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Policy Framework for the Introduction of Budget Norms for Health Sector

Budget at the Sub-National Level and for Revision of the Expenditure

Assignment in the Lao PDR: A Concept Note

Jean-Marc Lepain

Intergovernmental Fiscal Advisor

Public Finance Specialist

March 1st, 2010

Based on the new Budget Law approved by the National Assembly in December 2006, and on the

Prime Minister’s Implementation Decree of April 2008, the Ministry of Finance is planning to change

the budget formulation procedure by introducing budget norms. The objective of the present

Concept Note is:

(a) To define the general policy framework for the introduction of sector budget norms, including its

relation to the more global objectives of the Budget Law such as promulgation of principles for better

efficiency and transparency and introduction of a General Purpose Grant to finance all provincial

recurring expenditures;

(b) To identify issues associated with the health sector expenditure assignments such as vertical and

horizontal responsibilities for service delivery, service financing, management (planning, budgeting,

budget execution, project implementation management control and reporting) and issuance of

regulation;

(c) To define the general principles for the architecture of sector budget norm formulae in relation to

provinces, districts and the health facilities associated to these different levels of service delivery;

(d) To present the best options for the selection of indicators, cost units and weighting ratios to be

used in the design of the sector budget norms formulae;

(e) To identify data collection requirements for the regular updating of the budget norm formulae

and their application to budget formulation at the sub-national level;

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1. Background

1.1. Legal Framework

The new Budget Law considers the implementation of budget allocation norms essential as a basis

for recommending targets for the budget allocation to each provinces and each sector within the

framework of the consolidated state budget and as a key component of a formula based system of

intergovernmental transfers. The Prime Minister’s Implementation Decree (No 25/PM 208) provides

further guidance and gives to the Ministry of Finance full authority for developing (a)

intergovernmental transfers mechanisms through general and earmarked grants and (b) budget

norms for allocation of recurrent and investment expenditures in close cooperation with sector

ministries, the Ministry of Planning and Investment and PACSA.

Article 3 of the Revised Budget Law defines budget norms as “recommended targets in determining

allocations to sectors and localities based on characteristics, standard of works and specifics of each

sector and locality” and Article 6 stipulates that “Budget allocations to sectors and localities shall be

based on the budget allocation norms”.

The Prime Minister’s Implementation Decree No 25/PM dated 14-02-2008 provides more details.

Article 11 assigns the responsibility of preparing budget norms to the Ministry of Finance and

implementation will be conducted through another Prime Minister’s Decree.

Article 19 of the Prime Minister’s Decree distinguishes between budget norms for recurrent

expenditures and budget norms for investments.

Article 20 defines the two types of grants on which the Intergovernmental Transfer System will be

based. A “General Purpose Grant” will be established for the financing of provincial recurrent

expenditure. “Earmarked Grants” will be allocated for “the implementation of programs and

investment projects assigned in addition by the Government” and for “resolution of emergencies and

urgent issues relating to natural disasters, defense, security, and epidemics not included in the

localities’ annual budget”. It is probable that the scope of earmarked grants will need to be

broadened to cover needs of some provinces in excess of what they would received from a strict

application of sector budget norms and aggregated budget norms.

Article 23 mentions that a new revenue and expenditure assignment between provinces, districts

and cities will be prepared by the Ministry of Finance. The article mentions specifically “(the) sharing

of responsibilities for investments and development of general education public schools, more

specifically of kindergartens, primary and lower secondary schools”. This article provides the legal

basis for modifying, if necessary, the expenditure assignment and supervisory duties between District

and Provincial Education Offices, and for introducing school block grants.

Within the framework of the Budget Law, a new Prime Minister Decree will be issued for the

introduction of budget norms. It is assumed that a new decree will cover budget norm

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implementation for the Education sector and the Health sector. The decree will (a) modify some of

the technical provisions of the former decree if necessary, (b) provide budget norm formulae at the

disaggregate level for the two sectors and (c) reflect policy principles that will be established in more

detail by the policy framework for budget norms and intergovernmental transfers and (d) clarify the

expenditure assignment and modify if necessary responsibilities for planning, budgeting, managing

and reporting the utilisation of funds allocated to each sector at the sub-national level.

In a second stage, the Ministry of Finance will (a) extend the budget norm system to other sectors

and (b) prepare aggregated budget norms that will become part of the system of intergovernmental

transfers.

1.2. Sector Profile Summary

The health indicators of the Lao PDR have been improving steadily over the past three decades but

remain well below international standards. Life expectancy has risen from 51 years in 1995 to 61 in

2005 (Census 2005) and infant and mother mortality has dropped significantly while remaining still

very high compare with more advanced countries. There has also been significant progress in the

control of malaria and tuberculosis. The country has been less successful with its immunization

programmes while improvement in access to clean water and sanitation remains slow. Access to

curative medicine for the poor remains a concern and health facilities tend to provide services to the

better-off group of the population involving significant geographic disparities.

The lack of systematic data collection and the weakness of the reporting system between provinces

and MOH is a serious obstacle to the development of more effective policies. Financial Management

Systems in the health sector remain weak and do not ensure transparent execution and effective

monitoring of public spending.

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1.3. Trends in Health Sector Financing

Lao PDR’s public and private health spending is low compare with that of other Asian countries.

The total recurrent health budget represents an allocation of $10.31 per capita. Although this

amount is an improvement compared to the $8.70 of 2002 the health budget has fallen from 2% of

GDP in 2002 to 1% and the government share is less than half of the amount with $4.71 per capita.

This reflects the fact that households are shouldering an increasing share of health expenditure. In

2003, WHO estimated that 60% of national health expenditure consisted of household expenditure,

30% consisted of donor funding and 10% consisted of domestically financed government

expenditure. Although today new data is not available, there is no reason to believe that the trend

has improved. The health budget is struggling to keep pace with inflation and a population growth of

2.4% per year, while donor assistance grows at a rate well below the GDP. Without revising its

current priorities, the Government, in order to avoid a funding gap for staff and salaries had no

choice than to limit the recruitment of new staff and to decrease the share of non-wage expenditure

in the recurrent budget.

The health budget has experienced a negative trend from 2004 to FY2007/09 going from 4.1% of the

total budget to 3.8%. This has been mostly due to the fact that donor assistance while still remaining

very high is not growing at the same pace as the GDP and government revenues. In practice the

Government share in the health budget has grown from 0.33% of GDP to 0.40%. FY 2008/09 saw a

major surge in the health budget, due largely to an important increase in donor assistance (+154%), a

major contrast from the following year (-34%). The health budget has risen from 3.8% of total budget

to 6.3% and from 0.8% of GDP to 1.25%. However, the Government share of the health budget has

remained stable at 0.40% of GDP.

Main Statistics

Central hospitals 4

Curative centres 3

Regional hospitals 4

Provincial hospitals 12

District hospitals 127

Health centres 793

Village drug kits 5561

Private clinics 254

General Practitioners 4300

Specialized doctors 2000

Post-graduate health workers 600

Nurses and paramedics 4900

(Source: MPI, Statistics Year Book 2008)

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Based on FY 2008/09 figures, recurrent expenditures represent only 30% of the health budget.

However 84% of the investment budget is financed by donors and an important portion of these

expenditures cover recurrent routine expenditures. Funds allocated to the provinces represent only

33.3% of the Health Budget, but again we can assume that a significant part of the centrally managed

investment budget covers provincial recurring expenditures.

