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Schriftenreihe des Europa Institutes Budapest, Band 7:75–85.


Hungarian Health Care System in Transition*


Hungarian health reform is embedded in the socio-economic processes: a transition to market economy having great social costs: growing unemployment, poverty and deepening social inequalities. Transition of the health care system is connected to basic elements of the political and economic transformation such as changing role of the state, decreasing redistribution by the state budget, privatisation, competition and individual freedom. A well-functioning health care system meeting the requirements of equity, efficiency and quality should be developed under a situation of transition when economy, society and political system are undergoing dramatic changes and are fraught with uncertainty and instability. It makes difficult to reconcile long-term visions with short run exigencies. In fact, the grave economic situation set the agenda for the health reform rather than internal problems of the health system – forcing and at the same time hindering the changes.

Major problems of the health care system

The present crisis of the health system is a complex one consisting of three intertwining factors: long-lasting problems inherited from the state-socialism, new problems created by economic transformation, and side-effects of the on-going health care reform.

Problems inherited from socialist system are:

• deterioration of health status and inability of public policy to react to it

• deficiencies of the health care system

– inefficient resource allocation

– ineffective, highly-centralized management

– excess capacity in acute hospital care

– widening gap between existing capacities and available financial resources

• dual structure of health care system

Problems created by economic transition are:

• growing tension between health expenditures and income-producing capacity of economy

• distorted fund-raising

• distorted pharmaceutical market, soaring pharmaceutical expenditures

• growing deficit of health insurance (as a consequence of the above factors)

Side-effects created by on-going health reform are:

• adverse incentives generated by the new financing methods introduced in 1993

• disintegration of financial and professional control

• wide-spread bending of the rules of the financing system (false reporting of performance)

To cope with these problems would be a demanding task even if Hungary had a well-considered health care reform program, capable health care administration and public support for the implementation of reforms. In reality, there is no consensus even within the government and the ruling political parties as to the basic issues of the reform, health care administration is rather weak and support of the population and health professionals are missing.


Health status – an epidemiological crisis

Since the mid-1960s the life expectancy of males (especially in the case of the middle- aged men) has been decreasing. The differences between developed countries and Hungary are not only quantitative, but their trends diverged from the mid-60s onwards. The alarming deterioration in health status is a part of the failure of the state socialist type of modernization. Similar trends have evolved in the other former socialist countries – although having different magnitude and duration. In the male population between 35 and 65 the probability of surviving was slightly worse in 1994 than it had been in 1920–21. In some middle-aged male groups Hungarian mortality is among the highest in the developed world. (CSO, 1996)

Differences between social groups in Hungary are of similar magnitude as the East-West mortality gap – it can be stated that an ”East-West gap” also exists within Hungary. A few data are presented only to exemplify striking differences. As to sex differences in 1960/65 the female excess in life expectancy at birth was 5.6 years, while in 1992 it was 9.1 years. According to the educational status the difference between the highest and lowest male life expectancy at 30 was 10.5 years in 1990. Males with 15 or more grades can expect a further 44.5 years of life, while those with less than 8 grades only 33.7 years (Hablicsek, 1995). A married man aged 30 can expect as an average further 39 years of life span, while a non-married only 30 years.

Life expectancy further decreased in the early 1990s, but recently a slight increase can be observed.


Trends in health expenditures

During the socialist era, and especially in the ‘60s and ‘70s, the ‘non-productive’ sectors, including health care, were considered low priority. A comparison of trends in health care expenditures in Hungary and in the advanced Western countries highlights fundamental differences. Between the early 1960s and the mid-1970s Western countries experienced an expansionary phase: in the period of economic prosperity, health expenditures increased 40–60 % faster than the GDP. The Hungarian health care system, however, has never experienced a similar (expansionary) period. After several decades of under-financing, the public sector health expenditures increased substantially as a share of GDP between 1989 and 1991, from 4.9% in 1989 to 6.4% in 1991. (Table 1) There are two factors that justify this: in these two years, real GDP decreased rapidly, and in 1990, during the period of transition from direct financing from the state budget to a health insurance scheme, funds allocated to the health care sector increased considerably. (It should be emphasized that the data are based on the registered GDP, while the grey economy is estimated about 20-30% of the GDP.) Between 1991 and 1993 the share of the (public sector) health expenditures in GDP remained at the same level. It means that the contraction of health care resources was similar to that of the GDP. 1994 is an ‘outlier’: both real value of health expenditures and their share in the GDP increased. (Presumable it was an effect of ‘the election year’.)

