Policy Framework for the Introduction of Budget Norms for Health Sector     Budget at the Sub-National Level and for Revis...
1. Background        1.1. Legal FrameworkThe new Budget Law considers the implementation of budget allocation norms essent...
implementation for the Education sector and the Health sector. The decree will (a) modify some ofthe technical provisions ...
Main Statistics                       Central hospitals                                 4                       Curative c...
Based on FY 2008/09 figures, recurrent expenditures represent only 30% of the health budget.However 84% of the investment ...
There is no correlation between the health allocation per capita and the poverty index. Among thegroup of six provinces th...
   More unified types of services must be provided across provinces with a list of services that        should be deliver...
The general purpose grant will be either the result of the aggregation of all sectoral budget normformulae or a more aggre...
Health Ministry at the central level and one for the province. As the provinces, under the existingbudget law, are free in...
For the sake of budget norm preparation, in the absence of a MTFF, MOF’s Fiscal Department willneed to project sector ceil...
provinces that allocate more health workers to the district level have better health indicators. Thereis a slight bias in ...
1) The number of doctors is not a sufficient indicator of financing needs. It might be necessary       to distinguish betw...
most important part of donor assistance is channelled through projects implemented at the         provincial level but man...
   Activities that must be funded by the Government must be distinguished from those that can       be funded by donors.T...
government activities, with donor financed projects managed in a deconcentrated mannerand health facilities managed in a d...
The overlap between the two types of programmes is obvious and will create confusion in theplanning and budgeting process....
   Provincial hospitals are also district hospitals in their own district which means that the cost       of providing pr...
3) It is not recommended to disaggregate the provincial health budget by district. The existence       and the type of hea...
there is no quantitative objectives assigned to provinces which leaves little incentive for provinces toalign their planni...
hospitals not only deliver public services but have commercial activities the accounting law shouldapply to them as distin...
8.7. Hospitals’ legal statusHospitals and health centres operates as secondary budget units, a status which is not well de...
8.9. Lack of budget comprehensiveness of provincial budgetAccording to the principles of budget unity and budget comprehen...
9. User Fee policyFrom a budget norm view point, user fees are involved in two important issues: (a) there is not yet acle...
9.2. Dependence on user feesHospitals and health facilities have become highly dependent on user fees and technical revenu...
However as the Treasury plans to use commercial banks as part of the Treasury Single Accountarrangement, there are ways ar...
BUDEGET NORM ARCHITECTURE                                         Provincial Health Budget (F)                            ...
c) Provincial Hospitals and District HospitalsIt is not yet clear if Provincial Hospital and District Hospital Type A can ...
the number of cases. It would be very difficult to keep track of the number of patients treated andby whom. The conclusion...
a) Allocation based on the number of medical staffIf:          (a)   is the allocation per general practitioners          ...
To integrate poverty into the budget norm formula, four questions must be answered:          What is the best indicator o...
Vientiane Capital might be a special case, because this is the province with the lowest poverty index,but also because pat...
13. Implementation strategyIn FY 2010/11 MOF will implement two simplified formula one for provinces and if one for centra...
Upcoming SlideShare
Loading in …5
×

Policy Framework for the Introduction of Budget Norms in the Health Sector and Revision of the Expenditure Assignment

843 views

Published on

Published in: Economy & Finance
0 Comments
0 Likes
Statistics
Notes
  • Be the first to comment

  • Be the first to like this

No Downloads
Views
Total views
843
On SlideShare
0
From Embeds
0
Number of Embeds
1
Actions
Shares
0
Downloads
27
Comments
0
Likes
0
Embeds 0
No embeds

No notes for slide

Policy Framework for the Introduction of Budget Norms in the Health Sector and Revision of the Expenditure Assignment

  1. 1. Policy Framework for the Introduction of Budget Norms for Health Sector Budget at the Sub-National Level and for Revision of the Expenditure Assignment in the Lao PDR: A Concept Note Jean-Marc Lepain Intergovernmental Fiscal Advisor Public Finance SpecialistMarch 1st, 2010Based on the new Budget Law approved by the National Assembly in December 2006, and on thePrime Minister’s Implementation Decree of April 2008, the Ministry of Finance is planning to changethe budget formulation procedure by introducing budget norms. The objective of the presentConcept Note is:(a) To define the general policy framework for the introduction of sector budget norms, including itsrelation to the more global objectives of the Budget Law such as promulgation of principles for betterefficiency and transparency and introduction of a General Purpose Grant to finance all provincialrecurring expenditures;(b) To identify issues associated with the health sector expenditure assignments such as vertical andhorizontal responsibilities for service delivery, service financing, management (planning, budgeting,budget execution, project implementation management control and reporting) and issuance ofregulation;(c) To define the general principles for the architecture of sector budget norm formulae in relation toprovinces, districts and the health facilities associated to these different levels of service delivery;(d) To present the best options for the selection of indicators, cost units and weighting ratios to beused in the design of the sector budget norms formulae;(e) To identify data collection requirements for the regular updating of the budget norm formulaeand their application to budget formulation at the sub-national level; 1
  2. 2. 1. Background 1.1. Legal FrameworkThe new Budget Law considers the implementation of budget allocation norms essential as a basisfor recommending targets for the budget allocation to each provinces and each sector within theframework of the consolidated state budget and as a key component of a formula based system ofintergovernmental transfers. The Prime Minister’s Implementation Decree (No 25/PM 208) providesfurther guidance and gives to the Ministry of Finance full authority for developing (a)intergovernmental transfers mechanisms through general and earmarked grants and (b) budgetnorms for allocation of recurrent and investment expenditures in close cooperation with sectorministries, the Ministry of Planning and Investment and PACSA.Article 3 of the Revised Budget Law defines budget norms as “recommended targets in determiningallocations to sectors and localities based on characteristics, standard of works and specifics of eachsector and locality” and Article 6 stipulates that “Budget allocations to sectors and localities shall bebased on the budget allocation norms”.The Prime Minister’s Implementation Decree No 25/PM dated 14-02-2008 provides more details.Article 11 assigns the responsibility of preparing budget norms to the Ministry of Finance andimplementation will be conducted through another Prime Minister’s Decree.Article 19 of the Prime Minister’s Decree distinguishes between budget norms for recurrentexpenditures and budget norms for investments.Article 20 defines the two types of grants on which the Intergovernmental Transfer System will bebased. A “General Purpose Grant” will be established for the financing of provincial recurrentexpenditure. “Earmarked Grants” will be allocated for “the implementation of programs andinvestment projects assigned in addition by the Government” and for “resolution of emergencies andurgent issues relating to natural disasters, defense, security, and epidemics not included in thelocalities’ annual budget”. It is probable that the scope of earmarked grants will need to bebroadened to cover needs of some provinces in excess of what they would received from a strictapplication of sector budget norms and aggregated budget norms.Article 23 mentions that a new revenue and expenditure assignment between provinces, districtsand cities will be prepared by the Ministry of Finance. The article mentions specifically “(the) sharingof responsibilities for investments and development of general education public schools, morespecifically of kindergartens, primary and lower secondary schools”. This article provides the legalbasis for modifying, if necessary, the expenditure assignment and supervisory duties between Districtand Provincial Education Offices, and for introducing school block grants.Within the framework of the Budget Law, a new Prime Minister Decree will be issued for theintroduction of budget norms. It is assumed that a new decree will cover budget norm 2
  3. 3. implementation for the Education sector and the Health sector. The decree will (a) modify some ofthe technical provisions of the former decree if necessary, (b) provide budget norm formulae at thedisaggregate level for the two sectors and (c) reflect policy principles that will be established in moredetail by the policy framework for budget norms and intergovernmental transfers and (d) clarify theexpenditure assignment and modify if necessary responsibilities for planning, budgeting, managingand reporting the utilisation of funds allocated to each sector at the sub-national level.In a second stage, the Ministry of Finance will (a) extend the budget norm system to other sectorsand (b) prepare aggregated budget norms that will become part of the system of intergovernmentaltransfers. 1.2. Sector Profile SummaryThe health indicators of the Lao PDR have been improving steadily over the past three decades butremain well below international standards. Life expectancy has risen from 51 years in 1995 to 61 in2005 (Census 2005) and infant and mother mortality has dropped significantly while remaining stillvery high compare with more advanced countries. There has also been significant progress in thecontrol of malaria and tuberculosis. The country has been less successful with its immunizationprogrammes while improvement in access to clean water and sanitation remains slow. Access tocurative medicine for the poor remains a concern and health facilities tend to provide services to thebetter-off group of the population involving significant geographic disparities.The lack of systematic data collection and the weakness of the reporting system between provincesand MOH is a serious obstacle to the development of more effective policies. Financial ManagementSystems in the health sector remain weak and do not ensure transparent execution and effectivemonitoring of public spending. 3