In FY2009/10, Nam Theun 2 revenue provides 1.2 M USD representing 2% of the health budget.

Because of a significant decrease in donor assistance (-16.4 M USD) the health budget dropped to

5% of the total budget and to 1% of GDP, but the government share raise from 0.40% of GDP to

0.46%.

Health Budget Trends

2005/06 2006/07 2007/08 2008/09 2009/10

(actual)

Health Budget/total Budget 4.06% 3.71% 3.85% 6.33% 5.06%

Health Budget/GDP 0.68% 0.58% 0.79% 1.25% 1.00%

Recurrent Budget/Health Budget 42.53% 47.26% 44.20% 28.17% 38.30%

Government Share/Health Budget 47.93% 54.27% 50.20% 31.91% 45.75%

Health Government Share/GDP 0.33% 0.31% 0.40% 0.40% 0.46%

It is clear that the current level of funding is insufficient for reaching the objectives of the Millennium

Development Goals. However, taking advantage of the preparation of the 6th Five Year Development

Plan, it is important to develop stronger macro-fiscal objectives linked to human development

objectives.

1.4. Horizontal imbalance

There is a very high horizontal imbalance in the health sector compared to other sectors. While for

the general provincial budget the imbalance indicator is of 2.8 for in FY 2008/09 (Xekong receive 2.8

times more per capita than Vientiane Capital), the imbalance indicator in the health sector is 4.9

(Khamouane receives 4.9 times more per capita than Champasak). Six provinces, representing 52.5%

of the total population receive less than the national average per capita, indicating that provinces

with large population tend to allocate less to their health budget.

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There is no correlation between the health allocation per capita and the poverty index. Among the

group of six provinces that receive less than the national average, two are among the richest

(Vientiane Province and Champasak with a respective poverty index of 1.17 and 1.18), while the

other four are among the poorest (Saravanh has a poverty index of 1.54 and Houaphan of 1.52)

As user fees represent an important source of funding for hospitals, the poverty index appears as a

good indicator of their auto-financing capacity. For that reason, a total equalization of budget

allocation does not appear desirable, but a budget allocation better aligned with poverty will

represent a considerable improvement.

2. General Policy Framework for Budget Norms and Intergovernmental Transfers

The development of budget norms for the Health sector has to be put in the perspective of “The

Policy Framework for the Implementation of a Budget Norm System and a System of Unconditional

and Conditional Intergovernmental Transfers” developed by the Ministry of Finance for guiding the

development of sector norms.

The objectives of the budget norm system are defined as follows:

(1) Ensure that the rational distribution of fiscal resources across sub-national jurisdictions is

done in a transparent equitable manner;

(2) Ensure that fiscal resources allocated to sub-national jurisdictions (provinces and

districts) are administered in line with the Government development objectives.

(3) Ensure that all provinces and districts receive sufficient funding to deliver public services

with equal standards according to the mission given to them by the central Government and

in a manner that takes into account the characteristics of the population to be served and

the cost of service delivery in each geographic area;

(4) Improve financial management at the local level, including planning, budget formulation,

budget execution and reporting;

When applied to the health sector these principles mean:

Correcting existing vertical imbalance will require the introduction of a sector ceiling that will

apply to both the central government and the provinces;

Existing imbalance in fund allocation between provinces must be corrected on the basis of

existing health facilities and not on the basis of population;

Equity of fund allocation between districts must be ensured;

Mechanism for a better alignment of sub-national planning and budgeting with national

priorities and policies must be put in place;

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More unified types of services must be provided across provinces with a list of services that

should be delivered in all provinces and all districts;

Other aspects of the expenditure assignment must be clarified;

Missions of health facilities must be aligned with the fiscal capacity of the Government;

The Government must ensure that sufficient funding is channelled to local health facilities for

them to accomplish their mission within the constraints of the fiscal capacity of the provinces

and of the central Government.

A clear policy regarding user fees and out of pocket expenditures must be put in place with

clear identification of expenditures that must be totally covered by the budget and

expenditures that must be covered partially or totally by technical revenues, with the

objective of reducing out of pocket expenditures for the poorest segment of the population.

The system will use three types of norms:

(a) Sector budget norm(s) used for the calculation of each sector budget for each province;

(b) Economic norms that provinces will use for allocating funds by economic categories to

the various types of health facilities;

(c) Economic norms that will apply to line-ministries at the central level and that will not be

part of the Intergovernmental Transfer System.

The objective is to develop a transfer system that will be based on the following components:

(a) One single unconditional transfer covering the total recurrent budget (General Purpose

Grant).

(b) A number of conditional grants to cover additional recurrent expenditure for a limited

number of provinces such as:

(i) Provinces having sectors with structural expenditure needs above the level of funding

provided by the unconditional grant;

(ii) Provinces facing temporary revenue shortfall;

(iii) Provinces having unexpected expenditure needs due, for example, to natural

calamities

(c) Conditional grants for financing large investments or specific programmes managed vertically

but implemented at the provincial level.

The calculation of the General Purpose Grant will be based on an aggregated norm formula that will

reflect the different sector components of the grant. The total amount of the General Grant will not

be less than the aggregated amount of sector budgets based on budget norms.

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The general purpose grant will be either the result of the aggregation of all sectoral budget norm

formulae or a more aggregated formula that will not necessarily reflect the different sub-formulae.

3. Scope of budget norms

In a first stage the introduction of budget norms will cover only non-wage expenditures for MOH

central budget as well as health sector provincial budgets. However, a model will be developed in

parallel to prepare the next stage combining both wage and non-wage with the objective of

preparing comparative costing and identifying potential issues.

In practice, formulae that aggregate wage and non-wage are very similar in structure with formulae

for non-wage only. The difference lies in the level of financing associated with the cost units of the

formula such as the allocation per capita, per doctor or per medical case. Such formulae are usually

neutral on the level of staffing but also require a flexible employment policy driven by a fiscal

envelope for salary and not by the number of civil servant. Developing aggregated formulae in

parallel with non-wage formulae will tell us if the theory is verified in Lao PDR. It will give us a new

fiscal model that will tell us if such formula can be implemented without revising hospital staffing and

where the staffing gaps are.

Non-wage expenditures are defined as all line-items of chapter 12 of the budget nomenclature and

line-items of chapter 16. A more detailed review of hospitals’ budget will be necessary to see if there

is any need to include line-items from section 13.

4. Sector ceilings

The development of budget norms must start from the calculation of an earmarked fiscal envelopes.

Determining the size of the fiscal envelope available for non-wage budget norms and for aggregated

norms requires sector ceilings which are normally based on the national Medium Term Fiscal

Framework (MTFF). In the absence of a formal MTFF, sector ceilings can be determined by

percentage of GDP and percentage of the total national budget. However, MOF’s Fiscal Policy

Department is already engaged in the process of developing a MTFF and we can expect that it will

become operational by the time budget norms are implemented.

The introduction of sector ceilings in Lao PDR is a difficult issue because of the changes it requires in

current practices of budget formulation and the contradiction between provincial autonomy and the

fiscal discipline required for the implementation of national policies.

The recurrent budget is split into two fiscal envelopes: one for line-ministries and one for provinces.

