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Financing the health Millennium Development Goals Commonwealth Health Ministers May 2010 Dr. Cristian C. Baeza Partner Leader Global Health Systems Financing Group PROPRIETARY Any use of this material requires specific permission of McKinsey & Company Our discussion today ▪ Significant progress made for achieving the Millennium Development Goals (MDGs) ▪ However, major challenges remain in achieving target health outcomes and in closing face a significant financing gap ▪ Increasing and sustaining MDGs financing depend on two critical challenges – How to sustain and increase the revenue effort for DAH funding in a very challenging international macroeconomic environment? – How to substantially increase MDG funding allocation effectiveness and efficiency, among the complex DAH architecture, across all sectors contributing to health, and within countries? McKinsey & Company | 1 We have witnessed a significant improvement in health 1990 MDGs and access to care for populations around the world… 2007 Low, lower middle and upper middle income countries) Infant mortality rate (0-1 year) Under-5 mortality rate Prevalence of tuberculosis Indicators of health Per 1000 live births Per 1000 live births Per 100,000 population status of the population 103 162 398 387 393 80 126 59 81 219 38 37 50 50 127 100 19 22 Low Lower Upper Low Lower Upper Low Lower Upper middle middle middle middle middle middle Births attended by skilled Neonates protected at birth Immunization coverage Indicators of access to health personnel1 against neonatal tetanus among 1-year-olds (Measles) health services Percent Percent Percent 90 95 78 72 83 83 94 75 75 81 80 62 70 49 46 58 39 41 Low Lower Upper Low Lower Upper Low Lower Upper middle middle middle middle middle middle 1 Set of data from the 1990-1999 and 2000-2008 averages SOURCE: World health statistics 2009, WHO, McKinsey Health System Financing Team Analysis, World Bank income McKinsey & Company | 2 level classification Financial protection has also improved significantly, demonstrated 2000 by a worldwide decrease in OOP health expenditures 2006 Percent X% CAGR Out of pocket (OOP) health expenditures as a percentage of Global OOP health total health expenditures (THE) by geography and income expenditures as a % of THE -1.4 -1.4 -2.6 -0.3 -1.1 -2.2 64 59 -0.4 47 43 31 26 32 31 22.3 18 16 18 17 20.9 Africa1 Americas South- Europe Eastern Western East Asia Mediterra- pacific nean -1.6 -2.2 -0.9 60 54 56 -1.6 49 33 31 16 14 Low income1 Lower middle Upper middle High income Global income income 1 In poor countries, the significant increase in external transfers has been the reason for the growth in health expenditures SOURCE: World health statistics 2009, WHO; McKinsey analysis McKinsey & Company | 3 …yet, there are major challenges remaining to reach the Health, Nutrition and Population (HNP) Millennium Development Goals HNP-related MDGs Recent status reports for selected HNP sub-goals ▪ Reduce the hunger rate – Progress in reducing hunger is now being Eradicate eroded by the worldwide increase in food prices extreme poverty ▪ Out-of-Pocket health expenditures continues to play a significant role in and hunger impoverishment ▪ Under 5 mortality rate – 88% of 43 low-income countries made Reduce child insufficient (51%) or no (37%) progress in reducing child mortality rate mortality ▪ Maternal mortality rate – Decrease of <1% per year is well below the Improve maternal 5.5% annual improvement required to meet the target; 42 of 43 countries health have high or very high maternal mortality ratio ▪ Access to reproductive healthcare – Only 2% increase (to 41%) in number of births attended by skilled health personnel from decade of 1990s to the 2000s Combat HIV/ ▪ Access to treatment for HIV – Only 28% of 7.1 million people in low- AIDS, malaria, and middle-income countries had necessary treatment for HIV by 2006 and other ▪ Incidence of malaria –Little or no improvement has been seen since diseases 2000 on use of artemisinin-based treatments among African children SOURCE: The Millennium Development Goals Report 2008, Reich et al (2008), High-level Taskforce on International Financing for Health Working Group 1 (2009), “Countdown to 2015” (Lancet, 2008), Malaria & Children McKinsey & Company | 4 (UNICEF 2009) In response to this challenge, donor funding has increased significantly in the last decade … Annual Development Assistance for Health (DAH) $b (in constant 2007 dollars) ▪ Development assistance for health 21.0 (DAH) more than doubled between 