  4. 4. Main Statistics Central hospitals 4 Curative centres 3 Regional hospitals 4 Provincial hospitals 12 District hospitals 127 Health centres 793 Village drug kits 5561 Private clinics 254 General Practitioners 4300 Specialized doctors 2000 Post-graduate health workers 600 Nurses and paramedics 4900 (Source: MPI, Statistics Year Book 2008) 1.3. Trends in Health Sector FinancingLao PDR’s public and private health spending is low compare with that of other Asian countries.The total recurrent health budget represents an allocation of $10.31 per capita. Although thisamount is an improvement compared to the $8.70 of 2002 the health budget has fallen from 2% ofGDP in 2002 to 1% and the government share is less than half of the amount with $4.71 per capita.This reflects the fact that households are shouldering an increasing share of health expenditure. In2003, WHO estimated that 60% of national health expenditure consisted of household expenditure,30% consisted of donor funding and 10% consisted of domestically financed governmentexpenditure. Although today new data is not available, there is no reason to believe that the trendhas improved. The health budget is struggling to keep pace with inflation and a population growth of2.4% per year, while donor assistance grows at a rate well below the GDP. Without revising itscurrent priorities, the Government, in order to avoid a funding gap for staff and salaries had nochoice than to limit the recruitment of new staff and to decrease the share of non-wage expenditurein the recurrent budget.The health budget has experienced a negative trend from 2004 to FY2007/09 going from 4.1% of thetotal budget to 3.8%. This has been mostly due to the fact that donor assistance while still remainingvery high is not growing at the same pace as the GDP and government revenues. In practice theGovernment share in the health budget has grown from 0.33% of GDP to 0.40%. FY 2008/09 saw amajor surge in the health budget, due largely to an important increase in donor assistance (+154%), amajor contrast from the following year (-34%). The health budget has risen from 3.8% of total budgetto 6.3% and from 0.8% of GDP to 1.25%. However, the Government share of the health budget hasremained stable at 0.40% of GDP. 4
  5. 5. Based on FY 2008/09 figures, recurrent expenditures represent only 30% of the health budget.However 84% of the investment budget is financed by donors and an important portion of theseexpenditures cover recurrent routine expenditures. Funds allocated to the provinces represent only33.3% of the Health Budget, but again we can assume that a significant part of the centrally managedinvestment budget covers provincial recurring expenditures.In FY2009/10, Nam Theun 2 revenue provides 1.2 M USD representing 2% of the health budget.Because of a significant decrease in donor assistance (-16.4 M USD) the health budget dropped to5% of the total budget and to 1% of GDP, but the government share raise from 0.40% of GDP to0.46%. Health Budget Trends 2005/06 2006/07 2007/08 2008/09 2009/10 (actual) Health Budget/total Budget 4.06% 3.71% 3.85% 6.33% 5.06% Health Budget/GDP 0.68% 0.58% 0.79% 1.25% 1.00% Recurrent Budget/Health Budget 42.53% 47.26% 44.20% 28.17% 38.30% Government Share/Health Budget 47.93% 54.27% 50.20% 31.91% 45.75% Health Government Share/GDP 0.33% 0.31% 0.40% 0.40% 0.46%It is clear that the current level of funding is insufficient for reaching the objectives of the MillenniumDevelopment Goals. However, taking advantage of the preparation of the 6th Five Year DevelopmentPlan, it is important to develop stronger macro-fiscal objectives linked to human developmentobjectives. 1.4. Horizontal imbalanceThere is a very high horizontal imbalance in the health sector compared to other sectors. While forthe general provincial budget the imbalance indicator is of 2.8 for in FY 2008/09 (Xekong receive 2.8times more per capita than Vientiane Capital), the imbalance indicator in the health sector is 4.9(Khamouane receives 4.9 times more per capita than Champasak). Six provinces, representing 52.5%of the total population receive less than the national average per capita, indicating that provinceswith large population tend to allocate less to their health budget. 5
  6. 6. There is no correlation between the health allocation per capita and the poverty index. Among thegroup of six provinces that receive less than the national average, two are among the richest(Vientiane Province and Champasak with a respective poverty index of 1.17 and 1.18), while theother four are among the poorest (Saravanh has a poverty index of 1.54 and Houaphan of 1.52)As user fees represent an important source of funding for hospitals, the poverty index appears as agood indicator of their auto-financing capacity. For that reason, a total equalization of budgetallocation does not appear desirable, but a budget allocation better aligned with poverty willrepresent a considerable improvement. 2. General Policy Framework for Budget Norms and Intergovernmental TransfersThe development of budget norms for the Health sector has to be put in the perspective of “ThePolicy Framework for the Implementation of a Budget Norm System and a System of Unconditionaland Conditional Intergovernmental Transfers” developed by the Ministry of Finance for guiding thedevelopment of sector norms.The objectives of the budget norm system are defined as follows: (1) Ensure that the rational distribution of fiscal resources across sub-national jurisdictions is done in a transparent equitable manner; (2) Ensure that fiscal resources allocated to sub-national jurisdictions (provinces and districts) are administered in line with the Government development objectives. (3) Ensure that all provinces and districts receive sufficient funding to deliver public services with equal standards according to the mission given to them by the central Government and in a manner that takes into account the characteristics of the population to be served and the cost of service delivery in each geographic area; (4) Improve financial management at the local level, including planning, budget formulation, budget execution and reporting;When applied to the health sector these principles mean:  Correcting existing vertical imbalance will require the introduction of a sector ceiling that will apply to both the central government and the provinces;  Existing imbalance in fund allocation between provinces must be corrected on the basis of existing health facilities and not on the basis of population;  Equity of fund allocation between districts must be ensured;  Mechanism for a better alignment of sub-national planning and budgeting with national priorities and policies must be put in place; 6
  7. 7.  More unified types of services must be provided across provinces with a list of services that should be delivered in all provinces and all districts;  Other aspects of the expenditure assignment must be clarified;  Missions of health facilities must be aligned with the fiscal capacity of the Government;  The Government must ensure that sufficient funding is channelled to local health facilities for them to accomplish their mission within the constraints of the fiscal capacity of the provinces and of the central Government.  A clear policy regarding user fees and out of pocket expenditures must be put in place with clear identification of expenditures that must be totally covered by the budget and expenditures that must be covered partially or totally by technical revenues, with the objective of reducing out of pocket expenditures for the poorest segment of the population.The system will use three types of norms: (a) Sector budget norm(s) used for the calculation of each sector budget for each province; (b) Economic norms that provinces will use for allocating funds by economic categories to the various types of health facilities; (c) Economic norms that will apply to line-ministries at the central level and that will not be part of the Intergovernmental Transfer System. The objective is to develop a transfer system that will be based on the following components: (a) One single unconditional transfer covering the total recurrent budget (General Purpose Grant). (b) A number of conditional grants to cover additional recurrent expenditure for a limited number of provinces such as: (i) Provinces having sectors with structural expenditure needs above the level of funding provided by the unconditional grant; (ii) Provinces facing temporary revenue shortfall; (iii) Provinces having unexpected expenditure needs due, for example, to natural calamities (c) Conditional grants for financing large investments or specific programmes managed verticallybut implemented at the provincial level.The calculation of the General Purpose Grant will be based on an aggregated norm formula that willreflect the different sector components of the grant. The total amount of the General Grant will notbe less than the aggregated amount of sector budgets based on budget norms. 7
