December 2020 Collins Chansa Katelyn Jison Yoo Dominic Nkhoma Moritz Piatti Mariam Ally Toni Lee Kuguru John Borrazzo Patrick Hettinger Collins Owen Francisco Zamawe Pia Schneider © 2020 International Bank for Reconstruction and Development / The World Bank 1818 H Street NW, Washington DC 20433 Telephone: 202-473-1000; Internet: www.worldbank.org This work is a product of the staff of The World Bank with external contributions. The findings, interpretations, and conclusions expressed in this work do not necessarily reflect the views of The World Bank, its Board of Executive Directors, or the governments they represent. The World Bank does not guarantee the accuracy of the data included in this work. The boundaries, colors, denominations, and other information shown on any map in this work do not imply any judgment on the part of The World Bank concerning the legal status of any territory or the endorsement or acceptance of such boundaries. 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CONTENTS ABBREVIATIONS.................................................................................................................................................................................................................................................. i ACKNOWLEDGMENTS.................................................................................................................................................................................................................................... ii OVERVIEW............................................................................................................................................................................................................................................................. iii 1. INTRODUCTION.......................................................................................................................................................................................................................................... 1 1.1 Objectives and Scope of the Study...................................................................................................................................................... 1 1.2 Methodology and Data Sources........................................................................................................................................................... 1 1.3 Organization of Report............................................................................................................................................................................. 2 2. REVIEW OF PERFORMANCE IN THE HEALTH SECTOR....................................................................................................................................................... 3 3. HEALTH EXPENDITURE TRENDS AND FUNDING SOURCES........................................................................................................................................... 6 3.1 Level of Total Health Expenditure ........................................................................................................................................................ 6 3.2 Composition and Growth of Health Expenditures ........................................................................................................................ 7 3.3 Government’s Commitment to Funding the Health Sector ....................................................................................................... 9 3.4 Public Expenditure on Health................................................................................................................................................................ 9 4. EFFICIENCY AND VALUE FOR MONEY......................................................................................................................................................................................... 15 4.1 Introduction................................................................................................................................................................................................. 15 4.2 Public Financial Management............................................................................................................................................................... 15 4.3 Technical Efficiency ................................................................................................................................................................................... 17 4.4 Value for Money.......................................................................................................................................................................................... 19 5. EQUITY ANALYSIS...................................................................................................................................................................................................................................... 21 5.1 Introduction................................................................................................................................................................................................. 21 5.2 Spending on Health Services at Household Level ......................................................................................................................... 21 5.3 Catastrophic Health Expenditure......................................................................................................................................................... 23 5.4 Equity of Access to Health Services..................................................................................................................................................... 24 6. CONCLUSIONS............................................................................................................................................................................................................................................. 26 6.1 Key Findings................................................................................................................................................................................................. 26 6.2 Recommendations..................................................................................................................................................................................... 28 REFERENCES......................................................................................................................................................................................................................................................... 30 FIGURES Figure 1: Malawi’s Performance on the Human Capital Index............................................................................................................... iv Figure 2: Share of Budgeted Expenditure by Function ............................................................................................................................ vi Figure 3: Human Capital Index........................................................................................................................................................................ 3 Figure 4: Total Current Health Expenditure by Disease: FY2017/18 .................................................................................................... 5 Figure 5: Trends in Total CHE, FY2009/10 – FY2017/18 ........................................................................................................................ 6 Figure 6: Composition of Total CHE, FY2006/07 – FY2017/18 ............................................................................................................ 7 Figure 7: Nominal Growth in Health Expenditures: 2007/08 – 2017/18............................................................................................. 7 Figure 8: Spending on the Top Causes of DALYs by Financing Sources in Malawi.......................................................................... 8 Figure 9: GHE in Low-Income Countries and Other Countries in SSA, 2017...................................................................................... 9 Figure 10: Level of Public Spending on Health: FY2014/15 – FY2018/19............................................................................................ 10 Figure 11: Public Spending on Health in Per Capita Nominal and Real Terms.................................................................................... 10 Figure 12: Public Spending on Health; and Drugs and Medical Supplies ............................................................................................. 10 Figure 13: Public Expenditure on Health by Level of Health Care............................................................................................................ 11 Figure 14: Percentage Growth in Spending by Districts: 2014/15 vs 2018/19.................................................................................... 12 Figure 15: Per Capita Spending by District: 2018/19 .................................................................................................................................. 12 Figure 16: Per Capita Expenditure by District vs Health Outcomes ....................................................................................................... 13 Figure 17: Public Expenditure by Key Health Systems Inputs ................................................................................................................. 