In 1995–96 both the share of health expenditures in GDP and their real value decreased. The real value of funds allocated for ambulatory and in-patient care decreased by 25% between 1990 and 1996. As is generally known, inflation in health care was above average, therefore the decrease in the real value of expenditures allocated for ambulatory and in-patient care between 1990 and 1995 was, in fact, even more significant (about 43%, taking into account the special rate of inflation affecting the health care sector). It contributed to growing debts of great number of hospitals.

The distribution of health insurance fund between expenditures on personal health care and drug subsidies has changed considerably: in 1990, their ratio was 76.7% vs. 22.2%, while by 1996 it had reached 70% vs. 30%. It is to be noted that compared to international data, the proportion of drug subsidies was already high back in 1990. Total expenditures including patients’ co-payment reached 2.2% of GDP in 1996.

In 1996, the per capita expenditures were around 220 USD calculated at exchange rate (it would be higher at PPP), while in developed western countries they reached 6 to 10 times as much. (When making this comparison it has to be taken into account that we purchase medical equipment and medicine at the same prices as they do.)

In the early 1990s – from a macro-economic point of view – the share of health expenditures in GDP was relatively high for Hungary’s level of income. On the other hand, it cannot be considered satisfactory in comparison to social needs. This conflict, basically rooted in the low level of our economic development, has been further sharpened by the crisis resulting from the transition to a market economy, by the dramatic decrease of GDP. This basic contradiction between a macro-economic viewpoint and the requirements of the health sector cannot be solved in the short run. As a consequence of a modest increase in GDP and a cut (in real terms) in health expenditures the share of health care in GDP decreased in 1995 to the level it was in the late 1980s.


Process of health care reform

Important changes have taken place since 1989, particularly in the health financing system. Major measures include:

• switch from a general tax-based funding to funding through compulsory insurance, establishment of an autonomous purchaser of health services: the Health Insurance Fund (HIF),

• greater emphasis on primary care, introduction of the Family Physician Service,

• decentralisation and privatisation mainly in service provision,

• performance-based remuneration has begun while maintaining a cap on health expenditures,

• a start on reduction of excess hospital capacities.

In 1990–91 the shift to health insurance, reorganisation of primary care and privatisation, then in 1993–94 the introduction of performance-based financing and in 1995-96 restructuring of hospital care were given priority by health policy-makers. Shift to social insurance was expected to provide secure financing (vs. earlier weak position in the yearly bargaining over the state budget). The health administration expected the remedy of structural problems from performance-based financing, while doctors expected the improvement of their personal income. In fact, none of these expectations have been fulfilled. It soon became obvious that reform ideas and implementation, expectations concerning reform measures and actual effects differ. By the mid-1990, reforms implemented have started to exert their side-effects and new problems created by economic transition have been on the increase. As a consequence, health policy has become doubtful about the goals set in 1989–90.


A Chronology of Reform Measures in Health Care


– Private medical practice authorized


– Switch from tax-based funding to funding through compulsory insurance

– Ownership of health facilities transferred to local governments

– New system of consensus management in hospitals introduced


– Establishment of National Public Health Service


– Social insurance fund separated into a Pension Fund and a Health Insurance Fund

– Parliament defines eligibility conditions for health insurance

– Family Physician Service is created and capitation-based payment



– Voluntary ”Mutual” Health Insurance authorized

– Self-Governments of Social Insurance are set up with employer and

 employee representation (first election of representatives of


– Starting in July, out-patient care remuneration based partly on a

 fee-for-service scheme, and hospital care remuneration on DRG-type



– Act on Hungarian Medical Chamber


– Guidelines issued to replace consensus management with chief hospital manager

– Start on reduction of hospital capacities


– Act on norms of hospital capacity (capacity reduction)

A shift to compulsory health insurance

The independent Social Insurance Fund was established in 1989 (prior to which the revenues and expenditures of social insurance institutions were not separated from the state budget). The expenses of drug subsidies were transferred from the budget to the fund in 1989. The financing of health care services was transferred to the Social Insurance Fund in 1990.

