AidChapter 4.docx

Key Ideas
Experts disagree on whether aid improves health
Aid comes in different forms: humanitarian assistance, bilateral
aid, multilateral aid
Donors’ use of conditions and tensions between aid to
governments and non-governmental organizations (NGOs) are
contentious

Types of Aid
International: transfer of funds from one entity or government
to another across borders
Individual donations to Doctors without Borders
Humanitarian: funds to alleviate immediate human suffering
Official direct assistance: from official source to another
country; grant, loan, or goods
Bilateral: one government to another
Multilateral: through an intergovernmental organization
Remittances: informal aid to relatives in another country

The US and International Aid
US government contributes 0.2% of GNP to international aid
Lower than most other industrialized nations as a percentage,
but largest absolute amount
Below UN target of 0.7%
When individual citizen donations to NGOs are included, US is
largest contributor
General belief in US that NGOs are better equipped to handle
humanitarian issues than US government

The Aid Controversy
Some experts question whether aid helps or harms low income
countries
Question relates to governmental and NGO aid
Fosters dependency, complacency, corruption?
Some countries that have historically received aid have poor
infrastructure
Beneficial but used inefficiently?
Beneficial and needs to be increased?

Models of Global Aid for Public Health
Ex ante model: no prescriptions for public health; imagine
making decisions prior to being born into a specific set of
circumstances

Sachs model: did projects should be pooled to work
synergistically
Health cannot be created in unhealthy environments
Institutional approach to policy making: emphasizes local
service delivery over specific projects

Argument: Aid is Harmful
Prominence in 1960s based on work of Milton Friedman and
Peter Bauer
Foreign aid strengthens governments that are already too
powerful; too little investment in private organizations
Aid abdicates governments from their responsibilities if NGOs
provide basic services
Official direct aid fosters dependency, corruption, and poor
governance
Economies should be allowed to develop naturally

Argument: Aid is Poorly Managed
Aid is not inherently harmful but allocating it in context-
appropriate ways is challenging
Can create wage disparities in local economies
Difficult to recruit top managers to low income countries with
low salaries
Large number of NGOs with potentially little coordination
between them
Some may not have knowledge of local culture

Argument: Aid is Misused
Models for implementation may not be appropriate for low
income countries
One size fits all, structural adjustment programs
Inappropriate technology use
Funding for primary health care systems in countries without
adequate infrastructure and without basic prevention efforts like
sanitation

Argument: Just Send More
South Korea received large amounts of aid from the US
following the Korean War and is now a strong nation
economically and in terms of human capital
Some argue that other nations would have a similar outcome if
only similar levels of aid were provided

Argument: We Are Making Progress
Targeted, short-term goals often are achieved
NGOs often work to promote social and policy change in
addition to targeted projects
Additional challenges:
Balance services with achieving larger goals
Sustainability and local engagement
Scalability

NGOs and Aid
NGOs have different functions including:
Internal organizing or services
Lobbying or advocacy
Fundraising
Some NGOs take money from governments and must follow
stipulations
Other NGOs have a policy against taking money from
governments to prevent censoring of their messages

7
Financing health in low-income countries
Poverty magnifies the need for health care while shrinking the
capacity to finance it.
Low-income countries face 56 percent of the global disease
burden but account for
only 2 percent of global health spending (World Bank 2005;
Mathers, Lopez, and
Murray, forthcoming). With spending levels of some $30 per
capita on average, over
half of it out of pocket, low-income countries face severe
challenges in providing their
citizens with a basic package of essential services and a
modicum of financial protec-

tion against the impoverishing effects of catastrophic illness.
Most low-income coun-
tries, particularly those in Africa, are far off track for reaching
the Millennium
Development Goals for health. To improve the equity and
efficiency of their health
financing systems and to achieve the Millennium Development
Goals, low-income
countries will need to improve the efficiency and equity of their
institutions, particu-
larly public sector management; significantly increase their
current government
health spending levels through enhanced domestic resource
mobilization, improve-
ments in the efficiency of public spending, and large increases
in grant-based and sus-
tainable external assistance; improve financial protection to the
extent feasible
through appropriate risk pooling mechanisms adapted to
country-specific circum-
stances; and improve the technical and allocative efficiency of
government health-
purchasing decisions. Low-income countries face difficult
choices and trade-offs, and
there are no one-size-fits-all solutions or magic bullets.
Every country wants a health care system that offers good
health outcomes,
affordable services, satisfied consumers and providers, and
medical and financial
equity. These objectives are hard to attain in low-income
countries, where budget
constraints are binding at low levels of overall expenditure, in
particular in the pub-
lic sector. As progress toward the Millennium Development
Goals for health has fal-

tered in the poorest countries, strong international pressure has
been building to
scale up efforts. Because health expenditures are largely out of
pocket in low-income
countries and there is limited capacity to increase domestic
public expenditures,
donors are expected to finance most of the scale-up. But even if
donors make long-
term commitments, health expenditures will eventually have to
be absorbed within
209
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each country’s domestic resource envelope. Moreover, donor
assistance for health is
most likely to focus on Sub-Saharan Africa, because of its large
health needs and
challenging economic circumstances, and on a few other low-
income countries out-
side this region, leaving the remaining countries to find their
own solutions.
This chapter reviews the enabling conditions for an expansion
in health expendi-
tures from efficiency, equity, and sustainability perspectives in
the context of low-
income countries (countries with a GNI of less that $766; World
Bank 2005b). It
examines mechanisms for increasing resources for health and
the major restrictions
on each method in low-income countries. Public and private
financing arrangements

for pooling health care revenues are also reviewed. Seven main
lessons have emerged:
• Because economic growth is a precondition for reaching the
Millennium
Development Goals, low-income countries must not jeopardize
overall growth
and equity goals as they weigh decisions about additional
taxation and
resource allocation that could generate additional revenues for
health.
Although low-income countries should give priority to
increasing their ability
to tax in an effective and equitable manner, tax revenues cannot
be expected to
provide, in the short run, the large additional revenues needed
for most coun-
tries to reach the Millennium Development Goals.
• Payroll-financed social insurance has many of the same
limitations as general
taxation in low-income countries, and it will be difficult for
many countries to
meet the enabling conditions that increase the probability of
successful imple-
mentation of social health insurance schemes and guarantee
their sustainability.
• In many highly indebted poor countries, debt relief is
important for both
growth and solvency. Debt relief does not, however, generate
new resources for
these countries, so they cannot count on debt relief alone to
increase govern-
ment expenditures in social sectors.

• To effectively increase recurrent health expenditures, donor
funding should be
in the form of predictable on-budget financing offered over
extended periods
(20 years or more in some countries). Without long-term
commitments of
assistance, low-income countries may not be able to handle the
recurrent cost-
related fiscal contingencies generated by such increases.
• Donors and governments alike must carefully consider the
opportunity costs of
their resource allocation decisions: what other uses might spur
growth or gener-
ate increases in outputs and outcomes in other sectors, which
could in turn
improve health outcomes? The best way to approach overall
expenditure alloca-
tion issues is through explicit country strategies, as described in
poverty reduc-
tion strategy papers and medium-term expenditure frameworks.
Countries
must also carefully consider the distributional impact of their
limited resources.
• Low-income countries are likely to have a larger and more
equitable impact on
health outcomes if they select a very basic universal package of
mainly public
goods, including some treatment services proven effective in
moving toward
210 Health Financing Revisited
HFR_ch07.qxd 3/15/06 3:49 PM Page 210

the Millennium Development Goals. Other interventions should
be considered
in a targeted manner.
• The capacity of low-income countries to efficiently absorb
additional resources
may be a problem. To build capacity, donors need to work
within governments’
own programs and administrative mechanisms, rather than
through indepen-
dent initiatives. Low-income countries, in turn, need to improve
public expen-
diture planning, management, and monitoring, particularly by
upgrading
financial management and procurement systems, improving
accountability for
results, and strengthening judicial systems. Decentralization,
targeting, and
contracting may all help improve the equity and efficiency of
public expendi-
ture management.
Health spending by region
As discussed in chapter 1, low-income countries in all regions
spend much less on
health care than higher-income countries and depend much more
on private
expenditures, mostly directly out of pocket. Severe institutional,
fiscal, economic,
and political constraints limit the use of all organized means of
financing (which
include tax revenue, social health insurance, community-based
health insurance,
and voluntary health insurance). The basic pattern of low health

spending, heavy
reliance on out-of-pocket financing, and limited domestic
resource mobilization
ability holds for low-income countries in all regions.
Asia
In low-income countries in South Asia, it is difficult to estimate
total health
expenditures, because households’ out-of-pocket expenditures
on health care, the
largest source of financing, are not well quantified. According
to World Health
Organization (WHO) estimates, in 2002 total health expenditure
(the sum of
public and private health expenditure) was slightly above 6
percent of GDP in
Afghanistan and India, about 5 percent in Nepal, 3.5 percent in
Bhutan and Sri
Lanka, and just above 3 percent in Bangladesh and Pakistan
(figure 7.1).
On average across these countries, public sources of revenue for
health
accounted for less than 25 percent of total health expenditure,
while most of the
remaining 75 percent from private sources is in the form of out-
of-pocket pay-
ments (chapter 1). There are three exceptions to this common
pattern: Sri Lanka,
Bhutan, and Bangladesh. In Sri Lanka public sources of
financing for health ser-
vices are significant, accounting for half of all spending. In
Bangladesh, the share
of total health expenditures from public sources is about 35
percent, because
donor financing is more significant than in other low-income

South Asian coun-
tries (about 13.5 percent).
By looking at the trends, one can also see that in low-income
countries in
South Asia, the proportion of total health expenditures paid out
of pocket has
been stable or increasing, while the share from government
revenue sources has
Financing health in low-income countries 211
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been declining. For example, in India, the privately funded
share of the total
resources for health increased from 73.5 percent to 78.9 percent
during 1998–2002
(Government of India Ministry of Statistics 1998, 2001). Almost
all of it is directly
paid by patients at the point of delivery. By contrast, over the
same period, govern-
ment expenditure on health and family welfare in India
decreased from 9.2 percent to
7.3 percent of total government expenditure, and in 2002/3 it
was equal to only $3.50
per capita. The share of government spending on health has also
been decreasing in
Nepal and Sri Lanka and has been stagnant in Pakistan.
Governments in South Asia
seem to be unable to respond to the expectations about
increased levels of service,
better quality standards, and greater diversification of care that
is accompanying the

steady increase in population, income, and education levels.1
The situation in low-income East Asian countries is very similar
to that in South
Asia; population-weighted average private expenditures
represent 67 percent of total
health expenditure, and these expenditures are mostly out of
pocket (92 percent,
on average). In low-income countries, such as Vietnam, where
the private
health spending share of GDP is 5 percent, and even more so in
Cambodia—
where the share is 6 percent—private health spending is almost
entirely made up
of out-of-pocket expenditures. WHO data also show a trend of
increasing private
expenditures in Vietnam, essentially stagnant levels in Lao
People’s Democratic
Republic, and slight decreases in Cambodia during 1998–2002.
Mongolia is a spe-
cial case; private sources of revenue represent less than 30
percent of total health
expenditure (and are tending to decrease even further). So is
Papua Guinea, where
0
1
2
3
4