Provinces get a fiscal envelope that is disaggregated by economic categories. Then provinces allocate

the envelope of each category to sectors. As a consequence it is not before February, the fifth month

of the current fiscal year, that MOF gets to know the total forecasted expenditure by sector. These

constraints imply that sector ceilings needs to be disaggregated into two sub-ceilings, one for the

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Health Ministry at the central level and one for the province. As the provinces, under the existing

budget law, are free in their allocation of funds to the sectors, and as budget norms are purely

indicative, there is no mechanism that can ensure that the total of provincial allocations to the health

sector will fit within the sector ceiling. As a consequence the health sector sub-ceiling for central

spending will be a binding ceiling while the sub-ceiling for provinces will be an indicative ceiling. This

approach weakens considerably the concept of sector ceiling as instruments of fiscal discipline and it

means that there is no mechanism to align provincial spending with national priorities.

In that context, budget norms will become the most important instrument of fiscal discipline and the

Government’s meeting or not meeting its targets will depend on how effective the fiscal discipline is

at the provincial level.

Compared to the Ministry of Education, the Ministry of Health is lagging behind in the development

of its planning and budgeting tools. There is no sector macro-model comparable to the Education

Sector Development Framework and the process of developing a MTEF (Medium Term Expenditure

Framework) based on provincial expenditure need assessment has not started yet. To understand

the role that budget norms will play in the future it is necessary to look at how the different elements

of the planning and budgeting system are linked together.

The sector MTEF is an instrument to assess expenditure needs. It must be developed in a bottom-up

approach based on a three year sector plan developed by each province on the basis of the national

sector development framework under the responsibility of MOH’s planning department. A Provincial

Multi-Year Plan will be developed using either real cost units, or indicative cost units provided by

MOH. Provincial multi-year plan will be revised every year and consolidated into the national MTEF

with the appropriate adjustment to fit the national ceiling provided by MOF. Once developed, the

MTEF will become the natural tool for revising budget norm formulae as components of the budget

norm formula will result from the aggregation of the cost units used in the MTEF.

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For the sake of budget norm preparation, in the absence of a MTFF, MOF’s Fiscal Department will

need to project sector ceilings starting from FY 2010/11 as the reference year, up to FY 2013/14.

These sectors ceilings will be entered in the macro-fiscal model that will be used for testing and

selecting budget norm formulae. The ceilings at this stage are a purely indicative and should not

represent a commitment from MOF.

Based on sector ceilings, MOF will recalculate each year budget norms using its macro-fiscal model.

The formula structure and the various ratios will remain unchanged. Only the fix amount per capita

or per staff will be adjusted.

MTFF

Sector Provincial Plan

Provincial BudgetMTEF

Fiscal Planning Process

Cost Units

Budget Norms

Sector Ceiling Provincial Ceilings

5. Staffing

The number of doctors and nurses has been identified as the main cost driver for the health sector

and we expect staffing numbers to be an important component of the different budget norm

formulae. The number of doctors and their specialisation has a direct impact on the type of service

provided, the number of patients treated and the costs associated with the treatment.

Medical staff appears to be relatively rationally distributed across provinces according to population

size. Horizontal imbalance in staff allocation exists but is mostly driven by the existence or non-

existence of medical facilities and their type. However, even when health facilities exist at the

district level they have a chronicle shortage of qualified staff, especially doctors, as it is difficult to

convince doctors and qualified nurses to work in districts. Provinces tend to concentrate qualified

staff in the provincial hospitals and allocate limited resources to the district level. However,

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provinces that allocate more health workers to the district level have better health indicators. There

is a slight bias in staff allocation in favour of smaller provinces which tend to have more medical staff

per inhabitant. It might be an indication that different norms might apply to provinces with different

population size.

The number of health workers in Lao PDR is relatively high compared with neighbouring countries or

countries with a similar level of economic development. The real problem is the uneven distribution

of staff among the different types of health facilities and the shortage of non medical staff. Most of

the sector management functions are staffed with doctors and qualified health workers either at the

Ministry of Health or in Health Provincial Offices and hospitals. Most of the planning, budget and

reporting functions are performed by medical staff, reducing significantly the number of doctors and

nurses available for providing health services. There is also a notable shortage of doctors in some

medical specialities and the ratio of nurse to doctor tends to be very high, either pointing at some

inefficiency as is the case for central hospitals or to the fact that there is a shortage of doctors in

district-level facilities.

In practice, because most districts and some provinces face difficulty in recruiting high-level and mid-

level health professionals, they fill vacancies with lower level staff, with the result that district health

facilities in aggregate have excessive numbers of low level staff, and provincial facilities have

excessive numbers of general practitioners and insufficient numbers of specialist doctors and also

some categories of mid-level health workers.

District-level facilities account for the majority of health workers. However the bulk of the staff at the

district level is mid- and low-level (88%). Doctors represent only 6% of district level staff. Health

Centres are mostly served by low- and mid-level staff, respectively 81% and 18%. (Source: WHO,

Human Resource for Health, June 2007).

In the first stage of budget norm implementation, budget norm will apply only to non-wage recurrent

cost. However budget analysis has shown that there is a very strong correlation between non-wage

expenditures and staffing. In a second stage, budget norms will apply at an aggregated level and will

cover wage and non-wage expenditures. It is expected that an aggregated formula will be neutral in

terms of volume of salaries during the first years because the formula should be designed in a way

that will guarantee the present fiscal envelope for salaries.

MOH has developed norms for the number and category of health care workers which should be

employed in each type of health facility at the provincial and district levels (though norms and

standards for regional hospitals are still under development). However these norms have been

prepared without consideration for the fiscal capacity of the Government and of the provinces and

for that reason cannot be applied. The MOH has a five year plan for progressively filling the gaps

between actual staffing and the standards set by these norms, taking account of natural attrition

rates but this plan is not cost allocated nor prioritized and cannot replace a full scale cost allocated

and prioritized sector development plan

Knowing that the misallocation of staff is one of the major problems of the health sector, this

approach has two consequences for budget norms:

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1) The number of doctors is not a sufficient indicator of financing needs. It might be necessary

to distinguish between general practitioner and specialized doctors. It might also be

necessary to include in the formula other staff. Considering that 14 position types have been

identified and considering that each position type requires different levels of qualification; it

is not possible at this stage to define the level of disaggregation required by the budget norm

formula. However our recommendation is to keep it as simple as possible.

2) It is recommended that before introducing aggregated budget formulae covering wage and

non-wage, to identify staff allocation inefficiency and to distinguish between structural

inefficiencies (shortage of doctors in some medical specialities, unwillingness of qualified

staff to work in districts) and administrative inefficiency that can be corrected.

3) The introduction of budget norms in the health sector should be conducive to a revision of

the staffing norms prepared by MOH to align them with the budgetary capacity of the

provinces. Different types of staffing norms can be considered for provinces with different

population size or different size of hospitals (based on the number of patients treated per

day, for example).

6. Capital Investment and donor funded projects

In FY2009/10, investments represent 69.8% of the sector budget with 81% of the fiscal envelope

provided by foreign assistance. In practice, there is confusion between real physical investments and

donor funded projects which often finance the routine recurrent expenditures (such as vaccines,

drugs, disease control programmes, trainings, subsidies for treating poor population, etc.)

Additionaly, Nam Theun 2 revenues are allocated via the investment budget process (around USD 1.2

M this year) and also finance a mix of capital expenditures, human capital development and health

expenditures for the poor, which for the most part are recurrent.

Additionally some donors finance directly health institutions and their contribution appear neither in

the national budget nor in the provincial budget.

This situation has several consequences:

Neither MOH, nor MOF, nor MPI know the real level of investment in the health sector either

at the national level or at the provincial level.

It is not possible to know the share of recurring expenditure in the health budget.

