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Paying for global health programs on the basis of their outcomes has the potential to focus various actors on a single goal and make those investments more efficient and impactful. Yet in the face of institutional inertia, risk aversion, and operational challenges, few such projects have made the jump from theory to real-world implementation. The Next Generation Financing Models in Global Health Working Group, co-chaired with the Global Fund to Fight AIDS, Tuberculosis and Malaria, will explore how to put these new grant-making designs into practice, taking into account the constraints faced by global health donors. A final report is expected in December 2015.
Recognizing the many inherent tensions and limitations of traditional input-based aid, several CGD fellows and working groups have proposed new aid modalities designed to enhance impact and efficiency. In 2009, a working group on Performance-Based Incentives documented results-based financing experiences across the world, concluding that there was strong evidence “that [such] incentives can improve health and strengthen health systems in a variety of settings.” In 2010, Nancy Birdsall and Bill Savedoff released their comprehensive proposal for Cash on Delivery, a radical take on results-based aid that would tie all disbursements to verified outcomes or impact – no strings attached. And in 2013, CGD’s Value for Money Working Group identified contract design as one of four “domains” within the grant-making cycle where global health agencies could improve the efficiency and impact of their investments.
Yet despite enthusiasm from some corners – and despite the stated commitment to performance-based funding among some global health and development organizations – just a handful of results-based projects have made the jump from concept to reality. A 2015 paper from Perakis and Savedoff finds that “relatively few [results-based aid] programs are being piloted” – and those that exist “are relatively cautious adaptions of conventional approaches.”
To help bridge this gap from theory to practice, this working group aims to provide global health funders with concrete, practical guidance for applying these new aid modalities to their grant portfolios. Drawing from an extensive literature base on incentives in health financing, coupled with heretofore underutilized experiences and literature on adaptive contracting and regulation for public sector utilities and other monopolistic industries, the Working Group will work to adapt economic theory on optimal contract design to the real world context and constraints faced by global health funding agencies (click here for a background paper on that subject).
To bring these mechanisms from theory to practice, the Working Group will consider the following questions:
What are the characteristics of “contractible” indicators – that is, those indicators that could be the basis of payment under results-based aid modalities? Which potential global health indicators, and particularly indicators for the Global Fund’s three target diseases (HIV, tuberculosis, and malaria), meet these criteria?
How can global health funders structure their grants to derive maximum impact while protecting themselves and their beneficiaries against various types of risk? For example, what is the optimal mix of ‘guaranteed’ funding for core services or essential medicines versus variable funding tied to achievement of impact? What is the optimal relationship between various levels of achievement and grant disbursements? Should these design elements change based on grant- or country-level characteristics, for example disease burden, GDP per capita, government capacity, track record/past performance, or grant size?
How can a global health funder “verify” that payments are tied only to results that were actually achieved? How can the design and implementation of verification procedures deter fraud, reinforce incentives for impact, and strengthen domestic data systems?
What safeguards are needed for a global health funder to ensure that results are not achieved through unacceptable programmatic tactics, for example coercion or other human rights violations? How can appropriate indicator selection help mitigate the risk of such unintended effects?
Working group meetings were held on January 22-23 and July 9-10 near Geneva, Switzerland; a supplementary technical workshop of economists and epidemiologists was held April 1-2 in Berkeley, California. A final report is anticipated for December 2015.
