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Public Expenditure Review on Health Sector 2003/04 to 2005/06

Submitted to Health Economics and Financing Unit

Ministry of Health and Population Government of Nepal

Ramshah Path, Kathmandu

Submitted by Nepal Health Economics Association

Kathmandu

December 27, 2009

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Acronyms CBS Central Bureau of Statistics DDC District Development Committee DFID Department for International Development (UK) DoHS Department of Health Services DRF Debt Relief Fund EDP External Development Partner FCHV Female Community Health Volunteers FCGO Financial Comptroller General’s Office FMIS Financial Management Information System FY Fiscal Year GDP Gross Domestic Product GTZ Deutsche Gesellschaft für Technische Zusammenarbeit GmbH HEFU Health Economics and Financing Unit GoN Government of Nepal HSR Health Sector Reform ICPD International Conference on Population and Development IDA International Development Association INGO International Non-Governmental Organization JICA Japanese International Cooperation Agency KFW Kreditanstalt Für Wiederaufbau (Consulting Arm of German Bank) LSMS Living Standards Measurement Survey MoHP Ministry of Health and Population MTEF Medium-Term Expenditure Framework NDHS Nepal Demographic and Health Survey NFHS Nepal Family Health Survey NGO Non-Governmental Organization NNHA Nepal National Health Accounts NPC National Planning Commission NRs Nepali Rupees PERH Public Expenditure Review on Health PHC Primary Health Care Center SDC Swiss Agency for Development and Cooperation SHP Sub-Health Post SOE State-Owned Enterprises UNDP United Nations Development Programme UNFPA United Nations Population Fund UNICEF United Nations Children’s Fund USAID United States Agency for International Development VDC Village Development Committee WHO World Health Organization

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Executive Summary

Public expenditure review on health sector (PERH) is a continuous process of

analysis that helps to make fiscal management, macroeconomic and social stability

in the country from the health perspective. The PERH is designed to complement

rather than substitute for existing and ongoing work on improving the quality of public

expenditure. The PERH analyses overall trends in public health expenditure in order

to gain an overall picture of the allocation of expenditure by sector and functional

classification. The difference between estimated (budget) expenditures and actual

expenditures has also been analyzed in order to identify weaknesses in budget

implementation. The primary objective of this review, thus, is to assess the extent to

which public expenditure on health was incurred and to assess all of the financial

flows in the public health sectors, from the sources of financing to where resources

are converted into health care outputs.

This review provides a brief summary of the process of elaboration of the

public expenditure on health and a review of the different channels through which the

funds allocated for health flow to the ultimate users and facilities. The present review

has primarily covered the last three fiscal years from 2003/04 to 2005/06.The

assessment has been done based on the last six fiscal years 2000/01 to 2005/06 as

well. The study attempts to capture all public expenditures of health sector consisting

of the following components: expenditure of central government, expenditure of local

bodies, donor expenditure, expenditure of autonomous bodies and expenditure of

state-owned enterprises.

The macroeconomic performance of the country has a significant contribution

to determine the expenditures on health sector and health sector outcomes. The

levels of economic growth determine the fiscal space for the government

expenditure. Higher growth rate broadens the revenue space of the government that

leads to scale up health interventions and expenditures. In the health production

function, health sector expenditures are inputs that influence the health outcomes of

the country.

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Economic growth had remained very low in the country, and inflation rate has

continued to rise during the study period resulting that per capita real income has not

been able to increase very much. The economic growth was not in a satisfactory rate

however poverty is steadily going down.

The major sources of funding for public expenditure on health are mobilization

of tax revenue, expenditures by EDPs, allocations by local bodies and state owned

enterprises. Government expenditure has contributed between 58 to 68 percent of

the public health expenditure in Nepal during the review period. The share of the

development expenditure has increased from 9 to 16 percent while the share of the

regular expenditure has declined from 91 to 84 percent. The increase in the share of

development expenditure with a decline in regular expenditure is a matter of

satisfaction as it is likely to improve the quality and coverage of health service in the

future.

The contribution of the EDPs fell from 33 percent in 2003/04 to 23 percent in

2004/05 and again rose to 25 percent in 2005/06 indicating that EDPs are highly

fluctuating sources of health expenditures in Nepal. The contribution of EDP funding

was around 20 percent in the year 2002/03.

The combined contribution of other components - the state owned enterprises

(SOEs), autonomous universities and local bodies have remained between 7 to 13

percent of the total public expenditure on health. Expenditures by SOEs accounted

as the largest share among them in all review years.

During the three fiscal years under review (2003/04 to 2005/06), the health

expenditure ratio with GDP showed an increasing trends rising from 1.45 to 1.70

percent. Per capita public health expenditure in US dollar terms has persistently

increased over the last six years rising from US $ 3.86 in 2000/01 to US $ 5.65 in

2005/06.

The first group of burden of disease captured two third of total stock of health

problems of the country. However, this group exhausted less than a quarter of the

public health expenditure. The allocation of public health expenditure based on

burden of disease appears somewhat improving during the review years compared

to previous two years.

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The results suggested that priority I programmes consumed on an average

less than one third of the total development budget on the health sector, conversely

priority III programmes had consumed more than half the amount allocated to

development health expenditures. The allocations have, however, gradually

improved in FY 2005/06.

Under the health sector policy reform that aims to “shift emphasis from urban

to rural health services,” the policy documents reflecting the government’s priorities

were to increase financial allocations for rural health services through preventive as

well as clinical services. Analysis of public expenditure review on health sector

revealed that rural health services were kept in priority in the allocation of financial

resources in the review periods, except for fiscal year 2003/2004. The results

exhibited that life expectancy at birth has positive relationships with per capita public

health expenditures. On the other hand, moratality rates have negative association

with per capita public health expenditures.

The absorptive capacity index suggested that the capacity was very low

though it has been increasing over the years. The results exhibited that medical

services had higher absorptive capacity than public health services. It means that

public health services have greater barriers to utilize the resources compared to

medical services.

The Government has considered allocating more resources to health.

However, qualities of public health expenditure, or efficiency and equity of health

spending are equally important. The priority should be given to identifying the right

mix of investments to better reflect the country’s complex and wide-ranging public

health challenges. Efforts are made to analyze quality of health spending from

different aspects such as spending on priority based programmes, targeted services,

utilization and resource absorptive capacity of the programmes.

Government policies in the sector should be more clearly reflected in

budgetary allocations and greater transparency in decentralized health accounting

and spending is necessary. There should be appropriate mechanisms for mobilizing

resources and purchasing services and, what proportion of public expenditure is for

public health, as opposed to medical care.

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Table of contents

Acknowledgement ...................................................................... Error! Bookmark not defined. 

Acronyms ................................................................................................................................. ii 

Executive Summary ............................................................................................................... iii 

Chapter I Introduction ....................................................................................................... - 1 - 

Chapter II Macro Economic performance and Health policy ........................................ - 7 - 

Chapter III Sources of funding ........................................................................................ - 10 - 

Chapter IV Analysis of Public Expenditure on Health ................................................. - 17 - 

Chapter V Fiduciary risks of government expenditure on health ............................... - 31 - 

Chapter VI Discussions and Recommendations ............................................................ - 32 - 

References .......................................................................................................................... - 36 - 

Annexes .............................................................................................................................. - 37 - 

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Chapter I

Introduction

1. Background: Provision of equitable access to health and better quality of life by creating

more equitable distribution of resources is the dominant concern of Nepal, today. In

accordance with achieving this objective, several analytical works were undertaken

to reform the national health system during the last several years. Against this

background, there is a need that the government increase resources in the sector.

At the same time, there is also a need to look how far the public spending on health

is made from the perspective of efficiency, social equity and reducing poverty. Along

with this, the financial sustainability of some health care programs needs to be

analyzed to sustain them which otherwise become a problem after the withdrawal of

donors’ support. It is thus imperative to undertake the public expenditure review on

health (PERH) for providing information on sources of funding, their allocation and

expenditures. In particular, the PERH is a timely input into the Poverty Reduction

Strategy Paper (PRSP) formulation process and is intended to strengthen the

Medium Term Expenditure Framework (MTEF) process. The PERH, which includes

a set of Nepal National Health Account (NNHA), is commissioned as part of the

Ministry of Health and Population’s initiative to formulate a Health Financing Strategy

for Nepal. Many of its findings make startling reading and demonstrate the urgent

need to improve our expenditure planning and monitoring systems in order to reduce

poverty.