14 Figure 18: Expenditure by Key Health Systems Inputs at District Level................................................................................................. 14 Figure 19: Pathways for Potential Inefficiencies in the Health Sector.................................................................................................... 15 Figure 20: Number of Doctors per 1,000 Population, FY2018/19........................................................................................................... 17 Figure 21: Productivity of Health Workers by Districts – FY2018/19..................................................................................................... 18 Figure 22: UHC Index for Low-Income Countries in SSA, 2017................................................................................................................ 19 Figure 23: Translation of Outputs in Health Outcomes.............................................................................................................................. 20 Figure 24: Out-of-Pocket Expenditure on Health as a Share of total CHE............................................................................................. 21 Figure 25: Level and Composition of Household Spending on Health by Income Quintile .............................................................. 21 Figure 26: Percentage of Households Spending above 40 percent of their Total Non-food Expenditure on Health ................ 23 Figure 27: Utilization of Health Services by Income Quintiles .................................................................................................................. 24 Figure 28: Utilization Incidence of Outpatient and Inpatient Services: FY2010/11 vs FY2016/17................................................. 25 TABLES Table 1: Key Health Outcome Indicators.................................................................................................................................................... 3 Table 2: Size of GHE: Malawi, FY2014/15 – FY2018/19........................................................................................................................ 9 Table 3: Public Health Sector Wage Bill as a Share of Total Public Expenditure on Health.......................................................... 14 Table 4: PFM Environment by Budget Phase and Managing Authority............................................................................................. 17 Table 5: Budget Formulation, Execution and Evaluation by Facility Ownership............................................................................... 17 BOXES Box 1: High Levels of Fertility and Stunting are Impeding Progress on Human Capital ............................................................. 5 ABBREVIATIONS CHE Current Health Expenditure DALYs Disability-adjusted Life Years DHMT District Health Management Team EHP Essential Health Package FMIS Financial Management Information System GDP Gross Domestic Product GGE General Government Expenditure GHE Government Health Expenditure HCI Human Capital Index HSSP Health Sector Strategic Plan IHS Integrated Household Survey MOFEPD Ministry of Finance, Economic Planning and Development MOHP Ministry of Health and Population NGOs Non-governmental Organizations ORT Other Recurrent Transactions PBF Performance-based Financing PER Public Expenditure Review PFM Public Financial Management SLA Service Level Agreement SSA Sub-Saharan African STIs Sexually Transmitted Infections U5MR Under-5 Mortality Rate UHC Universal Health Coverage WDI World Development Indicators i ACKNOWLEDGMENTS T his report is an extract from a broader report on public spending on human capital in Malawi which focused on education, health, social protection, and governance.1 The health expenditure review was conducted by the World Bank’s Health, Nutrition and Population (HNP) Global Practice with financial support from the Global Financing Facility for Women, Children and Adolescents (GFF). The study was prepared by a team led by Collins Chansa and Katelyn Jison Yoo with technical support and guidance from Patrick Hettinger (Senior Economist - Macroeconomics, Trade and Investment [MTI]); Toni Lee Kuguru (Health Specialist, HNP); Dominic Nkhoma (Consultant, HNP); Angela Zeleza (Consultant, HNP/MTI); Mariam Ally (Senior Health Economist, HNP); Moritz Piatti (Senior Economist, HNP); Collins Owen Francisco Zamawe (Consultant, HNP); and Pia Schneider (Lead Health Economist, HNP). The Peer Reviewers were Owen Smith (Senior Health Economist, HNP) and Ellen Van De Poel (Senior Health Economist, GFF). Greg Toulmin (Country Manager, Malawi) and Mara Warwick (Country Director, Malawi) provided overall guidance. The team wishes to thank Inaam Ul Haq (Program Leader), Ernest Massiah (Practice Manager, HNP), and John Borrazzo (Country Focal Point - GFF) for their constructive inputs. Henry Chimbali (Communications Officer), Miriam Kalembo (Team Assistant), Tinyade Kumsinda (Team Assistant), Carolina Michelle Kern (Consultant), and Robert Waiharo (Consultant) facilitated internal and external communications; and provided editorial, graphics design and production support. This report benefited from fruitful discussions, comments and information provided by representatives of the Ministry of Health and Population, namely: Gerald Manthalu, Pakwanja Desiree Twea, and Kate Langwe. 1 World Bank. 2020c. Malawi Public Expenditure Review 2020: Strengthening Expenditure for Human Capital. Washington DC: World Bank ii OVERVIEW M alawi’s economic growth has been low and volatile for the past two decades, leading to stagnating high poverty levels. Real gross domestic product (GDP) per capita has averaged 1.5 percent between 1995 and 2015, well below the average of 2.7 percent in non-resource-rich sub-Saharan African (SSA) economies (World Bank, 2018). Growth has been undermined by exogenous, climate-induced shocks, as well as economic policies and management that have often exacerbated the impact of shocks. This instability has contributed to limited investment and structural transformation, which have further reinforced the pattern of low growth. Consequently, there has been limited progress in poverty reduction; with the proportion of the population living below the national poverty line2 estimated at 51.5 percent in 2016 remaining largely constant since 2004 (ibid). Some underlying factors for the persistent poverty include: limited employment opportunities, limited diversification of income sources, low educational levels, and high adolescent fertility rate. The COVID-19 pandemic will negatively affected economic growth leading to lower government revenue. In 2020, GDP growth is projected at 1.0 percent, the lowest in more than a decade, and down from pre-pandemic projections of 4.8 percent (World Bank, 2020b). Tax revenues which averaged 17.3 percent of GDP from FY2016/17 to FY2018/19 and are expected to decline to 16.3 percent in FY2019/20, and even further to a projected 15.8 percent of GDP in FY2020/21 (World Bank, 2020b). A drop of more than one percent in tax revenues as a share of GDP corresponds to more than 20 percent of government spending on education, and more than one-third of government expenditure on health or social protection. Low government revenue coupled with the need for higher expenditure will further increase the fiscal deficit which has been more than 6 percent of GDP on average since 2013. In FY2019-20, revenue shortfalls and expenditure overruns, further impacted by the pandemic, led to a deficit of 9.4 percent of GDP. Repeated high fiscal deficits, which are being further constrained by the COVID-19 pandemic, are likely to reduce fiscal space for human capital. Moreover, total public debt increased from 30.5 to 59.4 percent of GDP between 2012 and 2019; and to 64.6 percent of GDP between 2019 and 2020 (World Bank, 2020b). Despite low per capita growth, Malawi has made strong progress in many areas of human capital development since 2000. According to World Development Indicator (WDI) data,3 Malawi has halved maternal, infant, neonatal and under-5 mortality rates, and fares better than the averages for regional and peer countries. As of 2018, maternal mortality had dropped from 749 to 349 deaths per 100,000 live births, while under-5 mortality had declined from 173 to 55.7 deaths per 1,000 live births. Life expectancy also increased from 45 to 64 years between 2000 and 2018 and, through expanded access to primary education, literacy rates have increased from 67 percent in 2010 to 76 percent in 2017. Furthermore, although the proportion of the population living below the national poverty line has stagnated, ‘extreme poverty’ has decreased from 24.5 to 20.1 percent between 2010 and 2016, which is partly attributed to expanding social protection systems. Notwithstanding the above, Malawi still faces considerable gaps in human capital, which will impede its ability to reduce poverty in the medium term. Malawi lags behind in some health and nutrition outcomes, including HIV and malaria prevalence. High levels of stunting, with approximately 39 percent of Malawi’s children below the age of five stunted (ibid), has potential to reduce the productivity of labor in future. Due to its reliance on rain-fed 2 The poverty line in 2004/05 IHS was MWK 37,002 per year per person, being adjusted for change in cost of living in 2010/11 and 2016/17. 