  8. 8. The general purpose grant will be either the result of the aggregation of all sectoral budget normformulae or a more aggregated formula that will not necessarily reflect the different sub-formulae. 3. Scope of budget normsIn a first stage the introduction of budget norms will cover only non-wage expenditures for MOHcentral budget as well as health sector provincial budgets. However, a model will be developed inparallel to prepare the next stage combining both wage and non-wage with the objective ofpreparing comparative costing and identifying potential issues.In practice, formulae that aggregate wage and non-wage are very similar in structure with formulaefor non-wage only. The difference lies in the level of financing associated with the cost units of theformula such as the allocation per capita, per doctor or per medical case. Such formulae are usuallyneutral on the level of staffing but also require a flexible employment policy driven by a fiscalenvelope for salary and not by the number of civil servant. Developing aggregated formulae inparallel with non-wage formulae will tell us if the theory is verified in Lao PDR. It will give us a newfiscal model that will tell us if such formula can be implemented without revising hospital staffing andwhere the staffing gaps are.Non-wage expenditures are defined as all line-items of chapter 12 of the budget nomenclature andline-items of chapter 16. A more detailed review of hospitals’ budget will be necessary to see if thereis any need to include line-items from section 13. 4. Sector ceilingsThe development of budget norms must start from the calculation of an earmarked fiscal envelopes.Determining the size of the fiscal envelope available for non-wage budget norms and for aggregatednorms requires sector ceilings which are normally based on the national Medium Term FiscalFramework (MTFF). In the absence of a formal MTFF, sector ceilings can be determined bypercentage of GDP and percentage of the total national budget. However, MOF’s Fiscal PolicyDepartment is already engaged in the process of developing a MTFF and we can expect that it willbecome operational by the time budget norms are implemented.The introduction of sector ceilings in Lao PDR is a difficult issue because of the changes it requires incurrent practices of budget formulation and the contradiction between provincial autonomy and thefiscal discipline required for the implementation of national policies.The recurrent budget is split into two fiscal envelopes: one for line-ministries and one for provinces.Provinces get a fiscal envelope that is disaggregated by economic categories. Then provinces allocatethe envelope of each category to sectors. As a consequence it is not before February, the fifth monthof the current fiscal year, that MOF gets to know the total forecasted expenditure by sector. Theseconstraints imply that sector ceilings needs to be disaggregated into two sub-ceilings, one for the 8
  9. 9. Health Ministry at the central level and one for the province. As the provinces, under the existingbudget law, are free in their allocation of funds to the sectors, and as budget norms are purelyindicative, there is no mechanism that can ensure that the total of provincial allocations to the healthsector will fit within the sector ceiling. As a consequence the health sector sub-ceiling for centralspending will be a binding ceiling while the sub-ceiling for provinces will be an indicative ceiling. Thisapproach weakens considerably the concept of sector ceiling as instruments of fiscal discipline and itmeans that there is no mechanism to align provincial spending with national priorities.In that context, budget norms will become the most important instrument of fiscal discipline and theGovernment’s meeting or not meeting its targets will depend on how effective the fiscal discipline isat the provincial level.Compared to the Ministry of Education, the Ministry of Health is lagging behind in the developmentof its planning and budgeting tools. There is no sector macro-model comparable to the EducationSector Development Framework and the process of developing a MTEF (Medium Term ExpenditureFramework) based on provincial expenditure need assessment has not started yet. To understandthe role that budget norms will play in the future it is necessary to look at how the different elementsof the planning and budgeting system are linked together.The sector MTEF is an instrument to assess expenditure needs. It must be developed in a bottom-upapproach based on a three year sector plan developed by each province on the basis of the nationalsector development framework under the responsibility of MOH’s planning department. A ProvincialMulti-Year Plan will be developed using either real cost units, or indicative cost units provided byMOH. Provincial multi-year plan will be revised every year and consolidated into the national MTEFwith the appropriate adjustment to fit the national ceiling provided by MOF. Once developed, theMTEF will become the natural tool for revising budget norm formulae as components of the budgetnorm formula will result from the aggregation of the cost units used in the MTEF. 9
  10. 10. For the sake of budget norm preparation, in the absence of a MTFF, MOF’s Fiscal Department willneed to project sector ceilings starting from FY 2010/11 as the reference year, up to FY 2013/14.These sectors ceilings will be entered in the macro-fiscal model that will be used for testing andselecting budget norm formulae. The ceilings at this stage are a purely indicative and should notrepresent a commitment from MOF.Based on sector ceilings, MOF will recalculate each year budget norms using its macro-fiscal model.The formula structure and the various ratios will remain unchanged. Only the fix amount per capitaor per staff will be adjusted. MTFF Fiscal Planning Process Sector Ceiling Provincial Ceilings MTEF Budget Norms Provincial Budget Sector Provincial Plan Cost Units 5. StaffingThe number of doctors and nurses has been identified as the main cost driver for the health sectorand we expect staffing numbers to be an important component of the different budget normformulae. The number of doctors and their specialisation has a direct impact on the type of serviceprovided, the number of patients treated and the costs associated with the treatment.Medical staff appears to be relatively rationally distributed across provinces according to populationsize. Horizontal imbalance in staff allocation exists but is mostly driven by the existence or non-existence of medical facilities and their type. However, even when health facilities exist at thedistrict level they have a chronicle shortage of qualified staff, especially doctors, as it is difficult toconvince doctors and qualified nurses to work in districts. Provinces tend to concentrate qualifiedstaff in the provincial hospitals and allocate limited resources to the district level. However, 10
  11. 11. provinces that allocate more health workers to the district level have better health indicators. Thereis a slight bias in staff allocation in favour of smaller provinces which tend to have more medical staffper inhabitant. It might be an indication that different norms might apply to provinces with differentpopulation size.The number of health workers in Lao PDR is relatively high compared with neighbouring countries orcountries with a similar level of economic development. The real problem is the uneven distributionof staff among the different types of health facilities and the shortage of non medical staff. Most ofthe sector management functions are staffed with doctors and qualified health workers either at theMinistry of Health or in Health Provincial Offices and hospitals. Most of the planning, budget andreporting functions are performed by medical staff, reducing significantly the number of doctors andnurses available for providing health services. There is also a notable shortage of doctors in somemedical specialities and the ratio of nurse to doctor tends to be very high, either pointing at someinefficiency as is the case for central hospitals or to the fact that there is a shortage of doctors indistrict-level facilities.In practice, because most districts and some provinces face difficulty in recruiting high-level and mid-level health professionals, they fill vacancies with lower level staff, with the result that district healthfacilities in aggregate have excessive numbers of low level staff, and provincial facilities haveexcessive numbers of general practitioners and insufficient numbers of specialist doctors and alsosome categories of mid-level health workers.District-level facilities account for the majority of health workers. However the bulk of the staff at thedistrict level is mid- and low-level (88%). Doctors represent only 6% of district level staff. HealthCentres are mostly served by low- and mid-level staff, respectively 81% and 18%. (Source: WHO,Human Resource for Health, June 2007).In the first stage of budget norm implementation, budget norm will apply only to non-wage recurrentcost. However budget analysis has shown that there is a very strong correlation between non-wageexpenditures and staffing. In a second stage, budget norms will apply at an aggregated level and willcover wage and non-wage expenditures. It is expected that an aggregated formula will be neutral interms of volume of salaries during the first years because the formula should be designed in a waythat will guarantee the present fiscal envelope for salaries.MOH has developed norms for the number and category of health care workers which should beemployed in each type of health facility at the provincial and district levels (though norms andstandards for regional hospitals are still under development). However these norms have beenprepared without consideration for the fiscal capacity of the Government and of the provinces andfor that reason cannot be applied. The MOH has a five year plan for progressively filling the gapsbetween actual staffing and the standards set by these norms, taking account of natural attritionrates but this plan is not cost allocated nor prioritized and cannot replace a full scale cost allocatedand prioritized sector development planKnowing that the misallocation of staff is one of the major problems of the health sector, thisapproach has two consequences for budget norms: 11
