The World Bank...BDMS Budget Development Management System . BPHS Basic Package of Health Services ....

Document of

The World Bank

FOR OFFICIAL USE ONLY

Report No: 82682-XK

INTERNATIONAL DEVELOPMENT ASSOCIATION

PROJECT APPRAISAL DOCUMENT

ON A

PROPOSED CREDIT

IN THE AMOUNT OF SDR 16.5 MILLION (US$25.5 MILLION EQUIVALENT)

TO THE

REPUBLIC OF KOSOVO

FOR A

KOSOVO HEALTH PROJECT (P147402)

April 10, 2014

Human Development Sector Unit Southeast Europe Department Europe and Central Asia Region

This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.

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CURRENCY EQUIVALENTS (Exchange Rate Effective: February 2014)

Currency Unit = US$ SDR 1 = US$1.54 Euro 1 = US$1.37

FISCAL YEAR

January 1 – December 31

ABBREVIATIONS AND ACRONYMS

ANC Ante Natal Clinic BDMS Budget Development Management System BPHS Basic Package of Health Services CA Credit Agreement CBK Central Bank of Kosovo CS Consultancy Services CPS Country Partnership Strategy CQS Consultants Qualification DALYs Disability Adjusted Life Years DC Direct Contracting DPs Development Partners ECA Europe and Central Asia EU European Union FM Financial Management GDP Gross Domestic Product GOK Government of Kosovo HFA Health Financing Agency HI/ HIF Health Insurance/ Health Insurance Fund HIFIS Health Information Fund Information System HIL Health Insurance Law HMIS Health Management Information System HNP Health, Nutrition and Population HQ Headquarters IBRD International Bank for Reconstruction and Development ICB International Competitive Bidding IDA International Development Association IDF Institutional Development Fund IFRs Interim Financial Reports IMF International Monetary Fund IMR Infant Mortality Rate IPF Investment Project Financing IPH National Institute of Public Health IRR Internal Rate of Return IT Information Technology LuxDev Luxembourg Development Cooperation KFMIS Kosovo Financial Management Information System MCH Maternal and Child Health MoF Ministry of Finance

MoH Ministry of Health MLGA Ministry of Local Government and Administration MoPA Ministry of Public Administration MoU Memorandum of Understanding MTBF Medium Term Budget Framework MTEF Medium Term Expenditure Framework M&E Monitoring and Evaluation NCDs Non Communicable Diseases NPV Net Present Value QCBS Quality and Cost Based Selection PCU Project Coordination Unit PDO Project Development Objective PEFA Public Expenditure and Finance Assessment PIFC Public Internal Financial Control PFM Public Financial Management PHC Primary Health Care PEMTAG Public Expenditure Management Technical Assistance Project POM Project Operational Manual PPA Project Preparation Advance OP Out patient OOP Out of Pocket QoC Quality of Care RPA Regional Procurement Adviser SAA Stabilization and Association Agreement SDC Swiss Development Cooperation SEE South Eastern Europe SI Sanitary Inspectorate SMC Senior Management Committee STA Single Treasury Account TVM Time Value of Money U5MR Under Five Mortality Rate UN United Nations UNICEF United Nations Children’s Fund VAT Value Added Tax VC Video Conference WB World Bank WHO World Health Organization

Regional Vice President: Laura Tuck Country Director: Ellen A. Goldstein

Sector Director (Acting): Alberto Rodriguez Sector Manager: Daniel Dulitzky

Task Team Leader: Aneesa Arur

REPUBLIC OF KOSOVO Kosovo Health Project

TABLE OF CONTENTS

Page

I. STRATEGIC CONTEXT .................................................................................................1

A. Country Context ............................................................................................................ 1

B. Sectoral and Institutional Context ................................................................................. 1

C. Higher Level Objectives to which the Project Contributes .......................................... 5

II. PROJECT DEVELOPMENT OBJECTIVE(S)..............................................................6

A. PDO............................................................................................................................... 6

B. Project Beneficiaries ..................................................................................................... 6

C. PDO Level Results Indicators ....................................................................................... 6

III. PROJECT DESCRIPTION ..............................................................................................7

A. Project Components ...................................................................................................... 7

B. Project Financing ........................................................................................................ 10

C. Project Cost and Financing ......................................................................................... 10

D. Lessons Learned and Reflected in the Project Design ................................................ 11

IV. IMPLEMENTATION .....................................................................................................11

A. Institutional and Implementation Arrangements ........................................................ 11

B. Results Monitoring and Evaluation ............................................................................ 12

C. Sustainability............................................................................................................... 13

V. KEY RISKS AND MITIGATION MEASURES ..........................................................14

A. Risk Ratings Summary Table ..................................................................................... 14

B. Overall Risk Rating Explanation ................................................................................ 14

VI. APPRAISAL SUMMARY ..............................................................................................14

A. Economic and Financial Analysis ............................................................................... 14

B. Technical ..................................................................................................................... 15

C. Financial Management ................................................................................................ 16

D. Procurement ................................................................................................................ 17

E. Social (including Safeguards) ..................................................................................... 17

F. Environment (including Safeguards) .......................................................................... 18

Annex 1: Results Framework and Monitoring .........................................................................19

Annex 2: Detailed Project Description .......................................................................................25

Annex 3: Implementation Arrangements ..................................................................................35

Annex 4: Operational Risk Assessment Framework (ORAF) .................................................50

Annex 5: Implementation Support Plan ....................................................................................55

Annex 6: Economic and Fiscal Analysis ....................................................................................58

Map IBRD 37048R

.

PAD DATA SHEET

Kosovo

Kosovo Health Project (P147402) PROJECT APPRAISAL DOCUMENT

.

EUROPE AND CENTRAL ASIA

ECSH1

Report No.: PAD849 .

Basic Information

Project ID EA Category Team Leader

P147402 C - Not Required Aneesa Arur

Lending Instrument Fragile and/or Capacity Constraints [ ]

Investment Project Financing Financial Intermediaries [ ]

Series of Projects [ ]

Project Implementation Start Date Project Implementation End Date

14-May-2014 30-Oct-2019

Expected Effectiveness Date Expected Closing Date

30-Oct-2014 30-Oct-2019

Joint IFC

No

Sector Manager Sector Director Country Director Regional Vice President

Daniel Dulitzky Alberto Rodriguez Ellen A. Goldstein Laura Tuck .

Borrower: Republic of Kosovo

Responsible Agency: Ministry of Health

Contact: Health Care Commissioning Agency

Title:

Telephone No.: +38138 21 22 23 Email: [email protected] .

Project Financing Data(in USD Million)

[ ] Loan [ ] Grant [ ] Guarantee

[ X ] Credit [ ] IDA Grant [ ] Other

Total Project Cost: 25.50 Total Bank Financing: 25.50

Financing Gap: 0.00 .

Financing Source Amount

BORROWER/RECIPIENT 0.00

International Development Association (IDA) 25.50

Total 25.50 .

Expected Disbursements (in USD Million)

Fiscal Year

2015 2016 2017 2018 2019 2020 0000 0000 0000

Annual 1.90 6.20 7.50 7.20 2.10 0.60 0.00 0.00 0.00

Cumulative

1.90 8.10 15.60 22.80 24.90 25.50 0.00 0.00 0.00

.

Proposed Development Objective(s)

To contribute to improving financial protection from health spending for the poor and quality of care for priority maternal and child health and non communicable disease services. .

Components

Component Name Cost (USD Millions)

Improving financial protection and quality of care 11.20

Strengthening primary care 12.50

Project management 1.80 .

Institutional Data

Sector Board

Health, Nutrition and Population .

Sectors / Climate Change

Sector (Maximum 5 and total % must equal 100)

Major Sector Sector % Adaptation Co-benefits %

Mitigation Co-benefits %

Health and other social services Health 100

Total 100

I certify that there is no Adaptation and Mitigation Climate Change Co-benefits information applicable to this project. .

Themes

Theme (Maximum 5 and total % must equal 100)

Major theme Theme %

Human development Health system performance 100

Total 100 .

Compliance

Policy

Does the project depart from the CAS in content or in other significant respects?

Yes [ ] No [ X ]

.

Does the project require any waivers of Bank policies? Yes [ ] No [ X ]

Have these been approved by Bank management? Yes [ ] No [ X ]

Is approval for any policy waiver sought from the Board? Yes [ ] No [ X ]

Does the project meet the Regional criteria for readiness for implementation? Yes [ X ] No [ ] .

Safeguard Policies Triggered by the Project Yes No

Environmental Assessment OP/BP 4.01 X

Natural Habitats OP/BP 4.04 X

Forests OP/BP 4.36 X

Pest Management OP 4.09 X

Physical Cultural Resources OP/BP 4.11 X

Indigenous Peoples OP/BP 4.10 X

Involuntary Resettlement OP/BP 4.12 X

Safety of Dams OP/BP 4.37 X

Projects on International Waterways OP/BP 7.50 X

Projects in Disputed Areas OP/BP 7.60 X .

Legal Covenants

Name Recurrent Due Date Frequency

Project Steering Committee (SC) X CONTINUOUS

Description of Covenant

The Recipient shall, not later than 60 days after effectiveness of the Project, set up and maintain throughout implementation of the Project, a Project Steering Committee with a composition of staff, mandate, terms of reference and resources satisfactory to the Association.


Senior Management Committee (SMC) X CONTINUOUS


The Recipient shall maintain throughout implementation of the Project, the SMC, with the composition comprising among others directors of the relevant departments in the MoH with terms of reference and resources satisfactory to the Association.


Performance Agreements X CONTINUOUS


In implementing Part B of the Project, the Recipient shall ensure that MoH enters into an agreement (“Performance Agreement”) with each Participating Municipality, satisfactory to the Association.


Independent Technical Audit X Yearly


The Recipient shall carry out through MoH on an annual basis Independent Technical Audits; provide reports of Independent Technical Audits to the Association and promptly implement any recommendations resulting from the Association’s review of said reports as the Association may request from time to time.


Annual Work Plan and Budget X Yearly


The Recipient shall through MoH prepare and furnish to the Association not later than November 15 of each Fiscal Year during the implementation of the Project, an Annual Work Plan and Budget containing all activities proposed to be included in the Project during the following Fiscal Year and a proposed financing plan for expenditures required for such activities.


Memorandum of Understanding 30-Dec-2014


In implementing Part B of the Project, the Recipient shall, not later than 60 days after the effectiveness of the Project, ensure that MoH enters into a Memorandum of Understanding (MoU) with MoF, satisfactory to the Association to outline the obligation of each agency with respect to the Capitation Payments scheme.


Capitation Performance Payments Manual Adoption

X CONTINUOUS


The Recipient shall not abrogate, amend, suspend, terminate, waive or otherwise fail to enforce the Capitation Performance Payments Manual and MoU or any provisions thereof without the Association’s prior approval in writing. .

Conditions

Source Of Fund Name Type

IDA Project Coordination Unit (PCU) Effectiveness

Description of Condition

The Recipient has established a Project Coordination Unit and recruited staff with qualifications and experience under terms of reference, and with resources satisfactory to the Association.


IDA Project Operational Manual Effectiveness


The Recipient has prepared and adopted, in form and manner a Project Operational Manual satisfactory to the Association.


IDA Capitation Performance Payments Manual Disbursement


No withdrawal shall be made under Category 2 (Capitation Payments under Component 2 of the Project) unless the Recipient has prepared and adopted a Capitation Performance Payments Manual satisfactory to the Association.


IDA Performance Agreement with Participating Municipalities

Disbursement


No withdrawal shall be made under Category 2 (Capitation Payments under Component 2 of the Project) unless the Recipient through the MoH has: (i) prepared and adopted developed a Capitation Performance Payments Manual satisfactory to the Association; and (ii) entered into a Performance Agreement, satisfactory to the Association with the respective Participating Municipality.

Team Composition

Bank Staff

Name Title Specialization Unit

Johanne Angers Senior Operations Officer

Institutional Arrangements

ECSH1

Kashmira Daruwalla Senior Procurement Specialist

Procurement ECSO2

Annie A. Milanzi Information Specialist Project Document Processes

ECSHD

Nightingale Rukuba-Ngaiza

Senior Counsel Legal Counsel LEGLE

Jose C. Janeiro Senior Finance Officer Disbursement Arrangements

CTRLA

Zlatan Sabic E T Consultant Information Technology ECSH1

Andreas Seiter Senior Health Specialist Pharmaceutical sector HDNHE

Bekim Imeri Social Scientist Safeguards ECSSO

Aneesa Arur Public Health Spec. Task Team Leader ECSH1

Flora Kelmendi Senior Operations Officer

Operations ECSH2

Jonida Myftiu Financial Management Specialist

Financial Management ECSO3

Kate Mandeville Young Professional Public Health and M&E ECSH1

Marvin Ploetz Junior Professional Associate

Health Economist ECSH1

Non Bank Staff

Name Title Office Phone City

.

Locations

Country First Administrative Division

Location Planned Actual Comments

1

I. STRATEGIC CONTEXT

A. Country Context

1. Kosovo remains one of the poorest countries in Europe although there have been considerable gains in poverty reduction thanks to sustained economic growth. The Republic of Kosovo has experienced five consecutive years of economic expansion, growing 4.5 percent per year on average since 2008. The headcount poverty rate in Kosovo fell from 45.1 percent in 2006 to 29.7 percent in 2011, but remains high. The low estimated employment rate of only 25.5 percent and the high unemployment rate of above 30.9 percent have contributed to poverty and income insecurity.

2. Kosovo has managed to maintain healthy public finances, but legislative and financing constraints limit the scope for expansionary fiscal policies. Fiscal deficits in 2011 and 2012 were 1.9 and 2.7 percent of GDP, respectively, leaving Kosovo with a public debt-to-GDP ratio of 9 percent. Kosovo’s euroized economy is better positioned than most countries in the region and the maximum public debt-to-GDP ratio is fixed at 40 percent by law. In 2012, Kosovo secured support from the International Monetary Fund (IMF) for a 20-month, €107-million Stand-By Arrangement. Still, Kosovo’s unresolved status issue remains a key barrier to achieving political integration and socioeconomic development. However, the EU has determined that there are no legal obstacles for Kosovo to open negotiations for a Stabilization and Association Agreement (SAA), making Kosovo a potential candidate for EU membership.

B. Sectoral and Institutional Context

3. Kosovo has some of the worst health outcomes in Europe; Maternal and Child Health, respiratory conditions and circulatory diseases are key health priorities. Life expectancy at birth in Kosovo is 70.2 years1, which is 10 years lower than the European Union (EU) average of 80.2 years. The latest available estimates suggest an Infant Mortality Rate (IMR) of 9-11 per 1,000 live births2. These IMR levels are double the EU IMR of 4.1 per 1,0003. Moreover, these figures are based on routine reporting and there is a high likelihood that they are under-estimates4. Perinatal and respiratory conditions including Tuberculosis are among the top causes of mortality across the population as a whole5 while perinatal causes, respiratory conditions and diarrhea account for the main causes of infant mortality6. As is the case with other

1 World Development Indicators 2013. 2 National Institute of Public Health of Kosovo, 2012. 3 International country comparisons suggest that Kosovo performs better than countries at its income level in terms of infant and maternal mortality. However, since these figures are based on routinely reported data which are likely under-estimates of mortality, the extent to which Kosovo outperforms its income comparators is not clear. 4 By comparison, UNICEF, for instance, estimates an IMR of 33-49 per 1,000 live births and a U5MR of 69 per 1,000 live births, although these are based on older data UNICEF, downloaded from http://www.unicef.org/kosovo/children.html. Reliable and recent survey data from neighboring Albania (Albania DHS 2011) indicates considerably higher IMR and U5MR in Albania, which is likely to have similar or better mortality levels. 5 National Institute of Public Health of Kosovo 2013. 6 UNICEF, downloaded from http://www.unicef.org/kosovo/children.html

http://www.unicef.org/kosovo/children.html

2

countries in the region, Non Communicable Diseases (NCDs) are an emerging priority and circulatory disease is already a major cause of morbidity and mortality7.

4. Emerging epidemiologic patterns indicate that preventing and managing risk factors for NCDs at the primary care level will be critical to improve health outcomes and financial sustainability of the Kosovar health system. Although data on service delivery for NCDs in Kosovo is limited, data from the ECA region suggest highly probable gaps in the delivery of population-based services to prevent and manage risk factors for NCDs like cardiovascular disease. Improving health results for key risk factors like hypertension and high cholesterol in Kosovo will likely require expanded coverage of health education, counseling and testing services at primary care combined with improved financial access to anti-hypertensive drugs and statins. Experience in the region, and elsewhere, also highlights the importance of strengthening primary care and its gatekeeping role in the context of health insurance.

5. Total health expenditure and the health share of the government budget in Kosovo are low relative to regional and GDP per capita comparators, indicating the need to increase public spending on health. The Government of Kosovo’s spending on health was 2.6 percent of GDP in 20128 and health accounted for approximately 9 percent of total government spending in 2012. These are below the average for South Eastern Europe (SEE) and the EU average, which in 2011 were approximately 13 percent of general government spending and 5 percent of GDP, and among the lowest in Europe. Furthermore, analyses show that in 2011 health spending in Kosovo was below global averages for per capita GDP comparators indicating that there is a strong case for increasing public spending.

6. Partly as a result of limited public spending on health, Out of Pocket (OOP) spending is high and contributes to impoverishment. OOP spending at the point of service accounted for about 40 percent of total spending on health in 20119. According to the WHO, countries with OOP shares below 15-20 percent of total health spending are typically able to assure financial protection from health expenditures for their populations, which suggests that Kosovo fails to meet the WHO’s macro criterion for financial protection. The high OOP spending contributes to impoverishment in Kosovo with an estimated 7 percent increase in the poverty headcount associated with health OOP payments10.

7. Drugs account for a large share of OOP spending, and making them more affordable is essential to improve quality of care and health outcomes. Public spending on pharmaceuticals is very low – approximately US$16 per capita per year in 201211. The implications of a limited budget are compounded by weak procurement systems. As a consequence outpatients visiting public health facilities typically leave with a prescription for drugs that are then purchased at a private pharmacy and paid for in cash. This results in high OOP spending on drugs and supplies which account for 85 percent of OOP spending.

7 National Institute of Public Health of Kosovo 2013. 8 Ministry of Economy and Finance, Republic of Kosovo. 9 Estimates based on Household Budget Survey 2011. 10 Estimates based on the Household Budget Survey 2011. 11 In comparison, Turkey, which has fairly good coverage for pharmaceuticals, spent roughly US$110 per capita per person in 2010.

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8. Shortages in drugs and supplies at health facilities simultaneously increase OOP spending, depress use − through poor perceived quality of care − and result in poor outcomes for those who do use care. Essential medicines, especially injectables, are lacking in the Primary Health Care (PHC) sector. At the tertiary level, as well, only 20 percent of medicines were available12.

9. Drugs and supplies are not the only constraint to improving quality- improving provider practices will be essential to improve outcomes; this will require better incentives, skills and other quality improvement interventions. In general coverage for essential MCH services is relatively high but gaps in quality of care for those who receive services remain a constraint to improving health outcomes. To illustrate, although coverage for Ante Natal Care (ANC) is quite high with over 77 percent of pregnant women receiving 4 or more ANC visits, only about a fifth received ANC in the first trimester13. Over a third of women who got ANC did not undergo basic examinations and check-ups. Communication and counseling on danger signs and healthy behaviors was especially weak. Less than half of ANC clients were informed about problems during pregnancy or counseled on using preventive medication. While clinical guidelines and protocols for many conditions have been developed, adherence tends to be poor with limited quality oversight or support, and poorly functioning referral systems. Furthermore, provider knowledge and skills may be an important underlying concern. With the deterioration of the situation in Kosovo during the 1990s the quality of education suffered as education was provided through a parallel system, and this had an impact on the quality of medical training as well.