It is theoretically possible to know to which provinces donor funding flows, but in practice

this is never done because reporting is on a per project basis and there is no consolidation of

data.

Donor money might be spread unevenly. At the moment, we cannot tell if donor assistance

increased or decreased horizontal imbalance. If we look at the provincial budget, only nine

provinces beneficiate from donor funded project. But it is only part of the reality because the

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most important part of donor assistance is channelled through projects implemented at the

provincial level but managed centrally.

There is no legal definition of investment and without an inventory of fix assets it is

impossible to access correctly the level of funding required for maintenance.

Recommendations:

1) MPI budget should also be disaggregated by line-item or by economic categories. The most

obvious line items are: (i) physical infrastructures, (ii) medical equipments, (iii) IT equipments

and software, (iv) recurrent routine expenditures (v) training and (vi) social transfers.

2) Cost of centrally managed programmes should be reflected in provincial budget, or more

likely in health institution budgets.

3) Investment in fix asset should be limited to the maintenance capacity of the province, or in

the case of medical equipment, to their replacement capacity based on the life expectancy of

the asset.

7. Non-wage recurrent expenditures

The State Budget allocation system treats non-wage recurrent costs as a residual after salary,

investment and other non-discretionary spending are deducted from the macro budget ceiling. The

historical trends point toward a reduction of non-wage recurrent expenditures in favour of salary and

investment. As a consequence it is not possible to develop policies based on improvement in service

delivery. This does not take into account that health services have high non-wage cost for service

delivery which cannot be set up independently by the type of service provided.

The consequence of this budget formulation process is a drastic reduction in the quality of services,

lack of maintenance of existing equipments and infrastructures and less effort to reach remote

population. To conciliate the shortage of funds for financing non-wage expenditure, hospitals have

developed policies to increase revenues from user fees and profit generated by the drug revolving

fund. MOH has assigned a significant share of donor assistance to population outreach and routine

expenditure of priority programmes, such as the immunisation programmes which normally should

be fully financed by the Government. The consequence is that programmes more fundamental in

reaching the Government’s objectives are also the more dependent on external financing.

The introduction of non-wage budget norm can partially remedy this situation, but two types of

clarification are required:

Expenditures that must be financed 100% from budget funds must be distinguished from

those that require a mix of budget funds and user fees.

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Activities that must be funded by the Government must be distinguished from those that can

be funded by donors.

The recommendation is that basic infrastructure maintenance, utilities and transport should be

considered as recurrent expenditure that should be financed 100% by government funding and as

such covered by budget norms.

8. Revision of the expenditure assignment

There is a consensus that budget norms must be implemented on the basis of the existing de

facto provincial expenditure assignment. For that reason it was necessary to document

existing responsibilities for expenditure assignment at the central, provincial and district

levels as well as identifying existing and potential mismatches that can become a source of

difficulties. Clarification of the expenditure assignment is the first and fundamental step in

the design of any system of intergovernmental finance. As a consequence, this concept note

does not focus on broad structural issues such as the devolution of authority to the

provinces but rather on small technical reforms such as better design of programmes, new

accounting rules for hospitals, improved budget classification for investment, etc. These

technical reforms do not require any change in the existing legislation and can be done

incrementally.

There is a risk that the introduction of budget norm might “freeze” the existing mismatch in

the existing assignment because budget norms will be based on the existing provincial

budget which does not reflect the totality of provincial expenditures. However this risk will

not become significant until a full-fledge system of intergovernmental transfer system is put

in place. It will allow between three to five years revising more deeply the expenditure

assignment.

The expenditure assignment can be broken down in four components or dimensions: (1)

responsibility for delivering services, (2) responsibility for administering the service, (3)

responsibility for financing a service and (4) responsibility for setting standards, regulations

or policies guiding the provision of services.

Based on the review of the expenditure assignment framework conducted in February 2010

with the assistance of a World Bank expert, a number of recommendations have been

formulated for clarifying some aspects of the existing assignment of responsibilities in the

four dimensions mentioned above which might have implication for budget norms. It is

relevant for budget norm development to identify any aspects of the expenditure

assignment that might be ambiguous, in contradiction with the present Government policy

and its objectives, or the cause of misallocation of human and financial resources. In practice

the existing system is an unwieldy mix of decentralization and deconcentration of

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government activities, with donor financed projects managed in a deconcentrated manner

and health facilities managed in a decentralized manner and the same contradiction found in

the planning and budgeting process.

8.1. Lack of a standardized programme structure

The introduction of budget norms and formula based financing in a field as complex as public health

requires, if not full-fledge programme budgeting, at best, a minimum element of programming in

order to know which programme falls under the responsibility of the province and which programme

falls under the responsibility of the Ministry of Health at the central level. Only then, programmes

can be linked to specific budgetary envelopes.

The Ministry of Health used two types of programmes which are not easy to distinguish and which

have significant overlap. There are six programmes itemized below that we can call organizational

programmes because they have a linkage to the organization structure and to some extent to

budgeting, and eleven priority programmes that seem to be mostly used for policy planning.

(1) Preventive Medicine and Health Promotion

(2) Control of Food and Drug Quality and Procurement

(3) Health Research

(4) Planning and Management

(5) Curative Medicine

(6) Human Resource Development

According to existing plans, these six organizational programmes are those that will be used for the

preparation of the Medium Term Expenditure Framework (MTEF)

The eleven priority programmes are:

(1) Planning and Management (2) Human Resource Development (3) Health Finance (4) Health Education (5) Infectious Disease control (6) Primary Health Care (7) Maternal and Child Health (8) Nutrition (9) Hospital Services (10) Medical Laboratory Technology (11) Essential Drugs

Thirty one sub-programmes are managed under the priority programmes.

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The overlap between the two types of programmes is obvious and will create confusion in the

planning and budgeting process. The difficulty stems from the complexity to map programmes

according to organizational structures, especially at the hospital level where it becomes difficult to

identify who is responsible for what due to the mismatch between the two types of structures.

Programmes could be organized as 1) vertical programmes that do not deliver service directly to the

public but will link the functions such as Policy Planning, Management, Human Resources

Development, etc. performed at the central of MOH to the provincial level. and 2) horizontal

programmes in charge of delivery of services to the public and which bear clear responsibility

assignment in hospitals and health centres. Horizontal programmes could also better reflect the

traditional organization of public health services which differentiate between primary health care,

secondary health care (first level referral hospitals), and tertiary health care.

We can formulate three recommendations:

1) MOH should use the opportunity of the preparation of the 6th five year plan to merge the

two types of programmes and to design a more coherent structure in which clear

responsibility assignment amongst the health facility organizational structure, programmes

and health services to be delivered are outlined.

2) Programmes and sub-programmes that are significantly dependant on donor funding should

be managed centrally and excluded from the scope of budget norms;

3) Programmes that are managed centrally but delivered at the provincial level should be

reflected in the provincial budget, probably through conditional grants, in order to measure

their impact on horizontal and vertical imbalance.

8.2. Clarification in the responsibility for health service delivery

Complexity in the horizontal division of responsibilities for health services between districts,

provinces and central level needs to be understood to determine budget norms for health. The

allocation of responsibilities across levels of administration does not align with the distinction

between primary health care, secondary health care (also called “first level referral hospital”) and

tertiary health care (which provides a second level of referral for complex cases/interventions).