  12. 12. 1) The number of doctors is not a sufficient indicator of financing needs. It might be necessary to distinguish between general practitioner and specialized doctors. It might also be necessary to include in the formula other staff. Considering that 14 position types have been identified and considering that each position type requires different levels of qualification; it is not possible at this stage to define the level of disaggregation required by the budget norm formula. However our recommendation is to keep it as simple as possible. 2) It is recommended that before introducing aggregated budget formulae covering wage and non-wage, to identify staff allocation inefficiency and to distinguish between structural inefficiencies (shortage of doctors in some medical specialities, unwillingness of qualified staff to work in districts) and administrative inefficiency that can be corrected. 3) The introduction of budget norms in the health sector should be conducive to a revision of the staffing norms prepared by MOH to align them with the budgetary capacity of the provinces. Different types of staffing norms can be considered for provinces with different population size or different size of hospitals (based on the number of patients treated per day, for example). 6. Capital Investment and donor funded projectsIn FY2009/10, investments represent 69.8% of the sector budget with 81% of the fiscal envelopeprovided by foreign assistance. In practice, there is confusion between real physical investments anddonor funded projects which often finance the routine recurrent expenditures (such as vaccines,drugs, disease control programmes, trainings, subsidies for treating poor population, etc.)Additionaly, Nam Theun 2 revenues are allocated via the investment budget process (around USD 1.2M this year) and also finance a mix of capital expenditures, human capital development and healthexpenditures for the poor, which for the most part are recurrent.Additionally some donors finance directly health institutions and their contribution appear neither inthe national budget nor in the provincial budget.This situation has several consequences:  Neither MOH, nor MOF, nor MPI know the real level of investment in the health sector either at the national level or at the provincial level.  It is not possible to know the share of recurring expenditure in the health budget.  It is theoretically possible to know to which provinces donor funding flows, but in practice this is never done because reporting is on a per project basis and there is no consolidation of data.  Donor money might be spread unevenly. At the moment, we cannot tell if donor assistance increased or decreased horizontal imbalance. If we look at the provincial budget, only nine provinces beneficiate from donor funded project. But it is only part of the reality because the 12
  13. 13. most important part of donor assistance is channelled through projects implemented at the provincial level but managed centrally.  There is no legal definition of investment and without an inventory of fix assets it is impossible to access correctly the level of funding required for maintenance.Recommendations: 1) MPI budget should also be disaggregated by line-item or by economic categories. The most obvious line items are: (i) physical infrastructures, (ii) medical equipments, (iii) IT equipments and software, (iv) recurrent routine expenditures (v) training and (vi) social transfers. 2) Cost of centrally managed programmes should be reflected in provincial budget, or more likely in health institution budgets. 3) Investment in fix asset should be limited to the maintenance capacity of the province, or in the case of medical equipment, to their replacement capacity based on the life expectancy of the asset. 7. Non-wage recurrent expendituresThe State Budget allocation system treats non-wage recurrent costs as a residual after salary,investment and other non-discretionary spending are deducted from the macro budget ceiling. Thehistorical trends point toward a reduction of non-wage recurrent expenditures in favour of salary andinvestment. As a consequence it is not possible to develop policies based on improvement in servicedelivery. This does not take into account that health services have high non-wage cost for servicedelivery which cannot be set up independently by the type of service provided.The consequence of this budget formulation process is a drastic reduction in the quality of services,lack of maintenance of existing equipments and infrastructures and less effort to reach remotepopulation. To conciliate the shortage of funds for financing non-wage expenditure, hospitals havedeveloped policies to increase revenues from user fees and profit generated by the drug revolvingfund. MOH has assigned a significant share of donor assistance to population outreach and routineexpenditure of priority programmes, such as the immunisation programmes which normally shouldbe fully financed by the Government. The consequence is that programmes more fundamental inreaching the Government’s objectives are also the more dependent on external financing.The introduction of non-wage budget norm can partially remedy this situation, but two types ofclarification are required:  Expenditures that must be financed 100% from budget funds must be distinguished from those that require a mix of budget funds and user fees. 13
  14. 14.  Activities that must be funded by the Government must be distinguished from those that can be funded by donors.The recommendation is that basic infrastructure maintenance, utilities and transport should beconsidered as recurrent expenditure that should be financed 100% by government funding and assuch covered by budget norms. 8. Revision of the expenditure assignmentThere is a consensus that budget norms must be implemented on the basis of the existing defacto provincial expenditure assignment. For that reason it was necessary to documentexisting responsibilities for expenditure assignment at the central, provincial and districtlevels as well as identifying existing and potential mismatches that can become a source ofdifficulties. Clarification of the expenditure assignment is the first and fundamental step inthe design of any system of intergovernmental finance. As a consequence, this concept notedoes not focus on broad structural issues such as the devolution of authority to theprovinces but rather on small technical reforms such as better design of programmes, newaccounting rules for hospitals, improved budget classification for investment, etc. Thesetechnical reforms do not require any change in the existing legislation and can be doneincrementally.There is a risk that the introduction of budget norm might “freeze” the existing mismatch inthe existing assignment because budget norms will be based on the existing provincialbudget which does not reflect the totality of provincial expenditures. However this risk willnot become significant until a full-fledge system of intergovernmental transfer system is putin place. It will allow between three to five years revising more deeply the expenditureassignment.The expenditure assignment can be broken down in four components or dimensions: (1)responsibility for delivering services, (2) responsibility for administering the service, (3)responsibility for financing a service and (4) responsibility for setting standards, regulationsor policies guiding the provision of services.Based on the review of the expenditure assignment framework conducted in February 2010with the assistance of a World Bank expert, a number of recommendations have beenformulated for clarifying some aspects of the existing assignment of responsibilities in thefour dimensions mentioned above which might have implication for budget norms. It isrelevant for budget norm development to identify any aspects of the expenditureassignment that might be ambiguous, in contradiction with the present Government policyand its objectives, or the cause of misallocation of human and financial resources. In practicethe existing system is an unwieldy mix of decentralization and deconcentration of 14
  15. 15. government activities, with donor financed projects managed in a deconcentrated mannerand health facilities managed in a decentralized manner and the same contradiction found inthe planning and budgeting process. 8.1. Lack of a standardized programme structureThe introduction of budget norms and formula based financing in a field as complex as public healthrequires, if not full-fledge programme budgeting, at best, a minimum element of programming inorder to know which programme falls under the responsibility of the province and which programmefalls under the responsibility of the Ministry of Health at the central level. Only then, programmescan be linked to specific budgetary envelopes.The Ministry of Health used two types of programmes which are not easy to distinguish and whichhave significant overlap. There are six programmes itemized below that we can call organizationalprogrammes because they have a linkage to the organization structure and to some extent tobudgeting, and eleven priority programmes that seem to be mostly used for policy planning. (1) Preventive Medicine and Health Promotion (2) Control of Food and Drug Quality and Procurement (3) Health Research (4) Planning and Management (5) Curative Medicine (6) Human Resource DevelopmentAccording to existing plans, these six organizational programmes are those that will be used for thepreparation of the Medium Term Expenditure Framework (MTEF)The eleven priority programmes are: (1) Planning and Management (2) Human Resource Development (3) Health Finance (4) Health Education (5) Infectious Disease control (6) Primary Health Care (7) Maternal and Child Health (8) Nutrition (9) Hospital Services (10) Medical Laboratory Technology (11) Essential DrugsThirty one sub-programmes are managed under the priority programmes. 15