5
6
7
8
9
%
o
f G
D
P
India Pakistan Nepal Sri Lanka Afghanistan Bhutan Bangladesh
1998 – 2002 1998 – 2002 1998 – 2002 1998 – 2002 1998 – 2002
1998 – 2002 1998 – 2002
total private expenditure/GDP total government health
expenditure/GDP
FIGURE 7.1 Public and private health expenditures in South
Asia, 1998–2001
Source: WHO 2001.
HFR_ch07.qxd 3/15/06 3:49 PM Page 212

private revenue sources are estimated to account for less than
15 percent of total
health expenditure.
Africa
In Sub-Saharan Africa, government expenditures on health are
also extremely
low. However, because donor funding is an important source of
revenue for health
in these countries, on average, the sum of these two public
sources of revenue is
still substantial (chapter 1). Nonetheless, private spending
exceeds public spend-
ing on health (see chapter 1 and figure 7.2). Furthermore,
household out-of-
pocket spending accounts for 80 percent of private spending and
almost 50
percent of total health spending.
Nevertheless, with low per capita income, challenging growth
prospects, limited
domestic revenue mobilization potential, severe shortages of
health manpower,
and the highest disease burden in the world, Africa faces
difficult health financing
decisions. Africa accounts for 25 percent of the global disease
burden and 60 per-
cent of the people living with HIV/AIDS. But it accounts for
less than 1 percent of
global health spending and contains only 2 percent of the global
health workforce
(United Nations Population Division 1998; WHO 2004; WHO
and UNAIDS 2004;

0 5 10 15 20 25 30 35 40 45 50
US $ per capita
Benin
Burkina Faso
Cameroon
Côte d’lvoire
Eritrea
Ethiopia
Ghana
Guinea
Kenya
Mali
Mauritania
Nigeria
Senegal
Sierra Leone
Sudan
Tanzania
Togo

Uganda
private spendingpublic spending
FIGURE 7.2 Private and public health expenditures in Sub-
Saharan Africa, 2002
Source: Bitran forthcoming.
HFR_ch07.qxd 3/15/06 3:49 PM Page 213
Joint Learning Initiative 2004). In this region, increasing the
level of health expen-
ditures and improving their efficiency is literally a life and
death situation.
Other regions
Most low-income countries in Europe and Central Asia, Latin
America and the
Caribbean, and the Middle East and North Africa have public-
private health
expenditure patterns similar to those in Asian and African low-
income countries.
Health expenditures derived from private sources in Haiti and
Tajikistan are above
60 percent, are mostly in the form of out-of-pocket spending,
and show no recent
declines. But the relative importance of private health
expenditures is somewhat
lower, at about 50 percent, in Latin American countries that
have recently been
classified as lower middle income (Bolivia, Honduras, and
Nicaragua).

In the Kyrgyz Republic and Uzbekistan, two other low-income
countries in the
Europe and Central Asia region, the proportion of total health
expenditures
derived from private sources is lower, at about 50 percent, than
in some countries
in the region that are classified as lower middle income (such as
Armenia, Azer-
baijan, and Georgia), where the proportion is about 70 percent.
These differences
may reflect the different degrees of reductions in public health
expenditures after
the collapse of the Soviet Union. For example, Armenia and
Georgia faced some of
the largest declines in public health expenditures in the 1990s
(Bonilla-Chacin,
Murrugarra, and Temourov 2005).
The cost of the Millennium Development Goals
To integrate the Millennium Development Goals for health into
national poverty
reduction strategies, countries need to be able to estimate the
costs. More atten-
tion must be paid to relative cost estimates than to absolute
ones, to the short-
term time horizon than to the long-term one, to domestic
sources of funding than
to foreign aid, and to national ownership than to donor-driven
priorities (Vande-
moortele and Roy 2004). This local and immediate orientation
requires aligning
health plans that have been developed with the Millennium
Development Goals
in mind with each country’s medium-term expenditure
framework and poverty

reduction strategy. Moreover, it requires being cognizant of
budget constraints
and multisectoral priorities.
Estimating methods
The best methodology for estimating the costs of reaching the
Millennium Devel-
opment Goals remains a subject of debate. Some proposed
methods are summa-
rized in annex 7.1.
Table 7.1 provides a set of preliminary country-level estimates
for removing
bottlenecks to accelerate progress toward the health Millennium
Development
Goals (MBB method), what it will cost to achieve the health
Millennium Develop-
ment Goals (UN Millennium Project estimates), additional
expenditure estimates
HFR_ch07.qxd 3/15/06 3:49 PM Page 214
to reach the Millennium Development Goals in selected
countries based on mea-
sured elasticities (elasticity estimates), and additional health
expenditures per
capita under an optimized allocation framework (MAMS). (See
annex 7.1 for
detailed information about these costing strategies.) The
estimates illustrate
orders of magnitude and should not be compared directly to
each other or across

countries; each methodology has a different estimating
objective, and the num-
bers for each country are not comparable across methodologies.
The MP model estimates an average unit cost per capita and
includes all Millen-
nium Development Goals for health, including antiretroviral
treatment and essen-
tial universal coverage of hospital care for childbirth. MBB
estimates the costs of
removing bottlenecks at different levels of care delivery: for
Madagascar and Mali,
the needed expansion of services is largely at the household and
outreach levels of
TABLE 7.1 Alternative estimates of the annual cost of meeting
the Millennium Development Goals
for health (U.S. 2000 dollars per capita)
Country Model Cost estimate for the year specified
Mali (one region)
Madagascar (Toamasina)
Ethiopiaa
Bangladesh
Cambodia
Ghana
Uganda

Tanzania
Sources: MBB estimates from Soucat and others 2004 and
country estimates using the MBB tool. MP estimates from UN
Millennium Project 2004a. MAMS estimate from Bourguignon
and others 2004. World Bank staff estimates.
MBB is marginal budgeting for bottlenecks; MP is Millennium
Development Goal needs assessment; MAMS is maquette for
multisectoral analysis.
Note: Elasticity estimates are expenditure per capita estimates
by World Bank staff using the model in annex 5.1. Elasticity
estimates in the table are based on assumptions of spending 1
percent per year increase in real GDP per capita, 5 percent
increase in education, roads, water, and sanitation. For
descriptions of models, see annex 7.1.
a. MBB estimate refers to the maximum access scenario with
coverage up to 90 percent of the population for clinical care.
MBB
Elasticity
MBB
Elasticity
MBB/MP
Elasticity
MAMS

MP
Elasticity
MP
Elasticity
MP
Elasticity
MP
Elasticity
MP
Elasticity
$3.9 (2003)
$6.8 (2003)
$2.4 (2003)
$6.7 (2003)
$12.0 (2015)
$11.0 (2015)
$15.0 (2015)
$20.6 (average, 2005–15)

$16.9 (average, 2005–15)
$22.5 (average, 2005–15)
$37.4 (average, 2005–15)
$24.7 (average, 2005–15)
$23.7 (average, 2005–15)
$32.1 (average, 2005–15)
$40.6 (average, 2005–15)
$34.7 (average, 2005–15)
$66.9 (average, 2005–15)
HFR_ch07.qxd 3/15/06 3:49 PM Page 215
care, where the marginal impact on maternal and child mortality
per dollar spent is
expected to be large. When additional coverage of hospital care
for mothers and
treatment for HIV/AIDS is added to MBB costs per capita, per
capita costs can
reach $25–$35. Finally, the elasticity analysis measures
expenditure per capita,
under certain assumptions of growth in GDP, decline in
illiteracy, and improved
access to sanitation and roads. In the elasticity model, the
expenditures per capita
are especially high for countries for which under-five mortality
increased between

1990 and 2000.2
Closing the health financing gap
Whatever estimation method is used, the conclusion of all the
Millennium Devel-
opment Goal cost estimate studies is the same: the financing
gap between the costs
of achieving the Millennium Development Goals and the
potential for low-
income countries to mobilize domestic resources is large. That
gap can be closed
only by external financing. Hence, all Millennium Development
Goal cost esti-
mate studies conclude that public expenditures on health must
be increased and
this additional spending must be financed largely by donor
support, especially in
the least-developed countries (CMH 2001; UN Millennium
Project 2005).
To give a sense of this gap, actual and projected government
health expendi-
tures as a percentage of GDP are plotted for 10 low-income
countries in Sub-
Saharan Africa (figure 7.3). Projected expenditures per capita
are derived for each
country from the model presented in chapter 5 of this report
under assumptions
that GDP per capita would grow at 1 percent a year and that all
other independent
variables in that model (education, roads, water, sanitation, and
donor funding)
would grow at 5 percent a year.
For these countries, the ratio of government health expenditures
to GDP would

have to grow from an average of about 2.3 percent of GDP in
2000 (World Bank
2005a) to an average of 30 percent by 2015 to reach the goal for
child mortality. For
several of the countries, the level of public expenditures to GDP
at the end of 2015
would have to be much larger than 20 percent, well above the
ratio of total tax rev-
enues to GDP (Kenya, Lesotho, Tanzania, and Zambia). All the
other countries,
except for Nigeria, are projected to need public spending on
health well over 8 per-
cent of GDP. This is obviously not realistic and suggests that
the increases in spend-
ing would have to come mostly from donor grants and that these
grants would have
to be sustained for long periods. An independent study suggests
that in the cases of
Ethiopia and Tanzania, a doubling of aid as a percentage of
GDP would require grant
financing for 20 years before these grants can be substituted
with additional tax rev-
enue under reasonable assumptions of increased domestic
revenues (Foster 2003).3
One way low-income countries might improve their health
planning is to
develop poverty reduction strategy papers under different
scenarios of health sec-
tor assistance. For example, there is a strong push by certain
advocates for govern-
ments to produce health plans and even broader poverty
reduction strategies on a

HFR_ch07.qxd 3/15/06 3:49 PM Page 216
“needs basis,” without consideration of budget constraints,
under the assumption
that any gap will be financed by donors after reasonable
national efforts at
resource mobilization (UN Millennium Project 2005). Others
stress that to be a
useful guide to action, the poverty reduction strategy paper
needs to be linked to
the national budget process, establishing clear priorities to
guide public expendi-
ture plans and budgets based on a realistic assessment of
available resources.
Clearly, multiple scenarios of the poverty reduction strategy
paper are useful
for planning. By developing multiple scenarios based on
alternative revenue and
external assistance scenarios, as in the case of country
assistance strategies, some
countries have shown how the poverty reduction strategy paper
can be used as a
guide to the allocation of the resources they expect to have and
as a bid for addi-
tional support—a “high-case” scenario is used to attract
additional finance by
showing what could be achieved with it, whereas realistic
medium- or low-case
scenarios set out how expenditure plans should be prioritized in
the event that
fewer resources are available. The World Bank and IMF have
supported those
countries wishing to adopt this approach. A strong case can be

made for encour-
aging all countries to do so.
In any case, given the volatility and unpredictability of donor
aid (chapter 4),
the need for countries to eventually sustain their own increases
in expenditure,
and the need for realistic planning and prioritization, it is
imperative to analyze
%
o
f G
D
P
actual projected
0
10
20
30
40
50
60

70
80
90
100
1995 1997 1999 2001 2003 2005 2007 2009 2011 2013 2015
Eritrea
Ethiopia
Ghana
Kenya
Lesotho
Malawi
Nigeria
Uganda
Tanzania
Zambia
FIGURE 7.3 Estimated government health expenditures required
to meet the Millennium Develop-
ment Goal on child mortality in 10 African countries, 1995–
2015
Source: World Bank staff estimates.

