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close this bookHealth Economics for Developing Countries: A Survival Kit (London School of Hygiene and Tropical Medicine, 1998, 134 p.)
View the document(introduction...)
View the documentPublication Series - Health Policy Unit
View the documentAcknowledgements
View the documentPreface
View the documentChapter 1: Health Economics and its Contribution to Health Planning
View the documentChapter 2: Economic Development and Health
View the documentChapter 3: Financing Economic and Health Development
View the documentChapter 4: Health Care: the State versus the Market
View the documentChapter 5: Demand, Supply and the Price System
View the documentChapter 6: Concepts of Economic Efficiency
View the documentChapter 7: Inputs, Resources and Costs
View the documentChapter 8: Outputs, Health and Health Indicators
View the documentChapter 9: The Techniques of Economic Evaluation
View the documentChapter 10: National Accounts and the Health Sector
View the documentChapter 11: Health Sector Finance and Expenditure
View the documentChapter 12: Sources of Finance for the Health Sector
View the documentChapter 13: Budgetary Procedures: Budgetary Reform and Programme Budgeting
View the documentChapter 14: Approaches to Financial Planning: Resource Allocation Planning and the Financial Master Plan
View the documentSelected Bibliography
View the documentGlossary
View the documentBack Cover

Chapter 14: Approaches to Financial Planning: Resource Allocation Planning and the Financial Master Plan

1. The Main Issues

Financial planning takes place within the overall context of health planning, and assists with the following elements of the planning process:

- reviewing present and past expenditure patterns and financing mechanisms of the health sector

- estimating the costs and effects of proposed changes to the health sector to determine whether they are worthwhile

- determining the preferred pattern of resource allocation among population groups, geographical areas and services

- reviewing ways of raising money to obtain the required resources

- translating health priorities and programmes into the budget allocations of the agencies and institutions delivering health and health-related services

- monitoring budgets and controlling expenditure

- producing financial information for decision makers.

Financial planning has thus both a long-term and a short-term component. Long-term financial planning is most concerned with the next 5-15 years, to ensure that current policies concerning the development of the health sector are likely to be affordable and that they do not lead to a situation (such as an increase in hospital capacity or manpower) that cannot be afforded within that period. Short-term financial planning is most concerned with the next 1-3 years, to ensure that plans are translated into action, that costs are estimated, budgets drawn up and expenditure monitored.

2. Resource Allocation Planning

Resource allocation planning has been developed to support primary health care, and is an indicative planning exercise in which priorities are clearly established and resource targets are set for the various elements of the health service. This planning approach seeks to highlight the existing inequalities and imbalances in health care (e.g. between curative and preventive services, between levels of the health system, between geographical areas, between population groups), to support the process of planning their reduction and to allow progress to be monitored by comparing actual and planned expenditure. It, therefore, evaluates the implementation of primary health care plans and assesses their impact on the structure of health services, with specific consideration of the equity of resource allocations.

Its basic assumption is that only by the appropriate allocation of new resources can the pattern of resource allocation be re-shaped. The existing health infrastructure cannot be substantially altered or reduced and so it is only by allocating new resources to primary health care activities that they will receive funding.

The steps of resource allocation planning are:

- assessment of the development expenditure that may be allocated to the health services in the plan period

- assessment of the likely increase in the Treasury allocation to the health ministry's recurrent budget in the plan period

- the division of these resources within the health service both to meet necessary budget demands and, especially, to address primary health care priorities

In order to improve the equity of resource allocation, the division of resources between geographical areas should be based on population totals; weighted, if possible, by various 'need' factors (such as age and sex) and with respect to the differential costs of care in different areas, patient flows across administrative boundaries etc.

Inevitably the development of plans and budgets in this process involves much negotiation - both among government departments and within the health ministry. It is both a political and a technical exercise. It also requires reforms of budgeting procedures such as: re-structuring to reflect plans and priorities, more flexibility and decentralization of budgetary authority (see Chapter 13).

3. The World Health Organization Approach to Financial Planning

The WHO approach to financial planning falls within the Managerial Process for National Health Development (MPNHD). The MPNHD proposes a systematic way of formulating and implementing a strategy for achieving 'health for all by the year 2000' (HFA2000). The stages of the MPNHD comprise:

- the formulation of national health policies - comprising goals, priorities, and main directions towards priority goals, that are suited to the social needs and economic conditions of the country and form part of national social and economic development policies

- broad programming - the translation of these policies, through various stages of planning, into strategies to achieve clearly stated objectives and wherever possible, specific targets

- programme budgeting - the preferential allocation of health resources for the implementation of these strategies

- the master plan of action - resulting from broad programming and programme budgeting and indicating the strategies to be followed and the main lines of action to be taken in the health and other sectors to implement these strategies

- detailed programming - the conversion of strategies and plans of action into detailed programmes that specify objectives and targets and the technology, manpower, infrastructure, financial resources and time required for their implementation

- implementation - the translation of detailed programmes into action so that they come into operation as integral parts of the health system; the day-to-day management of programmes and the services and institutions for delivering them and the continuing follow-up of activities to ensure that they are proceeding as planned and are on schedule

- evaluation of developmental health strategies and operational programmes for their implementation, in order progressively to improve their effectiveness and impact and increase their efficiency

- reprogramming, as necessary, with a view to improving the master plan of action or some of its components, or preparing new ones as required, as part of a continuous managerial process for national health development

- support, in the form of relevant and sensitive information, for all these components at all stages.

