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Finance & Development
A quarterly magazine of the IMF
December 2006, Volume 43, Number 4

Getting Real on Health Financing
George Schieber, Lisa Fleisher, and Pablo Gottret

Will all the hype and money lead to results?

Never before have so much attention and money been devoted to improving the health of the world's poor. Celebrities have been using their star power to shine the spotlight on the grim health statistics of poor countries, and the international community has committed itself to achieving the eight Millennium Development Goals (MDGs) by 2015, three of which directly relate to health. Against this backdrop—and at a time when globalization has increased the risk of having isolated outbreaks of diseases such as SARS and avian influenza explode into global pandemics—funding from both traditional and new sources has increased significantly. Indeed, development assistance for health has risen steadily since 1990 from about $2 billion to close to $12 billion in 2004 (a doubling of the proportionate share of external assistance in developing countries' health spending), with most of this increase occurring over the past five years.

Yet despite the good intentions and new investments, the world's health is still in a dire state. Since 1985, there has been a decline of 10–20 years in life expectancy in some African countries—largely because of the HIV/AIDS pandemic, which has killed 25 million people since it was first recognized in 1981. Globally, 5,000 people die from tuberculosis every day, even though it is treatable and preventable. On top of this tragic human toll, these diseases take a significant economic toll. In the hardest-hit countries, HIV/AIDS is likely to reduce national income by 20 percent by 2020, and illness and death caused by tuberculosis are estimated to cost $1.4–2.8 billion a year in lost economic growth. And the reality is that developing countries continue to face 90 percent of the global disease burden but account for only 12 percent of all global health spending. Unless deficiencies in the global aid architecture are corrected and major reforms occur at the country level, the international community and the countries receiving the aid risk squandering this historic opportunity to improve the health of poor people.

The political economy of aid

What is wrong with the global health picture? To get a better understanding of the problem, it is helpful to examine the motivations and constraints of both donors and recipients.

At the country level, governments want to ensure an effective health system, and to do that, they must collect sufficient revenues in a manner that is sustainable, equitable, and efficient. They must pool health risks and purchase services so that they can provide their citizens with a package of essential services and also ensure financial protection against the costs of catastrophic illness. From a rational point of view, this means that governments should fund or subsidize those health services that qualify as basic public and merit goods. They should also, as a matter of basic equity, finance services for the poor and, ideally, provide their entire population with financial protection. An important element in these efforts is figuring out how to purchase health services efficiently, because efficiency gains constitute an additional source of revenue. External assistance from donor countries is one of many potential sources of revenues that can help finance a basic health system and is an important source of financing in many low-income countries.

At the donor level, a different set of considerations dominates. Donor assistance is provided in many different ways, including through earmarked assistance given directly to specific countries, global health funds (that is, independent entities established by donors to focus increased aid in specific areas), and international organizations. Donor countries choose to provide funds for many different reasons, including a desire to finance global public goods, advance global health security by protecting against pandemics, demonstrate international solidarity, and promote support for domestic policy. Usually, the main obstacle facing donor countries is the need to convince their electorates that tax money spent on foreign aid is worthwhile. For this reason, donors increasingly tie financing to tangible products and results that can be readily measured. This means that health aid is often dedicated to specific diseases or interventions where there is a direct link between spending, the purchasing of services, and, sometimes, outcomes. It is much more difficult to persuade people to support aid for health systems, health financing, and general budget support. These realities of foreign aid and the shortcomings of global health governance create a disconnect between donor contributions and the needs of countries. They may not only prevent aid from being channeled to the countries that need it most but also often interfere with countries' preferred funding methods.

