The Crisis of Russian Health Care and Attempts at Reform

by Boris A. Rozenfeld [1]


A search for new forms of development in all spheres of public health care and health promotion is currently being conducted in Russia. Accordingly, the understanding of health as a socially significant aspect of well-being is becoming widely recognized, and the importance of preventive care in individuals' value systems has increased.

Simultaneously, negative trends are developing in this sphere, specifically, in health indices and in the health care system. Uneven development of the health care system has become more apparent, and popular dissatisfaction with medical personnel and the quality of delivered services has grown.

Origins of the Current Crisis

The crisis in Russia's health care system has continued for a number of years. Despite the large number of hospitals and a huge army of medical doctors, they been unable to provide people with an acceptable level of health care services. This is mainly due to a continued lack of funds, medical and technical equipment and supplies, and, finally, to the ineffective organization of health care delivery services. As a result, the quality of services and their accessibility remains quite low.

The recent economic crisis did not create the crisis in the health care system, but it did exacerbate it. The lag in health care in Russia has accumulated over many years. The health care system was distorted by a perception of it as a set of social services that may be provided in greater or smaller amounts in response to certain circumstances, but not linked to the real state of health in the population.

All previous attempts to reform Russia's health care system may be seen as various tactical approaches that did not affect the principal problems or the overall strategy in the field. Many of Russia's health care problems have been rooted in the accepted political model of state-paternalistic social system development. From this approach follows an inattentive government attitude to the problems of health care, a reliance on primitive investment in extensive growth of health care delivery facilities, manpower, and other resources and supplies, and a lack of attention to the quality of care or its effectiveness in improving people's health. One of the characteristics of the Soviet period was the complete absence of incentives for improvement of services in all kinds of medical institutions.

The paternalistic approach manifested itself in the slogan, "The State cares for the health of its citizens," which in many ways defined the very character of medical service organizations across the country, as well as people's attitudes toward this sphere of policy. According to such an approach, every person is under the umbrella of the State and its medical facilities, which undertake entire responsibility for his or her health. In this way, a health care system was created which found itself fully dependent on the state and its governing bodies.

Of course, any state should bear some responsibility for the health of its citizens. But the ideological interpretation of such a principle and the propagandistic character of it in the former USSR led to the development of priorities such that quantitative measures and indices were considered most important. Indices such as volumes of services provided were considered sufficient indicators of growing state activity in public health protection and care.

Paternalism had many different features. This included an irresponsible attitude adopted by many people toward their health combined with consumption regardless of cost. But the consumer was also deprived of his right to complain about services rendered (often touted as "higher than established norms"), and he delegated fully to the state his right to defining consumption limits and needs in individual health care. The state took into its hands all manner of decision-making in the field, together with all methods of evaluating the effectiveness of state actions and their results.

When changes in the health of the population occurred at times, the health care system did not react properly. Excessive reliance on ideology led to goal distortion and emphasis on activities that did not correspond to the medical problems at hand, the level of national socio-economic development, medical capabilities, or public demand.

Current Policy Issues

Policies to resolve the above problems are still being sought. Issues considered extensively in scholarly journals, professional conferences, and the public media include the following:

  • the search for real goals for further development, de-ideologisation of the entire health care sphere;
  • democratization and enhancing the rights of health care providers and consumers of health services;
  • securing freedom from monopolistic dominance of central governing bodies; and
  • diversification of all kind of activities and development of new approaches to the delivery of services, including services provided on a fee-for-service basis.

A transition to the predominance of noninfectious diseases has not yet been completed and will require changes in health care strategies in Russia. But to reach this goal, such obstacles as general economic instability must be overcome, as that has undoubtedly fertilized the soil for growing morbidity and mortality in the Russian population. The same applies to the growth of operational difficulties in health care servicing.

In Russia, in comparison to other developed countries, the interconnection between the structure of pathology and the health care system's organizational and technological capabilities has increasingly deteriorated. This deterioration has generated long-term problems which are different from those in other countries and which, therefore, should be resolved independently.

