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Shifting the costs of budget cut onto providers

Partner Institute: 
PRAXIS Center for Policy Studies, Tallinn
Survey no: 
(15) 2010
Priit Kruus, Ain Aaviksoo
Health Policy Issues: 
Remuneration / Payment
Current Process Stages
Idea Pilot Policy Paper Legislation Implementation Evaluation Change
Implemented in this survey? no no no no yes yes no


Trying to meet the Eurozone criteria by cutting costs of the state budget, a reduction of 6% to Estonian Health Insurance Fund (EHIF) purchase prices was made by the government. The reduction affected mostly the revenue base of hospitals, but also primary, dental and long-term care providers. The cut was an addition to several other policies affecting the health care system: rise in VAT for pharmaceuticals, abolition of dental care reimbursement, changes in sick leave system and EHIF budget cut.

Purpose of health policy or idea

In 2008, Estonia had entered into a deep recession after several years of record growth. The crisis has had a serious impact on the state budget, including the health budget. Estonia and also other Baltic Countries have been hit more severely by the crisis than other EU Member States, but a recent economic forecast by the Ministry of Finance indicates that economic growth is expected to be positive again by 2011. Although increasing export is expected to speed up the recovery, domestic demand will stay low and unemployment, which has reached 14.4 percent of the labour force, will not start declining before 2011. Thus, there are two main drivers behind this policy decision: On the one hand, the rise of unemployment due to economic crisis had led to a large decrease of the EHIF revenue base - the Social Security Tax accruals (6 percent decreases in 2010 vs. 2009 according to the prognosis by the Ministry of Finance). On the other hand, the government prohibited the EHIF to use its risk reserve (239 mio. EEK = 15,3 mio. EUR), capital reserve (692 mio. EEK = 44,2 mio. EUR) or accumulated earnings (3000 mio. EEK = 192 mio. EUR) to cover the deficit, which is 493 mio. EEK = 31,5 mio EUR in 2010.* The latter was justified by the argument that using the reserves of a public entity would compromize the government's plan of adopting the Euro in 2011, as any use of accumulated reserve in the state budget is recognized as annual cost and would thus result in a higher deficit of the State budget. An exact purpose of the policy was to retain access of health care for the public with available finances - reducing the EHIF purchase prices by 6 percent and forcing care providers to cut costs in order to cover the revenue cut.

* Annotation: Since 2002, there is a fix exchange rate between the EEK and the EUR (1 EUR = 15,6466 EEK).

Main points

Main objectives

The Government Decree on the EHIF purchase prices was changed and a purchase coefficient of 0.94 was implemented on all service prices for the period of 15 November 2009 - 31 December 2010. The publicly declared purpose of the regulation was retaining access of care for the public with available finances. Typically, amendments to the regulation of the EHIF purchase prices stipulate changes and modifications to the price list (by law, the prices are inspected once a year). However, until now there was never such a vast change in the prices' purchase coefficient. In addition to the mentioned coefficient change, there were some changes to prices of specific services and also a 15 percent out-of-pocket payment was imposed to long-term care (previously financed 100 percent by the EHIF), beginning on the 1st of January 2010. The current paper concentrates mostly on the effects of the 0.94 coefficient on specialized care providers.  

Type of incentives

The incentive is financial and very straight forward - a coefficient of 0.94 is enacted for all purchases, resulting in 6 percent lower revenue for health care providers, while the number of treated cases has to remain unchanged.

Groups affected

Specialized care providers, Primary care providers, Long-term care providers, Health care workers, Dental care providers, Patients, Health Insurance Fund

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Characteristics of this policy

Degree of Innovation traditional rather innovative innovative
Degree of Controversy consensual highly controversial highly controversial
Structural or Systemic Impact marginal rather marginal fundamental
Public Visibility very low low very high
Transferability strongly system-dependent system-dependent system-neutral

The policy can be described as somewhat innovative because it has a characteristic of lowering costs without cutting the number of cases. This originates from the fee-for-service and DRG based system of Estonian health-care management. The policy is very controversial because the Estonian health care system is regarded as one of the most cost-effective in Europe and cutting more costs evidently has an impact on the other important components of a good health care system: quality and access. At the same time the life expectancy and general healthiness of Estonians is also one of the lowest in Europe, needing an immediate action according to many experts. The policy has a quite marginal impact on the structure of the system, at least in the short-term, although some systematic changes could be brought up in case of bankruptcy of some of the care providers. The public visibility of the policy is regarded as low, as the reform was implemented in a very short notice and without sufficient and transparent dialogue between stakeholders concerned in the subject.    