From a macroeconomic viewpoint, public expenditure management and

prioritization are critical issues for Nepal for several reasons. First, good expenditure

management is essential for economic growth and poverty reduction which ultimately

helps to maintain fiscal stability. Variations in expenditures have been mostly

responsible for fiscal instability, underlining the need for proper expenditure control,

management and prioritization. Proper expenditure management and prioritization

helps in achieving economic growth by raising real returns to public expenditures.

Similarly, a proper allocation of public expenditures also directly aid poverty

reduction, if expenditures are directed to goods and services that are mostly used by

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the poor. In this regards, PERH is continuous process of analysis that helps to

improve fiscal management and macroeconomic and social stability in the country.

The PERH is designed to complement rather than substitute for existing and ongoing

work on improving the quality of public expenditure, such as the MTEF, Sector

Investment Programmes (SIPs) and Sector Wide Approaches (SWAps). In addition,

the PERH has provided timely inputs into the preparation of the Poverty Reduction

Strategy Paper (PRSP).

1.2 Objectives:

The overall objective of this review is to assess the extent to which public

expenditure on health was incurred and was distributed in the realm of social equity

in terms of health benefits. The purpose of the PERH component is to assess all of

the financial flows in the public health sectors, from the sources of financing to where

resources are turned into health care outputs.The specific objectives of the review

are as follows:

• To assess the sources of public spending on health,

• To assess the public expenditure on health by levels (primary, secondary and

tertiary)

• To assess public spending on health across functional classification,

• To assess the capital and recurrent expenditure on health,

• To examine the distribution of public expenditure on health across age group,

geographical setting and regions,

• To assess the public expenditure review according to burden of diseases,

• To assess the absorptive capacity of resource in the health sector,

• To assess the public expenditure on health by reform outputs and priorities,

• To assess the compliance of financial discipline in the health sector,

• To assess the fiduciary risks of public expenditure on health,

• To compare public expenditure on health with health benefit.

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1.3 Methodology: Research design: The PERH is designed to strengthen the health policy and

budgetary process by various means. The PERH analyses overall trends in

expenditure in order to gain an overall picture of the allocation of expenditure by

sector, and functional classification. The difference between budgeted expenditures

and actual expenditures has also been analyzed in order to identify weaknesses in

budget implementation. Secondly, the PERH includes a review of the budget

process in order to suggest ways to improve the institutional framework of the budget

process. Thirdly, there is a review of the development budget that is intended to

facilitate moves towards bringing the development/capital budget into the

prioritization process. This provides evidence of trends in budgeted and actual

expenditure under the existing health policy. The PERH provides valuable inputs into

the budgetary process and outcomes evaluation. This is then further strengthened by

the funding gap analysis and benefit incidence analysis that provide an assessment

of the costs of alternative activities. This review provides a brief summary of the

process of elaboration of the health budgets and a review of the different channels

through which the funds allocated for health flow to the ultimate user and facility.

Collection of data and analysis: The PERH is a joint exercise conducted by

Government of Nepal, Ministry of Health and Population (MOPH) and Nepal Health

Economics Association (NHEA). A steering committee developed by Health

Economics and Financing Unit (HEFU) of MOPH had a meeting with the research

team from NHEA. The committee provided valuable inputs for developing data

collection tools, designing data collection format and report format.

The methodology has provided for adequate consultation with different

Government services, donors and end-users. It also includes a significant element of

quantitative analysis and an emphasis on making clear analyses, especially for

expenditure reallocations responding to Government policy based on a convincing

analysis. Meetings were held at the MOHP during the whole duration of the PERH

study, in order to determine the steps to be performed. This included agreeing on the

definition of various terms used in policy and budgetary documents, identification of

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the organizations to interview, questionnaire design, result interpretations, final

report content and recommendations.

The study attempts to bring out the status and trend of public expenditure in

the health sector as a whole, for which the expenditure of various ministries have

been taken into account. In this regards, the review has identified and assessed: the

sources of public spending on health, efficiency of public spending on health, public

spending on health across functional classification, equity (gender, demographic and

economic) in public spending on health, expenditure on health by the categories of

expenditures-recurrent and capital. Apart from this, the study assesses the

absorptive capacity, compliance of financial discipline in the health sector, fiduciary

risk of public expenditure on health; compare public expenditure on medical services

with public health services and recommendations for enhancing efficiency, equity

and sustainability of public spending.

The present review has covered the last three years period from 2003/04 to

2005/06. The study attempts to capture all public expenditures of health sector

consisting of the following components: Expenditure of Central Government,

Expenditure of Local Bodies, Donor Expenditure, Expenditure of Autonomous Bodies

and Expenditure of State-owned Enterprises.

Expenditure of Central Government: Data of government expenditures on health

were retrieved from the Financial Management Information System (FMIS). The

data of FMIS were verified with the data of the Ministry of Health.

Expenditure of Local Bodies: The estimation of a minimum sample size within a

country is based on the proportion of health expenditures through local bodies that is

2 percent as revealed by the public expenditure survey 2003 published by Ministry of

Health and population in 2004. Further assumption considered in determining the

minimum sample size is 5 percent of permissible errors.

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Initial sample size 2

22/

0 dpqZ

n α=

Where

Ζα/2 = 1.96 at 95% confidence level

p = Proportion of expenditure on health by local bodies.

d = permissible error (here we choose d, which is around 5 % of deviation

from the proportion of visitors of government health facilities.)

n0= initial sample size

≈ 30 local bodies

Fifteen districts have been selected based on random sampling and probability

proportional to size (PPS) that has represented ecological and development regions.

Followings are the randomly selected districts with representation of ecological belts

and development regions.

Table 1.1: Selected districts for field survey

Ecological belts/ Development

regions Eastern region

Central region

Western region

Mid-western

Far-western

Total selected Districts

Mountain Districts - Rasuwa Kalikot - 2

Hill Districts Ilam, Udaypur

Kavre, Nuwakot

Palpa, Magdi Kaski

Surkhet Doti 9

Terai Districts Jhapa Chitwan - Banke Kailali 4 Total selected Districts 3 4 3 3 2 15

The required data are collected from all DDCs (= 15) and all municipalities (=14) and

30 VDCs (almost two from each) from selected districts.

Donor expenditure: The study team collected the information from the respective

offices. Add to this, the study team used multiple source of information such as

Department of Health Services (DoHS) Annual report, annual report of Auditor

General and FMIS to cover the maximum numbers of donors.

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Expenditure of autonomous bodies/Expenditure of State-owned enterprises: The study team collected the information from the respective offices of local bodies

and state-owned enterprises. The following institutions have captured from this

survey: Nepal Agriculture Development Bank, Citizen Investment Trust, Dairy

Development Corporation, Gorkhapatra Corporation, Janak Education Materials

Centre, National Insurance Company, Nepal Housing Development Finance

company, Nepal Oil Corporation, Nepal Television, National Water Supply

Corporation, Rastriaya Banijya Bank, Nepal Drugs Limited among others.

A short structured questionnaire has been developed to conduct the

expenditure survey as per the objectives. Data were entered into Excel and

primary analysis has been done in Excel. The obtained data were summarised in

terms of number, percentage, rate, ratio, mean and median.

1.4 Organization of the report:

The following chapter deals with macroeconomics and health and

macroeconomic performance and health outcomes. The third chapter puts forward

review of sources of funding for public expenditures on health. The fourth chapter

assesses the allocative efficiency of public health expenditure on health. The fifth

chapter provides the fiduciary risk of public expenditure on health. The last chapter

provides conclusions and recommendations.

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Chapter II

Macro Economic performance and Health policy

Macroeconomic performance: The macroeconomic performance of the country

has a significant contribution to determine the expenditures on health sector and

health sector outcomes. The levels of economic growth determine the fiscal space

for the government. Higher growth rate broadens the revenue space of the

government that leads to scaled up health interventions and expenditures. In the

health production function, health sector expenditures are inputs that influence the

health outcomes of the country. Nepal’s macroeconomic performance during the

review period did not produce satisfactory results. The economic growth had

remained very low, and inflation rate has continued to increase during the study

period resulting in very small increase in per capita real income. The saving-

investment scenarios of the country reveals that the difference between ratio of

saving-investment and GDP have increased because of low investment from the

private sector due to conflict situation in the country. This gap demonstrates that a

huge amount of money from foreign savings is being invested in the country. On the

other hand, the results demonstrated that gross national savings are higher than

gross domestic savings because of inward transfers of remittances and foreign

grants. Table 2.1: Macroeconomic performance Indicators 2003/004 2004/005 2005/006 Economic growth (Annual % change) 4.7 3.1 2.8Annual change in real per capita GDP (%) 2.51 1.11 0.76Per capita GDP (USD) 293 328 350Population ( millions) 24.74 25.30 25.86Exchange rate( USD: Nepalese Rupees) 73.97 71.05 71.5Inflation (GDP Deflator) (2000/001= 1.00) 1.114 1.184 1.26Difference between Domestic saving and investment (%) -12.8 -14.9 -18.1

Sources: Ministry of finance, Government of Nepal (2007) Economic survey 2006/007

The economy did not grow in a satisfactory rate however poverty is steadily

going down. The results of NLSS-II survey suggested a significant reduction in

poverty during the study period. The poverty gap remains high that indicates high

income inequality among the poor too.