Amanda Glassman, Center for Global Development
Maria Kirova, The Global Fund to Fight AIDS, Tuberculosis, and Malaria
David Barr, The Fremont Center
Sebastian Bauhoff, Center for Global Development
Alexander Birikorang, The Global Fund to Fight AIDS, Tuberculosis, and Malaria
Olga Bornemisza, The Global Fund to Fight AIDS, Tuberculosis, and Malaria
Michael Borowitz, The Global Fund to Fight AIDS, Tuberculosis, and Malaria
Robert Brinckman, Formerly of the Clinton Health Access Initiative
Dave Burrows, APMGlobal Health
Jason Clark, The Global Fund to Fight AIDS, Tuberculosis, and Malaria+
Lucica Ditiu, Stop TB Partnership
Rajesh Divakaran, The Global Fund to Fight AIDS, Tuberculosis, and Malaria+
Erin Eckert, President’s Malaria Initiative+
Peter Godwin, Independent
Matias Gomez, The Global Fund to Fight AIDS, Tuberculosis, and Malaria
George Gotsadze, Technical Review Panel, The Global Fund to Fight AIDS, Tuberculosis, and Malaria
Katherine Guerra, Clinton Health Access Initiative
Kate Harris, Bill and Melinda Gates Foundation
Jacqueline Huh, Stop TB Partnership
Ashaque Husain, National Tuberculosis Control Program, Bangladesh
Pablo Ibarraran, Inter-American Development Bank
Harinder Janjua, The Global Fund to Fight AIDS, Tuberculosis, and Malaria
Sebastien Lenelle, Office of the Inspector General, The Global Fund to Fight AIDS, Tuberculosis, and Malaria
Julia Martin, Office of the Global AIDS Coordinator+
Linden Morrison, The Global Fund to Fight AIDS, Tuberculosis, and Malaria
Cynthia Mwase, The Global Fund to Fight AIDS, Tuberculosis, and Malaria
Regina Ombam, National AIDS Control Council, Kenya+
Mead Over, Center for Global Development
Nancy Padian, Berkeley School of Public Health
Hoangmai Pham, Center for Medicare and Medicaid Innovation
Ferdinando Regalia, Inter-American Development Bank
Suvandand Sahu, Stop TB Partnership
Yuna Sakuma, Center for Global Development
Motoko Seko, The Global Fund to Fight AIDS, Tuberculosis, and Malaria
George Shakarishvili, The Global Fund to Fight AIDS, Tuberculosis, and Malaria
Alexandra Shields, Clinton Health Access Initiative
Rachel Silverman, Center for Global Development
Pavlo Smyrnov, International HIV/AIDS Alliance
Tracy Staines, The Global Fund to Fight AIDS, Tuberculosis, and Malaria
Kate Thomson, The Global Fund to Fight AIDS, Tuberculosis, and Malaria
Veronica Walford, World Health Organization
Lisa Waugh, Clinton Health Access Initiative
David Wilson, World Bank
Aneta Wierzynska, The Global Fund to Fight AIDS, Tuberculosis, and Malaria
Nathalie Zorzi, The Global Fund to Fight AIDS, Tuberculosis, and Malaria
Our recent report on next generation financing models looks at how global health donors, specifically the Global Fund to Fight AIDS, Tuberculosis and Malaria, can enhance the health impact of grants for health service delivery by tying grant payments to achieved and verified results. Yet there are several ways to condition payments on performance and, as my colleagues and I have previously pointed out, (here, here, here and here), some ways would likely work better than others in any given setting. Can economic theory suggest specific features of contract designs which would generate more health for the money?
To answer this question, the Next Generation Financing Models in Global Health working group convened an expert meeting of economists, hosted in April, 2015 by the School of Public Health at the University of California at Berkeley. Han Ye at Boston University and Liam Wren-Lewis at the Paris School of Economics, wrote two path-breaking working papers for this technical meeting that apply the economic theories of regulation and incentives to the contracts between global health donors and service delivery organizations in recipient countries.
The two papers begin with the same basic assumptions about global health donors and their grant recipients. First, both papers view global health donors, such as the Global Fund and the US President’s Emergency Plan for AIDS Relief (PEPFAR), as purchasing agencies with the mandate to purchase health care services on behalf of poor beneficiaries in recipient countries. Second, they both adopt the notion that the contractors from whom donors purchase health care services have monopoly power in the delivery of the services to their beneficiaries and monopsony power in their bargaining relationship with the donor.
Under these assumptions, the donor’s objective of ensuring the delivery of quality services to beneficiaries at the lowest sustainable cost mirrors the problem of a regulator of a natural monopoly—a problem that has received decades of attention in the economics literature within the fields of mechanism design and the theory of regulation. As we lay out in the final working group report and as I discussed in an earlier blog post, from this perspective, the global health donor is a “principal” and the contractor in the recipient country is the donor’s “agent.” The relationship between the two is characterized by asymmetric information, a situation in which the agent knows more than the principal about the cost of quality service delivery and opportunities for cost reduction.