Political and economic background

The policy derived from the Government's strategic plan of adopting the Euro as national currency beginning of January 1st 2011. The change of government - the Social Democratic Party being excluded from the coalition in May 2009 - was favourable to the Government as the inter-governmental opposition to the decision was thus removed and there were no political obstacles for the cut. The Act of EHIF purchase price cut was changed by the Government Decree drafted by the Minister of Social Affairs on the basis of a formal decision by The Supervisory Board of EHIF (one member of the Board is the Minister of Finance - previously a Social Democrat, now a member of the Reform Party).

The policy is somewhat in conflict with national health policy objectives according to the Estonian Health Development Plan, which states the need of promoting public health in all walks of life and ensuring the long-term financial sustainability of the health care system. Furthermore, the background documents of the Tallinn Ministerial conference on Health Systems for Health and Wealth in 2008 point out that poor health has a cost for society and that this cost becomes even higher in times of economic crisis as it affects living conditions and social determinants.

On the other hand, economic crisis can also be used to implement politically sensitive structural reforms as Sweden did in the 1990's when it tried to increase productivity and strengthen sustainability of the system. Hospital capacity was dramatically reduced by closing down smaller hospitals, shortening hospital stays and investing more in outpatient care. Healthcare staff was reduced and total healthcare expenditures were kept in check by increasing co-payments for certain groups and restricting social welfare benefits. In Finland, the 1990's recession also pushed reforms where more financial responsibility was given to the municipalities; public service outsourcing was reduced and hospitals and health centres were stimulated towards greater efficiency (Pastorino & Palm 2009).

The experience from these crises shows that it is important to preserve health systems in order to avoid the deterioration of population health and the disastrous social consequences originated by it. In particular, it is important to have a clear vision on future developments and invest in the youth, especially in adapting healthy life styles (Pastorino & Palm 2009). The current policy and situation in Estonia is more similar to the Swedish experience - especially the reforms of rising efficiency, reducing salaries, increasing co-payments and restricting social welfare benefits. However, the lessons of having an explicit and clear vision of future investments and promoting healthy life styles have been somewhat overlooked in the current economic crisis, as many public health programmes have been cut or funding dramatically reduced by previous reforms and also by the policy under discussion (the act sees a reduction of disease prevention budget by 8 mio. EEK = 0,51 mio. EUR according to EHIF estimates).  

Complies with

Need to comply with criteria for joining the Eurozone and adopting euro as a national currency. The plan derives from the government's prognosis that joining Eurozone would boost up foreign investments and promote general economic confidence.

Purpose and process analysis

Current Process Stages

Idea Pilot Policy Paper Legislation Implementation Evaluation Change
Implemented in this survey? no no no no yes yes no

Origins of health policy idea

The Council of EHIF makes suggestions for annual amendments to the list of the Government Decree on a health services price list. Although different adjustments to service prices are implemented every year, services added and taken out, the idea of putting a rough 0.94 coefficient to purchase prices is rather unique. However, as a general rule the EHIF has the right to use the coefficient of 0.3 for the reimbursement of any health service, which exceeds the volume of cases as agreed previously in the contracts. So the use of such a coefficient gives the council of EHIF a possibility to strongly influence health care providers and the EHIF budget in a very short term. As far as the council of EHIF is comprised of representatives from the state (5 persons), the insured (5 persons) and employers of the health care sector (5 persons), it is difficult to estimate which stakeholders agreed to the idea, but it is stipulated by law that at least half of the members of the board have to be in favour of the decision concerning EHIF service prices.

