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In many large federal or decentralized countries, the majority of public spending on health is executed by state and district governments (see graph below). Improving health in these countries—and globally—depends on improving the sufficiency, efficiency, and effectiveness of health spending at the subnational level. The Intergovernmental Fiscal Transfers for Health Working Group, a partnership of CGD and the Accountability Initiative in India, is tasked with identifying practices that improve health and increase the efficiency of subnational allocations.
Health status, access, and care vary greatly across subnational entities, and the decentralization of health systems and spending has mixed and complex results. To understand this complexity better, CGD and researchers at the Accountability Initiative (AI) in India have examined national-to-subnational fiscal transfers in India to identify practices that have global implications. The goal is to identify lessons for domestic reforms and implications for countries and donors facing similar challenges. We have also examined worldwide experience in allocating budgets according to health needs, leveraging greater subnational spending on health, and boosting subnational performance on health outcomes and delivery.
Key questions for the working group
What are better practices in intergovernmental fiscal transfers for health worldwide that can also help improve health outcomes in India?
How can the central government create incentives for increased allocation to health by states, given low levels of current spending?
What should be done to increase synergies in health expenditure by the central government and states?
What role can intergovernmental fiscal transfers play in supporting state and district level innovations to improve health outcomes?
What role for external funders in this space? What is the policy research and data agenda going forward?
Working Group Members
Yamini Aiyar, Accountability Initiative, Center for Policy Research Sambit Basu, IDFC Foundation Pinaki Chakraborty, 14th Finance Commission Samik Chaudhuri, Institute of Economic Growth Mita Choudhury, National Institute of Public Finance and Policy Ravi Duggal, International Budget Partnership Victoria Fan, University of Hawaii at Manoa Saurabh Garg, Ministry of Finance Amanda Glassman, Center for Global Development Indrani Gupta, Institute of Economic Growth Nishant Jain, GIZ Avani Kapur, Accountability Initiative, Center for Policy Research Anit Mukherjee, Center for Global Development Aparajita Ramakrishnan, Bill and Melinda Gates Foundation Rajeev Sadanandan, Ministry of Labor and Employment Deepak Sanan, Government of Himachal Pradesh Shakthivel Selvaraj, Public Health Foundation of India Tapas Sen, National Institute of Public Finance and Policy
In 2015, India's system of fiscal devolution underwent a radical transformation. This paper uses the experience of Brazil, China, and Mexico to draw important lessons on how India can use the opportunity of fiscal devolution to create a better system of health financing through better policy coordination between federal and local governments.
The Indian government has sent a clear message with its latest budget: it is now up to the states to take leadership on health and invest more from their own coffers.
On the whole, India’s national budget was an exercise in fiscal consolidation to balance the government’s books. And as the Finance Minister said in his opening remarks, the 14th Finance Commission recommendations, which increased tax devolution to the states, has reduced the government’s headroom to increase expenditure on key social sectors such as health.
Consequently, the allocation for the National Health Mission is essentially flat. The only policy change is an increase in the benefits cap for the National Health Insurance Scheme (Rashtriya Swastha Bima Yojana, or RSBY) from Rs.30,000 (about US$500) to a more reasonable amount of Rs.100,000 (about US$1,500) per family per year. However, details on coverage, benefits package, and payment modalities have not yet been spelled out.
What does this mean for state expenditure?
As highlighted in our report on India’s fiscal architecture, states in India were given more fiscal power to determine their expenditure priorities following the 14th Finance Commission recommendation. And this is a good first step toward encouraging states to put their funds towards their own priorities, particularly underfunded social sectors.
Following our report, our coauthors, Avani Kapur and Vikram Srinivas of Accountability Initiative at the Center for Policy Research in New Delhi, crunched the numbers from available state budget documents for the last fiscal year. They concluded that the share of untied funds have increased significantly in most states (see Figure 1). In states like Bihar, Himachal Pradesh and Kerala, untied funds are now nearly 80 percent, up from around 50-60 percent before the Commission recommendations came into effect in April 2015.
This is good news.
But how have states responded to greater untied funds? Are they actually spending more in social sectors? Are there signs of a structural shift towards states spending more in social sectors as a share of their total expenditure?