The process is shown in Figure 21.

Financial planning is part of the stage of 'programme budgeting' which here has a much broader definition than that commonly used (see Chapter 13). Programme budgeting, as indicated in the Figure, contributes to all stages of the MPNHD. Long-term financial planning forms part of 'broad programming', and shorter-term financial planning of detailed programming, implementation and reprogramming.

Shorter-term financial planning is closely tied up with project planning and with the annual budgeting cycle. It is thus frequently undertaken by many countries. Long-term financial planning is much more rare, and for this and other reasons, WHO has placed particular emphasis on it.

Long-term financial planning provides a framework for planning strategies to achieve HFA2000 and to assess the financial feasibility of proposed health programmes. The end result of long-term financial planning is a financial master plan which forms part of the master plan of action produced during the broad programming stage of the MPNHD.

Figure 21: Managerial Process for National Health Development

4. The Financial Master Plan (FMP)

Four main steps are involved in the development of an FMP:

- the base line: establish what is spent on the health sector and how it was financed for a recent year or years

- the expenditure estimates: make broad estimates of the cost of the HFA plan plus any other commitments

- the income estimates: project existing sources of finance

- reconciling income and expenditure: identify the gap between expenditure and income estimates, and see if it can be tilled by new or existing sources of finance; reduce any remaining gap by adapting the costed plan to the finances likely to be available.

The fourth and final step is the most crucial, requiring often not only the mobilization of extra resources but also painful decisions on what can and cannot be afforded.

It is important to note two features that WHO considers as essential to the financial master plan:

- it is a plan for the use of all health sector resources - not merely the new or additional resources that are expected to become available

- it is a plan for the entire health sector - not merely the government part of it.

5. The Experience of Long-term Financial Planning

The approach recommended by WHO for the financial master plan is very new and there are thus very few examples yet available of financial master plans. However, some countries have undertaken long-term financial planning, even if not incorporating all the elements of a financial master plan. In particular, this financial planning may differ from a financial master plan in one or more of the following ways:

- it may not be explicitly oriented to achieving HFA2000

- it may take a shorter time span (e.g. ten years, for instance to 1995)

- it may restrict itself to only one element of the health sector, such as the Ministry of Health

- it may concentrate only on one element of the financial master plan, such as costing the strategy for HFA2000.

Nonetheless, this experience of long-term financial planning is of considerable use because it illustrates the methods required to make a financial master plan and demonstrates many of the practical problems.

Five examples of long-term financial planning, from Jamaica, Malawi, Ethiopia, Burkina Faso (Upper Volta) and Sweden, are described briefly below.

5.1 Jamaica

An analysis of health sector expenditure in Jamaica, designed to obtain useful information for analyzing policy, planning and management problems, led on to building up estimates of the future level of spending required to achieve a given level of health care and comparing this with projections of future resource availability. The objective of this analysis was to throw light on the financial constraints that might need to be taken into account in planning.

The method adopted was to use the estimates of health sector expenditure in 1980 and to project the level of expenditure to be expected over the period 1980-2000, given certain assumptions chosen to reflect current plans and policies and foreseeable changes in the economic, demographic and technical environment. Available revenue was also projected, based on assumptions on total population growth, growth of GDP per capita and the relationship of government health expenditure and total health expenditure to GDP.

This paper on Jamaica discusses a most important point: the extent to which the assumptions turned out to be valid and the extent to which the analysis was useful in the light of Jamaica's changing economic circumstances in the early 1980s.

See, Cumper G (1986) Health sector financing: estimating health expenditure in developing countries EPC Publication No. 9, London School of Hygiene and Tropical Medicine.

5.2 Malawi

In 1984, as part of the process of developing a new national health plan, the Ministry of Health (MOH) of Malawi undertook a resource analysis for the period 1984-1995. The objective of the analysis was to provide a framework that would assist the MOH to make decisions on the future distribution of available resources across the different services it aimed to provide by 1995. The analysis related only to the MOH, but reflects an approach to long-term financial planning for the MOH that is useful for a financial master plan.