10. Fragmented responsibilities for primary and secondary care combined with line item budgets do not offer adequate incentives to improve quality of primary care services and expand coverage of cost-effective preventive care services. The Ministry of Health (MoH) is responsible for hospital care in Kosovo, while Municipalities are responsible for primary care service delivery and receive a capitation-based grant for service delivery from the Ministry of Finance (MoF). This fragmentation in responsibilities and financing makes oversight of primary care services by the MoH difficult in the absence of appropriate incentive structures and co-ordination mechanisms. Provider payments from Municipalities to primary care facilities are based on line item budgets, and do not offer strong incentives to focus on improving quality of care or to expand cost-effective preventive services that could lower hospital costs.

11. The proposed mandatory health insurance scheme could improve financial protection, particularly for the poor, and raise additional revenues to increase public spending on health. The MoH has begun a comprehensive health sector reform to address these concerns. The cornerstone for these reforms is the introduction of a mandatory health insurance system. A Health Insurance Law (HIL) that provides the legal basis and overarching design for the proposed mandatory health insurance system was passed by Parliament on April 10, 2014. An autonomous Health Insurance Fund (HIF), to be created under the HIL, will be responsible for implementing the mandatory health insurance system including collecting insurance revenues, purchasing services and monitoring and oversight of service delivery. An agency within the MoH, the Health Financing Agency (HFA), is currently responsible for purchasing health

12 UNICEF. 2013. Maternal and Child Health in Kosovo: A way forward. 13 UNICEF. 2013. Quality of Ante Natal Care… now and then.

4

services. The HFA within the MoH will initially be responsible for implementing health insurance functions and will transition into the HIF which will take on the responsibility of implementing mandatory health insurance from the MoH under the Health Insurance Law. As presented to Parliament for ratification, the HIL introduces a mandatory health insurance scheme which will cover a Basic Package of Health Services (BPHS) at primary care facilities and hospitals. Insurance premiums will be defined as a payroll tax set at 7 percent – split equally between employer and employee – for public sector employees and formal private sector employees14. Family members of insured individuals in the formal sector will be automatically covered. All other non-exempt individuals will be required to pay a flat amount monthly premium of € 3.50. The HIL also includes robust protections for the poor and vulnerable groups. The poor, identified through one of the best-functioning administrative systems in the region, will be exempt from premiums and any cost-sharing. Furthermore, within the BPHS a sub-set of services, including emergency care, services for uninsured children and essential public health services are guaranteed to all. Depending on levels of enrollment among individuals employed in the informal sector and their families, the estimated additional net – i.e., after the additional costs of implementing health insurance − revenues per year are projected to be in the range of € 31 million to € 71 million in the first year of premium collection15.

12. The MoH plans to introduce an outpatient (OP) drug benefit as part of the mandatory health insurance scheme to reduce OOP spending on drugs among the insured. Currently, the majority of outpatient drugs prescribed to patients in primary care have to be purchased in a private pharmacy and paid for by patients in cash as public sector facilities have stock-outs. By contrast, the supply chain to private pharmacies appears to be robust: 4-5 major wholesalers supply most retail pharmacies which are well-stocked and serve patients who are unable to get the drugs from public facilities. The proposed OP drug benefit will enable patients with a prescription from public sector facilities to obtain drugs included in the OP drug benefit package from contracted private pharmacies. The future HIF will reimburse contracted pharmacies for covered drugs at a pre-negotiated rate. The OP benefit is expected to considerably expand access to drugs among the insured, and specifically among the poor. The poor, who are exempt from premiums and other cost-sharing contributions for health services, will gain access to OP benefit package drugs with no copayments, while the non-exempt will be subject to copayments to be set by the HIF. Copayment policies will regulate the demand for drugs, and will take into account potential net benefits from lowering or eliminating copayments for high public health impact drugs, such as anti-hypertensives or statins to manage NCD risk factors. Under the HIL, the proposed OP drug benefit will be funded through health insurance net revenues and drugs included in the package will be expanded as insurance revenues expand. The OP drug benefit will be introduced in a phased manner, starting with an initial publicly funded pilot.

13. The mandatory health insurance reform also creates an opportunity to improve quality and expand coverage of priority primary care services− if the right incentives are

14 Operationalized in the draft HIL presented to Parliament as individuals working in Value Added Tax (VAT)-registered private sector firms with an annual turnover of 50,000 euros or more. 15 These estimates are net of administration costs for the HIF and both the premiums for exempted groups and public sector employees. The estimate varies widely depending on the final parameters of the mandatory health insurance scheme, including contribution rates, exemption categories and administration costs. Initially, administrative costs for the health insurance scheme are expected to be relatively low as the Health Insurance Fund will continue to pay contracted health facilities based on line item budgets and gradually make the transition to activity-based payment mechanisms.

5

created through performance-based purchasing mechanisms. The success of the mandatory health insurance reform depends critically on well-functioning primary care services both to improve enrollment among individuals who work in the informal sector, and to assure the financial sustainability of the health insurance system. Recognizing this concern, the HIL also enables the HIF to enter into performance contracts for primary care, which would be funded through net health insurance revenues. These performance contracts are a tool to incentivize improvements in quality of care and coverage for priority primary care services. Since primary care services will continue to be funded through the Specific Health Grant from the MoF to Municipalities, performance contracts could give the HIF leverage over service delivery and outcomes at the primary care level. While creating the right incentives is essential, investments to improve provider capacity to respond to these incentives – through training, implementation of clinical guidelines and pathways, and information systems support – will be a key link in the chain to better health outcomes.

14. The proposed reforms have the potential to transform the health sector in Kosovo and address the main health sector constraints to improving financial protection and health outcomes. Experience from other countries indicates, however, that implementing these reforms successfully will require considerable institutional capacity and investments in systems to support implementation along with strong health sector oversight and monitoring.

C. Higher Level Objectives to which the Project Contributes

15. The main objectives of the Country Partnership Strategy (CPS) 2012-2015 (Report No. 66877-XK) of May 1, 2012, are to support Kosovo to: (i) accelerate broad-based economic growth and employment generation; and (ii) improve environmental management. The CPS recognizes health as a priority citing the low health outcomes in Kosovo, and highlights the need for major investments in quality of basic health care services. The Project is not, however, included in the list of proposed lending in the CPS due to constraints in the lending envelope for Kosovo at the time of the CPS. However, IDA resources became available subsequently to support a health sector project in FY14, and the Project directly addresses the health concerns identified in the CPS.

16. The Project is also directly aligned to the Government’s health sector reform strategy and will support the implementation of the Government’s reform agenda. This reform agenda is far-reaching and the mandatory health insurance reform proposed has the potential to transform the Kosovar health sector by raising more revenues for the health sector and presents an opportunity for purchasing reforms to improve both quality of care and the efficiency with which the limited resources are used. Legislative changes to facilitate these reforms are at an advanced stage. The Health Law, which was passed in December 2012, enables the implementation of the planned performance purchasing reforms, and a Health Insurance Law, which provides the legal framework for a mandatory health insurance scheme, was passed by Parliament on April 10, 2014.

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II. PROJECT DEVELOPMENT OBJECTIVE(S)

A. PDO

17. The proposed Project Development Objective (PDO) is to contribute to improving financial protection from health spending for the poor and quality of care for priority maternal and child health and non communicable disease services.

B. Project Beneficiaries

18. The Project’s main beneficiaries would be the population of Kosovo who will benefit from: (i) increased financial protection from health care expenses; and (ii) improvements in the quality of primary health care and hospital services. It is anticipated that the poor in Kosovo, identified through proxy means testing, will be a specific beneficiary group for the Project since the HIL is expected to exempt the poor from health insurance contributions and any cost-sharing for health care or drugs covered under the HIL. Women and children will also benefit from the Project as the MoH plans to prioritize improvements in quality of care for MCH services. Special attention will be given to reach underserved populations, including the Roma, through capitation-based performance payments to improve primary care service delivery in areas with Roma populations. Health sector stakeholders would also benefit from capacity building and other support provided under the Project. These stakeholders include: Municipalities, health facilities and providers at these facilities. Finally, the private pharmaceutical sector could also benefit from the Project as public spending on drugs could increase.

19. Gender. The Kosovo Health Project is gender-sensitive and addresses many gender-related aspects of health care, including maternal and reproductive health services for women at the primary care and hospital levels. Performance incentives to improve primary care service delivery will motivate improvements in quality and coverage for MCH services for women. The Project will support improvements in quality for MCH services across levels of care, in line with the MoH’s priorities, and will also fund equipment to provide improved MCH services. In addition, the Project will strengthen results monitoring by the purchasing agency – initially the HFA and subsequently the future HIF. These results indicators for purchasing will be disaggregated by gender.

C. PDO Level Results Indicators

20. The PDO indicators are as follows: • Percentage of the poor who are enrolled in mandatory health insurance; • Outpatient drug benefit scheme established and functional based on pre-defined

operational criteria; and • Percentage of participating municipalities where at least 75 percent of the agreed quality

targets were achieved in the preceding one year.

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III. PROJECT DESCRIPTION

A. Project Components

The Project will include the following three components: Component 1: Improving financial protection and quality of care (US$11.2 million equivalent)

21. This component will build institutional capacity to implement health sector reforms to improve financial protection and quality of care. It will finance capacity building and goods, services, training, and equipment to support the design and implementation of effective reforms, communications to manage the reforms, monitoring and evaluation of the reforms and upgrades of health information systems, including capacity building activities. Sub-component 1.1: Improving financial protection (US$4.8 million equivalent)

22. The main policy tool through which the proposed Project seeks to improve financial protection is the introduction of mandatory health insurance. The HIL provides the legal basis and overarching policy direction to the proposed mandatory health insurance system. Under the HIL, an autonomous HIF will be in charge of implementing mandatory health insurance on behalf of the state. Before the HIF is established and functional, the HFA in the MoH will be responsible for implementing mandatory health insurance during a transition period. The activities proposed under this sub-component will support the HFA in the MoH, and, once established, the HIF, to develop and implement critical functions and systems for the mandatory health insurance scheme. 23. This will include the following activities: (i) Support to finalize policy, regulation, and operational systems design; (ii) Building capacity to implement mandatory health insurance through training of HIF, HFA, University Clinical and Hospital Services staff and facility staff, twinning arrangements with well-functioning HIFs, study tours and secondments of experienced HIF personnel to the HIF in Kosovo. The capacity building plan will be developed in tandem with the plan for the expansion of the scheme; (iii) Investments into information systems to support the implementation of mandatory health insurance, including the purchase of Diagnosis Related Groups (DRG) software; (iv) Support to the MoH to develop design parameters for an outpatient drug benefit system, including parameters for contracting outpatient pharmacies, and to build capacity to establish and implement a benefit management system; and (v) Support to the MoH to design and implement communications activities to inform the public about their rights and responsibilities under the reform and gather public feedback. Communications activities will also include support to design and develop communications activities for health sector stakeholders, including MoH and health facility staff.

Sub-component 1.2: Improving Quality of Care (US$6.4 million equivalent) This sub-component includes three main sets of activities to improve quality of care across the health system.

8

24. Improving Quality of Care (QoC). This sub-component of the proposed Project will finance investments in priority MCH equipment for primary care facilities and hospitals, and the development of a maintenance system for existing equipment at primary care facilities and hospitals. In addition, it will also support training of key actors to implement the National Quality of Care Strategy with a specific focus on training for Quality Coordinators, who are current focal points for implementing quality of care initiatives at the primary care and hospital level. Directors of Health and Social Welfare, who have responsibilities for primary care in municipal government, will also be given training in managing performance agreements. This sub-component will also support quality-related training for the newly created Professional Service Line administrative units. The Professional Service Line administrative units are advisory bodies within the University Clinical and Hospital Services responsible for making recommendations on quality-related issues and for improving the integration of health services across levels of care.

25. Strategic purchasing of primary care services. Activities in this area seek to improve access to and quality of priority services at the primary care level, including MCH and NCD services by building the capacity of the HFA, and its successor, the HIF, to enter into performance agreements to purchase improvements in primary care services with Municipalities. It is anticipated that performance incentives created through these performance agreements will incentivize facility staff to improve physical access to incentivized services and increase quality of care. Activities under this sub-component will support the MoH and HFA/ HIF to design, and build capacity to implement performance purchasing agreements with Municipalities including training for HFA, Municipality and health facility staff. This sub-component will also finance an annual independent technical audit to be implemented by a firm to verify the number of beneficiaries, whether the targets in the performance agreements have been achieved and whether payments made under the performance agreements were calculated correctly.

26. Cross-cutting investments in Information Systems. The Project will finance the following investments in information systems to improve QoC: (i) Development of an E-health Development Framework to provide a long-term framework for policy making, regulation, data quality management, implementation management and operations of information systems in health care in Kosovo; (ii) Development and implementation of data analytics and reporting systems for the Institute of Public Health (IPH) so that timely analyses of health sector data are available for decision making and oversight in Kosovo. This will include the development of a reform scorecard and the generation of periodic performance reports for health facilities; and (iii) Support to develop and implement an e-prescription system with modules for health facilities, HIF and pharmacies to provide accurate and timely information on the prescription and dispensing of drugs and medical supplies. Component 2: Strengthening primary care (US$12.5 million equivalent) 27. This component seeks to improve access to and quality of priority services at the primary care level, including MCH and NCD services, and therefore, to contribute to enhancing the sustainability of the mandatory health insurance reforms and improving population health outcomes. The component will finance capitation payments linked to performance. It is anticipated that these capitation payments conditioned on performance will strengthen incentives to improve access to and the quality of priority primary care services. Within the MoH, the HFA

9

will be responsible for managing the capitation payments. Once the HFA transitions its functions to the HIF, the HIF will be responsible for managing capitation payments and will take over the HFA’s role in the institutional arrangements related to the implementation of this component. Ultimately, it is envisaged that these payments will be financed through health insurance net revenues via performance agreements between the HIF and Municipalities, or directly between the HIF and primary care facilities. The Project may finance a proportion of these capitation payments up to the end of Project, with Project financing tapering off by year 3 as the revenues mobilized by the HIF increase and can be channeled to purchasing primary care services strategically. This component would cover all Municipalities in Kosovo, although implementation will be phased and Municipality participation may be voluntary. 28. The capitation payment linked to performance will cover only incremental expenditures required to improve access to and quality of primary care services, and has been determined to be an initial average amount of € 2.4 per capita by the MoH16. As this is an average cost, it may be adjusted for the specific circumstances of individual Municipalities (for instance, remote areas would require more per capita resources) by the HFA in negotiations with individual Municipalities.

29. The MoH will enter into a Memorandum of Understanding (MoU) with the MoF outlining the responsibilities of each with reference to capitation-based performance payments. The MoH will enter into annual renewable performance agreements with Municipalities, and, once established, the HIF. Within the MoH, the HFA will be responsible for managing capitation payments linked to performance made to Municipalities. The HFA will also agree with each participating Municipality on annual performance goals for each of the indicators to ensure that progress is achieved each year. For every performance indicator, an annual target will be defined in the performance agreement. Two distinct mechanisms will be implemented to verify the number of participants receiving services and the achievement of the performance goals. On one end, the MoH, through the HFA, will monitor and evaluate the services delivered by the Municipalities as part of its essential public health functions and report the application of incentives and, if relevant, sanctions. This will be done on a rolling basis throughout the fiscal year. In parallel, the Project will finance (through Component 1) annual independent technical audit, carried out by a firm, which will validate the number of beneficiaries receiving services, the achievement of the performance targets, and whether capitation-based performance payments made to Municipalities were calculated correctly. A ‘capitation performance payments manual’, which will outline the standard operating procedures for implementing this component, will be developed under sub-component 1.2. This manual will be a disbursement condition for funds under this component. 30. Implementation of component 2 will be phased to learn lessons and fine tune design and implementation arrangements before expanding. As far as possible, the phasing will mirror the 16The MoH and Municipalities calculated that the cost of providing primary care services financed through the Specific Health Grant, i.e., excluding the cost of drugs, would be € 62.8 million (total) or € 34.91 per capita in 2015 and projected to increase to € 65.9 million (in total) or € 36.65 per capita in 2016. However, the resources that are available to support delivery of this package of services are calculated to be € 26.87 per capita in 2015 and € 27.4 per capita in 2016. The proposed average capitation-based performance payment amount of € 2.4 per person (i.e., approximately US$ 3.3 per person) are average per capita costs of delivering a sub-set of priority primary health care services to MoH standards of quality.

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expansion of the new provider Health Information System (HIS) under sub-component 1.2, which will facilitate performance reporting by facilities and Municipalities. Initial implementation will be in Pristina Municipality and three other Municipalities from the Prizren Region which are pilot sites for the new HIS. At the end of one year of implementation, the experience will be assessed and scaled up to cover other participating Municipalities over time.

Component 3: Project management (US$1.8 million equivalent) 31. This component will support the strengthening of the capacity of the MoH to carry out the technical and administrative management of the Project, including the financing of audits, equipment and operating costs.

B. Project Financing

32. The proposed Project will take the form of an Investment Project Financing (IPF) implemented over a five-year period. The IPF instrument is appropriate for the proposed operation because it will finance reforms and capacity building as well as direct investments that are critical to further implement health sector reforms, such as investments in information solutions. The Project will address key priorities for the improvement of the health sector, but Project funds will cover only a small part of total health sector investment needs and account for a very small proportion (annually on average around 1.68 percent)17 of health sector revenues estimated as a combination of general budget revenues and net additional revenues from the mandatory health insurance system. However, Project funds will be catalytic since they will support institutional capacity building to implement transformative health sector reforms, including mandatory health insurance which is expected to generate additional resources for the health sector.

C. Project Cost and Financing

Table 1: Project Costs by Component (In US$ million equivalent)

Project Components Project Cost IDA Financing % Financing 1. Improving financial protection and quality of care 1.1 Improving financial protection 1.2 Improving quality of care 2. Strengthening primary care 3. Project management

11.2

4.8 6.4

12.5

1.8

11.2

4.8 6.4

12.5

1.8

100% 100%

100%

Total Project Costs Total Financing Required

25.5 25.5

25.5 25.5

17 Average yearly Project funds (US$ 5.1 Million for 5 years) as a percentage of the general budget revenues of the MoH according to the proposed budget 2014 plus specific health grants for municipalities plus the expected baseline gross revenues under the new mandatory health insurance scheme in its first year of premium collection, assumed to be 2015 in the analysis.

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D. Lessons Learned and Reflected in the Project Design

33. The Project incorporates lessons from health system reforms in the region, and from recent research. The ECA Regional Health Report, Getting Better: Improving Health System Outcomes in Europe and Central Asia, analyzes the long-term diverging trend in health outcomes between ECA countries and the EU-15 to identify key policy ingredients to close this gap. These include: (i) Strengthening public health and primary care interventions to achieve the ‘cardiovascular revolution’ that has improved health outcomes in the EU-15 in recent years; and (ii) Improving financial protection, and ensuring a more efficient use of resources. Project-supported interventions directly incorporate both of these elements.

34. Project implementation uses country systems to the extent possible to minimize fragmentation in financing, and minimize administrative burden. Project financing is incorporated into the public budget and funds for the capitation-based performance payments will flow through the Kosovo Financial Management System. This reflects international best practice in development assistance.

35. The Project also incorporates lessons learned from the health sector component of the Economic Policy and Public Expenditure Management Technical Assistance Project (PEMTAG- P078674). The PEMTAG project included a US$1.26 million health sector reforms component which aimed to shift spending towards primary care and to improve mechanisms to allocate health care resources. Although most of the planned outputs of this component were completed, outcome targets were met only partially mainly because of a combination of limited ownership, slow procurement, limited capacity in the MoH and the lack of a functional HMIS. While these challenges remain, some of them are no longer a major concern. Support for the introduction of health insurance is high in the MoH, and is likely to remain high even with a leadership change as support for the reform extends across the political spectrum in Kosovo. Support for purchasing reforms is also likely to remain high since it will improve the sustainability of the health insurance system. A state of the art HMIS is being developed with support from a Development Partner. The Project design includes a strong emphasis on capacity building among critical technical agencies to address capacity constraints. The MoH has started with the recruitment of key expertise to initiate procurements and facilitate speedy implementation, although capacity remains a concern.