The evidence here is mixed. On one hand, there has been a more than 20 percent increase in social sector allocations in less-developed states such as Chhatisgarh, Jharkhand, Madhya Pradesh, Odisha, and Rajasthan. On the other, the share of social sector expenditure as part of total expenditure is nearly unchanged. This implies that states have indeed put more resources from their untied funds towards social sectors, but it has not been enough to cause a structural shift (see Figure 2). And without a structural shift, we are unlikely to see much improvement in access and quality of social services to tackle high infant mortality, malnutrition, and disease burden, for example.
What does all this mean for health?
India spends a woefully inadequate 1 percent of its GDP on public expenditure for health. Nearly three-quarters of that expenditure comes from states’ own resources, with the rest coming from the central government. It is in this context that the increase in tax devolution assumes significance.
Clearly, the top-down approach to increasing health expenditure has had limited impact, especially in reducing the burden of healthcare costs on the poor. Here’s a prime example: despite the nearly US$25 billion spent through the National Health Mission over the last decade, the proportion of out-of-pocket expenditure has not changed significantly. If states continue this trend of spending too little of their public expenditure on health, their residents will continue to face high out-of-pocket costs for health services—a problem that can keep the already worst-off in poverty.
With greater fiscal autonomy comes greater responsibility, and states need to step up. States must not only begin to move towards a structural shift in spending a greater share on health, but also design and implement policies, programs, and delivery mechanisms that address their populations’ health needs. Still, greater finances are only one part of the solution. Just as important is building the political will to set goals and standards, pool risk and design realistic benefits packages, and prioritize public expenditure on primary care. States have the power to take the lead, learn from each other, and deliver quality and affordable health care for all. The ball is in their court.
In the big decentralized countries where global disease burden is concentrated, such as India and Indonesia, most public money for health isn’t spent by the national ministry of health, the traditional counterpart for global health funders and technical agencies. Instead, most money is programmed and spent subnationally.
Greater subnational public spending reflects growing democratization, power-sharing, and local self-determination. It also responds to the conviction that local decision-makers understand local realities better than a bureaucrat sitting in the capital city. Yet evidence on the effectiveness of subnational spending on health care and outcomes is mixed at best, and incentives for greater spending and better performance can be weak.
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.
Most money and responsibility for health in large federal countries like India rests with subnational governments — states, provinces, districts, and municipalities. The policies and spending at the subnational level affect the pace, scale, and equity of health improvements in countries that account for much of the world’s disease burden: India, Indonesia, Nigeria, and Pakistan.
2015 has been the year we have been reminded that there have been major gains in development in many parts of the world, but that hundreds of millions of people still suffer the dangerous consequences of poverty, including high levels of maternal and infant mortality, hunger, illness caused by lack of basic sanitation, and death from easily treatable diseases. How can we improve health systems to make them more effective, as well as less wasteful and more accountable?
One way, CGD experts Amanda Glassman and Anit Mukherjee tell me in this podcast, is to focus on how health budgets in developing countries are spent. It is often administrations at the local level – regional, state – that make spending decisions, while health priorities are often set by national governments, who distribute tax revenues that pay for health programs. Glassman and Mukherjee have coauthored – along with other members of the working group – a new CGD report on how to close the gap between fiscal policy and health policy for more effective and efficient health services.
“It’s really important for us to understand the connection between money, services provided, and health outcomes,” Glassman says.
It’s particularly important in countries like India, where state populations surpass those of small countries. “We should be having a much more differentiated approach to how those states want to prioritize their expenditure,” Mukherjee says, “and how they can use the money for better outcomes.”
Health is a state rather than national subject in many countries (as we’ve discussed here and here), and in India this tendency has just become more pronounced. Based on the 14th Finance Commission’s recommendations (more here), money coming from the Central government to states will be less tied up and states more free to spend that money in whatever way they want. But will they spend (well) on health, in a country famous for health coverage and outcomes well below those of countries at similar levels of GDP?
Throughout our conversations, two issues were apparent: first, the radical devolution decided by the 14th Finance Commission has huge potential implications for state health budgets. And, second, states’ experiences during previous Finance Commission transfer schemes merit closer attention and highlight lessons learned for those of us interested in how much and how well state governments will spend on health.
More Room for State Spending under the 14th Finance Commission
Increases in fiscal space at the state level will be large. As we look at budget estimates for 2015-16, we estimate the 14th Finance Commission devolution to result in increases in per capita transfers of up to three percent of state GDP (see figure below). The question is how much will be allocated to health and what leverage the Center will have to influence State spending decisions given its shrinking pot of funding.
