4. Budgeting practices for health in OECD countries
Maximising value for money is critical to the performance of health systems. Good budgeting practices in the health sector can help governments retain control over expenditure growth whilst also respecting health policy objectives. This chapter investigates budgeting practices for health across OECD countries, examining how the budget for health is determined, executed, monitored, and reviewed. This chapter is accompanied with five case studies of Belgium, France, Israel, New Zealand and the United Kingdom.
Robust budget formulation mechanisms set a clear total budget allocation for public spending on health, which provides predictability of fund availability as well as cost control. A total budget or target for public health expenditures is set in most OECD countries to provide control over health expenditure growth.
Most surveyed countries (18 of 24) point to cost drivers as having a very strong or strong influence in determining the total budget or target for public health spending. The same share of countries found public finance constraints and macroeconomic factors, and health policy objectives as having a very strong or strong influence. Countries differ in the extent to which such criteria for setting of the total budget for health are explicit criteria, or instead are more implicit.
Total budgets for health are typically derived from baseline estimates of the cost of maintaining existing services and coverage, with the cost of funding new health policy initiatives estimated separately.
Almost all countries (about 90% of those surveyed) use corrective mechanisms to enforce spending objectives and improve budget compliance. In most cases, such corrective mechanisms are comprehensive, with systems in place to detect overspending risks and determine appropriate action.
In-year budget monitoring and ex-post budget reports are commonly used to monitor health budget implementation. In just over half of surveyed countries, budget execution reports are produced monthly, with 9 of 22 countries producing reports less frequently (e.g. quarterly), and 2 countries not producing such in-year monitoring reports.
Despite these budget control measures, overspending exists at various levels in most countries’ health systems, creating deficits which are routinely bailed out by governments.
Countries also use complementary spending controls and incentive mechanisms at different stages of budget implementation to try to keep health expenditure within total spending limits. This may include Health Technology Assessments, price regulation, volume controls and incentive mechanisms.
Multi-annual financial planning is undertaken in almost all (22 of 24) surveyed countries. However, it is mostly used for informational purposes only, rather than as a minimum spending floor, maximum spending ceiling or binding budget allocation.
Capital expenditures for health are separated from operating expenditures, using dedicated budget lines or programmes. Whilst the majority (17 of 24) of surveyed countries undertake multi-annual capital planning for health, less than a quarter have multi-annual capital budget envelopes.
A performance budgeting framework for health can address the disconnection between strategic health objectives as determined by health officials, and resource allocation decisions as determined through the budget process. Such a link also provides a deeper understanding of what is being achieved with public spending. Yet, whilst many countries are looking to better integrate health objectives into the budget process, a third of surveyed countries had no performance budgeting framework for health.
Spending reviews are commonly used (20 of 24 surveyed countries) as a strategic tool to analyse existing health expenditures and ensure they are aligned with government priorities.
Applying good budgeting practices for health increases the performance of health systems by maximising the value-for-money of health spending. The findings of this chapter contribute to the OECD Applying Good Budgeting Practices to Health developed by the OECD Joint Network of Health and Finance Officials (2023) (Figure 4.1).
Source: Vammalle, C., C. Penn and C. James (2023[1]), “Applying good budgeting practices to health”, https://doi.org/10.1787/b280297f-en.
The chapter draws on the results of a survey carried out by the OECD Joint Network of Senior Budget and Health Officials in 2021, where 24 countries responded (Box 4.1), as well as the in-depth analysis of Belgium, France, Israel, New Zealand and the United Kingdom (see Annex 4.A). Note that for the United Kingdom, analysis is predominantly based on England.1
After a brief overview of health financing arrangements in OECD countries, analysis focuses on four key topics:
Setting the budget for health – budget allocation mechanisms, including key stakeholders involved in setting a total budget or expenditure target; allocation of the health budget across categories and programmes (Section 4.3).
Budgetary tools to control health expenditure growth – use of spending controls; budget monitoring and reporting; price regulation, volume controls and other incentive mechanisms; deficit management (Section 4.4)
Multi-annual financial planning for health – multi-annual budgeting; capital budgeting for health (Section 4.5)
The budgetary process and links to strategic health objectives – use of programme and performance budgeting, including key performance indicators (Section 4.6)
During 2021, the OECD Joint Network of Senior Budget and Health Officials conducted a survey on macro-level management of health expenditure, with a special focus on multi-annual financial planning for health. The survey provides a horizontal perspective on management of health expenditure across member countries. Twenty-four countries responded to the survey, with a good balance between national health systems and health insurance systems: Eleven of the respondent countries are categorised as a government scheme at the central or subnational level (Australia, Finland, Greece, Iceland, Italy, Latvia, Mexico, New Zealand, Norway, Sweden and the United Kingdom), and 12 countries are categorised as compulsory health insurance scheme/s (Austria, Belgium, Chile, Colombia, Costa Rica, Czechia, Estonia, France, Israel, Japan, Korea, Luxembourg and the Netherlands).
In 2019, OECD countries spent on average 8.8% of their GDP on health each year, a figure relatively unchanged since 2013 (Figure 4.2). Health spending across OECD countries was significantly affected by the COVID-19 pandemic, and by 2021, this proportion had jumped to 9.7%, reflecting both increases in health spending and reductions in GDP due to the COVID-19 pandemic. For example, France, the United Kingdom and Israel saw health spending as a share of GDP increase by approximately 1 percentage point in 2021 compared to 2019. However, preliminary estimates for 2022 point to a significant fall in the ratio to 9.32% reflecting both a reduced need for spending to tackle the pandemic as well as the impact of inflation reducing the value of health spending.
Source: OECD Health Statistics 2023, https://doi.org/10.1787/health-data-en.
OECD countries use a variety of health financing arrangements through which individuals or groups of the population obtain healthcare,2 with no one model providing 100% of funding for healthcare (Figure 4.3). Compulsory or automatic coverage, through government schemes or health insurance, forms the bulk of healthcare financing in OECD countries. Taken together, three-quarters of all healthcare spending in 2021 was covered through these types of mandatory financing schemes. Out-of-pocket payments financed just under one fifth of all health spending in 2021 in OECD countries, while voluntary health insurance financed 4%.
Note: The “Other” category refers to charities, corporations, foreign and undefined schemes.
Source: OECD Health Statistics 2023, https://doi.org/10.1787/health-data-en.
4.3.1. Budget allocation mechanisms
Formulation of the total budget for health expenditure
Most OECD countries set a total budget for health expenditure.3 Setting a total budget provides control over health expenditure growth, and by consistently anchoring a target for health expenditure, governments can uphold the fiscal sustainability of their health systems over time.
Total budgets cover spending by the compulsory health insurance system for Belgium and Israel, and most public spending on health for New Zealand and the United Kingdom. In New Zealand, the budget excludes health spending by other government departments, and the Accident Compensation Corporation which is the compulsory provider of accident insurance. France sets an objective for social health insurance spending (the ‘objectif national de dépenses d’assurance maladie’, or ONDAM). This is a target, rather than a hard cap.
Most countries set annual budget allocations for health. Budget allocations for health over multiple years are only set in a subset of countries (see Section 4.5.1 and Chapter 6).
As the exception, England (United Kingdom) set a five-year budget allocation to the National Health Service in 2018.
Estimates of the baseline are a key initial step in constructing the budget for health expenditure. Baseline estimates are used to understand the minimum increase needed to next year’s health budget that will maintain the level and quality of service delivered, after accounting for the main cost drivers.
Countries differ in how baseline estimates are constructed, in terms of the actors carrying out estimates, and how explicitly the assumptions are set. For example, assumptions about possible efficiency gains are built into the baseline analysis in England.
Estimates of the baseline usually include supply-side factors such as existing wage agreements in the health sector, drug price agreements, and technological change. Estimations of healthcare demand are also accounted for to some extent, notably in terms of population growth and demographic change.
Estimates must be based on realistic assumptions on the cost-drivers of health expenditure to accurately calculate pressures on baseline expenditure to avoid generating deficits or frequent budget top-ups, which undermine the credibility of the budget ceiling.
A broad range of factors influence the total budget allocation for health, with cost-drivers being more influential than estimations of health-specific resources. Factors may be implicitly considered during the budget formulation phase or considered as more explicit criteria.
Country experience points to benefits from such explicit criteria, notably in terms of stability and predictability in future budgetary allocations to health, an absorption of changes in cost drivers, and a simplified annual process of negotiation. Although the criteria and assumption used to set the budget should be transparent and not regularly changed.
Israel, for example, sets a total annual budget for the compulsory health insurance system. This budget includes automatic adjustment mechanisms reflecting three cost drivers: demographic growth, technological developments, and a price index. Belgium’s Global Budget Objective (OBG) for health insurance automatically adjusts for inflation (Box 4.2).
Most OECD surveyed countries (18 of 24) point to cost drivers (notably demographic factors, epidemiological factors, wages, new drugs, and technologies) as having a very strong or strong influence in determining the total budget or target for public health spending (Figure 4.4). The same share of countries found public finance constraints and macroeconomic factors, and health policy objectives as having a very strong or strong influence. In contrast, the existing share of health spending within total public spending was seen as much less influential, seen as having ‘some’, ‘little’ or ‘very little/no’ influence in 17 of 24 countries.
Source: OECD (2021), Survey on macro-level management of health expenditure, with a special focus on multi-annual financial planning for health.
Budget allocations of new initiatives are discussed separately to the estimation of baselines (which cover existing and ongoing policies).
Space for new initiatives is often a small share of the total health budget. New initiatives must compete with other areas of government spending or be financed through efficiency gains on existing initiatives. New initiatives are negotiated with the relevant stakeholders. Alongside new initiatives, saving measures are proposed during the budget preparation process.
In Belgium and France, saving measures are proposed annually alongside new initiatives to keep expenditure growth on track. In England and New Zealand actors in the health system are expected to generate savings through incremental improvements to efficiency. In England, the extent of savings varies from year to year, while in New Zealand, this must only occur in some years.