The resource analysis was built up through the following steps:

Step 1:

analysis of the current (1984) service provision and of the resources expended on these services in terms of manpower, facilities and finance

Step 2:

identification of all objectives and targets of the MOH for the period up to 1995 covering both health status and the health delivery system

Step 3:

forecast of financial resources likely to be available to the MOH by the year 1995 based upon assumptions about Government allocations to the MOH, revenues to be made from fees, efficiency savings and donor contributions

Step 4:

comparison of total 1995 financial requirements to achieve targets with forecasted available funds. Identification of the resource gap between the funds needed and those likely to be available

Step 5:

examination of options for reducing the identified resource gap including adjustments to target manpower standards and to bed utilization levels. Identification of the reduced resource gap

Step 6:

analysis of different patterns of service delivery which could be considered within the resources forecast to be available.

The gap identified between expenditure and revenue availability clarified the choices facing the MOH on where to place additional resources.

See, Ministry of Health, Malawi (1984) Resource Analysis 1984-1995 Unpublished report.

5.3 Ethiopia

The final three examples, from Ethiopia, Burkina Faso and Sweden, concentrate on the cost side of a financial master plan, aiming to establish the resources required to implement current policies to provide a guide to whether the policies are financially feasible.

The objective of long-term forward planning in Ethiopia is to allocate available resources in ways that most effectively serve policy goals of expanded and equitably distributed health services. The financial planning component identified resource requirements and sources of finance for the provision of health services. The cost analysis was done by calculating the recurrent and capital cost of different levels of facility, assessing the degree and nature of under-provision or inadequacy of current services and then calculating the cost of the improved level of service required. Analysis of sources of finance consisted of distributing the resources required between different sources - community, foreign assistance and government - assuming that the level of finance required would be forthcoming. The plan implied an (unrealistic) 10% average annual growth rate in government recurrent expenditure and an 11% increase in annual capital expenditure.

See, Ministry of Health, Ethiopia (1984) Financial Planning for Health Care Development in Ethiopia World Health Statistics Quarterly 37 (4).

5.4 Burkina Faso

A study in Burkina Faso (Upper Volta) raised the question of whether HFA2000 was feasible there from an operational and financial point of view, in order to encourage the search for alternative and more realistic policies. The study calculated the capital and recurrent costs of providing a health infrastructure in a province (buildings, manpower, drugs, transport, primary health care, vaccination, evaluation) and then projected this for the whole country.

See, Merkle A (1982) The Cost of Health For All. A Feasibility Study from Upper Volta. Eschborn.

5.5 Sweden

The Swedish study calculated the operational costs and manpower requirements for the Swedish health care system, 1985-2000, in order to evaluate future resource requirements under different assumptions concerning changes in the health care structure and economic development. This approach to resource requirements differs from the others discussed above in that it is based on a computer model that starts with change in the population structure, calculates the service level required, taking account of changes in the quality and pattern of care, then allows for changes in wage and productivity levels, ending up with total manpower needs and total recurrent costs.

See, Lagergren M (1986) Sweden's plan for 2000. World Health May 1986.

6. Major Issues Arising

A number of important issues arise from this consideration of long-term financial planning.

First, should the expenditure projections be based on health programmes (for instance for maternal and child health care, the elderly) or on health facilities (for instance hospital beds, health centres)? The former can more easily be associated with the health needs of the population and with plan objectives stated in terms of health status. However, health programmes may cross-cut the basic institutional and accounting elements of the health sector, namely health facilities. Good information on health programme expenditure is rarely available and thus most expenditure projections are based on the development of physical facilities rather than health programmes.

Second, at what stage should resource constraints and evidence of the opportunity cost of proposals be introduced into the analysis? Plans are frequently based on over-ambitious policies and financial planning may reveal an enormous gap between expenditure projections and revenue projections. There is a strong case for acknowledging the importance of resource constraints at the start of any planning process.

Third, to what extent are detailed expenditure and revenue projections worthwhile and to what extent can simplifying assumptions be used? For example, it might be possible to assume that, say, for every 1% increase in GDP, total health expenditure increases by 1.2%; such assumptions might be based on past government/health expenditure trends and sensitivity analysis could be undertaken to establish the variation in projections resulting from differing simplifying assumptions.

And fourth, long-term planning has proved vulnerable to political and economic changes, even in the more stable countries of the world. Between 1985 and 2000, many unexpected events may happen that will overthrow the projections of financial planners. To what extent, and how, can long term financial plans be protected against these shocks? There is a need for:

- simplicity: simple methods of financial planning so that planners do not spend many months refining a financial plan that is then overturned by unexpected changes in the economic or political system

- flexibility: introducing flexibility into financial plans, so that changes do not require them to be drastically revised. For instance, different scenarios might be used for the expenditure and revenue projections, to test whether health policies are vulnerable to changes in the forecast levels.