IV. IMPLEMENTATION

A. Institutional and Implementation Arrangements

36. The Project will be implemented over a period of five years. The MoH will be responsible for the technical implementation of the proposed Project, and will have fiduciary responsibility for the Project through its PCU. The HFA, a unit with the MoH, will act as a key counterpart for the technical implementation of activities related to mandatory health insurance and purchasing reforms. Once the HIF is established and becomes functional, the HIF will take over purchasing and insurance-related functions performed by the HFA and become the key counterpart to the MoH on the technical implementation of activities related to mandatory health insurance and purchasing reforms. The National Institute of Public Health (IPH), an institute

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under the authority of the MoH, will also be a key counterpart to the MoH for Project activities that relate to health sector planning, monitoring and evaluation. Municipalities will play a key role in supporting the MoH in the implementation of component 2 of the Project.

37. A Project Coordination Unit (PCU) will be established within the MoH to support day-to-day Project management and implementation. The PCU will include core staff responsible for technical and fiduciary management, such as a full-time Project Coordinator, an IT coordinator, a M&E specialist, a procurement specialist and financial management specialist. The establishment of the PCU and selection of its staff with qualifications and experience satisfactory to the Bank is a condition of effectiveness.

38. The directors of relevant departments of the MoH, the chief executive of the HFA, heads of institutes, and, once established, the director of the HIF, will be responsible for the technical implementation of Project activities. The Project will therefore require clear implementation oversight, regular consultation among key stakeholders as well as decision making mechanisms to prevent and address bottlenecks. For this, the existing Senior Management Committee (SMC) of the MoH chaired by the Minister of Health or his designee and consisting, among others, of the Deputy Ministers, heads of executing agencies, directors of departments of the MoH, and once established, the HIF, which currently meets on a weekly basis, will dedicate on a monthly basis one meeting to coordinate and monitor progress of the Project and decide on actions to prevent and address bottlenecks.

39. Policy oversight will be the responsibility of a Project Steering Committee chaired by the Minister of Health or his designee, which will be established within 60 days from Project effectiveness. Details on Project institutional and implementation arrangements will be set out in a Project Operational Manual (POM), a draft of which was submitted to the Bank prior to negotiations.

B. Results Monitoring and Evaluation

40. Outcome indicators have been selected for their alignment to Project activities and reflect critical milestones along the results chain towards the PDO. All indicators will be at least partially attributable to the Project. Consensus among key stakeholders for the formulation of indicators and monitoring arrangements has been developed through Project preparation.

41. Progress on results will be monitored through routine data, administrative (including financial management) records and regular progress reports from relevant bodies. Denominator data for two indicators will be provided by the Ministry of Labor and Social Welfare and by the Ministry of Public Administration. Primary responsibility for data collection will be held by the PCU and HFA/HIF. The PCU will also be responsible collecting data from responsible bodies, monitoring the key performance indicators and results in collaboration with HFA/HIF and IPH, and communicating with the World Bank on progress according to the frequency of reports indicated in Annex 1.

42. Monitoring and evaluation under the Project will be integrated into the regular monitoring functions of the MoH, HFA/HIF and IPH. The Project will also strengthen systems for performance management and monitoring of performance indicators at central, municipality

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and facility level. If systems are not in place to collect data on other key indicators of importance to the Project, or if current reporting systems are unreliable, the Project will support the establishment or strengthening of such monitoring systems. Routine information systems are expected to improve with support from the on-going KSV/014 project co-financed by the MoH and the Luxemburg Development Cooperation, including improvement in the ease of collecting and reporting data through hardware and software investments at the facility level. Incentives created through the capitation-based performance-linked payments financed through the Project should improve reporting. As information systems improve, the results framework could be expanded to include additional indicators. If the availability of household survey data improves via the introduction of a health module in the Household Budget Survey, indicators that directly measure financial protection and utilization of health care by the poor may be added to the Results Framework.

C. Sustainability

43. The sustainability of the Project can be considered from two perspectives: financial and fiscal sustainability, and institutional sustainability. In terms of financial and fiscal sustainability, a key reform that the Project seeks to support is the introduction of mandatory health insurance. The Health Insurance Law which presents the foundation for the mandatory health insurance system has been explicitly designed to ensure financial sustainability. The Human Development and Poverty Reduction and Economic Management units in the World Bank, in collaboration with the IMF, provided technical support to the MoH on the Health Insurance Law. The HIL, in the form presented to Parliament, ensures that the introduction of mandatory health insurance will be fiscally neutral and includes safeguards to ensure that the HIF cannot run deficits. The mandatory health insurance reform is also expected to generate initial net additional revenues for the health sector ranging from € 31 to € 71 million per year depending on its final parameters and initial insurance coverage levels among those in the informal and formal sectors. Any investments to improve quality supported under the proposed Project can be sustained and further expanded through the incremental health insurance revenues. Furthermore, Project financing for capitation-based performance payments to Municipalities for primary care can subsequently be financed through the additional health insurance revenues under the HIL18. Finally, gains in efficiency created through performance-based purchasing reforms and improvements in quality can potentially create greater fiscal space to sustain and support health sector investments.

44. In terms of institutional sustainability, the Project supports the design and implementation of domestically initiated health sector reforms. Moreover, the proposed Project activities support building capacity within the MoH and public sector to design, implement and manage health sector reform activities to further increase the likelihood that the initiated health sector reforms are sustained beyond the lifetime of the proposed Project.

18 In 2017, when the capitation-based performance-linked payments are going to peak according to the proposed disbursement schedule for the Project, they would account for 1.74 percent as a percentage of the total projected health sector revenues estimated to include projected general budget revenues of the MoH, specific health grants for municipalities and expected baseline gross revenues under the new mandatory health insurance scheme.

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V. KEY RISKS AND MITIGATION MEASURES

A. Risk Ratings Summary Table

Risk Category Rating

Stakeholder Risk Substantial

Implementing Agency Risk

- Capacity Substantial

- Governance Substantial

Project Risk

- Design Moderate

- Social and Environmental Low

- Program and Donor Moderate

- Delivery Monitoring and Sustainability Moderate

- Other (Optional)

- Other (Optional)

Overall Implementation Risk Substantial

B. Overall Risk Rating Explanation

45. The overall risk rating for implementation is substantial. The complexity of the reforms may present many challenges to the MoH, and its subordinate entities (HFA, IPH, health facilities), the future HIF and to Municipalities. The proposed reforms may, if successful, transform the health sector. However it is possible that the reforms may encounter resistance from providers due to the introduction of performance-linked payment systems. Public support could erode if improvements in services and financial protection are not quickly apparent given increased public contributions to health through premium payments.

VI. APPRAISAL SUMMARY

A. Economic and Financial Analysis

46. The economic analysis of the project has been conducted in light of the following questions: (i) what is the Project’s likely development impact? (ii) is it fiscally sustainable?; and (iii) is public sector provision or financing the appropriate vehicle to achieve proposed Project objectives? 47. Development impact of the Project. The costs and benefits of the interventions to strengthen primary care and improve quality of care have been estimated over the 2014–2030 period. These interventions are expected to save almost 8,830 Disability Adjusted Life Years (DALYs) over that period. The most conservative scenario -- which assumes a low GDP growth rate and low effectiveness of the interventions relative to international experience -- results in a net present value of € 7.6 million using a high 6 percent time value of money (TVM) for the

15

discount rate. The same conservative assumptions about the GDP growth rate and the effectiveness of the interventions lead to a 20.11 percent internal rate of return. Furthermore, the Health Insurance Law will introduce a better risk pooling mechanism in health financing and foresees broadened exemption categories for premium payments (partly based on Proxy Means Tests), which should provide better financial protection for vulnerable groups. Preliminary results from a Poverty and Social Impact Analysis carried out in January 2014 indicate that the introduction of health insurance is likely to have a positive impact on poverty reduction. Using the data from the Household Budget Survey 2009 as counterfactual, the poverty headcount net of health payments would decrease from the 2009 estimate of 37.7 percent to 28 percent under the baseline scenario considered for the introduction of a health insurance system.

48. Fiscal sustainability of the new mandatory health insurance scheme. The initial additional net revenues from a new mandatory health insurance scheme are estimated to range from € 31 million to € 71 million, mainly depending on initial levels of enrollment among non-exempt individuals not working in the formal sector. Furthermore, considering the possible uses of the additional HIF revenues and based on these estimates, the potential mandatory health insurance scheme is fiscally sustainable. More detailed information about the assumptions used and the development impact of the Project are presented in Annex 6: Economic and Fiscal analyses.

49. The rationale for public sector involvement. All the entities involved in the project activities are public sector entities. A mandatory health insurance scheme is a widespread means of providing financial protection to the population in developed countries due to well-known market failures in the health sector. In Kosovo, such protection of vulnerable groups is necessary given the high OOP spending. At the same time, the overall level of health spending is low and mandatory health insurance will raise public health expenditures from 2.6 percent of GDP in 2012 to an estimated 4 percent of GDP in 2015. This will bring Kosovo closer to the SEE and EU average of 5 percent of GDP. Apart from Subcomponent 1.1 (Supporting capacity building at the future HIF), this Project does not involve the introduction of new programs that could be alternatively performed by the private sector, but instead strengthens existing government programs (PHC) and ongoing reforms (establishment of health information systems, improvement of quality of care) in order to alleviate binding constraints to public sector performance.

B. Technical

50. The technical approaches included in the Project are based on international best practice, adapted to meet Kosovo’s requirements and also reflect best practice policy recommendations for the region based on the analysis of the recent ECA Regional Health Report: Getting Better- Improving Health System Outcomes in Europe and Central Asia (2013). The regional report specifically emphasizes the importance of ensuring financial protection, and strengthening primary care.

51. The proposed implementation of a mandatory health insurance system addresses two of the most critical health sector concerns in Kosovo: high OOP spending and, indirectly, low quality of care. The proposed mandatory health insurance scheme will directly address out of pocket spending on drugs, which account for 85 percent of OOP spending, through the

16

introduction of an outpatient drug benefit. Furthermore, the proposed mandatory health insurance scheme directly targets the poor with public subsidies as they are exempted from premium contributions and cost-sharing. This should reduce barriers to care seeking for the poor. The proposed mandatory health insurance scheme also creates an opportunity for improving quality of care through the additional revenues raised which can be invested in improving quality of care through a combination of direct investments and purchasing arrangements that target improvements in quality and coverage for key under-used services.

52. The proposed introduction of capitation-based performance payments in primary care should create incentives to improve the quality and efficiency of service delivery for MCH and NCD services that reflect the epidemiologic profile and challenges in Kosovo. Implementing such a performance-linked purchasing arrangement is especially desirable in Kosovo to strengthen the MoH and future HIF’s stewardship over the health sector given the fragmentation of responsibilities and financing for hospital and primary care. Global experience also highlights the importance of strengthening primary care service delivery to increase the financial sustainability of the health system.

C. Financial Management

53. A financial management assessment was carried out to determine the financial management implementation risk and help establish adequate financial management arrangements for the proposed operation. The overall financial management risk is considered substantial given the high profile of capitation payments. The existing financial management arrangements in the MoH and selected Municipalities were reviewed, and the review included such systems as: staffing, internal controls, project accounting and financial reporting for project purposes, planning and budgeting, disbursements and auditing. Areas that require further strengthening were discussed and recommendations and complementary actions were provided to ensure that project is implemented within a sound fiduciary environment and meet the minimum requirements under OP 10.00.

54. As Project implementation is mainstreamed within the MoH, the Budget and Finance Division will be responsible for financial management aspects of the Project. Additional Project implementation support to the division will be provided through recruitment of local financial management consultant who will be located in the PCU and will provide support on the preparation of Project Annual Work Plan and budgets, financial reports, ex-ante controls to Project expenditure and coordination with auditors. Policies and procedures for implementation of the project will be documented in a POM. The manual will specify the financial management, disbursement and internal controls policies and procedures, and is intended to guide staff and minimize the risk of errors and omissions, as well as delays in recording and reporting. A draft POM was submitted to the Bank at negotiations.

55. The investment spending forecast prepared in accordance with Project Implementation Plan will be included in the Medium Term Expenditure Framework (MTEF) and the Kosovo Consolidated Budget for 2014 and onward. In this respect, the component 2 spending forecast will be part of municipal budget. The nominal ceilings will be set by MoF in consultation with MoH and HFA.

17

56. Under component 2, a dedicated internal control mechanism will be applied. The capitation performance payments manual will provide detailed administrative guidelines across the full functionality of the performance-based capitation payments scheme. The preparation and approval of the capitation performance payments manual is a disbursement condition for component 2. It will elaborate fiduciary controls, planning and budgeting, reporting requirements, monitoring, funds flow, besides the roles and responsibilities of institutions involved, including signatories of the performance agreements. Further roles and responsibilities toward the mechanism will be formalized by mean of the performance agreements between MoH, Municipalities and HIF (once established and functional).

D. Procurement

57. Procurement for the Project will be carried out in accordance with the World Bank‘s Guidelines Procurement of Goods, Works, and Non-Consulting Services under IBRD Loans and IDA Credits & Grants by World Bank Borrowers published in January 2011; and Guidelines Selection and Employment of Consultants under IBRD Loans and IDA Credits & Grants by World Bank Borrowers published in January 2011 (Consultants Guidelines) and as stipulated in the Financing Agreement for the Project. The World Bank Guidelines on Preventing and Combating Fraud and Corruption in Projects Financed by IBRD Loans and IDA Credit and Grants dated October 15, 2006 and Revised in January 2011, will also apply to this Project. Procurement will be conducted following implementation arrangements described in the POM and using the latest version of the Bank’s Standard Bidding Documents (SBD) for Goods and Non-Consulting services and Standard Request for Proposals (SRFP) for consulting assignments available on the Bank’s web site. 58. A procurement capacity assessment of the implementing agency was carried out during appraisal. The MoH has a procurement department staffed with a Procurement Director, two certified public procurement specialists, one procurement assistant, and an administration assistant. All procurement staff have more than five years of experience in public procurement, but have no experience in Bank-funded procurement procedures. The weak capacity in adopting Bank’s procurement guidelines was confirmed during the implementation of the IDF Grant where the Bank supported the implementing agency through the procurement process. Since, the proposed Project is complex and given that the implementing agency procurement department has no experience in implementing Bank-funded Projects, the overall Project risk for procurement is "high". Most of the high valued contracts financed from the Project will be prior reviewed by the Bank’s Procurement Specialist. A draft 18-month Procurement Plan was developed during appraisal; the Plan was agreed upon between the Government and the Bank during negotiations. Details on Project procurement arrangements are presented in Annex 3.

E. Social (including Safeguards)

59. Public support for the mandatory health insurance reforms. There is strong public support for the introduction of mandatory health insurance and making improvements in the health sector, including the readiness to pay a higher price for better health services. The Project will, therefore, likely have strong public support. The poor and excluded communities are expected to benefit from the Project interventions. Public outreach and communications will be carefully crafted to inform these groups about the reform process, including about their

18

responsibilities and entitlements under the new reforms, in order to maximize benefits among the poorest population.

60. The Project does not have any Social Safeguard risks. No construction or civil works are envisaged. However, minor refurbishment may be undertaken in health facility areas where equipment are to be installed. Given that these refurbishments will be carried out in publicly owned facilities and there are no other Project funded activities that will result in the loss of assets, income or displacement the Involuntary Resettlement Operation Policy 4.12 is not triggered. The Project also has gender benefits. The Project will specifically focus on improving the delivery of MCH and reproductive health services which benefit women by strengthening performance incentives to improve the coverage and quality of these services.

F. Environment (including Safeguards)

61. The Project is a straightforward Category ‘C’ and has no environmental risks. No construction or civil works are envisaged. Only minor refurbishment may be undertaken in health facility areas where equipment is to be installed. The medical equipment supported by the Project does not require any special arrangements for installation. Expert assessment of the list suggests that water and electricity requirements for the equipment are normally available in all hospitals. No medical equipment with safeguards consequences - such as radiographic equipment that requires room shielding works - will be purchased.

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Annex 1: Results Framework and Monitoring

Kosovo Health Project

.

Project Development Objectives

PDO Statement

To contribute to improving financial protection from health spending for the poor and quality of care for priority maternal and child health and non communicable disease services.

.

Project Development Objective Indicators

Cumulative Target Values Data Source/

Responsibility For

Indicator Name

Core Unit of Measure

Baseline YR1

(Oct 15) YR2

(Oct 16) YR3

(Oct 17) YR4

(Oct 18)

End Target

(Oct 19) Frequency

Methodology Data Collection

Percentage of the poor enrolled in mandatory health insurance

% 0 0 75 85 ≥90 ≥90 Annual

HFA/HIF and Ministry of Labor and Social Welfare records

HFA/HIF

Outpatient (OP) drug benefit scheme established and functional based on pre-defined operational criteria

Yes/no No

OP pharmac-ies for contract-ing identified

Anti-diabetic drugs or other pre-defined drugs covered

OP drug benefit package expanded to include anti-hyperten-sives or other pre-defined drugs

65% of primary care facilities have at least one pharmacy contract-ed to provide outpatient benefits package

OP drug benefit is entirely financed through HIF revenues

Annual

HFA/HIF documentation and expenditure data

HFA/HIF

20

within 1 km

Percentage of participating municipalities where at least 75 percent of the agreed quality targets were achieved in the preceding one year

% 0 50 75 75 75 75 Annual HFA/HIF performance data

HFA/HIF

INTERMEDIATE INDICATORS

Cumulative Target Values Data Source/ Responsibility for

Indicator Name

Core Unit of Measure

Baseline

YR1 YR2 YR3 YR4 End

Target Frequency

Methodology Data Collection

Direct project beneficiaries (number), of which female (percentage)

X

Number, %

0 0 900,000 48%

990,000 48%

1,080,000 48%

1,170,000 48%

Annual

HFA/HIF enrollment data and Ministry of Public Administra-tion records

HFA/HIF, PCU

Percentage of resident population enrolled in mandatory health insurance

% 0 0 50 55 60 65 Annual

HFA/HIF enrollment data and civil registry

HFA/HIF

Achievement of key benchmarks for functioning health insurance system

Yes/No No No

All key bench-marks for premium collection achieved

Initiation of premium collection

Premium collection continues

Premium collection continues

Annual HFA/ HIF Reports

HFA/HIF/MoH

Health personnel receiving training

X Number 0 100 250 500 750 ≥1000 Annual MoH PCU

Number of municipalities who have entered into performance agreements

Number 0 4 10 10 20 ≥25 Annual HFA/HIF data HFA/HIF

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with the MoH/ HFA/ HIF

Percentage of participating municipalities with a performance improvement action plan

% 0 0 75 75 75 75 Annual

Health and Social Welfare Departments of participating municipalities

PCU

Percentage of capitation-based performance payment budget spent at municipality level

% 0 70 80 85 90 ≥95 Annual

Budget monitoring report

PCU

Health facilities constructed, renovated, and/or equipped

X Number 0 8 8 8 8 8 Annual PCU PCU

.

22

Results Framework: Indicator descriptions .

Project Development Objective Indicators

Indicator Name Description (indicator definition etc.)

Percentage of the poor enrolled in mandatory health insurance

Numerator: Number of poor individuals eligible for mandatory health insurance exemptions enrolled in mandatory health insurance scheme Denominator: Total number of poor eligible for mandatory health insurance exemptions. Under the mandatory health insurance scheme, the poor are identified using routine administrative systems as beneficiaries of the proxy means tested last resort social assistance scheme.

