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The Transition From Economic Planning - Consequences On The Health Sector

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The Transition from Economic Planning - Consequences on the Health Sector

Since the late 1970's, many of the world's command economies have undergone radical reforms in pursuit of the higher productivity experienced in market economies. Subsequently, these economies have experienced a tradeoff between equity and efficiency as the transition process coincided with growing domestic inequity. This discussion is an analysis of equity-efficiency tradeoffs in the health sector, focusing particularly on the effects of reduced public funding and subsequent privatisation.

The issue of health is one of great importance from the perspective of transition economies. The International Monetary Fund only considers the economic transition complete once, amongst other indicators, a basic social safety net for national health has been implemented without excessive burdens on the private sector. However, using data from the world's two major transition economies and comparisons with Organisation for Economic Co-operation and Development (OECD) countries, it can be seen that healthcare affordability and quality in post-command economies have deteriorated due to the transition.


The former-Soviet Union (1922-1991) had been the world's first and largest Communist command economy. Its collapse in 1991 resulted in significant decreases in public health funding for the new Russian Federation, which is now the world's second largest transition economy in terms of Gross Domestic Product (GDP). Combined with the structural problems inherent within post-command economies and counter-productive privatisation, Russia has since seen substantial decreases in the national quality of health and affordability of healthcare.

From 1991-1998, spending on public healthcare was comparably reduced by 33%. In fact, Russia's overall healthcare spending is now at stage where it is comparatively disproportionate to private spending, as well as being an inadequate percentage of GDP when compared to groups such as the WHO European Region and the European Union (see Figure 1).

Figure 1 - Russian Federation Healthcare Spending as % of GDP

Source: Source: Anonymous, "Reforming Healthcare", OECD Economic Surveys (2006) 17, 183.

Consequently, Russia has experienced high levels of "poverty-related illness", as seen in Figure 2. Life expectancy hit an all-time low of 64.1 years (71 for women, 57.4 for men) in 1994, whilst the death rate still continually exceeds the birth rate.

Figure 2 - Selected Health and Demographic Indicators for Russia (1990-2004)

Source: Anonymous, "Reforming Healthcare", OECD Economic Surveys (2006) 17, 183.

Granted, some of these problems have roots within the former-Soviet healthcare structuring. Often medical techniques are forced to develop within monopolistic research institutes - an area evidently yet unprivatised - living the country with outdated technology, such as in the case of tuberculosis and Aids treatments. The spread of these two diseases alone was estimated to have cost 1.5-2% of GDP from 2001-2005. Moreover, protocol still dictates that patients are immediately directed to a specialist instead of a general practitioner.

The Russian government did embark upon the privatisation of healthcare through the introduction of the mandatory medical insurance system (OMS) in 1991, with the aims of improving quality and competition. The OMS supposedly funded a program of government medical guarantees. However, reality was that MMI funds were insufficient for such services. In 1997, OMS funds provided for only 37.5% of the basic OMS services, thus services covered by the program were cut back in 1998 (financial feasibility explored in Figure 3, Appendix). Furthermore, the employer-contribution element of the OMS meant in reality employer, not patients, chose insurers, exposing the system to kickbacks and employers opting for "pocket" insurance. Despite this, privatization of the health sector appears to be growing. Market researchers predicted a 10.5% growth of the Russian pharmaceuticals and healthcare markets for 2007, and annual 10% growths for 2008-2010.

Thus, it can be concluded that Russia's national health and health system are worse off due to the forces of economic transition and inherent characteristics of the economy. Domestic inequity, a decline in government funding and an inefficient insurance system have resulted in an inferior health sector that has and will continue to hamper Russia's transition to a market economy.


Like Russia, China is a major transition economy in terms of GDP. Previously, with the inception of the Chinese Communist Party (CCP) in 1949, public healthcare was strongly invested in. A primary rural healthcare system was a showpiece of Mao Zedong's Cultural Revolution, whilst the government had also provided for community healthcare workers, coverage for life-threatening illnesses, public health campaigns and widespread access to healthcare. The focus on rural healthcare was understandable given that even today, after years of urbanization, China's rural population officially stands at 940 million. However, as was the case with Russia, economic reforms saw significant reductions in government health expenditure (see Figure 4, Appendix), which resulted in poor quality of health and privatisation of the health sector. Furthermore, recent studies have uncovered a relationship between income inequality, a byproduct of the economic transition, and health-compromising behaviour.

Chinese Health Minister Gao Qiang, citing data from a 2003 official national survey, stated that government contributions to hospital running costs decreased from 30% in the 1970's to under 8% in 2000, that 30% of people needing hospitalisation did not receive it due to financial difficulties and that 49% of people needing treatment did not go to doctors. Moreover, inequity occurs at a rural-urban level, with 25% of all government healthcare expenditure being spent of the China's four wealthiest localities of Shanghai, Beijing, Jiangsu and Zhejiang. Market economics meant that there was no longer a disproportionate allocation of healthcare funds in favour of rural communities. Instead, rural area governments struggle to meet expenditure mandates using limited amounts of locally generated revenues.

In order to compensate for funding deficiencies,



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