Han-Ye’s paper provides a broad survey of the incentive mechanisms proposed in the theory of regulation and asks how each mechanism could be adapted by a global health donor to make its contracting procedures more efficient. The paper weighs the pros and cons of each mechanism, and highlights the tradeoff between the power of each mechanism’s incentives and the cost of its information requirements. Some of the mechanisms reviewed are appropriate for a single contract between a donor and a recipient; others envisage a sequence of contracts over several years, each of which is more efficient than the last. The engagement of the Global Fund and other health donors in some of the world’s poorest countries that are home to the highest disease burden is likely to endure for a decade or more into the future. It is therefore in the best interest of both health donors and recipients to adopt contract designs that will enhance efficiencies over the long term.
Liam Wren-Lewis’s paper starts from the same assumptions, but goes deep rather than wide. As currently practiced by the Global Fund and other health donors, contracting is essentially input financing with cost-reimbursement. From the agent’s perspective, a cost-reimbursement contract has the advantage of minimizing its financial risk. Given the bargaining power of agents, the challenge is to find a contract design that applies incentives towards improved value for the donor’s money, while also being acceptable to the agent. Wren-Lewis’s suggested solution is for the health donor to offer a contract that would give its agent the option to choose, at the end of the contract period, whether to receive a conventional reimbursement of costs from the previous period or to receive a payment proportional to the number of verified units of output it had produced (up to a target output). Of course, a contract with only two payment options is the simplest version of an elaborate multi-choice menu contract in the mechanism design literature. Despite its simplicity, however, Wren-Lewis cites literature showing that this design can achieve up to 80 percent of the efficiency gains seen with more complex contracts. By using familiar elements like a cost-reimbursement contract to develop a contract design that enhances efficiency, Wren-Lewis offers the global health donor an incremental path toward more powerful contracting.
While Ye and Wren-Lewis’ papers were written under the auspices of our working group, their findings have wider implications for improving the efficiency of donor and government spending. For example, the contract designs they discuss could be used to structure the contractual relationship between a national government and its subnational entities such as states, provinces, or nongovernmental organizations that deliver health services. The lessons could also extend to other sectors, such as education or water and sanitation, where foreign aid funders are searching for ways to improve the efficiency of the spending they channel through government and non-government recipients.
I see these two papers as contributions to the broader literature on results-based financing, including cash on delivery models. They offer new ideas about how to shift from cost-reimbursement, or input financing, to payments for verified outcomes to improve value for money. In particular, I hope they spark the growth of a literature on the application of efficiency-enhancing mechanism design to the global health sphere.
This paper uses contract theory to suggest simple contract designs that could be used by the Global Fund. Using a basic model of procurement, we lay out five alternative options and consider when each is likely to be most appropriate. We ultimately provide a synthesis to guide policy makers as to when and how 'results-based' incentive contracts can be used in practice.
Controlling healthcare costs while promoting maximum health impact in the recipient countries is one the biggest challenges for global health donors. This paper views global health donors as the regulators of monopolistic service providers, and explores potential optimal fund payment systems under asymmetric information. It provides a summary and assessment of optimal price regulation designs for monopolistic service providers.
The global health community has made great strides in addressing AIDS, tuberculosis and malaria: fewer people are contracting these diseases, fewer people are dying from them, and far more people are enrolled in life-saving treatments. Yet to sustain this progress and defeat these three diseases, the global community must find more efficient ways to allocate and structure funding.
This week, the Global Fund partnership will meet in Tokyo to plan for its fifth voluntary replenishment, covering the period 2017-2019. The stakes are high: in an austere budget climate, the Global Fund’s ability to raise the needed resources—and then to spend them effectively over the subsequent three years—will have outsize importance in determining the trajectory of the historic fight against AIDS, tuberculosis, and malaria.
Why are the next few years so important? First, the good news: the global community has made great strides in addressing all three diseases and saving lives. For HIV, fewer people are contracting the disease (down 35 percent since 2000), fewer people are dying (down 42 percent since 2004), and far more people are enrolled on antiretroviral treatment (up more than 100 percent since 2010). TB and TB/HIV interventions have saved an estimated 43.5 million lives since 2000. And just last week, the WHO released its most recent estimates, which suggest that malaria deaths have been almost cut it half over the same period. Yet global progress is threatened by growing drug and insecticide resistance; high rates of treatment dropout among ART and TB patients; and the ballooning cost of lifelong HIV treatment.