Outpatient (OP) drug benefit scheme established and functional based on pre-defined operational criteria

The following yearly benchmarks should be satisfied before or during the target year:

i) OP pharmacies for contracting identified ii) Anti-diabetic or other pre-defined drugs covered in OP drug benefit package iii) OP drug benefit package expanded to include anti-hypertensives or other pre-defined

drugs iv) 65% of primary care facilities have at least one pharmacy contracted to provide

outpatient benefits package within 1km v) OP drug benefit package is entirely financed through HIF net revenues

Primary care facilities are defined here as main family medicine centers and family medicine centers, excluding family medicine ambulantas (there are 124 such facilities).

Percentage of participating municipalities where at least 75 percent of the agreed quality targets were achieved in the preceding one year

Numerator: Number of participating municipalities where at least 75% of facilities achieved at least 75 percent of the contractually specified quality targets in the preceding one year Denominator: Total number of participating municipalities Participating municipalities are those municipalities that have entered into performance agreements with the MoH/HFA/HIF. Four municipalities will participate in the first year, with expansion of participation from Year 2 onwards. Performance agreements will be renewed annually and include up to twenty performance indicators, together with their targets, which will serve to evaluate the performance of each Municipality. The indicators will be selected and quality targets set by each Municipality in

23

negotiation with the HFA, and subsequently the HIF, from a master list of indicators, based on the geographic, demographic, and epidemiological profile of each municipal health network. The performance indicators and quality targets will be further defined in the capitation performance payments manual.

Intermediate Results Indicators

Indicator Name Description (indicator definition etc.)

Direct project beneficiaries (number), of which female (percentage)

Core indicator

Percentage of resident population enrolled in mandatory health insurance

Numerator: Number of persons enrolled in mandatory health insurance scheme in the preceding one year Denominator: Resident population Resident population will be taken from the civil registry held at the Ministry of Interior Affairs Enrollment defined as having been issued an insurance card or other means of verifying insurance registration status. The latest available figures in the reporting period will be taken for both numerator and denominator.

Achievement of key benchmarks for functioning health insurance system achieved

The following yes/no benchmarks should be satisfied before or during the target year:

i) Achievement of all key functional triggers for premium collections. These comprise:

a. The list of basic health care services along with a financial statement for that

fiscal year has been approved per Article 13 b. The list of emergency health services and essential health services to be provided

free of charge has been defined c. The price for each basic health care service for that fiscal year has been agreed d. Copayments and other cost-sharing levels for that fiscal year have been agreed e. At least 75% of employees in the public sector and VAT registered private or

public-private firms with an annual turnover of or exceeding € 50,000 have been issued an insurance card or other means of verifying insurance registration status

f. At least 75% of individuals belonging to the exempt category have been issued

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an insurance card or other means of verifying insurance registration status g. The start date for the collection of premiums has been specified in a sub-Legal

act issued by the Ministry of Health

ii) HIF starts collecting premiums from the non-exempt population

Health personnel receiving training

Core sector indicator

Number of municipalities who have entered into performance agreements with the MoH/ HFA/ HIF

Number of municipalities that have signed a performance agreement with the MoH/ HFA/ HIF in the preceding one year

Percentage of participating municipalities with a performance improvement action plan agreed with Quality Coordinators

Numerator: Number of participating municipalities with a performance improvement action plan agreed with Quality Coordinators Denominator: Number of municipalities participating in the capitation-based performance payments scheme The performance improvement action plan will lay out the plan that health facilities within that municipality will follow to achieve targeted improvements.

Percentage of capitation-based performance payment budget spent

Numerator: Capitation-based performance payments to participating municipalities in the preceding one year spent Denominator: Total final budget allocated for capitation-based performance payment during the preceding one year Expenditures will be measured through reports from the Kosovo Financial Management Information System.

Health facilities constructed, renovated, and/or equipped Core sector indicator

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Annex 2: Detailed Project Description

Republic of Kosovo: Kosovo Health Project Component 1: Improving financial protection and quality of care (US$11.2 million equivalent) 1. This component will build institutional capacity to implement health sector reforms to improve financial protection and quality of care. It will finance capacity building and goods, services and equipment to support the design and implementation of effective reforms, communications to manage the reforms, monitoring and evaluation of the reforms and upgrades of health information systems. Sub-component 1.1: Improving financial protection (US$4.8 million equivalent) 2. The main policy tool through which the proposed Project seeks to improve financial protection is the introduction of mandatory health insurance. The Health Insurance Law (HIL), provides the legal basis and overarching policy direction to the proposed mandatory health insurance system. The HIL creates an autonomous Health Insurance Fund (HIF) which will be responsible for implementing mandatory health insurance on behalf of the state. The activities proposed under this sub-component will support the Health Financing Agency (HFA) in the Ministry of Health (MoH), which is the predecessor institution to the HIF responsible for initially implementing health insurance functions under the HIL, and, once established, the Health Insurance Fund (HIF) will develop and implement critical functions and systems for the mandatory health insurance scheme.

3. Finalizing policy, regulation, and operational systems design. The Project will support the HFA, and subsequently the HIF, to finalize key operational documents for the health insurance system. These would include administrative regulations and by-laws for the HIL, the HIF Statute, Financial Management Regulation, General Act specifying payment conditions and other key policy, regulation and operational documents for the mandatory health insurance scheme. In addition, capacity building under the Project will support the HFA to develop and finalize the organizational structure and staffing for the HIF. The Project will also support the MoH to develop and finalize the design of key administrative and management processes to implement critical health insurance functions including financial management, contract management, beneficiary identification and enrollment and collection of financial contributions, claims administration and information systems and monitoring. Information systems investments supported under the Project are described in greater detail below.

4. Building capacity to implement mandatory health insurance. The HIL provides the legal basis for a new institution, the HIF, which will be responsible for implementing the mandatory health insurance scheme proposed under the Law. An effective HIF is a pre-requisite for the mandatory health insurance scheme to function well. Capacity building mechanisms can play a potentially important part in ensuring that HIF and health facility staff are well-prepared for their roles and benefit from the extensive experience with health insurance internationally and in the region, with a focus on countries with similar health system histories.

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5. To achieve this objective, the Project will support training for key HIF staff on essential skills related to their functions, drawing from best practices from regional and global experiences with health insurance, and management skills, as required. Documents related to the organizational structure of the HIF will also identify essential staff positions and associated qualifications, experience and essential skill sets, and these will be used to develop the capacity building plan. In addition, the Project will support twinning arrangements with well-functioning HIFs and, potentially, the secondment of experienced HIF personnel from an HIF in the region to support key HIF employees at the newly created HIF in the initial three years of its operations. It is anticipated that the need for both secondments and other forms of capacity building will taper off through the life time of the Project with the most intense support needed in the first two years, and a transition to problem-based on-demand support from year three onwards. In addition, Project activities will include training for key staff at health facilities. Health facility staff training will focus on the mandatory health insurance scheme, and on key operations functions related to health insurance scheme that may need to be performed at the facility level. Finally, the Project will also support training for key staff at the University Clinical and Hospital Services (UCHS) to support better hospital management, including financial management, in the context of health insurance. The capacity building plan will be developed in tandem with the plan for the expansion of the scheme.

6. Information systems support for the mandatory health insurance scheme from other Development Partners. The Government of Kosovo recognizes that setting up a functional Health Insurance Fund Information System (HIFIS) will be critical if the mandatory health insurance scheme is to be implemented soon. The Government has, therefore, identified the design and implementation of the core HIF information system (HIFIS) as a priority to be completed by the end of 2014. The core HIFIS will be funded through sources other than the proposed Kosovo Health Project as the timeline for the investments needed does not synchronize with those of the Project. In addition, an ongoing Luxembourg Development Cooperation (LuxDev) project, KSV/014 “Health Support Programme in Kosovo” and the MoH are co-financing improved performance tracking and reporting at the health facility level through both hardware and software investments which will be implemented in all public sector health facilities. The KSV/014 project includes some functionalities related to payments and purchasing, but it will require adjustments as the MoH and HIF are still to decide on the design of the performance-linked and activity-based payment systems. The KSV/014 project does not intend to include an e-Prescription system in its first two phases.

7. Project support for the Health Insurance Fund Information System (HIFIS). The Project will, support the following complementary investments to fully operationalize the HIFIS:

(i) Procuring the HIFIS system platform. The HIFIS, purchased before the Project effectiveness, will be temporarily hosted on existing servers at the central government data center in the Ministry of Public Administration (MoPA), which will be available mid-201419. The Project will finance purchase of additional servers and other equipment needed in the MoPA data center in order to ensure capacity to host the HIF information system overtime.

19 The Government has decided to centralize data processing from various sectors in MoPA data center, so the HIF information system will not be hosted in separated data center.

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(ii) Registry of insured persons. The registry of insured persons will be the foundation for all other systems to be implemented. Since this registry will be created for the purpose of the health insurance scheme, the HIF will face a one-time challenge of ensuring data accuracy and completeness and eliminate any duplicate records. The Project will support activities and information systems tools to support this process.

8. Complementary information systems improvements to support provider payments under health insurance. All health facilities will use an ‘electronic invoice’ to allow reporting on performance related to payments at primary care facilities and hospitals. At the health facilities supported by a fully functional Health Information System established under the KSV/014 project, data will be automatically exported to populate the invoice; the proposed Project will support the adjustment of the system implemented by the KSV/014 project. Health facilities not yet covered by the KSV/014 project will, by contrast, have to manually populate the invoice. The Project will support software adjustments to the HIF information system to ease manual input, to allow “electronic invoice” management, and implement performance “Dashboards” and balanced scorecards. The Project will also support the purchase of DRG software for hospitals.

9. Outpatient (OP) drug benefit. The introduction of an OP drug benefit is proposed under the planned mandatory health insurance reform. Introducing the OP drug benefit is a policy priority for the MoH in view of the fact that drugs account for 85 percent of Out of Pocket (OOP) spending, as a democratic benefit for the population at large and a visible ‘quick win’ from the health sector reforms. Under the current system, patients are supposed to receive medicines at public sector facilities, but typically do not due to shortages. The proposed OP drug benefit will enable patients to obtain medicines included in the OP benefit package from contracted private pharmacies who will be reimbursed by the HIF at negotiated rates. The OP benefit package would be funded through health insurance net revenues.

10. Activities under this sub-component will support the MoH to develop and refine design parameters for an outpatient drug benefit system, including parameters for contracting outpatient pharmacies, and to build capacity to establish and implement a benefit management system. The benefit management system will include a simplified information systems component linking contracted pharmacies with the HFA for claims processing and monitoring; a payment mechanism for reimbursement; a mechanism to define which medicines are covered at what price; a definition of the beneficiaries and several other rules and definitions that will be written into the software package to the extent possible to facilitate transaction management and to reduce the need to monitor or intervene in case of abuse. In addition, activities will support the improvement of existing treatment standards and train health professionals and benefit administrators on implementing the outpatient drug benefit.

11. Phased implementation of the OP drug benefit. The benefit will be introduced in a phased manner to ensure that the HIF is able to manage the OP drug benefit effectively and to match the revenues available. The first phase of implementation of the OP drug benefit will be a proof-of-concept pilot. The pilot will include an initial limited drug benefit to be financed through the public budget. This benefit will cover a very restricted list of medicines, for example insulins, oral anti-diabetics and blood glucose monitoring strips used by patients with diabetes, that will be available for free at contracted private pharmacies. This pilot will offer an

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opportunity to test claims processing and monitoring systems, build trust with private pharmacies to ensure their participation and offer some ‘quick wins’ from the health sector reforms to the public. The initial choice of drugs for the outpatient drug benefit seeks to limit a sudden spike in the drug budget from higher utilization with the introduction of the benefit. The second phase of the project will focus on extending the benefit package to cover a wider range of essential medicines bearing in mind public health benefits and financial protection as key concerns. The expansion will keep pace with the increase in revenues and HIF capacity to manage the OP drug benefit.

12. Reform communications and citizen feedback. Drawing on lessons from reform initiatives in other countries, this sub-component will also support the MoH to implement communications activities to inform the public about the reforms, including about the new mandatory health insurance scheme, their entitlements and responsibilities with reference to the scheme, on health sector results using the reform score card, and, also, to gather feedback on the reforms. Activities will focus on: (i) Developing a communications strategy focused on both internal (including MoH, Municipalities and public sector health personnel) and external audiences (including citizens and civil society organizations); and (ii) Capacity building of the MoH to implement this communications strategy.

Sub-component 1.2: Improving Quality of Care (US$6.4 million equivalent) 13. This sub-component includes three main sets of activities and investments to improve quality of care across the health system: (1) Building health systems capacity to improve quality of care; (2) Support to improve strategic purchasing of primary care services to improve physical access to quality services; and (3) Cross-cutting investments in information systems to improve quality of care and reform monitoring and oversight.

14. Building capacity to improve Quality of Care (QoC). This sub-component of the proposed Project will finance investments in priority Maternal and Child Health (MCH) equipment for primary care facilities and hospitals, and the development of a maintenance system for existing equipment at primary care facilities and hospitals. In addition, it will also support capacity building of key actors to implement the National Quality of Care Strategy with a specific focus on capacity building for Quality Coordinators, who are current focal points for implementing quality of care initiatives at the primary care and hospital level. Directors of Health and Social Welfare, who have responsibility for primary care in municipal government, will also be given training in management of performance agreements. This sub-component will also support training for the newly created Professional Service Line administrative units responsible for improving the integration of health services across levels of care.

15. Strategic purchasing of primary care services. Activities in this area seek to improve access to and quality of priority services at the primary care level, including Maternal and Child Health (MCH) and Non Communicable Disease (NCD) services by building the capacity of the HFA, and its successor, the HIF, to enter into performance agreements with Municipalities. It is anticipated that capitation-based performance payments that will be provided according to terms of the performance agreements with Municipalities will motivate facility staff to improve access to services and increase quality of care. Activities under this sub-component will support the MoH/HFA and HIF to:

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(i) Develop and finalize the necessary administrative regulations and by-laws to implement performance agreements; (ii) Design key parameters for the strategic purchasing of primary care services, including: Developing performance indicators, contract monitoring and payment terms; Develop a template agreement between the MoH / HFA, HIF (once established), the MoF and Municipalities to outline respective roles and responsibilities and provide a legal foundation and governance framework; Define standard operating procedures for the implementation of performance agreements, including setting and negotiating targets, performance monitoring, performance verification, payments, sanctions, grievance redress and performance agreements renewal and modification. These will be presented in a ‘capitation performance payments manual’, which is distinct from the Project Operational Manual; (iii) Build the capacity of MoH / HFA and HIF to effectively carry out the strategic purchasing function, including monitoring performance, identifying problems/ issues, making payments, and planning and budgeting methodology; and (iv) Build the capacity of Municipality staff, including primary care facility staff, to measure, report on and improve performance. (v) Finance an annual independent technical audit to be implemented by a firm to verify the number of beneficiaries of the capitation-based performance payments, that the agreed performance targets have been achieved, and to check whether capitation-based performance payments made to Municipalities were calculated correctly. 16. The proposed Project will support cross-cutting investments in information systems to improve reform monitoring and oversight and quality of care as outlined below.

17. E-health Development Framework. This sub-component will support the participatory development of an e-Health Development Framework (eHDF) to provide a long-term framework for policy making, regulation, data quality management, implementation management and operations of information systems in health care in Kosovo. The eHDF will cover the institutional arrangements for e-health in Kosovo, eHealth architectural concepts, standards and regulations. At a minimum, the eHDF will define: (i) eHealth policy making, regulation and standardization; (ii) Health information analytics and clinical data quality management; and (iii) Health information systems implementation and deployment management. Finally, it will build the capacity of the institutional actors defined in the eHDF to support long-term eHealth development in Kosovo.

18. Institute of Public Health (IPH) Information System, including the reform scorecard for better monitoring and oversight of results. By the end of 2014, the KSV/014 project aims to deliver the system platform for the IPH (hardware and data warehousing system software). This system platform will allow the basic management of data and will enable facility data to be imported into the IPH health information system from the facility-level software implemented by KSV/014 project. The Project will build on these investments and support the development and implementation of data analytics and reporting systems that will support and integrate most of the IPH data management business processes so that more timely analyzed data in a suitable format are available for health sector decision making in Kosovo. A key functional requirement for the IPH data analytics system will be: (i) the design and development of a reform score card to track progress with the implementation of health sector reforms and results

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achieved in terms of service delivery improvements; and (ii) periodic performance feedback reports for health facilities for management and quality improvement purposes.

19. E-prescription system. The KSV/014 project does not plan to include an e-Prescription system for the currently envisaged two phases of implementation that will end in late 2017. Therefore, the proposed Project will build on the systems created by the KSV/014 project and support the development and implementation of an e-Prescription system, which will include modules for health facilities, HIF, pharmacies, with links to other information systems that will provide accurate and timely information on the prescription and dispensing of drugs and medical supplies. The implementation of the system will, to the extent possible, mirror the expansion of facility information systems of the KSV/014 project, to maximize the immediate value gain.

Component 2: Strengthening primary care (US$12.5 million equivalent)

20. This component seeks to improve access to and quality priority services at the primary care level, including Maternal and Child Health (MCH) and Non Communicable Disease (NCD) services, and therefore, to contribute to enhancing the sustainability of the mandatory health insurance reforms and improving population health outcomes. The component will finance capitation payments linked to performance. It is anticipated that these capitation payments conditioned on performance will strengthen incentives to improve access to, and the quality of, priority primary care services. The HFA, a unit within the MoH, will initially be responsible for managing the capitation payments. Once established and functional, the HIF will take over the HFA’s purchasing functions, including the management of capitation payments. Ultimately, it is envisaged that these payments will be financed through health insurance net revenues via performance agreements between the HIF and Municipalities, or directly between the HIF and primary care facilities. The Project may finance a proportion of these capitation payments up to the end of Project, with Project financing tapering off by year 3 as the revenues mobilized by the HIF increase and can be channeled to strategically purchasing primary care services. This component will cover all Municipalities in Kosovo, although participation may be voluntary.

21. Primary care services identified as a priority are listed in Box 1 below. This Component will use capitation payments to cover the costs of activities to expand access to and improve the quality of these services. Capitation payments are the financial resources reimbursed by the Recipient of this IDA Credit to participating Municipalities calculated as an annual average per capita amount. The capitation-based payments linked to performance to be financed through the Project have been initially determined to be the equivalent of € 2.4 per capita (approximately US$3.30 per capita) on average by the MoH20. The per capita amount listed above is based on the MoH’s cost calculations to determine the budget needed to deliver the legally mandated package of PHC services to existing standards of quality. The average per capita amount of € 2.4 accounts for close to 26 percent of the calculated gap between the (projected) available public

20The MoH and Municipalities calculated that the cost of providing primary care services financed through the Specific Health Grant, i.e., excluding the cost of drugs, would be € 62.8 million (total) or € 34.91 per capita in 2015 and projected to increase to € 65.9 million (in total) or € 36.65 per capita in 2016. However, the resources that are available to support delivery of this package of services are calculated to be € 26.87 per capita in 2015 and € 27.4 per capita in 2016. The proposed average capitation-based performance payment amount of € 2.4 per person (i.e., approximately US$ 3.3 per person) are average per capita costs of delivering a sub-set of priority primary health care services to MoH standards of quality.

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resources and needed resources, including extra staff time, supplies and operating expenses. As this is an average calculation of the per capita resource gap, this amount may be adjusted for the specific circumstances of individual Municipalities (for instance, remote areas would require more per capita resources) by the HFA in negotiations with individual Municipalities, based on underlying per capita costs.