3 https://data.worldbank.org/country/MW iii subsistence agriculture, largely focused on maize production, the country’s high vulnerability to weather shocks can increase the vulnerability of households to poverty. These factors are exacerbated by high population growth of about 3 percent. Strengthening human capital in Malawi will be critical to reduce poverty, increase inclusion in society, and create jobs. Low levels of human capital are an impediment to the country sustaining economic growth and structural transformation. This calls for a workforce that is prepared to take on more highly-skilled jobs, so that it can compete effectively in the global economy. Strengthening human capital requires investing in people through improved nutrition, health care, education, jobs, and skills. The World Bank launched a new Human Capital Figure 1: Malawi’s Performance on the Human Capital Index Index (HCI) in October 2018 as part of its broader Human Capital Project (World Bank, 2020a). The HCI Human Capital Index measures the human capital that a child born today can expect to attain by her 18th birthday, given the .2 .4 .6 .8 1 risks of poor health and poor education prevailing in her country. In 2020, the global HCI was estimated Probability of Survival to Age 5 at 0.56. This means that globally, a child is expected to attain an average of 56 percent of her potential .85 .9 .95 1 productivity as a future worker (World Bank, 2020a). Malawi’s HCI score of 0.41 suggests that on average, Expected Years of School a child born in Malawi today will most likely attain 41 percent of her potential productivity as a future worker. 4 6 8 10 12 14 Malawi ranks 125 out of 157 countries on the HCI, and is in the bottom quartile across all individual indicators Harmonized Test Scores in the index (World Bank, 2020a). It scores poorly on harmonized test scores, learning-adjusted years of 300 400 500 625 school, adult survival rate and healthy growth (see Figure 1). Learning-adjusted Years of School • Probability of Survival to Age 5: Only 95 out of 100 children born in Malawi survive to age 5. 2 4 6 8 10 12 14 • Expected Years of School and Learning-adjusted Years of School: In Malawi, a child who starts school Adult Survival Rate at age 4 can expect to complete 9.6 years of school by her 18th birthday. However, when adjusting for .5 .6 .7 .8 .9 1 quality of learning, this is only equivalent to 5.5 years: a learning gap of 4 years. Fraction of Children Under 5 Not Stunted • Harmonized Test Scores: Students in Malawi score 359 on a scale where 625 represents advanced .4 .6 .8 1 attainment and 300 represents minimum attainment. • Learning-adjusted Years of School: Factoring in Source: World Bank (2020a) what children actually learn, expected years of Note: Large circles represent Malawi in 2020, diamonds represent Malawi in 2010, small circles represent other countries; and thick vertical lines and color of circles school is only 5.5 years. indicate quartiles of the distribution iv • Adult Survival Rate: Across Malawi, 74 percent of 15-year olds will survive until age 60. This statistic is a proxy for the range of health risks that a child born today would experience as an adult under current conditions. • Healthy Growth (Not Stunted Rate): Only 61 out of 100 children are not stunted. 39 out of 100 children are stunted, and so are at risk of cognitive and physical limitations that can last a lifetime. One factor that contributes to low human capital outcomes is Malawi’s adolescent fertility rate – one of the highest rates of in the world, with 132 births per 1,000 women aged 15-19. Adolescent pregnancies contribute about 29 percent of all deliveries in Malawi, and given that most of them are undernourished and their bodies are not fully developed themselves, they are predisposed to delivering low birth weight babies. This increases the number of neonatal deaths, which accounts for 47 percent of the total number of under-5 deaths in Malawi. Further, about 15 percent of all the maternal deaths in Malawi are among adolescent girls. Ultimately, the high adolescent fertility rate contributes to poor maternal, child health, and nutrition outcomes in Malawi. The high level of childhood stunting – estimated at 39 percent of the children below the age of five – contributes to losses of around US$597 million or US$39 per capita per year, and reduces Malawi’s HCI. These factors combined are a serious impediment to human capital development in Malawi (see Box 1). The main underlying cause for the high adolescent fertility rate is the high rate of child marriage. Although the prevalence of child marriage decreased by 7.4 percentage points in Malawi over a period of 25 years, it is still about 10 percentage points above the regional average (Male and Wodon, 2018). The prevalence of early childbearing is also high at 27 percent of girls aged 18-22 (NSO and ICF, 2017). Analysis of the timing of marriage and childbearing suggests that child marriage is the likely cause of around two-thirds of cases of girls having children before the age of 18 (Wodon et al. 2020). High child marriages contribute to high adolescent fertility, which, in turn, leads to high population growth and stunting, and lower health and education outcomes and earning potential. The Government is making efforts to strengthen human capital. However, achieving planned targets will be difficult due to the COVID-19 pandemic. For instance, closure of schools during the crisis (from April to mid- October 2020) has slowed learning and calls for developing new means of educating students. Progress in maternal and child health outcomes could also be reversed as health service delivery has largely focused on the COVID-19 response at the expense of routine essential health services. This has led to a reduction in utilization of health services as revealed in a study by the Global Financing Facility and the World Bank which evaluated data from Malawi’s health management information system. The study shows a 12-16 percent reduction in the total number of OPD attendances in April-July 2020 as compared to April-July 2019 (GFF and World Bank, 2020). There have also been reductions in the number of women using oral family planning methods and number of one-year-olds fully immunized by 18 percent and 10 percent, respectively, in April 2020 as compared to April 2019 (ibid). The COVID-19 has also led to a slowdown in economic activity and this is likely to increase poverty levels. v KEY FINDINGS Cross-cutting Themes on Human Capital Malawi was an early adopter of the Human Capital Figure 2: Share of Budgeted Expenditure by Function Project, signaling its commitment to prioritizing Average of FY14/15-17/18 investments in human capital. Using a whole-of- Education Other 18.1% government approach, a Human Capital Plan of 24.4% Action has been prepared. Furthermore, Malawi spends a significant portion of its national budget on human capital sectors. Education receives the Agriculture largest proportion of expenditure out of all sectors (ex FISP) 12.3% (Figure 2) averaging 18.1 percent of total government Interest Payments expenditure over the period 2014 ‒ 2018. This is 14.0% Health followed by agriculture (excluding the Farm Input 9.5% Roads & Subsidy Program) at 12.3 percent, and health Transport 5.4% Social Protection (9.5 percent). Government expenditure on social Defense & Security (incl. FISP) 9.7% protection is similar to health, at around 9.7 percent, 6.6% although almost all of this is for pensions and Farm Source: Authors’ calculations based on MoFEPD data Input Subsidy Program. Malawi’s government prioritizes spending on human capital. At an aggregate level, spending on human capital is relatively higher than the average for SSA. Malawi’s education spending of 5.0 percent of GDP (approximately US$16 per capita), for example, is higher than the SSA average of 4.2 percent of GDP. However, it has not consistently met the Global Partnership for Education guideline of allocating at least 20 percent of the national budget to education. Similarly, for health, Government health expenditure at 2.4 percent of GDP in Malawi is higher than the average for low-income countries (1.2 percent) and the average for SSA excluding high income countries (1.9 percent). Furthermore, government’s spending on social protection (including subsidies and pensions) of around 2.8 percent of GDP is also substantial. However, at 0.8 percent of GDP, expenditure on social safety nets is significantly lower than the 1.2 percent SSA average. Human capital spending depends heavily on external financing, particularly for health and the social protection sectors, raising concerns around financial sustainability. Donor expenditure on health at around 60 percent of total health expenditure over the period 2015/16 ‒ 2017/18 is among the highest levels in SSA. This level of dependency on donors to finance the health sector could risk making health financing unsustainable and disrupt service delivery. For social protection – including subsidies and pensions – funding from development partners is more than 40 percent of total social protection funding, with donor funding for social safety nets being more than 90 percent. The education sector receives slightly less funding from donors, at around 15 percent. However, some education sub-sectors are highly dependent on donor financing, such as early childhood development programs, for which development partners fund approximately 80 percent of the programs. More than 70 percent of the funding for health and education is off-budget. The education sector has developed a common financing mechanism to strengthen donor coordination, but expenditures under this mechanism are nonetheless off-budget, limiting their ability to be integrated within the government’s budgeting and planning system. For health, since the 2013 ‘Cashgate’ scandal, where massive theft and corruption totaling around vi US$32 million was uncovered, donor