The peculiarity of today's situation is characterized by the fact that the normal responses and progressive approaches to addressing problems of public health are not relevant. This impedes efforts to achieve the goals of the first epidemiological transition, i.e., to totally eradicate the occurrence of infectious diseases and epidemics, in order to concentrate manpower and financial resources on problems of life-span elongation and other goals of the second epidemiological transition.

The general basis for the situation described above is the attitude of policy makers who put the goals of health protection behind other "protected state priorities." Therefore, the health care system is, for the moment, financed just at the survival level. At the same time, with the above-mentioned changes in the structure of pathology requiring reorganization of the existing health care system and introduction of new medical technologies, diseases typical of previous periods of lower socio-economic development are still present. In the 1980s, this situation was considered temporary, but during recent years a decrease in life expectancy appeared[2] and may prove that the present situation has become the norm, at least for the near term.

More than in former years, prospects for the development of the health care system in Russia presently depend on whether they are linked to the management of medical enterprises, which are the first to sense all contradictions and problems of the reform period. Formerly, many different experiments were implemented in rather limited circles of medical caregivers and health care facilities, but the general conditions of medical care delivery to the broad population were not affected.

The following basic principles for reforming health care are widely accepted in Russia:

  • decentralization of management;
  • creation of a health services market;
  • multi-channeling of financial support for medical enterprises in order to attract additional reliable resources;
  • transition to a financing scheme under which payments depend on the quantity and quality of provided services;
  • introduction of obligatory medical insurance for the entire population; and
  • development of voluntary insurance schemes and "fee for service" (direct payment) for health care.

The Health Care Financing Crisis

Under present conditions of economic crisis, most medical facilities have given the highest priority to problems of lack of finances and financial instability. The initial reforms liberalized economic relationships and placed the health care system in a market environment. The entire health care system, being formerly financed by the federal budget, found itself in a very difficult situation--immersed in a market environment without the capacity to be an active member of that market.

Medical facilities at many different levels of the formerly hierarchical system have become deeply involved in the problems of day-to-day financing of their activities and have been frustrated by their inability to take the necessary steps towards achieving financial stability. This makes their prospects rather uncertain.

Left without proper funding, health care facilities were forced to cut off new construction, reconstruction, and other fundamental investments. In an effort to cut costs, they had to switch to simpler and cheaper technologies, which are insufficient to reach formerly attained levels of care. The available funds are spent on current needs only, particularly on salary payments, the amount of which constantly lags behind salaries in other industries. For example, the average salary of health care workers in 1994 was only 80 percent of the mean earnings for the average worker in Russia.

Medical organizations, first forced by necessity and later quite voluntarily, tried to take advantage of the situation to combine unusual sources of funding in order to obtain a reliable financial basis to start anew. For this purpose, they used residual state budget financing, revenue from other sponsors, etc., in attempts to identify a way (independently or with support of people with interests at stake, but of non-governmental origin) out of the complicated situation in which they found themselves. They tried to improve their situation by increasing commercial activities, providing more directly paid services for the population, renting some of their workspace to third parties, or depositing money in bank accounts to earn interest, etc. Sometimes they violated existing legislation, since many of the responsible persons did not possess proper legal knowledge or have relevant experience in bookkeeping, accounting, etc.

Left with insufficient financial support, many medical organizations tried to operate in the market economy independently, keeping in mind that such a transition was in general recommended as a strategic goal of the ongoing reform period. As a result, people now have to pay for services that yesterday they had received free of charge. In some cases, the charges for treatment have become very expensive. The growing number of directly paid services has created some possibilities for choice, but that is relevant to only the small proportion of the population that can afford the higher prices. To the remaining majority, conditions for obtaining medical care worsened. This process has not led to the creation of new supporting funds, but, on the contrary, has stimulated the irregular and often illegal usage of state institutions.

The uncivilized struggle for funds in an as yet under-developed market for health services has begun. This applies mostly to the charged services provided to people, the share of which, according to various recent evaluations, amounted to 5-20 percent of total funds available to medical organizations.

Emphasis on charging for services rendered (fee-for-services) together with the simultaneous cutting of government budget support to medical organizations has forced these organizations to restrict technological development and cut the more expensive services, which tend to be the highest quality services. Thus, as the share of charged services grows, the quality of care is becoming poorer. Hence, in actuality, the increasing share of charged services has led not to the widening of possibilities for most of the population, but to a decrease in the quality of services provided. This cannot be considered a goal of wise social policy.

