Formula funding of health services: Learning from experience in some developed countries
Discussion paper 1/2008
A key requirement for any health system is to ensure that the available public funds are directed to local organizations in line with health system objectives. Such funding seeks to give local institutions - such as local governments, local administrations and health authorities - both the financial capacity and the incentive to fulfil their objectives.
This paper focuses on one particular aspect of the financing mechanism: the use of mathematical formulae to determine the magnitude of funds directed towards local health agencies. This systematic approach towards funding local agencies is an essential prerequisite of successful decentralization policies. However, formula funding also embraces a number of perils that must be addressed if it is to be successful.
This paper summarizes the ‘state of the art’ of formula funding of publicly funded health care in developed countries, and the lessons that can be learned for implementation in more challenging settings in low and medium income countries. It addresses funding flows that are addressed by formula funding, and explains what formula funding is, then examines the various rationales for formula funding under three headings: efficiency, equity and political. It discusses the main building blocks of any funding formula, and then then describes in some detail examples of formula funding. Finally, the paper concludes with a summary of the steps that need to be taken to introduce formula funding, and a brief discussion of potential future development.