Credit: John D Sirlin/Shutterstock

No calm after the storm: time to retool country PFM systems in the health sector

 

The COVID-19 crisis is impacting every form of government action, including policies and processes around public financial management (PFM). In this blog, we present our common understanding of PFM lessons stemming from the health response to COVID-19 and offer perspectives to support the development of a coordinated PFM reform agenda in health as countries move towards recovery from this crisis.This contribution is based on a rapid review of country PFM processes, designed and administered by the WHO in April-May 2020. The review gathered and analysed data from 183 countries on a variety of PFM topics, including emergency spending measures, the revision of finance laws, the formulation of spending plans, spending modalities, and reporting mechanisms. This work also builds on lessons that have emerged through a growing body of work on PFM and health and through a number of projects and coordinated initiatives undertaken over the past decade to strengthen and tailor PFM systems in the health sector.

 

Key PFM lessons from the health response to COVID-19

Financing the health response to COVID-19 is a challenge for every country. Many PFM analysts agree that how public budgets are allocated and managed has been just as important to a country’s response to COVID-19 as the overall level of funding dedicated to the effort. There have been a number of common PFM issues that countries have encountered during the current crisis: i) how to reprogramme budget allocations; ii) how to accelerate spending to the frontlines; iii) how to set reporting mechanisms to ensure financial transparency and accountability. While the issues faced are common across countries, the speed and effectiveness of each country’s health response has varied widely, due to pre-existing weaknesses and bottlenecks in PFM systems. We describe some of these challenges below.

While most PFM systems accommodate exceptional spending procedures in their legal frameworks (e.g. virements and reallocation policies, activation of contingency funds), some budgeting features have stood in the way of an effective response. For instance, in countries with rigid line-item budgets, the process of reallocating funds towards COVID-19 preventive measures, testing and treatment has been cumbersome. Countries with well-defined and flexible budgetary programmes in health—where budget allocation approaches allow for the rapid reprogramming of expenditures—did not face these challenges to the same degree. This was seen in countries such as New Zealand, France and, to some extent, in South Africa.

The COVID-19 crisis exposed another major challenge, related to the enactment of budgets for the health response. Transitioning from a response led by the executive branch (i.e. adopting emergency regulations to redirect existing resources) to legislative action to refine and adopt new finance laws or supplementary budgets has been uneven across the countries reviewed. While enacting spending plans is, from a PFM perspective, essential to secure expenditure earmarking and to track spending, our review showed that only half of the countries impacted by the crisis have adopted new spending plans. Several low- and middle-income countries (LMICs) have struggled to quickly develop and approve spending plans due to systemic weaknesses in budget preparation and approval processes. Confusion around health budgeting roles and responsibilities, especially in decentralized contexts (e.g. between central, subnational and provider levels), has also been a source of delays and added unnecessary complexity that has inhibited an agile budgetary response to the crisis.

In some countries where new spending plans have been developed and adopted, the plans were formulated to follow an output-oriented approach. 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. Both approaches aimed at making resource use flexible for the response, while also creating a framework for monitoring the performance of the newly defined budgetary programmes.

Another interesting PFM lesson that emerged from the study of country experiences during the outbreak is the use of alternative spending modalities to accelerate the release of public funds to subnational levels and/or purchasing agencies (depending on health financing institutional arrangements), and/or directly to the health service providers on the frontlines. 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 get resources to where they were most needed, including fast-track spending authorizations at the central level, accelerated procedures for fiscal transfers to sub-national levels, and advance payments to health service providers as a complement to retrospective reimbursements.

Across countries, financial transparency and accountability have also been common challenges. Some reporting mechanisms may have facilitated integrated and transparent monitoring during the crisis more than others. For example, the adjustments to the Integrated Financial Management Information System (IFMIS) in Italy,  Malawi and Timor Leste seem to have been an effective approach to secure simple, integrated expenditure reporting for COVID-19. However, the creation of COVID-19 funds in about 40 LMICs to collect external resources and, at times, private donations, raises concerns around transparency and accountability. A rapid review of legislative provisions related to reporting mechanisms for these funds suggests that there is no guarantee of transparency. In addition, the creation of separate funds or entities to channel resources for COVID-19 risks increasing financial fragmentation in health, a sector that is often already characterized by multiple funding flows. When parallel reporting modalities for COVID-19 are introduced outside of the bounds of existing financial information systems, they are likely to add an unnecessary administrative burden to the frontlines, while not guaranteeing accountability.

