with the Europeanaverage of 58.8 years overall and 54.6 years for men in 1994. 3 LV-Latvia;LT-Lithuania; EST- Estonia;S-Sweden; FS-Finland, D-Germany. 4 PrimaryHealth Care and RestructuringProgram of KaunasApskritis. Working Group Report. 1998. Project Files. Page 4

Life-stylerelated risk factors. Various isolatedsurveys 5 on risk factors have been conductedbut little informationis availablefor cross-countryor longitudinalcomparisons. The prevalenceof smoking (50% among men and 10%among women)and alcoholconsumption is similarto the average in Western Europeancountries and notably less than in other former SovietUnion countries. It is estimatedthat 7,000 peoplea year die (20% of overall mortality)from tobacco-relatedillnesses. Increasedalcohol psychosis, suicideand crimerates are being associatedwith increasedalcohol abuse. 6 Nutritionalhabits differ considerablyfrom what WHO considershealthy: fat intake accountsfor 47 percent and carbohydratesfor 38 percent of total energy intake comparedto WHO recommended30 percent and 55 percent respectively. Mortalityand disabilityfrom non-communicabledisease and injury is amenableby improvementsin socio-economicconditions and cost-effectiveprimary and secondarycare interventions.

The public health system. Historicallyoriented towards infectiousdiseases and environmental health,the public health system has currentlylittle capacity and leadershipto comprehensivelyaddress the above root causes of non-communicabledisease mortality.The NationalHealth Concept(1991) and the Law of the Health System of the Republicof Lithuania(1994) call for strengthenedemphasis on health promotionand disease preventionbut until recentlythe countrylacked a national focal point to provide leadershipfor public health reform. A National HealthBoard, establishedin 1998to advisethe Parliament on publichealth issues and put togetherand publish an annual nationalhealth report, as well as recently establishedState Commissionof HealthAffairs to advisethe Minister of Health, may well becomea catalyst for comprehensivepublic health reform. As a first step, a comprehensivenational health program was developedand approvedby the Parliament.7

The Program outlinesa comprehensivestrategy to tackle nation's public health issues and it relies on implementationof variousprimary prevention(health promotion),secondary prevention (screening and early treatment),public health researchand several inter-sectoralmeasures. The Programalso proposesto developby 2005 a nationalpublic health surveillanceinstrument to monitor the key risk factors and proxiesof public health statusand progresstowards the targets providedin the Program. However,some of the most effectivehealth protectionmeasures such as substantialincrease of tobacco price or removing subsidiesfrom high fat contentfood products are yet to be included into nationalpublic health strategy. In 1998,specific excise duty on cigarettestranslated to LTL 0.5 (US$0.125equivalent) per pack of 20 cigarettes. The overall tax content of the retail price for the most popular cigarette brandsof LTL 3 (US$0.75equivalent) was about 30% percentwhich is the lowest among the Baltic states and far below EU recommended50 percent and does not createsignificant price barriers for tobacco consumption. Introducinganti-tobacco legislation in Lithuaniais complicatedbecause of a strong tobaccolobby backed by PhilipMorris, one of the largestforeign investorsin Lithuania.

An inefficienthealth care deliverysystem could be characterizedby excessive,poorly organized, low qualityhospital infrastructure;absence of first level and family care and related over-relianceon inpatienttreatment (one survey suggeststhat 25 percentof patients in Lithuaniaare inappropriatelyplaced in acute care beds); and a poorlydistributed mix of human resourceskills (too many specialistphysicians, too few skilled nurses and managers). This structuralinheritance from the Soviethealth systemplus shortcomingsof policy frameworkand low institutionalcapacity are contributingfactors to inefficiency. There is scopefor considerableimprovement in allocativeefficiency towards primary health care and improvedtechnical efficiencyin the hospital sector throughappropriate incentives and restructuring. Until to date, the Govermmenthas tried to use various normativeinstruments to correctfor inefficienciesin the health care deliverybut so far, these interventionshave not producedtangible changes.

In late 1996,Lithuania had 197 inpatientinstitutions with 39,182 beds. Althoughthe number of hospital beds has declined compared to 1990 levels by 7,000 (15 percent) and hospital production shows

5 E.g. WHO MONICAstudy conductedin some parts of Lithuania. 6 Rate of alcoholabuse is 1,691per 100,000 population. Note that alcohol impacton health depends on specific alcohol consumption patterns (e.g. alcohol abuse, binge drinking, alcohol dependency). Moderate consumption can have beneficialimpact on health. 7 Lithuanian Health Program 1997-2010. Project Files. Page 5 efficiencygains, the main efficiencyindicators remain below internationalbenchmarks (Table 2). Progress in optimizingthe bed capacityhas been the least among the Baltic countries,partly due to a lack of clear restructuringpolicy and adversefinancial incentives, but also because of a politicallycomplex health system environmentwith several major competinghealth care establishments(including the largest hospital in Europe in Kaunas) and severallayers of administration. Estimatesabout remainingexcess capacityin hospitalsvary from 10,000to 20,000beds (25-50 percent). The analysis of distributionof admissionsand hospital utilizationindicators reveals that district level hospitalshave the most excess capacity(6 percent of bed complementhandling 4 percentof admissionswith the lowest bed occupancy rates - 70 percent).8 1Mb*ato -- ds'~e MdmisXon Ag ;- .~Be&dpX MIDs lNur*-s

Estonia 1997 7.4 18 8.9 149 3.1 6.4 Latvia 1996 10.3 21 14.2 298 3.4 7.2 Lithuania1990 12.1 18.7 17.9 273 4.6 12.7 Lithuania1998 9.6 23.9 11.8 294 3.9 10.9 Hungary 1996 8.2 24.2 8.0 194 3.4 3.0 Portugal 1995 4.1 11.3 7.9 89 2.9 3.2 Sweden 1995 6.0 18.6 5.2 97 3.0 9.7 Netherlands1995 5.4 10.3 9.1 94 2.5 9.0 Australia 1993 4.3 24.6 4.9 121 2.1 11.0 Table2. Healthcare delivery system. Source: WHO/Europe, Medical Statistics Agencies in BalticCountries.

Consolidationof acute care servicesis neededto improvequality of care and efficiencyof disseminationof medical technologies. This shouldbe achievedthrough a mix of regulatorymeasures (planning,norms, management of investmentexpenditures), strengthening Primary Health Care services, incentivestructures (health financingsystems), improving management capacity of all levels in the health care systemand consensusbuilding activities. The Government'scurrent focus is on developmentof nationalguidelines and norms for serviceprovision. But it is likelythat administrativemeasures alone will not yield to significantchanges given its vulnerabilityto politicalmanipulations.

IneffectivePrimary HealthCare (PHC) was a by-productof and has now becomea Transpoit Accidents concomitantcause of this hospital oriented 14% I NO health care system. Althougha comprehensive Preganancy networkwas establishedunder central planning 1% of the FSU,9 it failedto promotehealth and contain health servicescosts. Problemsinclude: (i) insufficientattention to health promotionand dieoaesc diseaseprevention activities; (ii) lack of 24% comprehensivenursing servicesand supportto \ the elderlyand disabled; (iii) deteriorating Acute infrastructure;(iv) lack of patient choice of -llnesses physician;(v) differenthealth care arrangementsin urban and rural areas; (vi) low communityparticipation in health and health Figure1. Structureof VilniusAmbulance Service 199,925 care issues; and (vii) over-specialization of calls in 1997. Vilnius ApskritisRestructuring Proposal. primary health care and lack of continuityof care. The outcomeof an ineffectivePHC system is best reflectedin over-utilizationof ambulanceservices (see Figure 1) and over-referralsby district therapists(up to 50 percent of office visits).

8 BalticsHealth Care Sector Study.Interim report. Lithuania. 1998. InternationalFinance Corporation. Project Files. In 1995,Lithuania had 54 ambulance vehicle stations, 148 policlinicsin larger urban centers, 261 ambulatoriesin smaller townshipsand 1023 medical posts in villages. Page 6

Recognizingthe underlyingstructural issues, Lithuania adopted in 1995 a PrimaryHealth Care Reform ImplementationStrategy. 10 The main componentsof the strategy were a gradual introductionof the generalpractitioner/family physician (GP) institution,retraining a significantnumber of district pediatriciansand obstetriciansin family medicine,conversion of large policlinicsinto specialized diagnosticand treatmentcenters; conversionof smallerpoliclinics into health centers and GP group practices;focus on community,patient choice of GP, capitationfinancing of GPs and gatekeeping function. The strategyproposed a 10 year implementationperiod but the process has been delayedmainly because of a lack of funds and delays in the introductionof key regulatoryacts (A General PracticeLaw).

Limited number of nursing and support beds has been raised as an issue in Lithuania. The Ministryof Health is discussinga conversionof excess acute care capacityinto nursing and support beds. Recent experiencefrom other countriesshows that the needs of the frail elderly and chronicallyill are better and more efficientlymet throughmulti-disciplinary community based services,where the nursing and medical professionsacross the line of social and health servicesjoin to give the appropriateservices and support. Wide con-versionof hospital capacity for this purpose might becomecounter-productive to this necessarydevelopment. There will be need for hospital-typechronic care - both as long-termcare and convalescentand rehabilitationcare (for exampleafter stroke or major trauma), but the right size of this capacitycan only be appropriatelydetermined in settingswhere the alternativecommunity-based services - home care,home nursing, various forms of assistedliving and dementiacare - are in place. This all calls for flexible financingand administrativearrangements. In this area of servicesthe principleof "money follows the patient/client"across the sector lines between health and social would be most useful to reorientthe services. The currentlyestablished national norm of one nursing care bed per 1,000 populationneeds to be reviewed. Successfulcommunity based programs requiregood integrationand co- ordinationof social and health care which in Lithuaniais hinderedby differentadministration levels and financingflows.

The Governmenthas taken steps to introducecommunity-based health servicesto improve quality of service and in the longer, term provide viable alternativesfor institutionalcare. In particular,the MOH has developeda communitynurse concept1I and is planningto strengthencommunity mental health services. There is need to developfurther the concepts(e.g. integrationof communitymedical and social care) and integrationof mental health serviceswith PHC. Mental health serviceshave been given high politicalpriority by the Presidentof the country becauseof extraordinarilyhigh suiciderates in Lithuania. Restructuringof mental health servicesshould be basedon effectiveorganization of ambulatoryservices. Ambulatoryservices should be developedat least on two fronts: (1) to offer alternativeliving arrangementsand servicesto chronicpatients with usually lengthy hospital care careers and (2) to offer modern non-stigmatizingoutpatient servicesto personswith the types of mental health and psycho-social problemsthat are becomingmore and more apparent:depression, anxiety, problems with substanceabuse, etc. In both casesthe directionof developmentshould be to integratethe necessaryservices with the general health services,especially Primary Health Care, and to due extent with also social services.

Human resourcessupply is in excess comparedto the Europeanstates and Lithuania's Baltic neighbours. There has been a non-significantreduction of 1 percentin a number of physicianssince the level of 1990. Althoughin view of harmonizationwith EuropeanUnion practices,the Governmenthas consolidatedpreviously 116 medical(sub)specialties into 40 specialtycategories, the supply of physicians is unbalanced. In 1996, 77 percentof physicianswere in specialtiesnormally related to general hospitals, only 0.6 percentwere classifiedas GeneralPractitioners (GP).12 There are also significantregional

Lithuania Primary Health Care Reform Implementation Strategy. 1995. Consultant Report. Project Files. Confirmation of Medical Norm MN57:1998 "Community Nurse, Functions, Duties, Rights, Competencies and Responsibilities." Minister ofHealth Decree #691, November 27, 1998. Project Files. 12 Secondary hospital specialties include surgery with subspecialties, medicine with subspecialties, neurology, obstetrics and gynecology, pediatrics, ophthalmology, otorhinolaryngology, oncology, infectious diseases, dennatology, anesthesiology, radiology, pathology, forensic medicine, laboratory medicine and hygiene. Page7 imbalancesin physiciansupply ranging from 1.3 per 1,000population in some predominantlyrural countiesto 6.2 in big cities. A study on physiciansupply planning in Lithuaniapredicted a 2,000 physicianoversupply by 2005 and recommendeda major restructuringof workforce,including retraining districttherapists and pediatriciansas general practitioners,introducing an automatedhealth care human resource informationsystem, and using a "physiciansupply" model as a planninginstrument. 13 The human resources supplyneeds to be optimized,skills need to be improved,retrenchment considered through retrainingschemes and severancepackages and enrollmentinto medical schoolsand residencyprograms regulated,based on future need projections.

Increasedcost of pharmaceuticalsand utilitieshave put pressure on escalationof health care costs. Upwardpressure on health personnelsalaries will also have an impact on health services cost over mediumterm. Expected economicgrowth will not fill the gap and steps toward health services optimizationand decisions about health care prioritiesneed to be taken.

Managementof health expenditures. Since 1990, Governmentexpenditures on health have fluctuated,reflecting difficulties in the entire economy.In 1994,health care expenditureamounted to 751 million LTL which accountedfor 4.4 percent of GDP. This was 70 percentof the 1992 expenditurelevel in constantprices. In 1997 health care expendituresamounted to 1,609million LTL or 4.2 percent of GDP. Publichealth spendingin 1997was 7.6 percentof the state expenditure,down from 14.3percent in 1996. The sources of public funding are: (i) payrolltax (3 percent);(ii) 30 percent of incometax; (iii) a contributionfrom the nationalbudget which is definedby Seimas every year as part of national budget (see Table3). Most of the public health funds (84 percent in 1997) are consolidatedand administered throughthe State PatientFund (SPF) systemthat carry on health insurancecontracting health service providersthrough ten territorialPatient Funds (TPF). Ministryof Health (MOH) and Municipalities administerfunds assigned for health promotionand preventionprograms, investment progran and budgets for selectedhealth system institutions.

Lithuaniahas taken considerablesteps in reformingthe health financing systemtowards separationof purchasingand provision of health services. Delayedintroduction of a relatively straightforwardsystem has ensuredthat many of the pitfallsencountered by other countriesof CEE and the FSU have been avoidedor reduced. Some importantstrengths of the current systemare: (i) consolidationof health financingadministration in the SPF and 10 regionalbranch offices that allows for efficientrisk pooling,need based planningand participationin regionalhealth servicesplanning through long term fundingarrangements (all these opportunitiesare currentlynot used, however);(ii) a service- based remunerationsystem that is reasonablysimple to administeralthough there are anomalies(discussed further below); (iii) a SPF that does not collectcontributions and can,therefore, concentrateon the payment and purchasingfunction; (iv) fundingfor personalhealth care allocatedthrough the SPF, hence no problem of multiple fundingpipelines; (v) providershaving considerableautonomy over budgetingand resourceuse; and, (vi) providersresponding to financialincentives and evidenceof entrepreneurial activity.

However,there are severalways in which the systemmust continueto developto better meet the needs of the population. The overarchingissue is that the systemis currentlysupply rather than health needs driven.There are a number of areas that should be examinedin order to address this weakness:(a)

13 Lithuania:Physician Supply Planning. ConsultantReport, 1995. ProjectFiles. Page 8

supply-driven resource allocation; (b) inefficient management of investment expenditure; (c) inefficient purchasing practices; and (d) payment systems that encourage over-referral and hospital admission.

Supply-driven resource allocation. Patient Fund allocations are determined by the level of services provided by secondary and tertiary facilities within the territorial boundaries. This results in large cross-territorial variations in per capita allocation. TPFs do not have incentives to search for the most cost- effective provider of care for the territory's population, regardless of geographic location of the provider. Providers are not encouraged to offer cost-effective services since their funding is guaranteed.

The supply-driven resource allocation formulation results also in inequitable resource allocation. Variation in per capita allocations for primary care are relatively small, a product of the population-based formula for allocating these resources. For secondary care, which consumes around 72 percent of money allocated through the SPF, the variation is much larger - varying from 34 LTL per capita (first quarter 1998) in Taurage to more than 80 LTV in Kaunas. In addition, the coefficient of variation of total per capita expenditures was greater in the first quarter of 1998 than it was in 1996 (coefficient of variation 0.12). This suggests that the variation may be increasing despite the population-based system for primary care allocations.

Partly this variation is a product of cross-boundary use of services. Citizens of counties lacking tertiary level facilities will cross county boundaries to use hospitals in Kaunas and Vilnius. But it is also likely to be a product of relative access to service - those living closer to good quality facilities will make relatively greater use of services than patients with similar health care needs that live further away. In addition, the current payment system may exacerbate the inequalities if hospitals in certain areas are able to increase activity to a greater extent than others. The relative importance of each of these factors is not known since data on the place of residence of patients are not aggregated above the facility level.

Employees - Employer Contribution 3% payroll SODRA 71.2 17.5% -Employee Contribution 30% income tax Tax Office 1,259,900 34% 211.9 898.80 52.2% Socially protected MOF 0% - Pensioners (Lump sum 745,048 20% - Children (<18) contribution set 997,202 27% - Full time students annually by 58,776 2% - Registered unemployed Ministry of 110,200 3% - Disabled (type 1 & 2) Finance) 17,890 0.5% - Women on maternity leave 0% - Other socially protected [1] 0% Sub-total 1,929,116 52% 122.4 253.80 30.1% Farmers 3.5% minimum SPF 399,100 11% 0.714 7.16 0.2% wage [2] Other (unregistered 10% average wage SPF 121,418 3% 0.053 1.75 0.0% unemployed, housewives, employed in shadow economy) TOTA 3,709,534 100% 0.53,810 Table3. Sourcesof PublicHealth Funding.Ql, 1998. Source:Department of Statistics(1997) Districtsof Lithuania, code 2290, Governmentof Lithuania;Monthly Statistics (1998). [1] Includingformer Chernobylworkers, politicalprisoners, crime victims. [21about 50% of them are pensionersor have jobs outside the agriculturalsector. Page9

The Governmenthas drafted an initial population-basedregional resource allocation formula' 4 and plans to implementit in phases:(i) in 2000 theoreticalbudgets and interfundsettlements will be modeled for TPFs; (ii) in 2001 partialpopulation based territorial resource allocation will be introduced that would reach to about 80% of all resourcesby year 2002; (iii) by 2001 full population-basedfunding.

Inefficientmanagement of investmentexpenditure. Investmentfor state facilitiesis approved and allocatedthrough the Ministry of Health and municipal authoritieswith no role of SPF. Prices for services chargedto the patient funds do not, therefore,incorporate the cost of buildings and large equipment.While the separationof investmentand revenue expendituresallows the Ministry to preserve some financiallever over facilityplanning through the investmentbudget, it does lead to two interconnectedproblems: (i) private providersmay find it difficultto securecontracts since the price of their services,incorporating an investmentelement, will tend to be higher than equivalentstate facilities;(ii) the allocationof investment money to the state sector may not encourageeffective resource use because for the end user, the investmentis essentiallya free good. Local hospitalsbid for part of the investmentmoney knowingthat they will bear none of the cost of servicingthe investment.

AlthoughGovernment has introducedcommercial accounting practices in public hospitalsthat accountfor depreciation,assets and capital investmentfunds are still viewed as "free goods." A comprehensivepolicy, includingdevelopment of rationalcapital investmentplans linkedto health service plans, as well as a capital chargingregime or a suitablepractical alternative for giving financialincentives to public hospitalsand clinics to promoteefficient use of assets and investment,is needed.

Inefficientpurchasing practices.Currently, TPFs' purchasingdecisions are Taurage predominantlydriven by historic patterns of care and react to the Marijampole incentivesto boost activity levels o rather than health outcomes. At the , Panevezys same time, they lack the analytical and methodologicaltools to shift to Klaipeda the more efficientpractice of needs- l based purchasing. They have little Vilnius __.,_ _ capacityto assess needs or monitor 0 20 40 60 80 100 120 the qualityof services. Consistent LTL per Capita national protocolsof treatmenton which to determineservice needs and judge qualityof care are lacking. Figure 2. Inequities of actual regional allocation of resources. Potential Finally, TPFs lack the necessary effectof redistributioneffect of population based allocation formula. skills to develop,negotiate and Averageper capita LTL 87.6. Ql, 1998. monitor contracts. Likewise, managersof providerinstitutions lack the skills to participatein contractnegotiation and adapt to the demandsof needs-basedpurchasing.

Paymentsystems encourageover-referral and hospital admission. The current combinationof capitationpayments for primary care and activity-basedsecondary care payment meansthat there are in- built incentivesto minimise primary care services and refer to the specialistsector. Utilizationdata reveal that hospital admissionsin 1996 were 110 percent of 1990 levels and number of operationswere 115 percent of 1990 levels. This trend, however,is not adjustedto the possibleincrease of re-admissionrates because of the case-basedhospital payment system. This system is not moderatedby primary care audits and gatekeepingnor by inpatientcontracts that controlvolume and qualityof services. In addition, because prices for inpatient servicesare based in part on expendituresper bed day for specialtiesin

14 Resolution of The Obligatory Health Insurance Board on Ratification of the Budget of Territorial Patient Funds and the Order of Conclusion and Execution of Contracts with Health Care Institutions. Draft, December 1998. Page 10

differenttypes of hospitals, a simplecase that could be treated at a secondarylevel facilitywould be remuneratedat a higherrate if the service is providedat a tertiary level facility. There is a need to further refine the new reimbursementsystems - alreadyimproved by a shift from input-basedto service-based payment- to reduce remainingdisincentives for more efficientcare.

An unaffordablebenefit package. Officiallyall servicesare coveredby the SPF unless there is specificexclusion." The remainingbenefits packageis still too extensiveto be sustainedby Lithuanian resourcesand rationingoccurs in a numberof differentimplicit ways. There is considerableinterest in developinga more explicitbasic benefits package. The debate is focusingon the further developmentof a negativelist of services,in particularfor excludingsome pharmaceuticalsfrom benefits package altogetheror limit the number of beneficiaries. Applyingthis approachrarely yields significantsavings as there is invariablyconsiderable argument over each servicethat is consideredfor exclusion. Other approachesto limitingthe packageof benefits that are both effectiveand politicallyacceptable need to be considered.