Learning from Incentives in the 12th and 13th Finance Commissions
The 12th Finance Commission provided health-specific transfers known as “equalization grants” totaling US$920 million (or Rs.5887.08 crore) to seven states, with the goal of reducing inequality in per capita expenditure on health across states. Yet nearly one-fifth of these grants were not released. Why? One possibility is that the grants were not significant enough for states to go through the administrative measures required for their release. Most states had to navigate multiple transfers, not limited to health, each with its own independent criteria and release mechanisms. Lesson learned: as the Central government thinks about how to allocate its shrinking precious resources, consolidating Central flows may create a more significant incentive for States to pay attention.
The 13th Finance Commission provided a performance incentive, totaling US$780 million (or Rs.5000 crore), to states that reduced their infant mortality rates. 65 percent of allocations went to states that comprise less than 10 percent of India’s total population. The complicated allocation formula focused on reduction of infant mortality rates from the median, without consideration of factors such as population. And similar to the equalization grants, the amount of the incentive grant was simply not big enough for states to reorganize administrative procedures. Lesson learned: the structure and size of incentives should be carefully designed for an outcomes-based transfer to be successful. Along with a large enough prize, the 14th FC or Central government may consider adding on a better designed bonus that would create more virtuous incentives for health results.
The Central government is currently pondering its role vis-à-vis the states in health and the regulations that will be put in place to govern health financing and delivery. These decisions, which affect centrally-funded programs like the National Health Mission, are up to a group of state Chief Ministers who are currently deliberating the fate of the federally funded social sector schemes. They are said to have these by this summer, and we’ll be watching eagerly—stay tuned.
India has fallen behind in both health expenditure and health outcomes compared to other lower-middle-income countries. Its burdens of tuberculosis and malaria, and increasingly noncommunicable diseases like diabetes, are among the largest. Infant mortality and child malnutrition rates rival those in sub-Saharan Africa. Public expenditure on health—a mere 1.2 percent of GDP—is less than one-third of South Africa’s and share of out-of-pocket cost is the highest among G-20 countries. On the other hand, India’s thriving medical tourism industry generates revenues of over $70 billion a year—that’s equivalent to one-third of all public expenditure on health in India. It’s clear there’s a high level of inequity in health access and outcomes that must be remedied as a matter of priority.
India’s new draft National Health Policy begins to address some of these problems, outlining a series of much needed reforms. The draft policy appreciates the urgency to achieve universal health coverage—access to quality health care for all without increasing financial burden on individuals and families. It further recognizes the need for higher levels of public expenditure, makes improvements to primary health-care delivery, moves toward a purchaser model for health-care services including both public and private providers, and expands coverage of a national health insurance program targeting the poor.
These are all laudable policy initiatives; however, they don’t go far enough. And more importantly, the policy lacks clear direction in terms of health system design and in coverage of individuals and services.
That’s why, in response to the Ministry of Health’s call for public comment on its plan, we provided recommendations to help strengthen the plan across four key areas: financing and fiscal transfers, payment for performance, priority setting and benefits package, and data and information systems. Our view is that the National Health Policy needs to do four things above others:
Set a target of at least 5 percent of GDP for public expenditure on health.
Move money to the states by providing incentives for performance-based health outcomes.
Design a prioritized, cost-effective, and fiscally sustainable benefits package of health-care services.
Effectively monitor health outcomes by creating a comprehensive database of electronic health records and financial performance.
In our submission (abridged version here), we argue the National Health Policy’s target of 2.5 percent of GDP for public expenditure on health is too low. While it is an increase from current expenditure, it still will not be adequate to address the burden of disease, fill infrastructure and human resource gaps, and reduce out-of-pocket expenditure, especially for the poor. For comparison, middle-income countries such as Mexico and Thailand significantly increased their public expenditure in health to 6.3 and 4.1 percent of GDP, respectively, when they made major pushes toward universal enrollment in government-led insurance programs. Considering the current infrastructure and human resource gaps, India will need to spend at least 5 percent of GDP on health. Universal health coverage will not be achieved on the cheap.