As a result of these considerations, needs are going unmet and health spending efficiency and levels remain well below the thresholds needed to achieve the MDGs. Low-income countries spend some 5 percent of their GDPs on health, whereas middle-income and high-income countries spend about 6 percent and 10 percent, respectively (see Table 1). In exchange-rate-based U.S. dollars, per capita total health spending was $22 in low-income countries and over $3,000 in high-income countries. And even though official development assistance (ODA) increased to 0.33 percent of gross national income (GNI) in 2005 after a decade of decline (see Chart 1), this still falls well short of the 0.7 percent of GNI that developed countries have pledged. It also falls short of the 0.54 percent of GNI that the Millennium Project estimates will be necessary to achieve the MDGs. On the positive side, development assistance for health increased from 4.6 percent of ODA in 1990 to 15 percent in 2004. Most of the significant increases in development assistance for health come from bilateral donors, other multilaterals, and private foundations, with much of the aid funneled through recently established independent global health funds. In contrast, contributions from development banks and specialized UN agencies have been relatively flat (see Chart 2).

Chart 1. Unmet needs

Chart 2. New sources of health money

Problems at the country level

Low and inefficient spending, however, is only the tip of the iceberg. There are three other reasons why low-income countries—especially those in Africa—might not be able to finance the basic health services and financial protection needed to achieve the health MDGs.

First, over 60 percent of total health spending is out of pocket in low-income countries; this figure is 20 percent in high-income countries. In Africa, out-of-pocket spending accounts for almost 50 percent of total health spending, on average, and in 31 African countries, it accounts for 30 percent or more of total health spending. Out-of-pocket spending is one of the most regressive and ineffective sources of health sector financing for the poor because it denies individuals the benefits of income redistribution, risk pooling, and financial protection.

Second, social health insurance becomes increasingly important as a source of health spending as countries get richer, but for low-income countries it amounts to only 2 percent of total health spending. This small share raises questions about whether social health insurance has the potential to become a viable mechanism for risk pooling in low-income countries, especially given the large share of informal employment in most of them.

Third, external assistance accounts for some 7 percent of all health spending in low-income countries and is not an important source of health financing for other country income groups. However, these data mask important differences among countries and regions. For example, external assistance plays a much more significant role in health sector financing in Africa than elsewhere, accounting on average for some 15 percent of all health spending. In other regions, it accounts for less than 3 percent. Of the 23 countries for which external assistance accounts for more than 20 percent of all health spending, 15 are in Africa. Furthermore, it is important to keep in mind that external assistance accounts for 55 percent of all external flows to Africa. In the five other developing regions, remittances and foreign direct investment account for the bulk of external flows, with external assistance accounting for only 9 percent. Such a heavy reliance on external assistance to finance health and other services has obvious implications for sustainability. It also affects these countries' ability to plan for the long term.

As expected, differences in countries' capacity to mobilize domestic revenues mirror their expenditure patterns. As shown in Table 2, low-income countries mobilize only 18 percent of their GDP from domestic resources. This share rises as countries' incomes increase. The same pattern applies to social insurance revenues. Low-income countries collect less than 1 percentage point of this total from social insurance taxes.

Table 2
A narrow revenue base

Low-income countries are finding it difficult to collect taxes that could be spent on improving health care.

(average central government revenues, percent of GDP, early 2000s)

security taxes
Sub-Saharan Africa
Central Europe, Baltics, Russia and
other former Societ republics
Middle East and North Africa
Asia and Pacific
Small islands (population <1 million)
Income level
Low-income countries
Lower-middle-income countries
Upper-middle-income countries
High-income countries

Source: Gupta and others (2004).

The levels of expenditure and revenue mobilization in many poor countries fall short of the amounts that are needed to achieve the MDGs or to purchase the $34 per capita spending target recommended by the World Health Organization's Commission on Macroeconomics and Health. Some 50 low-income countries currently spend less than this $34 target. Even if these countries could improve their domestic resource mobilization efforts by 1–2 percent, as suggested by the Commission, they would still need massive increases in external assistance to improve and broaden their health systems. Unfortunately, however, money alone is insufficient. Changes will be needed in the global aid architecture, and countries will need to improve their capacity to absorb aid as well as their spending efficiency, irrespective of the source. Increased aid flows must be accompanied by improved aid effectiveness and quality.

The global aid quagmire

Some of these problems with the aid architecture stem from a lack of global governance and overlapping mandates. Other problems have their roots in the methods and instruments used for aid delivery. Problems at the country level and the inherent complexities of the health sector complicate matters further.