confidence and trust in government systems has plummeted. As a result, donors have opted to fund the health sector through vertical programs and projects that are managed by non-governmental organizations (NGOs). However, these organizations use their own financing and reporting systems, and in doing so, there is a missed opportunity to improve the country’s public financial management (PFM) system. Social protection expenditure is also largely off-budget, and poorly coordinated by donors. Significant improvements could be made by leveraging the Unified Beneficiary Registry and harmonizing social safety nets provision with humanitarian assistance. To strengthen human capital in the face of limited fiscal space, Malawi needs to improve the efficiency and effectiveness of government and donor spending on human capital. Firstly, there is need for improved donor coordination and increased use of government systems. Secondly, there is need to improve allocation and use of resources. This could be achieved by strengthening the PFM system. Thirdly, identifying linkages and making human capital spending more equitable could benefit the most vulnerable and improve human capital outcomes. Remedial measures could include interventions to strengthen institutions at the local government level for them to be able to deliver quality services. Fourth, results from the study show that availability and quality of data at district level is poor. Therefore, improving the process of data collection, analysis, management, and use is critically important. To address this problem, there is need to integrate financial reporting systems at district and central government levels. This will enhance government’s ability to monitor and evaluate expenditure and program implementation across sectors. Key Findings from the Health Sector Review Malawi performs better than most low-income countries in SSA in health service provision and, in transforming available health services and outputs into better child health outcomes. However, it is not as effective at translating available services and outputs into better maternal health outcomes. This could be attributed to low quality of maternal health care services. The COVID-19 pandemic could reverse the gains in maternal and child health outcomes that Malawi has registered since 2000. Since the advent of COVID-19 in Malawi, there has been a reduction in the utilization of some key reproductive, maternal, and child health services. This is mainly due to: (i) disruptions in the procurement and distribution of medicines and other essential medical commodities; (ii) greater emphasis on COVID-19 as compared to other essential services; and (iii) patients’ fears of contracting the disease if they enter health facilities. Financing and provision of health services in Malawi are likely to be affected by the COVID-19 pandemic whether the number of cases remain low or increase. Additional investments in the health system are required to: (i) prevent further spread of the disease; (ii) treat the sick; and (iii) maintain the provision of other essential services. This will require additional domestic and external funding but, given the negative impact of COVID-19 on economic growth and resource mobilization worldwide, expenditure on health and other social sectors could shrink rather than increase. Malawi’s total spending on health in per capita terms and as a share of GDP is higher than other low-income countries. However, total health spending per capita estimated at US$39 per year is insufficient to provide essential health care as outlined in the country’s health benefit package – the Essential Health Package (EHP) – which has contributed to gaps in service delivery. vii Compared to other low-income countries, government spending on health as a share of GDP and total government spending in Malawi is higher. However, in real terms, public expenditure on health has been decreasing over the years despite the increasing population and high and increasing disease burden. Donor funding is still the largest source of funding to the health sector but its growth has been declining since the ‘Cashgate’ scandal of 2013. As a result, post-Cashgate, growth in health spending by households, employers, and local NGOs has been significantly higher than the growth in donor and government spending on health. High dependency on donors to finance the health sector in Malawi poses a potential risk of making health financing unsustainable, which could cause disruptions in service delivery. Since the Cashgate scandal, most donors have opted to provide funding to the health sector through vertical programs and projects. By FY2017/18, about 74 percent of donor funding to the health sector was off-budget. Moreover, most of aid agencies and NGOs use their own planning, financing, procurement, and monitoring systems to manage donor funds. This undermines the five principles on aid effectiveness4 and is a missed opportunity to improve the PFM system in the country. While the three main financiers (donors, government, and households) focus their spending on the top 10 causes of disability-adjusted life years (DALYs), donor funding is less aligned to the order of priority of the disease burden. Furthermore, donor funds are often released late and absorption is low due to a number of reporting requirements. Addressing inefficiencies in the allocation and use of donor funds is critically important because donor funding is the largest source of funding to the health sector in Malawi. In line with the national health policy, the bulk of financial resources in the public health sector are spent at district level. However, more than half of the total public expenditure on health is on personnel emoluments, leading to low expenditure on drugs and medical supplies, and Other Recurrent Transactions (ORT). Moreover, expenditure on drugs as a share of total government spending is low and only caters for a six-month supply of drugs. This leads to persistent shortages at hospitals and health centers. Despite the relatively high expenditure on personnel emoluments in Malawi, there is still a critical shortage of clinical health workers and some of the existing health workers are underutilized. Districts with lower staffing levels see more outpatients than those with higher staffing levels, which suggests that some health workers are not fully utilized. Nationwide, the absenteeism rate is estimated at 18 percent of the total health workforce, and this exacerbates staff shortages, wastage of resources, and contributes to poor quality of health care. Predictability of funding is low. Spending is not aligned to the budget and this could be due to weaknesses in domestic resource mobilization at the national level, and gaps in health services planning. Constant expenditures above and below budgetary allocations raise concerns about the credibility of the budget as a planning and resource allocation tool in the health sector. Malawi has a formula for distributing financial resources from the center to the districts, aimed at achieving efficiency and equity objectives. However, the current formula is not being used, leading to wide variations across districts in per capita public health spending and health outcomes. Further, the formula is only applied on government funds for drugs and ORT. These constitute a very small portion of the overall resource envelope in the health sector. 4 In line with the Paris Declaration on Aid Effectiveness, the five principles that make aid more effective are: Ownership, Alignment, Harmonization, Managing for Results, and Mutual Accountability. Several donors that operate in Malawi are signatories to the Paris Declaration on Aid Effectiveness. For more information see https://www.oecd.org/dac/effectiveness/34428351.pdf viii Gaps in PFM arrangements have made it difficult to deliver health services at government hospitals and health centers. The PFM system is characterized by inadequate compliance with guidelines, poor accountability, and limited communication and dialogue. Budget execution also emphasizes control over flexibility, which has led to district authorities sidestepping the system. Moreover, poor integration of financial reporting systems at district and central government levels limits budget monitoring and reporting. Although out-of-pocket expenditure on health as a share of the total current health expenditure has been increasing consistently since FY2012/13, poor households have not been affected. The increasing burden of out-of-pocket spending has been borne by wealthy households. Further, the proportion of poor households incurring catastrophic health payments has decreased. However, geographically, the incidence of catastrophic health payments has increased in rural areas while there has been a reduction in urban areas. Equity of access to health services in Malawi has improved over the years but there is room for further improvement. Increased equity of access to health services could be attributed to increased utilization of free health services by poor households at government and Christian Health Association of Malawi (CHAM) health facilities. However, poor households still consume more health services at government health facilities (where quality of health care is low) as compared to CHAM and private health facilities. Furthermore, overall utilization of health services at government, CHAM and private health facilities is still higher among the rich than the poor. KEY RECOMMENDATIONS – HEALTH There is need to sustain the gains made in transforming the available health services and outputs into better child health