Caroline Penn
OECD
Chris James
OECD
Camila Vammalle
OECD
Fiscal Sustainability of Health Systems
How to Finance More Resilient Health Systems When Money Is Tight?
5. Medium-term budgeting for health: Looking beyond the annual focus of the budget
Abstract
Medium-term budgeting for health involves taking a strategic, multi‑annual approach to budgeting, looking beyond the one‑year focus of the annual budget. This chapter explores how OECD countries carry out medium-term budgeting for health, including the extent to which this relates to the regular annual budget cycle. It examines how such a forward-looking approach to setting priorities and budgets can help improve allocation decisions in light of emerging needs in the health sector, and what are the essential preconditions to realise the benefits of a medium-term perspective.
Key findings
Medium-term budgeting for health involves taking a forward-looking approach to budgeting, usually over a three‑to-five‑year time horizon. OECD countries have taken steps to build such a medium-term perspective into the budget process for health, with about 90% of surveyed country governments estimating health spending for future years. This provides visibility on emerging spending requirements for the health sector and the underlying cost drivers.
Governments in OECD countries consider a range of factors when estimating health spending for future years, notably cost drivers – such as demographic indicators and wage growth – have the greatest influence on future health expenditure estimates. Macroeconomic factors, including indicators for economic growth and annual health spending in recent years, are also important to estimate spending over the medium-term.
However, the link between these multi‑annual budget plans and the annual budget process is often lacking. Only just under half of surveyed OECD countries (11 of 24) use medium-term budgeting for health as the basis for future budget allocations. For countries where multi‑annual allocations are set, these generally cover expenditure on most publicly funded health services (including most curative and preventive health services).
More commonly, medium-term budgeting for health is limited to being used only for informational purposes. That is, it is used to highlight the future costs of current policies and signal the direction of future financing but does not bind future decisions on policies.
In general, medium-term budgeting for health is not an isolated activity. In three‑quarters of OECD countries, medium-term budgeting for the health sector forms part of governments’ broader medium-term expenditure frameworks (MTEF).
Designing a medium-term financial plan for health is complicated by the need to balance predictability and flexibility. That is, such a medium-term plan should allow health agencies to plan based on a reasonable assumption of the financial resource envelope available, while preserving the government’s flexibility to adjust to the public finance and macroeconomic climate. This challenge has been highlighted by the unexpected high inflation during 2022 and 2023.
Successful medium-term budgeting depends on some preconditions to realise its full benefits. Notably, it requires strong baseline estimates that capture a comprehensive list of cost drivers. Further, designating clear lines of responsibility for carrying out such estimates avoids inconsistent models across different government agencies. More generally, such multi‑annual planning requires buy-in from key stakeholders across ministries of finance, ministries of health and (when relevant) health insurance agencies.
5.1. Introduction and key policy findings
Traditionally, the annual budget process for health begins with the previous year’s budget as a starting point, adding incremental amounts for the new budget period. This is known as incremental budgeting. While offering a pragmatic approach to public budgeting, with incremental budgeting, budget allocations become rooted to existing policies, and risk not reflecting changing health needs.
The introduction of medium-term budgeting for health involves taking a strategic forward-looking approach and addressing the short-sightedness of annual budget. This means defining priorities and allocating resources for health beyond the annual budget year, so that spending decisions are driven by emerging health needs. The specific budgetary instrument used for multi‑annual planning is generally referred to as a Medium-Term Expenditure Framework (MTEF).
Successful medium-term planning offers substantial benefits for the health sector. A multi-year perspective to allocating resources gives predictability in the resource envelope for health agencies, in turn providing incentives for effective forward planning and the confidence to change the direction of policy to improve efficiency. In addition, planning over the medium-term term improves the budget formulation process, allowing ministries of health opportunities to allocate and reprioritise funds to better meet medium-term priorities.