Figure 4.5 summarises how the budget for health is set across selected countries. In Belgium, France and Israel, the budget for the following year is determined through a fixed formula. Israel uses three explicitly defined criteria to set the budget, consisting of a price index, population growth, and a component that allows for the adoption of new technologies into the health basket. In Belgium, inflation is automatically built into the budget, with the budget increasing each year predominantly based on a growth rate expressed in real terms. However, unlike in Israel, the criteria on which the growth rate or the real budget is set are not based on a formula linked to clearly defined indicators (such as population growth, price indexes, etc.), and instead is reached through government agreement, based on cost-pressures, fiscal objectives, and relative priorities of government. In France, a growth rate for social health insurance expenditure is applied to the previous year’s health expenditure to fix the target for the current year.
In contrast, the budget process in New Zealand and England (United Kingdom) allows for no automatic increase in the health budget. However, in 2018, the United Kingdom announced its latest multi-year funding settlement, setting a legally guaranteed annual increase to the English NHS budget for the next 5 years. England (United Kingdom) also uses spending reviews, often on a multi-year basis to set allocations to the health sector. Similarly, in 2022, New Zealand provided a two-year budget for the health sector for the first time, to finance two-years’ worth of cost pressures and new initiatives.
Political influence in the formulation of the total budget for health expenditure
Both the central-level health ministry and the central budget authority4 have considerable influence in determining the budget for health in countries with government schemes. For insurance-based systems, central government influence in determining the budget is weaker in comparison, and is jointly influenced with compulsory health insurance scheme/s.
Political choices also have a major influence on setting the budget for health (Box 4.3). In particular, the executive branch or agency (e.g. the Prime Minister’s or President’s Office), and the legislative branch (e.g. Parliament) have notable influence in determining the budget for health, particularly in countries with health systems organised around government schemes (Figure 4.6).
While estimates of the baseline that account for cost drivers are considered, final decisions on the budget usually balance considerations of healthcare needs with other government priorities and the state of public finances.
Countries that have a set formula increase for the health budget (such as Israel) find it simplifies the annual budget process, by reducing the scope of negotiations between health and finance ministries.
Allocated budgets often do not fully reconcile with the baseline costs and pressures to deliver policy ambitions. Consequently, overspending is frequent, which requires annual budget top-ups or bailouts to health providers (discussed further in Section 4.4).
Note: Influence is a weighted sum of scores (has a very strong influence=4, has a strong influence=3, has some influence=2, has little influence=1, has very limited to no influence=0), as a proportion of the potential maximum score.
Source: OECD (2021), Survey on macro-level management of health expenditure, with a special focus on multi-annual financial planning for health.
Parliament has a strong engagement in the budget cycle in selected countries, even health insurance countries such as France (Table 4.1). Parliament votes on annual budgets for health expenditure to authorise spending across selected countries except in Belgium. Nevertheless, parliamentary vote is still required in Belgium on the real growth rate, which is the most influential component in determining the health budget.
4.3.2. Allocation of the health budget across categories/programmes
In most OECD countries, the budget allocation corresponds to the organisational structure of the health system, rather than the type of health service provided. Allocation of the budget by organisational unit (i.e. the ministry of health, a health insurance fund, a central purchasing body, or a local health authority) identifies the responsibility for major components of health expenditure, and the management of day-to-day operational expenditure. The method in which expenditures are allocated has a direct impact on policy decision-making, as well as accountability for performance results.
Total budgets/expenditure targets are broken down into different degrees of aggregation, reflecting the unique organisational structure of purchasing bodies or health system providers in each country (Figure 4.7). When allocating the budget, the level of aggregation has implications on the visibility of central authorities over spending decisions, and the flexibility of purchasing bodies or providers to make spending decisions.
A high level of aggregation (i.e. large lump-sum transfers) gives purchasing bodies autonomy over spending decisions, and the flexibility to redirect in-year spending as needs change. However, this results in less visibility over spending decisions and outcomes for central government authorities and parliaments. In particular, the ability to view whether prioritised initiatives are being implemented equally across local areas is often limited. In contrast, more detailed allocations improve visibility but give less flexibility over spending decisions, and less ability to adjust as spending needs change.
Most OECD countries (nearly three-quarters of countries in the OECD survey) allocate the budget for health across sub-categories or programmes, rather than allocating a total amount (Figure 4.7). The nature of the sub-categories is very heterogeneous across OECD countries. A small number of countries use a consistent sub-categorisation across the health budget, dividing the entire budget by type of health service, or by the type of health provider. More commonly, however, countries use a mixed approach, containing different types of sub-categories within the budget, including the type of health provider, health service, or administrative entity, the purpose of expenditure, and the nature of expenditure (i.e. resource or capital expenditure).
While there is flexibility for health authorities to allocate funds within sub-categories for many OECD countries, there is often limited flexibility to reallocate across sub-categories. In nearly all OECD countries this requires either approval of parliament or the ministry of finance or is prohibited during the budget year.
In New Zealand, until the reform of 2022, most of the health budget was channelled through lump-sum transfers based on a capitation formula to the District Health Boards (DHBs), who had devolved responsibility to provide health services to their local populations. Similarly, in England (United Kingdom), a large share of the budget was allocated to Clinical Commissioning Groups who were responsible for local services, until they were dissolved in July 2022 (see Box 4.7).
In Belgium, the compulsory health insurance budget is broken down into 39 subsectors or ‘partial budgets’, with little scope to reallocate across categories, causing rigidities. Belgium is considering implementing a more global and transversal approach that would allow for greater flexibility in the budget allocations between the different subsectors.
Source: OECD (2021), Survey on macro-level management of health expenditure, with a special focus on multi-annual financial planning for health.
Across countries, a large part of the health budget is distributed to purchasing bodies through funding formulas. Such funding formulas are population-based and weighted according to cost-drivers; notably, age, gender, and socio-economic status (Box 4.4). They aim to allocate the budget equitably across purchasing bodies. However, as they depend on the total budget available to share, they do not necessarily ensure sufficient funding is provided to each, often leading to deficits at the purchasing body level.
Table 4.2 shows the allocation of the health budget to the main health purchasing bodies, and the method of distribution. Funding formulas across selected countries are population-based, adjusted by sex and age. Other factors include socio-economic factors, ethnicity, and rural adjustments. The United Kingdom goes a step further and uses measures of unmet need and health inequalities to calculate funding needs.
4.4.1. Spending controls and incentive mechanisms
Enforcement of spending objectives is achieved through hard constraints accompanied with strict rules on the overspending and breach of ceilings. Setting budget ceilings (or expenditure targets) for health can ensure that the overall health sector contributes to the national fiscal balance target. Hard budget ceilings can also be used to influence the volume, price, and rate of inclusion of new technologies. The threat of reputational damage also plays a part in the enforcement of budgets for health.
Across 24 surveyed OECD countries, budget ceilings for health in countries with government schemes are commonly set as a fixed budget allocation, where fixed amount of funds are defined for the budget overall and any overspending requires a special amendment process (Figure 4.8). Meanwhile, countries with compulsory health insurance schemes, alongside fixed budget allocations, also set the budget for health as a target, objective, or estimation, where actual spending could be larger, without need for a budget amendment.
In England, for example, overspending by the Department of Health and Social Care requires investigation into its cause, an examination of the financial procedures of the department, and potentially a reduction in the corresponding budget ceiling (Departmental Expenditure Limit) in the next fiscal year.
In France, the ONDAM is an objective, rather than a hard cap and spending has historically frequently been above this objective.
Source: OECD (2021), Survey on macro-level management of health expenditure, with a special focus on multi-annual financial planning for health.
Corrective procedures and incentive mechanisms work alongside budget ceilings. Among countries there is pessimism around the extent to which budget ceilings for health are successful in containing overall health expenditure by themselves. Avoiding breaking budget targets is sometimes achieved only by providing top-ups to the annual budget, or through reallocation of funds between capital and operating budgets. Common complementary mechanisms to ensure that health expenditure stays within budgets include:
Health Technology Assessment (HTA) is used to inform what services are included in the health benefit basket across many OECD countries. However, country approaches differ in the extent to which HTA results are linked with setting the total budget. In Israel, there is a direct link between HTA results and the annual budget process, since the committee who evaluates health technologies must consider the previously determined budget ceiling when making decisions on the inclusion of new services. On the other hand, while England has a well-established HTA process, there is not an explicit follow-through from new technologies approved to their budgetary impact.
Price regulation (of tariffs and wages) is an important part of budgetary management to control health expenditure. Price regulation of health services can also be used as an incentive mechanism aimed at purchasers or providers to encourage efficiency gains by setting prices that encourages innovation into more efficient and less costly ways of providing care.
Volume controls are also widely used. Israel has instituted tight control over volumes in the health sector, including a cap on public hospital income, consisting of a floor (lower cap bound) and a ceiling (upper cap bound) to control and incentivise the volume of hospital service delivery.
Steps to control prices and volumes in the health sector may be taken in-year as pre-emptive corrective measures to prevent budget over-runs.
Early warning mechanisms associated with corrective measures are frequently used.
A large majority of OECD countries (22 of 24 surveyed countries) use corrective mechanisms to enforce spending objectives and improve budget compliance, both where the budget is set as a fixed allocation and as a target (Figure 4.9). In most cases, corrective mechanisms are comprehensive, with a system in place that detects risks of overspending with actions required in the current year or future year. Partial mechanisms – systems that detect overspending, but where an alert does not legally require action – are used less frequently (in 5 out of 22 countries with corrective mechanisms).
France has introduced monitoring mechanisms with the aim of ensuring compliance of health expenditure within the ONDAM target. An Alert Committee (Comité d’alerte) is responsible for steering compliance with the ONDAM throughout the budget year and alerting the government, the parliament, and the health insurance funds if health expenditure risks exceeding the ONDAM by more than 0.5%. The Steering Committee monitors health expenditures covered by the ONDAM every month, implements all savings that have been decided to help meet the target, and prepares the ONDAM for the following year.
Source: OECD (2021), Survey on macro-level management of health expenditure, with a special focus on multi-annual financial planning for health.
4.4.2. Budget monitoring and reporting
Across most surveyed OECD countries, budget monitoring requires in-year reporting on health expenditures. In-year budget monitoring is essential for supervising budget implementation and identifying significant deviations from planned expenditure to inform pre-emptive corrective actions to prevent over or under-spending during the year. Budget monitoring should cover all expenditure, including operating and capital expenditure, and provide information in a timely manner.
