By Alan Wheatley and Daniel Alvarenga

LISBON (Reuters) - To get an idea of the enormous financial strains on Europe's health care sector, put yourself in the shoes of Professor Joao Alvaro Correia da Cunha.

As head of North Lisbon hospital centre, one of Portugal's largest, da Cunha has already slashed salaries by 20 percent and shed 150 staff as part of cuts demanded by international lenders in return for bailing out the government to the tune of 78 billion euros. He is under orders to keep cutting.

Yet da Cunha, a doctor for 43 years, is not ready to compromise on his calling to heal the sick. In February he spent 1 million euros to treat a woman with a complex blood disease and will soon prescribe a new drug for 25 people with a fatal degenerative nerve disorder endemic in northern Portugal. The cost will be perhaps 200,000 euros a year per patient.

Portugal's taxpayer-funded national health service (NHS) provides universal access, more or less free at the point of delivery, and da Cunha is proud that his hospital has never had to turn away a patient. He finds rationing of health care anathema. Yet times are tough.

"If it comes to the point when it's necessary to decide whether we can treat a patient or not, then that decision will not be mine. I'd rather retire," he said. "And you shouldn't have to look in your pocket to see if you can afford to be treated. But I agree we're reaching the limit: we have no money. The country is in crisis."

Portugal is in particularly dire straits because it is in hock to its lenders, with terms dictated by officials from the "troika" of the International Monetary Fund, the European Commission and the European Central Bank.

But the financial pressure that its medical system faces is replicated across the continent. Spain, for instance, is bracing for health cuts as part of an austerity budget promised by new Prime Minister Mariano Rajoy.

The debate on the scope of health care spending may have been triggered by the euro zone's debt drama, but it will not go away when the crisis ebbs.

"It will be unavoidable to rethink the resource allocation mechanism. Of course, in health most countries don't want to talk about explicit rationing. The political cost is too high," said Professor Monica Oliveira, an expert in health finance at the Technical University of Lisbon.

GOOD HEALTH, FINANCIAL PAIN

Standard & Poor's, a credit ratings agency, recently warned that health bills, compounded by the cost of caring for ageing populations, were likely to become unaffordable for the Group of 20 major economies unless governments changed their social protection systems.

Total health care spending has risen by more than 70 percent in real terms in the OECD area since the early 1990s. Public spending on health absorbs more than 6 percent of GDP and could increase by another 3.5 to 6 percentage points by 2050, estimates the Organisation for Economic Cooperation and Development, a Paris-based forum of 34 mature economies.

People are living longer, while medical technology and treatments are improving all the time. This is forcing governments - and voters - to make unpalatable financing choices. Is it possible to put a price on health? How much are we prepared to pay to extend a life by a few weeks or months?

Seen in that light, today's cost-cutting in Portugal is only a dry run for a more fundamental reassessment of how the country should pay for health care. Public and private spending on health totaled 10.1 percent of GDP in 2009, well short of the U.S. level of 17.4 percent but above the OECD average of 9.6 percent.

"We cannot undertake financing reforms when we are going through a troika programme. But as soon as we're through it, we'll have to start discussing financing. If not, the system will be unsustainable. This is something that everybody has to understand," said Fernando Leal da Costa, a secretary of state in the health ministry.

Like several experts interviewed for this report, da Costa said he expected a mixed system to evolve in Portugal; the state would continue to fund core services, but people would be asked over time to pay more out of their own pocket.

"If we don't try to do things smoothly now, we'll probably not avoid a catastrophe," da Costa said.

With the troika's bean counters bearing down, things are currently far from smooth. The government is desperate for more people to seek treatment in primary care centers instead of in hospitals, which are more expensive. It also needs to close some old hospitals to increase efficiency but has been shy of offending local interests by shutting wards that are surplus to capacity.

"The government is in the emergency room. They're trying to keep the patient alive," said Isabel Vaz, chief executive of Espirito Santo Health, a private hospital group. "They're making a huge effort to control costs, but I don't know how they're going to put in place all the reforms they need without money."

DOUBLE COVERAGE

In the longer term, Vaz said Portugal needed to reduce duplication: around two million people or about 20 percent of the population have access to private medical care - which is subsidized for civil servants - as well as the NHS. This "double coverage" is not efficient economically because it means paying twice to cover the same risk, she argued.

Vaz advocated the sort of model used in Germany and the Netherlands. "We'd have a social package so that everyone has access to basic care and people would have to top up," Vaz said. "But that of course means a different way of looking at the private-provision sector."

Talk of tampering with the NHS is heresy to many Portuguese, who cherish the system as a symbol of the country's transition to democracy after the overthrow of its dictatorship in 1974. It is no accident that Britain's health service, set up after World War Two and generally held in similarly high esteem, served as a model for that in Portugal.

The attachment to the NHS, founded in 1979, is not just sentimental. People see the results of big investments in health. In 1970, Portugal, western Europe's poorest country, recorded a shocking 55.5 infant deaths per 1,000, twice as many as in neighboring Spain. By 2009, the rate was down to 3.6.