At the global level, there is simply no one in charge. Although more than 100 major organizations are involved in distributing health aid, no one has been mandated to take the lead. In fact, even a clear delineation of mandates and roles for donor organizations is lacking. There are also no mechanisms to ensure that countries live up to their aid commitments and to help donors and countries coordinate the hundreds of channels for official and private aid flows. Furthermore, there is a pressing need to improve aid predictability and longevity, harmonize donor procedures, and align these procedures with country systems.

Over the past 10 years, there have been profound changes in the way aid is being financed and distributed. Private foundations and global funds—such as the Bill and Melinda Gates Foundation; the Global Fund to Fight AIDS, Tuberculosis and Malaria; and the Global Alliance for Vaccines and Immunizations—have entered the scene with large amounts of grant money and currently provide about 15 percent of all development assistance for health. Much of this assistance is distributed to countries on the basis of an individual application process rather than on the basis of greatest need.

The external assistance system is also challenged by the plethora of aid instruments and modalities. Aid is often unpredictable, volatile, and short term, which makes it difficult for recipient countries to budget and plan. The donor community has done an especially poor job of helping countries prioritize their efforts to reach the MDGs. The aid volume needed to achieve them will not be forthcoming in the near future, and many countries may be more than 20 years away from being able to replace expenditures that are currently being financed by aid with domestic funding. Donor disbursements fall short of commitments. In addition, aid is often earmarked for specific diseases and interventions that may not be well aligned with national epidemiological needs. This means that countries are spending money on programs that do not reflect their most urgent priorities. What is more, the program-specific nature of much aid encourages the development of separate delivery and financing silos and precludes the development of a holistic approach to health systems and sustainable financing at the country level. When the bulk of aid is directed to "donor darlings," the achievement of the MDGs at the global level is compromised. Aid distribution that is often based on different administrative procedures and budget cycles also results in high transaction costs for both donors and countries. Finally, aid instruments do not take economic shocks into account, and the lack of a framework for measuring results means there is little donor and country accountability.

Similarly, at the country level, countries are limited in how much aid they can absorb because of poor governance, weak public sector management, weak institutions, shortages of managerial and skilled health workers, poor policies, and a limited ability to raise domestic revenues. These challenges make it difficult to put both foreign aid and domestic resources to good use. About half of all donor assistance is currently off-budget, and a significant share does not enter into the balance of payments. Countries, on average, receive only about 20 percent of ODA in the form of general budget support that they can use for spending in areas that they themselves deem to be of high priority. As a result, governments often reduce their own spending in areas favored by donors, thereby reducing the "additionality" of foreign aid for these specific purposes. As with donor flows, there is very little accountability—few countries have effective monitoring and evaluation systems in place.

If those problems were not enough, the health sector itself is inherently more complex than other sectors, for the following reasons:

  • The bulk of the funding needed in the health sector is for long-term recurrent costs. This raises issues of sustainability because traditional donor funding is geared toward short-term investment costs. Countries need to figure out how to create adequate fiscal space in their budgets for health spending, not least because the health sector is critical in terms of both its share of the public budget and its role as a major source of public employment.
  • There are numerous non-health-related factors that affect health outcomes, necessitating complex cross-sector approaches.
  • Individual behavior plays a critical role in health outcomes and is very difficult to influence or change.
  • Measuring health outcomes—other than births and deaths—and attributing causality to specific factors is inherently complex.
  • Well over 100 major organizations are involved in the health sector, globally and nationally—far more than in any other sector.
  • The private sector plays a substantial, often predominant role in both the financing and the delivery of health care services and is often absent from the policy debate.
  • Insurance markets and the health sector more generally require complex regulatory frameworks.
  • The costly financial protection element of health financing is largely unique to the health sector (except for a few standard social protection programs such as pensions, unemployment insurance, and social assistance) and creates difficult trade-offs among competing health objectives for resource-constrained governments.

What next?

