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India matters for global health. It accounts not only for about one-fifth of the global population, but also one-fifth of the global disease burden. Yet the Indian government spends only 1 percent of its GDP on public health—a paltry amount compared to what other large, federal countries like Brazil and China allocate (4.7 percent and 3.1 percent, respectively). And this has a direct impact on Indian citizens who pay more out-of-pocket for health care than citizens in any other G20 country.

If you take a careful look at where India’s public expenditure on health lies, you’ll find that more than three-quarters of it is raised and spent by states. This means that policies, spending, and delivery of health services at the subnational level significantly impact the pace, scale, and equity of health improvements in the country as a whole. But health status and access to and quality of health care vary greatly across Indian states and the current system of financing health services, whereby both the central and state governments pay for direct provision of services, has had at best mixed results.

Given that financing needs are very large, the increase in public expenditure on health is going to be an essential, albeit long-term, objective. India will also need to find a way to effectively utilize its limited resources and reorganize its health financing to achieve better outcomes. But where to begin?

One mechanism that can play an important role in turning money into outcomes at the subnational level is fiscal transfers from central to state governments. These transfers are used to distribute tax revenues to states on the basis of a formula that accounts for states’ public expenditure needs—that is, poorer states typically getting a larger share of the transfers. When designed well, fiscal transfers can create incentives for increased spending, better service delivery, and greater accountability across sectors at the state level. To improve Indian citizens’ health within the current budget constraints, the key question is, therefore, how could a transfer system be designed so that it encourages and ultimately results in improved health outcomes?

Since January 2014, CGD and the Accountability Initiative, based at the Centre for Policy Research in New Delhi, have been engaged in a research project aimed at articulating a reform agenda for creating a better system of intergovernmental fiscal transfers that could improve health in India. To this end, we convened a working group of health and fiscal policymakers, academics, and civil society representatives to discuss the evidence base and develop policy options. The working group’s final report offers insight on how this can be achieved.

Build on the 14th Finance Commission recommendations and allocate towards better health in states

Adopted in early 2015, the 14th Finance Commission recommendations for increased tax devolution and greater state fiscal autonomy represent an opportunity to make expenditure on health a priority in the states (more on that here and here). The central government should not only continue and increase its allocations for health to the states, but go one step further and use its funds to encourage the states to spend more and spend smarter. In addition, the central government should make fiscal transfers more predictable to allow states to plan their investments in health over multiple years. At the same time, states should draw up a medium-term health sector expenditure framework that allows the central government to benchmark budgetary allocations across states over time.

Move towards better designed performance-based fiscal transfers for health

India’s central government should work with the states to choose a simple metric of health status, and transfers from the center to the states should then be tied to improvement in that metric. The transfer would incentivize good performance, rather than act as a reimbursement for costs that should be covered by state treasuries. For example, the metric could be based on the infant mortality rate, and the central government could pay for each averted infant death. A complementary payment mechanism could rely on an index of health indicators. Each additional percentage increase in the mean index, weighted by population, could be associated with a specific payment.

Payments should also be provided to different actors in two steps. First, we recommend payments be made to the state on the basis of verified outcome indicators. Second, the states can then decide on how to design pay-for-performance incentives that cascade to health workers, health providers, and individual beneficiaries within their state.

Invest in better data and evaluation research by strengthening health information systems

India should build an ecosystem for investment in better data, research, and accountability mechanisms to enable policymakers to target existing health inequities and reward better performers. It should establish an independent national health information authority to collect, manage, and analyze health data. This authority would act as a monitoring institution and would advise the government on performance payments to states, track utilization of health services, and promote research and impact evaluation of health programs.

Digital platforms such as India’s biometric ID system, Aadhaar, should also be used to build electronic health records that would be managed by the national health information authority. This would allow for the delivery of health services to better targeted, which could have a particularly positive impact on the poor.

Ultimately, India needs a strategic vision to reform its health financing. Debates around budget allocations and fiscal policies are ongoing and now—ahead of budget decisions for the next fiscal year—is an opportune moment for Indian policymakers to push for reforms. We hope this report provides some bold yet practical ideas that policymakers in India can push forward so that the country’s fiscal architecture has a positive impact on the health of its citizens. Even more, we encourage policymakers in other large, federal countries grappling with similar health financing issues to learn from India’s experience and see if and how our recommendations might apply to their own specific challenges.