Financing Global Health 2035Sources of Revenue andOptions for Cost Control

Sanjeev GuptaActing Director of Fiscal Affairs Department

International Monetary FundDecember 3, 2013 London

Presentation Outline

I. Incremental costs

II. How to finance convergence

III. Options to curb cost escalation

I. Incremental Costs

I. Incremental costs for convergence

• Low-income countries: US$23bn per year from 2016-25 and US$27bn per year from 2026-35 (or US$24 per person in 2035)

• Lower-middle-income countries: US$38bn and US$53bn per year, respectively (or US$20 per person in 2035)

• The cost of convergence is around 1% to 3% of GDP depending on the country grouping

II. How to Finance Convergence

II. How to finance convergence

A. Economic growth

B. Mobilization of domestic resources

C. Budgetary reallocations and efficiency gains

D. External resources

II.A Economic Growth

• During 1990 to 2011, economic growth averaged between 3.9% and 5.1% for different country groups

• Going forward, growth above 4% is forecast. At 4.5% growth, there is more than a doubling of revenues in 20 years

t = 0 t = 10 t = 200

50

100

150

200

250

1422

32

GDP Revenue

GDP and Revenue (GDP = 100 for t = 0, a constant revenue share of 14% and 4.5 % real

growth annually)

1990 1995 2000 2005 20110

5

10

15

20

25

30

II.B Mobilization of Domestic ResourcesGovernment Revenue (without grants) by Country Group* 1990-2011

(percent of GDP)

*The World Bank Country Classification

Low income (GNI per capita $1,035 or less)

Lower middle income(GNI per capita $1,036 to $4,085)

Upper middle income(GNI per capita $4,086 to $12,615)

II.B Government Revenue Composition1990-2011 (percent of GDP)

Low income Lower middle income Upper middle income

1990 1995 2000 2005 2011

Other

Property Tax Revenue

Tax Revenue from International Trade and Transactions

Excise Tax

General Revenue from Goods and Services Taxes

Individual Income Tax

Corporate Income Tax

Social Security Contributions

Revenue without Grants

1990 1995 2000 2005 20110

5

10

15

20

25

30

1990 1995 2000 2005 20110

5

10

15

20

25

30

II.C Budgetary Reallocations andEfficiency Gains

• Reallocate fiscal resources from unproductive to productive/high-priority spending, including health– Large energy subsidies on air-polluting fuels ( e.g.,3.5 % of

GDP in sub-Saharan Africa; governments there spend more on subsidies than on health)

• Scope for efficiency gains within health sector– Some potential for increasing efficiency in the sector; this

could free resources for expanding critical health services, thus improving health outcomes

II.D External Resources

• The need for external resources to finance convergence will depend on the increase in public health spending from current levels

• Two scenarios: public health spending rises to 3% of GDP or 4% of GDP– Only under 3% scenario would LICs need external support.

In lower-middle-income countries, domestic resources and non-concessional loans from World Bank and regional development banks are likely to suffice

III. Options to Curb Cost Escalation

III. Options to Curb Cost Escalation

A. Hard budget constraints

B. Reference pricing

C. Reduction of fee-for-service payments

D. Additional approaches

Large spending increases in advanced economies over past 40 years

0

2

4

6

8

10

12

Private

Public

Health Spending in Advanced Countries (percent of GDP)

Periods of Acceleration

Increases in public health spending were much smaller in emerging economies

Health Spending in Emerging Countries (percent of GDP)

0

1

2

3

4

5

6

7

Private

Public

• Population aging

• Technology

• Health policies and institutions

• Expansion in coverage

• Baumol effect

Main drivers of public health spending

III.A,B Hard Budget Constraints andReference Pricing

• Hard budget constraints raise awareness of costs

– Tight constraints raise risk of under-provision

– Encourage greater private expenditure; need to protect interests of the poor

• Reference pricing imposes cap on how much the public sector will pay for a specific drug or procedure

– Requires country-specific information on cost structures

III.C Fee-for-service Payments to Providers

• Fee-for-service payments reward quantity over quality and do not promote prevention or patient education

– Paying salaries or by capitation can reduce costs, while results-based payments can improve outcomes

– Fee-for-service payments can still play a role though where essential services are under-provided

III.D Additional Approaches

• Single payer approach– Reduces administrative costs

• Controlling health care supply– Promoting use of generic drugs or restricting new

technologies through health technology assessments (e.g., South Africa and Thailand)

• Gate-keeping– Primary care provider as first point of contact for patient

• Private financing– Cost-sharing limited to high income patients for low-value

interventions. Rwanda is exempting the poor, but using cost-sharing to raise revenues

III.D Additional Approaches

• Strategic purchases such as contracts between government and private providers or between different tiers of government is another avenue

• Taking steps to postpone incidence of non-communicable diseases (NDCs)– Low-income and middle-income countries could otherwise

see significant increases in medical costs of NDCs