In 13 of 24 surveyed countries, reports are produced monthly, with nine countries producing reports less frequently (e.g. on a quarterly basis). Such reports are typically released publicly for budget transparency (Figure 4.10).
Year-end reporting – reporting on actual execution of the health budget at the end of the budget year – is also an essential component of budget monitoring. Ex-post budget reports, when well designed and implemented, are fundamental to accountability and can yield useful findings on performance and value-for-money to inform future budget allocations.
Over 90% of surveyed OECD countries include year-end reporting within the budget monitoring framework.
Furthermore, in approximately a quarter of countries, independent government bodies, such as National Audit Offices or equivalent, are responsible for external monitoring of the budget alongside central governments. In addition, for countries with compulsory health insurance schemes, the ministry of finance (MoF) often takes a supervisory role to protect the financial interests of the central government. This takes place through the permanent or ad hoc representation of the ministry of finance in the supervisory boards of social health insurance agencies to oversee budget monitoring.
Source: OECD (2021), Survey on macro-level management of health expenditure, with a special focus on multi-annual financial planning for health.
Across OECD countries, the responsibility of budget monitoring mostly lies with the central health ministry in countries with government schemes and with the compulsory health insurance scheme in insurance-based systems (Figure 4.11). However, in many countries – especially those with government-based schemes – the central budget authority (CBA) has maintained a joint responsibility and control over the monitoring of the health budget.
Note: Proportion of countries that stated it was the responsibility of the institution to monitor the health budget.
Source: OECD (2021), Survey on macro-level management of health expenditure, with a special focus on multi-annual financial planning for health.
4.4.3. Management of overspending in the health sector
Despite setting a total budget for health expenditure, deficits exist at various levels in the health system across health purchasing bodies and health providers across OECD countries. Drivers of overspending include rising healthcare costs, insufficient initial funding, as well as inefficient models of healthcare delivery. While short-term deficits can be corrected through cash injections, long-standing deficits can be detrimental to health system performance. Deficit reduction aims to introduce healthcare reform to slow the growth in healthcare costs, without reducing the quality of or access to care.
In New Zealand, for example, 19 of the 20 District Health Boards were in deficit as of early 2021.5 Deficits have been attributed to underfunding of the health sector, but also to a range of governance and performance-related issues. This was one of the drivers of the 2022 reform.
As a result of overspending, governments are obliged to routinely bail-out deficits in the health sector. Purchasers and providers of healthcare are often considered too vital to collapse, and therefore are consistently protected by governments. When this is mutually understood by both parties, incentives to institute tight financial control and avoid overspending are weakened.
In Israel, it has become common practice for the government to provide additional funding for the four Health Maintenance Organisations at the end of the year. Consequently, HMOs tend to plan deficits into their spending, assured that these will be covered by government.
New Zealand and England (United Kingdom) have recently carried out large organisational reform of their health systems, including the centralisation and merging of small healthcare purchasing bodies (Box 4.7).
To manage and prevent overspending, OECD countries employ various strategies.
Overspending of the health budget is prohibited by law in approximately a quarter of surveyed OECD countries. In countries, where overspending is legally feasible, a common consequence – particularly for insurance-based systems – is the distribution of reserve funds or retained earnings of the fund from periods of surplus to cover overspending (Figure 4.12). Another frequent consequence is the approval of a supplementary budget or budget law to cover overspending. Often these must be accompanied with an ex-post or ex-ante explanatory report by the corresponding health authority justifying the overspending. Other consequences include the freezing of certain budget lines (for example for the ministry of health), expenditures or reserves, increasing taxes or social security contributions, clawback mechanisms, and – in extreme cases – the forced administration of health purchasing bodies or providers.
Belgium introduced measures to shift some of the financial responsibility of deficits onto the health insurance funds. Since 1995, when the financial accounts for the year are closed, the health insurance funds are individually responsible for 25% of their financial result. If a fund has a surplus, 25% of the surplus can be added into its reserve fund. But if the fund runs a deficit, it must finance 25% of the deficit from its reserves. It is possible that insured members of the fund will have to contribute to the reserve. This has happened just once, but there is sufficient consciousness to prevent budget overruns by the health insurance funds.
Source: OECD (2021), Survey on macro-level management of health expenditure, with a special focus on multi-annual financial planning for health.
New Zealand and the United Kingdom have recently undergone large-scale reforms of their health systems (Table 4.3). The reforms focus on consolidating and merging of healthcare purchasing bodies into larger, more centralised bodies.
4.5.1. Multi-annual budget perspective
The benefits and challenges of integrating a multi-annual dimension into the budget process for health
Across OECD countries, ministries of health, and actors in the health sector, have been calling for an approach that provides greater predictability and certainty over budget allocations to the health sector in the medium-term. This would enable longer-term planning and prioritisation and could establish incentives for ministries of health to identify efficiency savings. Planning over a multi-annual horizon must be based on high-quality projections of expenditure estimates and ceilings. Multi-annual allocations for health should be set at a level that prevents the need for annual top-ups that reduce credibility.
However, finance ministries warn about the possible trade-off with flexibility. By committing to credible medium-term budgeting ceilings, health officials have greater budgetary predictability. For finance ministries, committing takes away the flexibility to set allocations to the health sector as the fiscal environment changes, creating a sustainability risk. Therefore, flexibility instruments (such as contingency funds) are needed within multi-annual frameworks to deal with unexpected shocks.
Across the OECD, multi-annual financial planning in the health sector generally only provides informational input to the budget process in surveyed OECD countries. Multi-annual financial planning provides binding minimum or maximum budget allocations in only a subset of countries. Guaranteed maximum spending ceilings for health beyond the current fiscal year or guaranteed minimum spending floors are only set in 6 of 24 countries, and binding budget allocations are set in a further 4 countries.
In 2018, the United Kingdom set binding multi-annual commitments for the health sector, and in 2022, New Zealand set a two-year budget for health.
Source: OECD (2021), Survey on macro-level management of health expenditure, with a special focus on multi-annual financial planning for health.
Out of selected countries, the United Kingdom and New Zealand currently set the budget for the health sector beyond the current year. In England (United Kingdom) multi-annual funding takes the form of a 5-year funding deal for the NHS for the years 2019/20-2023/24, excluding key areas such as public health and health workforce planning and training. New Zealand set a two-year budget for health in 2022, thus including two-years’ worth of cost pressures and new initiatives. The intention is to move towards a three-year funding arrangement from 2024, subject to adequate system settings to support improved planning and financial control being in place. This was based on a top-down funding model developed by Treasury and the Ministry of Health, including factors for demographics, inflation (combination of wages and consumer price index), other health cost drivers (such as technology) and productivity/efficiency measures.
A multi-annual perspective is integrated in France, Israel and Belgium. In Israel, the formula-increase for the health budget provides some visibility over future funding levels. France sets an expenditure target for a three-year period, but this does not constrain decisions when setting the target for the current year. Belgium projects health expenditure up to 10 years ahead, which is used by INAMI to support baseline estimates, as well as model the implications of alternative policy scenarios.
Design issues when implementing multi-annual frameworks for health
Short- and medium-term projections of health expenditure can be used to support the formulation of budgets for health beyond the annual budget year. Nearly all surveyed OECD countries project health expenditure to the short term (i.e. three to five years). For most countries, projections are revised on an annual basis to coincide and provide informational input into the annual budget process, rather than revised on a more frequent basis.
In addition, the coronavirus pandemic has shown that flexibility instruments are needed in the design of multi-annual financial frameworks to account for unforeseen and large expenditure needs.
Expressing the total budget for health growth rate in real terms – such as in Belgium – rather than nominal terms, can help absorb unexpected changes in inflation but can have negative effects on fiscal sustainability. Existing budgets for health may also need to be re-adjusted according to new healthcare demands and cost-structures.
Contingency funds or supplementary budgets are useful tools for major unexpected events such as COVID-19. Contingency funds exist in over half of surveyed OECD countries. Funds exist either specifically for the health sector or are available across the whole of government.
Changes to multi-annual financial agreements – i.e. changes to budget allocations and/or prices within multi-annual financial agreements – are allowed across most surveyed OECD countries (Figure 4.15). In some instances, changes are allowed exclusively during an emergency, such as the COVID-19 pandemic. For others, multi-year financial agreements are reviewed and adjusted annually.
Source: OECD (2021), Survey on macro-level management of health expenditure, with a special focus on multi-annual financial planning for health.
Countries vary in the depth and coverage of their short-term projection models of health expenditure (Table 4.4). Belgium has developed a microsimulation model to project health expenditure up to 10 years ahead. The model projects health expenditure for 25 sub-groups of health expenditure and includes seven individual characteristics for healthcare consumption (such as age, sex, health status, and social situation).
4.5.2. Capital budgeting for health
Across surveyed OECD countries, capital expenditures follow the same budget process as operating expenditures in slightly over half of countries (Figure 4.16). In the remaining countries, capital expenditure either follows a centralised budget process for all central government investments, or follows a process led by the investing institution itself, such as large hospitals or regional health authorities.
Capital expenditures follow the same budget process as operating expenditures in Israel, and the United Kingdom. However, capital expenditure is contained within separate dedicated budget lines or programmes. Despite separate budgets lines, transfer of funds from the capital to recurrent budget during the year can occur, to prevent overruns in the operating budget. This has, for example, been common in the United Kingdom, causing a regular reduction of the capital budget.
In Belgium and France, capital expenditure follows a separate budgetary process than operating expenditure. A tailored framework for capital expenditure aims to ensure an appropriate total budget for health expenditure, an effective prioritisation of capital projects aligned with national strategic priorities, and an efficient execution of capital projects.
Source: OECD (2021), Survey on macro-level management of health expenditure, with a special focus on multi-annual financial planning for health.
Mechanisms to safeguard planned capital expenditures are rare across surveyed OECD countries (Figure 4.17). Mechanisms in place include the separation of capital budget from operating budgeting.
Source: OECD (2021), Survey on macro-level management of health expenditure, with a special focus on multi-annual financial planning for health.