Financing Shifts from Federal to Local Sources

One of the most important developments in health care financing is the shift of funding flows from the federal to the local level. Budgetary financing of health care is carried out mainly from local budget sources. This has put the organizations dependent on the federal budget in a complicated situation. Health care's share of the federal budget is relatively small, and has been steadily decreasing. In 1994 this share in the consolidated budget was 12 percent, while in 1990 it was approximately 20 percent.

The transfer of health care budgeting to the local level disrupted the former system, which had induced people to travel to specialized medical centers in other regions to get proper medical care. Nonresidential consumers are now required to pay for services rendered, and, as a consequence, there has been a distortion of the former system of transferring patients to regional centers for specialized care. The changes induced a kind of "atomization" of the health care system, following the process of territorial "sovereignization." The emerging incentives, then, are towards the inefficient approach of having all types of specialized care available in each administrative region.

The changes in financing have led not only to shifts in proportions of federal and local budgeting, but have also caused real shortages of funds (accounting for monetary inflation) at the federal level and have disrupted entirely the balance in the health care system. The federal facilities are still open (with some exceptions) to render services that cannot be provided by locally funded facilities. The best manpower is still concentrated in these federal facilities and, in many cases, the best technical equipment.

The better a medical center is equipped and the more advanced the technology it uses, the greater are the current expenses and the more difficult are the financial problems of such centers. Therefore, the most advanced centers, which had been financed from the federal budget, have been forced to speed up the introduction of charged services and to increase their share. Commercialized entities successfully selling services are, for the moment, concentrated in dentistry (including prosthetic dentistry), obstetrics and gynecology, and ultrasound and endoscopic diagnostics.

Innovative possibilities are imminent in the non-governmental sector, which arose on the basis of state property and, in many cases, was initially oriented around technological development. But this sector (and its potential for technological innovation) does not, and is very unlikely to, influence the general level of health care services for the broad population because it is oriented to its clients--foreign equipment and pharmaceuticals distributors. It exists as an autonomous element, separate from the whole system of health care.

While it should make use of the mainstream Western medical technologies, Russia should not put forward ambitious and unattainable goals and should ensure that costly, advanced technologies, domestic or imported, do not destroy the nation's health care system. Given the current state of the Russian economy, the presumption that health care expenses could be covered by private payers is obviously false. Such an orientation may in some way distort the medical system, especially in the absence of relevant marketing studies.

Fee-for-Service Financing

It is dangerous to overestimate the likely desire of the population for charged services. The demand for high quality services is not yet formulated, and family budgets are already heavily stressed by other financial pressures. This suggests that demand may be generally limited to the simplest and cheapest services and to those left still free of charge. The simultaneous restriction of supply and demand for medical services will in reality mean the degrading of the level of health care services.

As in other fields, the liberalization policy in general has not increased the demand for a greater volume and higher quality of health services. The mean price of services has increased (taking into account that the share of free services has diminished). Competition has not begun at all, and market relationships are still not sufficiently present. A domestically-focused market for medical technology and pharmaceuticals is still practically absent. Furthermore, underdeveloped individual initiative in seeking medical care, due to the long-standing habit of dependence on a paternalistic state health care system, and the lack of proper legislative regulations for practicing health care under the new economic conditions both play a role.

Hence, if one wants to conceive of social policy in health care only as maintaining a certain volume of medical care free of charge, and the remaining volume is considered in the fee-for-service sphere, then the most important part of care to the broader population would be reduced. In particular, modern technologies would be totally cut off from public (free) care, being left to develop in scattered medical institutions. The present, unified system may divide into two distinct parts: an elite one, using modern medical technologies and pharmaceuticals to render services to a rather small population group, and another part, providing hopelessly backward medicine for the rest of people.

Insurance Financing

As an instrument to push health care system reform further, the transition of medical organizations toward insurance principles of operations has been attempted. The legislative base for this transformation was created by issuing a state law on "Medical insuring of the citizens of the Russian Federation." The prospects and hopes for radical improvements in the health care system were linked to this document.