HFR_ch07.qxd 3/15/06 3:49 PM Page 217
the alternative financing mechanisms available to low-income
countries and the
major factors constraining their expansion.
Public sources of revenue for health
In principle, governments have various ways to increase health
expenditure at a
sustainable level—that is, to increase the fiscal space that can
be available to
health. Additional revenues can be raised by collecting new
taxes or by strengthen-
ing tax administration. Lower-priority expenditures can be cut
to make room for
more desirable ones. Resources can be borrowed, from either
domestic or external
sources, or released through debt relief. Governments may
benefit from the fiscal
space arising from the receipt of grants from outside sources.
Finally, governments
can use their power of seignorage (having the central bank print
money to lend to
the government). The following sections review the constraints
found in generat-
ing such fiscal space from the perspective of the health sector as
well as the con-
straints faced by low-income countries in pooling and allocating
resources.
Tax collection
One way of increasing fiscal space is to increase domestically
available resources

by raising tax revenues. However, raising revenues through tax
reforms may be
easier said than done. As shown in chapter 2, the low tax and
nontax resource base
and the slow growth rates of low-income countries imply that
any increases in
health expenditures derived from domestic financing will be
slow to come, unless
drastic changes take place in domestic revenue generation
capacity. Yet, countries
such as Benin, Ghana, and Zimbabwe have shown that such
efforts are possible
and can also support increases in expenditures in the health
sector.
The evolution of tax and nontax revenue for 16 African
countries during the
1990s shows that these countries had on average a low base of
tax and nontax rev-
enues, amounting to 16 percent of GDP in 1999. This average,
however, conceals
big differences across countries, four of which have shares
above 25 percent (the
Republic of Congo, Kenya, Lesotho, and Zimbabwe), seven
between 15 and 20
percent (Benin, Burundi, Cameroon, Côte d’Ivoire, Ethiopia,
Ghana, and Sene-
gal), and five below 15 percent (Burkina Faso, the Republic of
Congo, Guinea,
Madagascar, Rwanda, and Sierra Leone). The evolution of tax
and nontax rev-
enues as a share of GDP also varies across countries. It
decreased in five countries
over the 1990s, grew at less than 2 percent a year in another
four countries, and
grew at faster rates (above the population growth rates) only in

six countries
(figures 7.4 and 7.5).
Low ratios of tax to GDP imply that developing countries have
room to
increase revenues from taxation to accommodate some increase
in expenditures,
including those for health. Developing countries may want to
replace narrow, dis-
torting tax bases that have widely differentiated rates and
numerous loopholes
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Guinea
Côte d’Ivoire
non tax revenuetax revenue
Rwanda
Burundi
Madagascar
Cameroon
Ethiopia
Senegal
Lesotho
Kenya

Congo, Rep.
Zimbabwe
Burkina Faso
Sierra Leone
Benin
Ghana
–30 –20 –10 0 10 20
% of GDP
FIGURE 7.4 Annual percentage change of tax and nontax
revenue in
Sub-Saharan Africa in the 1990s
Sources: World Development Indicators (WDI) database and
IMF Poverty Reduction and Growth Facility (PRGF).
–4 –2 0 2 4 6
% of GDP
Guinea
Côte d’Ivoire
Rwanda
Burundi
Madagascar
Cameroon
Ethiopia
Senegal
Lesotho

Kenya
Congo, Rep.
Sierra Leone
Zimbabwe
Burkina Faso
Benin
Ghana
FIGURE 7.5 Annual percentage change in total revenue in Sub-
Saharan Africa in the 1990s
Sources: WDI database and IMF PRGF reports.
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with broader tax bases that generate higher revenues at lower
rates and that do not
discriminate against the various sources and uses of income.
Doing so would result
in efficiency gains and greater administrative simplicity and
horizontal equity.
However, the practical difficulties of implementing tax reforms
must not be
underestimated. Increasing revenues through tax reforms affects
many interests
and cannot be done effortlessly, especially when institutional
changes in the tax
authorities are required, rural and informal sectors are
important, borders are

large, and wealthy elites are politically powerful. Countries are
unlikely to attempt
tax reforms only to accommodate additional health expenditures
within their
budget constraints.
Budget reallocation
Governments may decide to reallocate resources from other
lower-priority expen-
ditures to generate fiscal space for health. This path, too, is
difficult. From an eco-
nomic point of view, the marginal social benefits derived from
government
expenditures should equal the marginal costs. Therefore,
expenditures could the-
oretically be reallocated from unproductive public uses to more
productive ones
(or from uses that generate a lower marginal social benefit per
dollar spent to
those that produce more marginal social benefit per dollar
spent). However, this
rarely works in practice. In the first place, governments do not
really have an opti-
mizing function, so it is difficult to prove unproductive
expenditures, beyond the
obvious “white elephant investments,” such as subsidies to the
rich or excessive
payrolls. Second, reallocation of expenditures implies cutting
expenditures to a
particular institution or program. Automatically, this raises a
political or regional
struggle. It is especially difficult when the reallocation of
expenditures involves
cutting payrolls.
Of course, inefficiencies are abundant and should still be

addressed. For every
rupee reaching the poor in a rice-subsidy program in India’s
Andhra Pradesh state
in 1996, 3.6 rupees were lost in leakage to the nonpoor
(Radhakrishna 1997).
Although difficult, change is possible. In the late 1980s, only
30 percent of Bolivia’s
average government investments went to the social sectors; the
remainder went
primarily to public sector companies. But in 2000 the reverse
was true: only 25
percent of government investments went to other sectors, while
75 percent was
invested in the social sectors. This reversal, however, took
almost 10 years and sub-
stantial structural reform, including the privatization of all
major public compa-
nies (petroleum, energy, telecommunications, railroads, airline,
and others).
Therefore, although reallocation of resources is possible, it
requires major politi-
cal will and significant time for an important impact to take
place.
Debt relief
Countries can increase their fiscal space through additional
borrowing. However,
a large number of low-income countries already have a large
debt burden and do
HFR_ch07.qxd 3/15/06 3:49 PM Page 220

not have much room for additional borrowing. Moreover,
scaling up health ser-
vices requires increases in recurrent expenditures (such as
salaries), which should
not be financed with debt but rather with permanent sources of
funding. The
complement to additional borrowing is obtaining debt relief to
release domestic
resources that could be used for additional investment and
recurrent spending in
the country.
In principle, the Heavily Indebted Poor Countries Debt
Initiative is a mecha-
nism to increase the financing available for the social sectors in
the target countries.
It has important features to help address constraints to improve
health, nutrition,
and population outcomes. Debt relief is based on the delivery of
measurable out-
comes. Debt relief, and thus increased expenditures in the social
sectors, are based
on each country’s poverty reduction strategy, taking into
consideration the views of
civil society and overall budget constraints. Poverty reduction
strategy papers must
look at overall constraints that affect absorptive capacity
beyond the social sectors
where expenditures are taking place.
Countries are eligible for the initiative if they receive
concessional loans from
the International Development Association (IDA) and would
still have unsustain-
able levels of debt after full use of traditional debt relief
mechanisms. Forty-two

countries are now eligible, and another 38 are expected to
qualify for debt relief.
Countries reach the decision point, the first stage of debt relief,
based on a three-
year record of macroeconomic stability and preparation of an
interim or full
poverty reduction strategy paper. At that stage they begin to
receive “interim”
relief. Simultaneously, the criteria for the completion point are
established. In
addition to maintaining macroeconomic stability, finalizing a
full poverty reduc-
tion strategy paper, and successfully implementing it for one
year, countries must
set performance benchmarks for structural and social reforms.
Once a country
reaches the completion point, the remaining debt relief is
scheduled and is irrevo-
cable. To date, 27 countries, including 23 in Africa, have
reached the decision
point and are receiving some interim debt relief. Nine African
countries had
reached the completion point (Benin, Burkina Faso, Ethiopia,
Mali, Mauritania,
Mozambique, Niger, Tanzania, and Uganda) as of May 2005.
The initiative provides eligible countries with substantial
savings in debt ser-
vice payments. The relief committed to the 27 countries that
have reached their
completion points or are in their interim period, together with
other debt relief,
represents a two-thirds reduction in the countries’ overall debt
stock (IMF/IDA
2004). But, from an expenditure perspective, what is relevant is
whether the bene-

ficiary countries had access to resources for additional
expenditures as a result of
debt relief. Debt service payments relative to fiscal revenue in
these 27 countries
have declined from an average of 24 percent in 1998–9 to 15
percent in 2003 and
are expected to decline to less than half the 1998–9 average by
2006. Not surpris-
ingly, there are large variations across countries. A recent study
of 23 African
countries shows that the ratios of debt service to government
revenues in 2003
HFR_ch07.qxd 3/15/06 3:49 PM Page 221
ranged from 6.1 percent in Rwanda to 30 percent in The Gambia
and Malawi
(Hinchliffe 2004).
An important question is whether the resources made available
through debt
relief were used to increase expenditures in the social sectors.
Progress on this
front is measured by IDA and the IMF as the share of poverty-
reducing spending
to GDP and to total spending. The definition of poverty-
reducing spending is
country specific and includes, for example, outlays on basic
health, primary edu-
cation, agriculture, infrastructure, housing, basic sanitation, and
HIV/AIDS. The
definition of such expenditure for each country is established in

its poverty reduc-
tion strategy paper. According to the IMF and IDA 2004 Status
of Implementation
report, poverty-reducing expenditures in the 27 highly indebted
poor countries
have increased on average from 6.4 percent of GDP in 1999 to
7.9 percent of GDP
in 2003 (Hinchliffe 2004).
As expected, the increase also varies across countries.
According to Hinchliffe
(2004), while poverty-reducing expenditures increased on
average from 39 per-
cent in 1999 to 48 percent in 2003 as a share of total revenues
in 23 of the 27
highly industrial poor countries, it increased by as much as 76
percent in Mozam-
bique and declined by 27 percent in Chad. Of 20 countries for
which there was full
information, 13 had significant increases in the share of total
revenues directed
toward poverty-reducing expenditures. Exceptions were Benin,
Madagascar, and
Niger, where the share remained roughly constant, and Chad,
Ghana, São Tomé
and Principe, and Zambia, where it fell.
Comparisons across countries make little sense, however, as the
definition of
poverty-reducing expenditures varies substantially from one
country to another.
The tendency has been for countries to widen the definition of
“priority sectors.”
This wider definition can easily mask what is happening to
expenditures in edu-
cation and health, in particular. An analysis by Hinchliffe

(2004) of the trend in
health expenditures as a share of total government expenditures
in 20 highly
indebted poor countries between 1998 and 2002 (table 7.2)
shows that the share
increased on average from 6.2 percent to 8.1 percent. Of the 20
countries, 13 had
increases. Exceptions are Guinea-Bissau, where data is not
available for enough
years to discern a trend; Malawi and Zambia, where the share
remained essen-
tially constant; and Burkina Faso, Ethiopia, Madagascar, and
Mali, where the
share declined.
Low-income countries have recognized the need for greater
investments in
health. In the 2001 Abuja Declaration on HIV/AIDS,
Tuberculosis, and Other
Related Infectious Diseases, African leaders pledged to increase
health spending to
15 percent of government budgets. Achieving this larger
proportion of expendi-
tures in health is going to be a slow process, as the data in table
7.2 show. Debt
relief for poor countries is important, but if the country did not
have resources to
repay the debt in the first place, it may have difficulty
complying with the
increases in poverty spending required by the program. Even
though debt relief
HFR_ch07.qxd 3/15/06 3:49 PM Page 222

can generate significant savings in debt repayments, it does not
automatically gen-
erate additional flows of resources to the recipient countries. Of
the 20 countries
in table 7.2, only 4 reported expenditures in health of 10 percent
or more of total
government expenditures in 2002. Reallocation of expenditures
across sectors is a
difficult political process, especially in a very constrained
resource environment,
as discussed later in this chapter.
Donor funding
As discussed in chapter 1, development assistance for health
accounts for about 20
percent of country-weighted health expenditures in low-income
countries. It
plays an especially important role in Sub-Saharan Africa: all 12
countries in which
external funding exceeded 30 percent of health expenditures in
2000 were in
Africa (WHO 2001).
TABLE 7.2 Share of health expenditures in total government
expenditures in 20 highly indebted
poor countries, 1998–2002
1998 1999 2000 2001 2002
Benin 6.5 8.3 7.2 8.8 8.1
Burkina Faso 9.8 5.4 5.6 5.9 8.1