Low Levels of Collectionby SPF. The only contributionsthe SPF is currentlyresponsible for collectingare those from farmersand other self-insuredpeople such as housewives(estimated 13.3percent of population). These collectionsare currentlyrunning at very low levels,constituting only 0.2 percentof public financeof health care. There has been some discussionabout how to increasethe level of contributionof farmers,e.g. by the AgricultureFund subsidisingthe farmers' contributions- effectivelya transfer of resourcesfrom one part of the governmentbudget to another withoutobtaining any further user contribution. Maintainingadministrative responsibility of such limitedcontribution collection is not efficientand there has also been discussionabout whetherthe SPF shouldgive up this role and the Governmentdesignate SODRAor Tax Agencyto assumethis responsibility.

Private/PublicMix. Fully private health care provisionhas been rather limited althoughprivate practice was legalizedin the late 1980s. An estimated70 percent of physicians,25 percent of dentists and 20 percent of nursing staff are involvedin part-timeprivate activities. More significantprivatizations has occurredin rehabilitationservices where Lithuaniahas a significantsupply of sanatoriums. By 1997, an estimated 14 sanatoriumshad been privatised. Private acute inpatientcare has been limited. In 1996, there were only 3 private hospitalsin Lithuaniacomprising only 9 beds. In 1998, a significantinvestment was made into a private cardio-vascularsurgical clinic with a support of US$16 million loan guaranteed by the Government. The investmentis not economicallysustainable and it highlightsproblems with definitionof Governmentrole vis-a-vis private sector,lack of regulationof high technologydissemination as well as politicalcomplexity of the health sector.

Private directhousehold expenditures in health care are limited because the mandatoryhealth insurancecharges are Public Private Total relativelyhigh and formal co-paymentsfor Public 381.60 68.82 449.66 servicespaid by Patient Funds low (see Table - 4.0% 0.7% 4.7% 4). Most ofthe private expendituresare for 0 Private 6.35 165.26 172.38 non-subsidizeddrugs and medical appliances 0.1% 1.7% 1.8% (77 percent) and non-paid private and public Total 387.95 234.08 622.03 services. To a lesser extent, privatepayments 4.1% 2.5% 6.5% are made for private services as an alternative to public services. Lithuanianhealth care Table4. Public-privatemix in healthcare. (Total in regulationsallow private providersto millionLTL and percentof GDP,Ql 1998. surchargethe patientsup to 60 percent of

15 Explicitly are excluded medicines prescribed on an outpatient basis with the exception of medicines for some socially protected groups, fifty percent of the cost of sanatorium treatment except children and some disabled, eyeglasses, elective abortion, and cosmetic surgery. Page 1 1 public reimbursementreceived from the state. The IFC 6 estimatesthat the potentialdemand for fully privatehealth care provisionand insurancewould be one to three percentof the total population(37,000 - 110,000people) but they would be youngerand healthierthan the populationon average.

The Governmentalso plans to alter the public/privatemix in the provisionand financingof health services.17 Sanatoriumsand resorts that alreadyare privatelyfinanced are the prime candidatesfor privatization. This is in additionto pharmaciesand dentistrypractices that already are to a large degree privatized. The strategy also proposesPHC practicesas suitablefor privatizationbut as they would be providers of essentialand publiclyfunded services,regulations and TPF contractsneed to be carefully designed. The key aspects that need to be consideredare: level playing field for private and public providers(likely to require changesin regulationsgoverning public institutions),universal co-payments for basic benefitspackage services, universal referral protocols and treatmentguidelines, incentivesto treat low income patients. Nursing hospital and social care servicesthat could also be consideredfor private provisionhave not been discussedin the Governmentstrategy.

Institutionalcapacity. MOH and StatePatient Fund are the key institutionsimplementing health reforms. Many stakeholdersview that the lack of capacity in the areas of reform planning,implementation and monitoringas one of the main obstaclesfacing the reform.'8 The MOH has important strengthsthat it can build upon but also needs to addressa numberof weaknesses. The 1996National Strategyof Health Reform is continuingto provideoverall directionof the health reform and defines priorities(PHC reform, restructuring,licensing and accreditation,health insurance). The MOH has strong leadershipand improvedstructure and improvedcooperation with the Parliamentand Ministry of Economy. To successfullyimplement health reform,the Governmentneeds to build institutionalcapacity for program management,monitoring and evaluation. Also, the MOH needsto improve capacitiesin communication and build new capabilitiesin needs assessmentand technologyassessment.

Weak institutionalcapacity and a vaguely defined institutionalfranework hinders implementationof the new health financingprinciples. Lack of capacity to track hospital re-admissions and monitor cross-boundarypatient flows make cost-containmentand introductionof equitableregional allocationformula difficult. Theproposed purchaser/providersplit has created needs for new institutions, new roles and responsibilities,clear by-laws and transparentadministrative procedures, new accountability mechanisms,new skills for health insuranceand business-likehospital management, and appropriate managementinformation systems that need to be developed.

In October, 1997,the Governmentchanged the status of health care facilitiesfrom budget organizationsto public institutions. These new regulationsprovide for substantialautonomy and flexibility,but they do not provide assurancesfor clear public accountability.Hospital owners (central government,municipalities and apskritis) play a passiverole in oversight,leaving the task of financial monitoringlargely to the TPFs, though TPFs' do not have the necessary powersto address poor business performancein hospitals. Many hospitalshave accumulatedsignificant debts, and owners sometimespay off these debts to keep hospitalsopen, underminingincentives for efficiency. It is difficultto achievea co-ordinatedrational approachto reconfigurationwhen hospitalownership is fragmentedacross three levels of Government,and parochialpressures inhibitrationalization. There is a prospectof further fragmentationas the numberof municipalitiesis increased. Success and credibilityof the reform depends on the appropriateresponse to such institutionalweaknesses and the appropriatelegal status, governance and monitoringarrangements for the organizationsinvolved.

Civil servicereform will unlikelyaffect health reformsbecause health serviceproviding institutionsare registeredas public institutionswhile civil servicereform will affect only budgetary institutions.However administrative reform may have negative impactto restructuringof service

16 Baltics Health Care Sector Study. Interim report. Lithuania. 1998. International Finance Corporation. Project Files.

17 Health Care System Privatization Strategy. White Paper. Draft. MOH, Vilnius, 1998. Project Files. Perceptions of Health Refonn. A Qualitative Stakeholder Analysis of the Progress of Health Reform in Lithuania 1996- 1998. Consultant Report. Project Files. Page 12 provision.According to reform by year 2000 the number of municipalitiesshould be increasedfrom 56 present to 96, i.e. municipalitieswill becomesmaller. The majorityhave hospitalsand policlinicsin their territoriesand it is likelythat municipalitiesas foundersof health institutionswill try to maintainthem to meet minimal requirementsestablished by the Ministryof Health. This may create additionaldisincentives to take radical steps towards restructuringof the hospital sector.

3. Sector issues to be addressed by the project and strategic choices: Lack of effective The NationalHealth Board (NHB)was establishedin 1998 as a national focal point for public health leadershipin public health policies. It is expectedthat in the short and mediumterm, programsto nationalpublic health prioritieswill be defined, surveillancemechanisms established address priority and programsinitiated. The projectprovides limited supportto the NHB in publishing health problems a nationalpublic health reportand knowledgebrokering activities to help the NHB fulfill its functions. Inefficienthealth The project supportsimplementation of PHC reform that is the Governmenttop reform care delivery priority. PHC is expectedto provide betterquality care to the populationand provide system economicallymore efficientalternatives to institutionalcare. Developingcommunity- based mental health servicesand communitynursing are strategicfocuses withinthe PHC reform. Mentalhealth is drivenby politicalpriority of mental health (high suicide rates) and internationallyrecognized best practicesin mental health services. Communitynursing is being developedas a strategicvehicle for introducinghealth promotionand disease preventionactivities in communitiesand for creatingan enabling professionalenvironment for integrationof social and health care services. Health services Health servicesrestructuring is inherentlya very politicallycomplex process. The restructuring project uses three strategicapproaches to address this issue:(i) developmentof an enabling policyand institutionalenvironment, including appropriate financial incentives,management of investmentexpenditures, need basedhealth services planningand health servicesgovernance reform; (ii) national developmentof service norms and guidelines,including alternatives to hospital care and review of ambulance services;(iii) a demanddriven competitivepilot approachto ensure quality of proposals,local ownershipand successfulimplementation and replicability. Supply-driven The project supportsa changefrom a supply-drivenhealth financingsystem to a needs- resourceallocation driven system. By 2003, all SPF resourceswill be allocatedto the ten TPFs on the basis resultingin of populationand other indicatorsof need, rather than on the basis of servicesprovided regionalinequities by facilitiesin the given territory. TPFs will then be responsiblefor purchasingservices for their residentpopulation from facilitiesproviding the most cost-effectivecare, regardlessof locationof the provider. Strategicconsiderations include the scope of need-basedallocation (inclusion of secondaryand tertiary care) and phasingthe changesbecause of the expectedsignificant impact on budgetsfor some territories (increasesor decreases,depending on the initial relative share). Inefficient The project supportsdevelopment of an effectiveand transparent systemof investment managementof appraisal,especially for capital funding(construction and equipment)above a certain investment level. The process builds on structuresthat already exist but puts them into a more expenditure formaland wider social,economic and health perspective. Feasibleoptions for Lithuaniato encourageeconomy of resourceuse will be developedduring the project, includingpopulation-based allocation of investmentbudgets, a system of investment creditsthat can be used to obtain capitalfunding, and inclusionof capital costs into the price of services. Inefficient The project will support implementinga strategy to introduceneeds-based purchasing purchasing by TPFsthrough skills developmentwithin purchaser organizations(SPF, TPFs) in practices needs assessment,quality monitoring,and contracting. Managersof provider Page 13

institutionswill also be trainedto participatein and respondto the contractingprocess. To underpinassessment of needs (by type and volume) and quality of care, and to guide priority-settingin the purchaseof services,evidence-based best practice service protocols will be developedfor priority areas of care. Given continuingchanges in medical science,population needs, and resourceavailability, protocol development will need to be an ongoingprocess. In-countrycapacity to apply the basic methodologies for evidence-basedresearch and review will be developedunder the project. Paymentsystems The project will support adjustmentsto the capitation-basedremuneration of PHC to encourageover- encouragethem to expandthe range of services. Volume limitswill be introducedto referral and the systemof hospital care reimbursementto discourageexcess admissions. The hospital admission projectwill support solvingimplementation issues such as applicationof sliding scale reimbursementof servicesexceeding contracted limits, finding a rational and transparentbasis for determiningcontract volumes, and adjustingprices with actual costs. It is expectedthat needs-basedpurchasing practiceswould graduallydetermine the servicevolume to be purchasedfrom health servicesproviders. A policy of applyingthe same prices for similarcare whetherperformed in tertiary or secondary facilities will be established. An unaffordable The project will support attemptsto establisha more explicit public health insurance benefit package benefits packagewhich is a methodologicallyand politically difficulttask. Technical assistance underthe project will help the Governmentto understandthe various approachesthat have been attemptedin other countries. A number of other project inputs will indirectlysupport the developmentof the core list of servicesthat are to be fundedthrough the compulsorystate health insurancesystem: (i) developmentof treatmentprotocolsto increasethe qualityof care and reducethe cost of treatmentfor some types of interventions;(ii) processinga needs assessment will help to showwhich treatable diseasesshould be included in the packageand given the overall limit on availableresources prioritise interventions towards those that offer the best value for the money; (iii) the developmentof a bettercost basisfor activitieswill help to establish the prices for servicesto be charged to patients;(iv) primary care incentiveswill help to reinforce primarycare led protocols. Low Levels of The project will facilitate assessmentand decision on how to improve SPF's Collectionby SPF contributionassessment and collectionsystem while maintainingadministrative costs at a low level. The optionsinclude (i) improvementof SPF collectioncapacity from the self-insuredpopulation (farmers, housewives, etc); (ii) transfer all collection responsibilitiesto SODRA and thus free the SPF to concentrateon its purchasing responsibilities;(iii) improvingthe contributiontracking systemto refuse servicesto those who have not paid. These issues are linkedto currentdiscussions on proposalsto introducea system of supplementaryhealth insurancewhich would cover services outside a universallyguaranteed basic packageof services. This nexus of policy decisions needs carefulconsideration of not only its impact on revenuegeneration, administrativecosts of collectionand priority-settingfor efficiency,but also on the fundamentalprinciple of universalityof accessto health care that can ultimatelybe resolved only throughthe processesof politicalchoice. TechnicalAssistance on definingthe basic package(above), on developingan efficientcollection system, and on approachesto and arguments for and againstsupplementary health insurancewill be providedunder the project. Health Support establishmentof a well coordinatedand comprehensiveHealth Information Information System consistingof databasesand applicationsystems independentlydeveloped by the System project participants,to effectivelyand enduringlyimprove the amount and accuracyof health data available for policy making, and to support the efficient operationof national health care budgeting and administration. Page 14

Insufficient Various project inputs would contributeto developmentof institutionalcapacity. A Institutional managementadviser will be providedtot he MOH to offer guidanceon implementation Capacity of reformsand to strengthenmanagerial capacity within the Ministry. A provider support unit will be establishedin the MOH to offer support, guidanceand trainingfor managersof providerinstitutions. Short courses on contracting,business planning, protocol developmentand health needsassessment will be offered for provider institutionmanagers as well as for staff of the SPF and TPFs. Finally, a long term nationalhealth managementtraining program will be commissionedfrom a relevant academicinstitution. An improvedmanagement information system (below)will also be an essential elementof the health managementinfrastructure. Specialeffort is paid to strategicinformation systems management. Page 15

C: Project Description Summary 1. Project components (see Annex 2 for a detailed description and Annex 3 for a detailed cost breakdown):

A. Supportto HealthReform 845 23% .1 48% A.l Policy Development Activitiesto support Policy,1B developmentof regionalresource allocationformula, allocationof investmentfunding, provider reimbursementand contracting,needs assessmentand service planning,basic package of services,clinical protocoldevelopment, and health care services restructuring. A.2 StrengtheningCapacity of NationalHealth Policy, IB Institutions.Supports capacity building in the MOH, SPF,National Health Board, and NationalHealth InformationCentre. Technicalassistance and training in management,information on cost-effectivehealth care, and trainingin public health policy issues. A.3. InformationManagement. Supportto the Health IB, InformationCentre. Development of strategichealth Physical informationsystems to support businesspractices for stakeholdersoperating in the health sector in the pilot regionsof the Project. B. Health ServiceRestruduring 24.1 71% 16 6 69% B.1 Alytus Pilot Project supportsregional PHC service Physical developmentand reorganizationof Alytus hospital, includingestablishment of a DSU. B.2 KaunasPilot Project supportsa health promotion Physical and disease preventionprogram, regional PHC development,a DSU as part of hospitalrestructuring program,community mental health servicesand an ambulanceservices development program B.3 Utena Pilot Project supportsregional PHC services Physical development,restructuring of two hospitalsand ambulanceservices. B.4 VilniusPilot Project supportsregional PHC Physical servicesdevelopment, conversion of an acutecare hospitalinto a long-termand nursing care facility. C. ProjectManagement 2 0 1.4 4% Q4 29% Strengtheningthe capacityof the MOHto effectively IB manageProject activities, monitor implementation progress and achievementof developmentobjectives, and administerprocurement and loanexpenditures. Front-endFee on the Loan (1%) 0.2 1% 0.2 100% Total 34.2 00%o 21.2 62% 2. Key policy and institutional reforms supported by the project:

The following benchmarks of the policy and institutional reforms will be supported and monitored by the project:

19 Total cost includes contingencies. 20 Project management cost also includes contingencies to finance fees to utilize options chosen by the GOL under the LIBOR based fixed spread loan instrument. Page 16

A. Health financingreform * By 2003, graduallymove from supply drivenhealth financingresources allocation among regions to a populationneeds based formula. * In 2000, introducevolume limitsto all contractsbetween TPFs and secondaryand tertiary facilities. Marginalpricing methodologywill be developedfor extra-contractualservices. * Strengthenthe CommunicationsSupport Unit withinthe MOH to inform general public about implicationsof the health reform and offer continuingsupport to providersduring the reforms. * Assign and strengthenthe functionof health needs assessmentin the MOH and SPF and appoint the necessarystaff. * Developmentof guidelinesfor appraisal,allocation, monitoring and financinghealth sector investments. TPFs as long terms funders and purchasersof servicesfor their respective populationsparticipate in the developmentof servicedevelopment plans for the period of 3-5 years.

B. Health SystemRestructuring. * Licensehealth care facilitiesto provide a limitedscope of servicesbased on national norms, efficiencyand quality criteria. * Developneed-based health servicesmasterplans on national and apskritislevel. * Graduallyintroduce a gatekeepingfunction for GPs to contain unnecessaryself-referrals to specialistand ambulanceservices. This will be done through phased definitionof the core PHC services. * Developand strengthenprovision of ambulatorymental health servicesin integrationwith general PrimaryHealth Care services. * Reviewthe systemof ambulanceservices provision with the objectiveto separatetrue emergency ambulanceservices from other necessarytransportation needs of health care personneland patientsand implementrecommendations in pilot regions. * Developmentof clinical practiceguidelines. Page 17

3. Benefitsand targetpopulation:

Society at iarge I*mproved efficiency of public health care expendituresallows the purchaseof more care for a monetaryunit * better standardsof care * improvedequity as a result of need-basedresource allocation Populationin pilot regions * better accessto care * better quality of care * reduction in urban-ruralinequities * increasedcommunity participation in health and health care issues * elderly and chronicallyill from communitynursing services Government * improveddecision makingcapacity through institutionaland process improvements,and increasedand accuratedata from improved infornation management,on health sectorneeds and costs.; * better communicationwith the populationand system stakeholders; Health policy decisionmakers * improvedinformation about reforms, opportunitiesfor feedback and opinion leaders: * improvedtransparency of health care fundingwill allow for better Government,Patient Funds, planning and accountability Parliament,influential * strategicplan for improvementof populationhealth throughpolicy and stakeholders other broad-basedapproaches a improveddetailed and aggregatedata on health from the MIS SPF and TerritorialPatient * strengthenedinstitutional capacity Funds * improvedjob satisfactionthrough skills developmentactivities and clear job descriptions * automationof data gathering,aggregation and analysis functions supportingstatistics, policy development,and resourceallocation * reductionof fraud in health insurancesystem Health administrators, * better managementskills managers General Practitioners * improvedskills and incentivesfor good performance * improvedprofessional prestige * better controland flexibilityover professionallives * improvedskills in health promotionand prevention * improvedworking conditions

4. Institutionaland implementationarrangements:

The executing agencieswill include:(I) the Ministry of Health,which will provide overall technical and managerialdirection; (2) apskritis administrations;(3) municipalities,which will be responsiblefor deliveringhealth services;and (4) the State Patient's Fund, with responsibilityfor financingand reimbursinghealth servicesthrough Territorial Patient Funds.

D: ProjectRationale 1. Projectalternatives considered and reasonsfor rejection: No-projectalternative. The perceivedvalue added of the project is to supportthe Governmentto leveragepolicy reform. Given that politicalwill exists, resourcesare neededto secure some critical inputs, producesuccessful pilots to secure positive feedbackon reform,and ensure stakeholder Page 18 engagementand approval. Post-socialisttransition economies do not have a traditionof adequately financingreform efforts. High opportunitycost of recurrentexpenditure dollars makes it difficultto allocatepublic funds for developmentpurposes and the countryneeds to rely on external donor support. A well designedand targeted projectwould mitigatethe risk of losing commitmentand credibilityof the reform comparedwith no-projectalternative.

Projectfocus. Health financingreform and restructuringwere selectedas focus areas because perceived Bank's comparativeadvantage in these areas. PublicHealth is not the focus of the project because of choices made earlierin the project preparationphase. Part of the rationalebehind the decision was a lack of respectiveGovernment counterpart and general reluctanceof the Governmentto use loan funds for technicalassistance intensiveactivities.

Size of the loan. The size of the operationwas influencedby what is acceptableto the Governmentand yet still sufficientto leveragepolicy changes. Annualproject disbursementsamounting to about 1-2 percent of the overallannual health spendingwere perceivedto be affordableto the Governmentand sufficientto supportthe policy program.

Specificdesign issues. Competitiveselection of pilot regions based on the qualityof proposals and consistencywith national health care reform, is perceivedto contributeto a successfulproject implementation. Tangiblepositive results from the first successfulactivities are believedto facilitate nation-wideimplementation of restructuringof the health sector.

2. Major related projectsfinanced by the Bank and/or other development agencies (completed, ongoing and planned): z=~~~~~~7

Bank-financed High relianceon institutionalcare for SocialPolicy and HS HS populationat risk (the elderly, CommunitySocial handicapped,and children). ServicesDevelopment Project

Otherdevelopment agencies: EU-PHARE Primary Health Care Project HealthCare Financing Denmark,Ministry of Health Health Management Training

IP/DORatings: HS (Highly Satisfactory),S (Satisfactory),U (Unsatisfactory),HU (Highly Unsatisfactory) 3. Lessons learned and reflected in the project design.

Lessonslearned from other health projects in the ECA region are as follows:(a) health sector reform is a lengthy, politicizedprocess and expectationsfor the reform process have been too optimistic for both the WorldBank and the client countries;(b) institutionalaspects of reform are as importantas technicallyproficient strategies; (c) greater attentionneeds to be paid to the politicaleconomy of the Page 19 reform throughmarketing reforms to lawmakers,the medical communityand the public;(d) projectshave been too complex;and (e) adequateresources need to be committedfor supervisionof projects.2 1

The projectteam recognizesthat sectordevelopment and achievementof the Project's developmentobjectives will requirea strong partnershipbetween the MOH and internationalexperts and and financiersto support the implementationprocess. Through consultanttrust funds and a Sida partnership,the Bank has broughtadditional technical assistance to the MOH during the project preparationphase. Technicalassistance has facilitatedthe productionof detailed regionalhealth care restructuringproposals which increasedthe technicalknowledge of local health care providersand will also facilitateimplementation. In addition,the Vilnius ResidentMission has been providingconstant support to the MOH and PMU in project preparationand implementationthrough a dedicatedHuman Developmentsector staff. The ongoingsupport from the Bank's local office will strengthenand sustain the supervisioneffort. Finally, to strengthenthe managementcapacity of the MOH and PMU, significant technical assistanceand trainingwill be financed underthe Project.

