FISCAL DECENTRALIZATION AND HEALTH SECTOR FINANCING FORMULAEBy: Jean-Marc Lepain Public Finance Specialist Intergovernmental Fiscal Advisor, Ministry of FinanceDate: June 8th, 2009This paper is intended to be used as a basis for discussion between the Ministry of Health and theMinistry of Finance for the selection of a budget norm formula for the financing of the health sectorwithin the framework of the forthcoming fiscal decentralization reform. It is an interim report and itdoes not reflect necessarily the project final conclusions.This report does not take into consideration needs that might arise as a result of the reform of thehealth insurance system. This will be done at a latter stage of the Expenditure Need Assessment.After reviewing the literature available on the subject1, it appears that the health sector fundingapproach the most adapted to Lao PDR seems to be a formula based on area-based capitationadjusted to take into consideration variations in costs and needs. Typically, capitation methods takesa measure of the size and characteristics of local population, for example in the form of risk factorsand costs such as levels of disease, poverty, population structure and geography, and infers theexpected level of local service expenditure without reference to actual local health service use.However it does not appear that the health financing formula can be based hundred percent oncapitation because of the heterogeneity of services provided across the territory of the Lao PDR andthe need to provide incentives for increasing the number of patients visiting health facilities. Wemight consider disaggregating the capitation amount by broad types of services in order to avoidallocating funds for services which are not provided. We might also consider the possibility of expost adjustments for adjusting the funding made available to local performance, such as number ofpatients treated or number of visits to villages.Following the various discussions we had with people in the MoH and with a number of experts(World Bank, WHO and Swiss Red Cross), five possible approaches have been identified. Making achoice between these different approaches should be put in the wider perspective of the healthsector financing strategy based on a national health policy framework that still need to be prepared.MoH can decide either to adopt an interim solution based on budget norms and applicable only forone or two budget cycles or undertake immediately the design of a health financing formula.1 I have paid special consideration to Formula Funding for Health Services ; Learning from Experience in someDeveloped Countries, WHO Discussion Paper No 1 2008 by Peter C. Smith and Achieving Universal HealthCoverage: Developing the Health Financing System, WHO Technical Brief for Policy Makers No 1 2005, by G.Carrin, C. James and D. Evans.
A. Selection of a formula 1) Approach based on salariesBased on the observation that salaries are the main expenditure in the health sector and one of theonly reliable indicators of service, we try to equalize the number of health workers and provideincentive for remote and difficult districts. Then non-wage recurrent expenditures can be expressedas a percentage of salaries or can be based on other indicators.Strength of the approach: We are using data which are easily available We can disaggregate the staff numbers by categories and facilities (provincial hospital, district hospital, health centres) The formula can ensure that sufficient funding is available for non-wage recurring expendituresWeakness of the approach: Increasing the number of civil servants is difficult in Lao DPR and requires a long process The equalisation impact will be very limited. There is a risk of freezing the existing situation. Staffing is not a good indicator of needs and the formula does not provide any mechanism for correcting under spending 2) Approach based on number of health workersThis approach is very similar to the previous one. It substitute to salaries the number of healthworkers to avoid the problem of variable elements in salary compensation. There is no objective ofequalization of the number of health workers. This will require the desegregation of the number ofhealth workers into a few categories such as: general practitioners, specialized doctors, nurses,paramedics , etc.Strength of the approach: The number of health worker is known and cannot be questioned This is a better approach than the number of beds because beds can be unoccupied This approach can be a good step in the direction of a heath financing formula or block grantsWeakness of the approach:
This approach works well for the equalisation of non-wage expenditure but does not give a solution for the equalization of wage The equalization impact is very limited 3) Approach based on capitation and case paymentsA number of countries use formulae that combine capitation with case payments. A health facilitycan be financed 60% by capitation and 40% by case payments.Strength of the approach: It provides a strong incentive for increasing service outreach The equalization impact remains strongWeakness of the approach: This approach works well only when case payments are reimbursed according the diagnosis and treatment of the patients. It implies knowing precisely the cost of each treatment; something that does not appear feasible in Lao PDR. The method requires a system able to check on the validity of the local data and the appropriateness of the services being delivered. Either it requires a large investment in it or a strong administrative structure. Without such system data can be easily manipulated and audit requirements will become costly and administratively demanding. 