22. The capitation payment linked to performance will cover only incremental costs required to improve access to and quality of priority primary care services; therefore, costs related to infrastructure rehabilitation, medical equipment, and salaries of civil servants are not covered by these payments. Furthermore, medical equipment investments are covered under Component 1. A detailed list of goods and services covered by the capitation payments linked to performance will be included in the capitation performance payments manual, which is distinct from the Project Operational Manual (POM). The per capita payments may be adjusted on an annual basis. Disbursements for component 2 will be conditional on the development of the capitation performance payments manual satisfactory to the Bank.

Box 1 Priority primary Care Services

A. Health Promotion Services 1. Health education 2. Basic hygiene education 3. Immunizations 4. Health promotion 5. Prevention and control of major communicable and tropical diseases 6. Surveillance and control of water, food, solid and liquid waste, medical and other health-related products,

toxic substances, and hazardous materials 7. Monitoring, epidemiological control and research, animal and insect disease control

B. Preventive Health Services

1. Prenatal, delivery and postpartum checkups 2. Immediate care of the newborn child 3. Nutrition services 4. Early detection of cervical and breast cancer 5. Family planning 6. Oral health prevention 7. Growth and development monitoring and promotion

C. Outpatient Ambulatory Services

1. Health care for people with disabilities 2. Management of childhood prevalent illness 3. Medical emergencies 4. Patients with multiple diagnoses or co-morbidities 5. Patients with chronic illnesses 6. Neonatal conditions 7. Community-based physical or psychiatric rehabilitation

Mental health disorders

23. Memorandum of Understanding and Performance agreements. The MoH will enter into a MoU with the MoF outlining the respective roles of the two entities with respect to

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capitation-based performance payments. The MoH/HFA, will enter into annually renewable performance agreements with Municipalities and, once established, the HIF21. The agreements may include up to twenty performance indicators, together with their targets, which will serve to evaluate the performance of each Municipality. The indicators will be selected by each Municipality in negotiation with the HFA, and subsequently the HIF, from a master list of indicators, based on the geographic, demographic, and epidemiological profile of each municipal health network. Initial indicators will focus on basic, generic structure or process indicators such as reporting or training and will become more specific and outcome-focused as the Project progresses. The performance indicators will be further defined in the capitation performance payments manual. The agreements will also specify the roles and responsibilities of the MoH/HFA, Municipalities, and, the HIF once established.

24. Performance targets. The HFA will also agree with each participating Municipality on annual performance goals for each of the indicators to ensure that progress is achieved each year. For every performance indicator, an annual target goal will be defined in the performance agreements. For example, if the indicator is increase in proportion of ANC clients who received their first ANC visit in the first trimester, the target for one Municipality may be 70 percent, whereas the target for a second Municipality may be 85 percent based on current performance. The performance targets will focus on achieving improvements in service delivery for priority services, with performance targets increasing in difficulty level over the tenure of Municipalities’ participation in this component. Progress towards these targets will be reported semi-annually.

25. Information systems and performance reporting to the HFA. The provider Health Information System which is being built through the KSV/014 project (co-financed by the MoH and Luxemburg Development Cooperation) will facilitate performance data reporting to the HFA (or its successor the HIF). Information systems investments to support provider payments under sub-component 1.1 will enable facilities to generate and submit a performance report on the parameters specified in the performance agreements. The Department of Health and Social Welfare in each participating Municipality will be responsible for aggregating and reporting these data. The KSV/014 project anticipates that all public sector facilities in Kosovo will be covered by the new information system by 2015. In case progress is slower than anticipated, interim paper-based performance reporting may be used in facilities that are not covered by the KSV/014 project.

26. Flow of funds. Flow of funds for this component will be through the Kosovo Treasury System, and each year the maximum capitation-based performance-linked funds that a given Municipality is entitled to should be appropriated into each participating Municipality’s budget as part of the approval of the Budget Law for the fiscal year which begins in January. Municipalities will receive capitation-based performance funds in two disbursements each fiscal year to facilitate the absorption of funds.

- PHC facilities will maintain records on service delivery as required under the performance agreements.

21 Once the HIF becomes operational, it will take over the role of the HFA on capitation-based performance-linked agreements.

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- PHC facilities will prepare semi-annual performance reports as required by the capitation performance payments manual and submit these reports to the Directorate of Health and Social Welfare in the Municipality. - The Directorate of Health and Social Welfare in the Municipality will check the individual reports received and then prepare an aggregate report on the performance of all PHC facilitates and submit this aggregate performance report to HFA. - The HFA will verify semi-annually the aggregated data provided by each PHC facility in the reports against the records in HMIS database. The HFA will then calculate the capitation-based performance payment due to each Municipality and health facility within the Municipality based on a performance scoring formula in the capitation performance payments manual. The HFA will then prepare a performance and payment report for each municipality. - The report will be approved by the HFA assigned committee and then submitted to MoH General Secretary for review and approval. - Upon clearance, the MoH will officially request the MoF to allocate the requested funds. - HFA will notify each Municipality on the funds allocated. The funds will be assigned as a line item entitled ‘capitation-based performance payments’ under the Specific Health Grant code. - Each Municipality will be able then to commit and spend the funds on the eligible expenditure categories. 27. Financial reporting and Bank reimbursements. Capitation-based performance payment funds under this component may only be used for eligible expenditure items which will be specified in the capitation performance payments manual. Health facilities and Municipalities will report to the HFA on the use of funds on a semi-annual basis. The PCU will submit a withdrawal application for this component to the Bank requesting reimbursements of actual expenditures. Activities under component 2 will also be reported in the quarterly IFRs.

28. Monitoring and verifying performance. Two separate mechanisms will be implemented to verify the number of participants receiving services and the achievement of the performance goals. On one end, the MoH, through the HFA, will monitor and evaluate the services delivered by the Municipal facilities as part of its essential public health functions and report the application of incentives and, if relevant, sanctions. This routine verification will be done on a rolling basis throughout the year. In parallel, the Project will finance (under Component 1) annual independent technical audit to be carried out by a firm for the Project duration, which will validate the number of beneficiaries receiving services, the achievement of performance targets, and whether the capitation-based performance payments made to Municipalities and individual health facilities were calculated correctly. The financial audit of Project funds undertaken as part of component 3 will also audit a sub-sample of Municipalities.

29. Phased implementation. Implementation of component 2 will be phased to mirror the expansion of the new provider Health Information System. Initial implementation will be in Pristina and three Municipalities of the Prizren Region, which are pilot sites for the new HIS under the KSV/001 project and two additional Municipalities. At the end of one year of implementation, the experience will be assessed and scaled up to cover other participating Municipalities.

Component 3: Project management (US$1.8 million equivalent)

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30. This component will support the strengthening of the capacity of the MoH to carry out the technical and administrative management of the Project, including the financing of audits, equipment and operating costs.

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Annex 3: Implementation Arrangements

Republic of Kosovo: Kosovo Health Project Project Institutional and Implementation Arrangements

1. The Ministry of Health (MoH) will be responsible for the implementation of the proposed Project with the Health Financing Agency (HFA) in the MoH acting as a key counterpart. Once established, the HIF will take over the role of the HFA as key counterpart to the MoH in implementation. The directors of relevant departments of the MoH, including the chief executive of the HFA, heads of institutes in the MoH, and, once established the director of the HIF, will be responsible for the technical implementation of Project activities. The Project will therefore require clear implementation oversight, regular consultation among key stakeholders as well as decision making mechanisms to prevent and address bottlenecks. For this, the existing Senior Management Committee (SMC) of the MoH chaired by the Minister of Health or his designee and consisting, among others, of the Deputy Ministers, heads of executing agencies, directors of departments of the MoH, and once established, the HIF, which currently meets on a weekly basis, will dedicate on a monthly basis one meeting to coordinate and monitor progress of the Project and decide on actions to prevent and address bottlenecks. 2. Policy oversight will be the responsibility of a Project Steering Committee chaired by the Minister of Health or his designee, and consisting of representatives from the MoH, the Health Insurance Fund once it is established, the MoF, the Ministry of Local Government and Administration (MLGA), Donor Coordination Office in the Department for Policy Co-ordination and European Integration in the Ministry of Health and two Municipalities on a rotating basis. The Steering Committee will meet on a semi-annual basis and on an ad-hoc basis, as required, to provide policy guidance, review and approve annual work plan and budget. The Project Steering Committee shall be established within 60 days upon Project effectiveness. 3. A Project Coordination Unit (PCU) would be established within the MoH (under component 3) to support day-to-day Project management and implementation. The PCU will be responsible for procurement, financial management and reporting on the use of Project funds. It would include core staff responsible for technical and fiduciary management and would consist of a full-time Project Coordinator, an IT coordinator, a M&E specialist, a procurement specialist, and a financial management specialist. The PCU will serve as the secretariat of the SMC and of the Project Steering Committee for the purposes of the Project only, and will produce brief semi-annual progress reports that will be shared widely within the Ministry, its agencies and key stakeholders, and which will be submitted to the Bank. Short- or long-term technical support will be provided as may be required during implementation with the objective of building capacity within the Ministry and its agencies. Details on Project institutional and implementation arrangements will be set out in a Project Operational Manual (POM), a draft of which was presented to the Bank at negotiations. The PCU will report to the General Secretary. Until the PCU is established, Project fiduciary functions are being supported by the fiduciary staff of the MoH IDF grant unit. The establishment of the PCU and selection of its staff with qualifications and experience satisfactory to the Bank is a condition of effectiveness.

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4. Key agencies which will have an important role during Project implementation are as follows: 5. Ministry of Finance (MoF) is responsible for allocation of resources to the sector and oversight of the budget execution. The Grants Commission (established by the Law No. 03/ L- 049 on Local Government Finance), an inter-governmental body led by the Prime Minister’s office, plays a critical role in allocation of the health specific grant to Municipalities that is earmarked to primary care. The Commission is responsible for the periodic review of the formula for allocation and annual assessment and monitoring of primary care budget execution. It provides recommendations to MoF and Kosovo Assembly on municipal finance issues as needed. The MoF supports reforms than can potentially increase efficiency in spending while incentivizing increased quality of care. 6. Ministry of Health (MoH) provides regulatory and policy guidance for health sector reform and is responsible for the stewardship and technical oversight of the health sector as a whole. It is responsible for secondary and tertiary care, while Municipalities are responsible for primary care service delivery. MoH has shown ownership and commitment through active dialogue with the Bank on Project preparation, and has already begun efforts towards reform implementation. The PCU will support MoH in performing fiduciary responsibilities and in ensuring technical implementation of all Project components, including coordination with other relevant stakeholders, such as HFA, MoF, MLGA and Municipalities. 7. Health Financing Agency (HFA) is an executive Agency of the MoH, predecessor of the mandatory health insurance fund, and is authorized with contracting and buying from the list of health care services and list of drugs and medical consumables material from health institutions licensed in all forms of ownership. It also has the right to pool all financial means for this purpose (as envisaged in the Law No. 04/L-125 on health). HFA is also responsible for setting performance stimulation scheme of health professionals and relevant professional services at all three levels of health care, based on objective and transparent criteria to meet the volume and quality indicators of health care services provided by sub-legal acts issued by the Ministry. The proposed Project will provide capacity building support to HFA in the context of Component 1. Once the Health Insurance Fund (HIF) becomes functional, the HFA will transfer its purchasing and insurance functions to the HIF which will then become the key agency responsible for the implementation of technical activities related to mandatory health insurance and purchasing reforms. 8. Municipalities are responsible for primary care service delivery, and receive a capitation-based grant directly from the Ministry of Finance for service delivery. The Health and Social Welfare Directorate within Municipalities is responsible for management and supervision of primary care facilities. The Municipalities will be responsible for collecting performance data from health facilities and reporting to agreed monitoring bodies.

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Financial Management, Disbursements and Procurement

Financial Management Country Issues 9. Kosovo has participated in a number of detailed reviews of its public financial management (PFM), among them two central government PEFA assessments (2007 and 2009), a municipal PEFA (2011), a Country Fiduciary Assessment (2012), annual EU-SIGMA reviews, and other analysis by the World Bank. The various reviews have confirmed the significant progress Kosovo has made in improving PFM. The Country Fiduciary Assessment conducted in March 2012 showed that key strengths of the system are the sound legal framework, integrated central treasury system, and an increasingly effective external audit office. The strengths are offset by limited professional and technical capacities and gaps in implementation. There is considerable scope for improving the quality of budget planning and preparation, internal financial control, audits, debt management, and capital investment management. The authorities are aware of these limitations, and progress is occurring with support from international bodies. 10. Lagging areas identified, include: (i) limited coordination of budgets, Medium Term Expenditure Framework (MTEF), sector plans, and budget ceilings; (ii) Budget preparation is not fully linked with Treasury systems; and (iii) Financial management control and audit are not fully effective.

11. The Medium Term Budget Framework (MTBF) and the Annual Budget Law are the two main documents presented for Assembly review and approval. Public financial management in Kosovo is highly centralized in relation to budget policy and institutional control. The annual budget covers 16 ministries, 8 agencies, around 30 Independent Institutions, reserved powers, and 38 Municipalities (although 3 Municipalities only partially participate – excluding resources and activities funded by Serbia). 12. Budget execution is controlled by setting allocation limits, which are based on forecasts of available resources and the individual needs of the spending institution, with due regard to seasonality of revenues and expenditures. The Treasury manages allocations through the year and controls budget execution and cash management based on the cash plan submitted by Budget Organizations themselves. The Kosovo Financial Management Information System (KFMIS) is an important tool in managing and executing the budget. In general, internal control procedures are well understood. The Treasury is serviced through the Single Treasury Account (STA) with the Central Bank of Kosovo (CBK), through which all Government revenues and expenditures are recorded. Reconciliations between Bank and Treasury records are performed on a daily basis. The financial information is inputted into the KFMIS, which produces reports. Records and information are produced, maintained, and disseminated to meet decision-making control, management, and reporting purposes, as needed. Budget execution reports are by structure of the budget and present fund balance commitment on a monthly and quarterly basis for each economic category. 13. The system of municipal PFM in Kosovo is fully compatible and integrated with the PFM system that operates in central government. The strength of the existing PFM system is centered

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on the successful roll out of the financial management information system to the Municipalities through training and certifying staff in its application. This has ensured that commitment control is applied in budget execution and that reporting on budget execution is timely and meets the need of management for effective decision-making. Basic ingredients necessary for a national PFM system are in place and are integrated. This includes: a) basic legislation which is modern, compliant with good practice, and updated as needed; b) annual budget legislation which provides yearly appropriations; c) an established annual budget process which includes all the necessary ingredients and which works on a familiar schedule; and d) specific units and staff in each Municipalities who have the designated responsibility for budget formulation and execution. The report of the Auditor General of 2012 has noted significant improvement in the quality of public financial management at the municipality level over the past two years; however there remain areas for improvements. The report highlighted a considerable number of breaches of the public procurement regulations, but also positive progress in the field of procurement. The Public Procurement Law was enacted in 2004 and amended in 2010. It brings public procurement in line with international standards and practices and applies to the Municipalities as it does to central government budget organizations. 14. The Project will rely extensively on the various elements of Kosovo’s public financial management systems, including: (i) planning and budgeting; (ii) internal control; (iii) flow of funds and payments; and (iv) accounting and reporting.

Project financial management

15. A financial management assessment was carried out to determine the financial management implementation risk and help establish adequate financial management arrangements for the proposed operation. The overall financial management risk is considered substantial given the high profile of capitation payments. Financial management arrangements in MoH and selected Municipalities were reviewed. Bank policies and procedures on financial management and disbursement require that the Borrower and the Project implementing entities maintain financial management systems—including accounting, financial reporting, staffing and internal controls, budgeting and planning, flow of funds and auditing systems—adequate to ensure that they can provide the Bank with accurate and timely information regarding Project resources and expenditures. Areas that require further strengthening were discussed, recommendations and complementary actions were provided to ensure that Project is implemented within a sound fiduciary environment, which meets minimum requirements under OP 10.00, namely preparation of a Project Operational Manual and capitation performance payments manual; hiring of qualified financial management specialist, and training on Bank financial management and disbursement procedures. 16. The Budget and Finance Division is responsible for planning and budgeting and processing of payments. The division reports to the General Secretary (GS) through the Director of Supporting Services and follows policies and procedures established by the Law on Public Financial Management (LPFM) and financial rule on public fund expenditure. The most recent audit report revealed improvement areas with respect to budgeting, allocation and cash flow forecast based on approved Project implementation plan and procurement plan, procurement procedures and contract management and fixed assets management. From the financial management perspective, the PCU will coordinate closely with the Budget and Finance Division

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on commitments and payment of Project expenditures, and planning and budgeting of Project activities to ensure funds are available for financing Project expenditures, as well as preparation of quarterly IFRs for the Project. In addition, the FM specialist in the PCU will prepare withdrawal applications including supporting documentation. Training on Bank financial management and disbursement policies and procedures will be provided for the MoH budget and finance division and FM consultant.

17. Budgeting. The mechanisms for budgeting and opening the budget (release of funds) for each institution in the health sector are considered to be adequate to cater for the needs of the proposed Project. The budget instructions issued by MoF will guide the MoH and municipal budget planning and execution process. These instructions provide nominal ceilings for the various budget categories at the planning stage and approved allocations for the budget execution stage. A separate Project code will be created for the proposed Project. The MoH will be preparing the budgets for the Project based on the procurement plan and Project Implementation Plan. These budgets will form the basis for allocating funds to Project activities, and when expenditures are paid, for requesting funds from the Bank. The MoH will be supported by the PCU during the process. The FM specialist will prepare the forecasts based on technical inputs from the PCU coordinator and procurement specialist. The Project annual work plan and budgets will be approved by the Coordination and Monitoring Committee led by the MoH General Secretary and by the Project Steering Committee.

18. With respect to component 2, the Budget Law will specify the Municipalities that will participate in the capitation-based performance payments scheme. Articles within this Law will specify the responsibilities of the MoH in determining and approving the framework and the capitation-based performance payments and of the MoF in paying and regulating expenditures. The law will also stipulate the amount of additional funds that are earmarked for health within municipality budgets. The budget categories will be specified as a line item entitled “capitation-based performance payments” under the Specific Health Grant code.

19. The investment spending forecast prepared in accordance with the Project Implementation Plan should be included in the MTEF and the Kosovo Consolidated Budget for 2014 and onward. In this respect, component 2 spending forecast should be part of the municipal budget. The nominal ceilings will be set by the MoF in consultation with the MoH and HFA/HIF.

20. Internal control. General government regulations for processing transactions and approving contracts exist. The MoH will maintain an effective internal control system to ensure that Project expenditures are properly verified and authorized; supporting documents are maintained; accounts are reconciled periodically; and Project assets, including cash, are safeguarded. The POM will set out the financial management, disbursement and internal controls policies and procedures; it is intended to guide staff and minimize the risk of errors and omissions, as well as delays in recording and reporting. These written standards also clarify segregation of duties and responsibilities, including level of authority, clear control over funds and assets, and it ensures timely and accurate financial reporting. A draft POM was submitted to the Bank prior to negotiations.

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21. Controls over capitation-based performance payments. Under component 2, a dedicated internal control mechanism will be applied. The MoH will enter into a MoU with the MoF outlining the responsibilities of each with reference to capitation-based performance payments. The MoH, through the HFA, will enter into performance agreements with Municipalities and the HIF once it is functional. These performance agreements will require primary care facilities to reach agreed targets against a set of indicators at the end of the fiscal year in order to receive performance payments that will be financed by the IDA credit. The HFA will have primary responsibility for the management and supervision of this component under the Project. The HFA will also be involved in assessing achievement against agreed target indicators as documented by the PHC facilities. Achievement of targets as stated in the performance agreements will be assessed by HFA in order to trigger capitation-based performance payments. Once the HFA transitions its purchasing functions to the HIF, the HFA’s role on capitation-based performance payments will be taken over by the HIF. 22. A capitation performance payments manual will provide detailed administrative guidelines across the full functionality of the capitation-based performance payments scheme. It is intended as a reference document for all parties involved in the regular and periodic functioning of the mechanism. It will elaborate fiduciary controls, planning and budgeting, reporting requirements, monitoring, funds flow, and the roles and responsibilities of institutions involved. Further roles and responsibilities toward the mechanism will be formalized by mean of performance agreements between MoH/ HFA, Municipalities and HIF (once it is established).