1995 and 2007 in real terms +163% ▪ Net official development aid (ODA) as a 8.0 percentage of Gross National Income (GNI) increased to 0.33% in 2005 and trended upward 1995 2007 SOURCE: Murray et al. (Lancet 2010), World Bank Strategy 2007, HLTF 2009, McKinsey Team Analysis McKinsey & Company | 5 … and overall public funding has also increased significantly in most regions, driven primarily by GDP growth in Asia and Latin America Growth in public financing of health in all developing countries ▪ Overall public financing in $b (in constant 2006 dollars) developing countries 2 ~244 has nearly doubled 4 Other1 during the period 19 SSA ▪ This includes DAH to government which likely 48 N. Africa distorts the increase for +88% SSA ~130 ▪ Health spend as a 3 proportion of GDP was 9 100 Latin America flat 3 for low income 25 countries 2000-2006 – Growth in spend has 63 been driven primarily 73 Asia by growth in GDP 30 rather than increased fiscal allocation 1995 2006 Note: Numbers were approximated based on Figure 1A from the Lancet article NUMBERS ARE APPROXIMATE 1 Other includes Oceania and Caribbean 2 This includes all developing countries, not just low income 3 CAGR for THE as % of GDP (2000-2006) is as follows: low income = 0.0%, lower middle = 0.4%, upper middle = 0.5%, high income = 1.9%) SOURCE: Murray et al. (Lancet 2010), WHO, McKinsey analysis McKinsey & Company | 6 Nevertheless, significant additional funding is NUMBERS ARE APPROXIMATED BASED ON MULTIPLE REPORTS needed to achieve the health MDGs Distribution of gap by geography1 Percent, 100% = $32b 1 Estimated annual funding gap for the Non-SSA health MDGs 22 $b in 2015 78 High-level Taskforce on International SSA 36-45 Financing for Health (2009) Distribution of gap by health MDG2 Percent, 100% = $32b 2 HIV/AIDS (#6) Under-5 30 30 mortality (#4) 13 Malaria/TB (#6) 22 Maternal mortality (#5) 1 Based on 2009 Taskforce analysis (median estimates under “no change” scenario) 2 Based on 2002 World Bank analysis adjusted to DAH levels in 2006 SOURCE: High-level Taskforce on International Financing for Health Working Group 1 & 2 (2009), Goals for Development McKinsey & Company | 7 (World Bank 2002) We face two key challenges in financing the health MDGs… A Generating Necessary Revenue Ensuring funding through sustaining and increasing the revenue effort for DAH funding in a very challenging international macroeconomic environment B Improving Allocation Effectiveness Maximizing impact through substantially increasing MDG funding allocation effectiveness and efficiency, among the complex DAH architecture, across sectors contributing to health, and within countries SOURCE: McKinsey Health System Financing group (2009); High-level Taskforce on International Financing for Health McKinsey & Company | 8 Working Group 2 (2009)s Revenue: Raising necessary funds A Revenue B Allocation 1. Innovating and Bilateral (Traditional) A1 1. Optimizing Innovative improving existing donor allocation across financing sources sources of donor sources A2 existing funding funding B1 vehicles (institutions) 2. Facing the impact Funding Vehicles for Health of the global (e.g. World Bank, Global Fund, GAVI) 2. Improving financial crisis efficiency, and B2 alignment in 3. Sustaining and Individual country level allocation from Leveraging existing funding existing public/ A3 vehicles to private domestic countries funds 3. Creating incentives for results in allocation from B3 MoF to Sectors at national and sub- Sub-national executing agencies national/ agency level budgets SOURCE: High-level Taskforce on International Financing for Health Working Group 2 (2009) McKinsey & Company | 9 A1 Both bilateral and “innovative” donor sources have increased in recent years… but, the financial crisis entails a significant challenge… Traditional donor sources Innovative financing sources Selected examples of innovative Types of financing mechanisms traditional donor sources Representative examples Revenue Cost Public funding ▪ PEPFAR $ billions % of rev. from donor and ▪ DFID Solidarity levy (e.g., 0.1 to <5 multilaterals ▪ SIDA airline tickets, tobacco) >10 ▪ IDA Align funding time with 1-10 5-20 Private ▪ The Bill & Melinda needs (e.g., IFFIm) foundations Gates Foundation ▪ The Carso Foundation Public resources for 1-10 <5 (Carlos Slim Hélu) private giving (e.g., DeTax) Corporate funds ▪ African Health Initiative (Exxon) Leveraging lending 0.1 <5 ▪ The Coca Cola instruments (e.g., buy- Foundation downs) While donor funding has increased greatly over time, volatility significantly affects aid effectiveness