Most Bank projects in Lithuania that are underimplementation are performingsatisfactorily or highly satisfactorily(9 out of 11 projects under implementation).The main problems are related to a lack of experienceand insufficientcapacity of implementingagencies to follow implementationarrangements includingapplication of procurementrequirements and commitmentto meet policy conditionalitiesif agreed.Timely and efficientcapacity building and TA, and trainingprovided to implementingagencies reduce these problems.In rare cases unsatisfactoryimplementation is due to inadequateproject design which ultimatelyrequires review of the project.

4. Indications of borrower commitment and ownership:

The MOH is the institutioncharged with the design, implementationand monitoringand evaluationof Lithuaniahealth reform and it is also the primary counterpartfor the WorldBank supported Health Project. The main prioritiesof the MOH reform efforts have been guided by 1996National Strategy for HealthReform and have largely remainedthe same althoughthe commitmentto the project has been influencedby changes in the MOH management. Over the past two years, the Ministryhad been managedby three Ministersand the MOH has undergonesignificant structural changes. However,after general and presidentialelections, Lithuania has a stable Governmentand developmentconcept and commitmentto the reforms has been reaffirmed. Duringthe 1998 World Bank and IMF annualmeetings, the Governmentexpressed explicit interestin World Bank support to the LithuaniaHealth reform.

The demand drivenapproach for competitiveselection of pilot regions in the restructuring componentof the project has strengthenedlocal ownershipof the project and helps to overcomethe complexpolitical context of health servicesrestructuring activities. The project also has enjoyed Parliamentarysupport throughout the preparatoryprocess that has been facilitatedby regularbriefing sessionsand project support to the National HealthBoard.

5. Value added of Bank support in this project:

Continuouspolicy dialogue during project preparationand implementationwould enable the Govermnentto tap into the Bank's extensiveinternational experience and knowledgebase about best practicesin designingand implementinghealth sector reform.

The Bank's credibilityas an institutionand its financial assistanceincreases the Government leverageto negotiatewith the stakeholdersand implementneeded reformsin a politicallycomplex health sector.

21 Health Sector Development Strategy for Europe and Central Asia Region. World Bank publication. Page 20

Bank financingwould complementfunding from other donors that is primarilyrestricted to technical assistance. The Bank's funds are importantin the complementaryeffort with other donors to accomplishestablished goals in PHC reform implementation.

E: Summary Project Analysis 1. Economic (supported by Annex 4): Cost-BenefitAnalysis: NPV=US$ 34.7 million; ERR= 41 % The economic analysisis a cost-benefitanalysis where both the costs and benefits are measured over a ten year presentedin 1999 prices. Currentand investmentcosts are consideredirrespective of the source of finance. The benefits are limitedto direct financialbenefits that are measurableand some indirect economicbenefits that are likely to occur as a result of the project. Intangiblebenefits such as improvedquality and health status, more equitableallocation of resourcesaccording to needs, better access, etc., are not quantifiedin the analysis.

Informationwas derived from domesticreports, and from ad hoc data collectionand research (questionnaires,telephone interviews). Some assumptionsare based on regional, nationaland internationalexperience about potentialsavings to the health care system. A discountrate of six percent was used to calculatethe net economicbenefits of the project expressedthrough an internalrate of return (IRR) and net present value of the project (NPV). The details of the economicevaluation are availablein the project files.22

The costs of the project and the expectedbenefits are estimatedin three main areas: (i) policy developmentand supportto nationalhealth institutions,including cross-regional equity and resourcere- allocationimplications of introducinga need-based(capitation) resource allocationprinciple, strengtheningthe role of the purchasersthrough developmentand implementationof new payments models and contractingsystem, strengtheningthe informationmanagement; (ii) health services restructuringin the four apskritis that supportthe PHC reform and hospital capacityoptimization; and (iii) total costs and benefits of the project includingsynergistic effects and indirect financialbenefits.

The costs and benefits of the restructuringcomponent are related to: (i) changes in referral rates to hospitalsand specialists; (ii) estimatedbenefits from expectedchanges in skills mix and structureof medical profession,costs and benefits of pilot PHC practiceswith focus on the shift of treatments from hospitalsto PHC (incl. indirect benefitslike reducedtime-costs and travel costs); (iii) costs and benefits of the pilot hospital-restructuringprojects (savingsdue to expandingday-care surgery and concentrationof some care and avoided duplications,benefits in terms of shorterALOS ands cuts in beds); (iv) estimated changesin directcosts and benefitsfor restructuringmental health by the expansionof out-patient treatment;and (v) estimatedcosts and productivitygains due to investmentin the ambulancesector (includinganalyzing the volume of differentservices provided and organizationalchanges).

The summaryproject costs includealso the cost for project managementas well as an additional benefit from the demonstrationeffect and synergisticeffect of coordinationand implementationprocess (equal to 1% of public HCE starting from midtermof the project). The project as a whole would yield an estimatedinternal rate of return of 41% if the indirect financialbenefits were included. The indirect benefits represents 14%of total projectbenefits, drivenprimarily by shorter length-ofstay in hospitalsdue to expansionof day-caresurgery and ambulatorycare. The total benefit over ten years is nearlyUS$94 million and the net present value over US$49 million.

22 Economicand Financial Analysis of the LithuaniaHealth Project. Clas Rehnberg and LiubaMurauskien6. 1999. ProjectFiles. Page 21

Estimatedsummary costs and benefitsof the project (US$ '000) - - 1-2O03t 0- Costs 6,462 13,184 12,007 5,612 4,046 3,973 3,552 2,513 1,914 1,599 Benefits 959 1,975 10,426 11,499 12,804 16,375 16,342 16,309 16,309 16,318 -5,503 -11,209 -1,581 5,887 8,513 8,831 12,823 13,829 14,309 14,720 Indirect benefits 45 606 1,263 1,985 2,654 2,733 2,815 2,900 2,987 3,076 NPV (6%): 49,000 IRR: 41%

2. Financial (see Annex 5): NPV=US$ 34,700 million; FRR= 32 %

Financial analysisestimates recurrentcosts linkedto the investments,and analyzeshow this affects the total public health care expenditures. The fiscal effects are to a large extent equal to the economiccosts and benefits, excludingindirect financial benefits. Estimated financial costs and benefits (US$ '000)

,9100 1'-011#2 02/03 , 5 .w Costs 6,462 13,184 12,007 5,612 4,046 3,973 3,552 2,513 1,914 1,599 Benefits 959 1,975 10,426 11,499 12,804 16,375 16,342 16,309 16,309 16,318 -5,503 -11,209 -1,581 5,887 8,513 8,831 12,823 13,829 14,309 14,720 NPV(6%): 34,700 IRR:32% Sensitivityanalysis

The followingare some factors that determinesuccess of policy reforms:(i) strengtheningthe institutionalcapacity of Patient Funds will be a determinantfor how effectivelythe Funds can use contractualagreements and participatein the regionalhealth servicesplanning and resourceallocation decisions; (ii) expansion of PHC would not automaticallylead to a reallocationof resourcesfrom hospitals, and incentives(pecuniary and non-pecuniary)given to doctors as well as patientswill be importantfor changesin utilizationof services; (iii) commitmentto the national and regionalplans for restructuringthe hospital sectorwill be crucial for releasingresources.

The macro-economicdevelopment is one of the most importantdeterminants of health care spending. The project economicanalysis is based on the key assumptionof a favorablemacro-economic environment. The projectedgrowth of GDP is estimatedto 5 percentover the next 4 years. International comparisonsshows that the incomeelasticity across countriesare greater than 1.0 (from 1.15to 1.31), meaningthat health spendingwill grow at a faster rate than the growth of the overall economy.23 But the health care sector is very sensitiveand suffers during economicrecessions. Availableresources for the project and expectedbenefits will depend on the overall economicgrowth.

Introductionof a decentralizedmodel of General Practitionerbased PrimaryHealth Care system may lead to an extra layer of health care system. Financialsavings would only occur if physical resources releasedin polyclinicsand hospitalswill be put for alternativeeconomic use (cut costs, generateincome) or closed (cut costs). If no savings are generatedfrom both closedpolyclinics and decreasein the number of facilities or space utilization,then the IRR for the PHC subcomponentof all four pilot apskritis would be negative,with the NPV equalingUS$-6.0 million. With 50% additionalcosts off-set by savings, the IRR would becomepositive; with 100%additional costs off-set by efficient use or closing of vacated space,both IRR and NPV will becomepositive (see table below). To monitor this critical factor,the use of vacated space will be monitoredby the PMU at mid-termand end of project.

23 OECD (1995) Page 22

Economicimpact of differentoptions for use of releasedresources in PHC in the four pilot apskritis

Costs 18,415 12,683 6,952 Benefits 13,376 13,376 13,376 Net-savings -5,039 6,93 6,424 NPV (6%) -6,055 -1,271 3,512 IRR -9% 2% 27%

3. Technical:

The project supportsintroduction of a population-basedresource allocation formula for TPFs. This is consistentwith the best internationalpractice and an importantpre-condition for developmentof the capacity of TPFs as purchasersof needs-basedhealth care services. In addition, TPFs would be able to developtheir planningcapacity to meet long-termfinancing needs for health servicesunder tight budgetaryconstraints. This transparent and equitableresource allocation mechanism to be utilized by TPFs, as well as a sophisticatedpurchasing capacity are factors recognizedinternationally as one of the best methodsfor controllingcosts and ensuringcost-effective use of resourcesin a decentralizedsystem.

The investmentpolicy developmentactivities supportedby the projectpropose to establisha transparentframework for investmentdecisions, review, financing, and monitoring. Technicalevaluation of final policiesis not possibleat this stage but the Governmentwill be able to choose an option from a list of internationalbest practicesthat fits best the Lithuaniancontext. The project will also support developmentof evidence-basedmedicine guidelines that is becominginternational best practice to improveefficacy and cost-effectivenessof health care interventions. The use of the methodologiesof populationhealth needs assessment,health serviceplanning, and hospital facilitiesfunctional planning to develop nationaland regionalmaster plans for reconfiguringsecondary care services is a robust and appropriatetool to help an oversized,formerly centrally-directed health system adjust capacity and move into a more decentralizedenvironment.

To assure technicalcredibility of developmentof Day Surgery Units for hospital restructuring plans, professionalguidelines were used, includingthe Royal Collegeof Surgeonsof England, recommendationsof the U.K. National Health Service ManagementExecutive, Day Surgery,Making it Happen, NHS ManagementExecutive, and Value for MoneyUnit, 1991London HMSO.

For the improvementsin the country's HealthInformation System (HIS), the project's approachis highly de-centralizedand pilot focused. Progresswill be possibleat severalfronts at the same time, and individualactivities have a high likelihoodto remainmanageable. For all of the applicationdevelopment work,there will be full involvement,on a competitivebasis, of the private sector which from experiencein other projects is known as having the elasticityto best respondto such needs. The tendenciesfor disintegrationwhich are natural in a decentralizedimplementation, will be counteractedby improved strategiccoordination on the country level supportedby EU/PHAREproject.

4. Institutional:

ExecutingAgencies: The Health Reform Componentwill be implementedthrough the MOH's State and TerritorialPatient Funds, while the Health ServicesRestructuring Component will be implementedthrough the existing institutionalcapacity of municipalitiesand health regions (Apskritis). Internationaland nationaltechnical assistanceservices would be providedto these entities to facilitate implementationof their respectiveProject Implementation Plans (PIP). These entities have participatedin the projectpreparation phase and workedjointly with consultantsin the preparationof their PIP.

Project ImplementationManagement: To strengthenthe capacity and knowledgeof the MOH to preparethe health reform and health servicesrestructuring policies and activities,a ProjectManagement Page 23

Unit (PMU), a Project SteeringCommittee, and ComponentWorking Groups were establishedin 1997. These units will continue to operatethroughout the ProjectImplementation Period. The PMU would be responsiblefor facilitatingproject implementation, in particular,to: (i) promotethe objectivesand sector efficiencyreforms being supportedunder the Project; (ii) monitor progressin the achievementof the agreeddevelopment objectives, benchmarks, and outputsas defined in the agreedKey Performance Indicators; (iii) operatea soundFinancial ManagementSystem and producethe required financial statementsto monitor eligible expendituresand meet auditingrequirements; and (iv) conductall procurementunder the Project in accordancewith Bank Guidelines.

5. Social:

Healthreform and health servicesrestructuring will have both politicaland social impactson specificsegments of the population. The project includesactivities to support the Government's communicationcapacity with the stakeholdersand generalpublic as well as a pilot fund to mitigatesocial consequencesof health workforceretrenchment through voluntary severance packages.

6. Environmental assessment: Environmental Category [ ] A [ ] B [X] C

The project is expectedto have a marginallybeneficial impact on the environmentby improving energy efficiencyof primary health care facilities,and closinghospitals and clinics. Otherwise,no appreciableenvironmental impacts are anticipated.

7. Participatory approach [key stakeholders, how involved, and what they have influenced; if participatory approach not used, describe why not applicable]:

An integratedparticipatory approach has been appliedto the identification,preparation and design phases of the LithuaniaHealth Care Reformproject. A "ParticipationStrategy for Project Preparation" was collaborativelydesigned in May, 1997 by the Ministryof Health, WorldBank and the project ParticipationConsultant. The strategy definedthe various componentsof the participatoryapproach for the project and was designedas a means to create broad basedcommitment to the Bank supportedproject while increasingthe number of actors potentiallyinvolved in the implementationof the project,especially at the localApskritis level. The participatorystrategy involved a diversityof central and regional stakeholdersrepresenting a diversityof health care systeminterests (160 stakeholdershave participatedin one or more of the participatoryevents which included a stakeholderanalysis, stakeholder infonnation and educationseminars, a participatoryproject designprocess and severalcapacity buildinginitiatives).

(a) Primary beneficiariesand other affectedgroups: Ministryof Health; State Patient Fund; TerritorialPatient Funds; municipalauthorities; apskritis authorities;primary, secondaryand tertiary facilitiesand providers;and allied health personnel.

(b) Other key stakeholders:Ministry of Finance,Ministry of Economy, Departmentof Statistics, medical providers,allied health personnel,medical professional associations, medical universities, national media, medical care consumers,and intemationaldevelopment agencies involved in the health sector. Page 24

F: Sustainability and Risks 1. Sustainability:

Policymeasures supportedin the projectare expectedto improve stabilityand certaintyof health servicesfunding on a regionallevel. This should establishconditions for developingplans to restructure health serviceson a sustainablelevel. Implementationof need-basedallocation formnulas will put financial strain on some regionsbut the impact is expectedto be mitigatedthrough phased implementationof reform. Economicanalysis is expectedto demonstratepositive return on the project but these need to be confirmedduring the appraisalmission. The project will not generatesignificant incremental recurrent costs. Any incrementalrecurrent costs are expectedto be offsetby savings from efficiencyimprovements. Political risk and sustainabilityissues are addressedin the table below.

An estimateof the financialsustainability of the projecthas been carriedout by relatingtotal project costs to the public health care expenditures,total public expendituresand the GDP, to determine the overall burden of the proposedproject on public financesand the overall economy. Real GDP growth is assumed to be 5 percent annually,and the share of the total governmentspending to stay around 25.0 percent of GDP. The financialburden of the project will be highest during the secondyear of the project and then decline (see table below).

FinancialSustainability of the Project. (US$ Millions,1999 prices)

G9^eneratFiinl Information 0p Total projectcosts (all financingsources) 6.2 11.9 9.4 2.1 0.4 Project costs (Governmentof Lithuania) 1.6 2.9 2.7 1.2 0.3

Public healthexpenditures 558 587 620 653 686 Total Gov't expenditures 2,905 3,055 3,225 3400 3,575 GDP 11,625 12,225 12,900 13,600 14,300 Projeact09Imac (%)00 ft0 0 0 0 GoL Project Costs / Public HCE 0.3 0.5 0.4 0.2 0.04 GoL Project Costs/ Public Expenditures 0.06 0.09 0.09 0.04 0.01 GoL Project Costs/ GDP 0.01 0.02 0.02 0.01 0.002

Total ProjectCosts / Public HCE 1.1 2.0 1.5 0.3 0.05 Total ProjectCosts / Public Expenditures 0.2 0.4 0.3 0.08 0.01 Total Project Costs / GDP 0.05 0.1 0.07 0.02 0.002 Sources: StatisticalYearbook of Lithuania 1998,Methodical Publishing Center, Vilnius 1998;Lithuania -An opportunityfor EconomicSuccess. World Bank 1998

For the implementationof the HIS sub-components,chances for sustainabilityof the investrnents are high due to the decentralizednature of the developmentactivities, an approachthat will increasethe individualrobustness of the componentsystems, and thereby of the overall HIS. Indeed,the application systems developedfor PHC facilities and hospitalsare expectedto be extremelyattractive to be implementedin further health care institutionsfar beyond the pilots supportedby the project. Page 25

2. Critical Risks (reflecting assumptions in the fourth column ofAnnex 1):

Governmentwill not followthrough on key S * project implementationconditionalities in the loan policyreforms to create enabling agreement; environmentfor health sector restructuring. * phased implementationof reforms; * transparentand internationallycredible solutions to problems; * effective communicationswith stakeholderssupported by the project; * strengthenedinstitutional capacity of the key health institutions Macro-economicsituation worsens and puts S * macro-economicsituation is out of controlof the project at risk implementationof the reformsas well and no measurescan be proposed; as counterpartcontribution Increasein numberof municipalitieswill S * Governmentplans to consolidateat leastacute care further fragment the ownership of health care hospital ownership to apskritis level facilitiesand hinder rational planningand restructuring.

Ineffectivedonor coordinationdoes not M * supervisionof internationaldevelopment programs by one allow realizationof synergiesand would MOH SteeringCommittee; allowoverlap and duplicationof activities. * regular contactsof the Bank team with representativesof other agencies.

Highlypolitical nature of health services S * conclusionof project ImplementationAgreements with restructuringand consolidationprograms pilot regionsmandated though Loan Agreement; will impedeachieving the results. * project designto include activitiesto mitigate resistanceof vested interestswho may perceive themselvesas losing throughprograms; * use demonstrationeffect of pilot projects; * ensurelocal stakeholdercommitment in pilot regions.

MOH lacks capacityto involve stakeholder M * the project supports developmentof MOH communications groupsin reformplanning and decision function(Communications Support Unit); making process. * MOH facilitatesregional stakeholder involvement/educationprograms in PHC reform and health servicesrestructuring. Restructuringand rationalizationprograms M * designand implementationof socialmitigation measures do not adverselyaffect or displacelarge under the project. numberof health care workers. Insufficientnumber of trainingopportunities M * effective collaborationwith EU-PHAREproject and with to train sufficientnumber of GP's. Absence academicinstitutions. of continuouspost-graduate training system for newly-trainedGPs Municipalitiesdo not have sufficient M * capacitybuilding activitiesunder the project. capacityto implementPHC and restructuring programs. High turnover and/or inadequatefunding of M * appropriateincentives for PMU staff; PMU impedesproject implementation * trainingopportunities and prospects for career development; * fundingarrangements firmly agreed in the loan agreement. Donor fundingfor the project components M * the project will tap its own grant or contingencyloan funds does not materialize. to achieve the requiredresults. Overall Risk Rating M Risk Rating- H (High Risk), S (SubstantialRisk), M (Modest Risk), N (Negligibleor Low Risk) Page 26

3. Possible Controversial Aspects:

A possiblecontroversial activity supportedunder the Project is the proposedinvestment into an inpatientnursing and long term care facility. The institutionalsetting for the proposedfacility is not the most efficient and high qualityway to provide for longtermn and nursing care needs as many countriesare movingtowards community-basednursing and home-basedcare. In addition, the private sector could be a more efficient providerof long-termand residentialcare. The primary objectiveof the proposed conversionof the Vilnius Railwayacute care hospital into a nursing and long-termcare hospital is the reductionof excess acute care capacity as well as to accommodatethe large unmet demand for long-term nursing care. This project componentdoes not serve as a model for meeting nursing and long-termcare needs. After completionof the conversion,Vilnius will have 0.13 nursing beds per 1,000 population which will still be very low in comparisonto internationalstandards. The proposedhospital project will also be basedon a sound businessplan and will demonstrateefficient use of space and utilities.

G: Main Loan Conditions l.During Negotiations, the following documents were reviewed and agreed: i. Updated ProjectImplementation Plan (PIP), includingdraft TORs for technicalassistance for the first six monthsfinanced underthe Project. ii. Decisionon State Patient Fund resource allocationformula and implementationtime schedulereflecting agreements reached after the review of the optionspaper. iii. Provideassurances that Pre-registrationof bidderswill not be required in tenders for provisionof goods. iv. Draft ProjectImplementation Agreement between the MOH and eachpilot apskritis v. Assurancesthat the Lithuanianbudgetary counterpart contribution for the year 2000 will be made availablefor project start-up. vi. RevisedAction Plan for developmentof a FinancialManagement System. vii. RevisedAction Plan for developmentof procurementcapacity.

2. Other: i. Disbursementcondition. A review of emergencyservices including ambulance services and generalplans on how to synchronizethe expansionof General Practitioners'services with the emergencyservices in an effective and sustainableway is a conditionof disbursementfor procurementof ambulances. ii. Financial. The Governmentof Lithuaniawill carry out a time-boundaction plan for regular submissionsof simplifiedPMRs until PMRs meet LACI requirements. iii. Financial. The Governmentshall, by June 30, 2000, submit for the necessary approvalby the Governmentagencies regulationsrequiring annual independentaudits of the State Patient Fund and TerritorialPatient Funds. iv. Execution of the project. The MOH will maintainthe PMU until project completionand ensure that the PMU functions at all times under appropriateterms of reference and with adequatestaff and resources. v. Executionof the project. The MOH will concludePilot ImplementationAgreements with pilot aspkritis on terms and conditionsacceptable to the Bank that will specify funding commitmentsand implementation,supervision, monitoring and reportingresponsibilities of the project. vi. Project Implementation.Project SteeringCommittee will remain operationalduring the project implementationperiod and be responsiblefor the policy guidance,donor coordinationand oversightand promotionof health sector reforms and regional restructuringplans developedand implementedunder the Project. vii. ProjectImplementation. The Governmentimplements regional resource allocation formula accordingto a plan agreedduring negotiations. Page 27

viii. Project Implementation. Unless the Bank agrees otherwise,the Governmentwill ensure that the operationsand facilities in which improvementswill be financedunder the Project shall continue to operate in the public health system and will not be included into a privatisationprogram.