outcomes while scaling-up the delivery of quality maternal health services. This will require addressing underlying issues such as high adolescent pregnancy and teenage marriage rates, low education status of mothers, poor maternal nutrition, and low access to social protection services. Additional financial and material resources will be required to prevent further spread of COVID-19, and to maintain provision of other essential health services. At a minimum, the government needs to ensure that existing financial resources in the health sector are not reduced. If there is an economic crisis, the government could consider cutting certain areas of the national and/or health budget to sustain provision of health services with the least possible impact on health and other social outcomes. For instance, spending on capital items and non-essential services could be cut or temporarily suspended. The government needs to continuously monitor how the COVID-19 pandemic is affecting supply and demand for health services, consistently map how the available resources are allocated and spent, and undertake timely procurement and distribution of medicines and other essential medical commodities. Scaling-up risk communication activities on the pandemic and maintaining the provision of essential health services during the outbreak is critical to reducing morbidity and mortality due to COVID-19 and other diseases. The MOHP needs to improve efficiency in the allocation and use of available resources by: (i) re-prioritizing government spending as highlighted above, and (ii) identifying and addressing root causes of absenteeism among health workers. This could lead to annual savings of US$15 million which is equivalent to 8 percent of the total public expenditure on health. ix The government could consider developing and implementing a comprehensive health financing strategy to guide resource mobilization, pooling, allocation, and purchasing of health services. The strategy needs to encompass viable strategies for promoting financial sustainability, efficiency, and health system resilience. This is very important because the likelihood of increasing domestic and external funding is very low given the already high level of government and donor spending in the health sector, as well as the reduced revenue generation capacity worldwide. To increase its effectiveness, donor funding needs to be aligned to government systems at both district and national levels. Aligning donor funding to the government system is critical to improving the overall allocation of funds, governance, and accountability in the health sector. Immediate actions include: (i) developing a system for routine mapping and tracking of external funds at both central and district levels, (ii) aligning donor funding to the order of priority of the disease burden, and (iii) increasing predictability of donor funding through the use of joint budgeting, disbursement, financial management, procurement, and reporting mechanisms. The government needs to strengthen health planning and budgeting, and the PFM system. This could be achieved by: (i) comprehensive training and mentorship of district authorities and service providers on health services planning and budgeting, (ii) improving communication and dialogue on planning and budgeting at district level, (iii) increasing flexibility on budget execution at government health facilities similar to the flexibility at CHAM health facilities, (iv) ring-fencing health budgets at district level to prevent inter-governmental transfers, and (v) integrating accounting systems at the district and central government levels to improve financial reporting, transparency and accountability. To achieve its efficiency and equity objectives, the government needs to fully apply the current (2019) district resources allocation formula to both government and donor resources. Furthermore, considering that this formula only focuses on the allocation of financial resources for drugs and operational grants in the public sector at district level, the MOHP also needs to look closely at the funding and distribution of human resources, infrastructure, and equipment. Focusing on the resources allocation formula alone will not lead to the desired improvements in efficiency and equity. There is need to improve purchasing and value-for-money in the health sector. Currently, the health sector in Malawi is characterized by high expenditure on personnel emoluments, critical shortage of clinical health workers, and low utilization of existing health workers. The government could address this problem by: (i) distributing the available workforce optimally across all districts, and (ii) increasing the productivity of existing health workers by introducing performance-based financing (PBF) schemes. By using PBF, financing to health facilities could be distributed on the basis of outputs produced rather than inputs. These sorts of schemes are currently being used in Rwanda, Tanzania, Uganda, Zambia, and Zimbabwe. Catastrophic health expenditures are still prevalent in rural areas even though there has been some improvement in financing and access to health services for the poor. Therefore, to achieve universal access to quality health care, the government needs to improve the quality of health care services at government health facilities since this is where most poor people access services. In addition, there is a need to further increase access for poor households to CHAM and private health facilities, especially in areas where there are no government health facilities. This could be achieved through the introduction of vouchers in addition to the existing service level agreements (SLAs) between the government and CHAM. x 1. INTRODUCTION 1.1 OBJECTIVES AND SCOPE OF THE STUDY This public expenditure review (PER) covers the period FY2014/15 ‒ FY2018/19; and builds on previous financing studies by the World Bank in the health sector in Malawi such as the 2013 PER and the 2016 fiscal space for health analysis. The specific objectives of this PER were to: (a) review the level, composition, and adequacy of public spending in the health sector; (b) assess resource allocation practices, budgeting, and budget execution; (c) review the extent to which existing resources are deployed to achieve efficiency and value-for-money as outlined in the national health policy and Health Sector Strategic Plan 2017-2022 (HSSP II); and (d) analyze equity in financing and utilization incidence of outpatient and inpatient services by different socio-economic groups. To get an in-depth understanding of the sources of inefficiencies in the health sector, an assessment of how the existing PFM system is supporting health service delivery was also conducted. The PFM assessment examined the viability of the system in facilitating service delivery at district hospitals and health centers at government and CHAM health facilities. A preliminary analysis of the potential impact of the COVID-19 pandemic on service provision and financing of health services in the country is also provided. 1.2 METHODOLOGY AND DATA SOURCES The framework for preparing PERs for human development was used (World Bank, 2009). This was complemented by the ‘benchmarking plus’ approach for measuring health system efficiency that has been developed by the Joint Learning Network for Universal Health Coverage (Hafez, 2020); and the guidance tool for assessing PFM for health service delivery that was adapted from Piatti-Fünfkirchen and Schneider (2018) and Cashin et al (2017). Through these instruments, primary and secondary data was collected and analyzed. This included a review of the flow of funds, institutions that make and execute public budgets, and sector performance. Interviews with stakeholders at six district councils and district health offices, and managers at 17 health centers and hospitals that are run by the government and CHAM were also conducted. Budget and expenditure information covering the period FY2014/15 ‒ FY2018/19 were drawn from annual government financial reports at both national and district levels. These reports were generated directly from Malawi’s integrated financial management information system (FMIS). Apart from government financial reports, additional information was obtained from several sources. For the analysis on total expenditures in the health sector, data were obtained from national health accounts surveys, while data on health inputs (i.e. human resources, drugs, and medical supplies) were collected from various departments at the MOHP. Data on demographics, performance of the health system, and health outcomes were collected from the health ministry’s health management information system, demographic and health surveys, household surveys, the Institute for Health Metrics and Evaluation, and the World Bank. Macroeconomic and fiscal data were obtained from the World Bank and the International Monetary Fund. 1 1.3 ORGANIZATION OF REPORT This report is organized in six chapters. Following the introduction, Chapter 2 provides an overview of performance in the health sector. This is followed by Chapter 3 which provides an analysis of health expenditure including the trends, funding sources, and budget execution. The initial parts of this Chapter provides an analysis of total current health expenditure from all financing sources while the latter parts focus on public spending in the health sector, specifically for resources that are channeled through the government system. Chapters 4 and 5 present findings on efficiency and value for money, and equity in resource allocation and use. Chapter 6 provides the main findings and recommendations. Findings and recommendations from the PER are expected to feed into the policy and decision-making processes in the health sector in Malawi. This includes input into the review of policies and strategic plans, and dialogue on various reform initiatives including institutional and financing reforms. Results from the PER are also expected to provide useful inputs into the planning and budgeting process by the government, development partners, and other stakeholders in the health sector in Malawi. In a nutshell, the audience for this report are the Malawian government, parliamentarians, development partners, civil society, NGOs, the academia, and the public.   