SOURCE: High-level Taskforce on International Financing for Health Working Group 2 (2009) McKinsey & Company | 10 A2 … the current economic crisis has significantly World Advanced economies impacted both developed and developing countries Emerging and develo- Percent ping economies Historical and forecasted GDP growth Key characteristic of the economic crisis Getting better but ▪ Global growth in 2009 fell to 0.45% still high uncertainty when measured in terms of PPP and to on future evolution 9 turn negative when measured in terms of of the crisis market exchange rates 1 – GDP declined by 4-6% in the Euro 6 Area in 2009 (World Bank, 2009) – In USA growth to turned negative in 2009 (IMF, 2009) – Growth in emerging and developing 3 countries fell from 6.25% in 2008 to 3.00% in 2009 ▪ Volatility (e.g., rapid changes in currency 0 exchanges and country financial risk) has increased significantly -3 1970 75 80 85 90 95 2000 05 10 1 World Bank forecasts SOURCE: International Monetary Fund; World Bank; McKinsey analysis McKinsey & Company | 11 A2 In many developed countries, health expenditures decrease in times of economic crisis, but its impact on health is unclear… Evolution of health expenditures across EU countries within 2 years from negative GDP growth 1980–83 1988–93 Countries reporting at least one year of 131 172 negative GDP growth Countries with increasing 3 7 health spending Countries with decreasing 10 10 health spending A large number of EU countries lowered health expenditure after an economic downturn Reduction in expenditures, however, often occurred with a lag (1-2 years) after the economic downturn 1 Austria, Belgium, Denmark, Germany, Iceland, Ireland, Luxembourg, Netherlands, Portugal, Spain, Sweden, Switzerland and UK 2 Belgium, Czech Republic, Denmark, Finland, France, Germany, Greece, Hungary, Iceland, Italy, Norway, Poland, Portugal, Spain, Sweden, Switzerland, UK SOURCE: OECD Health Data 2008; McKinsey analysis McKinsey & Company | 12 A2 …whereas, significant evidence from developing countries indicate a link between financial crisis and worse health outcomes Specific developing country examples Overall findings Drop in health ▪ Over 1 million excess Country spending2 Impact on health status deaths1 occurred in the developing world during ▪ Argentina -22% ▪ Less frequent consumption Utilization (2001-2002) of preventive medicine for 1980-2004 in countries children (38% of total experiencing economic households and ~60% of contractions of 10% or poorest ones) greater ▪ Nutrition levels usually ▪ Indonesia -10% ▪ Drop from 53% to 34% in worsen during and after a (1997-1998) health care service utilization crisis, leading to longer term health repercussions Direct ▪ Mexico -7% ▪ ~7% increase in child mortality ▪ Effect of crisis health (1995-1996) materializes through outcomes ▪ Peru (1990) ▪ 2.5% increase in infant N/A different channels mortality – Lower utilization (often not recovering till long term after the crisis) ▪ South East -15% ▪ Increased prevalence of – Higher cost of services Nutrition Asia (1997- micro-nutriment (e.g., vitamin due to input (e.g., drugs) 1998) A) deficiencies in children local price increase ▪ 22% increase in anaemia among pregnant women 1 Infant deaths 2 Measured over the period indicated as Government Health spending per capita (PPP adjusted) SOURCE: UNICEF 2009; World Bank; Scholars‟ articles; McKinsey analysis McKinsey & Company | 13 A2 But this is are very different crisis as compared to previous ones, further complicating the crisis and its potential long term effects in DAH Total leverage in US and parts of EU at historic high US and European total debt as % of GDP Main differences with previous economic crises European debt level Crisis propagation 350 currently already at ▪ Ongoing crisis originated in developed 300 countries after an unprecedented borrowing 300% in 2008 250 spree – further increased by current anti- 200 cyclical fiscal effort to address crisis 150 ▪ Unprecedented global wealth destruction 100 ▪ Economic downturn has been from capital markets onto the world real economy 1920 30 40 50 60 70 80 90 2008 ▪ Industry structure and consumer behaviour will remain in flux, creating new sources of volatility General Government Fiscal Balance Country positioning ▪ Developed countries Percent of GDP World – Total leverage is at historical high in US and Advanced economies Europe Emerging and deve- loping economies – The story of fiscal imbalance and public debt is 2 ongoing and uncertaint 0 ▪ Developing countries – On one hand, better positioned