Cameroon 3.2 3.4 4.8 5.5 7.8
Ethiopia 5.8 4.3 3.4 4.8 4.4
Ghana 2.7 3.3 3.0 3.7 5.7
The Gambia — — 12.8 14.6 16.3
Guinea 4.4 4.4 4.2 7.5 6.5
Guinea-Bissau — — 4.3 3.5 —
Madagascar 3.6 2.8 2.7 4.4 2.7
Malawi 9.6 8.0 6.6 8.3 9.3
Mali 5.2 4.4 6.1 7.1 3.3
Mauritania 6.8 6.7 5.4 7.1 9.3
Mozambique 11.1 11.3 12.1 11.2 12.0
Niger 9.0 11.7 11.9 — —
Rwanda 1.9 2.6 2.9 3.3 3.1
Senegal 4.9 5.2 5.8 8.7 11.7
Sierra Leone — 4.7 5.4 6.8 8.1
Tanzania — 8.5 7.3 9.1 10.1
Uganda 6.7 6.5 7.4 8.6 9.6
Zambia 6.9 5.5 4.7 4.7 6.9

Median 6.2 5.1 5.5 5.9 8.1
Source: Hinchliffe 2004.
— not available.
HFR_ch07.qxd 3/15/06 3:49 PM Page 223
However, official development assistance in general and health
aid in particular
have serious problems (chapter 4). These include lack of
predictability, increased
focus on specific diseases or interventions, large numbers of
new actors and
donors, lack of responsiveness and flexibility to crises, and
donors’ lack of
accountability for the absence of results and progress. Volatility
is especially dam-
aging, as is the fact that commitments are a bad predictor of
disbursements. This
hampers the ability of any government to plan appropriately.
Commitments are
made for short maturities (three years at best), but increased
recurrent expendi-
tures in health require long-term resources. Only a small share
of aid (about 20
percent) is provided as budget support; the rest of financing is
provided as either
earmarked project support, off-budget support for disease- or
intervention-specific
programs, or even technical assistance that is not registered in
the recipient coun-
try’s balance of payments. Coordinating health plans is

extremely difficult, if not
impossible, under such circumstances.
Despite these problems, donor funding seems to be the only
alternative in the
short run for scaling up expenditures in health in many low-
income countries,
especially in Africa. Yet, to increase the effectiveness of such
funding, additional
efforts are necessary—to increase the maturity of resources,
decrease volatility,
and improve harmonization. It is particularly important for
donors not to sec-
ond guess recipient countries’ preferences, but rather to fund
gaps in country
programs.
National health services
National health service systems have three main features (see
box 3.1): funding
comes primarily from general revenues, they provide (or at least
aim to provide)
coverage to the whole population, and they usually (though not
necessarily)
deliver health care through a network of public providers. Most
low-income
countries have a national health service run by the ministry of
health. National
health service systems finance a basic package of public health
services for the
entire population and some level of financial protection against
catastrophic ill-
ness for at least some segments of the population. Financing
also includes out-of-
pocket payments and purchases of private services, limited
social and private

health insurance, and community risk pooling schemes.
The problems with national health service systems have been
well documented
(World Bank 2004b; Wagstaff and Claeson 2004). These include
management,
accountability, corruption, incentives, underfunding, and
misallocation of expen-
ditures. Poor countries with very limited resources have weaker
institutions
(chapter 6 and below) and limited resources to finance essential
services and pro-
vide financial protection (chapter 1). The results are limited
access and poor-quality
health services as well as limited financial protection against
catastrophic health
expenditures, particularly for the poor in rural areas. More
troublesome is that
HFR_ch07.qxd 3/15/06 3:49 PM Page 224
only one of the three basic financing functions (revenue
collection), is fully under
the control of the ministry of health.
Revenue collection. National health service systems receive
their funding from
general revenues. Thus, how much is collected and the
proportion of the total
amount collected that is allocated to health is largely outside
the control of the
ministry of health. Significant donor financing of health

activities outside the gov-
ernment’s budget may motivate ministries of finance to allocate
domestic
resources to uses other than health, thereby reducing the
additionality of such
funding and overall resources devoted to the ministry of health.
In addition, the
tax and revenue system is outside the control of the ministry of
health, the min-
istry has little ability to affect the equity aspects of revenue
raising.
Pooling. Given that collection of resources is outside the
control of the ministry
of health and the whole population is generally covered by the
national health ser-
vice, risk and equity subsidization will be determined by
ministy of health deci-
sions on resource allocation and purchasing functions and by
service delivery
functions. Risk pooling and prepayment functions are central to
the creation of
cross-subsidies between high-risk and low-risk individuals (risk
subsidy) as well
as between rich and poor (equity subsidy).
Resource allocation and purchasing. For a given budget,
resource allocation and pur-
chasing are the key endogenous functions of ministries of
health. How a ministry of
health allocates its resources will largely determine quality,
efficiency, access, and
equity of services. Ministries of health must determine, within
their own political
economy constraints, what to purchase, how to purchase, and
for whom to purchase.

But although these functions are fundamental to attaining
access, equity, and efficiency
in the health system, they are not solely under the control of the
ministry of health.
National health service systems have usually been associated
with the delivery of
services by public providers. Problems such as capture by
medical unions, misappro-
priation of public funds, lack of accountability, and
interregional inequities in the
distribution of facilities and personnel have been associated
with public sector deliv-
ery. These problems may result in inequitable physical access to
services for the poor,
particularly in rural areas. Supply-side subsidies can further
impoverish those who
are already poor. For every dollar of services that is subsidized
for the overall system,
one less dollar is available to subsidize services for the poor,
who often have access
only to a very limited benefit package. As a result, the poor
seek additional coverage
from the private sector, becoming further impoverished.
Although public sector
delivery of services is not an inherent characteristic of all
national health services,
separation of financing from provision, as in Rwanda (box 7.2,
later in the chapter),
can generate the appropriate incentives to improve the services
efficiency and equity.
HFR_ch07.qxd 3/15/06 3:49 PM Page 225

Social health insurance
Social health insurance systems have been established in more
than 60 countries all
over the world (see chapter 3). Some low-income countries,
especially in Africa, are
considering introducing or implementing social health
insurance. For instance,
Tanzania implemented its National Health Insurance Fund in
2001, and Ghana
passed a national health insurance law in 2003. Kenya
introduced the National
Hospital Insurance Fund in 1966 but is currently considering a
major reform.
When low- and middle-income countries propose to adopt or
reform social
health insurance systems, the most common goals according to
the ILO (2001) are to:
• mobilize funds for health care expenditures (introduce a new
“tax”),
• improve insurance coverage (eliminate barriers to health care
services and pro-
tect households against incurring large medical expenditures),
• improve equity (redistribute income and ensure equitable
access to medical
services), and
• build democratic and participatory institutions (promote
solidarity and social
cohesion, empower citizens, strengthen civil society
organizations).

It is an open question whether these public policy goals can be
reached
through social health insurance, especially in low-income
countries. The enabling
conditions discussed in chapter 3 are especially difficult to meet
in low-income
countries.
First, while some countries have supportive economic
conditions, with rapid
growth and increasing formalization of the labor market, others
are experiencing
economic stagnation and have large informal sectors. Further
constraints to
developing social insurance schemes arise in economies that
rely on exports of
raw materials, agricultural products, or products with
international market-set
prices in which a competitive labor force is fundamental for the
country to remain
competitive. Moreover, policy makers should fully understand
the equity implica-
tions of the slower growth that can result from implementation
of a social health
insurance system, as the population that might benefit from
introducing such a
system is not likely to be the same as the population affected by
the slower growth
or the population that benefits from government-contracted
services.
Second, economies with large rural areas will face difficult
challenges introduc-
ing social health insurance. Some countries in Latin America,
such as Bolivia,

Ecuador, and Peru, which have large rural populations and large
informal sectors,
have had difficulty increasing coverage beyond 25 percent of
the labor force, despite
having social insurance schemes in place for more than 60
years. Coverage has been
expanded in some Latin American countries (Colombia, for
instance) through
demand-side subsidies from government for a predetermined
population. Such
subsidies must be analyzed from equity, efficiency, and
sustainability perspectives.
HFR_ch07.qxd 3/15/06 3:49 PM Page 226
Third, administrative capacity is an important constraint in low-
income coun-
tries. Policy makers must consider the opportunity cost of using
scarce adminis-
trative resources in the development and administration of a
social health
insurance system, which is likely to concentrate coverage
among the formally
employed and expand slowly to other, often more needy groups.
More important,
to function appropriately, a social health insurance system must
be soundly gov-
erned. The supervisory structure and systems needed to attain
the required qual-
ity of governance are difficult to find in low-income countries.
Private sources of revenue for health

Private spending plays a large role in health financing in low-
income countries,
where private spending invariably means out-of-pocket
expenditures, not private
insurance. The same is true of many lower-middle-income
countries, such as
China. The main consequence is that households have difficulty
accessing health
care services or are exposed to the risk of impoverishment
because of catastrophic
health expenses.
Evidence also suggests that exposure to the risk of catastrophic
medical
expenses as a result of highly limited insurance coverage causes
rural households
to hold more wealth and to keep it in liquid form (Wagstaff and
Claeson 2004).
This self-insurance is only partially successful at smoothing
consumption when
income shocks (due to a variety of factors including illness)
occur. For example, in
India, it has been estimated that nearly one-quarter of people
admitted to hospi-
tals were above the poverty line when they were admitted but
were below the
poverty line at the end of their stay because of the health
expenditures they
incurred. In Vietnam, health expenses are estimated to have
pushed about 3.5 per-
cent of the population into absolute poverty in both 1993 and
1998 (Wagstaff and
van Doorslaer 2003). The risk of large-scale impoverishment is
clearly greater the
poorer the country.

Low-income countries’ abilities to provide financial protection
to their popula-
tions are limited by the scarce opportunities for risk pooling, as
well as by very
limited public and private resources to finance health
expenditures.
Could enhanced pooling of private resources—whether through
private
health insurance or community-based health insurance—
improve financial pro-
tection in low-income countries? Both of these kinds of
voluntary insurance
have some significant constraints on their potential, which
require sustained
efforts to overcome.
Voluntary health insurance
Voluntary health insurance can be a mechanism for harnessing
and pooling pri-
vate resources to finance health expenditures (see chapter 3).
However, in low-
income countries, private and community-based risk
management and insurance
HFR_ch07.qxd 3/15/06 3:49 PM Page 227
schemes are in the initial stage of development. Voluntary
health insurance repre-
sents less than 5 percent of health expenditures in low-income
countries, and it
plays more of a role in supplementing private care for middle-

and upper-income
groups. This section highlights some of the pros and cons often
attributed to vol-
untary health insurance that were discussed in chapter 3. It is
important to note,
however, that these are largely untested in a low-income
context.
Potential advantages. From the perspective of low-income
countries, there are
some good public policy reasons for exploring the development
of both private
and community-based voluntary health insurance systems:
• Mobilizing additional funding for the health care system
• Reducing the potential that catastrophic health costs could
push the nearly
poor into poverty
• Freeing public resources by inducing individuals, particularly
those in the
upper income groups, to opt out of the public sector in favor of
the higher-
quality private sector
If the poor had improved access to voluntary health insurance,
they might
obtain better access to health services. Nonetheless, this
potential remains
untested in low-income countries. Table 7.3 highlights the small
percentage of
private health expenditures originating from pooled funds
within prepaid plans
in several low-income countries.