2 2. REVIEW OF PERFORMANCE IN THE HEALTH SECTOR Over the past two decades, Malawi has made remarkable progress in improving maternal and child health outcomes. It not only more than halved its maternal, infant, neonatal, and under-5 mortality rates, but also surpassed the averages for regional and peer countries (Table 1). And despite having a lower GDP per capita, Malawi has a higher score on the HCI than most of its peers and some lower middle-income countries in SSA like Lesotho, Tanzania, and Zambia (Figure 3). However, Malawi still lags behind on certain health outcomes, including stunting, HIV, and malaria prevalence, which contribute to the low HCI score of 0.41 (Figure 1). This means that a child born in Malawi today will be 41 percent as productive when she grows up as she could be if she enjoyed complete education and full health. Of the five indicators aggregated Figure 3: Human Capital Index in the HCI index, the high level of stunting is one of 0.60 the main underlying reasons for Malawi’s low score. Approximately 40 percent of children below the Togo Zimbabwe Malawi Tanzania Madagascar Uganda Human Capital Index age of five are stunted, 3 percent are wasted, and 0.40 Sudan Ethiopia Lesotho Zambia Cameroon Burundi Rwanda 12 percent are underweight. The adult survival rate in Congo DRC Liberia South Sudan Malawi is also worse than the averages for regional and Chad peer countries. Only 73 percent of children aged 15 in 0.20 Malawi today will survive to the age of 60. One of the underlying factors for poor maternal and child health, and nutrition outcomes in Malawi is the high adolescent 0.00 200 400 600 800 1000 1200 1400 1600 fertility rate, which was estimated at 132 births per GDP per capita (current US$) 1,000 women aged 15-19 in 2018. This is higher than Source: Authors’ calculations from WDI data the averages for regional and peer countries. Table 1: Key Health Outcome Indicators Malawi Avg Avg Indicators 2000 2010 2016 2018 LIC SSA Life expectancy at birth, total (years) 45.1 55.6 62.7 63.8 63.5 61.3 Adolescent fertility rate (births per 1,000 women ages 15-19) 158 148 135 132 94 101 Maternal mortality ratio (per 100,000 live births) 749 444 358 349 462 534 Mortality rate, infant (per 1,000 live births) 99.8 53.2 35.3 32.1 49.2 53.0 Mortality rate, neonatal (per 1,000 live births) 38.7 28.2 21.9 20.4 27.2 28.0 Mortality rate, under-5 (per 1,000 live births) 172.6 84.9 50.0 43.9 69.9 78.1 Prevalence of stunting, height for age (% of children under 5) 54.7 47.3 38.3 39.0 34.8 33.5 Prevalence of HIV, total (% of population ages 15-49) 14.4 10.6 9.7 9.2 2.0 3.8 Prevalence of anemia among children (% of children under 5) 74.4 64.8 59.2 59.2 59.9 Incidence of tuberculosis (per 100,000 people) 386 310 193 181 206 231 Incidence of malaria (per 1,000 population at risk) 427 386 211 214 191 219 Source: Authors’ calculations from WDI LIC = Low-income country; SSA = Sub-Saharan Africa 3 Progress on health outcomes over the past two decades could be reversed by the COVID-19 pandemic. As at October 25, 2020, there were 5,887 confirmed cases of COVID-19 in Malawi with 183 deaths.5 These figures are significantly lower what was initially projected,6 which suggests that the pandemic is still within manageable levels in the country. However, despite the low number of COVID-19 cases, a detailed review of health facility data from Malawi’s health management information system shows that utilization of some reproductive, maternal, and child health services has reduced since the first case of COVID-19 was declared in the country in early April, 2020 (GFF and World Bank, 2020). The study shows a 12-16 percent reduction in the total number of OPD attendances in April-July 2020 as compared to April-July 2019. There have also been reductions in the number of women using oral family planning methods and number of one-year-olds fully immunized by 18 percent and 10 percent, respectively, in April 2020 as compared to April 2019 (GFF and World Bank, 2020). These findings are corroborated by a study by the Global Financing Facility, which shows that the COVID-19 pandemic is likely to disrupt the supply and demand of maternal and child health services in Malawi (GFF, 2020). The reduction in utilization could be attributed to disruptions in the procurement and distribution of medicines and other essential medical commodities; greater emphasis on COVID-19 leading to reduced hours for essential services; suspension of outreach services (e.g. antenatal and under-5 clinics); and re-allocation of resources toward COVID-related activities. However, demand for health services may have also been affected by patients’ fears of contracting the disease in health facilities, and reduced ability to pay for medical costs at private and other fee-charging facilities. As such, these findings should be interpreted with caution as it is too early to say whether other factors played a part. Whatever the case, maintaining and/or scaling-up the provision of essential health services during the COVID-19 outbreak is critical to reducing morbidity and mortality due to COVID-19 and other diseases. The COVID-19 pandemic is likely to affect the financing and provision of health services in Malawi whether the number of cases remain low or increase. This means that there is need for additional investments in the health system because the existing human, material, and financial resources in the health sector are insufficient to effectively respond to the virus. Malawi is ranked at 154 out of 195 countries on the 2019 Global Health Security Assessment,7 which suggests that its ability to prevent, detect, and respond to epidemics and/or pandemics is limited. Evidence from Europe and Asia highlights the need to adequately invest in the health system to manage a rise in COVID-19 patients. If there is a surge in the number of COVID-19 cases requiring outpatient and inpatient services in Malawi, health authorities would have to deal with an increased disease burden due to the COVID-19 as well as other communicable diseases such as HIV/AIDS, malaria, and tuberculosis, which are already high. This will require additional domestic and external funding over and above what is currently being provided from all sources. Even if the number of cases remains low, however, the disease will most likely have a negative effect on economic growth due to reduced trade with other countries. Consequently, GDP growth in Malawi is projected at 1.0 percent in 2020, which would be the lowest in more than a decade, and down from pre-pandemic projections of 4.8 percent (World Bank, 2020b). And given the already high fiscal deficit, expenditure on health and other social sectors is likely to shrink. 5 https://covid19.who.int/region/afro/country/mw 6 https://www.imperial.ac.uk/media/imperial-college/medicine/mrc-gida/2020-03-26-COVID19-Report-12.pdf 7 Worldwide, the average score on the GHSA index is 40.2%, while the average score for the African region is 30.8%. Malawi scored 28.0 in 2019. https://www.ghsindex.org/wp-content/uploads/2019/10/2019-Global-Health-Security-Index.pdf 4 Box 1: High Levels of Fertility and Stunting are Impeding Progress on Human Capital Investments in people can help build the human capital that of the available financial and human resources is not aligned to is key to ending poverty and ensuring shared prosperity. the existing disease burden or health outcomes at district level. A healthy, well-nourished, well-educated, and skilled labor force For instance, even though there are significant disparities in the enables national economies to grow faster and compete in prevalence of stunting by district, there is higher expenditure the dynamic, technology-led global economy. While Malawi in districts with lower levels of stunting (see Figure 15a). has made good progress on many aspects of human capital, Breakdown of the total current health expenditure by disease including reduction of fertility and childhood stunting over also shows that nutritional deficiencies (underweight, the past two decades, its efforts need to be deepened and wasted, stunted) are not adequately prioritized despite accelerated. At 0.41, Malawi has a low HCI ranking 125 out of nutrition being key to human development (see Figure 4). The 157 countries. High levels of childhood stunting (estimated patterns of health spending in Malawi also suggest that there at 39 percent of children below the age of five), and a low is an association between high fertility, education attainment, adult survival rate (0.74) are the main reasons for this score poverty, undernutrition, and health status. In particular, high and are serious impediments to human capital development. fertility is a risk factor for HIV/AIDS, poor maternal health It is estimated that poor childhood nutrition outcomes in outcomes, and undernutrition, which perpetuates poverty. Malawi contribute to losses of US$597 million (2012 terms) Malawian women from the poorest communities