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May 28, 2020

No Calm after the Storm: Retooling PFM in the Health Sector

Covid
Posted by Helene Barroy, Srinivas Gurazada, Moritz Piatti-Fünfkirchen, and Joseph Kutzin[1]

The country response to COVID-19 has been extensively studied from a fiscal perspective. The speed and effectiveness of each country’s health response has varied widely, often due to pre-existing weaknesses and bottlenecks in their public financial management (PFM) systems. To better understand how PFM processes supported the allocation and utilization of public funds for the health response, the World Health Organization (WHO) conducted a quick review of 183 countries. Five key learning points are emerging:

  • Flexible budget formulation allowed for the rapid reprogramming of resources towards the health response. Countries with well-defined and flexible budgetary programmes in health benefited from greater financial room to manoeuvre within existing envelopes, as seen in New Zealand, France and, to some extent, South Africa. In countries with rigid line-item allocations, the process of reallocating funds toward COVID-19 preventive measures, testing and treatment has been more cumbersome.
  • Systemic weaknesses in budget planning and approval processes have made it more difficult for some countries to translate proposed responses into legislative action. Though spending plans are essential to secure expenditure earmarking and track spending, only half of the countries impacted by the crisis have enacted new plans. Confusion around health budgeting roles and responsibilities, especially in decentralized contexts, have also inhibited an agile budgetary response.
  • A performance-based budgeting has been useful in allocating resources for crisis relief and monitoring the results. Some countries introduced new budgetary programmes, subprogrammes or activities, and formulated them around the overarching policy objective of responding effectively to COVID-19. Others, like Nigeria, created temporary programmes by inserting new budget lines in their existing input-based budgets to allow more flexible spending.
  • Alternative spending modalities have been explored to accelerate the release of public funds to subnational levels and health service providers. Countries have tried different approaches to balance flexibility with control requirements. Examples from Australia, Belgium, Ghana, India, and the Philippines demonstrate the effectiveness of these approaches to shift resources where they were most needed. These include fast-track spending authorizations at the central level, accelerated procedures for fiscal transfers to subnational levels, and advance payments to service providers as a complement to retrospective reimbursements.
  • Financial transparency and accountability were common obstacles across countries, but the creation of COVID-19 funds in about 40 LMICs raises additional challenges. The creation of these funds risks increasing financial fragmentation and does not guarantee transparency and accountability. However, some countries, like Malawi and Italy, were able to track COVID-19 responses through adjustments to their existing Financial Management Information Systems (FMIS). This was a simple, effective and integrated approach.

The COVID-19 crisis creates an historic opportunity for countries to scale up action on PFM reform in health and to address the traditional PFM divide of flexibility versus control. The experiences of countries have shown that there are ways to make health spending more agile through a consolidated, sector-sensitive and responsive approach. Three action points stand out.

    1) Reshaping the health sector’s role in PFM reform:

While traditional concerns for overall fiscal discipline and expenditure efficiency are valid, PFM systems need to align with the core requirements of delivering key services. In health, this flexibility is necessary to manage changing health service needs throughout the fiscal year and the challenges created when rigid and excessive input-based controls lead to inefficiencies in service delivery. Moving forward, PFM systems should be simultaneously strengthened to ensure adequate control of resource use AND made more flexible. These efforts require a collaborative approach with health sector specialists  and to ensure that decentralization of health budgeting functions to subnational entities does not limit the role and responsibilities of health service providers.

    2) Reducing the use of parallel financial management systems in health:

The health sector already suffers from a proliferation of parallel financial management mechanisms for budgeting resources, and/or spending allocated funds and/or reporting expenditures. The COVID-19 crisis has only added to the problem, with the creation of special funds, including at the subnational level (e.g., Kenya and Nepal). There is a need to explore new ways of integrating such funds into national budgeting and accounting functions. Effective fiduciary risk models can be developed with country counterparts in such a way as to avoid undermining existing PFM systems and financial information systems currently under development. Such approaches include streamlining existing financial reporting channels (e.g., for specific diseases); consolidating financial and non-financial performance information within the health sector’s reporting framework; simplifying and making FMIS more user-friendly for health expenditure; redefining roles, responsibilities and capacities of health service providers in financial management; and enhancing incentives for effective financial monitoring at all levels of the health system.

    3) Systematically integrating PFM in future dialogues between finance and health:

Historically, PFM has been overlooked in discussions on the availability of health sector resources and generally neglected by health sector policymakers. This was partly because policymakers and health experts viewed PFM as a separate reform stream from health financing and service delivery. As finance and health authorities initiate budget discussions for 2021 and beyond, PFM should be fully integrated into the dialog on both policy issues and their financing. Tackling budget formulation and execution issues in health will contribute to enhancing budgetary space for health and addressing inefficiencies in resource use in a revenue-constrained world.

This article is part of a series related to the Coronavirus Crisis. All of our articles covering the topic can be found on our PFM Blog Coronavirus Articles page.

 

[1] Helene Barroy and Joseph Kutzin are with the World Health Organization, Health Systems Governance and Financing; Srinivas Gurazada is with the World Bank’s Governance Global Practice; and Moritz Piatti-Fünfkirchen is with the World Bank’s Health, Nutrition and Population Global Practice.

 

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