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Table 2.2: incidence of the poverty Sector

Population below the poverty line Poverty Gap 1995/96 2003/04 1995/96 2003/04

Urban 21.55 9.55 6.54 2.18 Rural 43.27 34.6 12.14 8.5 Nepal 41.76 30.9 11.75 7.55

Sources: Ministry of finance, Government of Nepal (2007) Economic survey 2006/007 National health policies and programmes: Existing health policies and

programmes are derived from the National Health Policy 1991 (2048 BS). The

primary objective of the National Health Policy is to extend the primary health care

system to the rural population so that they benefit from modern medical facilities and

the services from trained health care providers. The National Health Policy has

focused on preventive, curative and promotive services to be delivered through

health system to the people. The Ministry of Health and Population has implemented

20-year Second Long-Term Health Plan (SLTHP) for Nepalese FY 2054-2074 (1997-

2017). The aim of the SLTHP is to guide health sector development for the overall

improvement of the health of the population; particularly those whose health needs

are often not met. The priority in the SLTHP has been given to health promotion and

prevention activities based on Primary Health Care principles. It has identified

Essential Health Care Services (EHCS) that address the most essential health

needs of the population and that are highly cost-effective. EHCS are priority public

health measures and are essential clinical and curative services for the appropriate

treatment of common diseases. The three priority categories have been given in the

policy and programmes documents published by the MOHP.

Table 2. 3: priority of the health programmes SN First Priority programmes

Second Priority Programmes

Third Priority Programmes

1 Expanded vaccination and national polio vaccine

National Health Training Nepal Eye Hospital

2 Control of Acute Respiratory Infection

Bir Hospital Netrajyoti Sangh

3 Diarrhea Shahid Shukraraj Tropical and

BP Koirala Memorial Cancer Hospital

4 Nutrition Infectious Disease Hospital

BP Koirala Health Science Foundation, Dharan

5 Safe motherhood Kanti Children’s Hospital 6 Family planning HRH Indra Rajya Laxmi

Maternity HospitalShahid Gangalal National Health Centre

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SN First Priority programmes

Second Priority Programmes

Third Priority Programmes

7 Reproductive Health of the adolescents

Urban health Dental care service

8 Female Community Health Volunteers and sudenis (trained traditional birth attendants)

Ayurved services Ayurved Hospital, Naradevi

9 Epidemiology and control of diseases − Control of malaria − Typhus (kala-azar) − Natural disaster and management − Vector-borne diseases and their control, research and training − Tuberculosis − Leprosy − HIV/AIDS and Sexually Transmitted Diseases (STD) − Health information, communication and education − Supply management − Community medicine − Health insurance − Information management

Singha Durbar Vaidyakhana Homoeopathy Unani

Naturo-therapeutics Management of medicines Post-graduation

Hospital development and extension Control of addictive drugs

Curative health services are provided by tertiary, secondary and primary level

hospitals. Basic health services were provided during the study period by 89

hospitals, 186 Primary Health Care Centers (PHCCs), 698 Health Posts (HPs) and

3,129 Sub Health Posts (SHPs). Child health, reproductive health, disease control,

national health training, health education, information and communication, among

others are key public health programmes implemented in the country.

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Chapter III

Sources of funding

The major sources of funding for public expenditure on health are mobilization

of tax revenue, foreign grants and loans, allocations by local bodies, state owned

enterprises and autonomous universities. The size of public expenditure determines

the fiscal space of the country. The foreign grants and loan which is the second

major source of funding for public expenditure comes through bilateral and

multilateral commitments. Bilateral and multilateral agencies, called external

development partners (EDPs) have provided funds for health expenditures through

two channels: direct and indirect. The commitments of fixed amount of money

spelled out in the red book is called direct sources of funding and the amount of

money that is expensed by the EDPs themselves to improve health status of the

people is referred to as indirect sources. The public expenditure on health sector

from direct sources can be captured from various published government documents

such as FMIS; red books, auditors’ reports etc. Indirect sources of funding from

EDPs were very difficult to collect because financing documents were rarely found

and even if the documents were found, detail information were not available. We

have, therefore, presented here the direct sources of funding only.

Table 3.1: Public expenditure on health by sources of financing (NRs in million)

Source of financing 2003/04 2004/05 2005/06 Amount % Amount % Amount %

NS1.1.1 Government of Nepal 4,759.91 58.17 5,969.82 64.70 7,693.87 68.44 Development/Capital ( based on

budget line items) (NS1.1.1.1) 430.19 5.26 991.93 10.75 1,238.85 11.02

Regular (NS1.1.1.1) 4,329.71 52.92 4,977.89 3.95 6,455.02 57.42 Earmarked tax (NS1.1.1.2) - - - - - -

NS9.1 External Development Partners (direct) 2,672.48 32.66 2,099.41 22.75 2,759.25 24.55

NS2.5 State-owned enterprises 291.17 3.56 701.41 7.60 393.92 3.50 NS2.5 Autonomous universities 259.84 3.18 214.90 2.33 94.69 0.84 NS1.1.2 Local bodies 198.82 2.43 241.34 2.62 299.36 2.66

District Development Committees 88.28 1.08 92.49 .00 87.61 0.78 Municipalities 13.45 0.16 20.10 0.22 31.33 0.28 Village Development Committees 97.09 1.19 128.74 1.40 180.42 1.61

Total public spending 8,182.22 100.00 9,226.87 100.00 11,241.08 100.00

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Government expenditure has contributed between 58 to 68 percent of the

public health expenditure in Nepal during the review period. In nominal terms the

expenditure on health from the government expenditure on health increased steadily

from 4,760 million in 2003/04 to 5970 million in 2004/05 and 7694 million in 2005/06.

Regarding expenditures that contribute to expand the capacity of the health

service systems in the country in the future, the share of the development

expenditure, which is mainly capital expenditure, is found to have increased from 9

percent to 16 percent. The share of the regular expenditure, which is mainly

recurrent expenditures, in contrast has declined from 91 percent to 84 percent during

the review period. The earmarked expenditures which prevailed earlier were not

incurred during the review period.

Distribution of Government Expenditure by Recurent and Development (Capital) Categories

0

1000

2000

3000

4000

5000

6000

7000

2000/01 2001/02 2002/03 2003/04 2004/05 2005/06

Fiscal Year

RS

(MIll

ion)

Recurent

Capital

The External Development Partners (EDPs) were the second largest sources

of funding in the health sector and all expenditures were incurred as direct

expenditures. No uniform pattern was observed in their contribution too. Their

contribution fell from 33 percent in 2003/04 to 23 percent in 2004/05 and again rose

to 25 percent in 2005/06. This indicates that EDPs are a highly fluctuating sources of

health expenditures in Nepal.

The combined contribution of other components- the state owned enterprises

(SOEs), autonomous universities and local bodies have remained between 7 to 13

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percent of the total public expenditure on health. Expenditures by SOEs accounted

as the largest share among them in all review years. Expenditures by Ministries

Regarding expenditure on health by various ministries, the MOH spent the

largest share and has remained fairly constant at around 96-97 percent during the

review period. The Ministry of Local Development (MOLD) and the Ministry of

Industry, Commerce and Supplies (MOICS) made about 1 percent each while the

remaining were made by several other ministries during the review period.