and those or US$39 per capita per year. Undernutrition among children with low education have the highest levels of fertility and and adolescents is therefore a critical development challenge undernutrition, which limits their economic prospects and in the country. traps them deeply in poverty across generations. The underlying causes of childhood stunting in Malawi Figure 4: Total Current Health Expenditure by Disease: are associated with factors that children are exposed to at FY2017/18 individual, household, and community levels. Consequently, HIV/AIDS and STIs 37% only 74 percent of children aged 15 in Malawi today will Reproductive Health 17% survive to the age of 60. Further, at 349 deaths per 100,000 Malaria 13% live births, Malawi still has a very high maternal mortality ratio. Poor maternal, child health, and nutrition outcomes could be Nutritional deficiencies 9% attributed to the high adolescent fertility rate estimated at 132 Non-communicable diseases 7% births per 1,000 women aged 15-19 in 2018, which is higher Vaccine preventable diseases 5% than the average for low-income countries. Nearly one in every Injuries 5% three adolescent girls aged between 15 and 19 years in Malawi Tuberculosis 2% has already begun childbearing. Adolescent pregnancies contribute about 29 percent of all deliveries in Malawi, and Diarrhoeal diseases 1% given that most of them are undernourished and their bodies 0 10 20 30 40 Percent are not fully developed, they are predisposed to delivering low birth weight babies. This increases the number of neonatal Source: Authors’ construction from MOHP (2020) deaths, which accounts for 47 percent of the total number of under-5 deaths in Malawi. Further, about 15 percent of all In light of the above, it is evident that Malawi cannot end maternal deaths in Malawi are among adolescent girls. extreme poverty and ensure shared prosperity without effectively tackling the high levels of fertility and stunting. At the health system level, there are a number of challenges Prospects for economic growth and poverty reduction in that hinder the provision of quality health and nutrition services. Malawi could be substantially enhanced through investments As revealed in the Harmonized Health Facility Assessment in the key determinants of health such as agriculture, nutrition, (World Bank, 2019), health worker capacity is limited, medical health, education, water and sanitation, social protection, supplies and equipment are inadequate, and there are also and good governance. Given the new challenges posed by weaknesses in governance and management. Results from COVID-19, it will be critical for Malawi to ensure that provision of this PER also highlight gaps in the PFM arrangements at essential health and nutrition services is sustained, especially government hospitals and health centers; and that allocation for the poor and vulnerable populations. 5 3. HEALTH EXPENDITURE TRENDS AND FUNDING SOURCES 3.1 LEVEL OF TOTAL HEALTH EXPENDITURE Spending on health in Malawi averaged US$645 million per annum over the period FY2009/10 ‒ FY2017/18 (Figure 5). The level or volume of spending grew consistently between FY2009/10 and FY2012/13, but declined in FY2013/14, due to the ‘Cashgate’ scandal, after which it has increased in absolute terms but has never reached FY2012/13 levels. Expenditure peaked in FY2012/13 – the year before the scandal – both in US$ per capita terms, and as a share of GDP. Since then, total Figure 5: Trends in Total CHE, FY2009/10 – FY2017/18 per capita health spending has been between US$39 800 70 and US$40, while as a share of GDP, health spending 697 693 679 685 has been declining since 2012/13. In comparison 700 670 60 Per Capita (US$) and Share of GDP (%) 612 625 623 to other low-income countries, Malawi’s total current 600 50 Expenditure (US$, millions) 520 43 health expenditure (CHE) as a share of GDP and total 500 40 39 38 39 40 39 40 40 35 CHE per capita is higher, largely due to high donor 400 30 funding. Malawi’s total CHE as a share of GDP was 300 20 about 10 percent per annum on average over the 200 11.6 11.3 11.3 11.1 10.7 9.8 9 period FY2009/10 ‒ FY2017/18, which is almost twice 100 7.4 8.2 10 the 5.2 percent average for low-income countries. In per 0 0 10 11 12 13 14 15 16 17 18 capita terms, total CHE per capita estimated at US$39 20 0 9/ 20 1 0/ 20 1 1/ 1 2/ 1 3/ 1 4/ 20 1 5/ 1 6/ 20 1 7/ 20 20 20 20 per year over the same period is also relatively higher Total CHE (US$ millions) Total CHE Per Capita (US$) Total CHE as a Share of GDP (%) than the average of US$34 for low-income countries. Source: Authors’ construction from Malawi National Health Accounts Though per capita health spending in Malawi is relatively higher than other low-income countries, it remains below the estimated need. Firstly, the US$39 per capita is lower than the funding that is required for Malawi to provide essential health care as outlined in the national EHP.8 Consequently, only 44 percent of health facilities in the country are able to comprehensively deliver the health services under this package – significantly below the 80 percent target outlined in the HSSP II.9 Secondly, for low-income countries like Malawi, estimates by the World Bank through the third edition of the Disease Control Priorities (Jamison et al. 2018) shows that 80 percent coverage for a package of essential universal health care requires US$72 per capita per annum. This suggests that more funding to the health sector is required. However, given that the share of GDP committed to the health sector is already high, exploring efficiency-enhancing interventions within the existing resources is needed as getting additional (new) financing will be difficult. 8 The EHP was first implemented in 2004. It prioritizes interventions and services on which to allocate the available financial resources. The EHP was revised in 2011 and later in 2016/2017 to make it commensurate with the health maximization principle, equity, continuum of care, complementarity of service provision, and available resources. 9 The HSSP II, which covers the period 2017-2022, is Malawi’s medium-term strategic plan in the health sector. It outlines national objectives, strategies, and activities to improve health outcomes. Through the HSSP II, Malawi seeks to provide quality, equitable, and affordable health care with the aim of improving health status, financial risk protection, and client satisfaction. This data was obtained from the Aid Management Platform that is managed at the Ministry of Finance, Economic Planning & Development. 6 3.2 COMPOSITION AND GROWTH OF HEALTH EXPENDITURES Donor funding is the largest source of funding to the health sector in Malawi. As shown in Figure 6, donor funding is significantly more than all other sources of health funding combined. In distant second is government funding, which over the period FY2006/07 ‒ FY2013/14 was about three to five times lower than the share of donor funding. Between FY2014/15 and FY2017/18, following the ‘Cashgate’ scandal, this gap closed slightly to two to three times. It is also important to note that since FY2013/14, the contribution of households to the total spending in the health sector has been increasing consistently, which could have implications for equity of access to health care if the increased spending is borne by poor households. The annual nominal growth in donor and government expenditure on health has also been lower than households and employers or NGOs since the 2013 Cashgate scandal (Figure 7). While households, employers, and local NGOs have significantly increased their spending on health over the last period, the level of donor funding to the health sector remains very high. Figure 6: Composition of Total CHE, Figure 7: Nominal Growth in Health Expenditures: FY2006/07 – FY2017/18 2007/08 – 2017/18 80 14 50 48% Households and Employers (percent) 70 12 Donors and Government (percent) 40 60 10 50 30 35% 8 34% Percent 40 28% 6 27% 30 20 21% 19% 4 20 18% 2 10 10 0 0 0 Post-Cashgate Post-Cashgate 8 9 0 1 2 3 4 5 6 7 8 7 /0 /0 /1 /1 /1 /1 /1 /1 /1 /1 /1 /0 06 07 08 09 10 11 12 13 14 15 16 17 (2007/08-2013/14) (2014/15-2017/18) 20 20 20 20 20 20 20 20 20 20 20 20 Donors Government Households Employers/Local NGOs Government Donors Households Employers and Local NGOs Source: Authors’ construction from Malawi National Health Accounts Source: Authors’ construction from Malawi National Health Accounts High dependency on donors to finance the health sector in Malawi risks making health financing unsustainable, which could cause disruptions in service delivery. Since the ‘Cashgate’ scandal, most donors have opted to provide funding to the health sector through vertical programs and projects. By FY2017/18, about 74 percent of donor funding to the health sector was off-budget and only 24 percent was pooled under the government budget.10 The increasing volume of off-budget donor funds has led to a proliferation of agencies and NGOs that manage financial resources on behalf of donors. Most of the aid agencies and NGOs use their own planning, financing, procurement, and monitoring systems to manage donor funds. Use of vertical programs and parallel systems negates the five principles on aid effectiveness11 and is a missed opportunity to improve the PFM system in the country. Health expenditures from all the main financing sources are generally aligned to the disease burden, but priorities differ substantially. Spending priorities by disease differ by funding sources, i.e. donor, government, and households (Figure 8a). Of the total resources from donors in FY2017/18, about 43 percent was spent on HIV/AIDS, 21 percent on reproductive health, 9 percent on nutritional deficiencies, 8 percent on malaria, and 5 10 This data was obtained from the Aid Management Platform that is managed at the Ministry of Finance, Economic Planning & Development. 