H. Readiness for Implementation [X I The engineeringdesign documentsfor the first year's renovationsof PHC facilities are being completeand are expectedto be ready for the start of project implementation. [X] The procurementdocuments for the first year's activitiesare being developed and are expectedto be ready for the start of project implementation. [X] The Project ImplementationPlan has been appraisedand will be developedfurther for negotiations. [XI The seven items listed in sectionG(1) will be submittedby the Borrowerduring negotiationsfor review and agreement.

I. Compliance with Bank Policies

[X] This project complieswith all applicableBank policies.

ProgramnTeam Leader: Toomas Palu

SectorLeader: Annette Dixon

Country irector: Basil G. Ka ky Page 28

Annex I Project Design Summary

NarratvSumrKe efracMion,dvlain riilAsutos Indicattii XI$,hors Sector-related CAS Goal: Provision of improved social I. Improved efficiency of 1. Standard indicators in No major economic and services health care system. the MOH and SPF social crises. 2. Improved population reports. satisfaction with national 2. Population surveys. health service.

Project Development (Objective to Goal) Objective: Improve the quality, I . Standard health services 1. SPF data The Government health care efficiency, equity and access efficiency indicators reform remains consistent of the Lithuania health care improve yearly over the and stable. system. life of the project. 2. 90% of health care 2. SPF data Coordination in health providers stay within reform activities and year-end, predefined development projects fixed price-volume supported by different budgets. donors is effective and 3. 50% of population in 3. Pilot apskritis sustainable. project areas are covered administration data by certified GPs Health care funding is stable providing comprehensive and predictable during the services by end of project life of the project. (EOP). 4. Referrals and self- 4. SPF data and PMU referrals to ambulatory surveys. care specialists and hospitals are reduced by 20% in pilot areas by EOP. 5. Patient satisfaction with 5. PMU survey. the services they get from their Primary Care physicians is improved in pilot areas by EOP. 6. Policy framework for 6. WB review. Survey of health service planning health administrators in and restructuring in MOH, TPFs, apskritis place, and used by health and major providers. administrators by EOP. Page 29

Narrative Summary Perf mance Monitoring and Evaluation Critical Assumptions Indiciators Outputs: (Outputs to Objective) I. Appropriate policy 1.1 80% of funds allocated 1.1 SPF data. Major stakeholders do not framework and to regions according to derail reform process. institutional capacity for population and need- health services based formula by mid- MoF/MoH/Seimasaccept restructuring term evaluation policy/legislative established. recommendations. 1.2 100% of health funds 1.2 Review of report and are allocated to regions implementation through HC financing system adopts according to population regulations EOP. incentives to encourage and need based rationalization of services formula by EOP. and facilities.

1.3 Government guidelines Revised PHC financing for appraisal, scheme is sufficient to allocation, monitoring 1.3 Bank supervision encourage sustainable PHC and financing of health development. sector investments are developed and in use MOH has capacity to by Year 3 of project. monitor and enforce the new norms and standards. 1.4 A revised hospital 1.4 Bank supervision reimbursement schedule based on standard costing study is in place by 2003.

1.5 National and regional 1.5 PMU report need-based health services plans are developed in at least 7 regions (out of 10). 1.6 PMU report

1.6 Number of health institution managers are trained in management. 1.7 PMU report 1.7 Ambulance services review report is developed and disseminatedby 2001.

1.8 National Health Report is published regularly.

2. Health services 2.1 Individual targets for 2.1 Apskritis and PMU Sustainablegovernment restructuring programs each project Apskritis report commitment to implemented in target are defined in Project restructuring, rationalization areas. Implementation and PHC development. Agreements, including key performance Experience of pilots is indicators in: hospital effectively replicated on Page 30

bed reduction; national level increased population covered by certified GPs; reduction in ambulance services recurrent costs; Capacity to train and re- reduction in referrals to train GPs sufficient to secondary mental supply all project sites with health care services; certified GPs during the life increase in outpatient of project and immediately surgery; reduction in thereafter. hospital average length of stay (ALOS); Restructuring process is improvement in implemented in a way that financial performance; mitigates negative social reduction in cost of impacts. utilities in remodeled buildings; reduction in Levels of Government: number of hospital MOH, apskritis beds and personnel administrations and municipalities can work together effectively. 3. Project management. 3.1 Regular monitoring of Regular periodic meetings Qualified PMU staff Project implemented in progress towards between PMU, MOH maintained and trained to a timely and effective achievement of key management, regions, and effectively manage project manner with stakeholder performance indicators stakeholders to solve issues physical implementation, satisfaction. and agreed development and provide information on financing, and procurement. objectives. implementation progress.

3.2 Timely contracting of Project Management Reports goods, works, and (PMRs); supervision reports; services with quality mid-term evaluation; and outputs. final reports. 3.3 Efficiently managed PMU, with adequate staff and resources. 3.4 PMU promotes an effective dialogue among key project actors and stakeholders, in particular four pilot regions. 3.5 Satisfactory project accounting systems and annual audits 3.6 Annual PMU staff performance evaluations and training programs

_ro*ect Compon.nta/Su.., pD nts(budget for each (Comlpneats to Outputs)

Al. POLICY US$1.2 million 1. Quarterly Project DEVELOPMENT Management Reports. Page 31

Al. I Geographic resource allocation system.

A 1.2 Establishing and implementing principles of investment funding

A1.3 Provider reimbursement methodology and contracting

A 1.4 Needs assessment and Service Planning

Al.5 Guidelines and protocols: development of basic package of services

A 1.6 Health care delivery system restructuring.

A2. STRENGTHENING US$1.5 million 1. Quarterly Project CAPACITY OF NAT'L Management Reports. HEALTH INSTITUTIONS

A2.1 Support to Communications Unit, MOH

A2.2 Management Advisory Support to the MOH.

A2.3 Management training

A2.4 Information unit on cost-effective health care

A2.5 Policy Evaluation and Monitoring for NHB.

Project ComponentslSub- Inputs: (budget for each (Components to Outputs) components: component) B1 ALYTUS PILOT US$5.3 million 1. Quarterly Project PROJECT Management Reports.

B 1.1 Regional PHC development program.

B1.2 Hospital restructuring program.

B 1.3 Ambulance Service Regional Network. Page32

B1.4 Implementation Mgmt. US$7.0 million B2. KAUNAS PILOT PROJECT

B2. 1 Health Promotion and Primary Prevention Program

B2.2 Regional PHC development program

B2.3 Hospital restructuring program.

B2.4 Community mental health services program

B2.5 Ambulance services development program US$4.4 million B3 UTENA PILOT PROJECT

B3.1 Regional PHC development program

B3.2 Hospital restructuring proposal.

B3.3 Ambulance service development program

B3.4 ImplementationMgmt.

US$7.5 million B4. VILNIUS PILOT PROJECT

B4. 1 PHC services restructuring program.

B4.2 Hospital restructuring program.

B4.3 ImplementationMgmt.

Cl. PROJECT US$1.4 million 1. Quarterly Project IMPLEMENTATION Management Reports. AND MANAGEMENT. Page33

C I. I Management and Administration Staff, Technical Assistance, Equipment, and Training

Cl.2 Consumer Satisfaction Survey

Cl.3 Mid-term Evaluation

Cl .4 Final Implementation Completion Evaluation Report

Cl.5 Annual Independent Audits

C 1.6 Contingencies for fees for collar and cap hedge options under LIBOR based fixed spread loan

FRONT-END FEE US$0.2 million

TOTAL FINANCING US$ 34.2 MILLION REQUIRED Page 34

Annex 2 Lithuania Health Project Project Description

Project Component A. Support to Health Reform - US$8.5 Million

Sub-component Al: Policy Development

A1.1 Geographic Resource Allocation System Justification:The system of resource allocation is supply driven rather than needs led. The allocation of resources to TPFs is largely dependent upon the level of services delivered through specialist facilities.

Principleof reform:To establish a system of allocation that more closely matches population need based on available data with gradual introduction and refinement as more information becomes available.

Activitiesand recommendedpolicy.- Allocation of recurrent budgets to TPFs based on size of population and some other factors, with defined transition path for implementation, and integration of funding for tertiary as well as secondary for health care.

The following time-scale will be followed.

1999 Decisionmade on resource Obtaindata on TPFscontract for all Appropriatedecision allocationformula/formulae utilisation(proxied servicesprovided within and plan adoptedby and on transitionpath for by bed-days)of their boundaries. necessaryagencies by implementation. services by age group end 1999. at the nationallevel. 2000 Allocationbased on the old Periodicalanalyses TPF contracton the Practicalsubstantiation model. Theoretical budgets about distortions territorial principle, of a theoretical model and procedures for interfund between actual and volumes and quotas will for the allocation of settlements modelled for theoretical budgets be set. Identify and resources and TPFs. adjusted for CBFs monitor CBFs to reorganisation of undertaken, obtain providers within their services by end 2000. improved information boundaries, within on costs and use of theoretical budgets tertiary care and adjusted transparently for refine formula. CBFs. TPFs and territorial shall develop service development plans for the period of 3-5 years. Marginal prices will be developed for extra-contractual services.

26 Excluding resources for primary care which are already allocated on the basis of weighted capitation. 27 CBF - cross-boundary flows of patients Page 35

Al- cadnto ' D mn ad - C ~~~~~~data eoLec~n iagmstofCRFt - dIator 2001 Allocationaccording to Regularmonitoring TPFscontract on the Discrepanciesbetween mixedformula: partly based of distortionsarising territorialprinciple but the planned(per on population,partly based fromnew allocation willsettle accounts with formula)and actual on supply. formula.Possible otherTPFs for CBFsas budgetimplementation adjustmentof specifiedin the do not exceed20%. formulausing SMRs agreements.Contracts Actualservice volumes or otherproxy for specifyvolumes. do not exceedplanned relativehealth need. Introductionof volumesby no more performancebased than 5%.At least80% financialincentives. of resourceallocation to TPF is basedon population. 2002 The sameas in 2001 with TPFsalso contract Discrepanciesbetween proportionallylarger share individualhealth care the planned(per allocatedaccording to the providersin other formula)and actual populationbased formula. territories. budgetimplementation do not exceed10%. At least90% of resource allocationto TPF is based on population. 2003 Full implementationof Furtherdevelopment. 100%SPF resources for populationbased regional health services resourceallocation formula. allocatedper needs basedformula.

Goods and services: International and local health economist to assist in development and refinement of formula and dissemination workshop for SPF, TPF staff and managers of large institutions.

Responsiblefor implementation: Board of the SPF.

A1.2 Establishing and implementing procedures for allocation of investment funding. Justification: Institutions do not bear the cost of capital funding and do not, therefore, have an incentive to maximise the use of investments. The system for allocating investment funding is ad hoc and lacks a consistent framework for assessing the value of proposed projects.

Principle of reform: To establish clear principles for assessing investment proposals and the opportunity cost of existing assets, and develop skills, methods and incentives for allocating expenditure that encourages economy of resource use; to conduct rational planning for investment and disinvestment in facilities and equipment, at national and regional level, linked with service plans and norms, to be developed under subcomponents A 1.4 and A 1.6.

Activities and recommended policy: The Ministry of Health will establish a system of option appraisal for evaluating proposed investment in civil works and equipment in terms of medical need, economic benefit and social consequences. Capacity will be developed in the MOH and at apskritis level to carry project appraisal and set priorities for the State Investment Program, as a basis for giving

28 Excludingresources for primarycare which are alreadyallocated on the basis of weightedcapitation. 29 CBF - cross-boundaryflows of patients Page 36 systematic advice to the National Health Programs Coordination Commission. The MOH will prepare for the introduction of a system of capital investment allocation that can be used once the general restructuring of health facilities has been completed, including investment planning linked to needs-based service planning, and capital charging (or some practical alternative method of giving providers incentives to invest, divest and maintain assets efficiently).

Goods and services: International and local health economist to assist in development and refinement of investment allocation system and develop system of investment option appraisal; short training course in investment appraisal for MOH and apskritis staff, and managers/economists in major providers. It is envisaged that the MOH will maintain adequately staffed strategic planning and programs department to sustain the capacity in investment appraisal.

Responsiblefor implementation:MOH

A1.3 Provider reimbursement and contracting Justification: Substantial changes have already been introduced to the system of provider reimbursement. Payments now reflect activity rather than inputs used. Volume quotas have been introduced into contracts with hospitals. The payment system is simple to understand. Primary care units are paid according to the number of patients enrolled. Further refinements are being planned which should improve the functioning of the system. These include: * Refinements of the case-classification system in contracts with hospitals; * some additional payments to primary care practitioners for illness prevention; * adjustments to TPF allocation and hospital payment procedures for cross-boundary patient flows. Specific project assistance should concentrate on the following: * Standardisedfinancial management (costing) system. The project activities will support undertaking a comprehensive and realistic costing exercise. This is expected to provide a reconciliation of top down expenditure allocation and bottom up actual costs. It will provide valuable information for pricing. The methodology used should be flexible enough to show how changes in facility structure and protocols effect unit costs. It therefore becomes a vital tool for internal management. The system, once developed and fully tested, would become the standard analytical and reporting system to be used by all health care institutions (public and private) in Lithuania contracted to the TPFs. The system should be readily linked to activity data to provide management information that can be used at each level of the system. A cost-accounting based financial management model will be piloted in some of the Vilnius apskritis hospitals and policlinics (B4.1), in conjunction with the Vilnius TPF.

* Refining the system of secondary care reimbursement. These activities will use the new costing framework to help refine the current system of inpatient and outpatient specialist payment system. Pricing will be revised so that they reflect actual costs. Recommendations for incorporatingthese prices into contracts in a way that avoids the cost escalation of recent years and encourages more cost-effective patterns of care. * Primary health care reimbursement. Project activities will explore additional incentives for PHC providers to develop their own services and reduce referrals. An example could be additional income provided to practices based on the development of new services and reductions in specialist referrals based. Projects could be funded on a competitive basis. These changes would be tested out on a trial basis on the pilot apskritis. Funding for these allowances should, in the medium term, be provided through TPFs as a direct result from the reduction in spending at the Page 37

secondary level. As an interim measure it is suggested that some project funding be provided to fund these incentives on a declining basis. * National workshops or conferences on contracting will be organized each year of the Project for representatives of the purchasing and provider institutions on approaches to contracting looking especially at the framework and content of contracts. Goods and services: International financing specialist and local financing experts to develop standardized costing framework and advise on outpatient and hospital care reimbursement strategies. International contracting specialist for preparation and participation in the workshops or conferences. Short training course in contracting for SPF, TPF staff and managers/economists in major providers. An international study tour for 1-2 lead personnel in SPF and MOH.

A1.4 Needs assessment and service planning Justification: The Territorial Patient Funds do not currently purchase care on the basis of need. Rather funding is determined by the amount of care institutions are able to provide to patients. Health financing reform foresees need based regional resource allocation. TPFs as purchasers of care need to be equipped with the necessary information and skills for identifying population need, determining the best pattern of services and obtaining services in a cost-effective way through provider contracting. Purchasers require both strong evidence based information and the financing mechanisms and planning methods to use this information in an optimal way. Ministry of Health needs to ensure that rational planning of services occurs at national and regional level.

Activities and recommended policy: * A national conference drawing on international experience and with a broad range of Lithuanian representation to launch the concept and develop a consensus about needs assessment and service planning at the beginning of the project; with a short training course program for MOH, SPF and TPF staff to reflect these conclusions. * Health needs assessment will be a function of the health economics unit in the MOH and respective unit in the SPF. Needs assessment should inform service planning and priority- setting by the MOH, SPF and TPFs. * Mechanisms need to be developed to link the needs assessment functions to the planning functions of the MOH and SPF and should lead to implementationof a rational planning exercise on national and regional level by the end of the Project. Goods and services: International experts on needs assessment and service planning as conference speakers and trainers in the short course program. The organisation selected to run the conference and training course will be required to obtain speakers from a variety of country backgrounds from outside the main contracted organisation. International and local experts in epidemiology, health services organisation and service planning will provide technical assistance to the public health department to undertake the first needs assessment and service planning exercise. It is envisaged that the MOH will recruit an adequate staff specialised in needs assessment to sustain this area of activity.

Responsiblefor implementation:MOH, SPF.

A1.5 Development of the basic package of services Most of the countries have found the process of establishing a basic package of priority services politically very difficult. At a general level, Lithuania has defined the package of services covered by the patient funds. A number of project inputs will support refinement of the core list of services that are to Page 38 be funded through the compulsory state health insurance system, which will help to establish a clearer basis for service prioritization. * The process of needs assessment will help to show which treatable diseases should be included in the package. Of course, it is also possible that recommended treatment for some types of disease will increase. The task will then be to prioritize interventions towards those that offer the best value for money. * The development of a better cost basisfor activities will help to establish the prices for services to be charged to patients. * Primary care incentives will help to reinforce primary care led protocols. This project component focuses on development of improved guidelines or protocols for treatment based newly emerging evidence based medicine concept and methodologies. The protocols can be expected to increase the quality of care but also, through changes in the way patients are treated, reduce the cost of treatment for some types of intervention. It will also illuminate those current interventions that are ineffective or inappropriate and should therefore be dropped from the package.

Activities: A national conferencewill be organized by the MOH to draw on international and national experience and perspectives on protocol development, its objective being to determine a national approach. International experts also to advise MOH on priorities for diseases/treatment areas for which protocols should be developed and provide training for panels. Four panels per year to be established for appropriate disease or clinical specialty groups, with some methodological training for panel members; the panels then to identify appropriate clinical conditions to develop pilot protocols. The project also supports fellowships for overseas study in health economics and technology appraisal for two persons to work with the panels (to be employed by MOH and/or the Health Law and Economics Center).

Goods and services: International experts as conference speakers and trainers, and local experts for protocol development panels. Short term training and overseas fellowships in health economics and technology assessment.

Responsible agency: MOH and Health Law and Economics Centre.

A1.6 Health care delivery system restructuring The Government of Lithuania is developing a strategy for restructuring health care system in medium and long term. The underpinnings of the strategy are implementationof general practice based primary health care reform, developing national and regional plans for public hospitals and related health services based on evidence of international best practices and in the context what is affordable for Lithuania and consistent with emerging strategic plans for health services based on preliminary needs assessment. Restructuring is closely related to development of health financing policies, including incentives imbedded in the provider payment methodologies and capital investment allocation, as well as to permitting forms of ownership and management that improve accountability to the public and clients of the health system and ensuring that health system administrators have necessary skills and tools to run services in effective way. Different activities of the project support all these aspects of policy development.

This project component will focus on two health sector areas that are closely linked to the Government PHC reform: (i) introducing a community mental health concept; and, (ii) review of ambulance services system.

Goods and services: International and local experts in PHC, community mental health and emergency services management. Page 39

Sub-componentA2: Strengthening Capacity of National Health Institutions The objective of the sub-component is to strengthen institutional capacity to implement policy reforms. Institutional strengthening includes staff skills development, provision of information, tools and methodologies, building capacity to effectively communicate with the consumers of the health care system as well as the main stakeholders. The beneficiaries of the component activities are Ministry of Health, State Patient Funds, National Health Board, National Health Information Centre.

A2.1 CommunicationsUnit in the Ministry of Health Justification: The general public and health system stakeholders need be informed and consulted to ensure that they understand the reforms, can adapt to the change and can participate in the process of policy development and implementation.

Principle of reforms: To establish a mechanism for support, guidance and training for main health care system stakeholders and general public.

Activities: The Minister of Health has established a unit to give advice, guidance, and support to provider institutions. This unit will facilitate communication and consultation for providers with the MOH and will be a conduit for stakeholder feedback to the Government on health care reform. The Unit to be guided by the outcomes of the national conferences on contracting, business planning, protocol development and health needs assessment, and by the forthcoming projects on financial management and budgeting.

Goods and services: Local TA for training and communication facilitation; foreign TA from long term management adviser and training/developmentadvisers.

Responsiblefor implementation: MOH

A2.2 Management and development advisor to the MOH Justification: Management advice is needed on the implementation of reforms and to strengthen managerial capacity within the Ministry of Health. The health care sector needs to enhance its training/development capacity to enable it to respond to the changes.

Activities: To give advice: (i) on management and organization development issues arising out of reform process, including implementation issues, change management, the development and support of the provider support unit, and management development across the health care sector; (ii) on training and development issues arising out of the reform process, and on the training and development needs of the sector; to work collaboratively with the management adviser, relevant departments within the Ministry of Health, academic and other training suppliers in the assessment of training needs; organize appropriate national conferences and other training activities; work with academic and other training suppliers on long term management training programs; nurture and support for training and development activities across the sector.

Goods and services: Foreign TA from pre-project stage for one year, with six months of further support spread over the remainder of the project, including development of Lithuanian counterpart to be in post from beginning of the project (a continuing permanent appointment) with matching responsibilities. Support to this activity will be provided by the EU/PHARE project.

Responsiblefor implementation: MOH Page 40

A2.3 Management training Justification: Mainstream management training needs to reflect the different management skills required for the reformed health care sector.

Principle for reform: To commission a national health management training programme from a relevant academic institution.

Activities: (i) Commissioning of long term management training (possible national management training scheme) for the sector in conjunction with academic institutions (using contract mechanism if appropriate); the training program to include project work within health institutions as well as academic courses with a range of options to cover both purchaser and provider management. The training/developmentgroup to draw up a specification for this program as basis for tenders from academic institutions if contract mechanism is used.; (ii) A program of short courses on: information management, financial management and budgeting, business planning, etc. Commissioned and organized by the MOH reflecting special needs of health care services providers and patient funds. A proposed model is courses of three modules of one week each to be undertaken within one year for groups of 20 staff. The courses to be a mix of formal teaching with case studies, simulations, and group exercises with project work undertaken by course members on live problems in their own organizations. Continuous evaluation of courses and updates will be applied to keep the training abreast of policy developments and better meet the needs of the beneficiaries.

Goods and services: International and local TA to develop and deliver a course. Short term study visits, fellowships. The project inputs will have considerable training of trainers focus in order to develop sustainable in-country capacity. Support to this activity will be provided by the EU/PHARE project.

Responsiblefor implementation: MOH

A2.4 Information unit on cost-effective medical care A unit to provide information should be established in the Medical Library. This unit should provide access to current medical best practice and have the capacity to assemble information in a way that can be used by purchasers and providers.