The expenditures on health by autonomous universities are actually financed

from annual budget provided by the Ministry of Education and their other sources of

income. However due to definitional problem, these expenditures have not been

included in the expenditure of the Ministry of Education. Table 3. 2: Trend in government health spending (HMG and EDP Red Book) by financing agents, (NRs in million) Financing agent

2003/04 2004/05 2005/06 Amount % Amount % Amount %

FA1 Ministry of Agriculture 21.90 0.46 2.06 0.03 1.34 0.02FA2 Ministry of Defense 0.11 0.00 0.13 0.00 0.15 0.00FA3 Ministry of Education 4.60 0.10 3.74 0.06 4.36 0.06FA4 Ministry of Finance 0.00 0.00 0.00 0.00 0.00 0.00FA5 Ministry of Health 4617.70 97.01 5737.89 96.11 7436.44 96.65FA6 Ministry of Home 8.98 0.19 84.88 1.42 93.04 1.21FA7 Ministry of Industries, Commerce and Supplies 45.00 0.95 50.00 0.84 46.58 0.61

FA8 Ministry of Labour 2.67 0.06 2.53 0.04 4.00 0.05

FA9 Ministry of Local Development 49.45 1.04 75.87 1.27 90.39 1.17FA10 Ministry of Physical Planning 6.23 0.13 9.52 0.16 14.38 0.19FA 11 Ministry of Population 0.00 0.00 0.00 0.00 0.00 0.00FA 12 Women Children and Social Welfare 3.25 0.07 3.20 0.05 3.20 0.04

Grand Total 4759.907 100 5969.82 100 7693.872 100 Expenditures by Local Bodies

In accordance with the local self-governance act, local bodies namely the

Village Development Committees (VDCs), Municipalities and the District

Development Committees (DDCs) are entitled to spend a part of their budget in the

provision of health care services at the district and sub-district level. Data were

collected from local bodies and were extrapolated for national representation with

appropriate weightage.

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The results revealed that local bodies as a source of health expenditures has

a contribution that ranged between 2 to 3 percent of the total expenditure in health in

the country during the review period. This is an improvement compared to

preceeding year (2002/03) where it was only 0.7 percent. As DDCs are the largest

administrative units for local self governance, their contribution among the local

bodies in naturally the largest. During the review period, their share however

declined from 66 percent to 55 percent with increment in the share of the

Municipalities from 30 to 40 percent. The share of the VDCs in health spending by

local bodies is the smallest but has risen gradually from 3 percent to 5 percent during

the review period.

The sources of financing are diverse for each of the three local government units.

The VDCc have a greater reliance on budget provided by central government, the

municipalities have a large local tax at their sources of funding while the DDCs rely

more on assistance from international NGOs.

The budget provided by the central government constitutes the largest source

of funding (around 96 percent) for the VDCs while the rest comes from INGOs. In

case of the Municipalities, who have a stronger tax base in the urban population and

are able to raise significantly large local taxes themselves, about (60-80 percent)

from this source followed by assistance from central government and international

agencies. The share of funding from local bodies shows a declining trend with a fall

from around 80 percent to around 60 percent compensated by a rise in funding from

the general government tax revenue from 5 to 30 percent. The contributions from the

international agencies have also declined steadily from 18 percent in 2003/04 to 9

percent in 2005/06. In case of the DDCs, more than 80 percent of the amount spent

on health services are derived from assistance by international donor agencies while

13 to 16 percent comes from local bodies and the rest from general government tax

revenues. The overall expenditure by local bodies has gradually increased over the

review period.

Table 3.3: Average Expenditure by local bodies (in thousand Rs) Local bodies

Financing sources

2003/04 2004/2005 2005/06Amount % Amount % Amount %

VDC

General Government tax revenue 684073 3.07 867895 3.74 1290439 4.88

Local government 0.00 0.00 0.00 0.00 0.00 0.00International NGO 26500 0.12 28000 0.12 51500 0.19Total 710573 3.19 895895 3.87 1341939 5.07

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Municipalities

General government tax revenue 335700 1.51 495500 2.14 3195920 12.08

Local government 5189906 23.29 5530842 23.86 6327438 23.92International NGO 1236936 5.55 896500 3.87 958070 3.62Total 6762542 30.34 6922842 29.87 10481428 39.62

DDC

General government tax revenue 362000 1.62 494300 2.13 274000 1.04

Local government 1884680 8.46 2078140 8.97 2365400 8.94International NGO 12565920 56.39 12784680 55.16 11990700 45.33Total 14812600 66.47 15357120 66.26 14630100 55.31

Grand Total 22285715 100.00 23175857 100.00 26453467 100.00 Expenditures by State Owned Enterprises (SOEs)

The state owned enterprises (SOEs) whose number declined sharply after

several of the SOEs were privatized during the last few years also make health

related expenditures. These expenditures constitutes between 3.5 to 7.6 percent of

the total public spending during the review period. These expenditures were

significantly larger in the year 2000/01 ( 10%) and 2001/02 (9.9%) but fell

significantly in 2002/03 (2.7%) The spending by these SOEs during the review

period rose abruptly from 3.6 to 7.6 percent in 2004/05 and sharply declined again to

3.5 percent in 2005/06. The expenditures by SOEs is mainly in the form of

reimbursement of health expenditures by staffs in the SOEs. The SOEs broadly

divided into five categories: finance, industrial, social services, commercial and

public utilities show that expenditures by financial SOEs are larger (above 55

percent) compared to other SOEs except for the year 2004/05 when expenditures by

SOEs associated to public utilities peaked high (68 percent) Table 3. 4: Expenditure by SOEs, (NRs in million) Sector 2003/04 2004/05 2005/06

Amount % Amount % Amount %Finance 71.16 55.61 75.36 19.42 100.88 59.36 Industrial 21.48 16.78 28.71 7.40 27.72 16.31 Social/Service 11.56 9.03 10.70 2.76 14.81 8.71 Commercial 4.33 3.39 10.93 2.82 12.57 7.39 Public utilities 19.43 15.18 262.32 67.60 13.98 8.22 Grand Total 127.96186 100 388.02426 100 169.95175 100 Expenditures by The External Development Partners (EDPs)

A significant share of Nepal’s health expenditure is borne by the EDPs since

planned development started in Nepal. During the three years preceeding this review

period, the contribution of EDPs in the total expenditure in health was slightly above

- 15 -

one third of the total expenditure. This figure fell slighty to 33 and dropped

significantly to 23 percent and with a small rise rose to 25 percent t in 2005/06.

Available data indicate that all expenditures were of the direct expenditure category

during these three years. The major contributor in the EDP was DFID with up to 57

percent of the total share during 2003/04 in. In the year 2004/05, IDA became the

largest agency (20 percent) followed by UNICEF (18 percent) and DFID ((16

percent). The rest were distributed among various EDPs.

In absolute terms also the contributions of EDPs declined from 2672 million in

2003/04 to 2099 million in 2004/05 and then rose to 2759 million in 2005/06. DFID,

IDA, UNICEF, UMN, WHO, GAVI etc are the major EDPs supporting the government

of Nepal in the health sector. Table 3.5: Contribution of EDPs (NRs in million)

EDP 2003/04 2004/05 2005/06Amount % Amount % Amount %

Australian Aid 7.48 0.28 31.18 1.49 31.18 1.13China 0.00 0.00 0.00 0.00 0.00 0.00DFID 1535.93 57.47 338.38 16.12 483.36 17.52

European Union 0.00 0.00 0.00 0.00 0.00 0.00

GAVI 236.15 8.84 97.29 4.63 237.99 8.63Germany (DFI) 0.20 0.01 11.88 0.57 57.18 2.07Germany (GTZ) 30.78 1.15 26.87 1.28 44.72 1.62Germany (KFW) 60.09 2.25 63.44 3.02 0.11 0.00Global fund 10.57 0.40 50.05 2.38 324.06 11.74GTZ 60.52 2.26 53.67 2.56 45.24 1.64IDA 0.00 0.00 413.79 19.71 915.63 33.18India 23.03 0.86 32.00 1.52 0.00 0.00Japan government 0.00 0.00 15.00 0.71 0.00 0.00Japan Medical Association 37.72 1.41 0.00 0.00 0.00 0.00JICA/DRF 109.39 4.09 92.08 4.39 0.00 0.00Korea (Kyohogi International medical cooperation Korea) 25.16 0.94 0.00 0.00 0.00 0.00

Netherlands 0.53 0.02 0.61 0.03 0.40 0.01Norway 21.33 0.80 27.59 1.31 35.08 1.27SDC 0.93 0.03 28.45 1.36 0.28 0.01UMN 203.28 7.61 157.95 7.52 171.57 6.22UNAID 10.89 0.41 0.00 0.00 0.00 0.00UNDP 4.49 0.17 0.00 0.00 0.00 0.00UNFPA 42.60 1.59 39.70 1.89 37.01 1.34UNICEF 58.93 2.20 377.64 17.99 215.22 7.80USAID 56.58 2.12 55.19 2.63 47.04 1.70WHO 135.92 5.09 186.65 8.89 113.17 4.10Grand Total 2672.48 100.00 2099.41 100.00 2759.25 100.00

- 16 -

Functional classification of expenditure:

National Health Account (NHA) requires health expenditure by functional

categories to facilitate international comparison. The Nepal NHA has proposed

functional classification of health expenditures into Core Functions of Medical Care

and Health Related Functions. These headings have been further divided into further

sub-categories.