Some countries have developed frameworks for the prioritisation of resources to different capital projects for health, often on a multi-annual basis. Frameworks consist of the analysis of capital investment proposals, including cost-benefit analysis for larger projects, as well as links to a public investment committee or the ministry of finance (Box 4.10).
Over three-quarters of surveyed OECD countries have a multi-annual planning framework for capital expenditure (Figure 4.18). Among them however, only a third set their capital budget on a multi-annual basis. Countries should further develop medium-term capital plans for the health sector that go beyond the annual budget, to assess capital capacity, development needs, and priorities.
Source: OECD (2021), Survey on macro-level management of health expenditure, with a special focus on multi-annual financial planning for health.
Capital budget frameworks for health differ across countries. For example, in Belgium and France, most of the capital expenditure is the responsibility of the regions. Table 4.5 gives an overview of the capital budgeting frameworks in the United Kingdom.
4.6.1. Programme and performance budgeting, and use of KPIs
OECD countries are looking to better integrate health objectives into the budget process through programme or performance budgeting frameworks. These frameworks make an explicit link between the financial allocations as outlined in budget law, and the expected purpose or results, measured through key performance indicators (KPIs).
Currently, a third of surveyed countries have no form of performance budgeting framework in the health sector, with no link between health objectives and the health budget (Figure 4.19). Under 10% of surveyed countries have a direct form of performance budgeting – where indicators for strategic health objectives are incorporated within budget documents and there is a direct link between results and resources – however, this is often limited to a small proportion of the health budget. The majority of countries have an indirect form of performance budgeting, where indicators for strategic health objective are presented within or alongside budget documents, but there is no direct link between funding and resources.
Belgium intends to integrate healthcare goals into the budget process for its compulsory health insurance system. From 2022, the budgetary process allows for the allocation of resources to healthcare objectives. The intention is not to achieve cost-savings, but to use resources in the most effective way to improve health system performance.
Source: OECD (2021), Survey on macro-level management of health expenditure, with a special focus on multi-annual financial planning for health.
Long term health sector strategic plans are important for outlining the long-term vision for the health sector, and ensuring systems are fit for the future. Plans are also a means to link expenditure allocations to policy priorities. Without the link, plans can be unrealistic.
To support longer term strategic planning, Belgium, France, New Zealand and the United Kingdom project health expenditure beyond a 10-year time horizon.
In the United Kingdom, the NHS Long Term Plan was developed to link the NHS five-year funding deal and the long-term strategic objectives and priorities in the health sector.
There is recognition that strategic health objectives often require cross-cutting actions across areas of government. For example, on objectives such as improving mental health, the impact of health policies is constrained.
New Zealand aims to address this through their well-being budget, a new approach to budgeting by integrating measures of well-being in the budget process. The approach aims to break down agency silos and encourage cross-government policies to tackle complex health objectives.
Countries vary in the degree that strategic health objectives are integrated into the budget process (Figure 4.20). New Zealand integrates performance information into the presentation of most budget appropriations. In Belgium, from 2022, the budget included the allocation of resources to healthcare objectives.
In France, Israel and the United Kingdom, the budget process and development of strategic health objectives are undertaken in parallel, albeit some efforts to align the two. For example, Israel has developed a performance budgeting system, where a minor share of HMO financing is dependent on the results of key performance indicators.
4.6.2. Use of spending reviews for health
Budgets are annual processes and usually focus mainly on incremental changes and expenditure. However, it is often necessary to analyse existing expenditures, to ensure their effectiveness, and that spending is still aligned with government priorities.
Spending reviews are an effective instrument to do this. In the health sector, health ministries can opt to implement a spending review to identify areas of wasteful, inefficient, or ineffective spending. A spending review can also be used to demonstrate the extent to which expenditures align to government priorities. Doing so can increase the profile and priority of implementing health policies and bring awareness to the budgetary constraints and sustainability challenges facing ministries of health. Spending reviews should be integrated as part of the budget preparation process, on a regular, rather than ad hoc basis. The frequency should depend on the regularity with which government sets budget allocations for the health sector.
Across the OECD, spending reviews are widely used as a strategic budgeting tool in the health sector across surveyed countries (Figure 4.21).
In over half of surveyed countries, spending reviews are used on a regular basis as part of the budget process. However, countries differ in the extent to which the results of spending reviews influence future budget allocations for health. For example, in Austria, Colombia and Czechia, spending reviews are perceived as having little or no impact on determining future budget allocations. Meanwhile, in the Netherlands, spending reviews are seen as having a strong influence. As spending reviews are a resource-intensive activity, all aspects of the process need to be designed to deliver the best possible return.
The United Kingdom carries out spending reviews in the health sector every 2-4 years. Spending reviews are used to determine medium-term targets and spending limits, to ensure allocations of public resources are in line with government priorities.
France carries out spending reviews in the health sector on an ad hoc basis, focusing on the components that drive spending growth and provide analysis of the causes and target specific populations or diseases.
Source: OECD (2021), Survey on macro-level management of health expenditure, with a special focus on multi-annual financial planning for health.
Applying good budgeting practices for health increases the performance of health systems by maximising the value-for-money of health spending. This chapter demonstrates how good budgeting requires a coherent and effective budget strategy, beginning with a robust budget formulation mechanism. Experience from OECD countries points to the use of high-quality estimates of baseline expenditure, clearly identified cost drivers, and transparent assumptions to successfully set a total budget for health expenditure. Looking forward, improved collaboration with the ministry of finance during budget formulation can help to identify additional budgetary space for new policy initiatives in the health sector, while ensuring the consistency of budgets to the broader government fiscal constraints.
Secondly, the analysis stresses that good budgeting practices for health require the appropriate spending controls and active budget monitoring. This informs both short-term and pre-emptive actions to keep the budget on track, as well as yielding important messages on value-for-money to support effective future decision-making. Country experience also signals to health officials to undertake in-depth investigations into persistent overspending when spending controls and tools provide diminishing returns in their ability to contain health expenditures.
Furthermore, the chapter highlights how good budgeting practices for health requires on-going innovation in budgetary practices in the health sector. Country experience of incorporating a multi-annual perspective into budgetary management showcases the benefits of providing assurance over resource availability in the medium term and, in turn, providing incentives for effective forward planning. In addition, many countries are seeking to integrate health objectives into the budget process through deepening programme or performance budgeting. This provides a framework to better understand what health services are being delivered, and to what standards of quality and efficiency.
Finally, given the pressures on health systems from COVID-19, spending reviews are a readily available strategic budgeting tool to demonstrate the challenges and effectiveness of the existing allocation of resources in governmental budgets. The results from spending reviews are instrumental in helping to create fiscal space, improving a government’s control over aggregate expenditure, prioritising health expenditure, and managing potential risks.
References
[4] Chevreul, K. et al. (2015), “France: Health system review”, Health Systems in Transition.
[8] Clarfield, A. et al. (2017), “Health and health care in Israel: an introduction”, The Lancet, Vol. 389/10088, pp. 2503-2513, https://doi.org/10.1016/s0140-6736(17)30636-0.
[7] FIPECO (2022), L’objectif national de dépenses d’assurance maladie (ONDAM), https://www.fipeco.fr/fiche/L%E2%80%99objectif-national-de-d%C3%A9penses-d%E2%80%99assurance-maladie-(ONDAM).
[6] HCAAM (2021), “Rapport du HCAAM sur la régulation”.
[3] Lambert, L. (2020), “Budget des soins de santé, un vent d’espoir après la tempête?”, http://www.revue-democratie.be/index.php?option=com_content&view=article&id=1467:budget-des-soins-de-sante-un-vent-d-espoir-apres-la-tempete&catid=30&Itemid=130.
[10] Lomax, N., S. McLoughlin and B. Udy (2016), “The New Zealand Fiscal Management Approach”, https://www.nzae.org.nz/wp-content/uploads/2016/10/3228152_FINAL-Conference-Paper-Guide-to-NZs-FMA.pdf.
[11] NHS (2022), Capital guidance 2022 to 2025, https://www.england.nhs.uk/wp-content/uploads/2021/12/B1256-capital-guidance-for-2022-25.pdf.
[2] OECD (2023), Health at a Glance 2023: OECD Indicators, OECD Publishing, Paris, https://doi.org/10.1787/7a7afb35-en.
[12] OECD/WHO/Eurostat (2011), A System of Health Accounts: 2011 Edition, OECD Publishing, Paris, https://doi.org/10.1787/9789264116016-en.
[5] Senat (2022), Sur l’objectif national de dépenses d’assurance maladie, https://www.senat.fr/rap/r19-040/r19-0404.html.
[1] Vammalle, C., C. Penn and C. James (2023), “Applying good budgeting practices to health”, OECD Journal on Budgeting, https://doi.org/10.1787/b280297f-en.
[9] Waitzberg, R. et al. (2019), “The 2010 expansion of activity-based hospital payment in Israel: an evaluation of effects at the ward level”, BMC Health Services Research, Vol. 19/1, https://doi.org/10.1186/s12913-019-4083-4.
In Belgium, since 1995 a Global Budget Objective (OBG) has been established to determine the overall budget of the compulsory health insurance system, thereby providing a more predictable level of health expenditure. The OBG is largely driven by a real growth rate, one that automatically adjusts for inflation and is set in law. Beyond inflation, the real growth rate is not based on explicit criteria, but rather reflects a political decision, one that balances considerations of healthcare needs and relative government priorities.
Systems exist to detect and control budget overruns and implement corrective mechanisms to ensure compulsory health insurance spending adheres to the OBG. In this sense, the OBG is best understood as a ‘hard’ rather than ‘soft’ health expenditure target.
In France, an annual target for health expenditure has been set since 1996, known as the ‘Objectif national de dépenses d’assurance maladie’, or ONDAM. This target aims to control the growth of social health insurance expenditure. The ONDAM target (and sub-targets) set by Parliament are based on the forecasted growth of health expenditure, political objectives, and wider fiscal considerations.
France has over time introduced monitoring and stricter corrective mechanisms, with the aim of ensuring compliance with the ONDAM target. As a result, the ONDAM has been largely respected since 2010 (excluding 2020 due to the pandemic).
Israel sets a total annual budget for its compulsory health insurance system. This budget includes automatic adjustment mechanisms reflecting three cost drivers: demographic growth, technological developments, and a price index.