The inforrmationunit should be equipped with a good library. This will include some relevant primary medical journals but should concentrate on assembling secondary reviews of the medical literature prepared by other units world-wide. This will require quick and reliable access to the internet and regular subscriptions to medical effectiveness databases (mostly on CD or through the internet). The unit should be capable of performing quick searches on best practice for, for example, the protocol group or SPF. It should also begin to produce digests of evidence on treatment of certain conditions.

Goods and services: International health librarian/reviews specialist, local IT specialist to develop Ministry of Health information unit. Computer hard and software, shelving, tables, subscriptions.

Responsiblefor implementation: Medical Library.

A2.5 Policy Monitoring and Evaluation Activities and recommendedpolicy: This project activity will support the National Health Board that was established to advise the Parliament in develop public health policies, monitor the public health Page 41 issues and maintain and build contacts with the non-governmental organisations. The Seimas requested the Bank project to provide support to the Board in the form of study tours and professional exchanges. The project will also support strengthening of capacity for the MOH and the Health Law and Economics Centre to monitor and evaluate policy, giving advice to the National Health Programs Coordination Commission.

Goods and services: Study tours for members of the NHB and MOH personnel involved in monitoring and evaluation; a workshop to define policy evaluation roles and processes in MOH, short- course training in health economics for personnel to be employed by MOH and/or the Health Law and Economics Centre.

Sub-component A3: Information management

A3.1 Strengthening Health Information Centre Justification: The reforms within the health sector have a big impact on the information provision function of the Health Information Centre. New inforrnation flows are created, current information flows change or even become redundant. The function of the centre needs to be reviewed to meet the current information demands of the entire health sector.

Principle of reform: The Health Information Centre will need to play a key role in the emerging HMIS of the country. It needs to be provided with resources to meet the information demands of the entire health sector. medical statistics.

Activities and recommendedpolicy: The Government needs to commit to provide more adequate space to H1C(at least a doubling of the current space is needed), and adequate future recurrent funds to operate the IT including the web site and its communications costs. Health MIS Steering Committee needs to coordinate required investments from different funding sources.

Works, goods and services: Adequate furniture, office technology and IT outfit, including required software packages such as for statistics, software development costs to create a database and web site - with appropriate access safeguards- for the electronic submission of HIC questionnaire data by providers and for access to the derived, distilled, and aggregated statistical data produced by the Center, and highly specialized statistics and software training as needed by HIC staff.

Responsiblefor implementation: MoH.

A3.2 Development Hospital Information System/Primary Health Care Information System Justification: The grade of automation in the health establishments is poor and they are thereof the weakest chain in the applications infrastructure for the collection and interchange of data. They lack MIS to support and to measure their own performances.

Principle of reform: The aim of the development of a rudimentary information system for health establishments is to offer them a flexible and cost effective tool for patient management, administration and documentation. An open-ended system, allowing implementation in a modular fashion. The system will be based on an appropriate data base management system and will be open ended, both in hardware and software. The minimum requirements are the support of inpatient & outpatient departments, ambulance & emergency activities and PHC practices (including prescriptions) as well as basic financial management systems. These core modules should support most aspects of hospitals and PHC practices activities, both in clinical and financial terms. Page 42

Activities and recommendedpolicy: The system development comprises several phases: (i) system analysis (feasibility study and information requirements/functionaldesign); (ii) system design; (iii) programming (or selection of off-the-shelf product); (iv) end user test; (v) documentation; (vi) tender procedure for hardware; (vii) training and implementation; (viii) maintenance and upgrading.

Goods and services: The project will support MIS development in the four pilot regions and is linked to the facilities supported through the component B of this project. The project will provide for MIS project manager, MIS system analysts, MIS system designer, programmers. Computer hard and software based on the following assumptions: number of PCs for PHC practices and policlinics is about 350; number pilot hospital MIS is 4 (servers, LANs), additional workstation needed for pilot hospitals is about 130; MIS for day surgery centres is three.

Responsiblefor implementation: Strategic Information Management Group that will include representatives from four pilot regions, MOH, SPF and HIF.

Project Component B. Health Services Restructuring - US$24.1 Million

The project will support parts of restructuring programs in four pilot regions: Alytus, Kaunas, Utena and Vilnius. Lithuania has 10 regions in total. The pilot regions were selected on competitive basis out of nine applications. The four selected regions developed detailed regional health sector restructuring and development programs supported by international technical assistance.30

The regional restructuring plans had to meet the following criteria:

* Proposal be based on adequate analysis of regional health needs, priorities as well as main issues facing regional health care system of (i.e. demographic, prevalence of diseases, availability of resources considered). * Proposal is consistent with national primary health care reform strategy (GP based PHC system development, consisting of training and retraining of doctors and nurses, procurement of standard equipment, reconditioning of facilities, work organization improvement) and emphasizes its implementation in rural areas of the apskritis (to improve access to quality first level health care). * Concentration of services rendered (where any of the following actions is required to reduce duplication of services or increase efficiency, investments into policlinics are linked to such actions as consolidating children, adult policlinics and women consultancies; merging facilities in a policlinic complex consisting of several free-standing buildings; consolidating laboratory or diagnostic radiology services; integrating outpatient specialist services with hospital specialist services) as well as decentralization of GP offices. * Investments into hospitals are restricted to secondary care and linked to one or more of the following: consolidating services in one hospital complex and closing down free-standing buildings or wings, merging certain duplicated acute care services in the region into fewer hospital sites, converting acute care hospital into long-term care or nursing facility. * Hospital investment proposals as well as for services have adequate financial and economic analysis of expected impact that should demonstrate savings in terms of recurrent costs of facility or cost of treatment. Adequate assessment of expected funded demand of particular service is an important part of economic and financial analysis.

30 Alytus and Kaunas regions were supported by InternationalHealth Development Group (Denmark); Utena and Vilnius regions were supported by SOLVE (Austria). Page 43

* Proposal has adequate monitoring indicators and targets to measure improvements in efficiency, access and quality (incl. patient perspective) and respective monitoring arrangements. * Proposal has adequate implementation arrangements(human, skills, structural resources), including measures to improve project management capacity. * Local authorities co-finance the project out of their funds. Pilot regions will enter into implementation agreements with the MOH that will record the project objectives, funding commitments, implementation, supervision, monitoring, evaluation and reporting responsibilities and implementation conditions where applicable. All pilot regions have local implementation arrangements through local steering committees and project management units. All HIS investments for component B will be closely coordinated with, and implemented via, sub-component A.3.

Sub-component BI: Alytus Pilot Projecte1 Alytus apskritis is a region in the southern part of Lithuania. It covers 5,340 sq. kms and has a population of 202,354. About 50% of population lives in rural settings (compared to national average of 31%). Epidemiological and demographical situation follow the general pattern in Lithuania. In 1996, the apskritis had 10 hospitals (10.9 beds 1,000 population), 6 policlinics, 15 ambulatoriums and 81 medical posts. The apskritis had 26.7 physicians and 97.9 middle level health personnel per 10,000 population which is less than in the nation on average3 2 The health services utilization indicators indicate marked urban/rural differences in the use of services and low efficiency of obstetrics, neonatal and paediatric specialties. Bl.1 Regional PHCdevelopment program. The objective of the program is to accelerate the development of PHC services throughout the apskritis and to achieve a critical mass of newly qualified GPs as PHC providers in rural and urban settings (target: 55% of population coverage). Geographical organisation of GPs within the main Alytus policlinic and assimilation of outpatient specialist care into the Alytus apskritis hospital will allow integrate all children's medical services with adult services as part of the 'family' based general practice concept. Re-training and training of GPs is expected to raise the share of GPs over 50 % in all ambulatory primary care medical encounters. The project will develop a pilot model of dispersed GP group practice that will link small practices in Miroslavos, Simnas and Krokialaukis communities to provide a network of professional support and cooperation of isolated GPs. The project will finance refurbishment of family practice offices and health centres, provision of medical and office equipment and limited number of vehicles for the GPs in isolated rural areas. Training and retraining of PHC providers will be provided by national institutions.

B11.2Hospital restructuring program. The objective of the program is to improve the efficiency, cost-effectiveness and quality of care by establishment of a day-surgery unit and structural reorganisation of the Alytus apskritis hospital. The reduction in the need for beds and integration of adult and children care in Alytus policlinic will enable the hospital to close and dispose of some of the worst quality and most inefficient patient and service accommodation, including the laundry building, ambulance headquarters, garages and peripheral offices, and the children's infectious diseases department. The targets for hospital restructuring program are 20% reduction of hospital beds, 40% of all routine surgery undertaken on a day basis, reduction of ALOS to 9 days, and 10% improvement of financial performance of the hospital complex (input/output).

31 WorldBank Lithuania Health Project. PrimaryHealth Care and RestructuringComponent. Sumbission of AlytusApskritis. August 1998. ProjectFiles 32 Lithuaniaaverage 39.8 physicians and 106.8middle level medical personnel per 10,000population Page 44

The project will finance architectural design, functional planning and superivison of civil works, civil works, medical and office equipment.

Sub-component B2: Kaunas Pilot Project33 Kaunas apskritis is located in central lowlands. It covers 8,170 sq. kms (12.5% of Lithuania's total area). The population of 755,046 people consists of 74% urban population that is higher than Lithuania average. The epidemiological and demographic profile is in line with Lithuania average. Kaunas apskritis had in 1996 31 hospitals (117.5 beds per 1,000 population), 21 policlinics, 46 ambulatoriums and 142 medical posts. In 1996, the apskritis had 44.4 physicians and 109.1 middle level health personnel per 10,000population. Kaunas, the second largest city in Lithuania, has a very high concentration of health care services, including the largest hospital in Europe (2,228 beds in 1996). The apskritis faces huge restructuring challenge given the economically unsustainable excess service capacity.

B2. 1 Health promotion and primary prevention program. The objective of the program is to design and implement an organisational structure capable of delivering coherent and cohesive health promotion programs in the apskritis level. The project activities support training of health information specialists to be stationed in the policlinics and health centres, production and dissemination of mass media materials and minor civil works to create appropriate physical environment. The approach is consistent with the national health program and strategy to reduce mortality rates from ichaemic heart disease and stroke through effectively controlling risk factors suc as elevated blood pressure, hyper- cholesterolemia, diet, overweight and diabetes. The beneficiaries of the program are the primary health care providers and their catchment population.

B2.2 Regional PHC development program. The objective of the program is to significantly accelerate the development of PHC services to achieve a critical mass of GPs in both rural and urban areas of the region. Specifically, the project aims to achieve at least 55% of population covered by qualified GPs practicing within developed PHC models by the end of the project. The project will support change programs in Dainava, Central and Silainiai Polyclinics and pilot models of dispersed group practices in Jonava and Prienai districts as well as GP rural outposts. The project activities include training and retraining of general practitioners and nurses, refurbishment of general practice offices, provision of medical and office equipment and limited number vehicles for the GPs in isolated rural areas.

B2.3 Hospital restructuring program. The objective is to improve quality of care for patients by introducing new technologies and techniques and evidence-based approaches, to reduce lengths of stay and unnecessary hospital admissions as well as to leverage optimisation of selected acute care services in the region. The project will support development of a day surgery units (DSU) in the Kaunas Clinical Hospital No. II and/or No. III and consolidation of selected hospital services to improve efficiency of acute hospital service delivery. The DSU will have a maximum capacity of 5000-6000 cases per year and will enable a 30-45 surgical bed capacity reduction of the respective hospitals. Investments into the two hospitals are linked to restructuring commitments that will be set forth in the implementationagreements. The project activities will include refurbishment of facilities, provision of medical and office equipment and training. B2.4 Community mental health services program. The objective of the program is to establish in each municipality a multi-disciplinary team operating from community mental health centres in policlinics. The teams will provide a range of ambulatory, day care and community based preventive, diagnostic, therapeutic, rehabilitation and after care services and cooperate closely with PHC services, social and welfare services and inpatient mental health facilities. Once these centers have been established

33 WorldBank Lithuania Health Project. PrimaryHealth Care and RestructuringComponent. Submission of KaunasApskritis. August 1998. ProjectFiles. Page 45 they are expected to provide practically the usual mental health services for their catchment populations and leave only special tasks for ambulatory secondary care. The centers are expected to become key elements in the attempts to reduce high suicide rates by offering good access to crisis intervention. A 10 % reduction in referrals to psychiatric hospital care is expected to take place. The project activities will support refurbishment of facilities, working material and training.

B2.5 Ambulance and emergency services development program. As the number of GPs increases the role of ambulance and emergency services must be reviewed in order to make efficient use of the GPs' potential in acute care. Ambulances and their crew will be in the future used for serious medical and traumatological emergencies and the GPs and other Primary Health Care after-the-office-hours services will take up the responsibility of a bulk of present tasks of ambulance services. The project will support the development and implementation of a new regional emergency ambulance system, which is compatible with the development described above. The investments are expected to result in at least 10 % reduction of recurrent costs per ambulance kilometer and in a reduction of the number of vehicles needed to serve the apskritis population. The project activities include technical assistance for system development, limited number of emergency care vehicles, communications' equipment, training and retraining of emergency medical staff. Disbursement for ambulances is contingent on conducting a review of the ambulance services system in Lithuania and incorporating the recommendations into Kaunas regional ambulance network reorganization plan.

Sub-component B3. Utena Pilot Project3 4 Utena apskritis is located in the eastern part of Lithuania (see map), has an area of 7,021 sq. km and a population of 201,601. Compared to the rest of country, the apskritis has lower than average economic situation, higher than average elderly population, higher than average mortality and lower than average birth rate. The apskritis is a location for the Lithuania only nuclear power plant, closure of which in medium term is currently discussed in relation to Lithuania's EU membership application. In 1997, the apskritis had 6 acute care hospitals with a total of 1197 beds and 381 nursing/long term care beds (162 in small nursing hospitals). The apskritis has well developed network of PHC facilities. The health services produced 4.1 outpatient visits and 1.4 hospital admissions per capita in 1997. B3. I Regional PHC services development program will support training and retraining of PHC providers, refurbishment and equipment for policlinics and general practices and limited number of vehicles for GPs in rural areas. Over the life of the project 41 general practices will be established in the apskritis policlinics, ambulatoriums and health posts.

Improvement of efficacy and efficiency of the PHC system is expected to have the following impact by 2004: Reduction of referrals to specialists by 20-30 %, reduction of direct non-referral based encounters with ambulatory specialists by 20-30 %, handling of about 30 % of the present calls to the ambulance by GPs, nurses and GPs' on-call services instead of the ambulance services; reduction of hospital admission rate by 5 %; about 20-30 % savings in utility costs in the renovated facilities; reduction of the number of specialist FTEs35 by 20 %. B3.2 Hospital restructuring program supports steps towards optimisation of hospital services capacity based on apskritis working group analysis recommending that to ensure quality and efficiency acute care services in the future be provided in 2-4 hospitals. The project will support renovation and

34 PrimaryHealth Care Developmentand Restructuring Project. UtenaApskritis. A WorkingGroup Report. 1998. ProjectFiles. 35 FTE- fulltime equivalent. Page 46

restructuring of the Utena Regional Hospital, consolidation of maternity services of Visaginas, Zarasai and Ignalina hospitals and reconfiguration and re-profiling of Moletai Hospital based on their prospective roles in the regional health services provision plan. Restructuring commitments that will be set forth in the implementation agreements. The analysis of future demand for hospital services foresees 18% decline of beds and 12% reduction of medical staff by 2004.

The project will finance rehabilitation of selected hospital facilities, medical and office equipment and consultant services in functional planning, architectural design and works supervision. B3.3 Ambulance services development program will support the reorganisation and modemisation of the apskritis emergency ambulance system. General Practitioners are expected to become a first point of contact also in acute and urgent cases. Therefore a locally adapted system of how GPs will be on call outside the normal working hours on weekdays and on weekends must be planned. For accidents and other emergencies, a call centre and appropriately designed territorial placement system for paramedic and medical ambulance teams will be set up. The project supports system development, limited number of emergency care vehicles, communications' equipment, training and retraining of emergency medical staff. Disbursement for ambulances is contingent on conducting a review of the ambulance services system in Lithuania and incorporating the recommendationsinto Utena regional ambulance network reorganization plan.

SubcomponentB4. Vilnius Pilot Projec#'6 Vilnius apskritis is the largest in Lithuania. The area covers 9,650 sq. kms. Out of the total population of 895,000, 575,000 live in the city of Vilnius, capital of the Republic. Overall, 80% of the population live in urban settings. Ethnic composition of the population is multinational, including Lithuanians, Poles, Russians, Byelorussians. The Vilnius apskritis has excess supply of health services: 44 physicians, 103 middle level health personnel and 108 hospital beds per 10,000 population. The apskritis has higher than Lithuania's average morbidity rates that at least partially can be supply driven. The apskritis is very complex politically and faces enormous challenges to adjust the health services provision with changing socio-economic and demographic realities.

B4. I Vilnius aspkritis PHC services restructuring program will support consolidation of Vilnius City policlinic services from 12 to no more than 11 sites and development of GP practices in the areas where geographic access to policlinics is limited. The consolidation of policlinics will take place through consolidating freestanding children-only and women-only with formerly adult population policlinics consistent with family oriented general practice. It was agreed that by EOP there will be no single specialty or special population group linked policlinics in Vilnius. The project will support refurbishment of the facilities and provide medical and office equipment to eight consolidated policlinics3 7 in Vilnius and I 5 GP practices in areas with remote access to policlinics, training and retraining of PHC providers, technical assistance for development and piloting financial management models for policlinics. The Vilnius PHC development activities will also support strengthening of community nursing for an estimated 575 patients.

The project will also support improvement of General Practices in the Ukmerge and Svencionys municipalities of the Vilnius apskritis. The Ukmerge (Svencionys) municipality will require services of 27(17) GPs and 30 (25) nurses who will be trained during the project time. Fourteen (six) staff would also receive management training under the first component of the project. The project will also support investments into facility refurbishment, medical and office equipment and limited vehicles.

36 PrimaryHealth Care Developmentand RestructuringProject. VilniusApskritis. A WorkingGroup Report. 1998. ProjectFiles. 37 Naujamiesto,Senamiesto, Naujininkiu, Lazdynu, Naujosis Vilnios, Antakalnio, Karolinskiu policlinics. Page 47

B4.2 A hospital restructuring program will support a conversion of the Railway Hospital from acute care facility into long term and nursing care facility. The primary objectives of the project activity is to reduce excess acute care capacity, to respond to unmet need for nursing beds in the Vilnius (currently 0.1 beds per 1,000 population), improve the efficiency of management of hospital plant and improve quality of service. The current hospital structure bed complement of 190 beds consists of the following wards: (i) septic traumatology (60 beds); (ii) internal medicine (40 beds); (iii) gastroenterology (20 beds); (iv) neurology (25 beds); (v) intensive care (5 beds); (vi) nursing care (50 beds). The restructured hospital will have 150 beds in 2 buildings. A sound business plan will be produced assuring that the hospital is a viable entity under the GOL regulations of funding long term care and social care services.

Project Component C. Project Management - US$1.3 Million

Sub-component C.1. Project Management To prepare and implement the activities of the Project, a Project Management Unit (PMU) was established by the Ministry of Health in 1997. A PHRD Grant (TF-029690) has financed technical assistance and training to strengthen the capacity of the Ministry of Health to manage effectively project implementation. The PMU is currently staffed by a team of six persons: PMU Director; Project Implementation Officer; Health Financing and Health Services Reform Component Coordinators; Procurement Officer; Chief Financial Officer; Accountant; and Administrative Secretary. In addition, two component coordinators for Health Financing and Primary Health Care work full-time within the PMU to oversee implementationof these activities under the Project. To facilitate Project implementation and the achievement of the Project's development objectives in a timely fashion, the Project will continue to support the current PMU structure throughout the implementation period. To oversee the restructuring of health services in the four pilot regions and facilitate implementation at the local level, a core team of at least two staff would be placed at each of the four Apskritis participating in the Project.

To provide managerial policy guidance, oversee the Project preparation phase, and facilitate endorsement of the Project's health sector financing reforns and health services restructuring, a Project Steering Committee (SC) has been operating since Project inception. The SC will continue to provide policy guidance and oversee Project implementation. The SC will remain operational throughout the Project, and will work closely with the PMU Director. The Steering Committee is chaired by the Minister of Health, and includes the Vice-Minister, the PMU Director, MOH officials for PHC and health financing, and selective local health care officials. The Steering Committee would encourage participation in meetings of stakeholders or experts that could be consulted on specific subjects discussed.