Over the same period, life expectancy at birth improved from 67.1 to 79.5, the OECD average.

No one is more devoted to the NHS than Antonio Arnaut, a lawyer who set up the system when he was minister of social services.

"Today, everyone is equal when it comes to disease. Health is a right, not a privilege of those who can pay, as it used to be and is still the case in the United States, for example," he said in an interview in his office in Coimbra, a university town north of Lisbon.

A founding member of Portugal's Socialist Party, which is now in opposition, Arnaut is not against private health insurance and acknowledges there is a lot of scope to reduce waste. But he says the debate is less about financing and more about the political will to preserve what has become, in his eyes, a fundamental right.

"If the government cuts so much that the NHS loses its character, there'll be a popular revolt, because only revolt can recompense for the humiliation of the oppressed," Arnaut, who is also a poet and essayist, said.

SPREADING THE PAIN

Most Portuguese seem inured to the need for belt-tightening to cut the government's budget deficit to the EU threshold of 3 percent of GDP next year, but there is no doubt that the pain of the health cuts is being felt widely.

Da Cunha, the Lisbon hospital head, is planning to reduce his bill for drugs and medical consumables by another 10 percent this year, but the mean salary of his 6,700 professional staff, including three chaplains, has already fallen 20 percent over two years to 1,200 euros a month.

"We can't reduce our salaries any further," he said simply.

Portuguese have had to pay more for consultations and prescriptions since the start of the year, and patients in rural Portugal no longer automatically enjoy free transport if they have to go to the city for treatment.

Apolinario Eduardo, 36, who has just landed a job as a taxi driver in Coimbra, said he feared people would be deterred from going to the doctor's.

"For the last two years only my wife was employed and not earning much. If we needed to go to the hospital today, a co-payment of 20 euros, instead of 2 euros as it was before, plus the price of the drugs would take out a huge chunk of our monthly family income," he said.

Hospital executives and government officials brandish statistics to rebut media reports that the death rate has already started to climb because people can no longer afford all the tablets and medicines they need.

But Pedro Pita Barros, an economics professor at the Nova School of Business and Economics in Lisbon, said Portugal was probably at the limit of how much patients could be expected to pay out of their own pocket.

"You have people easily paying 40, 50, 60 percent of the cost of their drugs, and some of these will be chronic patients," he said. "The only thing that has helped them is a steep fall in price because of competition from generics; otherwise they'd have faced a hard time."

The government is expanding the use of cheaper generic drugs at the behest of the troika. By the end of 2012, Portugal's pharmaceuticals bill will have dropped 20 percent, or 525 million euros, in two years to 1.25 percent of GDP, according to Joao Almeida Lopes, chairman of Apifarma, the Portuguese pharmaceutical association.

IN PORTUGAL'S GENETIC CODE

A brighter result of the debt crisis for the pharmaceutical industry is that the government, again at the troika's prodding, finally intends to start paying next month about 3 billion euros of arrears built up over the past decade or more in the NHS.

"When you work with public hospitals, you're lucky to get paid after a year," said Ricardo Matos, an account manager at Alere Inc, a U.S. medical diagnostics developer.

Apifarma says pharmaceutical providers alone were owed 1.39 billion euros at the end of February, with payments taking an average of 500 days to come through. Some companies that were owed money and starved of credit have had to close, Lopes said.

"Our greatest enemy is the systematic underbudgeting of the health system in Portugal," he said. "In terms of health care, we should be careful not to go beyond what has been agreed with the troika and is in the budget for 2012."

That sounds self-serving, but Barros with the Nova School said the government's goal of cutting 1 billion euros from this year's budget of about 7.5 billion euros was probably too ambitious.

Weighed against that judgment, the IMF has identified health costs as the largest potential source of medium- and long-term fiscal pressure for Portugal. In today's money, the Fund estimates the country's future related health costs at 116 percent of GDP, dwarfing the average for advanced economies of 66 percent.

In other ways, though, Portugal is better placed than many others. An OECD analysis of health efficiency in 30 of its member states reckoned that only five countries had greater potential than Portugal for savings in public health spending. Portugal ranked above Denmark and Finland for efficiency in its peer group.

Portugal has also grasped the nettle of pension reform by linking payments to longevity. Moreover, its demographic profile is less severe than that of many of its neighbors. As a result, it faces one of the smallest rises in projected ageing costs in the EU - 4 percentage points of GDP or less - between 2007 and 2060, according to a European Commission study.

As such, the task of caring for the old will be more a matter of organisation than spending ever greater sums, said Barros: "More elderly people living alone with chronic conditions will require more health care in the community than in hospitals."

Still, the coming years will test health policymakers and finance ministers, especially in countries such as Portugal where the benefits of publicly-funded universal access to medical care are taken for granted.

Jose Martins Nunes, head of a cluster of seven hospitals in Coimbra, said asking the better-off to pay more would undo the very fabric of the national health service.

"The situation is tough, but the NHS is part of Portugal's genetic code. We will do everything within our means to maintain the model as it is," he said.

(Editing by David Stamp)