There are three main sources of funding for the health care system: social insurance contributions paid by employers and employees, general revenues (state budget), direct (out-of-pocket) payments. Investments and public health (hygiene and health promotion) activities are financed from the state budget. As to social insurance, in 1993 employers paid 44% and employees paid 10% of which 19.5% and 4% were for health insurance. (Employers’ contribution gradually decreased: it was 18% in 1996, while in 1997 employers pay 15% plus 1800 Ft /per month/per capita.) Health insurance covers health care services, pharmaceutical subsidies, sick-pay and disability pensions under retirement age. This high contribution rate encourages the black economy, underreporting of earnings, non-payment of assessed contributions, and discourages employment. Two main elements of the direct payments are co-payments on drugs and gratuity money. Gratuity money goes directly to doctors, distributed extremely unevenly among them, and it distorts the incentives of the official financing methods. Co-payments on drugs have increased more than 4 times between 1990 and 1995.

During the transition period, despite the restrictive measures, HIF has not been able to balance its budget. The deficit has been – directly or indirectly – due to economic factors outside the health sector. A major problem of compulsory health insurance is that the financial burden of funding the health system is distributed in a distorted, unjust way. Main factors are the following:

• Considerable groups are evading the payment of social insurance taxes through:

– underreporting of earnings in private sector, growing black economy,

– non-payment of assessed contributions in both private and public sector (arrears of social insurance has amounted to near 24% of the total revenues in 1995.)

• Contribution on behalf of non-employed population groups – pensioners, unemployed, those on social assistance are ill-defined. The state pays a lump-sum of money as contributions on behalf of certain non-active population groups (receiving social assistance). This amount of money is far below what would be reasonable: calculated on average per capita health expenditures. Consequently the burden on controllable incomes is great; cross-subsidizing by contributions paid by employers is unreasonably high. The share of social insurance contributions compared to general tax revenues in funding health care system is too high. Distorted funding has been a major cause of the imbalances of the Health Insurance Fund.

On the expenditure side, problems manifest themselves in different ways:

– curative-preventive services have fixed spending caps – tensions are occurring at the micro-level (e.g. increasing deficit of the hospitals)

– drug-subsidies, sick pay and disability pensions are ‘open-ended’. Expenditures on these items have exceeded every year the budgeted values contributing to the deficit of the HIF. (The only exception was the spending on sick-pay in 1996.)


Reform of the financing methods

The former system was inefficient, but able to control costs. Since the 1988 reform document, financing according to performance has been a top-priority goal. The new system has been expected to encourage micro-efficiency, while maintaining cost- control. The shift to new methods of remuneration of providers represents a serious effort to improve efficiency by linking payment to performance. New methods of payment, as implemented to date, are fraught with flaws.


Provider Payment Mechanisms in Hungary



Family Doctor Service                      fixed allowance per doctor

                                                           + weighted capitation

Inpatient Care

l. Acute Hospital Care

–   general rule                         DRG-type with spending cap

–   special services (kidney dialysis,   fee-for-service

–   CT, MRI, cardiac surgery, etc.)    

2. Long-term Care      per diem


Outpatient Specialist Care                 basic fee + capped fee-for-service

                                                           (German point system)

Special ”Tasks” (school health,

public health nurse services               fixed budget(historical basis)

dental care, special dispensaries, etc.)


The capitation system for family physicians does not provide sufficient incentive to improve the content of Family Medicine. As to the specialized care, performance-related financing was compromised by retaining elements of the old system in order to avoid mass bankruptcy of health care institutions. The capped fee-for-service method for outpatient specialist care was applied to only 45% of the budget until the end of 1995. This financing method theoretically reduces the incentive to increase services otherwise built into a fixed-tariff fee-for-service system. In practice in Hungary, it does not seem to have generated the desired effect. The result has been an increase in the number of ‘service points’, and a reduction in the money value of a single point.