There are good reasons for this in terms of the most efficient configuration and use of the network of

health care facilities. Health centres and District Hospitals Type B provide primary care. But hospital

outpatient departments for all levels of hospitals also provide primary care services for the nearby

community within in their district. District hospitals Type A, Provincial Hospitals and most Central

Hospitals all provide secondary care - first level referral services – for the populations in the districts

closest to them. Provincial hospitals provide some additional province-wide services not provided by

District Hospitals Type A. This complicates the definition and costing of the health budget

responsibilities of districts and provinces.

17

Provincial hospitals are also district hospitals in their own district which means that the cost

of providing primary health care in that district is shouldered by the provincial budget, not

the district budget.

Four provincial hospitals (Champasak, Savannakhet, Luang Prabang and Oudomxai) will be

upgraded / expanded to become regional hospitals, each providing a wider range of

specialist services for a group of three to five provinces. There will not be separate regional

and provincial hospitals in these provinces. Once fully implemented, these hospitals are

likely to have more staff relative to population size than other provincial hospitals. Cost per

hospitalization and cost per staff are likely to be higher in these hospitals because of the

greater intensity of treatment of more complex cases. However, potential for earning user

fees is also likely to increase when these hospitals are upgraded.

Selected districts in each province have District hospitals Type A, which function as inter-

district hospitals that provide surgical services for 3 - 4 adjacent districts, while most of Type

B hospitals are little more than heath centres with one or two doctors. Type A district

hospitals have significantly higher staffing and higher costs per hospitalization or per staff

than Type B district hospitals (which provide primary care only).

Although health centres are established as secondary budget units, they operate under the

supervision of district hospitals that manage staff, provide drugs and medical equipments,

collect proceeds of drug sales and manage through them a number of health services.

Respective responsibility of the District Hospital and of the District Health Office in relation to

health centre is relatively unclear. There might be some advantages in considering health

centres as an extension of district hospitals and providing more management and financial

integration.

A number of districts do not have district hospitals, either because the population is too

small or because means have not been given the district to create one.

These considerations bring an important number of recommendations:

1) The complete equalization of health expenditure, either in total or by main categories is not

desirable as long as provinces do not have the same type of health infrastructures and the

same coverage of the population.

2) In the case of Regional Hospital, it is not clear yet if the additional funding required should be

channelled to the provincial budget using budget norms and transfer formula. A conditional

grant might be a better instrument.

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3) It is not recommended to disaggregate the provincial health budget by district. The existence

and the type of heath facilities existing in one district is what should be the driver.

8.3. Integration of vertical programmes and project in health sector budgets

As previously mentioned in section 8.1, there is a need to clarify and consolidate definitions of the

vertical programs in order to clarify their source of financing. Currently each project is treated as a

separate vertical program. In practice, a precise definition of project should be introduced and

projects should be grouped under programmes and sub-programmes.

Many countries with decentralized health systems use some central financing and coordination

mechanism for managing – particularly programmes that require nationwide coverage, such as

certain disease control programs, and nationwide logistics management for distribution of vaccines,

drugs and commodities. In Lao, the major programs with vertical elements (in approximate order of

“verticality” are: EPI childhood immunization program, tuberculosis control, malaria and dengue

control, HIV/AIDS, mother and child health, and nutrition. In all of these programs, some healthcare

workers in HCs and DHOs are involved in the delivery of the program, while PHOs play a substantial

role in coordination, management and monitoring of the program.

Decisions will be needed after donor support ends to clarify MOH’s policy on which input should

remain centrally financed and managed (e.g. vaccines), which input should remain PHO-financed and

managed (e.g. outreach and supervision and monitoring). This is not a major issue of concern at this

stage. It is reasonably straightforward to identify the major centrally financed inputs to the larger

vertical programs and exclude them from costing of provincial and district health services. Some

available costing of district health services already exclude these (e.g. the BTC–LUX costing of district

health services), but there may be a need to update the list of centrally financed inputs if large

amounts of central donor support are introduced for MNCH and nutrition programs.

In terms of budget norms the main issue is the capacity of MOH and MOF to monitor the allocation

of vertically managed programmes to the province. Ideally this should be done through centrally

managed grants – as apparently envisaged by the new budget law. In the case where a grant would

be implemented it would be necessary to decide who of MOF or MOH will be responsible to

allocating the grants to the province. It also proposes the introduction in the current budget process

of a certain element of programme budgeting.

8.4. Planning and budgeting

One of the weaknesses of the planning process in the Lao PDR is that there is no strict distinction

between policy planning, which should be the responsibility of MOH at the central level, and

implementation planning, which should be the responsibility of the provinces. Policy planning follows

the deconcentration model while implementation planning follows the decentralization model

resulting in conflicting outcomes and difficulties in reporting and data collection.

Planning at the provincial level appears disconnected from planning at the central level due to the

absence of common tools and to the large autonomy of provinces. In theory, provinces must be

guided for planning and budget preparation by the Five Year Plan and policy; in practice because

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there is no quantitative objectives assigned to provinces which leaves little incentive for provinces to

align their planning activities with national priorities.

Provincial planning is also disconnected from national budgeting and as a result provincial budget

suffer from systematic cuts that force districts to go through an additional revision phase of their

plan when budgets are announced. The provincial planning and budgeting process is probably one of

the longest in the world and in the base case scenario lasted fifteen months.

The introduction of a Sector Development Plan (on the model of the Education Sector Development

Framework) and of a MTEF could solve partially the problem. Sector Development Plan and MTEF

should be approved by the Cabinet and become instruments of national policy on which provincial

plans and budgets should be aligned.

8.5. Linkage between investment and maintenance cost

There are indications of excessive allocation of capital expenditure relative to non-wage expenditure

resulting in poorly maintained infrastructure. The fact that budget norms will be introduced for

investment offers an opportunity to link investment norms to non-wage recurring norms. The usual

practice is to allocate a fraction of this investment to recurring expenditure for maintenance. MPI is

already calculating the maintenance cost of new investments. Considering that MPI is not very

advanced in the development of investment norms, we have not considered this linkage in the

budget norm formula, however, a revision of the formula will be possible when MOF moves from

non-wage recurrent norms to aggregated norms.

8.6. Accounting and reporting

Accounting and reporting at the health facility level show a number of weaknesses which are directly

linked with the expenditure assignment framework. The sector is struggling with the fact that

provinces as such do not have any obligation to report to line-ministries and at the central level only

a fraction of hospital budget is reported, albeit, with considerable delay.

a) Absence of double entry accounting

Health facilities, as yet, do not use double entry accounting and there is no uniform system for

accounting and reporting. Several health institutions have tried to implement accounting packages

but have been struggling with technology issues as well as the fact that those packages need

customization for implementation in the health sector. MOH is developing a new policy framework

for hospital management. A software pilot project has started in Vientiane at the Child and Mother

Hospital and we expect the project to roll-out in the provinces at a later stage. Considering the

shortage of IT manpower in the provinces, this process is likely to take several years. However an IT

package cannot solve financial reporting issues in the absence of precise regulation. Considering that

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hospitals not only deliver public services but have commercial activities the accounting law should

apply to them as distinct entities from the provinces or MOH.

b) Specific accounting rules are required

The introduction of accounting IT systems cannot solve all financial management issues unless

precise accounting rules are prepared for the health sector. The general chart of account should be

adapted to hospital activities and precise accounting rules should be introduced. The manner in

which the drug fund is integrated into the hospital accounting system is especially critical.

c) Drug Fund revenues, users fees and technical revenues

Hospitals prepare their budget for their own internal management purpose, but it does not seem

that these budgets are systematically discussed with provincial authorities. Most hospitals do not

report the user fees or technical revenues they collect, or they report them partially for tax purpose.