Creating a Bigger Tool Box: Next Generation Financing Models
To meet these challenges, the global community needs strategic thinking and a bigger tool box. Some of those tools will be new medicines and better technologies, emerging from the world’s best labs and biomedical researchers. But the fight against AIDS, TB, and malaria would also benefit from better ways to allocate and structure funding—the subject of our 2013 report on More Health for the Money. One important component of the More Health for the Money agenda: the introduction of new modalities that can marshal stakeholders, align their incentives, and ensure mutual accountability for achieving shared goals.
Specifically, many researchers and policymakers have hypothesized that models tying grant payments to achieved and verified results—what we refer to as next generation financing models—offer an opportunity for the Global Fund to push forward its strategic interests and accelerate the impact of its investments. And indeed, since its creation, the Global Fund has aspired to link funding to results achieved, has established routine internal processes toward that end, and is one of the few donors to do so across its entire portfolio.
Still, there is a perception that the Global Fund’s original performance-based financing (PBF) system has not fully succeeded in increasing programmatic performance, incentivizing innovation, or building sustainable country ownership, in part due to its complex and discretionary structure. The PBF process combined too many performance elements; did not include a direct link between results and payments; and relied largely on grantees’ self-reports, with only limited data verification—all of which limited the power of the incentive. And in the broader global health and development ecosystem, just a handful of true PBF projects have made the jump from concept to reality. A 2015 paper from Perakis and Savedoff found that “relatively few [results-based aid] programs are being piloted,” and those that exist “are relatively cautious adaptions of conventional approaches.”
To help bridge this gap from theory to practice, CGD convened a working group on next generation financing models in global health, with the aim of providing global health funders with concrete, practical guidance for applying these new aid modalities to their grant portfolios. Drawing from an extensive literature base on incentives in health financing, coupled with previously underutilized experiences and literature on adaptive contracting and regulation for public sector utilities and other monopolistic industries, the working group adapted economic theory on optimal contract design to the real world context of agencies funding global health programs. The working group’s final report, the culmination of these efforts, offers a practical guide to the design and roll out of Next Generation grants.
We were delighted to collaborate closely with the Global Fund on this effort, and to co-chair the working group with Maria Kirova, a Global Fund Department Head. However, it is important to note that the Global Fund does not necessarily endorse the report’s findings, nor does the Global Fund commit itself to any policy actions through its participation in this working group.
Next Generation Financing Models: Getting to the “How”
The final report addresses the how of next generation financing models—that is, the concrete steps needed to change the basis of payment of its grants from expenses to outputs, outcomes, or impact. For example, when is changing the basis of payment a good idea? What are the right indicators and results to purchase from grantees? How much and how should grantees be remunerated for their achievements? How can the Global Fund verify that the basis of payment is sound and that the reported results are accurate, reliable, and represent real progress against disease control goals? And what is needed to ensure that these new incentives don’t drive unintended consequences?
The report starts with a conceptual framework that explains why traditional grantmaking often gets the incentives wrong, why that matters, and how next generation financing models might offer a way for the Global Fund and other health funders to increase the value for money of their investments. It also describes the growing use of incentives at the Global Fund and elsewhere, including the current incentives embedded within Global Fund grants. It then discusses contexts where a move to next generation grant models could drive faster impact or other benefits and describes the technical elements and design choices required to bring them to life. Illustrating how this would work in practice, the report offers four case studies across the Global Fund’s three disease areas.
To bring these new financing mechanisms from theory to practice, the report offers seven medium-term operational recommendations for the Global Fund Board and Secretariat:
Secure strong Board and Secretariat commitment through inclusion of next generation grants as a key priority within the next Global Fund Strategy (due to be presented to the Board for approval in April 2016).
Leave no room for ambiguity: ensure that next generation grant agreements stick to their agreed disbursement protocols—against progress on independently verified results.
Reflect the needs and requirements of next generation grants in relevant related policies, including the allocation formula, counterpart financing requirements, sustainability framework, and differentiation initiative.
