Page 1 PROJECT INFORMATION DOCUMENT (PID) APPRAISAL STAGE Report No.: AB3786 Project Name SERBIA HEALTH Additional Financing Region EUROPE AND CENTRAL ASIA Sector Health (100%) Project ID P110593 Borrower(s) REPUBLIC OF SERBIA Implementing Agency Environment Category [ ] A [ ] B [X] C [ ] FI [ ] TBD (to be determined) Date PID Prepared April 4, 2008 Date of Appraisal Authorization April 8, 2008 Date of Board Approval July 15, 2008 1. Country and Sector Background Reforming hospital payment methods started only during the last year of the Serbia Health Project, mainly because there was a need to gain the political momentum and consensus of all stakeholders to create the conditions to develop and implement such reforms. As in other European countries changing the way healthcare providers are paid is the central pillar of reorienting the health system to improve hospital productivity. In Serbia, this reform involves a shift from input-based financing that sets an incentive to increase the number of hospital beds and the number of employees, towards a system that rewards outputs and quality leading to more efficient public spending. Serbian hospitals report relatively high numbers for hospital beds. High bed numbers combined with low inpatient admission rates and relatively long average length of hospital stays, point to low productivity in terms of patient turnover per bed and caseloads per staff. Total health expenditure (THE) was 8% of GDP in 2005 1 , which is comparable to neighboring countries. As the experience from OECD countries shows, reforming the payment system is a long-term process and requires continued monitoring, evaluation and adjustment to correct for adverse provider reactions. The proposed additional financing would enable the Government to scale up existing efforts to improve efficiency, utilization and quality of hospital care by supporting the implementation of case-based payment system. Introducing output-based financing is a complex but necessary process to improve efficiency and ensure sustainability of hospital care in middle income countries. It requires investments in modern health and financial information technologies and international technical assistance to build management capacity at different levels in the health system (such as the Health Insurance Fund (HIF), the Ministry of Health (MOH) and the hospitals) as well as sustained dialogue with many stakeholders, including the Ministry of Finance. At the same time, clinical pathways will be developed and accreditation of hospitals will be sustained to continue improving quality of health care and prevent drawbacks that new payment system could induce. 2. Objectives The original development objective under the Serbia Health Project (SHP) is still considered highly relevant, and is proposed to remain unchanged for the Additional Financing, which is: to build capacity 1 MOH Serbia: Development of National Health Accounts in Serbia – Phase III. August 31, 2007. Page 2 to develop a sustainable, performance-oriented health care system where providers are rewarded for quality and efficiency and where health insurance coverage ensures access to affordable and effective care . 3. Rationale for Bank Involvement The main aim of the proposed additional financing is to enable the Government to scale up activities to improve efficiency and quality of hospital care. It would finance activities started under the Serbia Health Project (SHP) to reform hospital payment methods and improve quality of health care services. The Serbia Health Project has been very successful in supporting the initial reforms aimed at introducing output-based payment methods and improving quality of service delivery I hospitals. However, these reforms need to be sustained over time to deliver best results. The World Bank is in a unique position to provide the support that is needed during the next phase of reform. More specifically, the proposed additional financing would finance the provision: (i) of management information technologies (hardware and software) for hospitals and the Health Insurance Fund (HIF); (ii) of technical assistance to hospitals, the HIF, and the Ministry of Health (MOH) to support institutional and management reforms on a sector and hospital level so that hospitals can react to the new financial incentives set by case-based payment systems such as Diagnosis-Related Groups (DRGs) and eventually improve hospital productivity and efficiency, and (iii) of technical assistance to support monitoring and evaluation of the payment reform within hospitals and the HIF and on a sector level in order to evaluate and adjust the impact of the payment change and to prevent adverse effects and cost escalations. These activities would contribute to the effectiveness and financial sustainability of the health system. The proposed scaling up is consistent with the World Bank Guidelines for Additional Financing (OB/BP 13.20) since it will finance the “implementation of additional or expanded activities that scale up a project’s impact and development effectiveness”. The team has considered several possible approaches for financing the project, including through a new operation or a repeater project. The choice of additional financing was made to maximize cost-effectiveness