On the basis of functional classification, basic medical and diagnostic services

extracted between 24 - 33 percent of the government health expenditure followed by

Allopathic hospital in-patient care (11 %), Immunization (except EPI 10 %), inpatient

curative care 10 percent among others during the review period.

This functional distribution changed to 24%, 12%, 7 % and 5% respectively in

the 2005/06. It can be observed that these have not occurred only due to change in

allocation of expenditures per se but due to change in classification criteria. Frequent

changes of heading into different categories create inconsistency in examining true

allocation.

The MOH data comprised of expenditures divided into 34 functional

categories. To avoid clumsiness, the detailed table of the function wise distribution is

presented in the appendix.

- 17 -

Chapter IV

Analysis of Public Expenditure on Health

The improvement of health status of the people requires allocating the public

resources for the health sector and spending them in such as way that it should

insure easy and affordable access of health services to the people. The primary goal

of public health spending is to produce healthy manpower for economic development

of the country and to ensure the access to health services. The size and quality of

public spending on health sector play a crucial role in the social equity and poverty

reduction. It is imperative to examine critically the public health spending and to

provide evidence for redesigning health policy and improving budget performances.

This chapter attempts to look over the status of public health spending and efficiency

of health spending.

Trends of health expenditure:

In the recent year, there has been an increasing trend in public health

expenditures. If we examine the period from 2000/01 to 2005/06, during the first

three years, the health expenditure ratio with GDP seems somewhat constant,

parallel to horizontal axis, at around 1.5 per cent. This is followed by an increasing

trend rising from 1.45 to 1.70 percent during 2003/04 to 2005/06. One of the major

reasons for fluctuations in public expenditure on health was due to changing

allocational strategies of national budget rather than fluctuations in the health budget

itself such as shifting public expenditure to security related expenditure. The

following table, particularly, with growth rate at 2000/2001 constant price, showed

the fluctuations in public health indicating weak commitments on allocation of health

expenditure. Per capita public health expenditure in US dollar terms has been

persistently increasing from US $ 3.86 in 2000/01 to 5.65 in 2005/06.

- 18 -

Indicators 2000/01 2001/02 2002/03 2003/04 2004/05 2005/06

Per Capita Expenditure(NRs) 289.78 305.21 296.88 307.25 349.56 420.01 Real Per Capita Expenditure (NRs) 289.78 293.64 277.12 275.31 294.10 330.20

Per capita Public Health Expenditure in US$ 3.86 3.90 3.96 4.13 4.95 5.65

Table 4.1: Growth trend of health sector spending Burden of disease:

The burden of disease of Nepal has been estimated based on 1996

population data projection derived from the 1991 population census. Several policy

changes and efforts in the health sector in the last decade have reduced disease

burden. Therefore the estimated burden might not represent the present scenario of

burden of disease; however the category of burden of disease can provide indicative

information for assessing resource requirements. The efforts have, therefore, been

made to estimate the public expenditure based on burden of disease category. The

burden of disease has been classified into three categories: group I that included

infectious diseases, maternal and prenatal disorder and nutritional deficiencies;

group II covered degenerative and non-communicable diseases; and group III

included injuries and accidents. The allocation of health expenditure based on

burden of disease for the last six years is presented in table 2. The first group of

burden of disease captured two third of total stock of health problems of the country.

- 19 -

However, in terms of actual allocation this group exhausted less than a quarter of the

public health expenditure. The allocation of public health expenditure seemed to be

better guided by the burden of disease in last three years compared to previous two

years.

Table 4. 2: Allocation of public expenditures based on burden of disease Categories of Burden

of diseases

Percentage of burden of

diseases

Allocation of Public health expenditures

2000/01 2001/02 2002/03 2003/04 2004/05 2005/06Group I 68 30.49 13.90 14.01 21.95 24.51 21.35 Group II 23 32.97 37.97 36.37 21.93 18.98 17.91 Group III 9 0.14 0.04 0.04 0.06 0.04 0.05 Not Distinguished 36.41 48.08 49.58 56.07 56.48 60.69 Total 100.00 100.00 100.00 100.00 100.00 100.00 100.00

Distribution of Government Health Expenditure by Disease Categoroes

0

1000

2000

3000

4000

5000

2000/01 2001/02 2002/03 2003/04 2004/05 2005/06

Fiscal Years

Rs (M

illio

n) I Group

II Group

III Group

Not Distinguished

Due to unavailability of data by disease burden, a large share of the

expenditure remained un-deterministic. In cases where data are available, the

distribution of expenditure reveals that expenditure targeting particularly for Group I

diseases though very poor now is gradually improving in the later years. The not-

distinguished category is quite large and is decisive.

Allocative efficiency of health care expenditure:

Neither the concept nor the measurement of efficiency and effectiveness of

public spending is straightforward. Nevertheless, bearing the limitations in mind, it is

worthwhile to investigate the efficiency and effectiveness of public spending. We use

- 20 -

following three pillars to measure allocative efficiency of public health expenditures

viz. priority programmes and comparison with MTEF; trends of public expenditure on

targeted services categories such as rural –urban, public health services and

medical services, levels of hospital services; and input and output relationship.

Allocative efficiency ofpublic health expenditure

Pilla

r IC

ompa

riso

n w

ith M

TEF

as a

gol

d st

anda

rd

Pi

llar

IIT

arge

ted

Serv

ices

: r

ural

/urb

an, m

edic

al c

are

/pub

lic h

ealth

, lev

el o

f hos

pita

ls

Pilla

r II

IIn

put o

utpu

t rel

atio

n

Indicators of allocative efficiency of public health indicators

Pillar I: Comparison with MTEF 2004 (gold standard)

The distribution of development expenditures for projects in various priority

ranking score categories (P1, P2 and P3) based on national need assessment was

given in MTEF 2004. For this study, this distribution is taken as gold standard for

allocation of budget. If actual expenditure follows MTEF projection, we can say

efficiency in allocation is achieved; otherwise we can consider it as inefficiency in

allocation of resources.

Table4.3 : Distribution of Prioritized Development Program Budget (2001/02-2006/07) (in percentage)

Priority

2001/02 2002/03 2003/04 2004/05 2005/06 2006/07 Allocatio

n Actual Exp.

Allocation

Actual Exp.

Allocation

Revised Exp.

Allocation

Projection

Projection

P1 58.66 55.26 71.04 68.59 75.75 77.58 76.01 75.29 76.65

P2 34.27 38.63 25.5 27.58 20.51 18.39 21.31 22.34 20.78 P3 7.07 6.11 3.46 3.83 3.74 4.03 2.68 2.37 2.57 Total 100 100 100 100 100 100 100 100 100 Source: MTEF, 2004

- 21 -

The table suggested us to develop indicators for allocative efficiency for

expenditure on health. There would be allocative efficiency if more than 75 percent

of total development budget goes to P1 programmes, almost 20% to P2

programmes, remaining almost 5% for P3 programmes. The following graph

suggested that priority I programmes consumed almost one third of the total

development budget on the health sector, conversely priority III programmes had

consumed largest amount of development health expenditures. The trend lines of

priority programmes demonstrated that first priority programmes had a greater

vicissitude compared to other priority programmes. The results validated that the

expenditures on health sector had not been allocated based on priority settings.

Trends of priority programmes

-10.0020.0030.00

40.0050.0060.0070.00

Fiscal Years

Perc

ent

P1 36.16 32.40 33.46 18.55 32.99 38.23

P2 7.87 24.26 32.07 23.40 7.16 24.87

P3 55.96 43.35 34.46 58.05 59.85 36.90

2000/01 2001/02 2002/03 2003/04 2004/05 2005/06

Pillar II: Trends of public health expenditure on targeted services categories

Under the health sector policy reform objective to “shift emphasis from urban

to rural health services,” the policy documents reflecting the government’s priorities

were to increase financial allocations for rural health services through preventive as

well as clinical services. Analysis of public expenditure review on health sector

revealed that rural health services were kept in priority for allocation of financial

resources in the review periods, except for 2003/2004 fiscal year (following diagram).