Initiators of idea/main actors

  • Government: The Ministry of Social Affairs is responsible for health policy making, The Ministry of Finance for the state budget. Ministers of both institutions are members of the EHIF Supervisory Board. EHIF is responsible for pooling the funds in the system.
  • Providers: The biggest specialized care providers are hospitals (state or municipality founded or owned), but also private hospitals can enter into contracts with EHIF. Primary care practices and, to some extent, dental care providers are also EHIF funded.
  • Patients, Consumers: Approximately 95% of the population of Estonia has EHIF health insurance and is thus affected by the policy under discussion.
  • Private Sector or Industry: Pharmaceutical companies are neutral because although the general volume has been cut, the EHIF budget of 2010 sees a rise in pharmaceutical reimbursement expenses.
  • Media: The media coverage of the policy was rather strong, but lacked constructive dialogue and discussion.
  • Political Parties: The coalition is formed by The Reform Party (31 seats) and The Union of Pro Patria and Res Publica (19). After excluded from the government in May 2009, The Social Democratic Party (10) forms the opposition with The Central Party (29) & The Green Party.

Approach of idea

The approach of the idea is described as:

Stakeholder positions

Having a very straight forward effect on health care providers, the main opposers for the cut were hospitals, primary care, long-term care and dental care providers. On the political landscape the opposition parties of Social Democrats and the Central Party were strongly opposed to the cut, suggesting that the cut will result in an increase of waiting times and out-of-pocket payments. Of the two minority coalition parties, the Reform Party was in a somewhat more influential position than the Union of Pro Patria and Res Publica, as the Prime Minister, Minister of Finance and Minister of Social Affairs are all Reform Party members. However, both coalition partners are strong advocates of adopting the Euro and thus very supportive to the cut. The alternative to the cut would have been reducing pensions or the maternity benefit, but both were main political promises of the government parties (mostly the Reform Party) and thus taken out of the discussion. The Green Party is regarded as neutral due to the fact that in some cases the government needed the support of the Green Party to implement policies and thus giving the latter an opportunity to impose their views. Still, the influence of the opposition parties is regarded weak because the current policy does not need the approval of the Parliament.

Although patients have been regarded as opposed to the policy, it can be suggested that the alternative to the EHIF budget cut would have been reducing the volume of services, which would have had a much worse impact on the insured. The current policy has most of all a short term effect on the providers and thus patients cannot be regarded as very opposed.

Graph 1

Actors and positions

Description of actors and their positions
Ministry of Social Affairsvery supportivesupportive strongly opposed
Ministry of Financevery supportivevery supportive strongly opposed
Estonian Health Insurance Fund (EHIF)very supportiveneutral strongly opposed
Specialized care providers (hospitals)very supportivestrongly opposed strongly opposed
Primary care providersvery supportiveopposed strongly opposed
Long-Term care providersvery supportiveopposed strongly opposed
Health care workersvery supportiveopposed strongly opposed
Dental care providersvery supportiveopposed strongly opposed
Patients, Consumers
General Publicvery supportiveopposed strongly opposed
Private Sector or Industry
Pharmaceutical companiesvery supportiveneutral strongly opposed
Mediavery supportivestrongly opposed strongly opposed
Political Parties
Reform Partyvery supportivesupportive strongly opposed
The Union of Pro Patria and Res Publicavery supportivesupportive strongly opposed
Central Partyvery supportivestrongly opposed strongly opposed
Social Democratic Partyvery supportivestrongly opposed strongly opposed
Green Partyvery supportiveneutral strongly opposed

Influences in policy making and legislation

The formal resolution was made at the EHIF Supervisory Board and presented to the Government by the Minister of Social Affairs (head of the EHIF Supervisory Board) and accepted as a decree of the government.

Legislative outcome

major changes

Actors and influence

Description of actors and their influence

Ministry of Social Affairsvery strongstrong none
Ministry of Financevery strongstrong none
Estonian Health Insurance Fund (EHIF)very strongstrong none
Specialized care providers (hospitals)very strongweak none
Primary care providersvery strongweak none
Long-Term care providersvery strongweak none
Health care workersvery strongweak none
Dental care providersvery strongweak none
Patients, Consumers
General Publicvery strongweak none
Private Sector or Industry
Pharmaceutical companiesvery strongweak none
Mediavery strongweak none
Political Parties
Reform Partyvery strongvery strong none
The Union of Pro Patria and Res Publicavery strongstrong none
Central Partyvery strongweak none
Social Democratic Partyvery strongweak none
Green Partyvery strongweak none
Ministry of FinanceMinistry of Social Affairs, The Union of Pro Patria and Res PublicaReform PartyPharmaceutical companies, Green PartyEstonian Health Insurance Fund (EHIF)Primary care providers, Long-Term care providers, Health care workers, Dental care providers, General PublicSpecialized care providers (hospitals), Media, Central Party, Social Democratic Party

Positions and Influences at a glance

Graphical actors vs. influence map representing the above actors vs. influences table.