Reflect the needs and requirements of next generation grants in the guidance and terms of reference given to key Global Fund bodies, including the Technical Review Panel, Country Coordinating Mechanisms, and operational divisions within the Secretariat.
Assure Global Fund and Principal Recipient access to needed expertise and resources to design and operationalize next generation grants, with particular attention to performance verification.
Revise Key Performance Indicators to accommodate differences in the management and evaluation of next generation grants.
Evolve financial management policies to accommodate less predictable cash flow and reduce restrictions on the use of funds.
Those who follow the Center for Global Development will be familiar with our branded meme: “Cash on Delivery” aid, or COD. As early as 2006, Owen Barder and Nancy Birdsall authored a working paper on the COD approach to foreign assistance, which was distinguished from “input-financing” and proposed as a mode of payment that would enhance efficiency and, by revealing government performance to local populations, improve the recipient government’s accountability to its own citizens. Subsequent work from CGD includes a book by Savedoff and Birdsall and most recently a paper by Savedoff and Perakis. Many are enthusiastic about COD’s potential to revolutionize aid effectiveness. Yet within some global development organizations, leadership and staff alike express common concerns: is COD practical in the real world? Have you thought about this problem, or that constraint? How would this work in the context of our organization? And if we decided to move forward, how would we design a COD grant?
To help answer these questions, our new report Aligning Incentives, Accelerating Impact differs from CGD’s past efforts in two important ways. First, due to the Global Fund’s engagement with our working group over many months, this report reflects and responds to the concerns raised by the staff of a single donor institution about the ways that cash on delivery could fail to improve results or could even create perverse incentives within their specific institutional context. As a result, the report avoids promoting COD as a panacea applicable to all of the Global Fund’s financing. Instead, it stresses the need for contractible, externally verifiable indicators and for a willing grant recipient that is able to pre-finance some aspects of service delivery in order to successfully implement a COD strategy. We therefore hope the report will prevent those with a more distal view of Global Fund activities, such as outside observers, board members, and even higher management within the fund, from pushing Global Fund staff to implement COD in situations where it is doomed to fail.
Second, more than any of its predecessors, this report explicitly adopts the “principal-agent” framework for understanding the relationship between the Global Fund (“principal”) and its counterpart in the recipient country called the Principal Recipient (“agent”). This framework comes from the fields of contract theory and mechanism design—which were recognized by the Swedish Nobel Prize committee in 2014 when they awarded the prize in economics to Jean Tirole, one of their most important contributors. (For a more technical presentation see here.) Importantly, the framework allows us to acknowledge that the Global Fund will always have less information than the Principal Recipient about the cost of service delivery—and especially about alternative ways personnel could be managed to reduce costs. Our report, therefore, proposes contract designs that will better align the Principal Recipient’s financial interests with its efficient expansion of health service delivery. In addition, forthcoming background papers by Liam Wren-Lewis and Han Ye suggest how specific examples of efficient contracts, drawn from the extensive literature and practice on industrial regulation and contracting, can be adapted to improve the efficiency of Global Fund expenditure. For instance, a particularly promising contract, the “Fixed Price/Cost Reimbursement” design, allows the Principal Recipient to choose the most advantageous option from a menu of contracts. This clever design could improve health service output per dollar of Global Fund financing.
We hope our new report will be useful not only to the Global Fund, but also to other donors in the global health arena. (PEPFAR, are you listening?) However, we caution that any other donor’s application of COD deserves the same detailed attention to their own institutional capabilities and constraints as the Global Fund received for this report. The last sentence of the Nobel Committee’s summary of Jean Tirole’s contributions warns that "desirable [mechanism designs] are different from market to market.” Similarly, we warn that desirable results-based contract designs differ from donor to donor—and, for any given donor, from recipient to recipient. Worst case scenario: failure from an inappropriate application of a COD approach could lead critics to reject incentives altogether, simply because a poorly designed project proved unworkable.
So please: say no to a cookie-cutter approach! And say yes to the careful, thoughtful, and tailored application of incentives as a strategy to improve the efficiency and effectiveness of global health investments.