Analysis in this chapter draws on results of the OECD survey ‘Macro-level management of health expenditure, with a special focus on multi‑annual financial planning for health’, conducted by the OECD Joint Network of Senior Budget and Health Officials during 2021. Twenty-four countries responded to the survey, comprising 11 countries where the majority of health spending is through government schemes at the central or subnational level (Australia, Finland, Greece, Iceland, Italy, Latvia, Mexico, New Zealand, Norway, Sweden and the United Kingdom), and 13 countries where compulsory health insurance scheme(s) make up the majority of health spending (Austria, Belgium, Colombia, Costa Rica, Chile, Czechia, Estonia, France, Israel, Japan, Korea, Luxembourg and the Netherlands.
This analysis in the chapter identifies two broad preconditions for successful implementation of a medium-term budget framework for health based on experiences among OECD member countries. These findings contribute to the OECD Applying Good Budgeting Practices to Health (2023).
First, effective medium-term budgeting for the health sector depends on reliable medium-term estimates of the baseline expenditure for health:
Medium-term health expenditure baselines should be revised at least on an annual basis to incorporate the latest available data on actual health expenditures, and the budgetary impact of recent health policies and cover the next 3‑5-year period.
Medium-term estimates require an understanding of the core cost drivers of health expenditure, and their impact on baselines.
Assumptions and methodologies used to forecast health should be transparent and stable. These assumptions (such as for GDP growth, wage growth, and demographic factors) should be consistent with those used in other areas of central government and line ministries.
Medium-term baseline estimates should include most health expenditure funded through public budgets for health (including health insurance, and by sub-national governments – depending on a country’s institutional arrangements).
Responsibility for making medium-term estimates of health expenditure baselines should be clearly established, to avoid competing models across ministries of health and finance.
Secondly, effective medium-term planning for health relies on well-formulated resource allocations to the health sector over a multi-year period:
Allocations should be set for a reasonable number of out-years (3‑5 years).
Medium-term allocations should be set at a credible level that prevents the need for annual adjustments.
Allocations beyond the budget year could be provided at a higher level of aggregation than the annual budget, to allow flexibility in allocating funds to the top priorities.
5.2. Strengthening the medium-term financing perspective for health
5.2.1. Estimating health expenditure beyond the current year
Estimating health expenditure beyond the current year can be decomposed in two elements: first, estimating the cost of existing policies (projecting baselines), and second, taking into account new policies.
Even without implementing new policies, the cost of delivering the same goods and services changes from one year to the next (for example due to evolutions of staff in salary grid, or changes in the demand for services). This is captured in the estimations of health budget baselines (i.e. future health expenditure under the assumption of unchanged policy).
Moving towards a forward-looking perspective for the health system thus requires:
Estimating health budget baselines beyond year t. This provides visibility on emerging spending requirements for the health sector and the underlying cost drivers.
Developing a medium-term plan for health, identifying medium-term objectives for the health sector, required policies to achieve these, and costing these policies. New policies can include providing a new type of health service (e.g. adding telehealth services to the list of reimbursements) or a significant change to existing policies (e.g. expanding publicly funded dental services to adults over 65).
Most OECD countries estimate the health budget for the following three to five years. Except for Mexico and New Zealand, all surveyed OECD countries make official medium-term estimates of health spending (Figure 5.1). These are done by public bodies, or by independent bodies on request of government. Prior to 2022, New Zealand had no formal mechanism for projecting the health budget beyond the annual year. However, the intention in New Zealand 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.
Figure 5.1. Do public bodies in OECD countries make official estimations of health expenditure for future years?
Source: OECD (2021), Survey on macro-level management of health expenditure, with a special focus on multi‑annual financial planning for health.
Medium-term public health spending estimates always include spending by government schemes or compulsory health insurance. A third of countries also disaggregate health expenditure by type of service. Health expenditure by age group, and private health expenditure are rarely included in estimations. Future health expenditure estimates are revised on an annual basis to coincide with the budget cycle.