 

Looking ahead: the new PFM agenda in health

Prior to the COVID-19 crisis, many countries piloted interventions to improve the adaptability and responsiveness of PFM systems, but their transition was often only partially complete. The crisis today offers a historic opportunity for countries to accelerate and scale up action on PFM reform in health. The price of inaction is far too high—slow funding flows, misdirected resources, and inefficient resource use and reporting come at a high cost to both public health and the economy. Based on our analysis, we have developed a set of key recommendations around three complementary actions:

1. Reshape the health sector’s role in PFM reform: Health financing specialists have long called for more flexibility for health spending in PFM systems, suggesting that controls be relaxed at critical points within the budget cycle to give health sector stakeholders more autonomy over resource use. While traditional concerns for overall fiscal discipline and expenditure efficiency are valid, PFM systems need to align with the core requirements of service delivery for different sectors. 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 can lead to inefficiencies in service delivery. The COVID-19 crisis taught us that these specialists were often right. Countries with more flexible spending mechanisms were able to release funds more quickly to the frontlines, creating a supportive financial environment for the delivery of care. The crisis also exposed systemic weaknesses in budget preparation, approval processes and accounting processes that are rampant in some LMICs which still lack the basic foundations for PFM. Moving forward, the debate is no longer on whether to strengthen the basics or make PFM systems more flexible; instead, PFM systems should be simultaneously strengthened AND made more flexible, so there is sufficient flexibility when and where it is needed and adequate control over resource use. Adjusting approaches towards PFM should reflect a new balance between compliance, control, flexibility and accountability to incentivize country systems to be more responsive and resilient to health service needs. These efforts should be done through a consolidated approach, in close collaboration with health sector specialists and with those at subnational levels, to ensure that decentralization of health budgeting and spending functions to subnational entities does not limit the role and responsibilities of health service providers.

2. Reduce 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. As a result, health financing arrangements in LMICs are often a mix of on-budget and off-budget mechanisms which frequently overlap, requiring additional reporting while still not guaranteeing accountability for health sector spending. Too many funding sources prevent comprehensive budget execution reporting, undermining the health ministry’s stewardship position and its ability to ensure allocative efficiency.  It also complicates resource management at the provider level, making it quite impossible for frontline managers to operate effectively. The response to the COVID-19 crisis has only added to the problem where special funds have been created, including at the subnational level (e.g. Kenya and Nepal). As opposed to furthering the debate between on- versus off-budget responses, we believe there is a need to explore new ways to incrementally integrate external funds into national PFM processes and accounts. 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. New approaches to use country systems and support accountability effectively could include: streamlining existing financial reporting mechanisms (e.g. for specific diseases); consolidating financial and non-financial performance information into a health sector’s consolidated framework; simplifying and making IFMIS more user-friendly for health expenditure; redefining roles, responsibilities and capacities of providers in financial management; and enhancing incentives for effective financial monitoring, even at the lowest levels of the health system.

3. Integrate PFM in future dialogues between finance and health. Historically, PFM has been overlooked in discussions on the availability of health sector resources and it has generally been neglected by health sector policymakers. This was, in part, due to the way policymakers and health experts viewed PFM as a separate reform stream outside of health financing and service delivery. Before the COVID-19 crisis, health budgets were chronically underspent in some LMICs also because of budget formulation and spending bottlenecks, but this has not been systematically addressed as a priority issue. For decades, this has hampered the sector’s resource envelope and its ability to operate effectively, as well as weakened its ability to negotiate for higher budget allocations. The COVID-19 crisis has demonstrated that PFM arrangements have a critical influence on the level of funds available for providers as well as a direct impact on the overall effectiveness of the health response—done well, PFM mechanisms can provide targeted funding quickly and with the necessary levels of accountability for spending. As finance and health authorities initiate budget discussions for 2021 and beyond, it is necessary to take a much more integrated approach to their dialogue.  PFM should be an integral part of budget discussions and reform agendas in health. 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. More money without better PFM systems will not bring better health outputs!

 

In summary, the COVID-19 crisis has shed light on the persistent weaknesses of PFM systems and the bottlenecks that impede effective health spending and the timely delivery of health services. This unique period of time offers an opportunity to address the traditional PFM divide of flexibility versus control. The experiences of countries moving through this crisis have shown that there are ways to make health spending more agile through a more consolidated, sector-sensitive and responsive approach. We look forward to working within our respective organizations, with sector partners and, most importantly, with country leaders, to further define and implement a new approach to PFM in health.

Helene Barroy (World Health Organization, Health Systems Governance and Financing), Srinivas Gurazada (World Bank Group, Governance Global Practice), Moritz Piatti-Fünfkirchen (World Bank Group, Health, Nutrition and Population Global Practice) and Joseph Kutzin (World Health Organization, Health Systems Governance and Financing)

We acknowledge the excellent support and inputs provided by Federica Margini (WHO consultant) for the development of the PFM COVID-19 Database, and thank all the contributors to the WHO PFM web-survey.

 

(Photo credit: John D Sirlin / Shutterstock)

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