Another possible advantage of voluntary health insurance is that
it could
encourage individuals to opt out of public sector health care in
favor of the private
sector, depending on the scope of coverage. Moreover, because
private insurance is
often concentrated among upper-income groups, expanded
insurance coverage to
TABLE 7.3 Share of private health spending and prepaid
insurance plans in private health
expenditures in selected countries
Private health expenditures Prepaid insurance plans
Country (percent of total health expenditures) (percent of
private health expenditures)
Kenya 78.6 9.5
Nigeria 76.8 0.0
Ghana 40.4 0.0
India 82.1 —
Pakistan 75.6 0.0
Sri Lanka 51.1 1.1
Indonesia 74.9 8.2
Vietnam 71.5 4.2
Source: WHO 2004.

— not available.
HFR_ch07.qxd 3/15/06 3:49 PM Page 228
these groups might permit better targeting of public
expenditures to the poor
(Gertler and Sturm 1997). However, there is limited evidence of
this occurring in
OECD countries with widespread voluntary health insurance
coverage, and the
publicly financed system often continues to play a role for those
with voluntary
coverage (OECD 2004). Moreover, such opting out might result
in reduced polit-
ical support for the public system by those who no longer use it,
to the detriment
of those for whom it remains the only option.
Furthermore, the administrative and regulatory costs required to
establish and
maintain a voluntary health insurance market are not
insubstantial. Regulatory,
cultural, and systemic barriers also contribute to the low level
of voluntary private
health insurance penetration, some of which may not be easily
tackled. Table 7.4
outlines some of the key barriers to the development of a
voluntary health insur-
ance market in India. One key barrier is a high capital
requirement. Other low-
income countries may face some or all of these barriers. It is
therefore important
to assess the potential for a voluntary health insurance market

within the specific
cultural, historic, and economic context of each country.
Community-based health insurance schemes
Community-based schemes have developed largely as a
community response to
the absence of alternative financial protection mechanisms (ILO
2002).4 Most
community-based health insurance schemes in Sub-Saharan
Africa are based on
voluntary participation of individuals and have fewer than 500
members (see
chapter 3). The population covered by these schemes is still
relatively small in
most low-income countries.
There are exceptions, such as Rwanda, where the government
and more than
90 community-based schemes have decided to subsidize
premiums for the poor to
encourage coverage of a defined package of services. As a
result, coverage has risen
to 4 percent of the total population. However, evidence shows
that most commu-
nity-based schemes do not reach the very poor. Another
exception is the
Yeshashvini scheme in the Indian state of Karnataka. The
scheme concentrates on
financial protection for surgical treatment and operates as a
“cashless service” to
the 2.1 million insured farmers in a network of 2 public
hospitals and 73 private
hospitals across the state. The scheme is managed by a third-
party administrator,
whose responsibilities include enrolling members, processing
claims, and devel-

oping a network of providers.5
Realities of achieving significant
risk pooling and financial protection
As discussed above, low-income countries are plagued by both
low absolute levels
of health spending and a high proportion of nonpooled out-of-
pocket spending.
The question remains: can low-income countries realistically
finance universal
coverage for a basic package of essential services and provide
financial protection
HFR_ch07.qxd 3/15/06 3:49 PM Page 229
for their populations? Both the breadth and depth of coverage
(the percentages of
the population with public and private formal coverage and the
percentage of out-
of-pocket spending) need to be evaluated. In theory national
health services cover
everyone and may appear to provide universal coverage. In
practice, that does not
necessarily mean that services are available or accessible.
Indeed, in most countries,
services are rationed through supply- and demand-side
constraints (unavailability
of services in certain areas, waiting lists, need for under-the-
table payments).
High-income countries have high absolute levels of health
spending and a rela-

tively small share of out-of-pocket spending—20 percent or 10
percent if country
weighted (see chapters 1 and 9). Population health risks are
pooled, and house-
holds have financial protection. In looking at the financial
protection and depth-
of-coverage issue in low-income countries, where out-of-pocket
spending is
around 60 percent of total health spending (40 percent if
country weighted), one
might initially6 use the 20 percent out-of-pocket spending
threshold of high-
income countries as a measure of financial protection and
coverage depth and pose
the question: how many low-income countries meet this
threshold? Examination
of 2002 country-level spending information shows that of the 58
low-income
countries for which data are available (WHO 2005) perhaps 7
would meet this cri-
terion, almost all of them small Pacific islands.7 In other words,
almost no low-
income countries, irrespective of their risk pooling mechanisms,
have been able to
provide their populations with high levels of financial
protection.
This finding reinforces the need for low-income countries to use
the most appro-
priate public and private mechanisms at hand, given their
individual circumstances,
to equitably, efficiently, and sustainably provide universal
access to an essential pack-
age of public health and curative services and to provide
financial protection to the
extent feasible, particularly for the poor. There are no

ideologically correct templates
or one-size-fits-all solutions. The proposed scaling-up of aid
and development
assistance for health is likely to be a necessary condition to
assist countries in pro-
viding universal access to essential services and financial
protection, but in the
absence of appropriate policies and targeting, that will not be
sufficient. Given the
extreme resource constraints in most poor countries, the entire
armorarium of
available instruments including users fees, needs to be
considered.
User charges
Few health policy issues are as controversial as user fees for
health care.8 Most
countries in Sub-Saharan Africa impose user charges for health
services. In China,
user fees are widespread and account for a substantial share of
total health financ-
ing. Cambodia has recently formally imposed user fees. In
Eastern Europe and
Central Asia, informal user fees have proliferated to make up
for major shortfalls
in public financing brought about by economic transition.
In the 1980s, the pervasive lack of public financing for basic
health services,
particularly for primary health care and drugs, led to calls for
the expansion of
HFR_ch07.qxd 3/15/06 3:49 PM Page 230

user fees. User fees were considered an appropriate financing
mechanism to make
resources available at public facilities to improve the quality of
services and health
outcomes. The adopting countries, other proponents of user
fees, and the litera-
ture at the time recognized that the introduction of user fees
could limit access to
services by the poor, as well as limit overall utilization of
preventive and primary
health care. Therefore, policy papers recommended that fees be
accompanied by
appropriate systems of waivers for the poor and exemptions for
preventive and
some primary health services.
Given the current focus on countries achieving the Millennium
Development
Goals, the recognition that demand-side constraints may be one
of the impedi-
ments to achieving the goals, the poor progress (especially in
Africa) in reducing
poverty, and the large actual and proposed increases in donor
aid for health, there
has been a strong push by several global development partners
to eliminate user
fees. Unfortunately, much of the debate has been clouded by
rhetoric, selective
interpretation of the global evidence, and a lack of clarity about
context and defi-
nitions, including confusion between goals and instruments, as
well as a lack of

understanding of how user fees for publicly covered services are
a small part of
consumers’ overall out-of-pocket payments.
Distinguishing goals and instruments. The goal of most
proponents of the elimi-
nation of user fees (Save the Children 2005) is improved access,
especially by the
poor, to essential health services in low-income countries.
Nonetheless, user fees
are merely one of many instruments (others include domestic
resource mobiliza-
tion, external assistance, and improved technical and allocative
efficiency of
spending) used to provide the revenues needed to achieve this
goal. The political
discussion surrounding the abolition of user fees often does not
deal with this
broader overall revenue question. In other words, raising
sufficient revenues to
ensure access to essential services and financial protection for a
country’s popula-
tion in an equitable, efficient, and sustainable manner must be
addressed in terms
of a holistic assessment of all public and private financing
instruments.
Distinguishing user fees for public services and overall out-of-
pocket health spending.
There is a lack of clarity in the precise definition of user fees,
as well as a lack of
distinction between user fees and out-of-pocket payments for
costs incurred in
the use of health services. In the classic public finance
definition, user fees are
charges for publicly provided services. Others define user fees

as payments for
publicly and privately provided services. Whatever the
definition, there are other
direct and indirect “costs” and payments incurred by families in
their use of health
services. These include the opportunity costs of the individual’s
and family’s time
in lost wages, work at home, studying, and so on; transportation
costs to and from
the health care provider; and costs that the patient and
accompanying relatives or
friends incur for food and lodging while seeking and obtaining
care (box 7.1).
HFR_ch07.qxd 3/15/06 3:49 PM Page 231
Moreover, the debate never takes into account that a large
portion of the user pay-
ments made at the facility level are informal or under the table,
such as in China and
India, and will not disappear merely with the approval of
legislation (Lewis 2000).
Arguments for and against user fees. Most of the debate has
focused on required
direct payments by households to providers for publicly
provided health services.
The health care system imposes many
payments on individuals and households.
They are shown as ovals in the figure below.
Some payments are indirect, not connected

with the act of obtained health care, whereas
others, known as user payments, are directly
linked with health care seeking. There are
many user payments. Removing user fees from
government health facilities may partly
reduce user payments. But, it does not elimi-
nate other user payments such as transport,
food, and lodging. And the removal of such
user fees, if not appropriately compensated by
other public funding for the provider, may
actually increase the financial burden to
patients, by forcing them to incur additional
private user payments to purchase needed
medical supplies or other health care
elsewhere.
Indirect payments
Some of the payments are made irrespective
of people’s actual use of health services (the
gray ovals). They include the taxes that indi-
viduals and households pay, a part of which
eventually are used by government to
finance its health care system. They also
include the contributions people make to
mandatory or voluntary health insurance and
other prepayment schemes. Finally, they also
include payments or contributions to local
health cooperatives. Because these payments
are not directly linked to individuals’
consumption of health services, they are
called indirect payments for health care.
Direct payments
These payments, shown as white ovals, are
also known as user payments, because they
occur in connection with using services. A first

kind of user payment, which does not involve
an actual disbursement of money, is known as
the opportunity cost of time. It represents the
income and other economic costs that the
individual and family incur because they have
to spend time seeking and obtaining care
instead of spending that time on their usual
activities, such as work, study, and home
duties. A second user payment is that made
for transportation to and from the health care
provider. A third user payment consists of the
costs that the patient and his or her accompa-
nying relatives or friends incur on food
purchases while seeking and obtaining care. A
fourth user payment includes disbursements
made on lodging while away from home for
medical care. A fifth kind are the purchases of
drugs and other medical supplies made in
connection with the medical problem for
which health care was sought. The sixth and
seventh kinds are the user fees charged by the
provider. User fees can be of two kinds. There
are fees that the provider must forward to the
country’s treasury and that are not retained by
the provider and are therefore not available to
improve the quality of care or to finance other
costs of provision. These fees tend to exist only
with government providers, not with private
providers. The other kind of user fee is the pay-
ment made by the patient to the provider,
which remains with the provider and which
can be used by it to improve health care qual-
ity (to buy medicines, to update the facility, to
pay bonuses to the medical staff ). This user fee
can be charged by both public and private