Adoption and implementation

The implementation of the policy is conduced by the EHIF, as it is responsible for pooling the funds in Estonia in accordance with the EHIF budget, official contracts with care providers and the EHIF purchase prices.

Graph 2

Monitoring and evaluation

The policy does not foresee a mechanism for a regular review of the impact, implementation process nor the overall appropriateness. No thorough ex ante evaluation has been carried out. The formal impact analysis attached to the Act consists only of the following brief monetary evaluations to the EHIF costs:


Impact (in mio. EEK; 1 mio. EEK = 64 tsd. EUR )







Primary care



Specialized care



Long-term care



Dental care




-61 (-3,9 mio. EUR)

-493 (-31,5 mio. EUR)


Expected outcome


Whereas the policy came into effect approximately four months ago (15 Nov 2009), not much statistical information is available and as far as health care reforms ordinarily show measurable outcomes and results only after a certain period of time, no concrete conclusions can be made about the impact of the policy. Nevertheless, some broader analytical assumptions can be drawn for three types of providers.

Specialized care

For specialized care providers, which are mainly hospitals, the policy foresees a significant financial impact - lowering the revenues by about 6 percent while leaving the volume of cases the same, hospitals may have to cut costs further. So far during the economic crisis, throughout the year 2009, hospitals have acted differently, but still, anticipating a cut in the EHIF budget, a common denominator can be regarded cost containment (both operating- and labour costs have been cut, also staff laid off). The uncertainty of the future has forced hospitals to cut salaries, make adjustments to payable services and implement additional fees. Fees like inpatient stay fee, specialized care out-of-pocket payment (Ida-Viru Hospital) and also parking fee (NEMC - North Estonia Medical Center) have been raised or put into use by the hospitals if not been used before. Some hospitals have broadened the selection of payable services (NEMC, East Tallinn Hospital) and one even reduced the prices of payable services (East Tallinn Hospital), in order to attract more patients.

The reduction of salaries of health care workers may affect the quality of care due to lower motivation which can initiate a further and more dangerous outcome. The emigration of doctors has been a critical topic in Estonia for many years, as up to five-fold difference in salaries for doctors and nurses in neighboring countries attract Estonian health care workers. The topic is becoming more acute in the light of the economic crisis and the impacts of the policy under discussion. The Health Board has already indicated the increased interest of doctors and nurses to work abroad.

Another long-term effect of the reduction of the specialized care revenue base is that lower income makes it difficult for hospitals to carry out impairments or acquire new medical equipment - this might also have an effect on the quality and level of care provided.

On the other hand, much of the previously mentioned effects depend on the content of service provision contracts for 2010 between hospitals and the EHIF. Recent developments have shown that smaller general hospitals have got contracts of much lower capacity than in the year 2009 (reduction of 7-11 percent), while bigger hospitals - regional and central hospitals - have been somewhat preferred (reduction of 3-5 percent and 4-7 percent accordingly). This development is economically reasonable, as the population of Estonia in rural areas is falling and also the efficiency of smaller hospitals is lower.

Little numerical data is available but some outcomes from the monthly financial information of public hospitals can be pointed out. The comparison of hospitals financial data of January - February 2009 and January - February 2010 shows that there has been a great decrease in the operating revenues of hospitals (see graphs 1 & 2).

The revenues of the selection of public hospitals have fallen significantly and it can be seen that a relatively bigger decline has affected general and local hospitals. The highest decrease of the revenues of NEMC can be, in addition to the policy and budget cuts, also a result of lower care utilization in the first months of the year and the closing of the Keila department. The lowest decrease in revenues (4 percent) has been in the case of Tartu University Hospital and East-Tallinn Hospital. Although there can be some changes in revenues due to financial periodizing differences between years, the results nevertheless give an overview of the impact of the policy on Estonian hospitals in the first two months of the year. It should be also pointed out that on average the decrease of payroll expenses is 8.5 percent and the decrease in operating expenses 9.5 percent  in January - February 2010 compared to January - February 2009. The last being probably mostly the result of cost-containments made by hospitals during the year 2009.