  16. 16. The overlap between the two types of programmes is obvious and will create confusion in theplanning and budgeting process. The difficulty stems from the complexity to map programmesaccording to organizational structures, especially at the hospital level where it becomes difficult toidentify who is responsible for what due to the mismatch between the two types of structures.Programmes could be organized as 1) vertical programmes that do not deliver service directly to thepublic but will link the functions such as Policy Planning, Management, Human ResourcesDevelopment, etc. performed at the central of MOH to the provincial level. and 2) horizontalprogrammes in charge of delivery of services to the public and which bear clear responsibilityassignment in hospitals and health centres. Horizontal programmes could also better reflect thetraditional organization of public health services which differentiate between primary health care,secondary health care (first level referral hospitals), and tertiary health care.We can formulate three recommendations: 1) MOH should use the opportunity of the preparation of the 6th five year plan to merge the two types of programmes and to design a more coherent structure in which clear responsibility assignment amongst the health facility organizational structure, programmes and health services to be delivered are outlined. 2) Programmes and sub-programmes that are significantly dependant on donor funding should be managed centrally and excluded from the scope of budget norms; 3) Programmes that are managed centrally but delivered at the provincial level should be reflected in the provincial budget, probably through conditional grants, in order to measure their impact on horizontal and vertical imbalance. 8.2. Clarification in the responsibility for health service deliveryComplexity in the horizontal division of responsibilities for health services between districts,provinces and central level needs to be understood to determine budget norms for health. Theallocation of responsibilities across levels of administration does not align with the distinctionbetween primary health care, secondary health care (also called “first level referral hospital”) andtertiary health care (which provides a second level of referral for complex cases/interventions).There are good reasons for this in terms of the most efficient configuration and use of the network ofhealth care facilities. Health centres and District Hospitals Type B provide primary care. But hospitaloutpatient departments for all levels of hospitals also provide primary care services for the nearbycommunity within in their district. District hospitals Type A, Provincial Hospitals and most CentralHospitals all provide secondary care - first level referral services – for the populations in the districtsclosest to them. Provincial hospitals provide some additional province-wide services not provided byDistrict Hospitals Type A. This complicates the definition and costing of the health budgetresponsibilities of districts and provinces. 16
  17. 17.  Provincial hospitals are also district hospitals in their own district which means that the cost of providing primary health care in that district is shouldered by the provincial budget, not the district budget.  Four provincial hospitals (Champasak, Savannakhet, Luang Prabang and Oudomxai) will be upgraded / expanded to become regional hospitals, each providing a wider range of specialist services for a group of three to five provinces. There will not be separate regional and provincial hospitals in these provinces. Once fully implemented, these hospitals are likely to have more staff relative to population size than other provincial hospitals. Cost per hospitalization and cost per staff are likely to be higher in these hospitals because of the greater intensity of treatment of more complex cases. However, potential for earning user fees is also likely to increase when these hospitals are upgraded.  Selected districts in each province have District hospitals Type A, which function as inter- district hospitals that provide surgical services for 3 - 4 adjacent districts, while most of Type B hospitals are little more than heath centres with one or two doctors. Type A district hospitals have significantly higher staffing and higher costs per hospitalization or per staff than Type B district hospitals (which provide primary care only).  Although health centres are established as secondary budget units, they operate under the supervision of district hospitals that manage staff, provide drugs and medical equipments, collect proceeds of drug sales and manage through them a number of health services. Respective responsibility of the District Hospital and of the District Health Office in relation to health centre is relatively unclear. There might be some advantages in considering health centres as an extension of district hospitals and providing more management and financial integration.  A number of districts do not have district hospitals, either because the population is too small or because means have not been given the district to create one.These considerations bring an important number of recommendations: 1) The complete equalization of health expenditure, either in total or by main categories is not desirable as long as provinces do not have the same type of health infrastructures and the same coverage of the population. 2) In the case of Regional Hospital, it is not clear yet if the additional funding required should be channelled to the provincial budget using budget norms and transfer formula. A conditional grant might be a better instrument. 17
  18. 18. 3) It is not recommended to disaggregate the provincial health budget by district. The existence and the type of heath facilities existing in one district is what should be the driver. 8.3. Integration of vertical programmes and project in health sector budgetsAs previously mentioned in section 8.1, there is a need to clarify and consolidate definitions of thevertical programs in order to clarify their source of financing. Currently each project is treated as aseparate vertical program. In practice, a precise definition of project should be introduced andprojects should be grouped under programmes and sub-programmes.Many countries with decentralized health systems use some central financing and coordinationmechanism for managing – particularly programmes that require nationwide coverage, such ascertain disease control programs, and nationwide logistics management for distribution of vaccines,drugs and commodities. In Lao, the major programs with vertical elements (in approximate order of“verticality” are: EPI childhood immunization program, tuberculosis control, malaria and denguecontrol, HIV/AIDS, mother and child health, and nutrition. In all of these programs, some healthcareworkers in HCs and DHOs are involved in the delivery of the program, while PHOs play a substantialrole in coordination, management and monitoring of the program.Decisions will be needed after donor support ends to clarify MOH’s policy on which input shouldremain centrally financed and managed (e.g. vaccines), which input should remain PHO-financed andmanaged (e.g. outreach and supervision and monitoring). This is not a major issue of concern at thisstage. It is reasonably straightforward to identify the major centrally financed inputs to the largervertical programs and exclude them from costing of provincial and district health services. Someavailable costing of district health services already exclude these (e.g. the BTC–LUX costing of districthealth services), but there may be a need to update the list of centrally financed inputs if largeamounts of central donor support are introduced for MNCH and nutrition programs.In terms of budget norms the main issue is the capacity of MOH and MOF to monitor the allocationof vertically managed programmes to the province. Ideally this should be done through centrallymanaged grants – as apparently envisaged by the new budget law. In the case where a grant wouldbe implemented it would be necessary to decide who of MOF or MOH will be responsible toallocating the grants to the province. It also proposes the introduction in the current budget processof a certain element of programme budgeting. 8.4. Planning and budgetingOne of the weaknesses of the planning process in the Lao PDR is that there is no strict distinctionbetween policy planning, which should be the responsibility of MOH at the central level, andimplementation planning, which should be the responsibility of the provinces. Policy planning followsthe deconcentration model while implementation planning follows the decentralization modelresulting in conflicting outcomes and difficulties in reporting and data collection.Planning at the provincial level appears disconnected from planning at the central level due to theabsence of common tools and to the large autonomy of provinces. In theory, provinces must beguided for planning and budget preparation by the Five Year Plan and policy; in practice because 18
  19. 19. there is no quantitative objectives assigned to provinces which leaves little incentive for provinces toalign their planning activities with national priorities.Provincial planning is also disconnected from national budgeting and as a result provincial budgetsuffer from systematic cuts that force districts to go through an additional revision phase of theirplan when budgets are announced. The provincial planning and budgeting process is probably one ofthe longest in the world and in the base case scenario lasted fifteen months.The introduction of a Sector Development Plan (on the model of the Education Sector DevelopmentFramework) and of a MTEF could solve partially the problem. Sector Development Plan and MTEFshould be approved by the Cabinet and become instruments of national policy on which provincialplans and budgets should be aligned. 8.5. Linkage between investment and maintenance costThere are indications of excessive allocation of capital expenditure relative to non-wage expenditureresulting in poorly maintained infrastructure. The fact that budget norms will be introduced forinvestment offers an opportunity to link investment norms to non-wage recurring norms. The usualpractice is to allocate a fraction of this investment to recurring expenditure for maintenance. MPI isalready calculating the maintenance cost of new investments. Considering that MPI is not veryadvanced in the development of investment norms, we have not considered this linkage in thebudget norm formula, however, a revision of the formula will be possible when MOF moves fromnon-wage recurrent norms to aggregated norms. 8.6. Accounting and reportingAccounting and reporting at the health facility level show a number of weaknesses which are directlylinked with the expenditure assignment framework. The sector is struggling with the fact thatprovinces as such do not have any obligation to report to line-ministries and at the central level onlya fraction of hospital budget is reported, albeit, with considerable delay. a) Absence of double entry accountingHealth facilities, as yet, do not use double entry accounting and there is no uniform system foraccounting and reporting. Several health institutions have tried to implement accounting packagesbut have been struggling with technology issues as well as the fact that those packages needcustomization for implementation in the health sector. MOH is developing a new policy frameworkfor hospital management. A software pilot project has started in Vientiane at the Child and MotherHospital and we expect the project to roll-out in the provinces at a later stage. Considering theshortage of IT manpower in the provinces, this process is likely to take several years. However an ITpackage cannot solve financial reporting issues in the absence of precise regulation. Considering that 19