It is important that all user fees and technical revenue be fully reported.

d) Absence of mandatory financial statements

Under the present accounting law, hospitals as economic entities as well as budget users have a

theoretical duty to publish financial statements but no secondary legislation or regulation has been

put in place. Considering the nature of their activities, hospitals should have a Profit and Loss

Account and a Balance Sheet.

e) Reporting obligations

The fact that Hospitals have commercial activities that make them dependent on their own revenues

and that they can have large payable and receivable accounts, underlines the fact that hospitals are

not just budget users but also economics entities that should use the same reporting procedures as

ordinary budget users. These economic activities represent a financial risk for the Government, just

like State Owned Enterprises (SOEs). The risk that a hospital goes bankrupt cannot be excluded and in

that case the central Government, not the province, will be responsible for the bail-out. This shows

that, like SOEs, the Central Government has the responsibility to monitor the financial position of

large hospitals. It cannot be done through the usual budget control procedure, but only through a

specific reporting mechanism, probably once a year when financial statements will be published.

Specific regulation must be put in place not only to define reporting obligations of hospitals, but also

for defining the respective responsibilities of MOF and MOH in monitoring the hospital’s financial

position.

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8.7. Hospitals’ legal status

Hospitals and health centres operates as secondary budget units, a status which is not well defined in

the new Budget Law and that by itself would require some clarification. However, by the fact that a

substantial part of provincial and district budget comes from users fees and technical revenues

hospitals are not ordinary budget users. In practice they operate more like subsidized State Owned

Enterprises. The current legal framework of hospital activities cannot provide a satisfactory solution

for many expenditure assignment issues linked with financial management. As in most countries,

hospitals must be granted a special legal status that will define their mission, their financial

autonomy and their reporting obligation.

8.8. Staffing

Despite the issue of structural staff misallocation which has been identified in section 5 of this

Concept Note, it does not appear that the current practice of staff management will be an obstacle

to the implementation of sectoral budget norms.

Budget norms cannot be an instrument for managing staff allocation and these two processes must

be kept separated. A general purpose grant combining wage and non-wage allocations will not offer

any mechanism for constraining salary expenditure as a share of the technical revenue. However

technical norms can warrantee that health facilities receive the minimum level of funding for

covering well-identified recurrent expenditure such as building maintenance, utilities and transport.

While user fees play an increasing role in health service financing, hospitals are moving toward a

model in closer resemblance to the private sector. As a consequence there is growing contradiction

between the financial autonomy granted to hospitals and the rigidity of the staff allocation system.

Hospitals have overcome staff allocation constraints by using user fees and proceeds from drug sales

in the hiring of contractual workers. However the consequence is an increased dependence on

unreported technical revenues which becomes an obstacle for lowering the cost of medical services

for the population. Health Centres and District Hospitals of Type B which do not have the capacity to

generate substantial technical revenues, also do not have the financial resource for recruiting

contractual staff. This situation aggravates the vertical imbalance between provincial hospitals and

district health facilities.

From an expenditure assignment point of view, a contradiction exists between the very centralized

process of staff allocation and the highly decentralized process of planning and budgeting for delivery

of public services. However, the fear that it could present an obstacle for moving from non-wage

budget norms to aggregated budget norms (wage + non wage) is highly exaggerated and is based on

the misconception that an aggregated formula should have two components: one for wage and one

for non-wage. In practice, the same formula structure can be used. It only requires an adjustment of

the cost units and maybe some of the weighting ratios.

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8.9. Lack of budget comprehensiveness of provincial budget

According to the principles of budget unity and budget comprehensiveness, all Government

expenditures should be reflected in budget formulation and budget reporting at the provincial level.

However, provincial budgets do not capture all sector expenditures made at the provincial level.

Programmes and projects financed centrally are not reflected in provincial budgets although their

delivery mechanisms are purely provincial. The investment budget of MOH in FY2009/10 represents

84% of the total central budget. The bulk of that investment budget is of course financed by donors.

We can assume that a significant part of that budget goes to the provinces and we can also assume

that a significant part is spent in the provinces on routine recurrent expenditures of so called

vertically managed programmes and projects which are delivered locally using local staff paid by the

provincial budget. Presently, there are no means to know where the money flows or how to

consolidate allocations to the different projects, province by province. In theory the implementation,

this year, of the new chart of account makes possible solving this problem. In practice it would

require a decree indentifying the programmes requiring a special procedure and providing detailed

instruction for accounting and reporting.

Recommendations:

1) The revised programme structure must be used for accounting and reporting;

2) Instructions must be issued for using location codes in an appropriate manner. It is not

known yet if general instructions are sufficient or if instruction must be given programme by

programme.

3) Programme reporting must be standardized as much as possible, knowing that different

donors have different reporting requirements. Already hospitals complain that reporting

becomes too difficult;

4) Vertically managed programme accounting and reporting should be the responsibility of the

Ministry at the central level, but in most cases data must be collected from the provincial

level.

8.10. Taxation of the drug revolving funds

Based on a Prime Minister Decree many provinces (but apparently not all) raise taxes on the drug

revolving fund. As such taxes are not mentioned in the Budget Law, it can be considered as obsolete.

In any case, a tax on the drug fund encourages hospital to raise their price schedule and does not

seem compatible with the Government’s objective of lowering the cost of medical services. Clearer

instructions must be prepared.

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9. User Fee policy

From a budget norm view point, user fees are involved in two important issues: (a) there is not yet a

clear policy about “which source of finance pays for which costs” between state budget and user

payments/third party payments, (b) the poverty reduction component of the budget norm formula

must be used for reducing user fees and a system must be put in place for a better monitoring of

user fees with a clearer policy framework.

9.1. Mechanism for collecting technical revenues

Technical revenues are collected through three essential mechanisms: profit from the drug revolving

fund, user fees for medical services, and third party finance scheme.

The drug revolving fund adds to the cost of drugs at a mark-up of 25%. In theory a fixed portion of

the profit generated goes to different activities, but in practice there is a lot of flexibility. There are

serious drawbacks with this system. Hospitals are encouraged to sell more drugs than patients need.

Hospitals are becoming so dependent on the drug fund that they are trying to expend its activity by

all means as a way to avoid cash restrictions;

Fee schedules for medical decree are determined by a MOF decree in consultation with MOH and

promulgated by a Prime Minister Decree. However most of the hospitals do not follow the schedule.

Central Hospitals complain that prices are set too low for cost recovery while provincial hospitals

complain that prices are too high and not affordable by the population. Several issues require

attention:

MOF should not get involved in determining or approving fees for medical services,

The process for determining user fees should be flexible enough to allow a revision at least

once a year;

Cost of services and affordability vary from province to provinces. Hospital should have a

certain flexibility in setting price schedules, but MOH is responsible for determining only the

maximum charge

Third party financing schemes (social health insurance, SHI for civil servants and formal sector, CBHI,

HEFs) aim to reimburse user fees for hospital services, on a basis that assumes some costs are

financed from budget or donor sources. (Some HEFs reimburse hospital user fees and transport and

food costs on a fee-for-service basis.) However, there is a wide range of capitation rates these

schemes pay, and a study indicates that capitation rates are below cost. The Curative Care Law

specifies items that may be covered by user fees, but is permissive. The PM-approved decree 3 on

the fee schedule does not seem to be based on a clear set of principles or objectives about what user

fees should cover. Clearly the reduction of patient out-of-pocket expenditure is linked to the

expansion of third party financing schemes and to a more realistic reimbursement of hospital costs.

