A New Compact for Health Aid: Integrating Evidence-Informed Priority-Setting and Public Financial Management

The Lusaka Agenda envisages fundamental shifts in the role of health aid towards sustainable domestically financed health services, country ownership, and donor alignment with country priorities and systems. In a previous policy paper CGD proposed a New Compact for health aid which is fully aligned with this vision. At the heart of the New Compact is the notion that existing power imbalances are redressed by countries setting a national package of health priorities and financing the core of this package, and donors align behind this by expanding what can be provided at the margin. Potential challenges with implementing the New Compact are not yet known, and so the aim of this note is to is explore the practical considerations for realising the New Compact in terms of public financial management (PFM), using the budget cycle­­—formulation, execution, monitoring—as a guiding framework. We find that the New Compact approach can support and promote the “one plan, one budget” vision, but need not be tied to a particular financing model such as direct budget support. The main PFM implications relate to budget formulation activities, although there are relevant considerations for execution and monitoring as well. The note goes on to explore PFM-related benefits and risks and argues that the New Compact is a promising concept whose implementation can be adaptable and pragmatic from a PFM perspective. While the approach holds potential for contributing to strengthening PFM systems, its implementation would have to carefully balance reality with aspiration.

Health aid is volatile and fragmented, tends to displace domestic finance, relies on ineffective prioritisation, and lacks coherent transition planning and country ownership. These challenges, equally relevant to aid for sectors other than health, have long been recognised and have led to various calls for improvements. Most recently, the Lusaka Agenda calls for health aid to have a “catalytic role towards sustainable, domestically financed health services and public health functions” while emphasising country ownership and donor alignment with country priorities and systems. CGD has outlined a potential New Compact for health aid that addresses some of the long standing challenges and is aligned with the aspiration of the Lusaka Agenda.

The New Compact has implications for domestic health financing, however these haven’t been explored to date. This note aims to explore these implications with a focus on public financial management (PFM) systems and capabilities, that is, the ability for health system to clearly formulate budgets, to execute payments based on those budgets, to appropriately track agreed spending, and to monitor and evaluate spending performance.

The New Compact—What is it?

The concept of the New Compact is built on three pillars:

• Locally led evidence-informed prioritisation. Country institutions are supported to set health priorities, drawing on relevant available evidence.
• Domestic-first resource allocation. Country ownership, including financing, of the core package of high priority services.
• Consolidated supplementary aid. Donors work together and with country leaders to design a top-up package, both in terms of additional health services and other cross-cutting support.

In the approach, domestic finances support essential health services and health aid expands the package of affordable services at the margin (see Figure 1 and Box 1). Instead of targeting the most cost-effective services, donors support countries to have effective prioritisation processes and direct any additional financial support to health services that would otherwise not be covered by domestic funds. This approach encourages better planning and prioritisation by countries and donors, leading to more health for the money. As countries’ health financing is expected to improve and domestic financing includes more priority services, health aid focused at the margin is naturally crowded out, offering a gradual, coherent aid exit strategy for thriving countries and ensuring the sustainability of financing for countries that continue to need support. Perhaps most fundamentally, it empowers national decision makers and national policy processes.

The New Compact does not:

• Prescribe in detail which health services should be financed, by whom and how. It provides organising principles and a starting point for making these decisions consistently over time to improve health financing in line with countries’ priorities.
• Rule out the possibility of government-donor joint co-financing specific health services.
• Instruct how health aid should be channelled in a particular context e.g., on- or off-budget.
• Amount to or require introducing specific reforms in the countries’ health financing systems, although there are mutual synergies between the New Compact and good financial management (more on this below).

Figure 1. Illustration of prioritised health benefits package with aid investment at the margin

The New Compact—How to rearrange funding flows?

The vision of the New Compact is one of country-prioritised health aid delivered in increasing alignment between donors and government budgeting processes—echoing the Lusaka Agenda’s aspiration “to align behind one national plan, one budget, and one monitoring and evaluation system, and enabling pooled and joint financing approaches to support core health system objectives.” The New Compact supports the “one plan” part of aspiration and to some extent the “one budget.”  Linking the core unified health benefit package resulting from prioritisation to the health budget reconciles how health aid is usually organised—around priority services—with how domestic health financing is usually structured—around service delivery platforms e.g., primary health care and health care functions e.g., prevention and treatment.

However, realising the vision of the New Compact may not be immediately achievable in all settings and may, in part, depend on confidence in country PFM capabilities. That is, the ability for health system to clearly formulate budgets, to execute payments based on those budgets, and to appropriately track agreed spending. Implementing the New Compact could take a range of different forms en route to a one plan, one budget vision. In Figure 2 we identify a spectrum of notional scenarios for reorganising health aid under the New Compact approach, arranged from a partial to a full implementation (again, notionally) of the New Compact’s principles. One illustrative scenario (A in Figure 2below) is where there is agreement on prioritising health services, but donor support is largely off-budget. Such a scenario would capture only a small, if essential, part of the New Compact’s potential benefits (coordinated country-led prioritisation) while maintaining the fragmentation of funding flows. This scenario would require intense coordination across government and donors for harmonising budgets, spending rules and processes, and monitoring frameworks across all financing sources. It would also act as an initial stepping stone towards more integrated approaches.

At the other end of the spectrum, in illustrative scenario D, all health aid is on-budget and focuses on expanding the total package of services, including those at the margin—the number of funding channels is largely reduced, coordination mostly concerns budget formulation, but pressure on government capacity and systems is high. While aid data from the OECD Creditor Reporting System indicate health aid delivered as budget support is and has been historically much lower than as project-specific interventions, a move in this direction would go a long way towards strengthening country ownership and reducing fragmentation.

Pragmatic scenarios in a given setting would most likely attempt to identify an implementation approach that balances gains in complexity (or reduced fragmentation), the costs of coordination, gains in government ownership, and available PFM capacity. Further contextual factors may also influence what is both feasible and desirable, such as the level of trust between government and donors, the strength of the country’s PFM system, and the government’s long-term PFM and aid agenda. Illustrative scenario D maximises, in principle, the potential benefits of the New Compact, however it may not be realistic for all countries to start implementing the New Compact directly under such a scenario; most likely this will be a journey in which practical arrangements will evolve in line with country and donor realities.

Figure 2. Illustrative scenarios of the New Compact

The New Compact and implications on PFM

The coordinated, principled reorganisation of which health services are funded by whom is the essence of the New Compact and while evidence informed prioritisation of services is a widely employed practice (particularly in high-income countries) health financing mechanisms are typically not organised by health service. For example, payments to facilities might be done on a capitation basis, where payments are linked to registered patient numbers, but not the services received. It is important therefore to understand how prioritisation of services—and the New Compact specifically—translates into implementation. To do this, the phases of the budget cycle—formulation, execution, and evaluation (see Box 2)—offer a useful guiding framework. The New Compact has practical relevance particularly to the budget formulation phase because of the essential link between prioritisation and resource allocation. Implications for budget execution and budget monitoring would depend on the practical arrangements of the New Compact (Table 1). 

Table 1. The New Compact and the budget cycle