  20. 20. hospitals not only deliver public services but have commercial activities the accounting law shouldapply to them as distinct entities from the provinces or MOH. b) Specific accounting rules are requiredThe introduction of accounting IT systems cannot solve all financial management issues unlessprecise accounting rules are prepared for the health sector. The general chart of account should beadapted to hospital activities and precise accounting rules should be introduced. The manner inwhich the drug fund is integrated into the hospital accounting system is especially critical. c) Drug Fund revenues, users fees and technical revenuesHospitals prepare their budget for their own internal management purpose, but it does not seemthat these budgets are systematically discussed with provincial authorities. Most hospitals do notreport the user fees or technical revenues they collect, or they report them partially for tax purpose.It is important that all user fees and technical revenue be fully reported. d) Absence of mandatory financial statementsUnder the present accounting law, hospitals as economic entities as well as budget users have atheoretical duty to publish financial statements but no secondary legislation or regulation has beenput in place. Considering the nature of their activities, hospitals should have a Profit and LossAccount and a Balance Sheet. e) Reporting obligationsThe fact that Hospitals have commercial activities that make them dependent on their own revenuesand that they can have large payable and receivable accounts, underlines the fact that hospitals arenot just budget users but also economics entities that should use the same reporting procedures asordinary budget users. These economic activities represent a financial risk for the Government, justlike State Owned Enterprises (SOEs). The risk that a hospital goes bankrupt cannot be excluded and inthat case the central Government, not the province, will be responsible for the bail-out. This showsthat, like SOEs, the Central Government has the responsibility to monitor the financial position oflarge hospitals. It cannot be done through the usual budget control procedure, but only through aspecific reporting mechanism, probably once a year when financial statements will be published.Specific regulation must be put in place not only to define reporting obligations of hospitals, but alsofor defining the respective responsibilities of MOF and MOH in monitoring the hospital’s financialposition. 20
  21. 21. 8.7. Hospitals’ legal statusHospitals and health centres operates as secondary budget units, a status which is not well defined inthe new Budget Law and that by itself would require some clarification. However, by the fact that asubstantial part of provincial and district budget comes from users fees and technical revenueshospitals are not ordinary budget users. In practice they operate more like subsidized State OwnedEnterprises. The current legal framework of hospital activities cannot provide a satisfactory solutionfor many expenditure assignment issues linked with financial management. As in most countries,hospitals must be granted a special legal status that will define their mission, their financialautonomy and their reporting obligation. 8.8. StaffingDespite the issue of structural staff misallocation which has been identified in section 5 of thisConcept Note, it does not appear that the current practice of staff management will be an obstacleto the implementation of sectoral budget norms.Budget norms cannot be an instrument for managing staff allocation and these two processes mustbe kept separated. A general purpose grant combining wage and non-wage allocations will not offerany mechanism for constraining salary expenditure as a share of the technical revenue. Howevertechnical norms can warrantee that health facilities receive the minimum level of funding forcovering well-identified recurrent expenditure such as building maintenance, utilities and transport.While user fees play an increasing role in health service financing, hospitals are moving toward amodel in closer resemblance to the private sector. As a consequence there is growing contradictionbetween the financial autonomy granted to hospitals and the rigidity of the staff allocation system.Hospitals have overcome staff allocation constraints by using user fees and proceeds from drug salesin the hiring of contractual workers. However the consequence is an increased dependence onunreported technical revenues which becomes an obstacle for lowering the cost of medical servicesfor the population. Health Centres and District Hospitals of Type B which do not have the capacity togenerate substantial technical revenues, also do not have the financial resource for recruitingcontractual staff. This situation aggravates the vertical imbalance between provincial hospitals anddistrict health facilities.From an expenditure assignment point of view, a contradiction exists between the very centralizedprocess of staff allocation and the highly decentralized process of planning and budgeting for deliveryof public services. However, the fear that it could present an obstacle for moving from non-wagebudget norms to aggregated budget norms (wage + non wage) is highly exaggerated and is based onthe misconception that an aggregated formula should have two components: one for wage and onefor non-wage. In practice, the same formula structure can be used. It only requires an adjustment ofthe cost units and maybe some of the weighting ratios. 21
  22. 22. 8.9. Lack of budget comprehensiveness of provincial budgetAccording to the principles of budget unity and budget comprehensiveness, all Governmentexpenditures should be reflected in budget formulation and budget reporting at the provincial level.However, provincial budgets do not capture all sector expenditures made at the provincial level.Programmes and projects financed centrally are not reflected in provincial budgets although theirdelivery mechanisms are purely provincial. The investment budget of MOH in FY2009/10 represents84% of the total central budget. The bulk of that investment budget is of course financed by donors.We can assume that a significant part of that budget goes to the provinces and we can also assumethat a significant part is spent in the provinces on routine recurrent expenditures of so calledvertically managed programmes and projects which are delivered locally using local staff paid by theprovincial budget. Presently, there are no means to know where the money flows or how toconsolidate allocations to the different projects, province by province. In theory the implementation,this year, of the new chart of account makes possible solving this problem. In practice it wouldrequire a decree indentifying the programmes requiring a special procedure and providing detailedinstruction for accounting and reporting.Recommendations: 1) The revised programme structure must be used for accounting and reporting; 2) Instructions must be issued for using location codes in an appropriate manner. It is not known yet if general instructions are sufficient or if instruction must be given programme by programme. 3) Programme reporting must be standardized as much as possible, knowing that different donors have different reporting requirements. Already hospitals complain that reporting becomes too difficult; 4) Vertically managed programme accounting and reporting should be the responsibility of the Ministry at the central level, but in most cases data must be collected from the provincial level. 8.10. Taxation of the drug revolving fundsBased on a Prime Minister Decree many provinces (but apparently not all) raise taxes on the drugrevolving fund. As such taxes are not mentioned in the Budget Law, it can be considered as obsolete.In any case, a tax on the drug fund encourages hospital to raise their price schedule and does notseem compatible with the Government’s objective of lowering the cost of medical services. Clearerinstructions must be prepared. 22
  23. 23. 9. User Fee policyFrom a budget norm view point, user fees are involved in two important issues: (a) there is not yet aclear policy about “which source of finance pays for which costs” between state budget and userpayments/third party payments, (b) the poverty reduction component of the budget norm formulamust be used for reducing user fees and a system must be put in place for a better monitoring ofuser fees with a clearer policy framework. 9.1. Mechanism for collecting technical revenuesTechnical revenues are collected through three essential mechanisms: profit from the drug revolvingfund, user fees for medical services, and third party finance scheme.The drug revolving fund adds to the cost of drugs at a mark-up of 25%. In theory a fixed portion ofthe profit generated goes to different activities, but in practice there is a lot of flexibility. There areserious drawbacks with this system. Hospitals are encouraged to sell more drugs than patients need.Hospitals are becoming so dependent on the drug fund that they are trying to expend its activity byall means as a way to avoid cash restrictions;Fee schedules for medical decree are determined by a MOF decree in consultation with MOH andpromulgated by a Prime Minister Decree. However most of the hospitals do not follow the schedule.Central Hospitals complain that prices are set too low for cost recovery while provincial hospitalscomplain that prices are too high and not affordable by the population. Several issues requireattention:  MOF should not get involved in determining or approving fees for medical services,  The process for determining user fees should be flexible enough to allow a revision at least once a year;  Cost of services and affordability vary from province to provinces. Hospital should have a certain flexibility in setting price schedules, but MOH is responsible for determining only the maximum chargeThird party financing schemes (social health insurance, SHI for civil servants and formal sector, CBHI,HEFs) aim to reimburse user fees for hospital services, on a basis that assumes some costs arefinanced from budget or donor sources. (Some HEFs reimburse hospital user fees and transport andfood costs on a fee-for-service basis.) However, there is a wide range of capitation rates theseschemes pay, and a study indicates that capitation rates are below cost. The Curative Care Lawspecifies items that may be covered by user fees, but is permissive. The PM-approved decree 3 onthe fee schedule does not seem to be based on a clear set of principles or objectives about what userfees should cover. Clearly the reduction of patient out-of-pocket expenditure is linked to theexpansion of third party financing schemes and to a more realistic reimbursement of hospital costs. 23