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9.2. Dependence on user fees

Hospitals and health facilities have become highly dependent on user fees and technical revenues.

Survey of central hospitals shows that in some provinces, technical revenues cover 70% to 80% of

their budget. In the case of Vientiane Province’s Hospital, technical revenues cover 72% of the

budget and direct donor assistance 3%. Government salaries represent only 10% of the operating

cost. Out of the 25% of operating cost financed by Government funding, it is not possible to know

how much comes from the donor funded investment budget as the hospital budget does not make

such distinction. However, we can estimate that only 15% of the hospital budget is financed by the

domestic budget.

9.3. Need for a more comprehensive and flexible policy

The draft of the Health Finance Strategy does not make clear recommendations about the future

basis for setting user fees. It hints at a range of options without explicitly discussing them. There is

not yet a consensus within the health sector about this issue. Considering the dependence of health

facilities on user fees, there is a need to define a more comprehensive and flexible policy.

9.4. Users fees and budget norms

There is a need to reach a practical consensus on some of these questions as a basis for deciding what expenditures and costs to include in budget norms. There may be some consensus on a need for the budget to cover all the recurrent costs of basic mother and child health services and priority disease prevention programs– which encompasses almost all the recurrent costs health centres and Type B district hospitals, and a larger share of the recurrent costs of Type A District Hospitals and province hospitals.

The capacity of health facilities to collect user fees is conditioned by the level of poverty of the population, therefore, the design of a budget norm cannot ignore the problem of user fees. It will be necessary to conduct a survey of health facilities in poor provinces to determine how much the poverty level of the province impacts the hospitals’ capacity to collect user fees. When we have more precise data, we will be able to assess the size of the poverty component in the budget norm formula.

9.5. Consequence of the introduction of the Single Treasury Account

Under the new Treasury Law that is being drafted, technical revenues are defined as “public money”

and must be deposited into a bank account which is part of the Single Treasury Account. As could be

expected, there is considerable reluctance of hospitals to accept the principle of having their

technical revenues deposited into a Government account. They complain of poor service of the

treasury and of delays in accessing funds which are not compatible with hospitals’ mission.

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However as the Treasury plans to use commercial banks as part of the Treasury Single Account

arrangement, there are ways around that problem. There is the possibility that Hospitals use their

bank account which is part of the Single Treasury Account like a normal commercial sight account

without referring to the Treasury. However it will be necessary to draft specific regulations.

We recommend that MOH prepare a policy paper on user fees and technical revenues covering all

the issues identified.

10. Architecture of the Budget Norm system for health sector provincial budgets

There is wide consensus in the Ministry of Heath as well as in the Province that a high level sector

transfer formula will only partially solve the problems faced by the health sector. The major problem

of the health sector lies in determining the minimum level of funding of health facilities such as

provincial hospitals, district hospitals (types A and B) and health centres. Based on these premises a

consensus has emerged that the health sector financing formula must be facility and district based

because it is these types of facilities, their locations, and the size of the attached population that

drives the budget needs of a district and ultimately of the province.

This new system will require four types of formulae:

-A general formula for sizing the health sector provincial envelope

-A formula for financing provincial hospitals

-Two formulae for financing district hospitals (types A and B)

-A formula equivalent to a block grant for Health Centres

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Provincial Health Budget (F)

District Health BudgetProvincial Hospital

(F)Prov.

Admin.

District HospitalType A (F)

District HospitalType B (F)

H.C. (F) H.C. (F) H.C. (F)H.C. (F)

BUDEGET NORM ARCHITECTURE

(F) = formula

a) District Heath Budget

At the district level there is no need for a formula. The size of the budget available for district is the

total provincial health budget after deduction of the provincial hospital budget and the Provincial

Health Office budget:

PHA = Provincial Health Allocation

DHB = District Health Budget

PHB = Provincial Hospital Budget

PHOB = Provincial Health Office Budget

Then: DHB = PHA – (PHB + PHOB)

b) Provincial Health Office Budget

At this stage we do not think that there is a need for a budget norm formula for the Provincial Health

Office. We think better to leave that budget to the discretion of the provincial governors (to be

discussed).

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c) Provincial Hospitals and District Hospitals

It is not yet clear if Provincial Hospital and District Hospital Type A can share the same formula.

However we expect that the two formulae will be very similar

District hospitals of Type B appear to be more similar to Health Centre. Usually they have few doctors

and like Health Centres they are mainly operated by nurses.

d) Heath centres

Health centres do not work as independent entities but work under the supervision of a District

Hospital. It might be better to allocate a single budget covering the district hospital and the health

centre attached to it rather than give to health centre a block grant based on the number of staff.

Population out-reach activities appear to be mostly financed by vertical programmes and the size of

the required budget does not appear to be directly linked to the attached population.

e) Regional Hospitals

The mission of regional hospitals is not yet defined clearly enough to see how a dedicated budget

norm formula could be designed for them. The difficulty stems from the fact that regional hospitals

might not offer all the same type of services and that the percentage of patients from other

provinces susceptible of using the services is not known.

The recommendation is to apply to regional hospitals the same formula as for provincial hospitals

and to add an earmarked grant to cover the difference in cost of service delivery. The earmarked

grant will come from the central budget and should be managed either by MOH or MOF.

11. Structure of budget norms formulae

10.1. Formula for provincial allocation

The members of the budget norm team have reviewed six possible approaches for designing the

formula for provincial health allocation: (1) approach based on salaries, (2) approach based on the

number of health workers, (3) approach based on capitation and case payments, (4) approach based

on capitation, needs and costs, (5) approach based on the cost of infrastructures (such as beds) and

programmes, and (6) approach based on cost of service delivery.

In July 2009 when the first concept note was discussed, MOH had indicated its preference for a

formula based on the number of health workers, possibly with a second component to reflect either

the numbers of cases or needs and cost. The idea was to provide an incentive for doctors and nurses

to treat more patients in a more efficient manner. Further investigations have confirmed that it

seems to be the right approach, although it was decided to drop the idea of taking into consideration

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the number of cases. It would be very difficult to keep track of the number of patients treated and

by whom. The conclusion is that the incentive system will have to be kept separate from the budget

norm system, at least for the time being until more efficient IT systems are put in place.

During the consultations we had with health authorities at the provincial and national levels, a

growing consensus has emerged to consider that the size of the provincial budget is driven by three

essential factors: (i) the size of the population, (ii) the number and types of health facilities in the

province territory and (iii) the population poverty level. As a consequence we think that the budget

norm formula must reflect these three components.

Out of these three components the number and type of facilities seems to be the determining factor.

No matter what the size of the population is, if there is no institution to deliver health service or only

small ones, there is no need for a large health budget.

In order to capture the budgetary needs of health facilities, the staff number, and more explicitly the

number of general practitioners and the number of specialists appear to be the best indicators. What

is not yet apparent is the number of staff categories that need to be taken into consideration by the

formula. In many health facilities there is no doctor and it is necessary to take into consideration the

number of nurses. However, in provincial hospitals and in district hospitals of type A we can consider

that nurses are attached to doctors and taking into consideration the existing number of nurses and

paramedical staff, this could encourage some inefficiency.