4) Approach based on needs and costThis is the simplest solution and the one that was envisaged when the Budget Norm PolicyFramework was prepared. We start from a notional level of spending per capita that we adjust inevery province to take into consideration needs and costs. For example: 20,000 kip per capita + 10%to 20% based on a need indicator + 5% to 25% based on a cost indicator. As in the previous approach,we ensure that a correct ratio wage/non-wage applies. Suggested need indicators are life expectancy, infant mortality, nutrition, percentage of population under the poverty line, etc. Suggested cost indicators are ethnic structure of the population, population density, altitude, etc.Strength of this approach The equalization effect will be maximum It meets all the requirements of the budget law and would get easily political support The formula can ensure that sufficient funding is available for non-wage recurring expenditures
Weakness of this approach Suggested needs indicators (life expectancy, infant mortality) appear to be all questionable The equalization effect might be too fast resulting in allocation of funds that cannot be properly used. The increase of the local budget should be limited over time or based on the submission of an implementation plan. 5) Approach based on cost of infrastructures and programmesThis approach combines the two previous one. It distinguishes the cost of infrastructure from thecost of other programmes. Infrastructure cost is calculated by “bed” with a minimum allocation by bed that includes salary cost and Goods & Services and by block grant for health centres. A substitute for beds could be the number of qualified doctors. Like in the previous formula, the allocation to other programmes is calculated on the based of a minimum allocation per capita adjusted for cost and needs. However this time are calculated by programme on the basis of a 10% (or more) increase in their coverage.Strength of this approach: This is the most equitable approach in terms of a balance between needs and costs This approach solves the problem of insufficient funding for district hospital and health centres. District hospital could be financed by a block grant calculated on that basis. It is consistent with programme budgeting which is the direction toward MoH wants to moveWeakness of this approach The formula become more complex Experience shows that at the district level the bed occupancy rate is very low. One can question the financing of bed if they are not used It might be difficult to distinguish between infrastructure cost (expenditure per bed) and other health services provided from the same health facilities. 6) Approach based on cost and service deliveryThis approach build on the previous one but includes some adjustments in order to take inconsideration the quantitative aspect of services provided and to offer incentives for better use offacilities and more services provided.
The cost of beds and other infrastructure is financed only to a certain level (between 60% and 80%).The difference is covered by a payment made on the basis of the number of patients treated (casepayments).Other incentives are introduced in other programmes. In the case of Lao PDR we can include lumpsum payments for each visit to a village in a priority district or even modulate the lump sum by villagetypes.Strength of this approach: It combines the advantages of the approach based on cost of infrastructure and programmes with a strong incentive to increase service delivery. The system is fairer and avoids financing facilities which are not efficiently used.Weakness of this approach: The formula can become too complex and difficult to calculate. Data on use of services might be difficult to collect or manipulated. B. Conclusion of the formula selectionApproach No 1 does not bring the equalization effect required and in fact exacerbate horizontalimbalance for non-wage expenditures. According to a test run with the macro fiscal model whenwage expenditure fluctuate between 13,000 kips and 23,000 kips (if we exclude Vientiane Capital andAttapeu which are special cases), non wage expenditures fluctuate between 7% and 94% of wageexpenditures.The conclusion that we should draw from the test is that we might consider limiting the capitation tonon-wage expenditure. Equalization of salaries and compensation is impossible in the short term andshould be considered as a long term goal that requires a proper mechanism.Approach No 2 is the one MoF’s Budget Department favors the more because it does not raise theissue of salaries and the equalization of wage expenditure. A formula limited to non-wageexpenditures should take in consideration the staff structure of the health sector, the deployment ofprogrammes in a given province, specific need factors and factors that affect cost of service delivery.Approach No 3 appears to be impracticable in Lao PDR.Approach 4 and 5 appear as good candidate for the interim formula if we accept that the final healthfinancing formula should be developed over one or two years. A financing based on the number ofbeds does not appear as a good approach due to the very low occupancy rate. That leaves thenumber of qualified doctors as the only indicator of need.