The principal issue of this law is the introduction of a system of obligatory insurance for all citizens of Russia, which should secure social guarantees of health care accessibility within the framework of its basic programs. The content of this program depends on the volume and structural characteristics of people's health care requirements and the resources available locally. Hence, this type of insurance is different from voluntary (private) insurance, also prescribed by that law, with the first type being a form of state social security.

To realize the state program of obligatory medical insurance, special federal and local funds were created in order to accumulate the necessary financial resources. The amount of obligatory payments to these funds by factories, enterprises, and other institutions are calculated as a percent of salaries paid to workers. The premium was established at 3.6 percent, of which 0.2 percent is to be paid to the federal level and 3.4 percent to the local level. Medical organizations are financed through local funds and their affiliated units. All such organizations must obtain local governmental licenses for their activities. By the end 1994, 86 local obligatory medical insurance funds were created, with more than 1,000 affiliated units. They began collaboration with about 300 insurers.

In principle, social guarantees promised to citizens in accordance with the above-mentioned law contribute to the improvement of the health of the population. The main focus of the legislation is the management of medical organizations, neglecting issues of programs for public health promotion. In spite of the legislation requiring the creation of the Obligatory Medical Insurance (OMI) system as of January 1, 1993, the results have so far not been encouraging because of the evident unwillingness on the part of health care organizations and the inability of many enterprises with low and negative profits to pay insurance premiums for their workers as is prescribed by the law.

The creation of a system designed to guarantee funds and resource accumulation could help the health care system if the proper management and controls can be organized. But this has nothing to do with the medical insurance system. Here the manner of obtaining resources has changed, but not the principles of medical management. In this case, no real incentives are present, and no real responsibility to the consumer exists either. The whole reform process, for the moment, is taking place in the financial field only; but the very idea of medical insurance concerns many other issues, such as the organization, management, and delivery of health care, and not only the payment mode.

The chosen model of OMI accepted recently in Russia violates the general principles of insurance and essentially serves to simply transfer money from the insurance funds, through insurance companies, and ultimately to the medical facilities without regard to the actual volume of services rendered. The OMI system functions presently, but not as a true insurance system because market conditions are still absent. This has stopped any increase in the effectiveness of medical care and the development of medical organizations.

Initially, the amount of government financial support for health had very little connection to the real volume and quality of services rendered, and there is little evidence that this pattern will soon change. The financial proposals for 1995 introduced a billing and payment system that only covered the direct costs of delivering services, and the newly prepared price lists for reimbursing expenses by insurance companies are often not even sufficient to cover current expenses, and do not include any expenses for facility maintenance, construction, or purchase of equipment.

In 1994, the multi-channel mode of financing, which was conceived by health care reformers, for the first time demonstrated some results. An emphasis was put on enlarging the number of financial sources and flows. The prioritization of state policies for health protection was temporally suspended, waiting for a resolution to the problem.

In this situation, the potential role of OMI funds seems to have increased. The money provided through OMI became a more reliable financing source than government budgetary allocations. This happened not only because these funds received more money from payers this year, but also because, at the same time, the budget expectations at both federal and local levels were not fulfilled and, therefore, this source of health care funding lost some of its reliability. But the OMI funds also didn't collect as much money as they expected. This was the case both for the working population (deductions from salary funds) and for the nonworking population (deductions from local budgets). In some cases, underfunding impeded the performance abilities of medical organizations. In 1993, only a few regions paid OMI premiums for nonworking people. But in 1994, after the first three months already 15 percent of all funds were collected through this source and in the second quarter another 18 percent was collected.

The creation of OMI mitigated and hid the effect of diminishing total government allocations for health care that the system needs to be viable. It was presumed that budget allocations would persist at a stable level and that premiums collected by OMI funds would be an additional surplus. But, in fact, all funds for health care need operate separately and are divided into two parts: the old (under government programs) and the new (under the insurance scheme). The second part immediately created their own bureaucracy, at the moment filled with large numbers of underqualified personnel.


As in the former system, the main state programs for improving the health of the Russian population are underfunded and suffer from lack of resources in general. No conditions can yet be foreseen for the reanimation of an effective preventive and curative health care system. Many famous medical research centers, especially on the federal level, are left without proper financial support. Progress in all spheres of health care is under great stress.