5.2.2. Capturing the main factors influencing health expenditure in future years
Governments in OECD countries consider a range of factors when estimating health spending for future years. These include cost drivers, public finance and macroeconomic factors, and health policy indicators.
Cost drivers – cost changes due to movements in prices and or quantities – have a strong influence on official estimates of medium-term health expenditures across OECD countries (Figure 5.2).
Demographic indicators have the greatest influence on estimates of the future health budget. For example, medium-term projections of social health insurance spending in the Netherlands consider the size and composition of the population (Box 5.2).
Salaries of health professionals, which represent the large share of health expenditure, also have considerable influence on estimates of the future health budget.
Drug and pharmaceuticals costs – that are susceptible to frequent price changes and are often uncertain due to expensive new entrants – also influence estimates, but to a lesser extent.
Other costs also influence health expenditure. For example, recent increases in energy prices affected the cost of providing healthcare.
During the pandemic, several countries introduced indicators specific to COVID‑19 to estimate the budget for future years. Uncertainty around the evolution of pandemic created challenges in forecasting future expenditure needs. In many OECD countries, expenditure related to COVID‑19 measures were often contained within dedicated budget programmes, codes, or funds, separate from the general budget for health (OECD, 2021[1]).
Public finance and macroeconomic factors: beyond key cost drivers, estimates of future health spending incorporate the broader criteria used when setting the budget for health.
OECD countries usually include the growth rate of health spending in recent years, and a desired future rate of health spending balanced against the government’s policy objectives for the health sector.
Estimating the health budget also calls for assumptions on the state of public finance and the macroeconomic outlook. This includes parameters such GDP growth and the government’s fiscal position, indicating how much public health expenditures can feasibly grow in practice, given the overall macro-fiscal outlook. These parameters are often estimated by the ministry of finance and communicated across all line ministries to ensure consistency in the underpinnings of the baseline. Indicators annual health spending in recent years are important to estimate spending over the medium-term, along with financial sustainability considerations, and the overall fiscal position, while less frequently used is the share of health spending in total government spending.
Efficiency dividends. Some countries apply a charge to the baseline when setting the target for health expenditure future spending to provide incentives to increase public sector productivity. This is referred to as an efficiency dividend (Box 5.1).
Health policy indicators, such as policies to extend coverage and improve accessibility, or initiatives to improve quality of care, are also considered by governments when producing medium-term health expenditure estimates.
Box 5.1. Applying an efficiency dividend
When developing the health budget, some countries apply a charge against the baseline forecast, known as an efficiency dividend. This aims to encourage agencies to find efficiency gains by automatically reducing baseline budgets in coming years. Putting line ministry in charge of identifying efficiencies should improves ownership and increase likelihood of implementation.
The rationale for introducing an efficiency dividend is to:
Give public agencies an incentive to find efficiencies within their baseline before taking requesting additional budget;
Redirect these efficiency gains to higher priority activities;
Demonstrate a commitment to find efficiency gains in the public sector resulting from improved practices.
Australia, Sweden, the United Kingdom and have introduced an efficiency divided on central government spending, including health. While in New Zealand, there is an expectation of an efficiency dividend in some years. The Australian Government applies a dividend to the operating expenses of government agencies including those responsible for health. The scale of efficiencies agencies must find has varied over time from between 1% and 4% of their operating budgets, with the 2022 budget including a dividend of 1%. In the United Kingdom, the government announces the efficiency dividend during the Spending Review process (which in the United Kingdom is the start of the budget process). The 2021 Spending Review announced that departments must identify at least 5% efficiencies from their day-to-day budgets for reinvestments over a three‑year period.
Source: Van Eden, H., D. Gentry and S. Gupta (2017[2]), Chapter 4. A Medium-Term Expenditure Framework for More Effective Fiscal Policy, https://doi.org/10.5089/9781513539942.071.