The PMU would be responsible for managing the project implementation and maintaining informed MOH management of progress achieved and issues requiring action and solutions. Under the management of the PMU Director, the PMU would be specifically responsible, among others, of the following tasks: (i) facilitate project implementation, promote the objectives and sector efficiency reforms being supported under the Project; (ii) monitor progress in the achievement of the agreed Development Objectives, benchmarks, and outputs of the Project as defined in the Key Performance Indicators (KPIs); (iii) coordinate Project Activities with responsible MOH Departments and local health care providers; (iv) establish and maintain a Financial Management System (FMS) to accurate reflect all project expenditures, meeting international accounting and auditing standards; (v) conduct procurement, in accordance with Bank Guidelines, for purchasing goods, works, and services, with due diligence to economy and efficiency; (vi) produce quarterly Project Management Reports (PMR), including physical, financial, and procurement implementationprogress; and (vii) liaise with financiers, donors, and the appropriate media or public relations entities. Page 48

Financial Management Systems. Under the management of the PMU Director, the PMU has been implementing a PHRD grant since December 1997, and has gained experience in disbursements, the operations of the Special Account, and in processing contracts for goods and services. The PMU will continue under the Project to be responsible for financial management and reporting procedures that are acceptable to the Bank. Due to capacity constraints, financial management systems have been inadequate to support deployment of resources with the purpose of ensuring economy, efficiency and effectiveness in the delivery of outputs required to achieve desired outcomes; however, to strengthen the FMS capacity of the PMU, financial management consultants were contracted to assist the PMl develop a viable financial management system including a comprehensivemanual of financial procedures, Chart of Accounts, and a fully integrated project accounting structure, using appropriate accounting software. In addition, a suitably qualified and experienced Financial Officer was recruited to participate in the development of the financial management system, and to guide and direct the financial management operations. The proposed Financial Management System would be able to produce a Project Financial Statement, including Summary of Sources and Uses of Funds, Special Account Reconciliation Statement, Cash Withdrawal Statement, and Cash Forecast. The Chart of Accounts would facilitate presentation of summary expenditures by Component,Activity, and Loan Disbursement Category. Although the PMU will maintain Project accounts of eligible expenditures, the MOF is expected to continue to operate the Special Account through a commercial Bank. Project ImplementationPlan (PIP). A detailed draft PIP was submitted by the PMU during Negotiations, and was acceptable to the Bank. The PIP has been completed by the PMU jointly with the Working Groups and Apskritis. The four Project Apskritis received technical assistance to develop integrated health services restructuring plans. The development objectives and key performance indicators for health services restructuring are outlined in each Apskritis proposal and will be incorporated in the Pilot Implementation Agreements to be entered into between the MOH and the administration of each pilot region. Page 49

Annex 3 Lithuania Health Project Estimated Project Costs

Project Component/Activity Local Foreign Total ------US DOLLARS MILLIONS------| A. Support to Health Reform I 1. Policy Development 0.35 0.81 1.16 2. Strengthen Capacity of National Health Institutions 0.30 1.17 1.47 3. Information Management 1.31 4.52 5.83 Subtotal: 1.96 6.50 8.46

B. Health Services Restructuring 1. Alytus Pilot Project 2.76 2.50 5.26 2. Kaunas Pilot Project 3.42 3.59 7.01 3. Utena Pilot Project _2.48 1.90 4.38 4. Vilnius Pilot Project 4.91 2.57 7.48 Subtotal: 13.57 10.56 24.13

C. Project Management = 1. Project Implementation Management 0.69 0.66 1.35

D. Front-end Fee 0.0 0.21 0.21

Total Financing Required 16.24 17.93 34.17 Page 50

Annex 3. Table 1 Lithuania Health Project Components Project Cost Summary

REPUBLICOF LITHUANIA HEALTHPROJECT Components Project Cost Summary

% % Total (Litas'000) (US$'000) Foreign Base Local Foreign Total Local Foreign Total Exchang Costs e

A. Support to Health Reform Policy Development 1,309.6 2,964.0 4,273.6 327.4 741.0 1,068.4 69 4 StrengtheningCapacity of NationalHealth Institutions 1,102.0 4,280.4 5,382.4 275.5 1,070.1 1,345.6 80 5 InformationManagement 4,579.0 15,601.0 20,180.0 1,144.8 3,900.3 5,045.0 77 17 Subtotal Support to Health Reform 6,990.6 22,845.4 29,836.0 1,747.6 5,711.4 7,459.0 77 25 B. Health Services Restructuring Alytus 9,539.6 8,642.6 18,182.2 2,384.9 2,160.7 4,545.6 48 15 Kaunas 11,679.5 12,451.2 24,130.6 2,919.9 3,112.8 6,032.7 52 20 Utenas 8,430.7 6,594.5 15,025.2 2,107.7 1,648.6 3,756.3 44 13 Vilnius 16,658.6 8,771.5 25,430.1 4,164.7 2,192.9 6,357.5 34 21 Subtotal Health Services Restructuring 46,308.3 36,459.9 82,768.2 11,577.1 9,115.0 20,692.0 44 70 C. ImplementationManagement 2,506.7 2,532.5 5,039.2 626.7 633.1 1,259.8 50 4 D. Loan Front-EndFee - 857.6 857.6 - 214.4 214.4 100 1 55,805.6 62,695.4 118,501.0 13,951.4 15,673.8 29,625.2 53 100 Physical Contingencies 6,028.7 5,619.7 11,648.4 1,507.2 1,404.9 2,912.1 48 10 Price Contingencies 3,137.2 3,404.0 6,541.2 784.3 851.0 1,635.3 52 6 64,971.5 71,719.0 136,690.5 16,242.9 17,929.8 34,172.6 52 115 Page 51

Annex 3. Table 2 Lithuania Health Project Expenditure Accounts by Components - Totals Including Contingencies (US$'000)

Support to Health Reform Strengthening Capacity of Natlonal Loan Policy Health infomiation Health Services Reatructurlng Implementatlon Front-End Development InstItutons Management Alytus Kaunas Utenas Vilnius Management Fee Total

A. WORKS BuildingAcquisition - - - 168.7 14.4 - * - 183.0 Refurbishment - - 1,491.4 2,108.2 1,571.1 3,754.8 - - 8,925.5 Subtotal WORKS - 1,491.4 2,276. 1,585.5 3,754.8 - - 9,108.6 B. GOODS 1. MEDICALEQUIPMENT - 2,169.0 2,410.9 956.8 1,877.9 397.5 - 7,812.1 2. COMPUTERS/OFFICEEQUIPMENT 5.6 203.9 - 11.2 138.6 11.2 11.2 11.7 - 393.3 3. COMPUTERHARDWARE/SOFTWARE - 4,745.4 - - - - - 4,745.4 4. FURNITURE - 21.7 207.9 78.4 5.7 529.6 - 843.3 5. VEHICLES - - 324.1 1,453.4 625.4 246.9 27.9 - 2,677.8 6. PRODUCTIONOF MASS MEDIAMATERIALS REPRODUCTIONOF MASSMEDIA MATERIALS - - - 9.3 - - - 9.3 7. MATERIALSAND SUPPLIES 4.7 93.2 - 5.6 5.6 508.7 5.6 - - 623.3 Subtotal GOODS 10.2 318.8 4,745.4 2,717.8 4,096.2 2,107.8 2,671.2 437.1 - 17,104.5 C. SERVICES 1. CONSULTANTSERVICES NATIONALCONSULTANTS 206.2 153.7 16.6 623.9 300.6 202.6 271.6 580.9 2,356.1 INTERNATIONALCONSULTANTS 635.1 735.1 661.2 - - - 209.2 2,240.5 Subtotal CONSULTANTSERVICES 841.3 888.8 677.7 623.9 300.6 202.6 271.8 790.1 - 4,596.8 2. TRAINING NATIONALWORKSHOPS AND SEMINARS 144.6 3.2 - 167.4 171.1 238.3 668.3 11.1 - 1,404.0 FELLOWSHIPSAND STUDYTOURS 116.1 204.0 - 83.9 82.9 177.9 - 97.8 - 762.6 SubtotWTRAINING 280.7 207.2 - 251.3 254.0 416.1 888.3 108.9 - 2,166.6 Subtotal SERVICES 1,102.0 1,096.0 677.7 875.2 554.6 618.7 939.9 899.0 - 6,763.2 E. Loan Front-EndFee - - - - - 214.4 214.4 1,112.2 1,414.7 5,423.1 5,084.4 6,927.7 4,312.0 7,365.9 1,336.2 214.4 33,190.7

A. INCREMENTALSTAFF SALARIES 50.8 50.6 ------101.6 B. INCREMENTALOPERATING COSTS - 6.0 409.7 - 50.7 - 5.1 - 473.4 C. VEHICLEOPERATING COSTS - - - 179.2 35.4 71.2 111.8 9.3 - 406.9 50.8 58.8 409.7 179.2 86.1 71.2 111.8 14.4 - 962.0 1,163.0 1,473.5 5,632.6 5263.6 7,013.8 4,383.2 7,477.7 1,350.6 214.4 34,12.6

Taxes 1.8 57.4 854.2 784.5 1,147.4 675.0 1,173.4 80.1 - 4,773.9 Foreign Exchange 806.6 1,167.4 4,518.9 2,495.2 3,594.3 1,904.2 2,586.6 662.1 214.4 17,929.8 Page 52

Annex 3. Table 3 Lithuania Health Project Components by Financiers

Government Govt. of Sweden EU PHARE Other World Bank Total Local Duties ______I_ & Amount % Amount % Amount % Amount % Amount % Amount % For. (Exc. Taxes ______~~~~Exch.Taxes)

A. Support to Health Reform Policy Development 52.7 4.5 893.6 76.8 - - 212.2 18.2 4.6 0.4 1,163.0 3.4 806.6 354.6 1.8 StrengtheningCapacityof National Healthinstitutions 187.3 12.7 256.2 17.4 861.5 58.5 - - 168.5 11.4 1,473.5 4.3 1,167.4 248.8 57.4 InformationManagement 1,263.8 21.7 677.7 11.6 - - - - 3,891.2 66.7 5,832.8 17.1 4,518.9 459.7 854.2 Subtotal Support to Health Reform 1,503.8 17.8 1,827.5 21.6 861.5 10.2 212.2 2.5 4,064.3 48.0 8,469.4 24.8 6,492.9 1,063.1 913.4 B. Health Services Restructuring Alytus 1,785.2 33.9 39.5 0.8 - - 44.5 0.8 3,394.5 64.5 5,263.6 15.4 2,495.2 1,983.8 784.5 Kaunas 1,814.2 25.9 16.4 0.2 - 96.4 1.4 5,086.8 72.5 7,013.8 20.5 3,594.3 2,272.1 1,147.4 Utenas 1,709.8 39.0 - - - - 2,673.4 61.0 4,383.2 12.8 1,904.2 1,804.0 675.0 Vilnius 2,070.2 27.7 - - - - 5,407.5 72.3 7,477.7 21.9 2,566.6 3,737.7 1,173.4 Subtotal Health Services Restructuring 7,379.3 30.6 55.9 0.2 _ - 140.9 0.6 16,562.2 68.6 24,138.3 70.6 10,560.3 9,797.6 3,780.4 C. ImplementationManagement 336.1 24.9 513.8 38.0 - 106.7 7.9 394.0 29.2 1,350.6 4.0 662.1 608.3 80.1 D. Loan Front-End Fee ------214.4 100.0 214.4 0.6 214.4 - - 9,219.2 27.0 2,397.2 7.0 861.5 2.5 459.8 1.3 21,234.9 62.1 34,172.6 100.0 17,929.8 11,469.0 4,773.9 Page 53

Annex 4 Lithuania Health Project Economic Analysis Summary3 8

Present Value of Flows Economic Financial Analysis Analysis Benefits (US$M) 93,147 78,845 Costs (US$M) 44,145 44,145 Net Benefits (6%; US$M) 49,002 34,700 IRR (6%; US$M) 41% 32%

Summary of Benefits and Costs:

Both current and investment costs are considered irrespective of source of finance. The benefits are limited to direct financial benefits that are measurable and to indirect economic benefits that are likely to occur as a result of the project. Intangible benefits such as improved quality, better information and health status, better access, etc., are not quantified in the analysis. The analysis is based on costs and benefits over a ten-year period.

The costs and the expected benefits of the project are estimated in three main areas each including components that work against similar targets: (i) Support to Health Reform; (ii) Primary Health Care Development and Health Service Restructuring in the four pilot regions; and, (iii) Project Management.

A. Support to Health Reform

Different investments aiming at supporting health care reforms are analyzed simultaneously. This includes programs to support development of regional resource allocation fortnula, allocation of investment funds, improved effectiveness of provider reimbursement and contracting and efforts to strengthening the capacity of national health institutions. It also covers the substantial part of the subcomponent addressed to investment in information management at hospitals and primary health care providers as well as at planning and coordination agencies.

Effects of the investments to support health reform are allocation and efficiency related. Better allocation of resources linked to needs is expected. The efficiency gains (or savings) of this change are difficult to estimate but an assumption was made that the change implies transfer of resources from less to more cost-effective treatments. On the provider side, the improved information systems will probably result in reduced duplications and reduction of some services. F or example, a doctor will have better access about the patient's prior results from X-rays, laboratory test etc. and decides not to perform another one.

38 Economicanalysis will be completedduring the appraisal.Summary of the designof the analysisis in the main text of the PAD. Page 54

The improvement and development of the investment policy will consolidate health investment and capital financing policy. The Knowledge analysis assumes an improved rate of return on investments from better investment program which equals 10% of present investment from f year 2001/2002. K f Investments in information systems are \-- K expectedto improve decision-making and the efficiency of production. The value of information is derived from the production - - __ _ function of a health care organization that P' P I shows the relationship between use of inputs Productionof health Information and the quantity of production. The produced services quantity is not only a function of the use of inputs but also human capital. Human capital is partly dependent on learned skills and Figure2. Healthservices production as a functionof knowledge. The same production function, informationused. improved information and knowledge results in improved production where P could be quality or quantity ore a combination of both. This relationship is difficult to quantify and there are other factors that could influence this dependence. Still, the analysis assumes that the combined effect of changing provider reimbursement and contracting and support of strategic information planning and coordination is likely to result in improved overall efficiency of health services.

The project support to health reform is expected to have a NPV of US$ 21 million and IRR of 66 percent (Table 1).

Costs 1,227 3,036 3,061 929 554 541 527 514 500 487 Benefits 1,323 3,748 3,748 3,748 3,748 3,748 7,276 7,276 7,276 7,276 -1,227 1,713 687 2,819 3,194 3,208 6,749 6,762 6,775 6,789 NPV (6%):21,307 IRR:66% Table5. Estimnatedcosts and benefitsof the 'Supportto HealthReforms' component (000' $US).

B. Health Service Restructuring

The project support to major restructuring in the four apskritis is expected to have a significant impact on maintenance costs, hospital admissions, ALOS, number of beds, etc. In order to estimate the effects of these changes a questionnaire was sent to all involved pilot projects and followed up telephone interviews. Prices for different services and the proportion of fixed and variable costs were based on average figure from representative provider units.

There are also indirect benefits in terms of productivity gains from less days lost due to increased primary health care service, investment in day-care surgery and overall shorter length-of-stay. For day- care surgery the analysis considers the loss of productivity since part of the curative treatment is transferred from the hospital to the family. For many discharges one other family member has to stay home for some days. Page 55

The productivity gains are derived from shorter length of stay and fewer admissions to hospitals. Since most patients are either elderly, children and other people not at work, the assumption was made that about 20% per cent of all bed day savings result in productivity gains. The average number of days worked per employed was estimated to 220 days a year.

Apart from the costs for the investment and incremental recurrent costs, consideration was taken to other running costs that will occur as a result of the project. Also the capital costs for replacing equipment, vehicles etc. during the evaluation period was considered using depreciation principles.

The project support to restructuring of the health services in the four pilot regions is estimated to have a negative financial NPV of US$ 9.2 million and a negative FRR of 6% 39 When indirect financial benefits are included, this subcomponent will have a positive NPV as well as generate positive IRR. The analysis does not include intangible benefits such as improved quality of services (Table 2).

99/OO 00/01 01/02 02/03 03/04 04/05 05106 06107 07/0 0/09 Costs 4,681 9,690 8,593 4,286 3,438 3,382 2,977 1,954 1,371 1,048 Benefits 959 652 2,268 3,341 4,401 4,647 4,690 4,657 4,624 4,633 -3,722 -9,038 -6,324 -945 963 1,265 1,713 2,703 3,253 3,585 Indirect benefits 45 606 1,263 1,985 2,654 2,733 2,815 2,900 2,987 3,076 NPV (6%): -9239 (incl. indirect benefits: 5,063) IRR: -6%, (incl. indirect benefits: 12%) Table 6. Estimated costs and benefits of restructuring component (US$ '000).

C. Summary of the total project - incl. Project Management

Total costs and benefits of the project is arrived at by including the cost for project management and an additional benefit from the demonstration effect of pilots and synergies from the coordination and implementation process that is assumed to be equal to 1% of public HCE starting from 01/02.

_9100 -0 1 2 02'3 0'00 00 07/08 8 Costs 6,462 13,184 12,007 5,612 4,046 3,973 3,552 2,513 1,914 1,599 Benefits 959 1,975 10,426 11,499 12,804 16,375 16,342 16,309 16,309 16,318 -5,503 -11,209 -1,581 5,887 8,513 8,831 12,823 13,829 14,309 14,720 Indirect benefits 45 606 1,263 1,985 2,654 2,733 2,815 2,900 2,987 3,076 NPV (6%): 34,700(49,002 when including indirect benefits) IRR: 32% (41% when including indirect benefits) Table 7. Estimated total costs and benefits of the project. (US$ '000).

39 The project uses a very conservative assumption about the savings from economic use of vacated policlinic space. If 50% of extra costs of the decentralised PHC model will be offset by savings from vacated space, FRR and NPV tuampositive. See sensitivity analysis. Page 56

Main Assumptions:

= wiab Value Health Care Expenditures (HCE) 1995:LVLM 1,085 (US$ M 271) Statistical Yearbook 1996:LVL 1,326 (US$ M 331) 1998 and Ministry of Economy 1997:1,764: (US $ 441) 1998:2,046 (US$ 512) 1999:2,230 (US$ 558) Investment costs in health care 6% of total HCE Real growth in HCE 3% per year Project team estimate Improvement by re-allocating 1% of HCE per year starting from Project team estimate resources from less cost-effective 2002 use to more cost-effective use through changed resource allocation formula Cost savings from reduction of As percent of total HCE (or ancillary Mission estimate duplication and error of services services); 2000: 0,5 %; 2001: 0,5 %; 2002: 1%; 2003: 1%; 2004: 1 % Increase in return on investment 5% of investment expenditures Mission estimates funding from better appraisal of beginning 2002 investrnent funding Average cost per bed-day general LVL 76 (USD 19) Mission estimates city hospital Cost structure at an average general Variable costs (incl some staff): 25% Mission estimates city hospital Semi-variable costs (staff etc.): 60%

Fixed costs (buildings etc.): 15% Average cost per-bed-day in LVL 40 (US$10) Mission estimates psychiatry Cost structure for ambulances: Variable costs: 50% Mission estimates Cost per visit: LVL 108 (US$ 27) Consumer Price Index 1996:24.6% Statistical Yearbook 1997: 8.9% 1998 and Ministry of Economy 1998: 5.1% 1999: 4.0% Monthly gross salary per capita 1997: LVL 774.4 Statistical Yearbook 1999 year prices: LVL 824.7 1998 and Ministry of 1999 year ~~Economy Employer payroll taxes 30% Lithuanian Tax Authorities Page 57

Work days gained 20% of all bed-day savings result in Project team estimate productivity gains of 220 days a year Expenditures savings resulting from Savings of 1% of HCE beginning in Mission estimates improved public health 2001 interventions Synergistic effects Savings of 1% of HCE beginning in Mission estimates 2002 Loan charges 5.8% Project team estimate Discount rate 6% Project team estimate Repayment terms 5 years grace, 18 years amortizing in Project team estimate equal installments

Sensitivity analysis / Switching values of critical items: Introduction of a decentralized model of General Practitioner based Primary Health Care system may lead to extra layer of health care system. Financial savings would only occur if physical resources released in policlinics and hospitals will be put for alternative economic use (cut costs, generate income) or closed (cut costs). If no expected savings from closed polyclinics or less space would occur, the IRR for PHC subcomponent of all four pilot apskritis would be negative and the NPV=US$ -6 million. With 50% of extra costs be set off by savings, IRR would become positive and with 100% extra costs set off by efficient use or closing of vacated space, both IRR and NPV will become positive (Table 4). To monitor this critical factor, the use of vacated space will be monitored by the PMU at mid-term and end of project.

Costs 18,415 12,683 6,952 Benefits 13,376 13,376 13,376 Net-savings -5,039 6,93 6,424 NPV (6%) -6,055 -1,271 3,512 IRR -9% 2% 27% Table8. Economicimnpact of differentoptions for use of releasedresources in the PHCproject in the four pilot apskritis. Page 58

Annex 5 Lithuania Health Project Financial Analysis Summary

99/00 0 250 6,102 109 0 6,462 0 959 0 959 -5,503 00/01 0 790 11,741 145 509 13,184 1,323 652 0 1,975 -11,209 01/02 0 1,253 9,122 305 1,327 12,007 3,748 2,268 4,410 10,426 -1,581 02/03 0 1,318 1,665 448 2,180 5,612 3,748 3,341 4,410 11,499 5,887 03/04 0 1,318 0 448 2,280 4,046 3,748 4,401 4,410 12,559 8,513 04/05 1,263 1,245 0 448 2,280 3,973 3,748 4,647 4,410 12,804 8,831 05/06 1,263 1,172 0 448 1,932 3,552 7,276 4,690 4,410 16,375 12,823 06/07 1,263 1,099 0 448 966 2,513 7,276 4,657 4,410 16,342 13,829 07/08 1,263 1,025 0 448 440 1,914 7,276 4,624 4,410 16,309 14,396 08/09 1,263 952 0 448 198 1,599 7,276 4,633 4,410 16,318 14,720

PV (6%) 3,975 7,506 2$,184 2,589 8,8615 44,145 30,09 23,966 24,370 78,845, 34,7400 SUM 6,314 10A423 28,630 i36 1. 54,4 44A92, 47 3,7 1.5S61 6006

FRR (ten years): 32% Page 59

Annex 6 Lithuania Health Project Procurement Arrangements and Allocation of Loan Proceeds

A. Procurement Methods and Thresholds

Procurement of Works (US$9.1 Million): Civil works would be contracted in accordance with the Bank's published Guidelines. Procurement under IBRD Loans and IDA Credits (January 1995, revised January 1999), through International Competitive Bidding (ICB). For contracts below US$700,000 National Competitive Bidding (NCB) procedures acceptable to the Bank would be followed, up to an aggregate of US$6.1 Million, utilizing the Standard NCB document for Small Works developed by the ECA Region which is acceptable to the Borrower. Civil works under the project include renovations of hospitals, clinics, and primary health care practices. The Government would finance about US$180,000 for building site acquisition for primary health care facilities under its public procurement procedures.

Procurement of Goods (US$16.7 Million): Procurement of goods would be carried out in accordance with the Bank's published Guidelines: Procurement under IBRD Loans and IDA Credits (January 1995, revised January1999). Goods to be financed under the Loan include: office equipment, computers, off-the-shelf software, furniture, materials, dissemination of mass media materials, and equipment for reproduction of examinations. Contracts estimated to cost above US$400,000 would be procured through International Competitive Bidding (ICB) procedures (total aggregate amount of US$14.7 Million. Contracts estimated to cost less than US$300,000 may be procured under International Shopping (IS) procedures (total aggregate amount of US$0.7 Million). Contracts estimated to cost less than US$50,000 may be contracted through National Shopping (NS) procedures (total aggregate amount of US$0.5 million). Purchase of library books and periodicals considered to be proprietary materials would be purchased under Direct Contract with publishers up to an aggregate of US$100,000. Other non-Bank financed goods would be procured by donors or the government under their respective procurement procedures, aggregating to US$0.7 Million.