23. PHC facilities will use the automated health management information system (HMIS) implemented by KSV/014 project to report results to the HFA. Reported data on the performance indicators will be submitted by Municipalities to the HFA through the HMIS on a semi-annual basis and verified by the HFA. If necessary, the Project will explore the possibility of using interim paper-based reporting in case implementation of the KSV/014 project is slower than anticipated.

24. The outline of the flow of transactions and control mechanism under component 2 are as follows:

- PHC facilities will maintain records on results indicators and service delivery as required

under the agreed performance agreements. - PHC facilities will prepare semi-annual performance reports as required by the capitation

performance payments manual and will submit these reports to the Directorate of Health and Social Welfare of the Municipality.

- The Directorate of Health and Social Welfare of the Municipality will check the individual reports received and then prepare an aggregate report on the performance of all PHC facilities and submit this aggregate performance report to HFA.

- The HFA will verify the semi-annual aggregated data provided by each PHC facility in the reports against the records in HMIS database. The HFA will then calculate the capitation-based performance payment due to each Municipality and health facility within the Municipality based on a performance scoring formula in accordance with the capitation performance payments manual. The HFA will then prepare a performance and payment report for each municipality.

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- The report will be approved by the HFA assigned committee and then submitted to MoH General Secretary for review and approval.

- Upon clearance, the MoH will officially request the MoF to allocate the requested funds. - HFA will notify each Municipality on the funds allocated. The funds will be assigned as a

line item entitled ‘capitation-based performance payments’ under the Specific Health Grant code.

- Each Municipality will be able then to commit and spend the funds on the eligible expenditure categories.

- Municipalities will report to HFA on the capitation based performance payment received on a semi-annual basis.

- The PCU will crosscheck and reconcile financial information from Municipalities with KFMIS generated IFRs, before submitting the later to the Bank as part of the withdrawal application.

- Monitoring and validation activities (inspections and audits) to promote truthful and accurate submissions will be performed periodically based on the perceived risk.

- If inaccuracies are identified, through the monitoring process, the performance funds allocated will be adjusted accordingly (either in that performance period, or in the subsequent period’s allocation.

25. In addition to the analytical verification processes conducted at each stage of reporting, HFA, and other institutions involved (such as the Health Inspectorate and Sanitary Inspectorate), will also conduct physical verification of reported information and actual use of funds throughout the year. Given the large number of transactions and information to be verified, a risk-based sampling approach will be conducted as part of the verification process. The minimum sample size will be defined in the capitation performance payments manual. 26. Accounting System. The MoH Budget and Finance Department, supported by the PCU, will maintain Project financial records (budget appropriations, allocations, commitments, and actual expenditure) in the KFMIS (Free balance system) on a cash basis. Similarly, the participating Municipalities will maintain financial records on the use of funds allocated to them out of the capitation funds linked to performance. The effective use of KFMIS will enable the generation of consolidated financial reports. The Project chart of accounts will be based on the KFMIS. Project funds will be accounted separately and identified by the Project code. The chart of account and Interim Financial Reports (IFRs) format will be described in the POM.

27. Financial reporting. The MoH Budget and Finance Department, supported by the PCU, will prepare financial information on a quarterly basis and will submit the information through the IFRs, which will include at a minimum: (i) statement of sources and uses of funds (with expenditure classified by component and disbursement category); and (ii) KFMIS budget execution reports by component and subcomponent. The quarterly IFRs for the Project will also include consolidated financial information on component 2 sources and uses of funds, as MoH will be able to generate financial information through KFMIS. Therefore, a statement on the capitation-based performance payments received by the participating municipalities during the semester will be included in the quarterly IFRs.

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28. The annual Project financial statements will be prepared based on IPSAS cash basis. The report will cover the fiscal year which coincide with the calendar year. The functional and reporting currency will be Euro. The format of IFRs and annual Project financial statements will be described in the POM. 29. The participating Municipalities will report to MoH and MoF on the use of capitation funds linked to performance on a semi-annual basis. The format of such financial reports will be confirmed as part of the preparation of capitation performance payments manual. The PCU will crosscheck and reconcile financial information from Municipalities with KFMIS generated IFRs, before submitting the latter to the Bank. The KFMIS is updated on a continuous basis.

30. Annual Audit. The Project Financial Statements (including those for component 2) will be audited annually by independent auditors under terms of reference acceptable to the Bank. The scope of the audit for component 2 will be amplified to include randomly selected Municipalities which received capitation-based payments linked to performance (to complement with technical concurrent audits). The objective will be the review the use of funds under the Project to verify compliance to the capitation-based performance payments manual (to be developed as a condition of disbursement for component 2). Specific procedures are to be agreed with the auditors in terms of compliance with the manual. The Project will be audited under the existing auditing arrangements in Kosovo whereby the MoF contracts out independent audit firm to audit all World Bank-financed projects. World Bank procurement procedures will be followed for the selection of the auditors. The audit of the Project Financial Statements will be financed from the Project. The audited Project financial statements shall be presented to the Bank no later than six months after the end of the fiscal year and will be made publicly available in a timely fashion and in a manner acceptable to the Bank.

31. Flow of Funds and Disbursement Arrangements. Disbursements for component 2 will be conditional on (i) the preparation and the adoption of the capitation performance payments manual satisfactory to the Bank; and (ii) a Performance Agreement, satisfactory to the Bank, entered with at least one Participating Municipality. The GoK preferred method of disbursement is reimbursement of funds pre-financed from the budget to finance Project expenditures. The other preferred methods by the Borrower are direct payments and special commitments to third parties (consultants, suppliers, contractors). 32. Bank funds disbursed using the reimbursement method will be documented by quarterly financial reports, i.e. the Project will use Interim un-audited Financial Reports (IFR) to support applications for withdrawal, and the Project will not provide the Bank with a detailed list of expenditures. Should the Bank determine at any time that the IFRs are not adequate to support the disbursement process, it reserves the right to revert to the traditional disbursement methodology (SOEs, summary sheets etc.). Withdrawal applications will be sent to the Bank every three months with the IFRs. Quarterly IFRs for the Project will also include consolidated financial information on component 2 sources and amounts paid to Municipalities, as MoH will be able to generate financial information through KFMIS. Therefore, a statement on the capitation-based performance payments received by the participating municipalities during the semester will be included in the quarterly IFRs. IFRs for component 2 will show the amounts paid to Municipalities based on an annual average per capita cost initially determined to be the

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equivalent of two Euros and forty cents (€ 2.40) multiplied by the registered population in the said Participating Municipalities and adjusted based on reported and verified achievement of Performance Targets in accordance with the provisions of the performance agreements and Capitation Performance Payments Manual. 33. Upon receipt of each application for withdrawal from the Credit, the Bank shall, on behalf of the Borrower, withdraw from the Credit Account and deposit into the Single Treasury Account an amount equal to the amount requested. 34. For direct payments, the Bank will require either copies of the original documents evidencing eligible expenditures in such form and substance specified in the Disbursement Letter. Records include such documents as invoices and receipts or a statement of expenditure summarizing eligible expenditures paid during a stated period. In all cases the Borrower/MoH is required to maintain original documents evidencing eligible expenditures and making them available for audit or inspection. These documents should be maintained for at least two years after receipt by IDA of the audit report and for a period required by local legislation. Further details on the Project disbursement arrangements are provided in the Project Disbursement Letter. 35. The flow of funds under Component 2 will follow the procedures reflected in the capitation performance payments manual. The HFA (subsequently the HIF), and the MoH’s Secretary General must first approve the Municipality performance reports prior to their release. Once approved, they will be sent simultaneously to both the MoF and the Municipalities to trigger MoF to undertake the necessary steps to release funds and Municipalities to commit and expense the funds. Two budget allocations will occur during the year. The first at the beginning of the fiscal year for results achieved in the second semester of the previous year, followed by the second allocation during the second half of the fiscal year, for the results achieved by Municipality during the first semester. The funds allocated will have to be spent within the fiscal year. If it is found that inaccuracies have occurred, through the monitoring process, the performance funds allocated will be adjusted accordingly (either in the respective period, or in the subsequent period allocation.

Table 1: Expenditure Categories Category Amount to be financed by the

Credit (in US$ equivalent) Percentage of expenditures to be financed by IDA

(1) Goods, non-consulting services, consultants’ services, Training and Operating costs for the Project, including audit

13,000,000 100%

(2) Capitation payments (under Component 2 of the Project)

12,500,000 100%

Total 25,500,000

36. Financial covenants for the proposed Project will include: (i) maintaining adequate financial management systems and controls throughout the life of the proposed Project; (ii) maintaining records and accounts for the Project adequate to reflect the operations, resources and

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expenditures related to the Project; (iii) preparing IFRs and submitting these reports to the Bank no later than 45 days after end of each calendar quarter; and (iv) having Project financial statements audited annually by independent auditors under terms of reference acceptable to the Bank, and submission of the audit report to the Bank no later than six months after the end of such year audited. Procurement 37. Procurement for the Project will be carried out in accordance with the World Bank‘s Guidelines Procurement of Goods, Works, and Non-Consulting Services under IBRD Loans and IDA Credits & Grants by World Bank Borrowers published in January 2011 and Guidelines Selection and Employment of Consultants under IBRD Loans and IDA Credits & Grants by World Bank Borrowers published in January 2011 (Consultants Guidelines); and as stipulated in the Financing Agreement for the Project. The World Bank’s Guidelines on Preventing and Combating Fraud and Corruption in Projects Financed by IBRD Loans and IDA Credit and Grants dated October 15, 2006 and Revised in January 2011, will also apply. A General Procurement Notice covering the project procurement activities will be prepared and published on the Bank’s external web-site and UN Development Business after negotiations. Specific Procurement Notices will be published for all International Competitive Bidding (ICB) and National Competitive Bidding (NCB) procurement, as well as, all consulting services contracts as required under the respective Guidelines. The following procurement implementation arrangements were agreed with MoH. 38. Procurement Implementation Arrangements: The procurement staff of the PCU will oversee, coordinate and be responsible for procurement for the proposed Project. The Project Operational Manual (POM) will include the description of the procurement procedures and Standard Bidding Documents (SBDs) to be used according to the World Bank Guidelines. 39. Procurement of Works: No works contracts are foreseen under the proposed Project. 40. Procurement of Goods: Goods contracts above US$1,000,000 equivalent will be procured under ICB procedures. The NCB method will be applicable for procurement of goods contract with an estimated budget of less than US$1,000,000. Goods contracts with an estimated budget of less than US$100,000 equivalent may be procured using Shopping procedures on the basis of at least three written price quotations obtained from qualified suppliers. The MoH expressed its intention to procure (i) System Platform for HIF information system (hardware, system software); (ii) IPH information system; and (iii) e-Prescription system for pilot regions. In situations and circumstances that are in compliance with the provisions of paragraph 3.7 of the Guidelines, procurement under Direct Contracting method may be used with Bank’s prior review.

41. The procurement will be done using the Bank’s Standard Bidding Documents for all ICB and National Standard Bidding Documents agreed with or satisfactory to the Bank. For small-value goods, shopping procedures will be followed using the request for quotation documents accepted by the Bank and in accordance with paragraph 3.5 of the Procurement Guidelines.

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42. Capitation-based performance payments under component 2 refer to allocations from the MoF to the Municipalities linked to verified results and therefore does not entail procurement. 43. Procurement of non-consulting services: Non-consulting services may be required under the Project. 44. Selection of Consultants: The proposed Project will finance consultants’ services by firms and individuals. Consultants will be hired by the Project to support the services reflected in the procurement plan. Consulting firms will be selected using the following selection procedures: Quality- and Cost-Based Selection (QCBS); Quality-Based Selection (QBS); Selection under a Fixed Budget (FBS) and Least-Cost Selection (LCS). The Selection Based on the Consultants’ Qualifications (CQS) method may be used for assignments below US$300,000 equivalent per contract. With justification satisfactory to the Bank, single-source selection can be used for hiring both firms (as in paragraphs 3.8–3.11) and individual consultants as described in paragraphs 5.1-5-6 of the Consultants’ Guidelines. The following two packages (i) Adjustment of Information Systems in PHC facilities and hospitals for the purpose of payment reporting; (ii) Adjustment of HIF information system - adding "electronic invoice", "dashboards" and balanced scorecards may be procured following the Single-Source Selection method because these interventions are not adding separated software modules, but adjusting and configuring the existing modules. However, a complete justification will be provided by MoH for Bank’s consideration prior to any procurement taking place and, if acceptable, agreement will be reached to adopt Single-Source for these two packages. Contracts estimated to cost US$300,000 equivalent or more will be advertised internationally. Short lists of consultants’ services estimated to cost less than US$300,000 equivalent per contract may be composed entirely of national consultants in accordance with the provisions of paragraph 2.7 in the Consultant Guidelines. 45. Training activities: Training is an integral element of the proposed Project’s support to capacity building. The Project will finance training programs, including training, workshops and study tours. Such training programs might be included in larger TA contracts with firms to reduce administrative burden on the PCU. Specialists contracted as short-term consultants under relevant selection process will design training courses and study tours. The PCU would be responsible for the administration of a small number of local workshops (including Project launch, mid-term review and completion workshops) and limited number of study tours. 46. The PCU will prepare an annual training plan. The plan would define the agreed procedures that would be used for procurement of various training services. The TOR, estimated budget, list of participants (selection criteria) and draft agenda for each training event would be subject to Bank’s prior review. 47. Operating costs will include all expenses necessary to ensure proper implementation of the Project, including, inter-alia, translation, interpretation, equipment maintenance and operations, travel costs (transportation, fuel, lodging and per diem). Procedures related to operating costs will be described in the POM. Project funds will also finance PCU staff, but will not include salaries of officials of the Borrower’s civil service.

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48. Procurement plan and methods and review thresholds: MoH has prepared a draft Procurement Plan for the first 18 months of the Project which also provide the basis for the procurement methods and thresholds. This plan will be agreed between MoH and the Bank and will be published on the Bank’s external web-site after negotiations. The agreed procurement plan will also be available in the Project files. The Procurement Plan will be updated at least annually or as required to reflect the actual Project implementation needs. A summary of the agreed procurement packages and their schedule are given in Table 2 below. The procurement plan includes the procurement methods and review thresholds as well as the Project specific arrangements. The Bank will review the procurement arrangements to be performed by MoH including contract packaging, applicable procedures, methods and the scheduling of the procurement processes to ensure conformity with Bank’s Procurement Guidelines, the proposed implementation program and disbursement schedule. The Bank’s prior review thresholds are provided in the agreed procurement plan. 49. Ex-post review: All contracts below Bank’s prior review threshold are subject to Bank’s ex-post review in accordance with the procedures set forth in Appendix 1 to the Procurement Guidelines, and on a random basis. Periodic ex-post review by the Bank would be undertaken during regular implementation visits or as the Bank may request for any particular contract and at any time. One in five contracts below the prior-review threshold will be post reviewed. A post review report will be prepared, shared with MoH and filed in the procurement post review system. 50. Retroactive financing is planned in order to finance Goods, Consultants’ Services, and Operating Costs for: (i) preparatory studies and detailed design studies; (ii) recruitment of the necessary staff to handle and support coordination, monitoring and evaluation, procurement and financial management; (iii) drafting of the Project Operations Manual and the capitation performance payments manual; and (iv) office equipment and furniture for the PCU.

Table 2: Summary of Procurement Packages

Con

trac

t P

ack

age Contract Description

Typ

e

Pro

cure

men

t M

eth

od

Rev

iew

Met

hod

Expected Bid Announcement Date

Expected Contract Completion Date

1 System Platform for HIF Information System (Hardware, system software)

G/SIIS ICB Prior 0209/15 11/30/15

2 IPH Information System G/SIIS ICB Prior 08/17/15 07/04/16 3 Medical Equipment for MCH (7 Lots) G ICB Prior 09/19/14 12/31/15

4 Designing Outpatient Drug Benefit Scheme

CS QCBS Prior 09/08/14 03/13/15

5 Outsourcing Outpatient Drug Benefit Management

CS QCBS Prior 01/19/15 05/05/17

6 Development of the Communications Strategy

CS QCBS Prior 09/08/14 09/20/19

7 Development of Capitation Performance CS QCBS Prior 05/12/14 10/31/16

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Con

trac

t P

ack

age Contract Description

Typ

e

Pro

cure

men

t M

eth

od

Rev

iew

Met

hod

Expected Bid Announcement Date

Expected Contract Completion Date

Payments Manual

8 Technical Audit for Capitation Performance Payments

CS QCBS Prior 01/19/15 09/30/19

9 Adjustment of Information Systems in PHC and hospitals (Software)

CS SSS Prior 10/12/15 12/15/15

10 Adjustment of HIF information system - (Software)

CS SSS Prior 10/12/15 12/15/15

G: Goods SBD; G/SIIS: Supply and Installation of Information System; ICB: International Competitive Bidding CS: Consultancy Services: QCBS: Quality and Cost Based Selection, SSS: Single-Source Selection.

51. Procurement Capacity and Risk Assessment: A detailed assessment of the MoH’s capacity to implement procurement actions for the proposed Project was completed during appraisal. The assessment reviewed the organizational structure for implementing the Project and found that there continues to be poor coordination between the Procurement Department and the technical line divisions within the MoH. It further concluded that MoH does not have adequate capacity to implement the procurement activities following World Bank’s Guidelines. The risk assessment rating for the entire project is being done through the Procurement Risk Assessment and Management System (P-RAMS). 52. Considering the complexity of the envisaged contracts and track record of MoH with procurement activities under the IDF Grant, the procurement risk for the Project is assessed as “high” with the following risks being identified:

(a) The Project will include IT procurements and Health Sector Goods that may need collaboration of different departments within MoH in the preparation of the bidding documents and also in the evaluation of the bids. There is a potential risk in delaying of the procurement activities due to inadequate coordination between the different departments. (b) MoH may need expert services for highly specialized areas for some of the procurements. There is a potential risk in delaying procurement and contract implementation activities in case no such support is received in a timely manner. (c) There is a risk of improper procurement implementation due to unfamiliarity of MoH staff on the World Bank’s January 2011 Procurement/Consultants Guidelines and latest relevant Standard Bidding Documents.

53. The measures and time frame given in Table 2 above were agreed with the MoH in order to mitigate the remaining risks, which are presented in Table 3 below.

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Table 3: Procurement Risk Mitigation Measures

Environmental and Social (including safeguards)

54. The Project is a straightforward Category ‘C’ and has no environmental risks. No construction or civil works are envisaged. Only minor refurbishment may be undertaken in health facility areas where equipment are to be installed. The medical equipment supported by the Project does not require any special arrangements for installation. Expert assessment of the list suggests that water and electricity requirements for the equipment are normally available in all hospitals. No medical equipment with safeguards consequences - such as radiographic equipment that requires room shielding works - will be purchased. 55. Public support for the mandatory health insurance reforms. There is strong public support for the introduction of mandatory health insurance and making improvements in the health sector, including the readiness to pay a higher price for better health services. The Project will, therefore, likely have strong public support. The poor and excluded communities are expected to benefit from the Project interventions. Public outreach and communications will be carefully crafted to inform these groups about the reform process, including about their responsibilities and entitlements under the new reforms, in order to maximize benefits among the poorest population. 56. The Project does not have any Social Safeguard risks. No construction or civil works are envisaged. However, minor refurbishment may be undertaken in health facility areas where equipment are to be installed. Given that these refurbishments will be carried out in publically owned facilities and there are no other Project funded activities that will result in the loss of

Mitigation Measures Responsibility Time Frame

Hiring a Procurement Specialist with relevant experience in other donors and/or World Bank procurement policies and procedures.