Figure 5.2. Types of indicators used to estimate the health budget for future years – assessment of influence on the budget (across surveyed OECD countries)
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.
Box 5.2. Medium-term health expenditure projections in the Netherlands
The Bureau for Economic Policy Analysis carries out medium-term projections of health expenditure in the Netherlands for a three‑year period. This includes expenditure under the three schemes that provide universal health coverage in the Netherlands (the Health Insurance Act (Zvw), the Long-Term Care Act (Wlz), and the Social Support Act (Wmo)) as well as publicly funded youth care expenditure.
The projection model estimates health expenditure under the assumption of unchanged policy. For each scheme, the model increases health expenditure recorded in the previous year by a growth rate and then adjusts for existing policies that have a cost-implication in future periods.
The growth rate consists of five components:
1. General inflation
2. The relative increase in health sector wages and other prices of health inputs
3. Demographics (size and composition of the population)
4. Income growth (per capita)
5. Other growth (e.g. new technology, new pharmaceuticals)
Source: Bureau for Economic Policy Analysis (CPB) (2019[3]), Middellangetermijnverkenning zorg 2022‑2025, https://www.cpb.nl/sites/default/files/omnidownload/CPB-Middellangetermijnverkenning-zorg‑2022‑2025-nov2019.pdf.
5.2.3. The importance of co‑operation among different public institutions
The ministry of health has strong ownership over forward estimates of the health budget. Ministries of Health have full insight to identify the cost drivers of budget items or programmes. At the same time, Finance ministries have strong buy-in to ensure consistency and accuracy in the preparation of estimates across different areas of government. Ministries of finance may also provide a common set of parameters such as macroeconomic forecasts and population projections.
Across OECD countries, the institutions responsible for preparing medium-term estimates of health expenditure depend in part on the health financing arrangements of a country (Figure 5.3). Among countries where health financing is organised predominantly around government schemes, the ministry of health or the national health service is responsible for preparing medium-term health expenditure estimates in just over half (55%) of the countries.
In contrast, among countries organised predominantly around compulsory health insurance, the ministry of health is less likely to have such responsibility (in 23%, or 3 of 12 countries). Rather, agencies implementing the compulsory health insurance scheme (e.g. social health insurance agency) are more likely to have this responsibility (in 62%, or 8 of 13 countries).
In both types of health financing arrangements, the ministry of finance is responsible for medium-term health expenditure estimates in just under half of the surveyed countries. Other institutions responsible for estimates include national government agencies in charge of government planning, those carrying out national economic analyses, and those producing national statistics. For example, this includes the Bureau for Economic Policy Analysis (CPB) in the Netherlands, and the National Statistics Office in Italy. Finally, in just under half of surveyed countries, the responsibility for producing medium-term estimates is shared across multiple institutions.
Figure 5.3. Institutions responsible for medium-term estimations of health expenditures
Source: OECD (2021), Survey on macro-level management of health expenditure, with a special focus on multi‑annual financial planning for health.
5.2.4. From medium-term to longer-term projections
A forward-looking perspective for health should incorporate longer-term projections of health budget (i.e. over 10 years) (see Chapter 2 on long-term projections). Given the current share of health spending within public budgets and rising cost pressures, longer-term projections of health expenditure provide a picture on the sustainability of healthcare costs in the absence of reform. This provides valuable support to policy makers to modify the long-term trajectory of health spending growth.
The choice of forecasting model changes with the time horizon of projections. Longer-term projections of health expenditure often require a different type of projection model than medium term projections, as they need to acknowledge the many uncertainties and assumptions such as the impact of changes in government policy. Box 5.3 outlines common forecasting models for health spending.
Box 5.3. Forecasting models for health expenditure
The OECD has identified three main classes of forecasting models for health spending:
Micro simulation models simulate entire populations and offer flexibility to test a range of “what if” policy scenarios related to prevention, treatment and the organisation and financing of care; and to examine forecasted results by different characteristics included in the model, such as by diseases, age‑groups, providers, or treatments.