Attempts to seriously consider plans for such centers at the federal level are made in all projects and programs and in the framework of proposals for the OMI system. But, for the moment, they are not sufficient in the absence of a firm state policy for public health. The amount of money collected today by all local OMI funds is too little to finance larger goals and is sufficient only for supporting the most basic set of health needs.

Local OMI funds are mainly financing state-approved basic health care. OMI programs operated by medical enterprises are still owned by the state. Nongovernmental institutions are still rare, and the services offered by them are rather expensive and cannot be covered by limited OMI reimbursements. Voluntary insurance schemes can bear such costs only on the basis of a corresponding process of contracting such services by institutions.

The OMI funds currently are collected more effectively than taxes, with 80 percent of the amount planned by legislation collected. They provide important help to the health care system, but the established tariff level (3.6 percent from an enterprise's total salary amount) is still insufficient because of constantly diminishing budgetary support.

Hence, the introduction of insurance principles into medical organization financing has begun. Many rules and standards have been prepared or are under preparation, which could be accepted as a legislative basis for this field of activities. More than 50 percent of hospitals and about 70 percent of polyclinics have been licensed for medical insurance. But for the time being there are more problems than achievements.

Although it has provided a new source of funds for health care, the established premium amount (3.6 percent) alone does not provide a secure financial foundation for improving health care. The problem is that this has been accompanied by a reduction of state financial support, under the rationale of a faster transition to a market economy. Many stable subsystems which have a long history of successful functioning have been threatened by these changes. No real competition between medical organizations or insurance companies has appeared so far. Thus, the insurance schemes exist more as a wish than as practical realities. These conditions have led to many violations of existing rules and legislation.

There are many problems in the health care system that could not be solved simply by providing more funds. Current spending is insufficient; there are no clearly defined federal and local health protection policies, no effective programs for monitoring of results, and no openly declared system of control and delegation of responsibilities for state structures and public health institutions. Without these, additional funding is likely to have a negligible effect.

It is evident that the prospects for health care in Russia are directly interwoven with the nation's future socio-economic development. What happens in the future depends on the extent to which and by whom health care will be funded as a system--through the state budget, by special funds, or by people directly. Because this sphere of life is extremely important for the future of the nation, it would be very unwise to abandon a state-approved health protection and care policy now or in the future.

Discussants' Comments

Discussants: Paul Gertler, RAND; Dana Goldman, RAND; and Jack Molyneaux, RAND

Discussants of Dr. Rozenfeld's paper pointed out that the American health care system is fundamentally different from the Russian. In the United States, most health care is offered by the private sector while the public sector provides a safety net for the poor. The United States has a powerful and diverse private insurance industry. Moreover, current trends in the health sectors of the two countries are almost opposite: while in Russia the government attempts to offer more autonomy to health care providers and users; in the United States their autonomy is being limited by the proliferation of managed care. Nevertheless, the United States' experience, especially in the area of health insurance, can prove very useful to Russian reformers. Specifically, the American example of excessive consumption and skyrocketing costs of health care suggests that controlling utilization and costs is a crucial prerequisite for a sustainable health insurance scheme. The failure of the current U.S. administration's attempt to introduce compulsory health care coverage can also serve as an important lesson to Russian politicians who propose obligatory national health insurance.

Although different from the United States, the health care problems of Russia are not exceptional. Many countries that traditionally relied on the public health sector have suffered from a shortage and misallocation of resources, declining quality, and, as a result, worsening health conditions of the population. The design of health care reform in Russia, like in any other nation, must take into account both local peculiarities and international experience. As the examples of many countries show, a thorough analysis and crafting of all the reform components is essential; an ill-designed benefit package, hasty decentralization, and over-reliance on the private sector can only worsen the situation.


[1] Dr. Boris A. Rozenfeld is Head of the Laboratory for Long-Term Development of the Social and Cultural Sphere at the Center for Demography and Human Ecology, Institute for Economic Forecasting, Russian Academy of Sciences.

[2] See paper by Shkolnikov and Meslé in this volume.