Similarly, the health policy documents such as SLHP have given importance to

primary health services. The comparisons of allocated expenditure among the

- 22 -

tertiary, secondary and primary services provide information on translation of policy

into implementation. The results showed that primary health services consumed

more resources compared to other level of services; however the trend lines of

expenditure of primary health services showed a downfall.

Allocation of Expenditure by Urban/Rural

0.00

10.00

20.00

30.00

40.00

50.00

60.00

70.00

80.00

2000/01 2001/02 2002/03 2003/04 2004/05 2005/06

Fiscal Year

Perc

ent

Urban Rural

Allocation of Expenditure by Level

0.00

10.00

20.00

30.00

40.00

50.00

60.00

2000/01 2001/02 2002/03 2003/04 2004/05 2005/06

Fiscal Year

Perc

ent

Tertiary Secondary Primary Not Distinguished

- 23 -

The following diagram suggested that the government has prioritised to the

preventive services which are related to public goods. The expenditures on medical

services were decreasing over the period; conversely, the expenditure on public

health services had increasing trends. The fiscal year 2003/04 had equi-allocation of

financial resources between medical services and public health services.

Allocation of Expenditure by Medical and Public Health Services

0.00

10.00

20.00

30.00

40.00

50.00

60.00

70.00

80.00

2000/01 2001/02 2002/03 2003/04 2004/05 2005/06

Fiscal Year

Perc

enta

ges

Medical Service Public Health Services

Allocation of Expenditure by Age Group

0.00

2.00

4.00

6.00

8.00

10.00

12.00

14.00

Fiscal Years

Perc

enta

ges

0-5 Years 1.93 1.65 1.71 0.98 0.99 2.28

0-14 Years 2.32 2.33 1.99 11.57 6.52 7.71

15-49 Years 2.31 1.55 1.91 1.70 1.51 2.66

2000/01 2001/02 2002/03 2003/04 2004/05 2005/06

- 24 -

Pillar III: input output relation Efficiency of Health expenditure

The policy efforts in terms of aggregate outcomes, such as child health

outcomes have been found to follow desired impact that is presented in the following

graph. The curve of under-five mortality has showed faster changes in mortality rate

compared to others. The child mortality rate after 2001 has declined considerably.

The life expectancy at birth is slowly increasing and after 2001, female life

expectancy at birth has become higher than male life expectancy. The graphs exhibit

that life expectancy at birth has positive relationships with per capita public health

expenditures. On the other hand, mortality rates have negative association with per

capita public health expenditures.

Mortality Rate

020406080

100120140

1996 2001 2006

Years

Rates

Neonatal Post neonatal infantchild under five

Trends of Life Expectancy at Birth

010203040506070

1971 1981 1991 2001

Years

life ex

pactan

cy

Male Female

Source: Population Division, Ministry of Health and Population, Government of Nepal, New ERA Kathmandu, Nepal and Macro International Inc. Calverton, Maryland, U.S.A.( 2007) Nepal demographic health survey

- 25 -

Trends of Real and Nominal Expenditure

050

100150

200250

300350

400450

2000/01 2001/02 2002/03 2003/04 2004/05 2005/06

Fiscal Years

Am

ount

(Rs)

Per capita Public Health Expenditure Per capita Real Public Health Expenditure

Nepal has made some progress in health outcomes over the years.

Particularly, in the last decade, there have been improvements in coverage in

immunization, utilization of health services, MCH programmes. However, health

outcomes have not been equitable, as are reflected in the income quintile.

Expanded Programme on Immunization

0.0%20.0%40.0%60.0%80.0%

100.0%120.0%

2000/01 2001/02 2002/03 2003/04 2004/05 2005/06

Fiscal Years

Cove

rage

Pe

rcen

tage

s

BCG coverage DPT- 3CoveragePolio-3 Coverage Measles coverage

- 26 -

Utilization of Curative services

30.0%

32.0%

34.0%

36.0%

38.0%

40.0%

42.0%

2000/01 2001/02 2002/03 2003/04 2004/05 2005/06

Fiscal Years

Per

cent

age

of to

tal

popu

latio

n

Total OPD new visit as % of total population

Outcomes of Safe Motherhood Programmes

0.0%

20.0%

40.0%

60.0%

80.0%

2000/01 2001/02 2002/03 2003/04 2004/05 2005/06

Fiscal Years

Per

cent

First Antenatal care as % of expected pregnanciesDeliveries conducted by Health workers as % of expacted pregnancies

Output of Family Planning programmes

34.0%

36.0%

38.0%

40.0%

42.0%

44.0%

2000/01 2001/02 2002/03 2003/04 2004/05 2005/06

Fiscal years

perc

ent

Contraceptive prevalence rate (CPR)

- 27 -

The recent data in the following tables clearly show that poor people have low

access to health care services; they have lower utilization of health services

compared to the rich and there is lower reporting of illness among the poor. Lower

utilization does not mean that they are comparatively healthier than the rich people.

In fact, they have greater incidence of disease but their inability to meet basic

requirement such as food availability makes them compelled to overlook health

problems.

Table 4.5: Reporting acute illness by consumption quintile and gender (in per cent)

Consumption quintile Male Female Total Poorest 11.2 9.6 10.4 Second 11.3 11.6 11.5 Third 12.7 14.4 13.6 Fourth 14.6 14.4 14.5 Richest 14.3 16.1 15.2

Source: NLSS, 2003/4

Table 4.6: Health care utilization by income (in per cent)

Consumption quintile

Consulted Not consulted TotalDoctors Paramedic Kabiraj/Baidya Traditional

Poorest 8.1 42.4 1.1 5.4 43.1 100second 16.6 40.1 0.2 2.9 40.3 100Third 20.6 42.4 0.2 2.5 34.4 100Fourth 30.9 34.3 1.2 4.3 29.3 100Richest 45.7 25.2 1.4 1 26.8 100

Source: NLSS, 2003/4

Table 4.7: Access to the nearest health services (health post) by consumption quintile (in per cent) Consumption quintile

up to 30 minutes

30 minutes to 1 hour

1to 2 hours

2 to 3 hours

more than 3 hrs Total

Poorest 48.9 18.9 22.5 6.3 3.3 100Second 53.4 21.8 18.1 4 2.8 100Third 58.9 20 13.7 4.8 2.7 100Fourth 61.4 20 13.4 3 2.2 100Richest 79.2 13.8 4.8 1.6 0.6 100

Source: NLSS, 2003/4

It has been recognized that diarrheal diseases as one of the major public

health problems among children under five in Nepal. The national reported incidence

of diarrhea per 1,000 among children under five years decreased during the study

years. The following trend lines suggested that the stock of health problems has

been decreasing over the years.

- 28 -

Diarrhoeal Diseases: Output measurement

0

0.2

0.4

0.6

Fiscal Years

Indi

cato

rs p

er th

ausa

nd

Diarrhoeal death perthausand

0.1 0.04 0.04 0.05 0.07 0.02

Case fatality rate perthausand

0.4 0.22 0.2 0.25 0.31 0.11

2000/01 2001/02 2002/03 2003/04 2004/05 2005/06

Absorptive capacity

The absorptive capacity of the programmes is the share of the allocated

budget that is spent each year. Absorptive capacity indexes of the priority

programmes are developed based on development (or capital) budget of the ministry

of health and population. The absorptive capacity index presented in the following

graph suggested that the capacity was very low in 2004. The capacity has been

increasing over the years though it still remains low.

Absorptive capacity index of development (or Capital) budget

0.00

0.50

1.00

Fiscal years

Inde

x

Absorptivecapacity

0.36 0.58 0.84

2003/04 2004/05 2005/06

The following graph exhibits absorptive capacity indices based on priority

programmes. P1 programmes had surprisingly lower absorptive capacity in fiscal

- 29 -

year 2003/2004. The absorptive capacity was increasing over the years however it

was still very low. P2 programmes consumed more resources as allocated in the

budget in 2006. But it had almost 50 per cent absorptive capacity in 2003/04 and

2004/05. Briefly, all priority programmes had low absorptive capacity indicating one

of the bottlenecks to produce desired health outcomes in the country.