Israel has established tight regulation over resources and expenditures in the health sector. For hospitals, there are rigorous controls on important supply factors, such as hospital beds and expensive medical equipment. In addition, the government sets maximum reimbursement rates and revenue caps on hospitals’ income.
Struggling with inequities and variation in access to the health system across the country, in 2022 New Zealand undertook a large-scale reform of their national health system. The new system disestablished the 20 local health organisations and merged their functions into a new national body which now leads the day-to-day running of the system for the whole country.
Under this new reform, New Zealand is moving towards a multi-annual budget for health sector. For the first time, the 2022 budget took a multi-year approach towards funding the health system, providing health entities with certainty about the funding available for the next two years. From the 2024 budget onward, the intention is to move to a three-year funding cycle when the system is ready.
The United Kingdom has a history of multi-year allocations for the health sector. In 2018, the government announced its latest multi-year funding settlement in the form of the NHS five-year deal for England. This was unique in that the funding for the next five years was protected by legislation.
The United Kingdom carries out comprehensive spending reviews every 2-4 years to allocate funding across the health sector in line with government priorities under the five-year deal.
Overview of health financing arrangements
Health financing in Belgium is organised predominantly around a compulsory health insurance system. This is overseen by the National Institute for Health and Disability Insurance (INAMI), with people free to choose between seven non-profit health insurance funds. These insurance funds are closely regulated, and must reimburse all services in the nationally established fee schedule (called the nomenclature).
INAMI is primarily financed through social security contributions (60%), but with a sizable amount funded through government transfers (40%) (OECD, 2023[2]). Such government transfers aim to cover the difference between revenues (as calculated by the National Office of Social Security), and expenditures (as calculated by INAMI). INAMI divides a global budget among the seven health insurance funds, using a mixture of prospective and retrospective payments: 70% of the division is based on historical expenditure, with the remaining 30% allocated using a standard formula reflecting demographics, mortality, socio-economic factors, the environment (such as the degree of urbanisation), and morbidity. This is intended to cover the full cost of reimbursements to their affiliated members.
Preparation of Belgium’s global budget for the compulsory health insurance system involves a range of stakeholders. These stakeholders are grouped into three bodies – the General Board of INAMI, the Insurance Committee of INAMI, and the Budget Control Committee.
Belgium spent 11% of its GDP on health in 2021, higher than the OECD average of 9.7%, and equivalent to USD 6 022 per capita (adjusted for purchasing power).
Compulsory health insurance accounts for 55% of total health spending, with government schemes a further 23%. Voluntary health insurance comprises 5% of health expenditure, with household out-of-pocket (OOP) payments accounting for the remaining 18%.
Source: OECD Health Statistics 2023, https://doi.org/10.1787/health-data-en.
Setting the budget for health
Since 1995, an overall annual budget is set for the compulsory health insurance system. This ‘global budget objective’ (‘Objectif Budgétaire Global’ or OBG) covers all reimbursements made by the health insurance funds. It excludes certain healthcare expenditure covered by the regions and communities (discussed further below), as well as spending by the private health sector.
Calculation of the OBG is legally fixed. The OBG for the upcoming year is equal to that of the current year, increased by three factors: a real growth rate, expenditure related to the revenue act 81/111 and agreed funding for additional policy initiatives (Annex Figure 4.A.1).
Source: INAMI.
Of these three factors, the real growth rate is the most important factor driving the budget, typically accounting for 70-90% of the increase. As with the overall OBG, it is legally defined, meaning it can only be changed at the initiative of the government. It includes an automatic adjustment for inflation, based on a health price index.
Other than accounting for inflation, the criteria on which the growth rate is set are not explicitly specified. As a first step, INAMI estimates a ‘natural’ growth rate of health expenditure. This is the expected increase in compulsory health insurance expenditure with constant legislation – a baseline scenario of no policy change. This natural growth rate estimate is based on historical trends, along with the impact of key cost drivers such as demographic and epidemiological factors.
Medium-term expenditure estimates by the Federal Planning Bureau are also considered. Such estimates of health expenditure ‘needs’ are used as a starting point for discussions, which also consider competing government priorities and fiscal constraints.
Ultimately, the real growth rate, and therefore the OBG, is a political decision, one that balances considerations of cost pressures and relative government priorities. It is realised through a series of dialogues between key stakeholders – INAMI and the health insurance funds, health providers, and the government. After these consultations, a final decision on the real growth rate is made by the federal government.
Assessing the evolution of the real growth rate reveals significant differences over time. Since 1995, while the natural growth rate has been typically around 2.2%, the real growth rate has varied between 1.5% and 4.5%. Notably, in 2005 the real growth rate increased from 2.5% to 4.5%. This rate allowed for surpluses, which were transferred into a special fund to finance the future impact of ageing. From 2012-14, the growth rate was set at levels closer to the natural growth rate. In 2015, soon after a change in government, the growth rate was cut to 1.5%, to create fiscal space for other government priorities. This was insufficient to keep up with the evolution of baseline healthcare needs, so savings had to be found to maintain a balanced budget. In 2022, the growth rate increased to 2.5%, to finance the higher demand for healthcare services due to COVID-19. It is also close to medium-term projections by the Federal Planning Bureau.
In addition to the real growth rate, Revenue Article 81/111 was created in 2010 as a managed entry agreement for new pharmaceuticals. It offers temporary reimbursement for pharmaceuticals where studies of clinical efficacy or cost-effectiveness are not conclusive enough to ensure permanent reimbursement. Medicines under Revenue Article 81/111 convention grew by an average of 32% between 2015 and 2018, while all other medicines experienced negative growth (-0.6%) over the same period (Lambert, 2020[3]).
Finally, additional initiatives can be included to reflect new policy proposals. Various committees for healthcare providers communicate their policy needs, ranked in order of priority. The adoption of new measures requires a strong rationale and political buy-in. Historical examples include funding for a new mental health package, strengthened hospital care, and new agreements with health professionals. Note that within-year adjustments to the budget require a change in law.
Once fixed, the overall health budget for compulsory health insurance (OBG) is allocated across different categories and programmes through ‘partial budget objectives’.
Partial budget objectives are currently set for 39 sub-sectors, reflecting the organisation of health professionals and institutions (e.g. medical fees, dental fees, pharmaceuticals, hospitalisations, medical centres).
Partial budgets form the basis for negotiations on the tariff conventions and agreements between health insurance funds and healthcare providers. National fees and reimbursement tariffs are set across health insurance funds for medical services and specific conditions related to content, quantity, and quality of care.
In principle, partial budgets may exceed their budgeted amount, if overall health spending is within the OBG. However, in practice partial budgets are regarded as the property of each subsector, with subsectors incentivised to introduce new resource needs to maintain their partial budget objective. Reallocations between partial budgets is difficult without strong political support.
Belgium is considering a more global, transversal approach that allows for greater flexibility in budget allocations between different subsectors.
Beyond compulsory health insurance, the three regions are responsible for some public health functions (such as vaccinations, screening campaigns), hospital investments and nursing homes. These regional health services are financed mainly through personal income tax, and unlike compulsory health insurance, integrated into the general government budget.
There are also budgeted expenditure outside the yearly budget process. This covers specific and exceptional circumstances, not related to day-to-day expenditure. Notably, additional costs of COVID-19 measures were outside of the OBG in the 2020 and 2021 budgets.
Budgetary tools used to control health expenditure growth
Historically, INAMI suffered from financial deficits. Therefore in 2017, Belgium introduced a law obligating the federal state to intervene if there is insufficient revenue from social security contributions to finance the compulsory health insurance system. This means that INAMI can never be in deficit.
However, systems exist to detect and control budget overruns and implement corrective mechanisms to ensure compulsory health insurance spending adheres to the OBG (Annex Figure 4.A.2). In this sense, the OBG is best understood as a ‘hard’ rather than ‘soft’ health expenditure target.
Multi-annual financing planning and capital budgeting for health
There is no formal medium-term financial framework for health. However, a medium-term perspective is integrated through multi-annual projections of health expenditure carried out by the Federal Planning Bureau (BFP). Since 2018, projections come from the PROMES model. Developed in collaboration with INAMI, it aims to align federal planning with the INAMI budget process. PROMES provides a detailed analytical view of the determinants of health expenditure for the next ten years. It has been used to support INAMI short-term recurrent estimates, negotiations of multi-annual deals for the pharmaceutical sector, and analyse different policy alternatives.
Most capital expenditures for health are the responsibility of the regions. Each region is responsible for financing investments in infrastructure and most medico-technical services (‘investment charges’), with the federal government responsible for financing short-term credit burdens (capital loans).
Links between the budgeting process and strategic health objectives
Recent reform in Belgium aims to create a formal link between the budgeting process and strategic health objectives. From 2022, the budget for the compulsory health insurance system includes the allocation of resources to healthcare objectives. A new budget line within the Global Budget Objective was introduced to commit resources to actions that fall within the scope of healthcare objectives. The aim is to eventually develop a multi-year allocation to healthcare objectives.
Four healthcare objectives were defined in 2022 and will be achieved through 15 projects (Annex Table 4.A.1).
Overview of health financing arrangements
France’s health system is based on a social health insurance system, covering almost 100% of the population. Health insurance is predominantly provided through the general scheme ‘Caisse nationale d’assurance maladie des travailleurs salaries (CNAM)’, covering nearly 90% of the population. There are separate schemes covering the self-employed and the agricultural sector.
The social health insurance system is predominately financed through social security contributions (50%), and state transfers from national taxes and duties (25%). Each year the Ministry of Health, in conjunction with the Finance Ministry, prepares the annual Social Security Financing Act (PLFSS) containing a target for social health insurance expenditure for Parliamentary approval. The Ministry of Health sets a target for the different sectors (hospitals, ambulatory care, mental health care, social and health sector for disabled persons) and, with respect to hospitals, among the different regions (Chevreul et al., 2015[4]).
At the regional level, 26 regional health agencies (Agence régionale de santé, ARS) are responsible for ensuring that the delivery of health services meets the needs of their local populations by implementing regional health policy while respecting the expenditure target.
France spent 12.3% of its GDP on health in 2021, higher than the OECD average of 9.7%, and equivalent to USD 6 106 per capita (adjusted for purchasing power).