Founded in 2002, the Global Fund to Fight AIDS, Tuberculosis and Malaria (the Global Fund) is one of the world’s largest multilateral health funders, disbursing $3–$4 billion a year across 100-plus countries. Many of these countries rely on Global Fund monies to finance their respective disease responses—and for their citizens, the efficient and effective use of Global Fund monies can be the difference between life and death.
Last September, we released a report on how the Global Fund could get more health for its money. In it, we offered concrete suggestions for improvements in several different value-for-money domains, all with an eye toward maximizing the health impact of every dollar spent.
A lot can change in a year. And during a recent reread of our own report, I was pleasantly surprised by how much the Global Fund has changed for the better, particularly in how it does business. So what’s been done, and what challenges remain?
More Data-Driven Allocation
Under its old system, the Global Fund allocated its funding through a series of proposal rounds. During each round, countries could submit their requests for funding; good proposals would be approved and bad proposals rejected by an expert technical review panel until all available funds were committed.
While well-intentioned, this system was rife with problems. As we wrote in our report, “by failing to provide countries with a clear budget constraint, predictable funding windows, or rewards for efficiency, the Global Fund created strong incentives for countries to maximize their funding requests—often without considering actual need and other funding sources, or assessing their most pressing priorities given scarce resources.” Funding went to countries with the best proposals—not necessarily the countries that had the greatest need or capacity to deliver results. As a result, major differences (up to 5,000-fold!) were seen in per-case spending on HIV across countries, with no obvious justification for the discrepancies.
Fast-forward to today and the Global Fund now deploys an explicit, data-driven allocation formula to split scarce funds across countries on the basis of their disease burdens and ability to fund their own disease programs (the board originally voted to enact a formula-driven allocation approach in 2012; exact allocations for the 2014–2016 window were announced in March). As a result, funding is better aligned with countries’ respective disease burdens, and more predictable funding empowers countries to plan ahead with a clear understanding of the available resource envelope. In a new paper with Victoria Fan and Amanda Glassman, we conclude that this new “methodology is expected, but not guaranteed, to improve the efficiency of Global Fund allocations in comparison to historical practice.”
Still, the fund has experienced some growing pains during its ongoing transition to the new approach. The split of funding across the Global Fund’s three target diseases is based on historical practice rather than objective criteria, and the relatively low allocations for malaria and tuberculosis (32 percent and 18 percent, respectively) remain controversial. Within each disease area, the sources to inform cross-country allocation are inconsistent. In particular, the use of malaria data from 2000 was intended to protect countries where continued funding is required to sustain recent gains; in practice, the fund’s own technical review panel worries that “allocation amounts … may no longer reflect the most strategic investment of resources.” Finally, during the first wave of New Funding Model proposals, confusion about the role of “incentive funding” and competition for its allocation proved a major distraction. But the Global Fund has absolutely taken a step forward toward a strategic, evidence-based approach, and we look forward to watching further refinements over the next few years.
More Results-Based Contracts
In our report and a related paper, we recommended that the Global Fund restructure its contracts to incentivize better results. One year later, we’re pleased to see the fund embrace piloting of results-based contracting mechanisms with open arms, and we’re even more excited to be part of the action.
Here are some highlights: In Rwanda, the Global Fund has signed on to a pilot project where payments are tied to performance against specific HIV outcome indicators. In Mesoamerica (countries of Central America and southern states of Mexico), the fund is supporting a Cash-on-Delivery model to reward countries for progress toward malaria elimination. In Benin, the Global Fund is partnering with the World Bank’s Health Results Innovation Trust Fund to support results-based financing for providers at local health facilities. And many more projects are currently under discussion as the Global Fund explores how results-based financing can become a core component of its overall business model.
One more exciting development: this month, with support from the Bill and Melinda Gates Foundation, and in partnership with both the Global Fund and the Clinton Health Access Initiative, we’re launching a new working group to explore how the Global Fund can best put innovative contracting designs to work across its portfolio—all while striving to maximize the health impact of each dollar and mitigating the attendant risks. The working group will be co-chaired by a high-ranking member of the Global Fund’s secretariat, and we expect that the output will help inform the Fund’s strategy for the next replenishment cycle.
Though the finish line is still far away, the Global Fund deserves kudos for what’s already been done. We’ll continue to check in on movement – but for now we’re happy to see momentum in the right direction.