MoH Before Effectiveness

Draft procurement plan for at least the first eighteen months of the Project.

MoH Before Negotiations

Bank’s procurement specialist to work closely with MoH, including organize procurement session as part of the Project launch workshop, procurement trainings for PCU staff whenever needed, specialized trainings on IT procurement when offered in ECA region for PCU staff.

WB During Project implementation

MoH to hire consultants to assist in the preparation of bidding documents/technical specifications, bid evaluation reports and contract management for highly specialized contracts.

MoH During Project implementation

MoH to prepare and initiate high priority contracts. MoH Before Project effectiveness

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assets, income or displacement the Involuntary Resettlement Operation Policy 4.12 is not triggered. Monitoring & Evaluation

57. Progress on results will be monitored through routine data, administrative (including financial management) records and bespoke progress reports from relevant bodies. Primary responsibility for data collection will be held by the PCU and HFA/HIF. The PCU will also be responsible for bringing together the progress reports, monitoring the key performance indicators and results in collaboration with HFA/HIF and IPH, and communicating with the World Bank on progress according to the frequency of reports indicated in Annex 1. Consensus among key stakeholders for the formulation of indicators and monitoring arrangements has been developed through Project preparation. 58. Monitoring and evaluation under the Project will be integrated into the regular monitoring functions of the MoH, HFA/HIF and IPH. The Project will also strengthen systems for performance management and monitoring of performance indicators at central, municipality and facility level. If systems are not in place to collect data on other key indicators of importance to the Project, or if current reporting systems are unreliable, the Project will support the establishment or strengthening of such monitoring systems. As HFA/HIF evolves, the results framework may need to be adapted to its emerging databases and reporting systems. Role of Partners

59. Complementarity with other development partners in the Kosovo health sector. The Project will seek to harmonize activities with other development partners in order to avoid duplication of activities and ensure consistent support to the MoH and the sector. Two key areas of complementarity to existing health sector development partners are in training and quality improvement activities, and in information systems. Potential synergies have been accounted for in the proposed Project activities. The PCU will ensure participation in existing collaboration mechanisms. Regular meetings to discuss health sector activities will also take place with the main Development Partners, Luxemburg Development (Lux Dev) and Swiss Development Cooperation (SDC), and the Bank.

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Annex 4: Operational Risk Assessment Framework (ORAF)

Republic of Kosovo: Kosovo Health Project (P147402)

.

Project Stakeholder Risks

Stakeholder Risk Rating Substantial

Risk Description: Leadership Change. Changes in leadership in the Ministry of Health (MoH) and Ministry of Finance (MoF) could adversely affect the Project if the new leadership does not support the reforms. The introduction of a mandatory health insurance is a long process and at the same time is very visible to the public. Its full implementation relies on continued political and public support. Public support could erode especially if no tangible improvements are apparent in service delivery and health care costs to the population. The risk of push back from municipalities, hospitals and/or primary care providers to enter into performance agreements. The risk of resistance from pharmaceutical companies or the select private pharmacies that benefitted from favorable supplier/dealer relationships to a procurement reform program that could limit their profits.

Risk Management:

In general, support for the reforms supported by the proposed Project is high. Nevertheless, the proposed Project will seek to mitigate risks from leadership change by broadening participation in the development of the proposed Project with a specific focus on including key technical officials in the MoH. Consultations on the scope of the Project have also been held with members of the opposition to ensure that the design reflects a broader vision on the need for reforms. The proposed Project will continue wider consultations (supported under sub-component 1.1) during implementation to ensure support in the event of leadership change.

Resp: Status: Stage: Recurrent: Due Date: Frequency:

Client In Progress Implementation CONTINUOUS

Risk Management:

The proposed Project will phase the implementation of the reforms to deliver ‘quick wins’ in terms of service delivery. At the same time, the proposed Project will support communications and citizen engagement to keep citizens informed and to respond to their expectations.


Client Not Yet Due Implementation CONTINUOUS

Risk Management:

Capitation-based payments conditional on performance provide additional funds. In a context of fiscal constraints, particularly for primary care, these funds would likely be welcomed even if conditional on performance improvements.

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Risk Management:

Although negotiated reimbursement prices to private pharmacies could create downward pressure on profits for pharmacies or pharmaceutical companies, the outpatient drug benefit scheme may also considerably expand sales for drugs in the package since poor or vulnerable groups who previously self-rationed their use of drugs will now be covered through insurance subsidies. This could mitigate resistance. Furthermore, if implemented well and supported through communications activities, public support for the outpatient drug benefit program could also mitigate resistance from pharmaceutical companies.



Implementing Agency (IA) Risks (including Fiduciary Risks)

Capacity Rating Substantial

Risk Description: Lack of Project management capacity in the MoH may result in implementation bottlenecks. FM and Procurement Risks: Fiduciary management capacity is weak. M&E: The data needed to monitor results may not be available in a timely manner.

Risk Management:

Implementation oversight and decision making mechanisms will be created to prevent and address bottlenecks. Monthly meetings chaired by MoH high level officials are proposed to coordinate and monitor progress of the Project and decide on actions to prevent and address bottlenecks. A Project Preparation Advance has been approved by the Bank to ensure that the necessary project management capacity is in place before implementation begins.


Client In Progress Both CONTINUOUS

Risk Management:

Fiduciary management capacity in the MoH will be supported by qualified fiduciary expertise in the PCU (FM and procurement). The Bank FM and procurement team members will also provide close supervision of project resources. The Project Preparation Advance requested by the MoH and approved by the Bank includes funds to hire an FM and Procurement specialist.

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Risk Management:

3.1.3 Indicators in the Results Framework have been selected such that they are specific, measurable, and realistic and potential data sources are available. The proposed Project will build M&E capacity in the health sector. Furthermore, incentives created through purchasing mechanisms will incentivize the reporting of accurate data which may be used to monitor results on a regular and timely basis.



Governance Rating Substantial

Risk Description: Risk Management:

Accountability and Oversight. The capitation-based performance payment mechanism will require clear line of accountability and oversight (MoH/HIF, health facilities, technical and financial supervision and verification).

A separate capitation performance payments manual will be prepared and updated regularly to provide details on the line of responsibilities and accountability/oversight. This manual will detail the standard operating procedures for implementing all aspects of capitation-based performance payments supported by the proposed Project. The manual satisfactory to the Bank will be a condition for disbursements under component 2.


Client Not Yet Due Implementation

Risk Management:

The MoH will develop specific internal control procedures that will be part of the Project Operational Manual (POM). The internal control procedures should primarily focus on reducing fraud and corruption risk during procurement and execution of contracts to be signed under the project.



Risk Management:

The POM will also clearly define responsibilities and accountabilities for all parties

53

involved in the project implementation. The responsibilities would be mentioned in the POM along with detailed description of procurement methods and procedures to be adopted under the Project. The Bank FM and procurement team members will provide close supervision. FM and procurement experts will be selected under the PPA and contracts renewal under the proposed Project at time of effectiveness will be subject to satisfactory management of their respective tasks prior to effectiveness.



Project Risks

Design Rating Moderate


The number of components and sub-components and their contents may overwhelm the various entities responsible for their implementation due to lack of capacity.

The Bank has assessed capacity at the MoH level and subordinate agencies to carry out their respective roles and capacity building measures will be agreed upon with the MoH and detailed in the Project Operational Manual. The proposed Project also seeks to phase implementation of reforms over a 5 year period to enhance simplicity of implementation.


Bank In Progress Both CONTINUOUS

Social and Environmental Rating Low


Not applicable as this is a Category C project.


Program and Donor Rating Moderate


Insufficient coordination and cohesiveness among interventions to support the health sector reforms.

The Project will continue the current practice of close coordination with and involvement of donors and local authorities in implementing projects through, among other mechanisms, monthly meetings of the Coordination and Monitoring Committee of the MoH.

54


Bank Not Yet Due Implementation CONTINUOUS

Delivery Monitoring and Sustainability Rating Moderate


Increased funding for the health sector in general, and specifically for primary care through capitation-based performance payments, may not be sustained.

Continued dialogue with the Government to maintain budget allocations for health in order to ensure that health sector improvements are sustained. Furthermore, financial sustainability of proposed Project interventions, such as capitation-based performance payments could be ensured through the additional revenues generated from mandatory health insurance revenues. Additionally, the project envisages information sharing with the population about the benefits of the reform and this could lead to increased demand for improvements in health care delivery and support to maintain health sector funding levels.


Bank Not Yet Due Implementation CONTINUOUS

Overall Risk

Overall Implementation Risk: Rating Substantial

Risk Description:

Implementation risk is rated "substantial" given that: (a) a package of ambitious reforms is being introduced; and (b) the country's institutional capacity.

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Annex 5: Implementation Support Plan

Republic of Kosovo: Kosovo Health Project

1. Strategy and Approach for Implementation Support

1. Implementation Strategy: The strategy for the Implementation Support Plan would include regular dialogue with the Government, joint review (MoH and Bank) of the Project implementation and regular oversight of the Project fiduciary activities. Regular dialogue would facilitate early identification of problems and obstacles, which could delay implementation and would enable timely provision of technical advice and support to remove such obstacles. Joint reviews would take place at least twice a year, aimed at reviewing the progress and achievement of agreed results. During each of the reviews, the type of implementation support that is needed would be identified, followed by joint decisions on specific necessary assistance.

Fiduciary Requirements

2. Financial Management. As part of its Project implementation support missions, the Bank will conduct risk-based financial management within the first year of Project implementation, and then at appropriate intervals based on the assessed risk and performance of the Project. During Project implementation, the Bank will supervise the Project’s financial management arrangements in the following ways: (a) review the Project’s Interim Un-audited Financial Reports (IFRs) as well as the Project’s annual audited financial statements and auditor’s management letters and remedial actions recommended in the auditor’s management letters; and (b) during the Bank’s on-site missions, review the following key areas: (i) Project accounting and internal control systems; (ii) budgeting and financial planning arrangements; (iii) disbursement arrangements and financial flows, including counterpart funds, as applicable; and (iv) any incidences of corrupt practices involving Project resources. The Bank’s on-site financial management implementation support and supervision will be conducted by the Bank-accredited Financial Management Specialist. 3. Procurement supervision. Prior review supervision would be carried out by the Bank in accordance with the procurement thresholds. In addition and in compliance with the results of the capacity assessment of the Implementing Agency, there will be two supervision missions every year to carry out post review of procurement actions. These missions will include informal training to procurement specialists of the PCU/MoH. 4. The PCU will maintain complete procurement files, which will be reviewed by Bank supervision missions. All procurement related documentation that requires Bank’s prior review will be cleared by the Procurement Specialist and relevant technical staff. Procurement information will be recorded by the Procurement Specialist at the PCU and submitted to the MoH and the Bank as part of the semi-annual IFRs and annual progress reports.

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Implementation Support Plan:

Table 4: Implementation Timeline and Support

Time Focus Skills Needed Partner Role Bi-yearly Technical Review:

All components

Fiduciary Oversight: Financial Management Procurement Safeguards Oversight: Environmental performance and socially responsible performance

Public Health Specialists (HQ); Health economist; Sr. Operations Officer and other key consulting services (i.e., IT specialist; Medical Equipment specialist) Financial Management Specialist/

Procurement Specialist

Safeguards Specialist (if needed)

N/A

Regular support by TTL and field-based staff

Technical Review:

All components

Fiduciary Oversight: Financial Management Procurement Safeguards Oversight: Environmental performance and socially responsible performance

Public Health Specialists (field-based staff and international staff), Health economist, and operations specialist Financial Management Specialist/ Procurement Specialist Safeguards Specialist (if needed)

N/A

Table 5: Skills Mix Required

Skills Needed Number of Staff Weeks

per FY

Number of Trips per FY

Comments

Task Team Leader 12 2 TTL based at HQs—field visits; VC and audio

Health Specialist 6 2 Trips to be combined with other Project support; regular support also planned from field-based public health specialist and operations

57

Skills Needed Number of Staff Weeks

per FY

Number of Trips per FY

Comments

specialist Health Economist 4 2 Trips to be

combined with other Project support

Senior Operations Officer 4 2 Trips to be combined with other Project support

Health Information Systems Specialist 4 2 Trips to be combined with other Project support

Safeguards Specialist 3 0 Staff based in the field, as may be needed

Procurement Specialist 4 0 Staff based at HQ

Financial Management Specialist 4 0 Staff based in the field

Senior Operations Specialist 8 0 Field-based support between missions

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Annex 6: Economic and Fiscal Analysis

Kosovo Health Project

1. The economic and fiscal analyses carried out during the preparation of the Project covered: (i) the estimation of the Project’s development impact; (ii) the fiscal impact and sustainability of the Project and in particular the future mandatory health insurance scheme whose preparation is supported by the Project; (iii) the World Bank’s contribution to the Project; and (iv) the rationale for public involvement. Estimation of the Project’s development impact 2. Health expenditures in Kosovo are lower than in regional or GDP per capita comparator countries. Partly as a consequence, Kosovo has the worst health outcomes in Europe, and due to the low public health spending, OOP spending is high resulting in insufficient financial protection of the population against adverse consequences from health expenditures (See paragraphs 4-6). This implies that health spending should be increased in order to improve the health outcomes for Kosovo’s population and, at the same time, that OOP spending must be reduced in order to provide the population with a better financial protection from catastrophic and impoverishing health expenditures. 3. The Law on Health Insurance will introduce a better risk pooling mechanism in health financing and foresees broadened exemption categories for premium payments (partly based on Proxy Means Tests), which should provide better financial protection for vulnerable groups. Preliminary results from the Poverty and Social Impact Analysis of January 2014 indicate that the introduction of health insurance is likely to have a positive impact on poverty reduction. Using the data from the Household Budget Survey 2009 as counterfactual, the poverty headcount net of health payments would decrease from the 2009 estimate of 37.7 percent to 28 percent under the baseline scenario considered for the introduction of a health insurance system. The gradual introduction of an outpatient drug benefit will improve the financial protection of the poor and vulnerable from OOP spending that is mainly related to pharmaceuticals.

4. However, the constrained public resources mean that health spending should be as efficient as possible. This in turn means that the efficiency and the quality of care (given that the efficiency of a health system and the quality of care provided are closely intertwined) in the Kosovar health system must further be enhanced.

5. In view of this, the PDO of the proposed operation aims to improve financial protection from health spending for the poor and quality of care through:

(i) Support for health sector reforms focused on mandatory health insurance (by which the poor and other vulnerable groups are covered without having to pay premiums) and performance-based purchasing of PHC services which incentivize providers to improve access to and quality of services;

59

(ii) Building capacity to improve quality of care for priority MCH and NCD services (given the country’s burden of disease and the room for quality improvement in MCH services, see paragraphs 9-10).

6. In the following, the economic rationale for the combined interventions of strengthening primary care and improving the quality of care as well as the capacity building for the establishment of a mandatory health insurance scheme (improving financial protection from health spending sub-component) are discussed in detail.

Strengthening primary care and improving the quality of care

7. The distinction between investments directed at increasing efficiency and improving quality of care is to a certain degree subjective. Efficiency savings free up resources that could remain in the health sector and enhance quality of care, whereas achieving a higher quality of care with given funds is tantamount to increasing the efficiency of the health sector.

8. In view of Kosovo’s epidemiological profile and the population’s needs, the Kosovar health sector is crucially characterized by gaps in quality of care for those who receive services (e.g. essential MCH services for which coverage is relatively high) and beyond that by high gaps in the delivery of population-based services to prevent and manage risk factors for NCDs (e.g. cardiovascular disease).

9. One reason for the above mentioned flaws of the health sector are the institutional and financial arrangements for primary care services. They are characterized by a separation between the regulatory, financing and provision functions. The MoH formulates health policy and is responsible for hospital care, whereas Municipalities are responsible for primary care service delivery and receive a capitation-based grant for service delivery from the MoF. Provider payments from Municipalities to primary care facilities are based on line item budgets, and do not offer strong incentives to focus on improving quality of care. Financial resources are allocated on the base of the installed capacity (e.g. number of health staff) with scarce consideration of population health needs.

10. This lack of incentives due to the fragmentation in responsibilities and financing creates some inefficiency as providers tend to focus on securing funds rather than on improving efficiency or the quality of care and makes oversight of primary care services by the MoH difficult.

11. Economically speaking, the split between the provision, financing, and regulatory functions introduces a principal-agent problem22 in the health sector. A principal (i.e. MoH and local authorities) delegates the provision of health service to an agent (i.e. health care facility) in an environment characterized by (i) moral hazard: the agent's action (e.g. effort, quality) affects the principal payoff, but the action is not directly observable by the principal; and/or (ii) information asymmetry / adverse selection: the agent has some private information, for example is better placed to judge the severity of the condition of the patient treated; and (iii) costly outcome verification: the agent can observe some outcomes, such as the quality of care delivered better 22 Andreu Mas-Colell, Michael Dennis Whinston, Jerry R. Green - Microeconomic Theory, Chapter 9, Oxford University Press, 1995.

60

than the principal. The difference between the principal's payoffs when there is full information and/or no moral hazard and when there is not, is known as the agency cost.

12. There are two ways of mitigating agency costs: (i) the implementation of incentives and (ii) the enhancement of information. The principal can either put in place a set of incentives which encourage the agent to carry out actions in accordance with the principal's requirements. Therefore, capitation-based performance payments made to health care facilities can solve the principal-agent problem by linking the payment with the achievement of output/process targets, thereby fostering entrepreneurial behaviors striving for more efficiency. Once the HIF has accumulated higher revenues and can make the capitation-based performance payments to Municipalities or primary care facilities, it can therefore also gain the stewardship in the health sector. The payments align the agent’s incentives to the ones of the principal who can hence effectively and efficiently manage health resources.

13. In turn, the cross-cutting investments in information systems that include the development and implementation of data analytics and reporting systems for the IPH will improve monitoring and evaluation of health providers' performance. These investments hence represent a complementary strategy to mitigating the problem of information asymmetry and overcoming the fragmentation of the health sector functions.

14. In the following cost-benefit analysis, the combined benefits from strengthening primary care and improving the quality of care are quantified.

Cost-benefit analysis

15. Benefits considered. The beneficial effects of the improved access to and quality of priority services at the primary care level, including Maternal and Child Health (MCH) and Non Communicable Disease (NCD) services (from Project Component 2), and the improved quality of care across the health system (from Project Subcomponent 1.2) will be estimated using the impact on population health status measured in terms of Disability Adjusted Life Years (DALYs), which represent the sum of years of potential life lost due to premature mortality and the years of productive life lost due to disability. The cross-cutting investments in Information Systems (part of Subcomponent 1.2) supporting the mentioned interventions are not assumed to have a direct (but clearly an indirect) beneficial impact on the population health status. The financial costs related to the implementation of the Information Systems are however taken into account, given that these investments are necessary in order for the other interventions to have the desired beneficial impact on population health.

16. Costs considered. The complete Project funds designated for Subcomponent 1.2 (US$6.4 million) and Component 2 (US$12.5 million) are accounted for.

17. The assumptions used in the cost-benefits analysis are listed below:

• Basic discount rate. Financial costs and financial savings are discounted at 4.5 percent to account for inflation (1.5 percent) 23 and the time value of money (TVM) (3 percent).

23 The IMF World Economic Outlook, October 2013 estimates an inflation rate of 1.59 percent for the 2014-2018 period.

61

A higher discount rate of 7.5 percent (reflecting a 6 percent discount rate accounting for the TVM) is also applied to verify the sensitivity24 of the results to this assumption. A higher inflation estimate would decrease the present value of the financial costs (increasing the estimated benefit as measured by the NPV) and is therefore not considered in a sensitivity analysis.