Increasing expenditure is only one piece of the puzzle; spending will also need to be done more effectively. Over the last decade, fiscal transfers through the National Health Mission have been plagued with expenditure inefficiencies. Most states have not been able to utilize funds and are burdened with planning and reporting guidelines imposed by the Central government. This needs to change. States should be given the primary responsibility of implementing the national plan and provided with adequate fiscal space to do so. Greater tax devolution recommended by the 14th Finance Commission is a step in the right direction, as I discussed in an earlier blog. Top-down financing should be replaced with performance-based transfers on the basis of outcomes. The draft policy plan acknowledges this, but fails to explicitly provide how it will move towards greater subnational autonomy and accountability.
The National Health Policy should also establish an independent authority to collect, manage, and analyze health data as its core business. This would be similar to the Unique ID Authority of India (UIDAI), which issues the biometric Aadhaar number. It should be a professionally managed nodal agency that collects data from all levels of government and the private sector, providing data warehousing services for electronic health records and the Health Management Information System, and evaluate performance at State and district levels. India could learn from the experiences of the Mexican Social Security Institute and the National Health Security Office of Thailand, which have been relatively successful in this regard. The goal of creating such an entity would be that data-driven, evidence-based policy and fiscal transfers tied to improved health outcomes would change the health landscape of India in the coming decades.
It’s been nearly 70 years since the Bhore Committee report laid the blueprint for universal health coverage and more than a decade since India’s last national health policy set ambitious targets for achieving health for all. In the end, what is lacking is the political will to make these reforms happen. Will NHP 2015 deliver equitable and quality health care or will it be more of the same? We’ll have to wait and see.
The fiscal relationship between the Central and State governments in India has just been radically transformed. As far as intergovernmental transfers are concerned, the 14th Finance Commission report will have wide-ranging implications for India and lessons for other large federal countries around the world. Here’s why:
India’s Finance Commission provides recommendations on how the Central government should share its revenue – nearly 10 percent of the country’s GDP or about $200 billion per year – with the 29 State governments. The recommendations are based on consultations with every State government and are submitted to Parliament at the end of the Commission’ two-year term. And, in a unique tradition, the Central government has accepted the recommendations in full without modifications.
The latest report recommends a 10 percent increase in fiscal devolution, reduced fragmentation of fiscal transfers, and enhanced fiscal space at the sub-national level so States can plan and spend based on their own priorities. There are three reasons why these recommendations are a game-changer.
First, the share of States in tax revenue has significantly increased from 31.54 percent to 42 percent. A ten-point increase in tax devolution is practically unheard of in any large fiscally decentralized country where such changes typically take place over decades. This means States will now have significantly larger fiscal space (around $20 billion) to make their own resource allocation decisions. This will have implications for many sectors, including health (see our work on fiscal transfers for health here and here), education, water and sanitation, and food security.
Second, the report doesn’t provide any specific-purpose grants to equalize per capita expenditure in health and education. This is a good thing. My forthcoming research with Victoria Fan and colleagues at Accountability Initiative, New Delhi, suggests equalization grants mandated by the past two Finance Commissions for health were an exercise in futility. The transfers were neither substantial enough to make an impact on health expenditure especially for the poorer states nor were they designed efficiently to pay for performance (see related blog post here). The new strategy of providing unconditional transfers to augment fiscal space at the State level, therefore, is a better approach as it puts the onus of increasing expenditure and improving performance on State governments. This replaces bureaucratic obfuscation with political accountability—something the Indian voter has been demanding for quite some time.
Finally, greater transfers to the States means the Center’s fiscal power has been reduced significantly. Its discretion in determining transfers through what came to be known as ‘centrally sponsored schemes’ is now down from nearly one-third of the divisible resources to less than one-sixth. In the context of other major institutional reforms, such as the restructuring of the Planning Commission, the leverage that the Center had with the States in directing development policy will give way to a much broader array of policy choices driven by States’ needs and priorities. The Center will do well to seize this opportunity to foster the new paradigm of ‘cooperative federalism’, playing the role of a facilitator to improve growth and reduce inequality. Countries like Brazil, Mexico, South Africa and Indonesia, where there have been calls for greater State fiscal autonomy, will be keeping a keen eye on how the new fiscal world unfolds in India.
Thanks to this landmark report, things are looking good and moving in the right direction. However, a lot will depend on how States seize this opportunity and spend effectively to achieve better outcomes. I’ll be following the developments closely, so stay tuned!