Unless the efficiency of the global aid architecture is improved and countries enhance their ability to put aid to good use, the massive investment in health that is currently taking place will not deliver the improvement in the health of the poor that everybody is striving for. Failure to achieve results might compromise the future willingness of donors to provide assistance for improving global health. Efforts to improve aid effectiveness have been undertaken by the OECD's Development Assistance Committee, and many individual donors are trying to harmonize their procedures with those of other donors and international organizations and to align administrative processes with those of recipient countries. But there is still a long way to go.

What recipients need to do. Developing countries should challenge donors who refuse to align their contributions with national priorities. But the countries themselves must also make greater efforts to improve public sector management. This will require a new focus on governance and transparency. Countries must improve their financial and procurement systems and should seek to better integrate specific sectors with their overall macroeconomic framework. Without effective public sector management, including sound sectoral policies, procurement processes, and financial management systems, donors will not be able to support country-owned programs through general budget support. Above all, countries as well as donors must be held accountable for their results. Countries should also build up their ability to raise money through taxes and more generally make public spending more efficient. Countries that are at war or plagued by civil strife face particular challenges, as do countries emerging from conflict. Countries should base their health spending decisions on cost-effectiveness as well as on principles of equity, efficiency, and sustainability and not on buzzwords, magic bullets, and flavors of the day that are promulgated by some donor organizations. Countries will need more technical assistance to improve the quality of their health care decisions, and both governments and donors must make a long-term commitment to change. Leadership at the highest level of government is essential.

What donors need to do. Beyond the question of overall aid levels lies the challenge of enhancing the efficiency of aid by improving its predictability and longevity and getting the mix of instruments right. Donor governments will need to persuade their taxpayers to provide more aid as general budget support rather than, as is currently in vogue, earmarking it for specific diseases or interventions. This will not be easy. Similarly, better mechanisms are needed to get donors to live up to their aid commitments. The level, quality, and deployment of aid need to be revamped. How this will happen is unclear. But stronger leadership from the Group of Eight, the European Union, the OECD, and large multilateral organizations is key. Better documentation of good practice and a global evidence base will be critical in developing a new results-oriented culture. Technical assistance should be targeted to help countries improve their public expenditure management and develop effective health plans that are linked to their macroeconomic frameworks. Donors must be held accountable through new mechanisms that could help ensure that more global aid is allocated according to need rather than to domestic political considerations, be it in the form of countries chosen (the "donor darlings") or services supported. There is no global plan to assist the "aid orphans." Donors are making serious efforts to deal with many of these deficiencies, but many fundamental questions have not been resolved yet.

It is hoped that this current window of opportunity to improve the health of the world's poor will not close before real results have been achieved. There is too much at stake, for both humanitarian and global security reasons. But unless the global community learns how to reconcile national interests with global public needs, and unless governments and donors improve aid effectiveness and achieve results, the plight of the world's poor will continue to be in question.


Gottret, Pablo, and George Schieber, 2006, Health Financing Revisited: A Practitioner's Guide (Washington: World Bank).

Gupta, Sanjeev, and others, 2004, "Foreign Aid and Revenue Response: Does the Composition of Foreign Aid Matter?" in Helping Countries Develop: The Role of Fiscal Policy, edited by S. Gupta and others (Washington: International Monetary Fund).

Millennium Project, 2005, Investing in Development: A Practical Plan to Achieve the Millennium Development Goals (United Kingdom: Earthscan).

Wagstaff, Adam, and others, 2006, "Millennium Development Goals for Health: What Will It Take to Accelerate Progress?" in Disease Control Priorities in Developing Countries, Second Edition, edited by Dean T. Jamison and others (Washington: World Bank and Oxford University Press).

World Bank, 2006, World Development Indicators 2006 (Washington).

——— and International Monetary Fund, 2006, Global Monitoring Report 2006: Strengthening Mutual Accountability—Aid, Trade, and Governance (Washington).

World Health Organization, Commission on Macroeconomics and Health, 2001, Macroeconomics and Health: Investing in Health for Economic Development (Geneva).

World Health Organization, 2006, World Health Report 2006 (Geneva).

George Schieber is Health Policy Advisor, Lisa Fleisher is a Public Health Specialist, and Pablo Gottret is a Lead Economist in the World Bank's Human Development Network.
Table 1. Rich in health