Compulsory health insurance accounts for 81% of total health spending, with government schemes a further 4%. Voluntary health insurance comprises 6% of health expenditure, with household out-of-pocket (OOP) payments accounting for the remaining 9%.
Source: OECD Health Statistics 2023, https://doi.org/10.1787/health-data-en.
Setting the budget for health
Since 1996, France sets a health expenditure target, known as the ‘Objectif national de dépenses d’assurance maladie’, or ONDAM. The ONDAM is an objective for the total amount of health expenditure for a given budget year financed through the Social Security Financing Act (PLFSS). This covers most public expenditure on health in France but excludes state expenditure on areas such prevention, medical care in schools, and expenditure by local authorities.
The ONDAM is set through the annual process for the Social Security Financing Act (PLFSS). Each year, the Ministry of Finance produces a draft PLFSS in collaboration with the Ministry of Health. The PLFSS proposes a growth rate for social health insurance expenditure for the coming year. This growth rate is applied to the current year’s actual health expenditure to fix the ONDAM (Annex Figure 4.A.3). The proposal for the growth rate takes into consideration the forecasts of the evolution of social security spending, political objectives, and wider fiscal objectives, but is not set based on explicit criteria. Following the submission of the draft PLFSS, Parliament votes on the ONDAM target.
Alongside the voting of the ONDAM, there is an annual forecast and adjustment process to keep the ONDAM on track. Within the PLFSS, the Ministry of Health must propose a package of saving measures to contain social health insurance expenditure growth. The extent of the saving measures corresponds to the difference between the voted ONDAM and the forecasted growth in health expenditure in the absence of new measures (the trend growth) (Annex Figure 4.A.4). This phase makes it possible to identify efficiency margins and priorities for action to control health expenditure. However, the focus on savings gives the false impression that the government wants to make cuts to health expenditure, although the target for health expenditure grows each year.
Source: Senat (2022[5]), Sur l’objectif national de dépenses d’assurance maladie, https://www.senat.fr/rap/r19-040/r19-0404.html.
The ONDAM target is broken down into 5 objectives and 2 sub-objectives. These correspond to specific categories of expenditure, which are predominately defined by the way in which health services are contracted and regulated.
The two main objectives (covering approximately 85% of total expenditure) are related to ‘Soins de Ville’ (ambulatory care) and healthcare establishments (hospitals, rehabilitation, long-term care etc.).
The remaining objectives cover medico-social establishments (services for the elderly and disabled), regional health agencies expenditure (for public health activities), and other support (care for French resident abroad, specialised drug addiction centres etc.).
France has recognised the current breakdown of the ONDAM target does not favour care integration and does not enable Parliament and the public to understand how much money goes for what. As such, there are proposals for a breakdown by destination of care, for example by primary care (including local care specialties), acute hospital care, rehabilitation care, old age care, and disability and dependency (HCAAM, 2021[6]).
The ONDAM is an objective, rather than a hard cap. Between 1996 and 2010 the ONDAM target was never respected, with social health insurance spending always exceeding the target.
As such, France has gradually introduced monitoring and corrective mechanisms with the aim of ensuring compliance of health expenditure within the ONDAM target. As a result, the ONDAM has been respected since 2010.6
An Alert Committee (Comité d’alerte) is responsible steering compliance with the ONDAM throughout the budget year and alerting the government, Parliament, and the health insurance funds in the event the evolution of health expenditures risks exceeding the ONDAM by more than 0.5%
The Steering Committee monitors health expenditures covered by the ONDAM every month, implements all savings that have been decided to help meet the target, and prepares the ONDAM for the following year.
Reimbursements to hospitals are adjusted in line with the ONDAM. Health insurance schemes finance hospitals primarily based on activity and on the mix of patients (referred to as activity-based financing). Reimbursement rates are set at the beginning of the year to be consistent with the ONDAM target by forecasting growth for hospital activity. If planned activity is underestimated, these rates are reduced during the year. Other payments from health insurance schemes to hospitals are independent from activity, and instead are lump sum allocations to fulfil tasks of general interest, such as medical research. Part of these allocations (around EUR 600 million in 2020) is placed in reserve at the start of the year and is only paid to hospitals at the end of the year if health expenditure is compliant with the ONDAM (FIPECO, 2022[7]).
The budgeting process in France is legally grounded to the principle of annuality. However, France has made several efforts to introduce a multi-annual perspective into the budgeting process for health:
The Social Security Financing Act (PLFSS) contains forecasts for the next four years of revenue and expenditure of the ONDAM.
The PLSS also includes an assessment of the financial consequences of new discretionary spending measures in terms of additional savings or costs over several years.
Under the Public Finance Programme Law introduced in 2008 the ONDAM is set for at least three years. However, these are not enshrined in budget law and cannot constrain either the Government or Parliament in the annual procedure for preparing and adopting the budget.
Most capital expenditures are included within the ONDAM target. Capital budgeting in France occurs mainly at the regional level, with the 26 regional health agencies (ARS) overseeing capital expenditure, including the purchasing of major medical equipment. Every 5 years, the ARSs produce a regional health project (Projet régional de santé). The regional health project defines multiannual priorities for large capital investments and the objectives for the provision of expensive medical equipment based on an assessment of local population need and taking into consideration national health strategies. Authorisation for the purchase of expensive medical equipment by providers is granted for five years, according to objectives defined in the regional health projects.
Links between the budgeting process and strategic health objectives
A link between the setting of the ONDAM and strategic health objective is reflected through the Social Security Policy Evaluation Reports (REPSS) annexed to the PLFSS. The REPSSs aims to provide transparent reporting on the quality and outcomes of the social health insurance scheme, improve the clarity of public policies, and contribute to policy evaluations by measuring the performance of health policies. The REPSSs are used during debates in Parliament to provide context for discussions related to the success of public policies.
The REPSS prescribes the provision of performance information, including objectives, policy strategies, results, and performance indicators for the health system. The REPSSs also aim to judge the adequacy of the measures proposed in the PLFSS for the year in the economic, demographic, health, and social context, using quantitative indicators. REPSSs are produced each year by the social security department of the Ministry of Health.
However, the aim to compare health objectives with the resources voted in the ONDAM has so far failed. The indicators have no legal force, or great visibility, and there is question over the optimal number of indicators with concerns there are too many. There is also a gap between budget-setting and indicators, as the indicators do not reflect directly budgetary choices and trade-offs (HCAAM, 2021[6]).
Overview of health financing arrangements
Health financing in Israel is organised predominantly around a compulsory health insurance system. People are free to choose among four competing non-profit Health Maintenance Organisations (HMOs). These HMOs must provide all insured persons with a mandated health basket as defined in law.
The Ministry of Health is responsible for managing an overall budget set for ‘national health insurance’ (NHI). This budget is divided amongst the four HMOs using a capitation formula that adjusts for age mix, gender, and place of residence. NHI is financed through an earmarked payroll tax and government transfers. The payroll tax is equal to 5% of income for individuals aged 22 and over. Married women, children, and certain population groups excluded from the national health insurance system (such as soldiers) are exempt from the tax. The government funds the difference between the payroll tax collected and the overall NHI budget (through general taxes), equivalent to around 50% of NHI funding in 2019.
Preparation of Israel’s global budget for NHI is formally based on discussions between the Ministries of Health and Finance, who together define the yearly increase. The HMOs participate in the budget process, and though not having an official role in setting the budget, they have strong political power and influence.
Israel spent 7.9% of its GDP on health in 2021, lower than the OECD average of 9.7%, and equivalent to USD 3 258 per capita (adjusted for purchasing power).
Compulsory health insurance accounts for 49% of total health spending, with government schemes a further 19%. Voluntary health insurance comprises 10% of health expenditure, with household out-of-pocket (OOP) payments accounting for the remaining 20%.
Source: OECD Health Statistics 2023, https://doi.org/10.1787/health-data-en.
Setting the budget for health
Three automatic drivers determine the majority of the NHI budget: a price index, a demographic coefficient, and an adjustment for new technologies. Each year the budget is adjusted according to these automatic drivers, increasing the budget by predictable amounts. Beyond these automatic increases, the government decides each year on funding for new policy initiatives – through negotiations between the Ministries of Health and Finance (Annex Figure 4.A.5).
The price index is defined in law and reflects the changing prices of health sector inputs. It is determined retrospectively, based on data from the Central Bureau of Statistics. A formula is used to specify the index’s components, and these components respective weights. The index is primarily based on adjustments in health professionals’ wages (a weight of 62%), followed by changes to the consumer price index (27%). Changes in other wages and the construction price index are also included. Health sector wages are determined at the national level. The Ministry of Finance leads wage collective bargaining negotiations with healthcare labour unions, such as the Israel Medical Association.
The price coefficients included in the index only partially reflect the true increase in the inputs required to provide the basket of services. For example, the formula does not include the cost of hospitalisations, which make up around 40% of health expenditures. This has been a source of controversy between the Ministries of Health and Finance, and the HMO’s. Reviews of the price index aim to reduce the gap between the rise in the index and the actual rise in prices. But the formula is not frequently reviewed, with the last revision occurring in 2016.
The demographic coefficient is currently set at the population growth rate in the previous year. Unlike the price index, it is not defined in law, but reached through government agreement. Prior to 2014, the demographic coefficient rate was calculated according to a predetermined rate for three years, with rates lower than population growth. The demographic coefficient does not account for ageing. While Israel has a relatively young population, its fertility rate is falling. Israel is therefore considering adjusting the demographic coefficient to account for ageing populations.
The component for technological change compensates HMOs for the absorption of new medical technologies. A “Basket Committee” decides on which new technologies are included, usually every three years. This committee is appointed by the Ministry of Health, and includes representatives from the Ministry of Finance, HMOs, hospitals, doctors, and the public (Clarfield et al., 2017[8]). All proposed new technologies are considered together, integrating HTA assessments with pre-defined criteria, and subject to a budget constraint. Increases in funding due to technological additions have represented between 0.65%-1.69% of the total health budget since 2008.
Once fixed, the overall health budget for NHI is distributed among the four HMOs, using a capitation formula that adjusts for age mix, gender, and place of residence. Clalit, the largest HMO, received 54% of the budget in 2019, with Maccabi receiving 25%, Meuhedet 12% and Leumit 8%.