and timeliness in processing so that implementation of scaling up activities can supplement successful implementation of ongoing activities quickly by using existing implementation capacity and arrangements. The project and its additional financing remain consistent with the Country Partnership Strategy for the Republic of Serbia for the period FY08-FY11, which also aims at improving delivery of social services at all levels of Government. By focusing on provider payment reforms at Secondary and Tertiary Health Care hospitals, the additional financing would complement activities supporting the capitation payment reforms in Primary Health Care (PHC) centers that are being financed by the World Bank Delivery of Improved Local Services Project (DILS), the Canadian International Development Agency (CIDA) and the European Commission (EC). The additional financing would also complement information technology investment in hardware, software and network connections between health facilities and the HIF branches supported by DILS and the EC. 4. Description The additional loan will finance scaling up activities that were supported by the original project mostly under Component 2 (Health Finance, Policy and Management and Quality Improvement) and in particular in Subcomponent 2.1 (Health Finance), Subcomponent 2.2 (Quality Improvement), Subcomponent 2.3 (Health Information System) and Subcomponent 2.4 (Capacity Building and Communication of the MOH). Information on the individual sub-components of the additional financing is provided in the following paragraphs: Page 3 (i) Health management information technology . Hospital payment reforms requires: (a) investment in Serbian Health IT network that will link 400 health care providers into the single communication body, thus allowing testing of new discharge forms; (b) investment in the implementation of servers, hardware and LAN (network within hospital) in hospitals based on the experience of 4 hospitals that were equipped under the SHP; (c) investment in hospital management software, including upgrading of hospital software currently used in 4 hospitals to include additional data on finance and accounting, expenditures, production factors, ICD-10 update (from 3 to 4 digits), procedure coding, case-mix information of patients, ABC costing, and license fee for DRG software and replicating the upgraded hospital software in 5 additional hospitals; and (d) investment in upgrading databases of the HIF and the Institute of Public Health (IPH) including members, claims and provider databases so that data can be used by the provider performance analysis department in the HIF for monitoring and evaluation of payment effect on HIF expenditures. (ii) Activities to build capacity for hospital management and to improve quality . To ensure that providers can react to the new incentives set through the payment system, there is a need for technical assistance to be provided to the Chamber of Health Care Institutions to implement institutional and organizational changes that can produce more financial and management autonomy in hospitals, and ensure improved quality and productivity in care. This includes capacity building in order to institutionalize health management as a profession in Serbia. Furthermore it includes supporting hospitals in staff-mix adjustments as proposed in the human resource strategy of the MOH, and creating a staff payment merit system to reward staff for better performance and patient satisfaction. It also includes supporting health facilities in adjusting department (day care and day surgery) and bed structure following the health sector restructuring strategy, including partnerships with private providers to improve hospital productivity. Legal changes for hospitals to become public firms with more autonomy and clearly defined responsibilities and accountabilities are also necessary so that financial and management responsibility for staff and all other production factors can be devolved to the directors of health facilities. Technical assistance is also needed for the development and implementation of clinical pathways in hospitals, which will build upon the clinical practice guidelines produced under the Health Technology Assessment component of the SHP. At the same time, the accreditation process started under the SHP will be replicated to the selected hospitals in order to improve quality of health care services. (iii) Technical assistance to build capacity on monitoring and evaluation : To build capacity to monitor and evaluate the impact of the payment change on overall health policy goals, technical assistance is planned to be provided to: (a) health care facilities for monitoring and evaluation and fine-tuning of DRGs in hospitals; (b) the HIF to build analytical capacity and support the creation of a provider performance analysis department in charge of data analysis, auditing of provider results to detect misreporting of DRGs, and presenting results to the HIF director and hospitals; (c) the Ministry of Health to be able to use all information that is generated to steer implementation of provider payment reform and (d) the National Health Account team at the Institute of Public Health, who will be monitoring and evaluating the sector-wide effect