Component-based models forecast health expenditure by component, such as by financing agents or providers of care, or by age group. Component-based models are typically more demanding in terms of data requirements as they use several drivers to project health spending.
Macro-level simulation models focus on forecasting total health and include analysis of time‑series and cross-sections of aggregate indicators. Macro-level models are typically the least demanding projections models in terms of data requirements, as very often include just a few explanatory variables.
Source: Astolfi, R., L. Lorenzoni and J. Oderkirk (2012[4]), “A Comparative Analysis of Health Forecasting Methods”, https://doi.org/10.1787/5k912j389bf0-en.
Most surveyed countries project health expenditure over the longer term (Figure 5.4). In nearly all these countries, longer-term projections for health expenditure use a different methodology than medium-term projections. For example, Australia uses a component-based model for medium-term projections, and a macro-level model for long-term projections (Box 5.4).
Figure 5.4. Are separate longer-term projections made for health expenditure?
Source: OECD (2021), Survey on macro-level management of health expenditure, with a special focus on multi‑annual financial planning for health.
Box 5.4. Long-term projections of health expenditure in Australia
Every 5 years, Australia produces The Intergenerational Report, projecting government expenditure for the next 40 years. The Treasury is responsible for longer-term projections, using the following methodologies:
For forward estimates from t+4 to t+11, health expenditure is projected based on an individual component model for public hospitals, pharmaceutical benefits, medical benefits, and private health insurance rebates
For estimates from t+12 to t+40, a macro-level model is used to project total central government health spending. The model is based on an alignment of spending to demographic factors, supplemented by assumptions around growth in unit cost such as technological change.
The use of component models for the short term and a macro-level model for long term projections seeks to balance the desire for more detailed projections against the uncertainty as to whether recent trends in individual components of government health spending will be representative of longer-term trends.
Source: Commonwealth of Australia (2021[5]), 2021 Intergenerational Report, https://treasury.gov.au/sites/default/files/2021‑06/p2021_182464.pdf.
5.3. Improving the link between multi‑annual budget plans and the budget process
5.3.1. Integrating health spending projections into annual budget documents
The results of medium-term budgeting for health should feed into the annual budget process. As a starting point, health spending projections can be integrated into government budget documents. This informs Parliament and other stakeholders of the emerging spending requirements for the health sector. Only half of surveyed OECD countries include such estimates of the health budget for future years within government budget documents (Figure 5.5). For countries with a compulsory health insurance scheme – such as France and Belgium – projections are integrated into separate budget documents for social health insurance institutions.
Figure 5.5. Are medium-term health spending estimates included within budget documents?
Source: OECD (2021), Survey on macro-level management of health expenditure, with a special focus on multi‑annual financial planning for health.
Medium-term spending projections for the health sector are translated into multiyear budget allocations through the annual budget process. Medium-term expenditure frameworks (see following section) are the main instrument for setting medium-term budget allocations to the health sector.1 Future budgets may be set as an approved hard expenditure target with the only adjustments allowed for exceptional circumstances. A less developed approach may include soft or indicative budget ceilings. While these provide valuable information on expected future budgetary decisions, the credibility of such financial planning is lower, and serves more as an outlook rather than a framework.
Medium-term expenditure allocations to health can be defined in either nominal or real terms. Forward allocations expressed in nominal terms are simpler to interpret and monitor and ensures tight financial discipline. However, price and wage shocks are not absorbed within nominal frameworks, which can come at the disadvantage of the health sector if real budgets shrink to accommodate inflationary pressures. On the other hand, expenditure allocations set in real terms are adaptable to changes in wages and prices but are less transparent in nature and deliver less predictably as projections are routinely updated (Van Eden, Gentry and Gupta, 2017[2]).
