Financial management of Public Health Institutes: economic losses due to reimbursement system and purchases contravening the rules

Press Release on audit No 19/30 – 3 May 2021

The Supreme Audit Office examined the financial management of Public Health Institutes between the years 2017 and 2019. The SAO focused on how the Institutes proceeded in making public purchases. It also looked into how the Ministry of Health (MoH) carried out its role as founder of the Institutes. The audit showed that the MoH had not taken action to prevent the financial losses of the Public Health Institutes. The financial management of the Institutes was unprofitable in the audited period due to an increase in salary rates, and also due to the reimbursement system of medical services for laboratory examinations and diagnostics. Also, the MoH did not sufficiently monitor the expenditures of the Institutes. The purchases of the Institutes exceeded CZK 1.3 billion in the years under review. The SAO identified a number of serious deficiencies in the area of purchases, including infringements. The internal control system of Public Health Institutes was not working properly either.

Public Health Institutes are state-funded organisations of the Ministry of Health and provide, for example, laboratory services in the field of health care, environmental protection, or vaccination. In 2012, the Institutes were reorganised. There are thus two Public Health Institutes – one based in Ústí nad Labem and the other in Ostrava – which provide their services in the workplace and in other regions of the Czech Republic.

Between the years 2017 and 2019, the financial management of the Public Health Institutes was unprofitable. One of the reasons for this was the reimbursement system for laboratory services, which is covered by public health insurance. This system is designed in a manner that does not calculate the payment for individual procedures, but for individual unique insured persons1. Therefore, the remuneration did not correspond to the actual volume of the recognised procedures carried out by the Institutes. Between 2016 and 2018, the annual yields of the institutes decreased on average by more than CZK 20 million. It is worth noting that reimbursements from insurance companies constitute the most important part of the Institutes’ income. However, the MoH did not propose any changes to the reimbursement system that would at least reduce the annual differences in reimbursement.

The economic performance of the Public Health Institutes was also affected by an increase in the salary rates of civil servants, thereby increasing wage costs. These accounted for more than 50% of the total costs of the Institutes. The increase in salary rates was neither reflected in the operating allowance, which was determined by the MoH, nor in the reimbursements made by the health insurance companies, whose scheme remained unchanged. On the contrary, the MoH required the Public Health Institutes to draw up a balanced budget without increasing the allowance on their operation.

The MoH, as the founder, is obliged to inspect the Institutes, but since 2012, it has carried out only one public administrative check, specifically at the Public Health Institute Ostrava. It found a number of serious shortcomings in spending; the MoH did not follow up on whether these shortcomings were rectified. At the Public Health Institute Ústí nad Labem, the MoH did not start an inspection until 2020.

The total expenditure of the Institutes in the area of purchases between 2017 and 2019 exceeded CZK 1.3 billion, of which 85% was expenditure on purchases made on the basis of small-scale contracts and, thus, outside the statutory tendering procedure. However, in the above mentioned period, there was only one internal audit of public purchases carried out by the Public Health Institutes.

The SAO examined selected purchases worth CZK 239 million. For purchases exceeding CZK 168 million, the Institutes did not follow the Public Procurement Act or the budgetary rules. The SAO therefore notified the competent tax authorities. For example, one of the Institutes regularly purchased the same goods such as diagnostics, culture media, chemicals, etc., with a total value of over CZK 122.5 million on the basis of orders alone. It did not issue a public contract for these purchases in a public procurement procedure in accordance with the law. In the case of purchases worth over CZK 31 million, which were made on the basis of small-scale contracts, the Institutes did not act transparently or they discriminated against other suppliers.

Moreover, the Public Health Institutes did not have a robust internal control system to prevent significant weaknesses while creating the conditions for cost-effective and efficient public purchases. The SAO identified weaknesses at all the stages of making purchases – from the identification of needs, market research, to the establishment of trading conditions and performance control. It was only during the audit of the SAO that the Public Health Institutes started to work on remedying the situation.

1] Under the Reimbursement Order, a unique insured person is a member of a health insurance company who is treated by a provider with a particular speciality at least once, during the assessment or reference period. If the unique insured person has been treated more than once in the relevant period, only one treatment shall be included in the number of unique insured persons of the relevant health insurance company who were treated in the relevant professional capacity and shall cover only one treatment.

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