providers.
In summary, individuals and households
must make a variety of payments to finance
the health care system. Some payments are
indirect and are not connected with obtaining
health care. Others, known as user payments,
B O X 7 . 1 Payments for health care
(Continues)
HFR_ch07.qxd 3/15/06 3:49 PM Page 232
Such payments include charges for the use of publicly covered
or provided ser-
vices (the abolition of these public charges is at the center of
the current debate)
and charges to consumers made by private providers for direct
purchase of their
services, including drugs, physician care, and diagnostic tests.
While public and
private providers may charge user fees, regulatory mandates
(law, presidential
decree, or other) can eliminate only the user charges for
publicly covered services.
are directly linked with health-care-seeking
behavior. Removing user fees from government
health facilities may reduce direct user
payments. But, it does not eliminate other indi-
rect user payments related to accessing health

care (such as transport, food, and lodging costs).
Source: Bitran forthcoming.
In addition, the removal of such user fees, if
not compensated for by other public funding,
may increase the financial burden to patients
by forcing them to incur additional private
user payments to purchase needed medical
supplies or more health care elsewhere.
B O X 7 . 1 Payments for health care (Continued)
user
tax
user
tax
user
fee user
fee
quality
enhancements
premium
contribution
prepayment
payment
payment

payment
risk pooling
advanced payment,
no risk pooling
transport
food
lodging
drugs
copayment
taxes
may have some risk
pooling features
Payments for health care
fiscal
balancetime
government’s
treasury
insurer
cooperative
prepayment

fund
individual patient provider
Charges for privately financed nonpublic services remain. It is
extremely rare for a
country to restrict its citizens’ ability to purchase privately
provided health ser-
vices on a purely commercial private basis.9 Abolition of user
fees at public facili-
ties may not lead to a substantial reduction in the total out-of-
pocket payments
because the user fee charged by public programs is likely to be
small relative to all
the other payments (direct and indirect) incurred by the user.
Moreover, if the
quality of service declines as a result in public facilities (which
previously retained
the fees), then consumers may go to private facilities and pay
higher fees, resulting
in an increase instead of a decrease, in out-of-pocket payments.
Table 7.5 summa-
rizes some of the arguments for and against user fees.
Evidence of the impact of user fees on access to quality health
services by the poor
is mixed (Bitran forthcoming; World Bank 2004b; Pearson
2004; Wilkinson and oth-
ers 2001). This evidence shows that where user fees have been
removed, demand by
the poor has increased in some places and decreased in others.
It also shows that
demand can be both price inelastic and price elastic. This
diverse and seemingly con-

tradictory body of evidence may result from varying
circumstances where the studies
have been undertaken and from the use of different research
methods.
A key variable is what is done with user fee revenue,
specifically whether it is
used to finance improvements in health care quality at the local
level. Evidence
shows that where the revenue has been kept locally and spent on
drugs or salary
improvements, quality of care has improved, leading to
increased demand and
improved welfare for both poor and nonpoor patients (Niger and
Cameroon are
TABLE 7.5 Arguments for and against user fees
Arguments for user fees Arguments against user fees
• Generate additional revenue with which to
improve health care quality
• Increase demand for services owing to
improvement in quality
• May reduce out-of-pocket and other costs, even
for the poor, by substituting public services sold
at relatively modest fees for higher-priced and
less-accessible private services
• Promote more efficient consumption patterns,
by reducing spurious demand and encouraging
use of cost-effective health services

• Encourage patients to exert their right to obtain
good-quality services and make health workers
more accountable to patients
• When combined with a system of waivers and
exemptions, serve as an instrument to target
public subsidies to the poor and to reduce the
leakage of subsidies to the nonpoor
• Are rarely used to achieve significant
improvements in quality of care, either because
their revenue-generating potential is marginal or
because fee revenue is not used to finance
quality improvements
• Do not curtail spurious demand because in poor
countries there is a lack, not an excess, of
demand
• Fail to promote cost-effective demand patterns
because the government health system fails to
make cost-effective services available to users
• Hurt access by the poor, and thus harm equity,
because appropriate waivers and exemption
systems are seldom implemented; where they
are, the poor receive lower-quality treatment
HFR_ch07.qxd 3/15/06 3:49 PM Page 234
examples). There seems to be growing evidence that the demand
for health care is
more price responsive among the poor (Indonesia, Peru), and

therefore the need
to find well-functioning waiver systems for better targeting
public subsidies to the
poor remains a priority. Evidence from Africa, Asia, and Latin
America is showing
that the adoption of effective waiver systems by poor countries
is possible, albeit
difficult. Evidence has also shown that implementation of user
fees can lead to
quality improvements, but that such a link is not automatic and
requires careful
design and implementation.
The recent decision by the government of Uganda to remove
user fees has
helped fuel the debate, because of the reported impact of the
removal on the
poor’s use of services in public sector facilities. Indeed, the
more rigorous studies
show that the benefit incidence in public facilities after
abolition has improved
(for example, utilization by the poor has increased relative to
the nonpoor) (Xu
and others forthcoming). Unexpectedly, however, the incidence
of catastrophic
health expenditures among the poor did not fall. Xu and others
(forthcoming)
claim that the most likely explanation is that the frequent
unavailability of drugs
at government facilities after 2001 forced patients to purchase
from private phar-
macies. Informal payments to health workers may also have
increased to offset the
lost revenue from fees. This occurred in spite of Uganda’s track
record of improv-
ing public expenditure management, increasing government

health expenditures,
and other restructuring in the health sector before the abolition
of user fees.
As low-income countries emerge from poverty over the coming
decades, they
are likely to move toward greater public financing of health
care and universal
coverage, either through the establishment of national health
service systems or
through social health insurance. But while they transition to
those systems from
their current situation of underfinancing and user fees, countries
will require help
from their development partners to lessen any detrimental
impact of fees on the
poor. During this transition, blanket abolition of user fees may
appear to be an
attractive policy option. In reality, however, the abolition of
user fees may result in
the exclusion of many basic services, or worse, a reduction in
quality and even
access for the poor, the population the policy is intended to
help. There are a range
of policy options that could mitigate negative effects caused by
user fees, each of
which should be adapted with consideration for the individual
country context.
Some governments may decide that user fees should remain a
policy option, even
when new health financing systems are adopted.
Donors should focus on helping countries promote demand for
preventive, pri-
mary, and other health services that can make the greatest
contributions to achiev-

ing the Millennium Development Goals. They should also help
countries find
mechanisms for increasing poor people’s access to needed
medical care without
jeopardizing their consumption of other basic goods and
services. In addition, sup-
port should be given to local and national initiatives aimed at
raising additional rev-
enue for health care (such as local taxes and local health
insurance) and ensuring
HFR_ch07.qxd 3/15/06 3:49 PM Page 235
that part of that revenue is targeted to the poor (with waivers or
other targeting sys-
tems) and to underprovided, cost-effective health services.
The importance of country-specific factors and the resulting
multitude of
organizational and health financing arrangements suggest that
no single solution
can be formulated for all. The overall operational sustainability
of health systems
may depend on user fees for some time to come. Although small
as a source of
health financing at the aggregate health system level, user fees
may constitute an
important resource for the payment of variable costs, especially
for primary care
at the individual facility level. This flexible (not earmarked)
income for primary
care facilities will be difficult to replace with other funding

sources until a number
of conditions are met, most notably improvements in
governments’ ability and
readiness to mobilize funding for health care through alternative
sources and to
make those resources reliably available at the facility level. The
international com-
munity must assist low-income countries to obtain equitable,
efficient, and sus-
tainable financing to provide their citizens with an essential
package of basic
services and financial protection against the impoverishing
effects of catastrophic
medical expenses.
Equity and efficiency of health
spending in low-income countries
Although government health expenditures are likely to increase
in low-income
countries attempting to reach the Millennium Development
Goals for health, bud-
get constraints will surely remain, and low-income countries
will continue to face
allocation decisions that have important implications for equity
and efficiency.
The use of currently available resources may not be directed
toward interven-
tions that have the greatest marginal impact on health outcomes.
Tradition, cor-
ruption, political pressures, and other factors generate
incentives to use increased
health resources as additional subsidies to university hospitals,
sophisticated
equipment, specialized diagnostic laboratories, or elite
cardiovascular or cancer

institutes (World Bank 2002).10 The mix of recurrent inputs in
the health sector is
unique, demanding a large scope and scale of labor skills, as
well as the continued
availability of a large variety of drugs and supplies. To make
adequate use of addi-
tional funding, each country will require individual support to
understand clearly
the production function and to maximize the impact of services
on improved
outcomes for the Millennium Development Goals.
However, progress toward the Millennium Development Goal
targets could be
achieved through a pattern that benefits primarily the better-off,
while largely
bypassing the poor (Gwatkin and others 2000). As mentioned
above, there is an
incentive to use increased available resources in tertiary
hospitals, where utiliza-
tion trends tend to favor the rich (Castro-Leal and others 1999).
Moreover, a
study in 2000 of the benefit incidence of public spending on
health in Africa
showed that among seven countries only Kenya and Tanzania
exhibited a pro-poor
HFR_ch07.qxd 3/15/06 3:49 PM Page 236
pattern of utilization of primary care services (Sahn and
Younger 2000). In the
remaining five countries (Côte d’Ivoire, Ghana, Guinea,

Madagascar, and South
Africa), the richest 20 percent of the population accessed
primary care, as well as
higher-level care facilities, more than the poorest. This implies
that shifting resources
to primary services alone will not necessarily increase their use
by the poor. Other
efforts will be required.
To overcome the allocative and technical efficiency problems
and increase the
probability that the additional resources will have the desired
effect on health out-
comes, countries will need to strictly monitor and adjust their
poverty reduction
strategies. And they will need technical assistance to improve
their capacity to
absorb and make efficient use of any additional resources
derived from debt relief
and other initiatives. Given budget constraints, countries must
carefully answer
some fundamental questions through the health plans imbedded
in their poverty
reduction strategy (Preker and Langenbrunner 2005):
• What services should the government purchase?
• How should it purchase those services?
• From whom should it purchase services?
• For whom should it purchase services?
What services should the government purchase?
The answer to this difficult question is determined by economic,
social, and polit-

ical factors. In low-income countries, budget constraints impose
restrictions or
become binding at relatively low levels of expenditure per
capita. This implies that
states must make their financing choices with careful
consideration of whether
they are merited. A small but important collection of health-
related activities
must be financed by the state if they are to be provided at all or
provided at the
socially optimum level of consumption. These interventions
appear to account
for much of the impact of health spending on health
improvements (Musgrove
1996). These public health activities are especially important at
low income levels,
for both epidemiological and economic reasons, so that public
financing may be
particularly crucial for health in poor countries. However, as
Musgrove (1996)
points out, numerous other criteria influence government
decisions to finance
and directly provide health services.
From the perspective of reaching the Millennium Development
Goals, effective
health interventions exist for all health targets. There is an
impressive array of inter-
ventions to fight child malnutrition, child mortality, maternal
mortality, and com-
municable disease mortality (Wagstaff and Claeson 2004, pp.
47–54). Many of these
interventions should be financed by the public sector, because
they provide public
goods or generate externalities. Many of these interventions are
underused, espe-

cially by the poor. Public financing of the portion of these
interventions that are pri-
vate goods can also be justified from an equity perspective for a
targeted population.
HFR_ch07.qxd 3/15/06 3:49 PM Page 237
In 1993 the World Bank recommended a basic package of health
services that
costs about $12 per capita (World Bank 1993). More recently,
more inclusive pack-
ages with costs of $30–$40 per capita have been recommended
(CMH 2001). These
packages include treatment of AIDS with antiretroviral therapy,
which is very
costly. In Ethiopia, a package of services that is designed to
reach the maternal and
child health Millennium Development Goals and includes
prevention and treat-
ment of other communicable diseases (except for HIV/AIDS)
was estimated at $16
per capita. Treatment for HIV/AIDS would essentially double
the cost per capita.
Moreover, with increases in life expectancies afforded by
antiretroviral therapy,
HIV/AIDS can, in some cases, become a chronic as well as an
infectious disease,
imposing the challenge of maintaining treatment levels over an
extended period
(Lewis 2005). From this perspective, the inclusion of

antiretroviral therapy in pub-
licly financed interventions needs to be weighed against the
high opportunity cost
of other investments not undertaken and the implications of this
decision for eco-
nomic growth, education, and other health interventions.
Determining which health services the government should
purchase or cover
is a difficult decision that low-income countries must face. This
decision is usu-
ally made on social and political grounds rather than economic
reasoning alone.
Yet the decision has important implications for the opportunity
cost of the
resources used and the impact on outcomes and growth.
Moreover, it can gener-
ate far-reaching fiscal contingencies, even if financed in the
short and medium
terms with donor funding. Governments are encouraged not to
promise what
they cannot deliver. It would seem to be best for these
governments to first
finance a universal, small package of services, essentially
encompassing public
goods, goods with externalities, and other interventions with
proven impact on
the health Millennium Development Goals or other goals set by
each country
and reflected in its poverty reduction strategy.11 Any other
clinical care and cata-
strophic expenditures would then be financed for the poor
through some target-
ing mechanism.
How and from whom should the government purchase services?