Medium-term budgeting for health provides binding future budget allocations in just under half of surveyed OECD countries (Figure 5.6). In four surveyed countries (Finland, Iceland, Italy and Latvia), medium-term budgeting for health is used as the basis for binding budget allocations. Further, binding spending ceilings for health beyond the current fiscal year are set in Greece, Israel and the Netherlands; with guaranteed minimum spending floors set in Chile, Costa Rica and England (United Kingdom).
For the remaining countries, medium-term budgeting for health is limited to being used only for informational purposes in just over half (11 of 20) of those surveyed countries that produce medium-term expenditure estimates (Figure 5.6). Here, medium-term expenditure projections are intended to highlight the future costs of current policies and signal the direction of future financing, but do not bind future decisions on policies. For example, France, sets the target for health expenditure (objectif national de dépenses d’assurance maladie) for three years, but 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.
Figure 5.6. The purpose of medium-term financial planning for health
Source: OECD (2021), Survey on macro-level management of health expenditure, with a special focus on multi‑annual financial planning for health. No information available for Sweden.
Multi-year binding budget allocations generally cover most publicly funded health services. Table 5.1 provides information on the medium-term budget allocations for health in place across selected OECD countries. In Italy and England (United Kingdom), expenditure ceilings are set for the National Health System budget; in Greece, Latvia and Finland, expenditure ceilings are set at the ministry level, for the ministry responsible for health.
Time horizon of medium-term budget allocations varies across OECD countries, ranging from three to five years. Budget allocations are set for a three‑year horizon in Italy and Latvia. In Italy, the Pact for Health is produced typically every three years, determining a set level of funding and related objectives for the National Health Service for the duration of the Pact. Budget allocations are set on a longer time horizon in Finland and England (United Kingdom). In Finland, binding ceilings for expenditure are set for the whole parliamentary term of four years, with the annual budget updated to reflect changes in the level of prices and costs. In 2018, England (United Kingdom) established a five‑year funding deal for the National Health Service for the period 2019‑2024. However, it is still to be decided if such a five‑year funding deal will be repeated after 2024.
Table 5.1. Medium-term budget allocations for the health sector in selected OECD countries
Source: OECD (2021), Survey on macro-level management of health expenditure, with a special focus on multi‑annual financial planning for health.
5.3.2. Medium-term budgeting for health as part of a broader medium-term expenditure framework
In general, medium-term budgeting for health is not an isolated activity. Medium-term allocations to the health sector often form part of governments’ broader medium-term budgeting through instruments such as medium-term expenditure frameworks (MTEF) (Box 5.5). These feed into the budget formulation process.
Box 5.5. Medium Term Expenditure Frameworks
Medium term expenditure frameworks (MTEFs) are a tool for linking the budgetary process to broad fiscal policy goals beyond the annual budgetary cycle. Most OECD countries have MTEFs in place although their coverage and design vary significantly. At their core, MTEFs consist of four elements:
Clear fiscal objectives are typically set in fiscal rules, which provide ceilings for public debt, deficit of expenditure growth.
Credible estimations of resource availability for the medium term, consisting of economic projections and revenue forecasts, need to be prepared. This is based on the government’s current tax policy and any agreed changes over the period.
Updated expenditures baselines provide an estimate of all government expenditure over the medium term. This comprises existing policies and any agreed changes over the period.
Expenditure ceilings set the total amount of expenditures over the medium term. In the purest form, there would be one ceiling for each ministry and the responsible minister given flexibility to reallocate within the ceiling. In practice, the ceilings are generally more detailed. They may be divided by the type of expenditure – personnel, other operating expenditure, transfer payments and capital expenditures are common categories. There may be ceilings for specific programmes or areas of expenditures – “ring-fencing.” There may be flexible ceilings for certain categories of expenditures – including unemployment benefits and other cyclical expenditures. The degree of detail in the ceilings tends to be more specific in the near years than the out years.