Procurement of Consulting Services and Training (US$6.8 Million): Services would be carried out in accordance with the Bank's published Guidelines: Selection and Employment of Consultants by World Bank Borrowers (January 1997, revised January 1999). Services to be financed under the Loan include consulting services; training courses, fellowships, and study tours; research studies and surveys. The limited consulting services and training financed under the Loan would be procured under the following specific methods: (i) Quality and Cost-Based Selection (QCBS) procedures (total US$0.1 Million); (ii) contracts below US$100,000 for firms would be awarded under procedures for Selection Based on Consultant Qualifcations (SBCQ) (Section 3.7 of the Guidelines) (US$0.3 Million); (iii) contracts for training, fellowships, seminars, and study tours would be contracted through Single Source under procedures acceptable to the Bank (total US$30 thousand); and (iv) individual consultants would be contracted in accordance with procedures for Selection Based on Individual Consultants Qualifications (ICQ) according to the Bank Guidelines and based on the comparison of CVs (US$0.3 million). The majority of technical assistance, including training and consulting services, would be financed by donors and by the Government, aggregating to US$6.1 Million. During Negotiations, the Government would provide assurances that selection of individual consultants would follow advertisement of the positions in a newspaper with national circulation. Page 60

Incremental Recurrent Costs and other Compensation (USS1.1 Million): Incremental recurrent costs would be non-Bank financed expenditures. Recurrent costs cover incremental staff for the financing component, The Government of Lithuania would finance all recurrent costs.

Procurement Capacity Assessment. The capacity assessment carried out during project appraisal includes recommendations for strengthening the PMU's current procurement capacity. Recommendations included: (i) contracting one additional full-time national procurement expert with knowledge of contract management; (b) provision of intemational technical assistance to assist the PMU in implementing procurement activities, provide in-house training to procurement staff in the PMU and project Regions, and to assist in preparation of technical specifications as needed; (c) international procurement training for PMU procurement staff and others as appropriate, as well as participation in Bank-sponsored workshops; and (d) delivery of a procurement seminar for staff of stakeholders/entities who will participate in bid evaluation.

Review of Procurement Decisions: Procurement of works, goods, and services would be carried out according to the agreed procurement plan described in Table 6.B and would be subject to the reviews noted in Table 6 (C) of this Annex.

Annex 6. Table A Project Costs by Procurement Arrangements (US$million)

Expenditure Procurement Method Total Cost Category (including contingencies) International National Competitive Competitive Bidding Bidding Other N.B.F. INVESTMENT COSTS: 1. WORKS Building Improvements 2.8 6.1 0.2 9.1 (2.1) (5.2) (7.3) 2. GOODS Equipment/Furniture/ Vehicles/Materials 15.1 1.3al 0.7 17.1 (12.8) (0.6) (13.4) 3. SERVICES Consultant Services, Training, Fellowships, and Study Tours 0.4 b/ 6.4 6.8 (0.4) (0.4)

4. FEE 0.2 c/ 0.2 (0.2) (0.2) INCREMENTAL RECURRENT COSTS: Salaries/Operating Costs 1.0 1.0

TOTAL: 17.9 6.1 1.9 8.3 34.2 (14.9) (5.2) (1.1) (21.2)

Note: Figures in parenthesis are the amounts to be financed by the IBRD N.B.F. = Not Bank-financed (includes elements procured under parallel financing and bilateral trust funds

a.! National Shopping(US$0.5 Million); International Shopping (US$0.7 Million); Direct Contract (US$0.I Million) b / QCBS (US$0.1 Million); SBCQ (US$0.2 Million); ICQ (US$0.1 Million) c./ Front-end Fee: 1% of IBRD Loan. Page61

Annex 6. Table B Schedule of Procurement Arrangements

[date:October 6, 1999] TotalCost # of Procurement Dateof Responsible Estimated EstimatedContract (US$S000) Pckgs Method Advertisement[ Unit Contract ExecutionPeriod 2/ Invitation 3/ Award Date

GENERALPROCUREMENT NOTICE: 16-Apr.99 IBRD

PROCUREMENTWORKSHOP: Mar-00 MOH-PMU

PROJECT LAUNCH WORKSHOP: Mar-00 MOH-PMU .

PROCUREMENTPACKAGES: 1/

1. WORKS:

B 1 Alytus Pilot Project B.1(1) Renovationof Polyclinics,Satellites, andAmbulatoria Package1(4 sites) $ 153.2 1 NCB Oct-99 PMU/RPM Apr-00 10 months Package11(7 sites) $ 255.2 1 NCB Oct-00 PMUIRPM Apr-01 10 months PackageIII (12 sites) $ 408.3 1 NCB Oct-99 PMU/RPM Apr-02 10months PackageIV (6 sites) $ 204.1 1 NCB Oct-99 PMU/RPM Apr-03 10 months

B.1(2) Hosp.Restruct:AlytusDay Surgery Center Repairsand Engineering $ 470.8 1 NCB Oct-99 PMU/RPM Apr-00 18 months

B.2Kaunas Pilot Project -- Renovations $168.7 __ _. B.2(I) Building Acquisition $ 168.7 __ _ _ _ NBF-GOV ______B.2(2) Renovationof Polyclinics,Satellites, Ambulatoria, Community Mental Health Centers & HealthPromotion: PackageI(10 sites) $405.6 1 NCB Oct-99 PMU/RPM Apr-00 18 months Package11(13 sites) $567.8 1 NCB Oct-00 PMU/RPM Apr-01 18 months PackageII) (16sites) $_648.9 NCB Oct-99 PMU/RPM Apr-02 18months

B.2(3) Hospital Restructuring/Renovation_ _ HospitalNo. 2 DaySurgery Unit $ 248.2 1 NCB Oct-99 PMU/RPM Apr-02 12months HospitalNo. 3 DaySurgery Unit $ 239.6 1 NC Oct-00 PMUWRPM Apr-01 12months

B.3 Utena Pilot Protect - Renovations | ______B.3 (1) Building Acquisition $ 14.4 _ _ NBF-GOV B.3 (2) Renovationof Polycdinics,Satellites, and Ambulatora .. Package1(5 sites) $121.2 1 NCB Oct-99 PMU/RPM Apr-00 18 months Package11(6 sites) $ 169.7 1 NCB Oct-00 PMUIRPM Apr-O0 18 months PackageIII (7 sites) $ 193.9 1 NCB Oct-99 PMUIRPM Apr-02 18 months

B.3 (3) Hospital Restructuring/Renovation-- Packaged together in one ICI tender MoletiaiHospital Restructuring $ 66.1 NCB Jan-00 PMU/RPM Oct-00 36 months UtenosHospital Restructuring $ 694.1 1ICB Jan-O0 PMU/RPM Oct-00 36 months VisaginoHospital Restructuring $ 326.1 1 NCB Jan-00 PMU/RPM Oct-00 36 months

B.4 Vilnius Pilot Project - Renovations _ r______B.4(1) Renovation of Polyclinics, Satellites, and Ambulatoria _ _- Package1(7 sites) $ 364.21 1 NCB Oct-99 PMU/RPM Apr-00 18 months Package11 (9 sites) $ 510.0 I NCB Oct-00 PMU/RPM Apr-01 18 months PackageIII (11sites) $ 582.8 1 NCB Oct-99 PMU/RPM Apr-02 18 months

B.4 (2) HospitalRestructuring/Renovation -- Packagedtogether in one ICB tender SirvintuSecondary Care $ 780.5 1 ICB Jan-00 PMU/RPM Oct-00 24 months UtenosHospital Restructuring $ 1,517.2 1 ICB Jan-00 PMUIRPM Oct-00 24 months

Subtotal: $ 9,108.6 |

I. GOODS: _ _ _ A.1 Policy Development i i i A. 1(6)(a) Community-based Mental Health Care _ _ _ OffiiceEquipment/FurniturelSMHC [ $ 5.6 1 NS Sep-99 SMHC Jan-00 On Delivery Production InformationMaterials $ 4.7 NBF-SIDA _ Page 62

(date:October 6,19991 =______Total Cost # of Procurement Date of Responsible Estimated EstimatedContract ______(US$000, Pckgs Method Advertisement Unit Contract Execution Period 2/ Invitation 3/ Award Date

A.2. Strength,Capacity:NationalHealth Inst. A.2(1)Communications Unit I I Workstations/OfficeEq/Furniture $ 39.7 1 NS Sep-99 MOH-PSU Jan-00 On Delivery A.2(3) Management Training Equipment,Training Institutions $ 113 3 lEUPHARE ___ A.2(4) InformationUait:Cost-Effective Care ______LibraryWorksta_ons/Office Eq. $ 55.8 1 NS Sep-99 MOH-IUCEC Jan-00 OnDelivery Fumiture $ 16.7 1 NS Sep-99 MOH-IUCEC Jan-00 OnDelivery Reference Databases $ 93.2 DC Sep-99 Jan-00

A.3 InformationManagement A.3(5) Dev.His Pilot Health Care Inst. ______Hardware& Software $ 4,745.4 1 ICB Oct-99 SPF Aug-00 12 months

B.1 Alytus Pilot Project B.1(1) PHC Health Facilities MedicalEquipment $ 1,307.4 2 ICB Dec-99/00 PMU_RPM Sep-00/01 On Delivery Vehicles $ 324.1 2 [CB Dec-99/00 PMU_RPM Sep-00/01 On Delivery Fumiture $ 184.9 4 NS 4 Annual PMU RPM On Delivery B.1(2) Hosp.Restruct:AlytusDay Surgery Center MedicalEquipment $ 861.6 1 ICB Apr-00 PMU-RPM Feb-01 On Delivery Fumiture $23.0 1 NS Sep-01 PMU-RPM Dec-01 On Delivery B.1(3) Regional Implementation Mng.Team rn ______=_!_-______OfficeEquipment/Fumiture $ 11.2 1 NS Jul-99 PMU_RPM Oct-99 OnDelivery OfficeMaterials and Supplies $ 5.6 N8F-GOV

B.2 Kaunas Pilot Project B.2(1) Health Promotion/PreventionProgram ___ Prod/DisseminationMass MediaMtris. $ 9.3 NBF-GOV ____ _ - Fumiturefor 12 Polyclinics $ 35.3 NBF-GOV OfficeEquipment/Computers $ 88.3 1 IS Oct-99 PMU_RPM Dec-99 On Delivery

B.2(2) Primary Health Care Development TrainingAuditoriums Off.eq/Fum. $ 39.0 1 NS Oct-99 PMU RPM Dec-99 On Delivery MedicalEquipment $ 561.9 2 ICB With B.1(1) PMU-RPM On Delivery Vehicles- GP RuralOutposts $ 55.8 2 ICB With B.1(1) PMU-RPM On Delivery

MedicalEquipment $ 1,723.2 1 ICB With B.1 (2) PMU-RPM On Delivery Fumiture $ 43.1 I NS Feb-00 PMU-RPM Apr-00 OnDelivery

B.2(4) Community Mental Health Centers . ___ MedicalEquipment & Instruments $ 68.4 1 is Aug-00 PMU-RPM Oct-00 OnDelivery

B.2(5)Ambulance Regional Service Network Ambulances $1,397.6 2 CB Jan-00/01 PMU-RPM Oct.00/01 On Delivery CommunicationsEq. $ 57.4 2 ICB PMU-RPM On Delivery

B.2(7)Regional Implementation Managemnt______OfficeEquipment/Furniture $ 11.2 1 NS Jul-99 PMU-RPM Oct-99 OnDelivery Office Materials/Supplies $ 5.6 NBFG___

B.3 Utena Pilot Project ______B.3(1) GP Offices _ Medical Equipment $ 686.8 2 ICB With B.1(1) PMU-RPM On Delivery Fumiture $ 5.7 2 NS Feb-00 PMU-RPM May-00 On Delivery Vehicles - GP Rural Outposts $ 159.6 2 ICa With B.1(1) PMU-RPM On Delivery HealthPromotion Materials $ 503.1 NBF-G3V

B.3(2) Hospital Restructuring (5) Anyksiu&MoletiaiHospitals $ 241.3 1 ICB May-00 PMU-RPM Mar.,2001 On Delivery

B.3(3)Ambulance Services Development Vehicles $465.9 1 ICB With B.2.(5) PMU-RPM On Delivery CommunicationsSystems $ 28.7 1 ICB PMU-RPM On Delivery Page 63

[date: October 6, 1999] _ 1 ______Total_ Cost # of Procurement Date of Responsible Estimated Estimated Contract (US$'000, Pckgs Method AdvertisemenV Unit Contract Execution Period ______2/ Invitation 31 AwardDate

B.3(3) Regional Implementation Managemntt ______OfficeEquipmentVFumiture $ 11.2 1 NS Jul-99 PMU-RPM Oct-99 OnDelivery OfficeMaterials/Supplies $ 5.6c NBF-GOV

BA. Vilnius Pilot Project ______B.4(1) PHC Network MedicalEquipmenVFumiture(City) $ 1,516.9 2 ICB With B.1(1) PMU-RPM On Delivery Vehicles- GPrural offices $187.9 2 [CB With B.1(1) PMU-RPM On Delivery

B.4(2) Restructuring Sirvintu Polyclinic--SecondaryCare Facility MedicalEquipment $ 81.215 1 ICB WithB.1(2) PMU-RPM On Deiivery Furniture $ 11 . 1 NS Sep-00 PMU-RPM Dec-00 On Delivery

B.4(2) Railways Hospital Restructuring to Nursing Care Facilities MedicalEquipment $ 279.8 1 ICB Aug-00 PMU-RPM June.2001 On Delivery Fumiture $ 518.1 2 IS Aug-00 PMU-RPM June.2001 On Delivery Vehicles $ 59.0 1 ICB With B.1(1) PMU-RPM June.2001 On Delivery

B.4(6)Regional Implementation Managemnt OfficeEquipment/Furniture $ 11.2 1 NS Jul-99 PMU-RPM Oct-99 On Delivery Office Materals/Supplies $ 5.6 NF-GOV _ _.

C.1 Project Implementation Management OfficeEquipment $11.7 1 NS Jul-99 PMU Oct-99 OnDelivery ProjectManagement Contingency $ 397.5 1 ICB TBD Vehicle $ 27.9 1 NS Jul-99 PMU Oct-99 OnDelivery

Subtotal GOODS: $17,104.5

I11.SERVICES:_

A.1. Policy Devebpment = ______CONSULTANTS/TRG/FELLOWSHIPS: A.1(1) Geographic Resource Allocaton System Technical Assistance & Training _ $ 50.8 N8F SIDA A.1 (2) Procedures Allocation of Investment Funding ______Technical Assistance & Training | $ 77.4 NBF-SIDA _ _ A.1(3) Provider Reimbursement& Contracting ______TA/Training/Study $ 184.9 NBF-SIDA A_1(4) Needs Assessment & Service Planning . TA/Training/Conferences r $ 72.6 . NBF-SIDA A. 1(5) Dev.Guidelines& Protocols: Basic Package of Services TA/Training 1 $ 177.3 NBF-SIDA A.1(6)(a) Community-basedMental Health Carel TA/Training $152.6 NBF-Other A.1 (6)(b) Emergency Services Review $ . _ TA/Training I $ 55 757r A.1(6)(c)Prmary Health Care Pilot Evaluaton TA 1 $ 71.1 NBF-GOV ____ A.1 (6)(d) Support to Hospital Restructuring _ TA/Training $ 330.8 NBF-SIDA __

A.2. Strength,Capacity:NationalHealth Inst. A.2(1)Communications Unit .I.__ .. Technical Assistance $ 133.5 NBF-SIDA ___ A.2(2-3) Management Advisory Support to MOH I_ Consultant Services & Training I $ 768.6 INMF-PA __ A.2(4) Information Unit:Cost-Effective Care I - . Consultant Services & Training $ 41.3 NB-SIDA _ A.2(5) NHB Policy Evaluation/Monitoring Conference/StudyTour/Cons.Serv. $ 81.4 NBF-_SIDA

A.3Information Management A.3(1) Modernization Health Information Center Page 64

[date:October 6,1999] I _ _ _ _ i _ Total Cost # of Procurement Date of Responsible Estimated EstimatedContract (US$000) Pckgs Method AdvertisementV Unit Contract Execution Period 2/ Invitation 3/ Award Date

Technical Assistance _ $ 127.2 NBFgl _ A.3(2) Dev.HIS Pilot Health Care Institutions _ _ _ _ Technical Assistance $ 550.6 NB0-S,D _

8.1 AlytusPilot Proect______B.1(1) Regional PHC Development Program Retraining Nurses/Doctors $ 450.2 Contracting GP Replacements $ 123.6 N _____ DesignEstimates PHC facilities $ 22.7 1 SBCQ Dec-99 PMU-RPM Feb-00 6 months B.1(2) Hosp.Restruct:AtytusDay Surgery Center Training - Outpatient Surgery $ 43.8 1 0NB Gov, OutpatientSurgery Trg. Fellowships $44.5 1 B-Ole______DesignEstimates $ 17.6 1 SBCQ Dec-99 PMU-RPM Feb-00 6 months

B.1(4) Regional ImplementationMng.Team Cons:Coordinator/Assistant $ 133.4 2 N Management Training,Advisory Board $ 52.6 NBSI Ongoing

8.2Kaunas Pilot Project B.2(1) Health Promotion/PreverntionProgram ; _ Training of New InformationSpecialists $ 33.2 NBFGW _ _ Evaluation of Program: Nat. Cons. $ 7.8 N _

B.2(2) GP Offices Retraining of GPs and Nurses $ 94.2 __ DesignEstimates PHC facilities $ 36.0 1 SBCQ Dec-99 PMU-RPM Feb-00 6 months B.2(3) Day Surgery Center _ _ DesignEstimates/Engineering $ 34.8 1 SBCQ Dec-99 PMU-RPM Feb-00 6 months Outpatient Surgery Training - DSU $ 66.4 i .t

B.2(4) CommunityMental Health _____ StaffTraining $ 33.6 2 NBFGOV Jun-00 PMU-RPM Jul-00 1 week

8.2(5)Ambulance Regional Service Network TrainingWorkshops $ 26.6 =_ BF-IDA Continuous

B.2(7) Regional Implementation Managemnt Implementation Coordinator/Assistant $ 133.4 2 Program Evaluations $ 88.6 3 ICQ End-years 1,2,4 1 month

B.3 Utena Pilot Project B.3(1) PHC Development Retraining of Doctors & Nurses $ 228.0 NEi.Q . _ _ DesignEstimates PHC facilities $ 10.7 1 SBCQ Dec-99 PMU-RPM Feb-00 6 months B.3(2) Hospital Restructuring DesignEstmates/Engineenng $ 58.6 1 SBCQ Jul-99 PMU-RPM Feb-00 6 months HospitalManagement Training $ 178.0 1 NBF6GV Jun-00 PMU-RPM Sep-00 6 months

B.3(3) Ambulance Service Dev. Program Staff Training $ 10.1 _ NBF:GGV Continuous

B.3(3)Regional ImplementationManagemnt ImplementationCoordinator/Assistant $ 133.4 2 NBF-GO____

B.4. Vilnius Pilot Project ______B.4(1) PHC _ _ _ Retraining of Doctors & Nurses and $ 576.5 SJBF-G.OV _ _ DesignEstimates PHC facilities $ 32.5 1 SBCQ Dec-99 PMU-RPM Feb-00 6 months B.4(2)Sirvintu/Railways Hospital Restructuhng DesignEstimates & Engineenng $ 105.8 1 QCBS Jul-99 PMU-RPM Feb-00 6 months Training $ 78.7 NBF43OV _ _

B.4(6) Regional ImplementationManagemnt______ImplementationCoordinator/Assistant S133.4 2 N O

C.1Project ImplementationManagement _ _ _ Page 65

[date: October6, 1999] TotalCost # of Procurement Dateof Responsible Estimated EstimatedContract (US$'000) Pckgs Method Advertisemen Unit Contract ExecutionPeriod 2/ Invitation 3/ AwardDate

C.1(1) Implementation Management ProjectManagement $ 195.6 4 NBF-GQV Chief Financial Officer $ 108.7 1 __NtE____R Implementation& ProcurementExperts $ 195.6 3 NBF-StOA TrainingfFellowships/Conferences $ 108.9 _____NBF4SiEA______IntemationalFMS & Proc Expts. $ 209.2 _ - NBPFStDA C.1(2) Evaluation Studies _ _ Consultants $ 47.3 NBF-OV C.1(3)Annual Audits $ 35.6 4 SBCQ Annual

Subtotal SERVICES: $ 6,763.2

V. INCREMENTALRECURRENT COSTS: A.1 Policy Development I A 1(5)Guidelines & Protocols:Basic Pckg.Serv. Needs Assesment Specialist ] $ 50.8 N8F-GOV ______A.2. Strength,Capacity:NationalHealth Inst. Information Unit, Materiais/Supplies $ 4.2 N _F-V _ _ CommunicationsUnit Staff/Materials $ 3.7 NBF V __ Training Unit Staff $ 50.8 N______

A.3 Information Management = ______Matenals and Supplies $ 409.7 N_BFGV

B.1 Altus PilotProject r _ ___ : VOC $ 179.2 -|-NBF GV _

B.2 Kaunas Pilot Project ______GP Practices- Op. Costs $ 88.3 __ _ NtF-GOV- CommunityMental Health Center - OC $ 26.1 NBS___V Day Surgery Centers $1.8 NBF-GOV

B.3 Utena Pilot Project VOC $71.2 INBF-GOV ______

8.4Vilnius Pilot Project __._ VOC $ 111.8 NBF-GOV

C. 1 Project Management VOC/Operating Materials $ 14.4 iBF-GOV

Subtotal Incremental RecunrentCosts: $ 982.0

Front-EndFee (1% of Loan) $ 214.4

TOTAL PROJECTCOSTS: $ 34,172.7

11Packages are listed by ComponentlActivity reference 2/ PROCUREMENTMETHODS: Works and Goods: 31 RESPONSIBLE UNITS: ICB: International Competitive Bidding ___=__ NCB: NabonalCompetitive Bidding DHP: Department of Public IS: International Shopping MOF: Ministry of Finance NS: National Shopping _ _ _MOH: Ministry of Health Services: NHB: National Health Board QCBS: Quality-Cost Based Selection PNU: Project Management Unit SFB: Selection under Fixed Budget I_PSC: Project Steering Committee SBCQ:Selection Based on Cons.Qual (Sect.3.7 of Guidelines) PSU: ProviderSupport Unit IC: Individual Consultants - CV Comparison RPM: Regional Project _ Other: SODRA: Social Insurance Agency NBF: Non-Bank Financed SPF: State Patient Fund IBRD: Intemational Bank for | SMHC - State Mental Health Center - PrimaryHealthlPHCD Care Department Page 66

Annex 6. Table C Lithuania Health Project Summary of Procurement Arrangements

Percentage of ICB NCB IS NS Minor Other contracts' value subject Works Methods to prior review WORKS Procurement Above Below 100% of all thresholds: US$ 700,000 $700,000 ]CB; Individuals and (Aggregate (Aggregate 30% of NCB aggregate US$2.8 M) US$6.lM)

Prior review All tender First four NCB documents and tender contracts docsuments, evaluations, and contracts

GOODS Direct Contracting Procurement Above Below Below Aggregate 90% thresholds: $300,000 $300,000 $50,000 Value of individual and USS100,000 aggregate Aggregate: Aggregate: Aggregate $15.1 million $0.7 million $0.5 million

Prior Review All bidding First four First four Budget documents and Contracts Contracts Approval contracts SERVICES QBCS QBS SBCQ ICQ SS Co-Financing (Consultants and Training) Procurement Aggregate: Aggregate: Aggregate: 80% method thresholds $0.1 million US$0.2 million $0.Imillion

Prior Review All TOR, All TORs, and All TORs, and In accordance 100% of Short Lists and Qualifications, Qualifications, with LOI/TORs and Qualifications/ and terms of and terms of Administrative Consultant Eval; employment; employment; Agreement Qualifications First contract first four first four and all contracts, and contracts, and contracts then contracts then contracts above $50,000 above $20,000 Expost Review Ex-post review mechanism: Semester random sample reviews during supervision mission; Reviews in accordance with Para.4 of Appendix I of the Bank's Guidelines (about 10% of documentation subject to expost review, mainly for national shopping, would be reviewed during supervision missions). Page 67

Brief statement

Responsibilityfor conducting all procurement under this Project will be within the MOH's PMU, its procurement officer, and procurement consultants. The PMU will also be supported by four regional coordinators who will liaise with the stakeholders at the health institution respectively in the four pilot regions of the project. The PMU was established in 1997, and has received international technical assistance for procurement during the implementationthrough a Swedish Trust Fund and a PHRD grant. The Project provides financing for national and international technical assistance from procurement expert during the duration of the Project, as well as international procurement training, and Bank-sponsored workshops and seminars.The Government accepts the Bank's standard bidding documents and use of the Bank's procurement Guidelines, standard ICB documents, and agreed Regional NCB tender documents for works.