• Period of time considered. The cost-benefits of the interventions are calculated over the 2014-2030.

• Population covered. It is assumed that all interventions will be first implemented in the Pristina Municipality and three Municipalities of the Prizren Region in 2014-2015 and then phased out nationwide. Therefore, the interventions will affect the efficiency and quality of care levels of all facilities and the health results for the entire population, (around 1.82 million people in 2013) from 2016 onwards. Population growth up to the year 2030 is based on the WB HNP Statistics.

• Benefits of interventions beyond Project completion. Although the benefits from the interventions will likely persist beyond Project completion in 2018 (given that the HIF will continue and build on the developed performance-linked capitation payments and quality improvement schemes by using its additionally raised revenues), benefits in terms of better population health are assumed to taper off starting in 2020. This approach assures that the estimated benefits are conservative.

• Reduction in DALYs: DALYs, which represent the sum of years of potential life lost due to premature mortality and the years of productive life lost due to disability, have a built-in age weighting and discount rate of 3 percent. The reduction in DALYs upon Project completion in 2018 from the integrated Project interventions to increase the access to strengthened PHC services is conservatively set at 0.3 percent across all NCDs, whereas the reduction in DALYs in 2018 from improved quality of care is conservatively set at 0.1 percent across all NCDs25.

• Counterfactual Scenario for DALYs: The baseline DALYs were calculated for the various conditions from WHO estimates for the Eastern and Central Asia region, adjusted for the population size of the Project (1.82 million people) and the age structure of Kosovo (from the WB HNP Statistics). These include the forward projections of DALYs averted (that is, healthy life years gained) from 2014 to 2030.

• Valuation of DALYs used a very simple rule. Each DALY saved is valued at yearly per capita income (using a starting value of about Euro 2,850 for 2014). The Disease Control Priorities Project and Copenhagen Consensus guidelines mention three times per

24 The estimated benefits are sensitive to a higher TVM, since it decreases the present value of the more distant benefits from DALYs averted.

25 The benefits of the interventions are estimated assuming that interventions are separable and benefits are additive. It is plausible to argue that benefits from the interventions are integrated and that benefits are multiplicative.

62

capita income as a still conservative estimate for the value of each DALY averted.26 Studies of valuation of life in the United States even utilize much higher values for a year of life that would produce more extreme benefits due to the Project interventions.

• Discount Rates for DALYs: The monetary value of future stream of health benefits (i.e. annual DALYs saved) is discounted at 3 percent (a higher rate of 6 percent is used for the sensitivity analysis) 27 to account for the TVM.28

• GDP Growth: An annual growth rate of 4 percent in real per capita GDP is used, being more conservative than the estimates provided by the IMF29. The halved growth rate of 2 percent is used for the sensitivity analysis.

Figure 1. Total DALYS averted by year compared to Europe and Central Asia counterfactual projections, baseline scenario

Expected benefits from the interventions

18. Table 6 presents the NPV and the estimated IRR of the considered interventions. The sum of costs and benefits (i.e. the NPV of the interventions) is largely positive and the estimated IRR ranges between 20.11 and 24.24 percent, depending on the GDP growth rate used, which clearly shows the positive development impact of the considered Project interventions.

26 See: D. Jamison, P. Jha, and D. Bloom, “Copenhagen Consensus 2008 Challenge Paper: Diseases,” 2008; http://www.givewell.org/files/DWDA%202009/Stop%20TB/Copenhagen%20Consensus%20Paper-Diseases.pdf. 27 Per guidelines from WHO and the Disease Control Priorities Project. See: http://www.dcp2.org/. 28 Since the benefits from DALYs averted are measured using real GDP growth rates, discounting for inflation is not needed. 29 The IMF World Economic Outlook, October 2013 estimates a growth rate of 4.56 percent for the 2014-2018 period.

0100200300400500600700800900

1000

2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030

DALY

s av

erte

d

Year

http://www.givewell.org/files/DWDA%202009/Stop%20TB/Copenhagen%20Consensus%20Paper-Diseases.pdf

http://www.dcp2.org/

63

Table 6. Net Present Value and Internal Rate of Return of the Project (EUR ’000s) for different GDP growth scenarios

TVM Discount Factor

Baseline GDP growth Low GDP growth

NPV IRR30 NPV IRR31 3% 15,467 EUR

24.24% 11,429 EUR

20.11 % 6% 10,657 EUR 7,610 EUR

Building capacity for the establishment of a mandatory health insurance scheme 19. There are three main benefits from the establishment of a mandatory health insurance scheme:

(i) The consolidation of funding flows for the health sector into a single risk pool improves the financial protection of the population against negative welfare effects from health payments. In particular, the poor and other vulnerable groups are protected, since they are exempted from premium payments and copayments. Such a risk-pooling scheme with sufficient exemptions creates better access to care for the poor and hence contributes to better equity outcomes of the health system.32 (ii) The health insurance directs additional resources from insurance premiums to the health sector and therefore contributes to the needed rise in health funding. (iii) The establishment of the health insurance fund helps to overcome the fragmentation of the health sector in the long-run. As mentioned in the discussion of the benefits from Strengthening primary care and improving the quality of care, the performance-based purchasing of primary care services, once it can be financed by insurance premiums and led by the HIF, presents a strategic stewardship tool for the MoH and the HIF.

20. Whereas the benefits of introducing a single risk-pool insurance fund scheme are clear-cut from a theoretical perspective, the success and feasibility of a mandatory health insurance scheme raising revenues (mainly) from payroll taxes hinges on its fiscal sustainability. This holds especially true in a country like Kosovo whose economy only has a relatively small formal sector.33

Fiscal Impact and Sustainability

21. Assessing the fiscal impact and sustainability of the future mandatory health insurance scheme supported by the Project is therefore a keystone of these economic and fiscal analyses. The assessment has been based on an actuarial model of the expected revenues and uses of these

30 Net of inflation. 31 Net of inflation. 32 Zweifel P,Breyer F, Kifmann M, 2009, Health Economics, Chapters 6&7: Springer Dordrecht Heidelberg London New York 33 Kosovo, like many of the Western Balkan countries, lacks informal sector data. Information from some new EU member states suggests that informality is highest in agriculture (80.6 percent) and construction (38.2 percent), and among the self-employed (83.9 percent). Numbers based on data from: Bulgaria, Czech Republic, Estonia, Latvia, Poland and Slovakia. – Kosovo Labor Force Survey 2012.

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revenues of the future health insurance scheme. It is crucial to underline that the creation of the mandatory health insurance scheme in the Kosovar case is primarily a revenue raising mechanism. 22. Given the broad support of a mandatory health insurance among political parties as well as the population34 at large, policy makers have freedom to choose the terms (parameters so to speak) of the eventual insurance scheme. They do not need to overpromise and can ensure the fiscal sustainability of the insurance scheme.

23. In April 2006, the Kosovo Assembly approved a health insurance law, which would have introduced a contributory system for health financing based on payroll taxes. The law was later withdrawn, because the burden of insurance contributions in the formal sector would have been too high and likely would have discouraged firms from hiring staff on a formal basis. Against this backdrop, the current proposal for the establishment of a HIF foresees a flat rate contribution of Euro 3.5 per month from any citizen/resident of Kosovo, unless they get exempted due to poverty. This measure is crucial for the sustainability of the proposed insurance scheme. The payroll tax rate levied on formal sector incomes was also kept moderately at 7 percent. The Human Development and Poverty Reduction and Economic Management units in the World Bank, in collaboration with the International Monetary Fund, provided technical support to the MoH on the Health Insurance Law. The Law seeks to ensure that the introduction of mandatory health insurance will be fiscally neutral and includes safeguards to prevent the Health Insurance Fund from running deficits.

24. Still, the government/MoH is well advised to counter pressure for increased compensation through increased public education. It should explain to workers and retirees what the new system is and why these decisions were taken. Therefore, Component 3 of the Project will support the MoH to implement communications activities to inform the public about the reforms, in particular about the new mandatory health insurance scheme, their entitlements and responsibilities with reference to the scheme.

25. The fact that establishment of the HIF is foremost a revenue raising mechanism and that its claims will at the beginning not fully match revenues, allows the Fund to build a reserve from its revenues during the first years of its existence. Such a sufficiently big reserve fund is of key importance for the financial sustainability of the HIF and should be accumulated during the approximately first 5 years of the fund’s existence to match as a best practice the equivalent of 3-6 months of claims faced by the HIF.35 The different scenarios allow for different reserve building speeds. The estimated revenues raised by the mandatory health insurance scheme 26. All the scenarios considered for the revenue estimation are based on conservative assumptions. Figure 2 compares the highest revenue scenario considered to the lowest one, Figure 3 compares the uses of these revenues in the first year for the same two scenarios. Under

34 Kosovo is the only succession state of former Yugoslavia that does not have a health insurance system. 35 World Bank Working Paper No. 219 – Health Insurance Handbook

65

the high revenue scenario36, first year net revenues would be Euro 71 million (after having subtracted administration costs of the future HIF and the repayment of the premiums for exempted groups and the employer part of public sector employees. This high revenue scenario still only assumes that 40 percent of the non-exempted population not being covered by insurance through the formal private (defined as Value Added Tax-registered firms with an annual turnover of € 50,000 or more) or public sector will sign up for insurance in the first year of its implementation. Figure 2: High and low revenue scenarios for the first year premium revenues

Figure 3: The distribution of the estimated revenues raised across different purposes for different scenarios

36 Assuming premium collection in 2015.

7.7 16.9 17.6

12.2 17.6 12.2

42.2 29.0

12.4

5.5

0

20

40

60

80

100

120

High revenue scenario Low revenue scenario

First year revenue composition (EUR Million)

Rest of population

VAT sector

Public sector-employee

Public sector-employer

Exemptions

17.6 12.2

7.7 16.9 3.0

7.5 1.3 1.4

37.9 0.0

30.0

24.8

0

20

40

60

80

100

120

High revenue scenario Low revenue scenario

First year use of revenues (EUR Million)

Outpatient Drug Benefit

Quality Enhancement

Administration

Reserve fund

Exemptions

Public sector premiums

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27. The low revenue scenario (yielding net revenues of Euro 31 million), even assumes that only 25 percent of the not-exempted and not formally covered population will take out insurance in the first year of premium collection. Furthermore, the scenario assumes that only 50 percent of employees from the formal VAT sector actually start contributing premiums in the first year. 28. Given the premise that the government will keep its budget for health constant (in real terms) and only pay for secondary and tertiary health care as before, it is assumed across all scenarios that the HIF must reimburse the employer part of public sector premiums to the government. This assumption underlines the conservativeness of the estimated net revenues. 29. The analyses in this section are based on contribution and exemption parameters stated in the draft of the HIL which was circulated to Parliament for its review and approval. The non-exempted flat premiums of Euro 3.5 per month as well as the 7 percent payroll tax for formal sector workers (which are stated in the draft law presented to Parliament) are very likely to be maintained in the final law. The uncertainty related to these numbers is limited. Still, the low revenue scenario portrayed in Figure 2 even considers that the payroll tax is dropping to 5 percent. 30. Likewise, the list of exemptions (some categories of people are only eligible for an exemption depending on a means-based test) used as the exemption estimate (some 180,000 people) in the high revenue scenario has been agreed upon by MoH and MoF. The low revenue scenario from Figure 2 assumes that all possible exemptions from premium payments discussed at some point will actually be made. All scenarios assume that the HIF pays 100% of premiums for exempt groups from the very first year.

Table 7. Public health expenditure in Kosovo, 2009-2019

2009 2011 2012 2013 2014 2015 2016 2017 2018 2019

PHE (current US$ '000)

134,944 160,391 174,004 202,276 216,374 302,782 322,766 339,115 355,665 362,779

PHE (% of GDP) 2.26% 2.48% 2.63% 2.98% 3.05% 4.09% 4.15% 4.17% 4.19% 4.19%

Project disbursements (current US$ '000)

740 3,350 7,930 7,360 4,490 1,630

Project disbursements (% of PHE) 0.34% 1.11% 2.46% 2.17% 1.26% 0.45%

Source: Calculation based on Kosovo BOOST v1.0 (MoF data) and World Economic Outlook, October 2013. Estimates after 2013.

31. Table 7 shows public health expenditures (PHE) in Kosovo from 2009 to 2019. The estimated disbursements of the proposed Project will represent a small share of PHE, reaching at most around 2.46 percent of PHE level in 2016. PHE in Kosovo is going to increase by up to 50 percent due to the introduction of the mandatory Health Insurance Fund. Therefore, the country's future fiscal space should allow Project-supported investments, including capitation-based performance payments, to be sustained after Project completion.

67

The rationale for public sector involvement 32. All the entities involved in the Project activities are public sector entities. A mandatory health insurance scheme is a widely used means of providing financial protection to the population in developed countries due to well-known market failures in the health sector. In Kosovo, such protection of vulnerable groups is necessary due to high OOP spending. At the same time, the overall level of health spending is low and mandatory health insurance will raise funding levels. Apart from Subcomponent 1.1 (Improving financial protection by supporting the capacity building at the future HIF), this Project does not involve the introduction of new programs that could be alternatively performed by the private sector, but instead strengthens existing government programs (PHC) and ongoing reforms (establishment of health information systems, improvement of quality of care) in order to alleviate binding constraints to public sector performance. The World Bank’s contribution to the Project 33. The support provided by the World Bank for this Project builds on the well-established partnership with the Government of Kosovo since 1999. Following a series of Interim Strategy Notes, the Bank has adopted the first four-year Country Partnership Strategy (CPS) for Kosovo in 2012. In the health sector, the Bank recently has contributed several studies, including: (i) The Health Financing Reform Study (2008), (ii) The World Bank Health Sector Master Planning Project: Data Report (2008) and (iii) Policy Issues in the Social Sector ( 2008). The proposed Project supports the on-going health sector reforms, and will build institutional capacity to implement the reforms effectively. Health financing reform is at the top of Kosovo’s health policy agenda. In fact, the Health Sector Strategy 2010 - 2014 states the development of a sustainable funding system for the health sector as one of the five strategic objectives. Another objective of the Health Sector Strategy is to decrease morbidity and mortality of the overall population, for which maternal and child mortality rates are cited as critical success indicators. The HIL underlying the foundation of the HIF has been developed in close cooperation with health insurance experts from the Bank.

SERBIASERBIA

SERBIASERBIA

FYR OFFYR OFMACEDONIAMACEDONIA

ALBANIAALBANIA

MONTENEGROMONTENEGRO

ToToRaškaRaška

ToToProkupljeProkuplje

ToToLeskovacLeskovac

ToToSkopjeSkopje

ToToTetovoTetovo

ToToBujanovacBujanovac

ToToKukKukësës

ToToBeraneBerane

ToToNoviNoviPazarPazar

FushFushë Kosova/ë Kosova/Kosovo PoljeKosovo Polje

Lipjan/Lipjan/LipljanLipljan

KamenicKamenicë/ë/KamenicaKamenica

Viti/Viti/VitinaVitina

ShtShtërpcë/ërpcë/ŠtrpceŠtrpce

Shtime/Shtime/ŠtimljeŠtimlje

Theranda/Theranda/Suva RekaSuva Reka

Drenas/Drenas/GlogovacGlogovac

Skenderaj/Skenderaj/SrbicaSrbica

KlinKlinë/ë/KlinaKlina

Rahoveci/Rahoveci/OrahovacOrahovac

MalishevMalishevë/ë/MališevoMališevo

Dragash/Dragash/DragašDragaš

Istog/Istog/IstokIstok

PodujPodujevë/evë/PodujevoPodujevo

Zubin Potok/Zubin Potok/Zubin PotokZubin Potok

NovobNovobërdë/ërdë/Novo BrdoNovo Brdo

Obiliq/Obiliq/ObiliObilic

Leposaviq/Leposaviq/LeposavLeposavicic

Zveçan/Zveçan/ZvecanZvecanˇ

Deçan/Deçan/DecaniDecaniˇ

Kaçanik/Kaçanik/KacanikKacanikˇ

Vushtrri/Vushtrri/VucitrnVucitrnˇ

DaravicaDaravica(2656 m)(2656 m)

Gjilan/Gjilan/GnjilaneGnjilane

Ferizaj/Ferizaj/UroševacUroševac

Prizren/Prizren/PrizrenPrizren

GjakovGjakovë/ë/ÐakovicaÐakovica

MitrovicMitrovicë/ë/MitrovicaMitrovica

´

PRISHTINPRISHTINËPRIŠTINAPRIŠTINA

MITROVICAMITROVICAKOSOVASKA MITROVICAKOSOVASKA MITROVICA

P E J AP E J AP E CP E C

G J A K O V AG J A K O V AÐ A K O V I C AÐ A K O V I C A

PRISHTINËPRISHTINËPRIŠTINAPRIŠTINA

GJILANIGJILANIGNJILANEGNJILANE

FER IZAJ IF ER IZAJ IUROŠEVACUROŠEVACP R I Z R E N IP R I Z R E N I

P R I Z R E NP R I Z R E N

Fushë Kosova/Kosovo Polje

Lipjan/Lipljan

Kamenicë/Kamenica

Viti/Vitina

Shtërpcë/Štrpce

Shtime/Štimlje

Theranda/Suva Reka

Drenas/Glogovac

Skenderaj/Srbica

Klinë/Klina

Rahoveci/Orahovac

Malishevë/Mališevo

Dragash/Dragaš

Istog/Istok

Podujevë/Podujevo

Zubin Potok/Zubin Potok

Novobërdë/Novo Brdo

Obiliq/Obilic

Leposaviq/Leposavic

Zveçan/Zvecanˇ

Deçan/Decaniˇ

Kaçanik/Kacanikˇ

Vushtrri/Vucitrnˇ

Gjilan/Gnjilane

Ferizaj/Uroševac

Prizren/Prizren

Gjakovë/Ðakovica

Mitrovicë/Mitrovica

PejëPec

PRISHTINËPRIŠTINA

MITROVICAKOSOVASKA MITROVICA

P E J AP E C

G J A K O V AÐ A K O V I C A

PRISHTINËPRIŠTINA

GJILANIGNJILANE

FER IZAJ IUROŠEVACP R I Z R E N I

P R I Z R E N

SERBIA

SERBIA

FYR OFMACEDONIA

ALBANIA

MONTENEGROIbar

Klina

Ibar

Ibar

Sitnica

Lab

Tula

rska

Reka

Binacka

Binacka

Drenica

Gracanka

Sitnica

Topluga

BistricaDrini i

Bardh

ë

Beli Drim

Beli

Drim

Klina

Miruša

Ha j l a P o d g o r

Ša

r P

l a n i n a

Daravica(2656 m)

ToRaška

ToProkuplje

ToLeskovac

ToSkopje

ToTetovo

ToBujanovac

ToKukës

ToBerane

ToNoviPazar

20°00’ E 20°30’ E 21°00’ E 21°30’ E

20°00’ E 20°30’ E 21°00’ E 21°30’ E

43°00’ N

42°00’ N

42°30’ N

43°00’ N

42°00’ N

42°30’ N

KOSOVO

IBRD 37048R

MAY 2012

This map was produced by the Map Design Unit of The World Bank. The boundaries, colors, denominations and any other informationshown on this map do not imply, on the part of The World BankGroup, any judgment on the legal status of any territory, or anyendorsement or acceptance of such boundaries.

0 5 10

0 10 20 Miles

20 Kilometers

KOSOVOKOMUNA/OPŠTINA CAPITALS*

RRETH/OKRUG CAPITALS**

NATIONAL CAPITAL

RIVERS

MAIN ROADS

RAILROADS

KOMUNA/OPŠTINA BOUNDARIES

RRETH/OKRUG BOUNDARIES

INTERNATIONAL BOUNDARIES* The first name is in Albanian and the second one is in Serbian.

** Names of the Rreth/Okrug are the same as their capitals.

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