Figure 5.7. Medium-term expenditure framework
Source: OECD (2022[6]), Medium term expenditure frameworks, https://www.oecd.org/gov/budgeting/medium-term-expenditure-frameworks/.
Across the OECD, over three-quarters of surveyed OECD countries integrate health expenditures within their central government’s medium-term expenditure framework (MTEF) (Figure 5.8). This includes both countries heath systems funded through government schemes and compulsory health insurance schemes. For example, the MTEF in Latvia includes the budget of the Ministry of Health – the main source of finance for the national health system – among other sector such as education, defence, and welfare (Box 5.6).
Figure 5.8. Is health included in your government’s medium-term expenditure framework (MTEF)?
Source: OECD (2021), Survey on macro-level management of health expenditure, with a special focus on multi‑annual financial planning for health.
Box 5.6. Medium Term Budget Planning in Latvia
In 2012, Latvia introduced the Medium-Term Budget Framework Law. This covers the state budget, including expenditure on education, social protection, and defence. Under the framework, a three‑year budget is prepared every year on a rolling basis. Year t+1 of the medium-term budget serves as a basis for the preparation of annual budget of that year (Figure 5.9). The medium-term budget is also linked to development planning documents in Latvia, to ensure the allocation of available financial resources is in accordance with government policy priorities for the medium term.
Figure 5.9. Medium Term Budget Planning System
Source: Ministry of Finance, Latvia.
5.4. The benefits and challenges of medium-term budgeting
Successful medium-term planning for health can offer substantial benefits for the health sector. Preparing an annual budget by taking the previous year’s budget and adding incremental amounts for the new budget period discourages policy debate and creates rigidities in the budget. A forward-looking approach to setting priorities and budgeting means spending decisions are determined in light of emerging needs, as medium-term budgeting implies that the ministry of health or equivalent has developed a medium-term plan based on an assessment of priorities. (Figure 5.10). For example, the NHS Long Term plan in the United Kingdom defines the future direction for the health sector given the multi‑annual funding settlement for the National Health Service (Box 5.7).
Extending the time horizon of policy analysis means saving measures are more easily identifiable. Extending the budget horizon provides an opportunity for health agencies to examine the composition of baseline spending and the allocation of resources across different programmes or services. This allows for greater opportunities to reallocate resources to better meet medium-term priorities.
Figure 5.10. Translating health sector priorities into budget allocations
Box 5.7. Medium-term budgeting: United Kingdom
In 2018, the United Kingdom announced a multi-year funding settlement for NHS England. Under law, the government committed to increasing NHS funding for a 5-year period until 2024.
Accompanying the multi-year settlement, the NHS Long Term plan sets out the medium to long term strategic objectives and priorities for the health sector. This includes a vision for the NHS service model, such as moving towards a greater focus on out-of-hospital care and redesigning and reducing pressure on emergency hospital services.
Funding is allocated through the Spending Review process. Planned and assumed allocations are shown in Figure 5.11, based on commitments outlined in the NHS Long-Term plan and NHS accounts. Primary care, community services, and mental health are set to grow as a share of overall NHS spending, with a third of the funding growth ring-fenced for these services. The Better Care Fund initiative requires local health providers to work together by pooling budgets to deliver more integrated care. The plan also requires the NHS to deliver savings from administrative costs of more than GBP 700 million by 2023/24.
Figure 5.11. Planned and assumed allocation of the NHS England funding growth 2018/19 to 2023/24
Note: This is based on assumption over future allocations, actual spending may differ.
Source: Adapted from The Health Foundation (2020[7]), Spending Review 2020: Managing uncertainty.
Medium-term budgeting improves predictability and certainty for the health sector. Health budget managers feel annual budgets do not provide enough planning certainty. Moving towards a multi-year perspective signals the direction of health policy and gives more predictability in the resource envelope. This in turn provides incentives for effective forward planning and the confidence to change the direction of policy to improve efficiency.