A hospital can earn HIF revenues from different sub-funds: acute care; long-term care; special services such as kidney dialysis, CT, MRI, heart surgery, etc.; and out-patient care. Acute care and long-term care are financed in different ways, as described below. Special services are remunerated by fee-for-service. Acute care services are financed essentially by a method similar to that of the American Diagnosis Related Groups (DRG). However, the DRG method as applied in Hungary’s hospitals, rewarded past inefficient performance by assigning higher ‘cost coefficients’ to hospitals that had higher unit costs in 1992. The Forint value of each unit of performance was hospital-specific until the end of 1995 and it was determined on the basis of the given hospital’s costs and performance in 1992. Hospitals that had higher unit costs in 1992 received higher weights. In October 1995, the hospital-specific Forint values of DRG units of performance was eliminated and two ‘coefficients’ were introduced: so-called professional (department) coefficient and the ‘institutional coefficient’. Furthermore – according to the government regulation – individual hospitals could not fall outside the range of 90% and 120% of their previous revenues. It was again a compromise between performance-related finance and the old input/previous budget/-related finance – because of the fear of bankruptcy of hospitals. Changes introduced in 1995 (and the faulty way as they were applied by the officials of the HIF) further confused even messed the relationship between real performance of an individual hospital and remuneration given for it by the health insurance. As remuneration systems tend to favour inpatient over outpatient care, hospitalization rate even has increased – which means that incentives generated by the financing system contradict to professional goals.


Privatization and decentralization in health sector. Implementation of a mixed ownership pattern

The fundamental question of the change of the political system in welfare, similarly to other areas, is the change of the role of the state which is characterized by two principle processes, namely privatization and decentralization. We interpret privatization as being the withdrawal of the state from financing, the service sector and regulation. The change of the role of the state not only involves privatization but also decentralization within the public sector. Decentralization we define as being the shift of various tasks to lower levels of administration, as well as the establishment of various councils (self-governments).

Privatization of health care has been taking place in all three major fields: regulation, finance and services. But this has not affected public sector dominance so far. It should be emphasized that there is no clear-cut division between the public and private sectors – public institutions often provide a background or basis for the operation of the private sector. The most important components of privatization in health care are: (1) reorganisation of primary care, i.e. the introduction of family doctor system; (2) emergence of private insurance; (3) an increase in direct payment for prescriptions; (4) privatisation of pharmacies; (5) development of private medical companies.

Ownership was affected by two significant changes after 1990:

• health care institutions, previously owned by the state but operated by the local councils, became the property of local governments

• private businesses were allowed and encouraged.

In Hungary private enterprises in health care including private pharmacies were allowed for by a decree of 1989 (private practice was possible to maintain beside full time work in the state sector even before). After the political changes in Hungary in 1990, the Government saw no significant difference between the world of business and health care services. However, the reality has proven to be much more complicated than theory. Privatisation did not start in the health care in 1990. By 1992, even political goals were reduced to the so called ”functional privatization” of family doctor services and support of new private institutions – the privatization of the existing stock of public institutions (especially hospitals) was opposed by the government. Functional privatization meant that a family doctor has become self-employed (or established a private firm) having contract with the local government and the health insurance – while the local government remained the owner of the health care facilities. 2829 of the total 6772 family doctor services functioned as private practices or enterprises in early 1995. Despite the uncertainty of health policy, privatization has evolved in several ways in Hungarian health care since 1989. Private enterprises are extremely heterogeneous, ranging from physicians working individually to foreign companies striving for an international presence.


Restructuring of health care delivery

The service structure of the Hungarian health system has failed to provide a cost- effective response to the increase in chronic diseases. There has been excess reliance on curative hospital services. Patients are treated at a higher level of the health care system than is medically required, usually in hospitals instead of in primary care or out-patient specialist care. Services such as targeted screening, health education or even rehabilitation are underdeveloped. Institutions (nursing homes, home care) primarily caring for the elderly are almost entirely missing.