Absorptive Capacity based on Priority Programmes

-

1.00

2.00

Fiscal Years

Indi

ces

P1 0.18 0.66 0.78

p2 0.47 0.54 1.85

p3 0.57 0.55 0.62

2003/04 2004/05 2005/06

We compared absorptive capacity of medical services and public health

services in the following graph. The results exhibited that medical services had

higher absorptive capacity than public health services. It means that public health

services have greater barriers in utilization of the resources compared to medical

services.

Absortive capacity index

-

0.50

1.00

1.50

Fiscal Years

Inde

x

Medical Services 0.56 0.82 1.06

Public HealthServices

0.30 0.51 0.74

2003/04 2004/05 2005/06

- 30 -

Bottlenecks of budget utilization

The results mentioned above demonstrated that utilization rate of the

programmes budget was very low due to the under-funding to the programmes.

Budgets are not released in time for the programmes (ATI, 2008). There is provision

to supply the approved programmes to the implemented body within 15 days of

starting of the new fiscal year. However, in practice it has been taking at least a

month to approve the programmes. Approved programmes with authority to

implement, and 80 percent physical achievements of programmes for second

trimester are preconditions for releasing the budget. Hence, institutional weakness;

delay in disbursement of programme budget and regional disparities are responsible

for low utilization of allocated budget in the health sector.

- 31 -

Chapter V

Fiduciary risks of government expenditure on health

Fiduciary risk is the measure of uncertainty that fiduciary requirements are

actually met. The fiduciary risk explains about the funds not properly accounted for,

are not used for the intended purpose and do not represent the value of money

(DFID, 2004). We used secondary information to assess the fiduciary risk of

government expenditure on health sector.

One important aspect of public budgeting is the maintenance of financial

discipline in the form of allocating budgets and making expenditures in the allocated

heading within the stipulated time. Any expenditure that deviates from sanctioned

allocation is a case of budgetary indiscipline as all budgetary allocations are a part of

the public sanctioning through parliamentary approvals. Allocations that exceed or

fall short of the budget amount within scheduled time frame pose a threat to

achieving sectoral and broader national development targets set by the country.

Fiduciary risks are mostly brought to public notice though annual reporting by

Office of the Comptroller Generals. These reporting have revealed that such risks

have been prevailing continuously during the last consecutive years. For instance in

the fiscal year 2003/04, it has been reported that among the twenty-one projects

which had been given a Priority status in the Tenth Plan, budget allocation for the

Reproductive Health Programme for the Teen-age Population is missing. The

Comptroller Generals report has mentioned that funds not being allocated even for

projects that were under Priority I of the government could not be considered a good

sign (MOF, 2008).

Similar observations have been made by the report of the Comptroller

General for consecutive fiscal years 2004/05. In the fiscal year 2004/05, budget

allocation has been missing for yet another project under Priority I. In yet another

Report of the comptroller General for the year 2005/06, it has been reported that the

achievement out of the physical target for four projects have not been reported

indicating a lack of accountability

- 32 -

Chapter VI

Discussions and Recommendations

Analysis of public expenditure on health sector help to strengthen MOHP's

position in tracking financial resource allocation and expenditure trends with the view

of improving equity and efficiency in resource allocation within the sector. The review

documented the trends of funding sources and allocation of public expenditure and

provided overall budget performance and factors constraining the allocations of

resources. This PERH highlighted a number of different facets of public expenditure

on health in Nepal and prompted a series of fundamental questions: including the

overall adequacy of funding, the role of public expenditures in the health sector,

appropriate mechanisms for mobilizing resources and providing services with

appropriate mix of public health and medical care.

Nepalese health system has made tangible improvements after restoration of

democracy in the health status of the people. It is however struggling to produce

desired outcomes, particularly among the poor, endogenous and tribal people. Large

number of children continue to die of preventable diseases; too many mothers die in

childbirth, burden of fighting against communicable diseases, the number of non-

communicable diseases (diabetes, heart diseases, etc) is increasing rapidly. This

double burden of communicable and increasing non-communicable diseases is

placing additional pressures on the health system. In addition to this major

demographic change, epidemiological and nutritional transitions are also occurring.

These changes will have important implications for demand for health care and for

policy decisions in health financing. Nepalese health sector is entering a period of

transition. The country is in a position of transforming into new systems, particularly

regarding political systems and mechanism of governing. The policies and strategies

are designing with new visions. In this situation, the review provides base line

information and lessons from experiences.

Public expenditure on health sector has been increasing in the recent years,

but trends of expenditures were heavily fluctuated over the last six years, 2001 to

2006. The Government has considered allocating more resources to health. Along

- 33 -

with, qualities of public health expenditure, efficiency and equity of health spending

are equally important. The priority should be given to identifying the right mix of

investments to better reflect the country’s complex and wide-ranging public health

challenges. Efforts are made to analyze quality of health spending from different

aspects such as spending on priority based programmes, targeted services,

utilization and resource absorptive capacity of the programmes. At the same time,

analysis of public health expenditure data remains problematic not only due to the

lack of reliable data from different sources but also because of complexities

introduced into the system: changing in budget item lines, expenditures on health

from different ministries, changing items development budget to capital budget and

recurrent budget, direct and indirect channels of spending on health sector from

development partners, limitations in local health accounting system, among others.

The functional classification of public expenditure and various categorizations

of expenditures based on programmes and budget line items were difficult due to

frequent changing budget line items and name of the programmes. Data record

system was very weak in the local level such as VDCs, Municipalities and DDCs due

to the various reasons such as impact of conflict on programmings, implementing,

and running of the offices, along with limited awareness of functional classification of

expenditure among others. This led to many difficulties in determining expenditure by

health sector classification. Obtaining details of expenditures patterns and

classification on health sector from the EDPs was very difficult because they had

their own system of allocating budget and expenditure classification. They did not

publicly disclose their reports on details of expenditures on health. Efforts to improve

on these aspects of the expenditure are beyond the scope of this study.

The method of extrapolation of expenditure on health from local bodies might

not be robust and estimated amount might not be representative of real expenditure

due to small sample size of local bodies for survey. Similarly, the amount of

expenditure on health by EDPs did not cover the indirect expenditure in this review.

The government assumed that indirect sources of expenditure on health by EDPs

were almost 10 percent of total expenditure on health by EDPs.

- 34 -

Econometric evidence shows that most cross-country variance in health

outcomes is explained by per capita income (poverty level) differences and that

public expenditure has limited explanatory power (Roberts, 2003).

Recommendations

Government policies in the sector should be more clearly reflected in

budgetary allocations and greater transparency in decentralized health

accounting and spending is necessary.

There should be appropriate mechanisms for mobilizing resources and

purchasing services and, appropriate proportion of public expenditure for

public health, as opposed to medical care. These issues are reflected from

the public policy, such as the role of the state, the design of decentralization,

and the social and political values attached to equity and efficiency.

The MTEF has marked an important milestone in public resource

management in the country; however, the budgetary and the MTEF processes

have not been properly integrated. MTEF has been proved to be an

extremely useful tool for public expenditure management from several

perspectives. The budgetary reforms that have been introduced to implement

the MTEF, particularly linking fund releases to the plan priorities for effective

implementation and performance that will help to improve the effectiveness of

public spending and service delivery.

The prioritization criteria require further revisit to make them more objective

and comprehensive. Criteria have to be periodically reviewed and made more

objective, focused and comprehensive, particularly in the context of the

changing environment and sectoral need. To ensure adequate resources to

P1 projects, budget share of P1 projects has to be reviewed and made more

realistic from funding and implementation point of view.

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Research team

Shiva Raj Adhikari Principal Investigator

Bishnu Prasad Sharma Co Investigator

Baburam Shrestha Co Investigator

Damaru Paneru Researcher

Indu Joshi Researcher

Sumanta Neupane Researcher

Sunil Kharel Researcher

Ghana Prasad Neupane Research Assistant

- 36 -

References Government of Nepal, MOF, (2007) Economic Survey, Ministry of Finance, Kathmandu,

Nepal _____, Source of Foreign Aid Projects Handbook under Development Budget of Various

Fiscal Years (Nepali) _____, Expenditure Estimate Description of various FY (Nepali), Ministry of Finance, Financial Comptroller General Office (2008) “Public Expenditure and

Financial Accountability: An Assessment of the Public Financial Management Performance Measurement Framework (As of FY2005/06)”

_____, (2008) “Health expenditure report” in Nepali Central Bureau of Statistics, (2004) Nepal Living Standard Survey 2003/04: Statistical Report,

Central Bureau of Statistics, Kathmandu, Nepal _____, (1996); Nepal Living Standard Survey 1996: Main findings, Central Bureau of

Statistics, Kathmandu, Nepal _____, (2003) Population Monograph 2001 Central Bureau of Statistics, Kathmandu, Nepal HMG/Nepal, (1999) Second Long Term Health Plan (1997-2017), Ministry of Health,

Kathmandu, Nepal _____, (2003), Health Sector Strategy: An agenda for reform, Ministry of Health,

Kathmandu, Nepal _____, (2004) Nepal Health sector Program- implementation Plan” (NHSP-IP), HMG/N,

Ministry of Health, Kathmandu, Nepal _____, National Planning Commission, 2003, The Tenth Plan (2002-07), National Planning

Commission/ Government of Nepal Government of Nepal, (2007) Three Year Interim Plan (2007/08 – 2009/10) _____, Ministry of health and population (2006) Nepal National Health Accounts (2001-

2003) _____, Ministry of health and Population, (2004) Public expenditure review on health sector _____, Department of health services, Ministry of health and Population, Annual report

2006/007 Ministry of Health and Population (MOHP) [Nepal], New ERA, and Macro International Inc.