Medium-term budgeting highlights the value of spending in the short term to avoid facing costs in the future. Planning over the medium term demonstrates that tackling long-standing issues now can produce cost-savings down the line. This raises important questions about health system capacity and provides a framework within which multi‑annual policy proposals can be assessed. This can help to highlight and lock in the impact of various savings measures that accrue over time, such as upgrading or modernising capital infrastructure, or investing in the health workforce or prevention.
Medium-term budgeting can also show the future increases in health expenditure due to present policies. In particular, some investment projects (such as building a new hospital) have a long-term impact on operational expenditure.
However, finance ministries warn about the possible trade‑off with flexibility. Committing to credible medium-term budget allocations gives health officials greater budgetary predictability. For finance ministries, committing reduces the flexibility to set allocations to the health sector as the fiscal environment changes, creating a sustainability risk. The challenge is to design the medium-term framework that allows health agencies to plan based on a reasonable assumption of availability of financial resources, while preserving the government’s flexibility to adjust to policy changes.
There is also a risk that the medium-term budget allocation is seen by ministries of health as a minimum spending floor for starting the budget negotiation in coming years, rather than a fixed ceiling constraining expenditure growth.
Implementing a medium-term budgeting framework for health is arguably more complex than for other expenditure areas. Medium-term budgeting inherently loses value as soon as it cannot be upheld. Strong baseline estimates capturing an inclusive list of all the cost-drivers of health expenditure are difficult to produce, due to inherent uncertainties of certain health expenditures. Multi‑annual reforms also require broad support and participation from stakeholders. In the health sector, where there is often many stakeholders, pushing through reform can be challenging.
5.5. Conclusions
OECD countries have taken steps to build a medium-term perspective into the budget process for health, with most OECD countries estimating the public budget for health for future years to provide visibility on emerging spending requirements for the health sector and the underlying cost drivers. However, the link between this multi‑annual budgeting and the annual budget process is often weak, with less than half of surveyed OECD countries using medium-term budget plans for health as the basis for future budget allocations. More commonly, medium-term budgeting for health is limited to being used only for informational purposes. That it, it is used to highlight the future costs of current policies and signal the direction of future financing but does not bind future decisions on spending levels or policies. This reduces the potential benefits of implementing a medium-term budget for health. Well-functioning medium-term budget frameworks for health should be based on reliable baseline forecasts and integrate flexibility instruments to ensure a balance between increasing certainty whilst maintaining flexibility.
References
[4] Astolfi, R., L. Lorenzoni and J. Oderkirk (2012), “A Comparative Analysis of Health Forecasting Methods”, OECD Health Working Papers, No. 59, OECD Publishing, Paris, https://doi.org/10.1787/5k912j389bf0-en.
[3] Bureau for Economic Policy Analysis (CPB) (2019), Middellangetermijnverkenning zorg 2022-2025, https://www.cpb.nl/sites/default/files/omnidownload/CPB-Middellangetermijnverkenning-zorg-2022-2025-nov2019.pdf.
[5] Commonwealth of Australia (2021), 2021 Intergenerational Report, https://treasury.gov.au/sites/default/files/2021-06/p2021_182464.pdf.
[6] OECD (2022), Medium term expenditure frameworks.
[1] OECD (2021), “Adaptive Health Financing: Budgetary and Health System Responses to Combat COVID-19”, OECD Journal on Budgeting, https://doi.org/10.1787/69b897fb-en.
[7] The Health Foundation (2020), Spending Review 2020: Managing uncertainty.
[2] Van Eden, H., D. Gentry and S. Gupta (2017), Chapter 4. A Medium-Term Expenditure Framework for More Effective Fiscal Policy, International Monetary Fund, https://doi.org/10.5089/9781513539942.071.
Note
← 1. Note in most countries, while appropriations law only covers a single budget year, governments prepare an annual budget for each year covered by the MTEF.