Creation of a Family Physician service

The creation of the Family Physician service has been the most concrete effort to move towards a more cost-effective mix of health services. The institution of personal choice in selection of a family physician (through the health-card-system) linked with the shift to capitation-based payment was intended to constitute incentives for the maintenance of quality service and closer ties between physician and client. Also, the new system has offered public sector physicians the option to privatize, with access to health insurance funding. Important problems remain, however. Old-style practices of the ‘district doctors’ have not changed: family physicians continue to offer mainly prescriptions and referral services, and just little more.

Reducing hospital capacities

The persistence of excess capacity in the health service system, and particularly in acute hospital care, continues to be a major cause of inefficiency of financial shortages, and ultimately of poor quality services. In Hungary in 1994, there were 33 physicians and 101 hospital beds (78 acute beds) per 10.000 population, the averages for EC countries, where per capita budgets for health are significantly higher than in Hungary, were 25 physicians and 90 beds (55 acute) per 10.000 in 1990. The rationality of reducing hospital capacities is obvious if basic figures are considered: average length of stay was 11.6 days (9.6 in the case of acute care) in 1994, discharge rate was 21.3 per 100 inhabitants and occupancy rate was 67%. The number of beds per 10.000 population is only one of the indicators for analysis, however, it is not an adequate target for government interventions. A new act on ‘responsibility of health care provision and territorial capacity standards of provision’ was passed in July, 1996. The act defines inpatient and outpatient capacity by county (maximum number of hospital beds per county and the relative share of each speciality within the total number of beds). The number of beds is based on a (rather questionable) formula. To determine reductions the act sets up local consensus committees for each county – however, without any real authority. Reductions were effected by the contracts on capacities concluded between HIF and the hospitals in December 1996. The number of hospital beds in acute care was reduced by 9% (from 73353 to 67029).


Major alternatives of the reform – What kind of public/private mix?

During 1995–96 policy debates sharpened as to the main direction of the reform. We must emphasize that, explicitly or implicitly, the two alternatives concerning the main trend of the reform have been present since the mid-80s in professional and political debates and various programs. One of the possibilities is a health care system based fundamentally on public financing (compulsory insurance and tax-financing) and mixed ownership in the service sector (in providing services the non-profit sector takes over, to a great extent, the role of the state sector), in which private health insurance assumes a supplementary role. The main objectives of this reform are to contain costs and to increase the efficiency of the health care system. That is, the objective is the development of a service structure, an institutional-, financing- and information system which guarantees that the money spent on health care contributes to the greatest possible improvement in health status. In short: the main objective here is to increase ‘value for money’. The modernization program of the Ministry of Welfare, as well as the strategy of the Health Insurance Self- Government follows these principles.

The other approach, supported by the Ministry of Finance, states that the main objective of the reform is to reduce public expenditures, as a result of which the financial resources of health care need to be provided for, to a great extent, from the private sector: a widespread introduction of patient fees, and private health policies. In this case public financing would be limited to rather basic services, and the health care of the poor. Considering short-term, top-priority budget interests, the Ministry of Finance fails to realize that the trend it proposes contradicts long-term macro-economic interests, for it would launch structural changes leading to the massive increase of total health expenditures.

The new bills on Health and Health Insurance reflect the approaches of the Ministry of Welfare: retaining the dominance of public financing. (However, we expect that the debate between the two approaches will not come to an end,)

The question of ‘whither the health reform’ is still open. The following basic questions of the health care reform are to be answered: How much public money should Hungary spend on health care? How to distribute the burden of funding the health care system? What principles of access (for what services) should be applied? How to improve efficiency? What kind of public/private mix (in financing and service provision) should be developed? How to define the responsibility and scope of authority of the Ministry of Welfare, health insurance and local governments?

The forthcoming one or two years will show whether privatization is progressing, whether restructuring of health care delivery will be profound or only illusive, toward what model the Hungarian health care system is muddling through. The analysis of the processes involved and the possible effects of different policy options can help decision-making. However, we should not cherish illusions – political ideologies and improvisation under the pressure of economic exigencies might influence the reform more strongly than principles of equity and efficiency.