Budgetary tools used to control health expenditure growth
Israel has tight control of resources and expenditures in the health sector. For hospitals, the Ministries of Health and Finance have a mixed set of policy levers designed to limit hospital expenditures with little or no marginal benefit.
In terms of physical inputs, the supply of hospital beds is closely regulated, along with their geographical distribution, ownership, and speciality. The government also regulates hospital licensure and oversees the authorisation process for opening a new hospital or department. Further, a ‘certification of needs’ regulates public and private hospitals purchase of costly medical equipment or devices, notably those that need highly specialised professionals (e.g. MRI scanners). Such items require approval from the Ministry of Health before they can be purchased. The Ministry of Finance can also veto approvals of such items. National ceilings are set for each of these devices in terms of units per million population, with the Ministry of Health determining how to allocate national quotas across providers and localities.
If a hospital repeatedly ends the financial year in deficit, the Ministry of Health can limit the certification of new hospital beds, medical equipment and/or devices.
Maximum price lists for public hospitals, determined by a joint Ministry of Health and Finance pricing committee, are mandated by law. In addition, a ‘cap mechanism’ regulates the expenditure of public hospitals, consisting of a minimum floor (lower cap bound) and a maximum ceiling (upper cap bound) on hospital incomes (Annex Figure 4.A.6). If an HMO purchases fewer services at list prices with an aggregated cost below the floor, the HMO must still pay the floor to the hospitals. Conversely, for services purchased over the ceiling, the HMO pays less than 100% of the full price. In 2016, for example, due to discounts related to the ceiling, hospital income was 15% lower than the potential income (Waitzberg et al., 2019[9]).
Source: Adapted from Waitzberg, R. et al. (2019[9]), “The 2010 expansion of activity-based hospital payment in Israel: an evaluation of effects at the ward level”, BMC Health Services Research, Vol. 19/1, https://doi.org/10.1186/s12913-019-4083-4.
The predominant aims of these floors and ceilings are to contain expenditure and ensure financial viability of hospitals. Still, the Ministry of Finance and Health have utilised the incentives inherent within the cap mechanism to achieve specific policy objectives. For instance, a 2017 reform removed the cap on hospital emergency room visits. For HMOs this meant paying full price for all emergency room visits by their insured patients. Consequently, HMOs were incentivised to provide alternative modalities to provide care. They opened more community-based centres to treat patients that would have otherwise attended the more costly, and sometimes less effective, emergency room at the hospital (Waitzberg et al., 2019[9]).
Nevertheless, budgetary deficits for both HMOs and health providers are major concerns (Annex Box 4.A.4).
Budgetary deficits for both HMOs are providers are a major concern in Israel. For HMOs, capitated financing from the government covers approximately 95% of HMO actual expenditure. The remaining 5% must be funded through other means. For example, it has been common practice in Israel for the government to subsidise HMO deficits. Between 2017-20, this amounted to approximately 2 billion Shekels additional spending per year, or 500 million Euros.
Due to the routine subsidising of deficits, there is a potential incentive for HMOs to plan for deficits, based on the assumption that these will be covered by the Ministry of Health. To counteract this perverse incentive, the government has the power to designate a representation to run HMOs’ finances. However, in practice this has only happened once to date (in 2003).
For hospitals, there is limited accountability for managers to end the financial year in balance. Similar to the situation with HMOs, there is a tacit expectation that any deficits will be covered by the Ministry of Health. The Ministry of Health is currently exploring a new capitation mechanism to replace deficit funding, directly allocating additional resources to hospitals depending on objective measures reflecting costs (such as the number of hospital beds and location of the hospital) and performance based on national indicators.
Looking at the wider health financing context, Israeli authorities are concerned with the declining share of financing from public sources, and the risk of a growing burden of private expenditure on households. When the NHI system was introduced in 1995, public funding accounted for 70% of total health expenditure. By 2021, public sources had declined to 64% of total health expenditure on health.
Multi-annual financing planning and capital budgeting for health
There is no formal medium-term financial framework for health. However, various medium-term financial planning exercises exist. The Ministry of Finance’s 3-year macroeconomic plan contains a forecast for the social budget including health. The Finance Ministry also carries out three and five-year projections of health expenditure, centred on the automatic drivers within the annual budget. Separately, the Ministry of Health has a medium-term strategic plan for the health sector, which takes a five and ten-year horizon. This plan integrates some limited financial information but makes no direct link to the medium-term financial planning exercises carried out by the Ministry of Finance.
The capital budgeting approach for the health sector in Israel is highly centralised, with the central level having tight control over the volume and nature of capital expenditure. The capital budget is allocated on a yearly basis. The government has direct decision-making power for major capital projects, such as the construction of new hospitals, whether private or public. To finance major projects, the government sets aside a share of the pooled funds available for the health sector. Israel also receives substantial international donations for various capital projects.
Links between the budgeting process and strategic health objectives
A small proportion of the NHI budget is connected to national objectives and performance results. The Ministry of Health creates specific programmes where financing depends on the performance results of each HMO. Programmes are defined by their objective, with specific criteria and conditions to be met by HMOs receiving the funds, and how these funds will be distributed across HMOs. For example, a specific objective to reduce waiting times for publicly funded surgeries has a budget line and is tied to public sector surgery volumes by HMO. Nevertheless, for most health expenditure, there is no formal link between the budget and strategic health objectives.
Overview of health financing arrangements
New Zealand has a national health system predominately financed through general taxation. Some financing comes from private insurance schemes and out of pocket payments by individuals accessing health services, but these sources are relatively small. Additionally, there is a no-fault social insurance scheme, providing income support and health services for people with accidental injury.
Prior to 2022, most health services in New Zealand were provided by 20 District Health Boards (DHBs), defined by their geographical area. However, a 2018 review of the health system found that over time the system had become too fragmented and complex. Moreover, in July 2022, New Zealand disestablished the DHBs and moved to a new, more centralised national health system.
New Zealand spent 10.1% of its GDP on health in 2021, in line with the OECD, and equivalent to USD 4 921 per capita (adjusted for purchasing power).
Government schemes account for 70% of total health spending, compulsory health insurance schemes a further 10%. Voluntary health insurance comprises 5% of health expenditure, with household out-of-pocket (OOP) payments accounting for the remaining 13%.
Source: OECD Health Statistics 2023, https://doi.org/10.1787/health-data-en.
Setting the budget for health
New Zealand is moving towards a new approach for setting the budget for health. Each budget cycle, the Ministry of Health prepares the “Vote Health”, the main source of funding for the health system. Previously, the starting point for budget negotiations in New Zealand was “fixed nominal baselines”, meaning there are no automatic adjustments to the health budget (Lomax, McLoughlin and Udy, 2016[10]). However, New Zealand has traditionally uplifted health funding each year to maintain current policy settings, using estimates of projected inflation, demographics, and other cost drivers. Moreover, each year, the government sets a cap on its expenditure growth by deciding on the pool of new funding available given its fiscal objectives.
Recent reforms to the health budget process are shifting away from this approach. New Zealand is making efforts to understand and estimate the cost of maintaining current policy settings in health and reflect this in the budget documents. The approach to setting the budget for health will be informed by a top-down model developed by the Treasury and the Ministry of Health and bottom-up planning information including factors for demographics, inflation (combination of wages and the consumer price index), other health cost drivers (e.g. technology) and productivity. Moreover, the intention is to move towards a three-year funding arrangement from 2024, subject to adequate system settings to support improved planning and financial control being in place.
The budget negotiation process for health will continue to distinguish between two types of expenditure initiatives:
Initiatives related to cost pressures of existing programmes.
New initiatives (which often create new cost pressures for the future budgets).
The budget for the health sector, Vote Health, is allocated to 19 appropriations which form the basis of appropriations. Around 50% of the budget is allocated to deliver hospital and specialist services, and a third of the Vote is allocated to deliver primary, community, public and population health services. Other appropriations finance capital investment, the purchase of pharmaceuticals, and the Māori Health Authority to deliver Māori services.
Budgetary tools used to control health expenditure growth
Prior to the health system reform in 2022, the health sector in New Zealand was suffering from poor financial performance. Previous health system arrangements were causing issues, including variation in fiscal management and financial performance across the District Health Boards (DHBs). This was demonstrated in that 19 of the 20 DHBs in deficit as of early 2021 (while COVID-19 pandemic has worsened the financial situation of DHBs, deficits precede the pandemic).
Several reasons explained the poor fiscal situation of District Health Boards:
Governance – District Health Boards (DHBs) were governed by a board of up to 11 members. Six members were appointed by the Minister of Health, and local communities elected seven board members every three years. The 2020 review of the health system concluded that semi-elected DHB boards led to blurred accountabilities. Elected members focused on local priorities and issues rather than on guidance from the Ministry of Health. Although it is argued that this conflict can encourage DHBs to tailor local responses to national policy directions, others questioned the degree to which elected leaders reflected local priorities due to low-turnout elections.
The size and number of DHBs – 20 DHBs covered a population of approximately 5 million, meaning that for some, their defined populations were small, consisting of around 50 000 people. The number of DHBs also caused unnecessary duplication, with DHBs replicating functions such as procurement, IT systems and asset management.
As a result, in 2022 New Zealand moved to a new national health system. The previous system posed a significant affordability challenge. The new health system aims to address major structural issues and reorientate the system towards sustainable health expenditure growth. Key changes to the health system include:
The 20 DHBs were disestablished, and their functions were merged into Te Whatu Ora (Health New Zealand), which now leads the day-to-day running of the system for the whole country.
The Te Aka Whai Ora (Māori Health Authority) was established alongside Te Whatu Ora, and has shared responsibility for decision-making, planning and delivery.
A new Public Health Agency within the Ministry of Health now leads population and public health policy, strategy, regulatory, intelligence, surveillance, and monitoring functions across the system.
Within the new health system, accountability measures, reporting and monitoring, and intervention powers when specific risks or issues are identified, will form the full set of arrangements to support financial control.