  24. 24. 9.2. Dependence on user feesHospitals and health facilities have become highly dependent on user fees and technical revenues.Survey of central hospitals shows that in some provinces, technical revenues cover 70% to 80% oftheir budget. In the case of Vientiane Province’s Hospital, technical revenues cover 72% of thebudget and direct donor assistance 3%. Government salaries represent only 10% of the operatingcost. Out of the 25% of operating cost financed by Government funding, it is not possible to knowhow much comes from the donor funded investment budget as the hospital budget does not makesuch distinction. However, we can estimate that only 15% of the hospital budget is financed by thedomestic budget. 9.3. Need for a more comprehensive and flexible policyThe draft of the Health Finance Strategy does not make clear recommendations about the futurebasis for setting user fees. It hints at a range of options without explicitly discussing them. There isnot yet a consensus within the health sector about this issue. Considering the dependence of healthfacilities on user fees, there is a need to define a more comprehensive and flexible policy. 9.4. Users fees and budget normsThere is a need to reach a practical consensus on some of these questions as a basis for decidingwhat expenditures and costs to include in budget norms. There may be some consensus on a needfor the budget to cover all the recurrent costs of basic mother and child health services and prioritydisease prevention programs– which encompasses almost all the recurrent costs health centres andType B district hospitals, and a larger share of the recurrent costs of Type A District Hospitals andprovince hospitals.The capacity of health facilities to collect user fees is conditioned by the level of poverty of thepopulation, therefore, the design of a budget norm cannot ignore the problem of user fees. It will benecessary to conduct a survey of health facilities in poor provinces to determine how much thepoverty level of the province impacts the hospitals’ capacity to collect user fees. When we have moreprecise data, we will be able to assess the size of the poverty component in the budget normformula. 9.5. Consequence of the introduction of the Single Treasury AccountUnder the new Treasury Law that is being drafted, technical revenues are defined as “public money”and must be deposited into a bank account which is part of the Single Treasury Account. As could beexpected, there is considerable reluctance of hospitals to accept the principle of having theirtechnical revenues deposited into a Government account. They complain of poor service of thetreasury and of delays in accessing funds which are not compatible with hospitals’ mission. 24
  25. 25. However as the Treasury plans to use commercial banks as part of the Treasury Single Accountarrangement, there are ways around that problem. There is the possibility that Hospitals use theirbank account which is part of the Single Treasury Account like a normal commercial sight accountwithout referring to the Treasury. However it will be necessary to draft specific regulations.We recommend that MOH prepare a policy paper on user fees and technical revenues covering allthe issues identified. 10. Architecture of the Budget Norm system for health sector provincial budgetsThere is wide consensus in the Ministry of Heath as well as in the Province that a high level sectortransfer formula will only partially solve the problems faced by the health sector. The major problemof the health sector lies in determining the minimum level of funding of health facilities such asprovincial hospitals, district hospitals (types A and B) and health centres. Based on these premises aconsensus has emerged that the health sector financing formula must be facility and district basedbecause it is these types of facilities, their locations, and the size of the attached population thatdrives the budget needs of a district and ultimately of the province.This new system will require four types of formulae:-A general formula for sizing the health sector provincial envelope-A formula for financing provincial hospitals-Two formulae for financing district hospitals (types A and B)-A formula equivalent to a block grant for Health Centres 25
  26. 26. BUDEGET NORM ARCHITECTURE Provincial Health Budget (F) Provincial Hospital Prov. District Health Budget (F) Admin. District Hospital District Hospital Type A (F) Type B (F) H.C. (F) H.C. (F) H.C. (F) H.C. (F) (F) = formula a) District Heath BudgetAt the district level there is no need for a formula. The size of the budget available for district is thetotal provincial health budget after deduction of the provincial hospital budget and the ProvincialHealth Office budget:PHA = Provincial Health AllocationDHB = District Health BudgetPHB = Provincial Hospital BudgetPHOB = Provincial Health Office BudgetThen: DHB = PHA – (PHB + PHOB) b) Provincial Health Office BudgetAt this stage we do not think that there is a need for a budget norm formula for the Provincial HealthOffice. We think better to leave that budget to the discretion of the provincial governors (to bediscussed). 26
  27. 27. c) Provincial Hospitals and District HospitalsIt is not yet clear if Provincial Hospital and District Hospital Type A can share the same formula.However we expect that the two formulae will be very similarDistrict hospitals of Type B appear to be more similar to Health Centre. Usually they have few doctorsand like Health Centres they are mainly operated by nurses. d) Heath centresHealth centres do not work as independent entities but work under the supervision of a DistrictHospital. It might be better to allocate a single budget covering the district hospital and the healthcentre attached to it rather than give to health centre a block grant based on the number of staff.Population out-reach activities appear to be mostly financed by vertical programmes and the size ofthe required budget does not appear to be directly linked to the attached population. e) Regional HospitalsThe mission of regional hospitals is not yet defined clearly enough to see how a dedicated budgetnorm formula could be designed for them. The difficulty stems from the fact that regional hospitalsmight not offer all the same type of services and that the percentage of patients from otherprovinces susceptible of using the services is not known.The recommendation is to apply to regional hospitals the same formula as for provincial hospitalsand to add an earmarked grant to cover the difference in cost of service delivery. The earmarkedgrant will come from the central budget and should be managed either by MOH or MOF. 11. Structure of budget norms formulae10.1. Formula for provincial allocationThe members of the budget norm team have reviewed six possible approaches for designing theformula for provincial health allocation: (1) approach based on salaries, (2) approach based on thenumber of health workers, (3) approach based on capitation and case payments, (4) approach basedon capitation, needs and costs, (5) approach based on the cost of infrastructures (such as beds) andprogrammes, and (6) approach based on cost of service delivery.In July 2009 when the first concept note was discussed, MOH had indicated its preference for aformula based on the number of health workers, possibly with a second component to reflect eitherthe numbers of cases or needs and cost. The idea was to provide an incentive for doctors and nursesto treat more patients in a more efficient manner. Further investigations have confirmed that itseems to be the right approach, although it was decided to drop the idea of taking into consideration 27