We recommend the following formula structure:

Total Health Provincial Allocation = (Allocation on the basis of medical staff) + (Allocation on the

basis of population) + (Adjustment for poverty level and other cost factors)

Considering the peculiarities of Vientiane Provinces where patients use a centrally managed hospital

and where the incidence of poverty is less than in other provinces, we might have to prepare a

modified formula for that province.

Each component will receive a different weighting.

If we consider (Allocation on the basis of medical staff) + (Allocation on the basis of population) as

the primary envelope, we can start with a weighting of 80% for the allocation on the basis of medical

staff and 20% for the allocation on the basis of population.

The allocation on the basis of poverty can be calculated as a percentage of the primary envelope. For

example, 5% can be allocated to the less poor provinces, 15% for the poorest provinces, and 10% for

intermediary provinces. It will be necessary to conduct a survey of how poverty impacts hospitals’

capacity to collect user fees in order to determine the correct level for the poverty adjustment ratio.

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a) Allocation based on the number of medical staff

If:

(a) is the allocation per general practitioners

(b) is the allocation per specialized doctors

(c) is the allocation per nurses in district hospital type A and B

(d) is the allocation per medical staff in Health Centres (excluding doctors)

Total allocation based on the number of medical staff = (a x number of general practitioners) + (b x

number of specialized doctors) + (c x number of nurses in hospital type A and B) + (d x number of

medical staff in Health Centres)

We need to go to the fiscal modelling stage to know if four staff categories are enough. Other

hypothesises that can be tested are:

Distinguishing between general practitioner at the province level and district level

Allocating different amount to nurses in district hospitals type A and B

b) Allocation based on population number

The allocation on the basis of population is justified by several considerations:

Fairness requires that the provincial allocation to be to some extent proportional to the size

of the population.

Funding for preventive medicine is directly proportional to the size of the population

A significant amount of the population based allocation will be used for financing Provincial

Health Offices and District Health Offices but there should be enough funding left to cover

other general activities which are not directly linked to the infrastructure of health facilities.

If (g) is the fix amount per capita, then:

Allocation on the basis of population = (g x total provincial population)

c) Allocation on the basis of poverty and other cost drivers

There has been long discussions to determine if poverty was the only cost driver or if there are other

cost drivers such as access to remote areas, presence of ethnic minorities, prevalence of certain

diseases such as malaria, TB and HIV, lack of access to clean water, etc. The general feeling is that

there is significant overlap in these indicators. People living in remote areas are generally very poor.

Often, but not always, they are members of ethnic minorities. Remote population are more

vulnerable to malaria and TB, etc.

Another reason to select poverty as a good quality need indicator is that the poverty level of a

certain area determines the capacity of heath facilities in that vicinity to collect user fees and

technical revenues.

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To integrate poverty into the budget norm formula, four questions must be answered:

What is the best indicator of poverty?

Should poverty be measured at the provincial or district level?

How to take into account a priority district?

What should be the weighting of the poverty factor in the formula?

(i) Selection of the poverty indicator

There has been another discussion to determine if the Human Poverty Index (HPI) is a good indicator

of the need of the population and of the capacity of health facilities to collect user fees. First it

should be noted that the poverty index has three components: health measured by longevity,

education measured by the literacy rate, and standard of living which is a composite value sub-

indicator measured by the proportion of the population without access to clean water, health

services, and the proportion of children under the age of 5 years who are underweight. The Human

Poverty Index has a very strong health component and we do not think that other Health Indicators

would perform better, but if a good candidate can be identified, we will test it with the fiscal model

to see if it brings better results. One of the advantages of the HPI is that it is measured every five

years by MPI’s Statistics Office. The number is easily available at the provincial or district level.

(ii) Should poverty be measured at the provincial or district level?

Measuring poverty at the provincial level is the easier approach. It is true that it is an average, but

the total amount of funding available for poverty relief does not depend so much on the level of the

poverty index but on the weighting ratio used. It is easier to use different weighting than to use

different index.

We recommend using the average poverty index for the province without disaggregating by district.

Formulae for hospitals and health facilities can use the district index.

We can work on the hypothesis that the system will distinguish between three levels of poverty:

First level: provinces with a HPI between 1.10 and 1.20

Second Level: provinces with a HPI between 1.21 and 1.40

Third Level: provinces with a HPI above 1.41

According to the first simulation, it is possible to use up to 5 different levels of poverty. Only micro-

fiscal simulation during formula testing can tell us how many levels are required.

31

Vientiane Capital might be a special case, because this is the province with the lowest poverty index,

but also because patients have access to central hospitals which are financed directly by MOH’s

budget.

(iii) How to take into account priority district?

The best way to use the poverty index is to create different levels of poverty associated with

different weightings for the poverty component in the budget norm formula. One of the poverty

levels can be associated to the priority district. However it should be used only in the transfers

between the provinces and the districts.

(iv) What should be the weighting of the poverty factor in the formula?

In theory, poverty alleviation funding should be used with two types of activities: outreach of

population in remote areas, and subsidies to reduce pocket expenditures for poor patients. There are

two ways to consider the problem. One way is to consider that we subsidize the patient, and in so

doing, the best approach is to earmark the poverty component of the formula to create a special

fund. The other way is to consider that instead of subsidizing the patient we subsidize the hospital.

Considering that there has not been sufficient time to consider the two options, and considering that

the first option is more difficult to implement, we have been working under the assumption that

poverty reduction funding will be used to subsidize health facilities and not patients.

In theory, the correct level of funding for poverty alleviation can be assessed by comparing hospitals

which have the highest capacity of collecting user fees and technical revenues against hospitals

having the lowest capacity. The other approach is to consider the fiscal capacity of the Government.

Only test with the macro-fiscal model will tell us how much could be allocated for poverty alleviation.

Once again, only the testing of different formulae will tell us what the correct level of adjustment is.

12. Budget Norms for Central Budget

MOF will also implement non-wage budget norms for the central budget of MOH. In the first year,

the non-wage expenditure norm will be calculated on the basis of historical trends as a percentage of

salaries or as a percentage of the recurrent budget.

In the second year of implementation, the Health Ministry will be disaggregated into two main

components: the budget for central ministry operations and the budget of ancillary institutions such

as the medical schools and central hospital. For each type of ancillary institution a non-wage

expenditure formula will be introduced.

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13. Implementation strategy

In FY 2010/11 MOF will implement two simplified formula one for provinces and if one for central

budget. Implementation of full-fledge formulae as described in this concept note will take place in FY

2011/12.

14. Way forward

The present concept note should be reviewed and approved by MOH as soon as possible and

submitted to MOF for approval. According to the PRSO Aide Memoire, approval of MOF is expected

by the end of May.

In order to update the micro-fiscal model, MOF should (i) communicate provincial health sector

budgets for FY 2009/10, (ii) prepare sector ceiling for FY 2010/11 and develop the projected budgets

for FY 2011/12 and FY 2012/13.

MOH should collect budget samples of hospitals and health centres in several provinces representing

different levels of poverty. These budgets should include all user fees, and revenues coming from the

drug revolving fund, and should be prepared in a standard format that will be decided by the team.

Meanwhile the team will start working on the budget norm formula for the provincial health budget.

A notional fiscal envelope for wage and non-wage will be prepared and used for testing several

formulae.

Regarding the health provincial budget for non-wage expenditure, the following elements need to be

determined:

Unit cost per capital for population based transfers

Level of disaggregation of medical staff numbers

Unit cost per levels of medical staff

Weighting of the three components of the formula (staff number based component,

population based component, and poverty based component).

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