(2007). Nepal Demographic and Health Survey 2006. Kathmandu, Nepal: Ministry of Health and Population, New ERA, and Macro International Inc.

Roberts, J. (2003) Poverty Reduction Outcomes in Education and Health: Public Expenditure and Aid, Working paper 210, Overseas Development Institute.

RTI International (2008) Bottleneck study for the timely Disbursement of funds. Research Triangle Park, NC USA

World Bank (2000) Nepal operational Issues and Prioritization and resources in the health sector, health Nutrition and Population Unit, South Asia region World Bank

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Annexes

Table 1 Functional Classification of Public Expenditure

Functions 2003/2004 2004/2005 2005/2006 Amount % Amount % Amount %

Administrative and provision of health related cash benefits 0.00 0.00 0.00 0.00 0.00 0.00

Administrative and provision of social services to those living with disease and impairment

82.40 1.73 108.49 1.82 193.38 2.51

All other discipline-specific specialised medical care services 27.49 0.58 45.32 0.76 78.72 1.02

All other health-related expenditures 0.00 0.00 0.00 0.00 0.00 0.00All other public health services 265.91 5.59 478.19 8.01 865.63 11.25Allopathic hospital in-patient care 530.71 11.15 728.28 12.20 910.66 11.84Allopathic medicines 19.99 0.42 58.41 0.98 42.20 0.55Basic medical and diagnostic services 1575.42 33.10 1748.32 29.29 1817.93 23.63Capital formation of health care provider institutions 310.03 6.51 405.77 6.80 1203.92 15.65

Clinical laboratory services 38.46 0.81 38.83 0.65 30.44 0.40Drinking water and sanitation 6.23 0.13 9.52 0.16 14.38 0.19Education and training of health personnel 89.26 1.88 200.75 3.36 144.84 1.88

Family health (MCH and FP) and reproductive health services 19.22 0.40 24.29 0.41 143.20 1.86

Government administration of health and health-related social security 337.54 7.09 366.32 6.14 427.83 5.56

Immunization (except EPI) 498.77 10.48 323.84 5.42 523.23 6.80Infant and child health 1.13 0.02 9.38 0.16 15.78 0.21In-patient curative care 462.48 9.72 375.64 6.29 366.96 4.77Non-allopathic hospital in-patient care 15.38 0.32 17.54 0.29 18.01 0.23Non-allopathic hospital out-patient care 4.14 0.09 5.67 0.09 5.40 0.07Non-allopathic medicines 5.22 0.11 6.67 0.11 0.00 0.00Non-allopthic medicine and other health care services 94.84 1.99 108.32 1.81 123.34 1.60

Occupational health care 2.67 0.06 2.53 0.04 4.00 0.05Other communicable diseases 0.00 0.00 0.00 0.00 0.00 0.00Other reproductive health 0.00 0.00 0.00 0.00 0.00 0.00Patient transport and emergency rescue 96.86 2.04 275.22 4.61 247.23 3.21

Pharmaceuticals and other medical non-durables 7.17 0.15 0.00 0.00 7.70 0.10

Prevention and management of communicable diseases 0.00 0.00 0.00 0.00 0.00 0.00

Prevention and management of non-communicable diseases 45.00 0.95 50.00 0.84 46.58 0.61

Preventive health care and public health services 0.50 0.01 3.88 0.06 0.77 0.01

Research and development in health 41.32 0.87 81.60 1.37 62.13 0.81STDs 31.57 0.66 235.98 3.95 130.40 1.69Tuberculosis and leprosy control 97.06 2.04 153.61 2.57 152.17 1.98Vector borne diseases 37.88 0.80 61.07 1.02 49.93 0.65Water and food borne disease control 15.26 0.32 46.41 0.78 67.09 0.87Total 4759.91 100.00 5969.82 100.00 7693.87 100.00

38

Technical notes Form A: Income by Source

This form includes the income of institution by different sources. They might be government, local bodies, promoters/shareholders, student fee, donation/charity, NGOs, INGOs, ODA (International Assistance Grants) etc. Form B: Expenditure by Source

This form includes the expenditure by source such as government, local bodies, promoters/share holders, student fee, donation/charity, NGOs, INGOs, ODA (International Assistance Grants) etc. Form C: Expenditure by Providers Level This form captures the expenditure of Tertiary level hospitals: This item comprises central hospitals, all teaching and/or university hospitals except specialist hospitals. Secondary level hospitals: This item comprises all zonal and regional hospitals. Primary level hospitals: This item comprises all district hospitals. Form D: Medical Practice Expenditure (Paid to other Institutions) of Medical/Nursing Schools

This item includes the medical practice expenditure incurred by paying the sum of money to the contracted government hospitals or private hospitals (for profit) or NGO hospital (private for profit) or community hospitals or primary health care facilities (PHC, HP, SHP). Form E: NR Health Related Function NR: Health Related Functions NR1: Capital Formation of Health Care Institutions This item comprises the gross capital formation of domestic health care institutions excluding those listed under NP4 (Retail sale and other providers of medical goods).

i. Building ii. Land (Procured) iii. Medical Equipment (cost per item US$100 and more)

Note: Establishments and equipments whose primary objective is to manufacture of medical goods for sale to the general public/personal/household are excluded in this category.

39

NR2: Education and Training of Health Personnel

This item comprises government and private provision of education and training services for health personnel, including the administration, inspection or support of provider institutions. Training corresponds to national post-secondary and tertiary education levels. This item includes the following expenditures: the education and training of health personnel by both public and private agencies and institutions; education and training that involves (i) paramedical schools, (ii) medical/paramedical departments in undergraduate schools and (iii) graduate and under graduate medical schools; expenditures for universities and other training institutions on medical education; the salaries of medical interns, medical residents and trainee nurses.

i. Salary and allowances of teachers/trainers ii. Salary and allowances of interns and trainee nurses

iii. Educational supplies (Books, journals, stationeries and others) iv. Examination cost of students/trainees

This item excludes expenditure by teaching hospitals. NR3: Research and Development in Health

This item comprises Research and Development (R&D) expenditure in health, which is defined as follows: "R&D programmes directed towards the protection and improvement of human health. 1; includes R&D on low: hygiene and nutrition and also R&D on radiation used for medical purposes, biochemical engineering, medical information rationalization of treatment and pharmacology (including testing medicines and breeding of laboratory animals for scientific purposes) as well as research relating to epidemiology, prevention of industrial diseases and drug addiction.'' Note: Research and experimental development (R&D) comprise creative work undertaken on a systematic basis in order to increase the stock of knowledge, including knowledge of man, culture and society and the use of this stock of knowledge to devise new applications. "R&D covers three distinct activities: basic research, applied research and experimental development. Basic research is experimental or theoretical work undertaken primarily to acquire new knowledge of the underlying foundation of phenomena and observable facts, without any particular application or use in view. Applied research is also original investigation undertaken in order to acquire new knowledge. It is, however, directed primarily towards a specific practical aim or objective. Experimental development is systematic work, drawing on existing knowledge gained from research and/or practical experience that is directed to producing new materials, products or devices, to installing new processes, systems and services, or to improving substantially those already produced or installed. R&D in health excludes outlays by pharmaceutical firms, which are shown separately. R&D outlays by pharmaceutical firms have to be distinguished from other related scientific and technological activities such as, for example, patent and license work. Research by postgraduate students carried out at universities and university hospitals in medical science should be counted, wherever possible, as part of R&D in health care.