vs. the past -2 due to better fiscal balance -4 – On the other, unable to rely on increasing -6 exports to developed countries … -8 – … and on lower availability of capital, also 2000 02 04 06 08 10 at higher costs SOURCE: International Monetary Fund; McKinsey analysis McKinsey & Company | 14 A2 … it could lead to a “no change” or even "No change" scenario1,2 negative revenue growth scenarios for DAH "Commitments met" scenario1 Crisis trend (ILLUSTRATIVE)3 Additional funding $b 55 50 MDG gap range 45 $36-45b in 2015 40 35 30 25 20 15 10 5 0 -5 2009 10 11 12 13 14 15 16 17 18 19 20 21 2022 Time 1 Projections taken directly from High-level Taskforce Working Group 1 analysis through 2015 2 Beyond 2015, “no change” projection assumes constant annual growth rate of 31% matching the 2012-2015 CAGR from the Taskforce projections 3 Crisis trend is illustrative. Assumes 1) tracking “no-change” scenario until 2011 and 2) decreasing level of additional funding of -5% per year after 2011 SOURCE: High-level Taskforce on International Financing for Health Working Group 1 (2009) McKinsey & Company | 15 A3 Development assistance for health (DAH) is essential (particularly in low-income countries but, it remains a fraction of total health spend Breakdown of total healthcare expenditure Private Public Percent Low income countries¹ Lower middle countries¹ Total in 2000 62.4 37.6 100% 62.9 37.1 100% Out-of-pocket 53.4 58.3 External 10.2 1.1 Total in 2007 58.1 41.9 100% 57.5 42.5 100% Out-of-pocket 48.3 52.1 External 17.5 1.1 ▪ While increasing DAH is important, countries have a key say on MDG financing ▪ Effectively channeling country expenditure – particularly OOP – is crucial to attain MDG targets ▪ Sustained and expanded domestic health expenditure should be in line with national plan 1 Income category defined by World Bank country classification SOURCE: WHO McKinsey & Company | 16 A2 Recent evidence suggests an added complication: increases in 2000 external transfers may have resulted in a decrease in „fiscal‟ 2006 allocation to health in poor countries X% CAGR Percent Total health expenditures, External funds as a Total health expenditures excluding external funds, percentage of GDP as a percentage of GDP as a percentage of GDP Africa 7.0 -0.7 0 0.6 5.1 4.9 5.5 5.5 0.4 Low income 5.8 0.5 0.4 0.7 3.7 3.6 4.2 4.3 0.5 A recent report states that “for all developing countries… for every $1 of DAH to government, the government reduced spending from it‟s own sources by $0.46” SOURCE: McKinsey Health System Financing Analysis; World health statistics 2009, WHO, Murray et al. (Lancet 2010) McKinsey & Company | 17 A Summary of revenue challenges and opportunities Existing international donor sources ▪ Improve effectiveness and predictability of funding from existing sources ▪ Continue to develop new ways of raising additional funds Global Financial Crisis ▪ Biggest crisis on record is may affect country and international donor financing ▪ Likely enhanced difficulty in increasing DAH revenue ▪ Substantial increase in focus on DAH effectiveness at all levels ▪ Increased focus on sustaining country funding. In-country funds ▪ Create domestic fiscal space – Economic growth – Efficiency in health sector (see allocation section) ▪ Address the “additionality” challenge in donor funds and avoid „crowding out‟ ▪ Leverage out-of-pocket (OOP) household financing McKinsey & Company | 18 Allocation: The critical imperative of improving efficiency and maximizing impact A Revenue B Allocation 1. Innovating and 1. Optimizing Traditional donor Innovative financing improving existing A1 allocation across sources sources sources of donor existing funding funding B1 vehicles (institutions) 2. Facing the impact of the global Funding Vehicles 2. Improving financial crisis (e.g. Global Fund, World Bank, GAVI) efficiency, and B2 alignment in 3. Sustaining and IHP+ ; HSS Platform; other allocation from Leveraging existing funding existing public/ Individual country level vehicles to private domestic A2 countries funds 3. Creating incentives for results in allocation from MoF to Sectors at B3 national and sub- Sector and Sub-national executing agencies national/ agency level budgets SOURCE: High-level Taskforce on International Financing for Health Working Group 2 (2009) McKinsey & Company | 19 B1 Need to optimize allocation to existing funding vehicles reaching a right balance between specific health sector investments and multisector investments with health impact Multisectorial investments Earmark for health with proven health impact Earmark funding for (e.g., water & sanitation, services and priority diseases employment, HH income, systems education, other) While Ensuring Health system strengthening A Challenge for Ministries of Health Transition from owner/guardian of inputs (i.e., health sector investments) to guardian to broader focus on outcomes (i.e., health results) McKinsey & Company | 20 B2 Challenges in improving efficiency in allocation from funding vehicles to countries Issues Description Ensure ▪ Harmonization of processes (e.g. reporting, standards for funding Harmonization application) across multiple funding vehicles and alignment ▪ Alignment of international organizations: – To give in accordance with country strategies IHP + and other – To select receiving countries against a standard basis for need and capacity to efficiently utilize/absorb external resources In line with ▪ Compatibility with macroeconomic performance Macroeconomic – Creation of necessary budgetary fiscal space conditions – Synergy with economic growth, funding to all sectors with health impact, avoidance of country economic distortions (e.g.DAH driven price distortions) „Address ▪ Donor funding on top of country fiscal spending (Cf. issues with this from Additionality‟ section A1) Promote Results- ▪ There are various results-based financing (RBF) mechanisms (e.g. output- based financing based aid, provider-payment incentives) and payment is made in response to the achievement of performance targets ▪ Historically, input-based financing has been used which easier to track ▪ However, there is a trend to change to RBF which will require – Change in culture (away from tracking $ flow) – Creation of new capabilities – Establishment of new informational systems and fiduciary rules/roles SOURCE: High-level Taskforce on International Financing for Health Working Group 2 (2009) McKinsey & Company | 21 B3 Challenges in allocation within countries: the promise and the challenges on results linked financing Issues Description Promote Results- ▪ There are various results-based financing (RBF) mechanisms (e.g. output- based financing based aid, provider-payment incentives) and payment is made in response to the achievement of performance targets ▪ Historically, input-based financing has been used which easier to track ▪ However, there is a trend to change to RBF which will require – Change in culture (away from tracking $ flow) – Creation of new capabilities – Establishment of new informational systems and fiduciary rules/roles „The Challenges‟ ▪ Historically, input-based financing has been used which easier to track ▪ Shifting towards RBF will require: – Change in many donors culture (away from tracking $ flow) – Creation of new capabilities at country and donor level – Establishment of new informational systems and fiduciary rules/roles – Address and avoid potential perverse incentives in reporting and in narrow focus on specific targets SOURCE: High-level Taskforce on International Financing for Health Working Group 2 (2009) McKinsey & Company | 22 Conclusion: A Renewed Commitment to Achieving the MDGs Addressing the challenges for financing MDGs will require: ▪ A renewed commitment and innovation for generating revenues for DAH, ▪ With equal intensity, setting the capabilities and health system financing arrangements to leverage and efficiently use country level funding (fiscal and household out-of-pocket) ▪ A unified vision and leadership both, at country and international agencies levels that: – acknowledges the challenge of the financial crisis for health but, also the needs beyond, in multiple sectors also contributing to health – avoids fragmentation and confusion in the content and in conveying the message to world leaders ▪ Scaling up of investment in a way that strengthens overall health systems (addressing all determinants of success in achieving the MDGs) ▪ Balancing those investments with investment in multiple sectors beyond health care that substantially contribute to health ▪ A very significant effort to improve efficiency to get more health for the available funding at all levels – Harmonization and alignment in the overall international architecture level – Strengthening health systems at country level with incentives for proven results McKinsey & Company | 23 Financing the health Millennium Development Goals Commonwealth Health Ministers May 2010 Dr. Cristian C. Baeza Partner Leader Health Systems Financing Group CONFIDENTIAL AND PROPRIETARY Any use of this material without specific permission of McKinsey & Company is strictly prohibited
"Innovations in financing for health"