Mainstreaming Performance Based Financing into the Government Budget

Performance based financing (PBF) initiatives in the health sector have been introduced in a wide range of countries. They reward hospitals or health facilities, against the delivery of services adjusted for quality. This was in part to mend problems with traditional, input-oriented public financial management (PFM) systems that were unable to incentivize efficiency or utilization in the delivery of quality health services.

However, while PBF initiatives have shown promising results with international support, there are concerns of sustainability if these reforms cannot be fully absorbed into the government budget management cycle. A new World Bank HNP discussion paper addresses this problem: it sets PBF reforms into a PFM context, identifies a set of steps required to integrate PBF principles into government budget management, and seeks to solicit feedback from the health finance and PFM community in order to guide further work in this area.

What changes has PBF introduced?

Most fundamentally, the facility is established as its own budget holder and is reimbursed based on the level and quality of services that have already been delivered. This is a profound departure from an input-based budget system. More specifically the following changes are notable:

  • Provider autonomy. In many countries the providers did not receive and spend funds directly before the introduction of PBF, with central ministries or local governments holding this power instead. Under PBF, providers are their own budget holders and need access to financial services or bank accounts, as well as the capacity and procedures to guard against miss-appropriation. This can conflict with other reforms such as the introduction of a treasury single account which seeks to avoid inefficiencies from idle cash balances.
  • Spending flexibility. A PBF initiative also aims to give providers flexibility for the use of funds received, including for paying salary bonuses. This tends to be in contrast to input-based budget systems where rigid line-item controls determine how funds can be spent and broader civil service pay rules standardize the provision of allowances. These changes have also made it difficult to use standard government financial management information systems for PBF payments, as these would not accommodate PBF-specific budget execution protocols.
  • Paying for services delivered. In most PFM systems, a budget is determined on an annual basis ex-ante (i.e., before the services are delivered), based on estimates of what a facility is likely to need. That ceiling is legislated at some level to limit the risk of overspending. The basis of budgetary allocations under PBF is a direct function of performance of the facility. A facility gets paid against the delivery of services and budget releases follow rigorous verification of facility performance indicators, usually on a quarterly basis. This introduces uncertainties over spending ceilings and the process for releasing funds in the input-based system, both of which are less complex to manage in an input-based system.

While these changes are purposefully introduced through PBF projects in order to improve system performance, they also create a sustainability challenge if the government budget management systems do not adjust. As long as the PBF operates in parallel to PFM systems, it fragments the payment system and governments are likely to revert back to the input based legacy PFM system after the project closes, even if the PBF approach has shown results. Sustainability is especially at risk if PBF spending protocols and accounting and reporting manuals differ from routine government processes at the local level and bypasses the financial management information system. Lasting change will require policy and institutional reform to routine PFM systems reflecting provider autonomy, financial management capacity, an output orientation of the payment system and a having in place a unified payment system.

Introducing an analytical approach and soliciting feedback

If the aim is to embed PBF as national systems for financing health service delivery, then the next generation of donor support will need to encourage greater alignment between government PFM systems and PBF schemes.
This will take time and compromises. In the PFM space reforms are mostly gradual and all of the elements outlined will take time to introduce in government systems. PFM systems must also serve all sectors equally well, so changes to accommodate PBF must be balanced against other demands being placed on the PFM system from different stakeholders. The way forward is likely to vary considerably depending on the country, with some able to progress rapidly while others cannot.

Our new paper aims to encourage a more systematic look at the possibilities of aligning PBF and national PFM systems. It explores this across four facility financing pillars: (i) provider autonomy and spending flexibility; (ii) financial management capacity; (iii) output orientation; and (iv) unified payment system. Across these dimensions it provides a framework to explore likely differences between a conventional PBF system and traditional PFM systems. A series of questions and scoring criteria can help understand how significant differences are and where there could be opportunities to initiate reforms to national systems or tailor the PBF approach to better align as far as possible with the domestic PFM system.

Moritz Piatti-Funfkirchen, Sierd Hadley and Benoit Mathivet (October 2021)

Read the complete working paper: Moritz Piatti-Fuenfkirchen, Sierd Hadley and Benoit Mathivet. 2021. Alignment of Performance-Based Financing in Health with the Government Budget : A Principle-Based Approach. Health, Nutrition and Population Discussion Paper;. World Bank, Washington, DC.

This blog first appeared on RBFHealth.