of DRGs and its impact on total health expenditures. This sub-component also includes specific capacity building activities such as international training courses and conferences related to payment reforms; study tours on DRGs for example to Ireland, Tuzla Canton in Bosnia and Herzegovina and Hungary; and the national flagship course offered by the World Bank Institute on health financing. Page 4 5. Financing Source: (US$m.) Borrower 0 International Bank for Reconstruction and Development 16.6 Total 16.6 6. Implementation Project implementation arrangements for the Serbia Health Project have worked very well over the past two and a half years and will be continued for the Additional Financing activities. The executing agency for the additional project will continue being the MOH and will continue working with other agencies and institutions such as the HIF, the IPH and all health care institutions. The Project Coordination Unit (PCU), which is established in the Sector for International Relations in the MOH, will execute activities planned under the additional project. The Assistant Minister for this Sector will continue having overall responsibility for the Project in the Ministry while the Assistant Minister for the Sector for Health Insurance and Health Financing will have technical oversight of all activities. Because of the experience and strong capacity of its existing staff, the PCU will also coordinate those activities envisaged to be implemented under the recently approved DILS. The combined operational cost will be reduced and synergies will be maximized. 7. Sustainability After a few years of learning and discussions, there is now consensus in the MOH and the HIF on sustaining the reforms needed to implement a new system of paying hospitals based on their production. This is expected to ensure the sustainability of the investments financed by the additional project. At the same time, the focus of the additional project on building capacity for better and coordinated management of the IT system for the health sector will also contribute to ensure sustainability of all IT investments. 8. Lessons Learned from Past Operations in the Country/Sector Reforming the health sector in transition countries is a long-term effort that requires sustained focus and support . This is particularly so for health financing reforms. Changing the way healthcare providers are paid is the central pillar of reorienting the health system away from historical, line item budgeting towards a system that rewards outputs and quality, thereby increasing the efficiency of public spending and the sustainability of health financing. Reforming the payment system will, however, be a very difficult and lengthy process. One of the biggest constraints is the limited capacity for strategic purchasing in most health insurance funds. Most countries in the Western Balkans, including Serbia, have started or plan to start introducing capitation payments for primary health care and case-based payments for secondary and tertiary care. As countries move forward with changing provider payment mechanisms, it is crucial to consider individual incentives alongside institutional incentives. It is not sufficient to devise ever more sophisticated reimbursement systems at the institutional level if employees within these institutions continue to receive the same low, productivity-independent salaries. Page 5 9. Safeguard Policies (including public consultation) The Additional Financing will invest in information technology and technical assistance. No safeguard policies are envisaged to be triggered ; therefore, an Environmental Category “C” rating has been established by our Regional Safeguards Unit for this project. 10. List of Factual Technical Documents Caryn Bredenkamp and Michele Gragnolati. Sustainability of healthcare financing in the Western Balkans: An overview of progress and challenges. World Bank Policy Research Series. November 2007. Pia Schneider. Provider Payment Reforms: Lessons from Europe and America for South East Europe. HNP Discussion paper. The World Bank. Washington DC. October 2007. Sanigest International. Designing and Implementing of Starting Phase for Hospital Payment Reform. Inception Report prepared for the Ministry of Health of the Republic of Serbia. December 2006. Sanigest International. Designing and Implementing of Starting Phase for Hospital Payment Reform. Review current and application of the new system of reporting and data collection – phase I and II: Establishment of a National Minimum Data Set (NMDS) and Patient Classification System. July 2007 Sanigest International. Republic of Serbia Health Sector Reconfiguration Strategy. Draft Document prepared for the Ministry of Health of the Republic of Serbia. May 2007. Sanigest International. Methods and Selection of a Procedure Coding System for Serbia. Document prepared for the Ministry of Health of the Republic of Serbia. February 2008. 11. Contact point Contact: Michele Gragnolati Title: Senior Economist Tel: +(387-33) 251-509 Email: mgragnolati@worldbank.org 12. For more information contact: The InfoShop The World Bank 1818 H Street, NW Washington, D.C. 20433 Telephone: (202) 458-4500 Fax: (202) 522-1500 Email: pic@worldbank.org Web: http://www.worldbank.org/infoshop