Multi-annual financial planning and capital budgeting
Until recent reforms, multi-annual exercises were limited in New Zealand. Under the fixed nominal baseline approach in New Zealand, multi-annual exercises were not seen as a priority. Projections reflected best estimates of future cost pressure allocations or any new investment decisions (Lomax, McLoughlin and Udy, 2016[10]). There was growing pressure in New Zealand to reform the health financing system to give greater visibility on the future allocations to help effective planning in the health sector.
New Zealand has transitioned towards a multi-annual budget for health sector. For the first time, the 2022 budget took a multi-year approach towards funding the health system. A two-year budget was provided for health in 2022, covering 2 years’ worth of cost pressures and new initiatives. In addition, the budget included sufficient funding to remediate historic District Health Board deficits and gave the certainty for health entities to share resources, support new models of care, and invest for the longer term.
From the 2024 budget onward, the intention is to move to a three-year funding cycle, subject to adequate system settings to support improved planning and financial control being in place. The three-year commitment would be set as a strongly enforced upper limit on health spending, where health entities would be expected to manage all wage and other costs pressures, including setting aside an appropriate level of reserves to manage risks. Only in the case of genuinely unforeseeable shocks – such as a pandemic – would adjustments or addendums to the ceiling be permitted. The multi-year funding arrangement aims to provide certainty for long-term planning and incentivise decision-makers to manage cost-pressures.
Alongside the three-year funding commitment, Te Whatu Ora (Health New Zealand) and Te Aka Whai Ora (Māori Health Authority) must jointly develop a New Zealand Health Plan – a three-year costed plan for the delivery of publicly funded services to align funding and planning.
The arrangements for allocating capital funding for the health sector are under review as part of the current reforms.
Budgetary regulation of health expenditure and links to health objectives
Within the Vote Health, a comprehensive performance budgeting system is in place. Performance information is integrated into most appropriations, except for budget appropriations under NZD 5 million, or where information for the appropriation is not likely to be informative in the light of the nature of the expenditure (e.g. payment of loans for residential care facilities).
Each appropriation must define:
The scope establishing the limits of what an appropriation can be used for i.e. its legal boundary.
How performance will be assessed and end of year Reporting Requirements. This includes the set of performance indicators specific to each appropriation. Around 200 indicators were included in the Vote Health document for 2023/24.
Overview of health financing arrangements
Since 1999, healthcare is a devolved responsibility in the four nations of the United Kingdom, however each nation has retained a National Health System (NHS). The UK Government allocates a budget for healthcare in England, and a comparable population-based total to Scotland, Wales and Northern Ireland. In England, the Department of Health, and Social Care (DHSC) has overall responsibility for the health system, with equivalent departments existing in the devolved nations. This study focuses mainly on the health system of England, but many of the policies discussed are consistent with those in the other three nations.
The National Health System in England is primarily tax-funded, with a smaller proportion (20%) coming from national insurance, a payroll tax paid by employees and employers. The central budget authority, HM Treasury, sets spending limits for the Department of Health and Social Care (DHSC), which forms the basis of the annual budget to be approved by Parliament. The DHSC implements the health budget, operating with a substantial degree of freedom, but it must function within its financial limits.
The majority of the DHSC budget is allocated to NHS England, the body responsible for the budget, planning, delivery, and day-to-day operation of the NHS. In turn, around three-quarters of the NHS budget is allocated to the 42 Integrated Care Boards,7 the bodies arranging the provision of health services in a geographical area.
The United Kingdom spent 12.4% of its GDP on health in 2021, higher than the OECD average of 9.7%, and equivalent to USD 5 467 per capita (adjusted for purchasing power).
Government schemes account for 83% of total health spending. Voluntary health insurance comprises 2% of health expenditure, with household out-of-pocket (OOP) payments accounting for the remaining 13%.
Source: OECD Health Statistics 2023, https://doi.org/10.1787/health-data-en.
Setting the budget for health
The specific budget mechanisms for setting the DHSC budget are not defined in law, instead budgetary policy is influenced by various government funding agreements and cycles of spending reviews (Annex Figure 4.A.7).
Source: Adapted from the UK Central Government Public Financial Management System, ICAEW.
The new NHS five-year funding deal was announced in July 2018, setting multi-year allocations to the NHS protected by legislation covering the timeframe 2019-24, after which it is still to be decided if such a five-year funding deal will be repeated.
Another integral element of the budget process across the United Kingdom are comprehensive spending reviews:
Spending reviews are used to determine multi-annual spending limits and to ensure the allocation of public resources is in line with government priorities. The amounts determined through spending reviews are not legal limits; operational and capital spending must still be authorised by the Treasury through the annual budget process.
The main input into the spending review process are expenditure estimates produced by the DHSC. The DHSC estimates baseline cost pressures at constant policy. During the process, governments also announce new policy ambitions and their projected cost. The outcome of the review will balance the costs (baseline pressures, policy ambitions, and efficiency assumptions), weighed against the macroeconomic context and fiscal space. The process for holding a spending review is not set out in legislation and Parliament has no official role. There is also no agreed methodology to carry out a review.
The Treasury allocates the DHSC budget across the main areas of spending in England.
The bulk of expenditure is allocated to the NHS (90% for 2022-23). Within this, the largest expenditure item is the NHS providers pay bill. The rest of the NHS budget is allocated to NHS England, who in turn allocate expenditure to Integrated Care Boards.
Other expenditure is allocated to the DHSC for administration expenditure, to Local Authorities for public health, and Special Health Authorities, Public Health England, and Health Education England.
Budgetary tools used to control health expenditure growth
To control health expenditure throughout the budget year, limits on Department of Health and Social Care annual spending are set during the annual budget process. DHSC expenditure is broken down into different budgetary limits.
Annually Managed Expenditure (AME) covers large and volatile demand led elements of expenditure, such as litigation provisions for clinical negligence cases, which the Treasury doesn’t expect departments to control within budgetary limits.
Departmental Expenditure Limits (DEL) are strict expenditure limits, meaning the DHSC cannot end the year in deficit. Most of the DHSC day-to-day running costs falls within the DEL category. During the financial year, if the DHSC approaches its legal limit, Treasury has two options to prevent overspending. The first is to transfers funds between budgets, i.e. from capital to resource budgets (as has happened in recent years). Alternatively, Treasury can agree on budget in-year top ups.
With most of the NHS budget allocated to Integrated Care Boards (ICBs), (the local purchasing bodies), strategies for containing costs within the English health system often rest with the ICBs. This includes applying a so-called efficiency factor to the National Tariff:
National tariffs are the prices and rules to pay providers of healthcare services commissioned by ICBs and are adjusted by an efficiency factor. The efficiency factor is the government estimate of the efficiency savings providers can expect to achieve. Over time, providers are expected to treat patients at a lower cost, for example by introducing innovative healthcare pathways, technological changes, or better use of the health workforce.
Setting an efficiency factor aims to incentivise providers to improve their use of resources and achieve cost-savings. Providers with below-average costs are incentivised to keep them below average as they will retain the marginal difference. Providers with above-average costs are incentivised to reduce them to ensure they are adequately reimbursed.
Multi-annual financial planning and capital budgeting for health
In 2018, the government announced its latest multi-year funding settlement in the form of the NHS five-year deal for England. This was unique in that the funding for the next five years was protected by legislation. Under law, the government commits to increase NHS funding up until the year 2024 (Annex Table 4.A.2). Funding under the five-year deal is allocated through the spending review process.
The Treasury defined a narrow baseline for the five-year funding deal, covering services within the scope of NHS England’s mandate. This includes day-to-day operational expenditure of the NHS. Annual funding settlements remain for other areas of the health system, such as capital investment, public health, and investments in the health workforce. Local authority public health spending and social care are also excluded.
The budgeting process in the United Kingdom separates resource and capital expenditure. The Spending Review process provides the NHS with a multi-year capital settlement. The NHS capital allocation is split into three categories:
A system-level allocation (system-driven) – to cover day-to-day operational investments
Nationally allocated funds (nationally-driven) – to cover nationally strategic projects already announced and in development or construction, such as hospital upgrades and new hospitals.
Other national capital investment – including national programmes such as elective recovery, diagnostics and national technology funding and the mental health dormitory programme.
To provide assurance on value for money, new investments must be approved at different levels of authority. DHSC approves provider capital expenditure when it is greater than GBP 15m, and Treasury must approve expenditure greater than GBP 50m (NHS, 2022[11]).
Budgetary regulation of health expenditure and links to health objectives
In England, there is no explicit link between the health budget and strategic health objectives. However, to strengthen these links, the government introduced Single Departmental Plans (SDP) for health and other sectors in 2015. More recently, the NHS Long Term Plan was developed to link the NHS five-year funding deal and the long-term strategic objectives and priorities in the health sector (Annex Figure 4.A.8).
Notes
← 1. In the United Kingdom, healthcare is a devolved responsibility to England, Ireland, Scotland and Wales. Although each nation has retained the tax-funded National Health Service model.
← 2. The financing of healthcare can be analysed from the point of view of financing schemes (financing arrangements through which health services are paid for and obtained by people, e.g. social health insurance), financing agents (organisations managing the financing schemes, e.g. social insurance agencies, and types of revenues of financing schemes (e.g. social insurance contributions). Here “financing” is used in the sense of financing schemes as defined in the System of Health Accounts (OECD/WHO/Eurostat, 2011[12]) and includes government schemes, compulsory health insurance as well as voluntary health insurance and private funds such as households’ out-of-pocket payments, NGOs, and private corporations. Out-of-pocket payments are expenditures borne directly by patients.
← 3. A total budget for health expenditure refers to a fixed amount of funds defined for health expenditure over an annual or multi-annual period (any overspending would require a special amendment/approval process). A total budget for health expenditure is sometimes referred to as a global budget for health by Ministries of Health and other health officials.
← 4. The Central Budget Authority (CBA) is a public entity, or several co-ordinated entities, located at the central level of government, which is responsible for budget formulation and oversight. In many countries, the CBA is often part/division/unit found within the Ministry of Finance or Economy.
← 5. COVID-19 related spending was channelled through other budget instruments.
← 6. Excluding 2020 due to exceptional expenditure related to the COVID-19 pandemic.
← 7. Note Integrated Care Boards replaced clinical commissioning groups (CCGs) in the NHS in England from 1 July 2022.