Country Procurement Assessment Report or Are the bidding documents for the procurement actions for Country Procurement Strategy Paper status: An agency the first year ready by negotiations? Procurement Capacity Assessment was completed during Yes No X. the appraisal mission.

Estimated date of Actual date of Indicate if there is Domestic Preference Domestic Preference Project Launch publication of General procurement subject to for Goods. for Works, if Workshop. Procurement Notice. mandatory SPN in applicable. Development 09t16/99 04/16e99 Business. Yes No X Yes Noac X Yes 5 No X

Retroactive financing t b d i t g a i a n ithB G l Yes0NoXX I | 1

Explain briefly the Procurement MonitoringSystem: Procurement monitri wi e o ne:t rcegu ar quartel Poect~ Management Reports.

Co-financing:Explain briefly the Procurement arrangements under co-f nancing:-

It is expected that a Sida grant would be obtained for some activities of the project, and would be implemented according to procurement procedures and thresholds to be defined in the grant agreement in accordance with Bank Guidelines.

Indicate name of Procurement Staff or Bank's staffpart of Task Team responsible/or the procurement in the Project:

Name: Vijay Vijayaverl (X81467)

Explain briefly the expected role of the Field Office in Procurement: Advisory, as needed. Page 68

B. Allocation of Loan Proceeds

The proposed specific investment loan of US$21.2 Million would be disbursed over four and one-half years. Loan disbursements would be made in accordance with procedures described in the Bank's Disbursement Handbook, under the following Expenditure Categories:

Annex 6. Table D Allocation of Loan Proceeds (Amountsin US$ Millions)

EXPE/NDITUR AEGORY AMOllNT5;40:IN SSj FIACN PERCNTAG

1. CIVILWORKS 6,300,000 100%of foreignexpenditures and 84% of localexpenditures 2,300,000 2. GOODS * 100%of foreign expenditures; (includes equipment, furniture computer * 100%of local expenditures, hardware and software, production and (ex-factorycost); and dissemination of mass media materials, * 84%of local expendituresfor vehicles, and office materials. items procured locally

3. CONSULTANTS' SERVICES 350,000 100% (includingaudits)

4. Ambulances* 1,900,000 100%

5. MedicalEquipment ** 7,400,000 100%

6. FRONT-END FEE 212,400 Amountdue under Section 2.04 of the Loan Agreement.

7. Premiafor Interest Rate Caps and Interest Amount due under Section 2.09 (c) Interest Rate Collars of the Loan Agreement

8. UNALLOCATED 2,777,600

TOTAL: 21,240,000 " Disbursementsfor Category4 wouldbe contingenton acceptanceof a revisednational model for emergencycare amnbulance services. ** Disbursementsfor Categories4 and 5 refer onlyto tax exemptmedical equipment and ambulancesas listedin ResolutionNo. 1202 of the Republicof Lithuaniadated October 15, 1996,or as amendedthereafter. Withdrawals from the loan accountsunder these categorieswould be madeexclusively for itemsor packagesthat meetthe tax exemptionprovisions.

Disbursements: The MOF would open and maintain through the duration of the Project, a Special Account, in a commercial bank acceptable to the World Bank. The Initial Deposit (Authorized Allocation) would be equivalent to about four month's expenditures, or about US$1.6 million. However, the authorized allocation shall be limited to an amount equivalent to US$700,000 until the aggregate amount of withdrawals from the Loan Account, plus the total amount of all outstanding special commitments equals or exceeds US$3,000,000. The MOH would comply with Disbursement Handbook guidelines, including:

* payments out of the Special Account would cover eligible expenditures under the Project, the MOH would reimburse the Special Account for any ineligible expenditures; Page 69

* replenishments to the Special Account would be made on a monthly basis, or whenever the balance reaches less than one-third of the Authorized Allocation; * Statement of Expenditure (SOE) Procedures would be followed for expenditures for: (a) works under contracts costing less than US$700,000 equivalent each; (b) goods under contracts costing less than US$300,000; (c) services of consulting firms under contracts costing less than US$100,000 equivalent each; and (d) services of individual consultants under contracts costing less than US$50,000 each, all under conditions to be specified to the Borrower. * The Government and the Bank may agree to PMR-based disbursements after December 31, 2000, based on the reliability of quarterly project management reports being produced by the MOH-PMU; the loan agreement would be accordingly amended to accommodate such disbursements.

Annex 6. Table E Lithuania Health Project Schedule of Loan Disbursements (US$ Millions)

SemesterEnding( Semester Disbursements Cumulative Amount

Fiscal Year . , ,., W_,_._ Amount Percent Amount Percent

December 31, 1999 1.7 8% 1.7 8%

June 30, 2000 1.7 8% 3.4 16% December 31, 2000 1.7 8% 5.1 24%

June 30, 2001 1.8 8% 6.9 32% December 31, 2001 1.9 9% 8.8 41%

June 30, 2002 2.4 11% 11.2 52% December 31, 2002 2.4 11% 13.6 63%

June 30, 2003 3.8 18% 17.4 81% December 31, 2003 3.8 18% 21.2 100%

TOTAL 21.2 100%

The Project would be completed on March 30,2004. A period of six months would be allowed to complete disbursements, with the Loan Closing Date on September 30,2004. Page 70

Annex 7 Lithuania Health Project Development of Project Financial Management System

Introduction. As part of project appraisal of the Lithuania Health Project, a Financial Management Capacity Assessment was carried out during the period of March 22-April 8, 1999. The objective of the assessment was to determine the Borrower's and implementingagencies' capacity to maintain financial management systems, including accounting, financial reporting, and auditing systems - adequate to ensure that they can provide to the Bank accurate and timely information regarding project resources and expenditures, in accordance with OP/BP 10.02. The review focussed on the assessment of Project Management Unit (PMU), and financial reporting in the health care institutions, as well as arrangements for financial reporting and accountability for public funds by the Territorial and State Patients Funds.

Overall the project will satisfy the Banks' minimum financial management requirements, but with risks limited to general capacity shortcomings in the implementing agencies that may result in unintentional errors, omissions, miscalculations, late submission of financial statements, and financial statements that may not reach acceptable standards. Subject to the Development Action Plan being successfully addressed prior to effectiveness, the Bank's minimum financial management requirements will be satisfied. Weaknesses and inadequacies found during the assessment are summarized below.

Internal Control Systems. Due to capacity limitations in the country as a whole, the PMU has been unable to attract well-trained and qualified accountants. All the three accountants who have worked in the PMU lacked experience in systems development and, as a result, the PMU had not developed standards and guidelines for internal control and financial accounting, with clear delegation and segregation of duties. However, with technical assistance from an international accounting firm, comprehensive manuals of procedures and adequate internal control mechanisms were developed to guide staff and minimize risks of errors and omissions, as well as delays in transactions, recording, and reporting. The written standards and procedures clarify responsibilities, including levels of authority, clear control over assets, cash and bank accounts, easily available access to supporting documentation, and timely and accurate financial reporting.

Project Accounting System. The MOH-PMU has maintained separate accounts for project preparation activities financed under a PHRD Grant. With technical assistance, the PHRD grant accounts are now up to date, and an independent international accounting firm has been contracted to complete the audit. The PMU accountant and chief financial officer will continue to receive training throughout project implementation, as well as receiving support from international technical assistance.

Project Planning and Budgeting. With support from technical assistance, a manual has been developed outlining the PMU's budgetary policies and procedures. Further technical assistance during project implementation will include the preparation of further detail defining responsibilities for budget preparation, adoption, execution, monitoring and reporting, as well as budgetary control procedures by staff of the PMIJ and health care institutions.

Staffing. The PMU is currently staffed by the PMU Director, Procurement Specialist, Project Implementation Officer, Project Accountant, two coordinators for Primary Health Care and Health Services Reform activities under the Project, and an Administrative Secretary. The Project Accountant has clear understanding of government accounting systems, regulations and requirements, but lacks exposure to international accounting practices and standards. Although the accountant is undergoing some accounting training by distance learning, the attendant pressure means that she is most unlikely to attain the desired level of confidence by project effectiveness. The accounting personnel employed in the health Page 71 care institutions are hard-working, but there are obvious capacity limitations due to lack of recognized professional accounting qualifications, and exposure to commercial accounting practices.

Disbursements, Replenishments and Documentation. The Accounts Section of the PMU does not currently have in place a financial management system that can provide the information required by the World Bank for the LACI-basedProject Management Reporting (PMR) disbursement mechanism. However, as capacity is developed to comply with PMR-based disbursements, it is expected that during the second project year a review of such capacity would be conducted with the view to adopt PMR disbursements. Thus, in the short-term, existing disbursement procedures would be followed as outlined in the World Bank's Disbursement Handbook. Disbursement of funds would be made against Withdrawal Applications with full documentation or against Statements of Expenditure (SOEs) submitted by the Borrower.

Audit Arrangements. The Lithuanian Law does not make it obligatory for organizations such as the PMU to submit audited financial statements. The law, however, provides for inspection of public institutions by state and municipal institutions and entities offinancial activity control. In order to comply with Bank reporting requirements, an independent and qualified audit firm, with experienced staff, will carry out an audit of the project accounts.

Financial Management Capacity Assessment. A detailed financial management capacity assessment report and proposed development action plan to strengthen accounting weaknesses was discussed with and presented to the PMU. Successful implementation of the Action Plan will ensure that the project operates in a healthy environment, under existing disbursement arrangements. Financial management consultants are now engaged to help the PMU develop adequate systems of accounting and internal control.. In addition, it was agreed that a suitably qualified and experienced Financial Officer would be recruited to participate in the development of the financial management system, and to guide and direct the financial management operations throughout the Project implementation period.

Pilot Hospital Financial Management Systems. Technical assistance will also be required to help upgrade and transforn the accounting systems in health care facilities in the pilot regions. This will facilitate introduction, on a pilot basis, of Hospital Financial Management System, with emphasis on cost accounting and activity-based budgeting procedures. Page 72

Annex 8 Lithuania Health Project Project Processing Budget and Schedule

Planned Actual A. Project Budget (US$000) 304.1 (as of May 10, 1999)

B. Project Schedule Planned Actual

Time taken to prepare the project (months) 35 First Bank mission (identification) 05/04/1996 Appraisal mission departure 03/15/1999 03/15/1999 Negotiations 05/24/1999 10/25//1999 Planned Date of Effectiveness 09/01/1999 01/31/2000

Prepared by: Ministry of Health

Preparation assistance: PHRD Grant, Austrian, Denmark's, Sweden's and Portuguese TFs, Danish Bilateral Assistance.

Bank staff who worked on the project included:

Name Specialty Toomas Palu Program Team Leader, Health Specialist Vilija Kostelnickiene Social Sector Specialist, COLT Patricia Kleysteuber Operations Officer Teresa Ho Sr. Health Economist Loraine Hawkins Consultant, Health Financing and Management Fritz Konigshofer Sr. Informatics Specialist Simo Kokko Sr. Health Specialist Angela Demas Operations Analyst John Ogallo Financial Management Specialist Vijay Vijayaverl Procurement Specialist Clas Rehnberg Health Economist Sancta Watley Projects Assistant Angelita M. Yacat Team Assistant Page 73

Annex 9 Lithuania Health Project Documents in the Project File*

A. Project Implementation Plan

Lithuania Health Project: Description of Health Financing Component. Consultant Report. Alytus Region Health Services Restructuring Proposal. Working Group Report. Kaunas Region Health Services Restructuring Proposal. Working Group Report. Utena Region Health Services Restructuring Proposal. Working Group Report. Vilnius Region Health Services Restructuring Proposal. Working Group Report.

B. Bank Staff and Consultant Assessments

Review of health financing reforms: Health Policy Issues and Options for Change. Consultant Report. Lithuania Health Financing Reform: Overview of Best Practice in Europe with Respect to the Use of Smart Cards in the Health Sector. Consultant Report. Perceptions of Health Reform. A Qualitative Stakeholder Analysis of the Progress of Health Reform in Lithuania 1996-1998. Consultant Report.

C. Other

Lithuania Primary Health Care Reform Implementation Strategy. Consultant Report. RMC, 1995 Lithuania Physician Supply Planning. Consultant Report. RMC. 1996 Community Nurse: Functions, Duties, Rights, Competencies and Responsibilities. MOH Decree No. 691, Novemeber 27, 1998. Health Care System Privatisation Strategy. White Paper. Draft. MOH, Vilnius, 1998. Project Files.

*Including electronic files. Page 74

Annex 10 Statement of Loans and Credits Status of Bank Group Operations in Lithuania IBRD Loans and IDA Credits in the Operations Portfolio

Difference Between expected Original Amount in US$ Millions and actual Loan or Fiscal _ disbursements a/ Project ID Credit Year Borrower Purpose No. IBRD IDA Cancellations Undisbursed Orig Frm Rev'd

Number of Closed Loans/credits: 2

Active Loans LT-PE-35163 IBRD40640 1997 REPUBLIC OF LITHUANIA ENERGY EFFIC/HOUSING 10.00 0.00 0.00 8.93 2.07 0.00 LT-PE-44056 IBRD41020 1997 REPUBLIC OF LITHUANIA SAL 80.00 0.00 0.00 40.00 40.00 0.00 LT-PE-8539 IBRD41350 1997 REPUBLIC OF LITHUANIA SOC. POL. COMM SERV 3.70 0.00 0.00 2.83 1.66 0.00 LT-PE-8551 IBRD40840 1997 REPUBLIC OF LITHUANIA HIGHWAY 19.00 0.00 0.00 9.43 -3.08 0.00 LT-PE-35783 IBRD39630 1996 REPUBLIC OF LITHUANIA SIAULIAI ENVIRONMENT 6.20 0.00 0.00 5.50 2.49 0.00 LT-PE-36011 IBRD40130 1996 REPUBLIC OF LITHUANIA KLAIPEDA GEOTHERMAL 5.90 0.00 0.00 5.88 3.55 0.00 LT-PE-8538 IBRD39950 1996 GOVT OF LITHUANIA PRIVATE AGRIC. DEVT. 30.00 0.00 0.00 28.76 9.93 0.00 LT-PE-8536 IBRD38660 1995 GOVT. OF LITHUANIA ENTERP & FIN. SECT. 17.50 0.00 0.00 8.20 -1.02 0.00 LT-PE-8536 IBRD38661 1995 GOVT. OF LITHUANIA ENTERP & FIN. SECT. 4.50 0.00 0.00 1.15 -1.02 0.00 LT-PE-8553 IBRD38160 1995 GOVT OF LITHUANIA KLAIPEDA ENVIRONMENT 7.00 0.00 0.00 5.40 4.66 0.00 LT-PE-8537 IBRD37370 1994 GOVERNMENT OF LITHIJANIA POWER REHABILITATION 26.40 0.00 0.00 24.87 22.19 7.97

Total 210.20 0.00 0.00 140.95 81.43 7.97

Active Loans Closed Loans Total Total Disbursed (IBRD and IDA): 72.16 61.53 133.69 of which has been repaid: 0.00 4.25 4.25 Total now held by IBRD and IDA: 217.10 57.53 274.63 Amount sold : 0.00 0.00 0.00 Of which repaid : 0.00 0.00 0.00 Total Undisbursed : 140.95 0.00 140.95

a. Intended disbursements to date minus actual disbursements to date as projected at appraisal. b. Rating of 1-4: see OD 13.05. Anrnex D2. Preparation of Implementation Summary (Form 590). Following the FY94 Annual Review of Portfolio performance (ARPP), a letter based system will be used (HS = highly Satisfactory, S = satisfactory, U = unsatisfactory, HU = highly unsatisfactory) : see proposed Improvements in Project and Portfolio Performance Rating Methodology (SecM94-901), August 23, 1994. Page 75

Annex 11: Lithuania at a glance 9/22/99

Europe & Lower- POVERTY and SOCIAL Central mIddle- Lithuania Asia Income Development dlamond^ 1995G Pooulation.mid-vear(millions) 3.7 473 908 GNP oer caoita (Atlas method, US$1 2,440 2.190 1.710 Life expectancy GNP (Atlas method. US$ 9.0 1.039 1,657 Averace annual arowth. 1992- Poouiatton(%) -0.2 0.1 1.1 Laborforce (%) 0.1 0.8 1.5 GNP Gross Most recent estimate 0latestvear available. 1992. -7ir enrimaev PovertV(% of DoDulatn below national povet. v Urban pooulation(% of total 74 66 5s Life exoectancyat birth(veers) 71 69 68 Infantmortalitv(Derl.00011ve 10 23 38 Child malnutritionf% of children under - - Acoess to safe water Access to safe water (%oV .. .. 7S Illiteracyf% of population are 1 4 14 Gross orimarv enrollment f% ofschool-ace 98 100 103 Lithuani Male 100 101 106 Lower-middle-income Female 96 99 100

KEY ECONOMICRATIOS and LONG-TERMTRENDS 1977 1987 1997 1998

GDP (USS .. 9;0 9.6 10.7 Economic ratioe

Gross domestic .. 386 26.5 28.3 ExDortsof ooods and .. 56 54.5 47.4 Trade Gross domestic .. 280 16.0 16.3 Gross national .. . 16.3 16.1

Currentaccount .. - -10.2 -12,1 Domestc Interest oavments/GDP . . . 0.6 0.7 Investment Total debt!GDP .. .. 27.0 28.3 Savinqs Total debt .. .. 9.2 14.S Present value of .. .. 14.5 Prese-ntvalue of .. .. 26.2 Indebtednes 1977-87 1988-98 1997 1998 1999-03 (averaqe annual GDP .. 4.8 7.3 5.1 3.7 Lithuani GNP DefCaDita .. 4.1 0.8 4.8 1.7 Lower-middle-income Exoortsofooods and .. 2.9 6.5 -Z9 2.7

STRUCTUREof the ECONOMY (% of GDP) 1977 1987 1997 1998 Growth rates of output and investment I%(

Aanculture .. 25.8 11.9 10.3 60- Industrv .. 46.7 33.4 32.1 40 Manufacturina 35.0 20.8 18.9 20 Services 27.5 64.8 57.7 o 2 0 qr 95 96 97 sa Private *- 49.7 65.0 64.3 40 General aovemment 19.0 19.4 GD -"GP.4022.4 ImDortsof qoodsand .. 67.2 65.1 59.4 faveraqe annual 1977-87 1988-98 1907 '1998 Growth rates of exports and lmports (%) Aariculture .. -1.3 8.6 0.5 15 Industrv .. -9.9 4.7 6.7 10 Manufacturina .. -12.4 6.1 4.8 s Services - -0.4 9.0 5.3

Private .. -0.7 -6.6 8.4 93 f go s General aovemment .. 5.2 3.6 7.4 Gross domestic .. 8.8 8.0 11.9 -10 Imwortsof aoods and .. 2.1 4.2 4.0 Exports ImportsI Gross national .. -4.1 0.6 4.8

Note: 1998 data are Dreliminarv

* The diamondsshow four kev indicators in the countrv (in bold) comoaredwith its income-aroupaveraae. If data are missina. the be incomDlete. Page 76

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LITHUANIA SIULAI HEALTH PROJECT L L$ATVIA KUPISKIS, ToDo9opl PILOTREG ONS RADllSI Z -PANEVEZS 0 ,~HOSP TATRESTRUCTURIN.G SITES e ZA SAb .-

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Population60+/Population 20-59 .... 30.3 o,yko - - ,.TfK I LifeExpectancy at Birth (years) . 71.1...... IEN7)1

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