  28. 28. the number of cases. It would be very difficult to keep track of the number of patients treated andby whom. The conclusion is that the incentive system will have to be kept separate from the budgetnorm system, at least for the time being until more efficient IT systems are put in place.During the consultations we had with health authorities at the provincial and national levels, agrowing consensus has emerged to consider that the size of the provincial budget is driven by threeessential factors: (i) the size of the population, (ii) the number and types of health facilities in theprovince territory and (iii) the population poverty level. As a consequence we think that the budgetnorm formula must reflect these three components.Out of these three components the number and type of facilities seems to be the determining factor.No matter what the size of the population is, if there is no institution to deliver health service or onlysmall ones, there is no need for a large health budget.In order to capture the budgetary needs of health facilities, the staff number, and more explicitly thenumber of general practitioners and the number of specialists appear to be the best indicators. Whatis not yet apparent is the number of staff categories that need to be taken into consideration by theformula. In many health facilities there is no doctor and it is necessary to take into consideration thenumber of nurses. However, in provincial hospitals and in district hospitals of type A we can considerthat nurses are attached to doctors and taking into consideration the existing number of nurses andparamedical staff, this could encourage some inefficiency.We recommend the following formula structure: Total Health Provincial Allocation = (Allocation on the basis of medical staff) + (Allocation on the basis of population) + (Adjustment for poverty level and other cost factors)Considering the peculiarities of Vientiane Provinces where patients use a centrally managed hospitaland where the incidence of poverty is less than in other provinces, we might have to prepare amodified formula for that province.Each component will receive a different weighting.If we consider (Allocation on the basis of medical staff) + (Allocation on the basis of population) asthe primary envelope, we can start with a weighting of 80% for the allocation on the basis of medicalstaff and 20% for the allocation on the basis of population.The allocation on the basis of poverty can be calculated as a percentage of the primary envelope. Forexample, 5% can be allocated to the less poor provinces, 15% for the poorest provinces, and 10% forintermediary provinces. It will be necessary to conduct a survey of how poverty impacts hospitals’capacity to collect user fees in order to determine the correct level for the poverty adjustment ratio. 28
  29. 29. a) Allocation based on the number of medical staffIf: (a) is the allocation per general practitioners (b) is the allocation per specialized doctors (c) is the allocation per nurses in district hospital type A and B (d) is the allocation per medical staff in Health Centres (excluding doctors)Total allocation based on the number of medical staff = (a x number of general practitioners) + (b xnumber of specialized doctors) + (c x number of nurses in hospital type A and B) + (d x number ofmedical staff in Health Centres)We need to go to the fiscal modelling stage to know if four staff categories are enough. Otherhypothesises that can be tested are:  Distinguishing between general practitioner at the province level and district level  Allocating different amount to nurses in district hospitals type A and B b) Allocation based on population numberThe allocation on the basis of population is justified by several considerations:  Fairness requires that the provincial allocation to be to some extent proportional to the size of the population.  Funding for preventive medicine is directly proportional to the size of the population  A significant amount of the population based allocation will be used for financing Provincial Health Offices and District Health Offices but there should be enough funding left to cover other general activities which are not directly linked to the infrastructure of health facilities.If (g) is the fix amount per capita, then: Allocation on the basis of population = (g x total provincial population) c) Allocation on the basis of poverty and other cost driversThere has been long discussions to determine if poverty was the only cost driver or if there are othercost drivers such as access to remote areas, presence of ethnic minorities, prevalence of certaindiseases such as malaria, TB and HIV, lack of access to clean water, etc. The general feeling is thatthere is significant overlap in these indicators. People living in remote areas are generally very poor.Often, but not always, they are members of ethnic minorities. Remote population are morevulnerable to malaria and TB, etc.Another reason to select poverty as a good quality need indicator is that the poverty level of acertain area determines the capacity of heath facilities in that vicinity to collect user fees andtechnical revenues. 29
  30. 30. To integrate poverty into the budget norm formula, four questions must be answered:  What is the best indicator of poverty?  Should poverty be measured at the provincial or district level?  How to take into account a priority district?  What should be the weighting of the poverty factor in the formula? (i) Selection of the poverty indicatorThere has been another discussion to determine if the Human Poverty Index (HPI) is a good indicatorof the need of the population and of the capacity of health facilities to collect user fees. First itshould be noted that the poverty index has three components: health measured by longevity,education measured by the literacy rate, and standard of living which is a composite value sub-indicator measured by the proportion of the population without access to clean water, healthservices, and the proportion of children under the age of 5 years who are underweight. The HumanPoverty Index has a very strong health component and we do not think that other Health Indicatorswould perform better, but if a good candidate can be identified, we will test it with the fiscal modelto see if it brings better results. One of the advantages of the HPI is that it is measured every fiveyears by MPI’s Statistics Office. The number is easily available at the provincial or district level. (ii) Should poverty be measured at the provincial or district level?Measuring poverty at the provincial level is the easier approach. It is true that it is an average, butthe total amount of funding available for poverty relief does not depend so much on the level of thepoverty index but on the weighting ratio used. It is easier to use different weighting than to usedifferent index.We recommend using the average poverty index for the province without disaggregating by district.Formulae for hospitals and health facilities can use the district index.We can work on the hypothesis that the system will distinguish between three levels of poverty:  First level: provinces with a HPI between 1.10 and 1.20  Second Level: provinces with a HPI between 1.21 and 1.40  Third Level: provinces with a HPI above 1.41According to the first simulation, it is possible to use up to 5 different levels of poverty. Only micro-fiscal simulation during formula testing can tell us how many levels are required. 30
  31. 31. Vientiane Capital might be a special case, because this is the province with the lowest poverty index,but also because patients have access to central hospitals which are financed directly by MOH’sbudget. (iii) How to take into account priority district?The best way to use the poverty index is to create different levels of poverty associated withdifferent weightings for the poverty component in the budget norm formula. One of the povertylevels can be associated to the priority district. However it should be used only in the transfersbetween the provinces and the districts. (iv) What should be the weighting of the poverty factor in the formula?In theory, poverty alleviation funding should be used with two types of activities: outreach ofpopulation in remote areas, and subsidies to reduce pocket expenditures for poor patients. There aretwo ways to consider the problem. One way is to consider that we subsidize the patient, and in sodoing, the best approach is to earmark the poverty component of the formula to create a specialfund. The other way is to consider that instead of subsidizing the patient we subsidize the hospital.Considering that there has not been sufficient time to consider the two options, and considering thatthe first option is more difficult to implement, we have been working under the assumption thatpoverty reduction funding will be used to subsidize health facilities and not patients.In theory, the correct level of funding for poverty alleviation can be assessed by comparing hospitalswhich have the highest capacity of collecting user fees and technical revenues against hospitalshaving the lowest capacity. The other approach is to consider the fiscal capacity of the Government.Only test with the macro-fiscal model will tell us how much could be allocated for poverty alleviation.Once again, only the testing of different formulae will tell us what the correct level of adjustment is. 12. Budget Norms for Central BudgetMOF will also implement non-wage budget norms for the central budget of MOH. In the first year,the non-wage expenditure norm will be calculated on the basis of historical trends as a percentage ofsalaries or as a percentage of the recurrent budget.In the second year of implementation, the Health Ministry will be disaggregated into two maincomponents: the budget for central ministry operations and the budget of ancillary institutions suchas the medical schools and central hospital. For each type of ancillary institution a non-wageexpenditure formula will be introduced. 31
  32. 32. 13. Implementation strategyIn FY 2010/11 MOF will implement two simplified formula one for provinces and if one for centralbudget. Implementation of full-fledge formulae as described in this concept note will take place in FY2011/12. 14. Way forwardThe present concept note should be reviewed and approved by MOH as soon as possible andsubmitted to MOF for approval. According to the PRSO Aide Memoire, approval of MOF is expectedby the end of May.In order to update the micro-fiscal model, MOF should (i) communicate provincial health sectorbudgets for FY 2009/10, (ii) prepare sector ceiling for FY 2010/11 and develop the projected budgetsfor FY 2011/12 and FY 2012/13.MOH should collect budget samples of hospitals and health centres in several provinces representingdifferent levels of poverty. These budgets should include all user fees, and revenues coming from thedrug revolving fund, and should be prepared in a standard format that will be decided by the team.Meanwhile the team will start working on the budget norm formula for the provincial health budget.A notional fiscal envelope for wage and non-wage will be prepared and used for testing severalformulae.Regarding the health provincial budget for non-wage expenditure, the following elements need to bedetermined:  Unit cost per capital for population based transfers  Level of disaggregation of medical staff numbers  Unit cost per levels of medical staff  Weighting of the three components of the formula (staff number based component, population based component, and poverty based component).. 32

×