Public funds are central to making progress toward UHC. But the practicalities of how budget allocations are made and funds actually flow to frontline health providers are often ignored. What is the country’s process for deciding on budget allocations for health, and does this process ensure funding matches priorities? How do public funds flow through the system? How is the pooling of these funds constrained by fiscal decentralization and institutional boundaries? Does the public budget process make it possible to pay health providers, public and private, based on service outputs and results to get the most value from limited funds?
The answers to these questions often lie in the public financial management (PFM) system—the institutions, policies and processes that govern the use of public funds. The PFM system is implemented through the budget cycle—budget formulation, execution, and monitoring. A strong PFM system can ensure more predictable budget allocations for health, reduced fragmentation in revenue streams and funding flows, timely budget execution, and better financial accountability and transparency. So most PFM improvements are inherently beneficial to the health sector. But the health sector is highly complex, and in some budget systems it can be challenging to direct funds to the right services and interventions and ensure access for the people who need them. This is especially true when budgets are still formed, disbursed and accounted for using input-based line items—paying for buildings and staff instead of services and interventions.
The Public Financial Management System
This situation can lead to the vicious cycle of low budget allocations, mismatch between budgets and priorities, and underspending. Available data from sub-Saharan African countries indicate that between 10% and 30% of allocated health budgets go unspent (view full paper). This underspending is sometimes attributed to low absorptive capacity and inefficiency in the health sector, but in reality it often reflects difficulties in budgeting and disbursing funds according to national PFM rules and lack of flexibility to reallocate funds to areas with higher-than-anticipated needs. Even where this is the cause, underspending may be used as a rationale to reduce budget allocations in the following year.
The challenges can be even greater for health financing reforms that aim to improve equity and financial risk protection through better pooling and to improve quality and efficiency through strategic purchasing mechanisms such as output-based provider payment systems. These policies often stall at the point of implementation because PFM systems cannot accommodate the more complex funds flows these reforms require.
So how can budgets work better for UHC? Understanding the challenges within the PFM and health financing systems for better allocation, use and accountability for health budgets is a good place to start. WHO has partnered with Results for Development (R4D) to better understand the challenges that countries face when there is misalignment between PFM systems and health financing policy objectives.
A series of products developed as part of the Collaborative Agenda on Fiscal Space, Public Financial Management and Health Financing Policy aims to support dialogue at the country level to better align PFM systems and health financing for UHC. The first product is a WHO Health Financing Working Paper that lays out the areas where PFM systems and health financing policy share objectives and reinforce each other, as well as potential sources of misalignment and their consequences for revenue raising for health, pooling, and purchasing. The paper draws on a vast stock of country experience and links to 14 different global resources on PFM and health financing.
The paper unpacks the sources of misalignment between PFM systems and health financing policy objectives observed in low- and middle-income countries. In some cases, PFM policies that are in alignment with health financing objectives, such as policy- and program-based budget classification, are implemented slowly or incompletely, or the health sector has not made adequate use of these reforms to effectively implement health financing policy. For example, the move from strict input-based line-item controls towards program-based budgeting can introduce flexibility and make it possible to pay health providers using output-based payment methods. But country experience has been mixed. As of the end of 2012, more than 80% of African countries had introduced or were committed to introducing some sort of program- or performance-based budgeting, but none had a fully functioning system in place. Even when program-budgeting is implemented, the health sector may not be aware or choose not to make use of it to improve pooling and purchasing. This was the case in Mongolia, where the health sector was accustomed to estimating budgets based on historical input-based allocations to health facilities even though the Ministry of Finance allowed budgeting by program.
Many times countries embarking on improvements in their PFM system do not consider the implications for health financing policies, especially when the health sector does not actively engage in policy dialogue and articulate its needs. This can lead to inadvertent misalignments that make it difficult to change pooling and purchasing arrangements as planned. For example, fiscal decentralization reforms, when applied across the board, can be at odds with better pooling of health funds. Finally, the way that the different policy objectives of PFM and health financing are operationalized may lead to misalignment. For example, detailed budget controls and other steps taken in the name of strengthening financial accountability may actually be a source of inefficiency by constraining the ability of public managers to make timely reallocations in response to needs.
What can countries do to improve alignment between PFM systems and health financing policy to make better use of budgets for UHC? The aim is a single, integrated cycle in which health financing policies are embedded in the PFM system and budget cycle.
Integrated Health Sector Financial Management
As countries have worked to reform their PFM system, some have taken specific measures to address the needs of health financing and budgeting, such as enabling expanded pooling of health funds possible within a context of fiscal decentralization or allowing specific output-based payment systems to be implemented. In countries where the specific health financing needs cannot be accommodated within the budget rules, extrabudgetary funds managed by quasi-autonomous agencies, such as national health insurance funds, sometimes assume responsibility for all or part of the health pooling and purchasing functions, with mechanisms in place to maintain financial accountability. Some countries have such entrenched PFM challenges that they turn to schemes that bypass the public system almost entirely. One approach that has been promoted by the donor community is the use of results-based financing (RBF) projects that send funds directly to front-line health providers in the form of performance incentives While some countries such as Burundi and Rwanda have used RBF programs to drive improvements in both PFM and health financing systems, many donor-funded RBF programs have continued to operate outside these systems, raising questions of sustainability given the failure to integrate these programs into national PFM arrangements and bring about deeper changes in health financing systems over the long term.
In most countries, some combination of approaches is necessary to improve alignment between the PFM system and health financing policy objectives. Regardless of the specific country context, all of the steps toward improving alignment between the PFM system and health financing system are intended to promote good financial management and ensure that effective services are purchased for the population in the most efficient way. The most important underlying steps are to establish a platform for ongoing dialogue between the health authorities and finance authorities, focus on improving service delivery and other common objectives, and generally improve transparency and accountability so that money reaches priority populations, interventions and services and countries can sustain progress toward UHC.
Acknowledgements: Danielle Bloom, Susan Sparkes, Hélène Barroy, and Sheila O’Dougherty