Public funds may be used to pay for the provision of services by
public providers
(budget allocation), to purchase services from private or public
providers, or to
contract managed care institutions, which in turn do the
purchasing and/or pro-
vision.12 Once resources are available to a low-income country,
restrictions on
how to use them are determined by the country’s absorptive
capacity. Although
absorptive capacity constraints are usually discussed in relation
to international
aid, they also relate to any increase of expenditures
(independent of the source of
funding), especially at the sector or regional level. For instance,
the ministry of
health may have difficulty spending additional resources
allocated in a given year
or a municipal government may have difficulty executing a
budget.
HFR_ch07.qxd 3/15/06 3:49 PM Page 238
From the perspective discussed above, absorptive capacity
includes the ability
of the public sector to design, disburse, coordinate, control, and
monitor public
spending. This coordination is both vertical (between central
and local govern-
ments) and horizontal (between line ministries at any given
level). The question is
whether governments or even institutions such as health
ministries have the
capacity to manage a large increase in real expenditures beyond

a usual trend.
These issues have to do with public expenditure management
but also with more
general administrative systems, such as registries for contracts
and property, sys-
tems for arbitrating contractual conflicts, and transparent
judicial systems.
As discussed in chapter 6, the World Bank’s Country Policy and
Institutional
Assessment (CPIA) Index rates countries on a composite scale
of 1 (low) to 6
(high). The Africa region, where further efforts are required
with respect to Mil-
lennium Development Goals, had the lowest CPIA score of all
regions in 2004.
Only five countries in the region scored 4 or higher. On another
indicator of insti-
tutions, Transparency International’s Corruption Perceptions
Index, more than a
third of the countries in the Sub-Saharan region scored below 3
(on a scale from 1
to 10, with 1 being most corrupt) in 2001. The perception of
corruption, payment
delays and difficulty adhering to contractual agreements, and
the overall lack of
absorptive capacity in African governments negatively affect
prices and terms
offered to African countries for pharmaceuticals and medical
supplies as well as
for other services and result in delays or cancellation of donor
financing to the
health sector. They may lead ministries of finance to conclude
that health financ-
ing is excessive, thereby inhibiting further budgetary increases
to the health sector.

Thus, programs to improve public expenditure management are
an important
priority and may even constitute a necessary precondition for
scaling up pro-
grams in health or other social sectors. Well-designed health
plans need to be part
of a multisectoral strategy, reflected and costed as part of
poverty reduction
strategies. Moreover, poverty reduction strategies need to be
reflected in medium-
term expenditure programs, disbursed and monitored according
to compliance
with objectives measured in outputs.
Good practices in these areas were discussed in chapter 6. Box
7.2 illustrates the
case of Rwanda, where the government costed a health strategy
that was part of a
poverty reduction strategy. The costs of the poverty reduction
strategy—in particular,
the cost of the health plan—were negotiated with the Ministry
of Finance and
included in the medium-term expenditure framework, with
important increases
in the health budget. What is to be accomplished, in terms of
outputs, is clearly
established in the strategy and is part of the medium-term
expenditure frame-
work. The Ministry of Finance is clear about what it will
provide from the
increased budget and may cut future allocations in cases of
nonperformance, thus
generating a clear mechanism of accountability. The World
Bank supports the
program through a poverty reduction support credit.

HFR_ch07.qxd 3/15/06 3:49 PM Page 239
For whom should the government purchase services?
A major problem with allocations of resources is that increased
expenditures
often may benefit the better-off more than the poor. Studies
have repeatedly
shown that the poor benefit much less than the nonpoor from
government health
expenditures in many countries. Supply-side subsidies (such as
the financing of
public hospitals) and gratuities (under-the-table payments to
physicians) are
common in Eastern Europe, and together they imply a subsidy
to the rich, who
take advantage of a public facility by paying an amount that
does not cover the full
cost while receiving a privileged service because of their ability
to pay the gratuity
to the doctor. Similarly, supply-side subsidies to deficit-ridden
social insurance
institutions in Latin America (for example, Argentina) imply a
subsidy to the
nonpoor, since such institutions cover mostly formally
employed urban workers.
Rwanda is like other postconflict countries
that suffered massive loss of lives in that its
overall health status has deteriorated. Mortal-

ity rates for infants, children under five years
old, and mothers are some of the highest in
the world, even though the major causes of
mortality and morbidity, such as malaria, acute
respiratory infections, intestinal parasites, and
diarrheal ailments are largely avoidable.
Although there have been important
improvements in health indicators in recent
years, the continuing high mortality rates pri-
marily reflect inadequate access to high-
impact health services, especially by the
poorest segments of the population, as well as
the increasing incidence of HIV/AIDS.
The government is seriously committed to
improving the health of its population and
meeting the Millennium Development Goals.
Over the past three years the government,
with the assistance of development partners,
has improved the quality of its health centers
and the availability of drugs and has created
incentives among health staff to increase the
availability of human resources in rural areas.
To finance these efforts, the government bud-
get allocation to health has increased substan-
tially: an almost twofold nominal increase (185
percent) occurred between 2002 and 2004. Yet
the budget allocation to the health sector
remains relatively low, amounting to only
about 1.6 percent of GDP, equivalent to about
$3.2 per capita in 2004.
To ensure there are enough resources to
meet the Millennium Development Goals by
2015, the Ministry of Health involved the Min-

istry of Finance upfront in health strategy
development. As part of the process, the
health strategy was costed using the
marginal-budgeting-for-bottlenecks model,
and performance targets were linked to
expenditures to justify funding increases.
The main objective of the program is,
through budget support, to reduce under-five
mortality rates and maternal mortality ratios
and improve other health indicators through
increased utilization of a set of evidence-based
interventions, increased access to these inter-
ventions by the poor, improved accountability
and efficiency in the health system, and fiscal
sustainability of the budget support effort.
Increased utilization of
evidence-based interventions
The set of interventions to be delivered
through the health system has been selected
on the basis of the most recent research
regarding the impact of such interventions for
the particular causes of illness and death in
Rwanda.
B O X 7 . 2 Rwanda: aligning a health strategy with the poverty
reduction strategy and medium-term expenditure framework
(Continues)
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How can governments improve the allocation of resources so

that they favor
the poor? There is no conclusive evidence that either of the
collective resource
generation mechanisms for health services—social insurance
(Bismarck model)
or general taxation (Beveridge model)—works better for the
poor. To favor the
poor, both require some level of cross-subsidy—through either
differential premi-
ums or progressive taxes (World Bank 2004b). However, in a
low-income country,
given the limits of the formal economy, as well as the binding
constraints faced by
government at low levels of per capita expenditures, the options
for reaching the
poor are even less clear. Beyond a basic universal package,
special targeting mech-
anisms are needed to ensure financing of needed services for the
poor population.
These were discussed in chapter 6. The enabling conditions for
decentralization
were also discussed in chapter 6. Box 7.3 on Vietnam shows
how growth and even
Increased access for
the poor population
Access for the poor would be obtained through
a universal (available to the whole population)
package of basic services to be delivered at the
household, community, and health center levels
and financed through the budget. Increased
access to referral clinical care for the poor pop-
ulation would be obtained through the
payment by government of the premium for a

package of such services in Mutuelles de Sante.
Targeting will be carried out by the administra-
tive districts.
Improved accountability and efficiency
of the health system
To improve the accountability and efficiency
of the health system the government will
introduce conditional transfers from the bud-
get to administrative districts and provinces
for the purchase of specific packages of ser-
vices for targeted populations. The
government will also purchase a limited set of
clinical services for the poor from district and
national hospitals, using performance-based
contracts. The block grants from the central
budget will be transferred to the administra-
tive districts or the provinces conditional on
compliance with certain actions as
established in specific contracts to be under-
written by the Ministry of Health and the cor-
responding local authorities. Similarly, the
Ministry of Health will purchase from the hos-
pitals a set of specific interventions for the
poor population on the basis of specific con-
tracts. Only on verification of compliance of
contract clauses will the Ministry of Health
request the transfer of resources by the Min-
istry of Finance to the administrative district
or the province or make the payment to the
hospital.
Fiscal sustainability
The health sector contribution to fiscal sustain-
ability will be accomplished through close coor-

dination of additional budget requirements
with the Ministry of Finance to ensure that such
requirements fall within the envelope of the
medium-term expenditure framework and
longer-term government fiscal program.
Planning and negotiation with the Ministry
of Finance led to an increase in the budget allo-
cation directed to health. The initial medium-
term expenditure framework ceiling allocated
to health for the medium-term expenditure
framework period of 2004–7 implied a constant
expenditure per capita of $3.2. The negotiations
resulted in an increased budget allocation to
health—6.2 percent of the government budget
in 2004 to 10.4 percent in 2007—implying an
increased expenditure per capita from $3.2 in
2004 to $5.6 in 2007.
Source: Authors.
B O X 7 . 2 (continued)
HFR_ch07.qxd 3/15/06 3:49 PM Page 241
improved health outcomes may leave the poor lagging behind
and thus the need
to give special consideration to the targeting mechanism.
Conditional cash transfers: seeking results from targeting
A recent social safety net innovation from Latin America and
the Caribbean, which
constitutes a de facto “negative” user fee, is the conditional
cash transfer (Rawlings