Primary care

Since family physicians receive up to 27 percent of revenues from the EHIF on the basis of fee-for-service prices, on average the revenues could fall in 2010 up to 2 percent. Furthermore, as more than half of the revenue comes from capitation payments (fixed fee per patient), the decreasing number of insured citizens (the number of insured people fell almost by 5000 people during year 2009) makes the situation even harder. This could result in cuts of salary of primary care workers (physicians, nurses and other staff), and drawbacks in quality of care are also probable.

Long-term care

Imposing a 15 percent out-of-pocket payment for long-term care services in the beginning of January 2010 might also have an impact on hospitals' revenues (most hospitals provide long-term care), as the low purchasing power of patients will probably lead to a reduced volume of long-term care utilization, thus decreasing providers' revenues. The broader impact of that part of the act should be discussed in greater depth, as long-term care and nursing care have relatively small volumes in Estonia and thus need more attention in terms of impact on patients, care providers, accessibility and quality.

Dental care

Dental care is EHIF-funded only for people under the age of 20, thus the impact of the policy for dental care providers should be rather small (most of the revenues for dental care come from the private sector). The exact number is still hard to anticipate, as there is no adequate statistical information about dental practices' financial situation in Estonia.

Assessment of the policy in the light of a possible Euro adoption

Although joining the Eurozone as a strategic goal is regarded highly possible by now, no thorough impact analysis has been made so far by the government for the plan of cutting costs in order to achieve the target. Nevertheless, many politicians and economists expect foreign investments to rise, which might result in creating new jobs and a somewhat faster decrease of unemployment.

From the health-care point of view, more jobs result in more social security tax payers and an increase in tax accrual results in a rise of the EHIF revenues. On the other hand, the long-term costs of adopting the Euro at the account of social benefits and health care services provision will become clearer in some years - a rise in diseases that are sensitive to long-term unemployment and increased risk-behaviour could be expected.

It should be also pointed out that most social sector entities can cut expenditures during a crisis without demolishing the system for a longer period, whereas the health sector is more fragile and the true impact of changes can result over a very long period.  

While acute budget cuts can be justified in the time of crisis, it does not neccessarily solve the long-term fiscal sustainability problem of the Estonian health care system. If difficult decisions to reform the whole system are not made in such circumstances, it may hamper the success of future inevitable choices on how to finance the system. Yet, the sustainability of Estonian health-care financing has been put under doubt by many local and international experts and such a conclusion is not disputed by any stakeholder group.

Impact of this policy

Quality of Health Care Services marginal neutral fundamental
Level of Equity system less equitable system less equitable system more equitable
Cost Efficiency very low very high very high

As far as the policy of reducing EHIF purchase prices by 6 percent is short-term (lasting from 15 November 2009 till 31 December 2010), it might not have a direct effect on the quality of care. However, as low public expenditure on health care has been a cause of low motivation of health-care workers, it might lead to even higher emigration, as there is a shortage of health care workers in several neighbouring and farther European countries. Under the assumption that more qualified workers have a possibility to get work abroad - the quality of care in Estonia will be affected. As higher cost-efficiency is basically the goal of the policy under discussion, its impact on that indicator is rated very high. The system can be regarded a bit less equitable, as extra fees are not in favor of families with financial difficulties.


Sources of Information

  • Koppel A, Kahur K, Habicht T, Saar P, Habicht J, Ginnenken E. Estonia Health system review. Health Systems in Transition 2008.
  • Sarah Tomson, Andres Võrk, Triin Habicht, Liis Rooväli, Tamás Evetovits and Jarno Habicht. Responding to the challenge of financial sustainability in Estonia's health system 2010.

Author/s and/or contributors to this survey

Priit Kruus, Ain Aaviksoo

Suggested citation for this online article

Priit Kruus, Ain Aaviksoo. "Shifting the costs of budget cut onto providers". Health Policy Monitor, April 2010. Available at