Approach 6 can be considered, but look more like a basis for a more elaborated health financingformula.So far the best approach seems to be Approach No 2 seen as a transition formula toward a HealthFinancing Formula developed on the basis of approach No 4 with a strong incentive componentand a clear objective of increasing the utilisation of heath facilities. C. Analysis of cost driversThe main cost drivers in Lao PDR seem to be geography and population structure. Reachingminorities in high lands is more expensive than reaching Lao Loums in Mekong plain. Probably thebest approach would be classifying provinces and districts in four or five broad categories associatedwith different cost levels based on some characteristics such percentage of minorities, percentage ofurban population, population density, etc. D. Decisions that need to be made We need to decide the scope of the financing formula. Certain health services might be excluded from the formula and financed by ad hoc grants. It might be the case of specialized hospitals. The formula should be linked to a health package available on a national basis. At the moment it looks more likely that budget norms for the health sector will be introduced in different stages. The different stages could be (a) a formula for non-wage expenditure, (b) a formula for intergovernmental transfers giving an indication on the broas size of the general budget in the provinces, (c) a complete health financing formula MoH needs to look at the process for rationalizing the number of health workers in provinces by developing staffing norms. Do we take a full-fledge capitation approach based on a minimum spending per capita (approach 1 and 2) or do we want to disaggregate the formula in a number of service type? Do we want to use the health financing formula to provide incentive for heath delivery? E. Conclusion and RecommendationsDesigning a complete health financing formula is a complex task that cannot be rushed. It can bedone only when a number of health policy issues have been clarified such has the content of thehealth package, the new universal insurance scheme, user fee policy, incentive policy, and hospitalmanagement autonomy. We expect that these issues will be clarified within a year when a HealthPolicy Paper will be published as part of PRSO triggers.From the previous analysis we are able to make a few recommendations: An interim budget norm formula applying for one or two budget cycles seems to be the best approach. A full-fledge health formula can de develop in parallel in one or two stages an introduced for the preparation of 2010/11 budget.
The interim formula should prefigure the health financing formula in order to avoid any disruption. Health facilities, activities and programmes outside the scope of the formula should be identified immediately and will be financed through ad hoc grants. The selection of the formula should be based on its equalization effect and on its capacity to ensure that sufficient funding is available for non-wage recurring expenditures. At this stage there is no guarantee that an increase in non-wage recurrent budget will cause a reduction of user fees. This objective can only be achieved if proper instructions are given to health facilities. Work on user fee policy and instructions (or regulation) should start in parallel with the design of the budget norm formula. Additional components of the formula such as incentive, program financing desegregation and availability of funds at the district level will be reviewed in the next forth coming weeks and it will be decided if they become part of the interim formula or not. If the option of an interim formula is chosen, it is important to create a dynamic with time constrains that will ensure that the final outcome (the complete heath financing formula) is not postponed indefinitely. Objectives of the health financing formula should be defined in the Health Policy Paper under preparation. A satisfactory health financing formula requires better data than exist presently in Lao DPR. For that reason we believe that the health financing formula should de developed in several stages. Meanwhile other actions must be taken: o A database must be created for the systematic collection of health management data; o A statistical model for analysing spending variations amongst health facilities, programmes, provinces and districts must be developed ; o The Medium-Term Expenditure Framework (MTEF) must be completed; o The MTEF should be used to create a link between investment decisions and recurrent costs. No investment should be approved unless there is sufficient additional funding for its operation and maintenance. o A more detailed heath budget must be produced and consideration should be given to the introduction of programme budgeting; o The health budget should include user fees and user fees should be reflected in the national budget; o Accounting rules should be revised in order to provide better information on central/local expenditures, recurrent/investment expenditures and the used of donors’ funding. o A reporting mechanism on budget execution should be put in place between Provincial Health Offices and MoH. This reporting mechanism should provide data by district, by programme and by health facility o User fees should be fully reflected in health facilities’ accounting and proper regulation must ensure that user fees are always linked to a traceable service.
o For the sake of reporting, transparency and effective public finance management, an agreement should be reached with the Treasury for they management through the Single Treasury Account while ensuring that the fund collected remain fully available at the local level. o In accordance with good public finance management practices, user fees should be included as resource of the Health Budget. F. Way forwardIn the first stage this paper will be used as a basis for discussion in an informal way. The objectivewill be to eliminate impracticable approaches, identified other possible options and refine thestrategy. When a consensus will have emerged we might consider organizing a round table to reach afinal decision.