2004). Conditional cash transfers provide direct cash payments
to poor households
contingent on certain behavior, such as completing a full set of
prenatal visits or
attending health education classes. In some pilot programs, cash
grants were based
on an estimate of the economic cost of travel and waiting time
for the beneficiary
and so represent a negative user fee. The focus of conditional
cash transfers is both
on short-term income support and on longer-term human capital
accumulation
and not necessarily on strict financial protection against illness
shocks. Nonethe-
less, the cash grants can be fairly large, up to 25 percent of
household income, and
In the 1980s Vietnam was one of the poorest
countries in the world. A rough estimate of its
GNP per capita in 1984—$117—made it the
second poorest country in the world, barely
ahead of Ethiopia and just behind Bangladesh
(as reported in World Bank 1986). By 1999 Viet-
nam’s GNP per capita had increased to $370, so
that Vietnam ranked 167 of 206 countries. This
rapid improvement began in 1986, when the
first Doi Moi (“renovation”) economic policies
started to transform Vietnam from a planned
to a market-oriented economy. In particular,
the government disbanded state farms and
divided agricultural land equally among rural
households, removed price controls, legalized
buying and selling of almost all products by
private individuals, stabilized the rate of infla-

tion, and opened up the economy to foreign
trade and investment. In the 1990s Vietnam
was one of the 10 fastest-growing economies
in the world, with an average real GDP growth
of 8.4 percent a year from 1992 to 1998. This
rapid economic growth led to a dramatic
decline in the rate of poverty, from 58 percent
in 1993 to 37 percent in 1998.
Health outcomes—good progress
By international standards, especially given its
relatively low per capita income, Vietnam has
achieved substantial reductions in mortality
among infants and children under five. By the
mid-1980s, its rates were among the lowest in
the developing world. The Vietnamese govern-
ment’s own goal was to reduce the infant mor-
tality rate to 30 per 1,000 live births by 2000.
The infant and under-five mortality rates
appear to have continued to fall under Doi
Moi. The infant mortality rate was below the
2000 target of 30 per 1,000. Indeed, the
evidence suggests that this target was proba-
bly reached in the mid-1990s, and the figure
now may well be around 25 per 1,000 or even
lower. There have also been large decreases in
the rate of stunting among Vietnamese chil-
dren and improvements in other health out-
comes.
Growth can potentially
leave the poor behind
Nevertheless, inequalities in child survival
between poor and less poor children now exist

in Vietnam, and these inequalities appear to be
a recent phenomenon. Reductions in child mor-
tality appear not to have been spread evenly
and are heavily concentrated among the better-
off. Poorer Vietnamese children do not appear
to have seen any appreciable improvement in
their survival prospects in recent years.
B O X 7 . 3 Vietnam: leaving the poor behind?
(Continues)
HFR_ch07.qxd 3/15/06 3:49 PM Page 242
so potentially constitute a buffer against financial shocks due to
illness (in addition
to having a direct effect on incentives to use mandated health
care interventions)
(Gertler 2000). Evaluation of the programs has been rigorous,
usually involving
random assignment designs. The results are generally positive;
the programs have
demonstrated gains in human capital outcomes, including
health.
The applicability of such programs to health care financing in
low-income
countries is still unresolved. The evidence suggests that well-
designed conditional
cash transfers have the potential to improve human capital and
health outcomes
and to reduce poverty, with relatively modest administrative
costs. However, testing
of the programs has been confined almost exclusively to

middle-income countries,
many in Central and South America, where the programs
constitute social sector
spending on top of existing health spending. Further research is
needed to deter-
mine whether conditional cash transfer programs can be an
effective means of
improving health outcomes and cushioning households from
illness shocks and
whether they can be effectively implemented in low-income
country settings.
What explains this inequality and what
policy options are available for accelerating
the pace of decline of child mortality among
Vietnam’s poor?
Extensive analysis of data from several
sources points to two important factors:
declining education levels among poor moth-
ers and declining use of skilled birth
attendants and medical facilities among the
poor. In 1993, mothers in the bottom income
quartile averaged 5.8 years of schooling. In
1998, this figure had fallen to 5.4 years. In
1993, 62.7 percent of births in the poorest
quartile were attended by a medically trained
person, and 43.1 percent of births took place
in a medical facility. In 1998, these figures had
fallen to 57.3 percent and 33.3 percent,
respectively. Reversing the decline in maternal
schooling and in deliveries in medical facilities
and attended by medical personnel would
reduce the under-five mortality rate by an

estimated 11 percent.
Success factors
Econometric analysis shows that growth in
household incomes accounted for only a
small proportion of the improvement of
child and maternal health in Vietnam from
1993 to 1998. Looking to 2015, even under
quite optimistic assumptions about annual
income growth, the projected levels of child
mortality are likely to be higher than the tar-
gets. In other words, economic growth is not
enough. Ensuring that it is not just the bet-
ter-off who benefit from improvements that
increase the impact of health determinants
on child survival is central to achieving the
Millennium Development Goals.
What policies can promote this
objective? Better targeting is essential. In
improvements in health services, drinking
water, and sanitation, where the poorest
quartile of children lag far behind the best-
off are also necessary. Closing these gaps—
by bringing the poor up to the levels enjoyed
by the better-off—is likely to have a sizable
effect on child mortality. The largest impact
would come from raising health service cov-
erage among the poorest quartile to the level
of coverage enjoyed by the best-off three
quartiles.
Source: World Bank 2004a; WHO [www.who.int].
B O X 7 . 3 (continued)

HFR_ch07.qxd 3/15/06 3:49 PM Page 243
Annex 7.1 Four models to estimate the cost of the Millennium
Development Goals for health at the country level13
Millennium Development Goal needs assessment (MP) model
developed by the
UN Millennium Project (UN Millennium Project 2004a)—The
MP model yields
total cost estimates for full coverage of the needs of a defined
population with a com-
prehensive set of health interventions in a given year.14 It uses
the unit cost of cover-
ing one person multiplied by the total population in need in a
given year to yield the
direct health cost. Resource requirements are added (on the
basis of assumptions
rather than actual inputs) for improving the health system;
increasing salaries for
human resources, administration, and management; and
promoting community
demand and research and development (UN Millennium Project
2003).
Marginal budgeting for bottlenecks (MBB) model developed by
the United
Nations Children’s Fund (UNICEF), the World Bank, and WHO
(Soucat and others
2004)—The MBB model determines the additional resources
required for removing
a set of health system bottlenecks, which are thought to hinder
the delivery of essen-
tial health services, through family/community, outreach, and

clinical delivery
modes. The MBB method also estimates the impact on outcomes
(for instance,
child and maternal mortality) of increased coverage and use of
health services. First,
a set of high-impact services are selected on the basis of a
country’s epidemiological
needs. Second, health system bottlenecks hindering delivery of
these services are
identified. Then strategies for removing the bottlenecks are
discussed and the inputs
for improving coverage (for example, in a village) are
identified. Cost estimates are
based on these inputs by scaling up the cost to cover the
district, province, or nation
(Soucat and others 2004).
Elasticity estimates through econometric modeling developed by
World Bank
staff—A few studies use econometric techniques to analyze the
impact on Millen-
nium Development Goal outcomes of certain cross-sector
determinants (such as
economic growth, water and sanitation, education, road
infrastructure), as well as
government expenditures on health (Filmer and Pritchett 1997;
Wagstaff and
Claeson 2004; Bokhari, Gottret, and Gai forthcoming).
Econometric analysis has
been used mostly to analyze the impact of changes in
government health expendi-
tures on outcomes, using cross-sectional or panel data at a
global scale. But in one
study in India, the methodology was used to estimate the
marginal costs of avert-
ing a child’s death at the state level. The estimates could vary

from as low as $2.4
per child death in a low-income state to $160 in a middle-
income state.
Maquette for multisectoral analysis (MAMS) of Millennium
Development
Goals under development by the World Bank—the basis for this
new approach is
that development aid is a key ingredient of the development
process of a country,
but its effectiveness has to be assessed at the country level
within each country’s
local implementation and macroeconomic constraints. The
objective of the
model is to calculate the financial needs to attain a targeted
path to 2015 and
determine an optimal allocation of additional funding directed
to different social
sectors for the Millennium Development Goals. The model
captures some aspects
HFR_ch07.qxd 3/15/06 3:49 PM Page 244
of absorptive capacity (such as the impact of increased demand
for skilled labor
on public sector overall wages); spillovers across sectors and
across Millennium
Development Goals; implications of additional financing, such
as grants, on the
macroeconomy (for instance, on the exchange rate); and
interactions between
growth and the Millennium Development Goals (Bourguignon

and others 2004).
Endnotes
1. Sri Lanka is the only low-income country in South Asia
where public sources of
financing for health services are significant, accounting for half
of the spending.
2. An alternative methodology establishes a “production”
frontier using the health
expenditure level (total and public) for the 20 percent of
countries in a sample of 135 that
performed best on health indicators such as under-five
mortality, maternal mortality, and
HIV prevalence (Preker and others 2003). The gap in
expenditures between each country
and the production frontier is calculated, adjusting for
population and controlling for level
of income (measured by GDP per capita). The methodology was
used to estimate a global
expenditure gap to reach the Millennium Development Goals—
estimated to be between
$25 billion and $70 billion—by aggregating individual country
expenditure gaps.
3. Obviously, a more ambitious assumption of real GDP growth
per capita would reduce
health expenditures as a percentage of GDP. However, the
percentages are likely to be high
unless very ambitious GDP per capita growth rates are assumed.
If GDP per capita grows at
an average of 3 percent a year in real terms, the average
expenditure per GDP in the coun-
tries in figure 7.3 would have to increase from 2.3 percent in
2000 to 16 percent in 2005.

Ghana, Kenya, Tanzania, and Zambia would still be spending on
health more than they tax.
4. For a detailed discussion of organizational, institutional, and
management con-
straints of community-based health insurance schemes see Dror
and Preker (2002).
5. The scheme basically leverages an existing institutional
mechanism in order to mini-
mize adverse selection and moral hazard issues by restricting
coverage to members of the
cooperative and insuring a huge number of members (2.21
million lives were insured as of
March 2005); reduce the transaction costs in providing
insurance coverage for people in
rural areas, which are thinly populated; and ease administration,
as an existing administra-
tive set-up is used to administer the scheme.
6. Leaving aside the low levels of absolute spending, which
clearly make it more difficult
to provide large amounts of financial protection against
catastrophic illness costs.
7. The seven countries meeting the threshold are Timor-Leste,
Solomon Islands, Papua
New Guinea, Bhutan, São Tomé and Principe, Mozambique, and
Lesotho. The information
for Mozambique is clearly suspect and not consistent with data
from other sources.
8. This section of the report relies heavily on Bitran
(forthcoming).
9. A recent decision by the Supreme Court of Canada has called
into question the valid-

ity of some Canadian provinces’ restrictions on people’s ability
to buy private health insur-
ance to cover privately provided health services. In this case,
the court ruled that the
Quebec government cannot prevent people from paying for
private insurance for health
care services obtained from private providers outside the
publicly reimbursed system
(Chaoulli v. Quebec, June 9, 2005).
10. In 2000, Mauritania allocated most of the additional HIPC
resources for its tertiary
hospital. Senegal allocated HIPC funds to building a secondary
hospital, although the Min-
istry of Health had proposed allocating the funds to recurrent
cost requirements of existing
primary-level infrastructure.
HFR_ch07.qxd 3/15/06 3:49 PM Page 245
11. Included in the package for instance would be preventive
and treatment interventions
for child and maternal mortality as established in Wagstaff and
Claeson (2004, figure 3.2). If
resources were not available to guarantee universal coverage of
such services, limits would be
based on morbidity and mortality indicators. If additional
resources were available, still other
interventions would be undertaken and targeted to the poor
though alternative mechanisms.

12. For a detailed analysis of purchasing, see Preker and
Langenbrunner (forthcoming).
13. Claeson and others forthcoming.
14. These methodologies have different objectives and produce
different estimates,
which cannot be compared with each other. Each methodology
has strengths and weak-
nesses, the discussion of which is beyond the scope of this
report. It is, however, fundamen-
tal to have a clear objective of what is to be measured in order
to select the appropriate tool.
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