11 In line with the Paris Declaration on Aid Effectiveness, the five principles that make aid more effective are: Ownership, Alignment, Harmonization, Managing for Results, and Mutual Accountability. Several donors that operate in Malawi are signatories to the Paris Declaration on Aid Effectiveness. For more information see https://www.oecd.org/dac/effectiveness/34428351.pdf 7 percent on non-communicable diseases. Meanwhile, the order of prioritization of spending by the government and households was HIV/AIDS, non-communicable diseases, malaria, reproductive health, and nutritional deficiencies. While all three financiers focused their spending on the top 10 causes of DALYs in Malawi, government and household funding was more aligned to the order of priority of the disease burden (i.e. compare Figure 8a with 8b). This suggests that although health spending in Malawi is linked to the disease burden, the order of prioritization is aligned to the preferences or interests of the financiers. Meanwhile, between 2007 and 2017, there has been a reduction in the prevalence of the top 10 diseases, except for ischemic health disease and sexually transmitted infections (STIs) (Figure 8b). What is more, while the prevalence of HIV/AIDS reduced by about 70 percent, the prevalence of STIs increased by more than 55 percent. This could be attributed to the substantial funding for HIV/AIDS and opportunistic infections as compared to STIs. Of the total donor funding on HIV/AIDS and STIs, only 1 percent was spent on STIs while the government and households each used 7 percent of their funding for HIV/AIDS and STIs. This suggests that focusing funding on the top causes of DALYs could help to reduce the overall disease burden. Figure 8: Spending on the Top Causes of DALYs by Financing Sources in Malawi A. Spending on Diseases as a Share of Total B. Top 10 Causes of DALYs in 2017 and Spending on Health by Financing Source, 2017/18 Percent Change, 2007-2017 Percent -70 -50 -30 -10 10 30 50 7% 7% 3% 12% 3% 10% 2% 10% 1 HIV/AIDS 9% 10% 10% 2 Neonatal disorders 21% 20% 20% 3 Lower respiratory infection 8% 5% 4 Malaria 21% 20% 5 Diarrheal diseases 43% 29% 29% 6 Congenital defects 7 Tuberculosis Government Donors Households 8 Meningitis HIV/AIDS and STIs NCDs (including injuries) Malaria 9 Ischemic heart disease Reproductive Health Nutritional deficiencies TB All other diseases 10 STIs Source: Authors’ construction from Malawi National Health Accounts (MOHP, 2020) Source: Institute for Health Metrics and Evaluation http://www.healthdata.org/malawi There is a need to improve the predictability of donor funding and the overall allocation of resources by regions, level of health care, and functions. Identifying and resolving inefficiencies in the allocation and use of donor funds is critically important because donor funding is the largest source of funding to the health sector in Malawi. Interviews with MOHP officials revealed that donor funds are often released late and that the absorption of some of these funds is low due to a number of reporting requirements. Results from the 2020 National Health Accounts also show that about 22.8 percent of the total funds in the health sector are spent at public hospitals while only 13.8 percent of the expenditure is spent at primary health care facilities (MOHP, 2020). More funding is also allocated to urban than rural areas, and given that public health services are free in Malawi, the increasing share of households’ expenditure on health suggests that there are gaps in service provision. This has implications for equity of access, as discussed later. 8 3.3 GOVERNMENT’S COMMITMENT TO FUNDING THE HEALTH SECTOR Though Malawi has one of the lowest GDP per capita in the world (US$390 in 2018), the share of government spending on health is relatively higher than other low-income countries. As shown in Table 2, Government Health Expenditure (GHE) as a share of the total General Government Expenditure (GGE) was about 8.4 percent on average over the period FY2014/15 ‒ FY2018/19, while GHE as a share of GDP was 2.4 percent on average over the same period (Table 2). Compared to low-income countries and other countries in SSA, government’s total spending on health as a share of the total GGE and GDP in Malawi is higher (Figure 9). Specifically, GHE as a share of GDP at 2.4 percent in the country is higher than the average for low-income countries (1.2 percent) and the average for SSA countries [excluding high income] (1.9 percent). Similarly, in per capita terms, GHE averaged US$9.6 on average per year over the period FY2014/15 ‒ FY2018/19, which is also higher than the US$7.8 average for low-income countries. These findings suggest that the level of government commitment or prioritization of the health sector in Malawi is already high and prospects for additional funding could come from improvements in allocative efficiency and use of available resources. Table 2: Size of GHE: Malawi, FY2014/15 – FY2018/19 2014/15 2015/16 2016/17 2017/18 2018/19 Average GHE as % GGE 8.5% 7.8% 8.7% 8.3% 8.9% 8.4% GHE as % GDP 2.5% 2.2% 2.5% 2.4% 2.6% 2.4% GHE Per capita (US$) 9.9 9.4 8.4 9.8 10.7 9.6 Source: Authors’ calculation based on government financial reports Figure 9: GHE in Low-Income Countries and Other Countries in SSA, 2017 10 20 Zimbabwe Madagascar 5 Lesotho Lesotho 10 Burkina Faso Malawi Niger Tanzania Zimbabwe Burundi Rwanda Malawi Burkina Faso Kenya Niger GHE as % GDP GHE as % GGE Zambia Madagascar Rwanda 2 Kenya Mauritania Ghana Burundi Central African Republic Mozambique Tanzania 5 Togo Ethiopia Mozambique Ghana Togo 1 Ethiopia Central African Republic .5 2 200 500 1000 2500 5000 200 400 1000 2500 5000 10000 GDP per capita, US$ GDP per capita, US$ Source: Authors’ calculations from WDI data 3.4 PUBLIC EXPENDITURE ON HEALTH As discussed above, the public health sector in Malawi is funded by a number of sources with the bulk of funds coming from external sources. In this section, we only analyze public expenditures (both domestic and external) that are reflected in the national budget. Trends in Public Expenditure on Health While the level of public spending on health increased in nominal terms during the period under review, in real terms the value of spending has been virtually constant (Figure 10a). In nominal terms, public expenditure on health increased from MWK76 billion in FY2014/15 to MWK145 billion in FY2018/19, but due to high inflation, in real terms, the level of public expenditure on health has been stagnant at around MWK37 to MWK39 billion 9 Figure 10: Level of Public Spending on Health: FY2014/15 – FY2018/19 A. Nominal vs. Real (CPI: 2010=100) B. Budget Execution Rate 160B 160B 140 140B 140B Percentage of Budget Disbursed 120 126% 120B 120B 116% 100 101% Amount (MK) Amount (MK) 100B 100B 97% 90% 80 80B 80B 145B 60 129B 60B 60B 105B 97B 40 40B 40B 76B 20B 20B 20 38B 35B 37B 39B 38B 0B 0B 0 2014/15 2015/16 2016/17 2017/18 2018/19 2014/15 2015/16 2016/17 2017/18 2018/19 Nominal Real Budget Expenditure Budget Execution Rate Source: Authors’ calculations based on government data per year during the period FY2014/15 ‒ FY2018/19 (Figure 10a). Moreover, given high population growth, per capita public expenditure on health in real terms has remained virtually the same at around MWK2,132 per annum during the period under review (Figure 11). Compounding the problem is that most of the key health system delivery inputs (i.e. medicines, medical supplies and equipment, ambulances, and utility vehicles) are purchased outside the country. This has decreased the ability to buy sufficient quantities of drugs and medical supplies that are paid in foreign currencies from international suppliers. There are inconsistencies between expenditures and budgeted amounts. As shown in Figure 10b, public expenditure on health was consistently above budget with the exception of FY2016/17, when it was 90 percent, and FY2018/19, when it was 97 percent. However, at district level, expenditures were consistently above budget, averaging 179 percent per annum over the period FY2014/15 ‒ FY2018/19. Inconsistencies in spending (both above and below the budget) undermine the credibility of the budget as a tool for resource allocation and strategic planning. This implies that funding is unpredictable, interventions are not adequately prioritized, and overall health services planning is weak. In current US$ terms, the results also show that total public spending on health and expenditure on drugs and medical supplies have remained the same and only increased in FY2018/19 (Figure 12). Consequently, combined with an increasing population, rising disease burden, and fluctuations in the US$-MK exchange rate; per capita spending on drugs and medical supplies declined consistently between FY2014/15 and Figure 11: Public Spending on Health in Per Capita Figure 12: Public Spending on Health; and Drugs Nominal and Real Terms and Medical Supplies 8,000 12 200 2.5 2.21 180 2.14 7,000 10.7 10 1.93 160 2.0 Total Expenditure (US$ millions) 9.9 9.8 1.73 6,000 9.4 140 1.57 8.4 8 5,000 Per Capita (US$) 120 1.5 196.01 7,878 6 100 US$ 4,000 176.15 MK 7,194 163.40 159.36 145.67 80 1.0 6,049 3,000 5,715 4 60 4,573 2,000 40 0.5 2 2,280 2,224 1,983 2,114 2,059 1,000 36.58 36.30 33.65 28.20 31.80 20 0 0 0 0.0 2014/15 2015/16 2016/17 2017/18 2018/19 2014/15 2015/16 2016/17 2017/18 2018/19 MK Per Capita (Nominal) MK Per Capita (Real) Total Public Expenditure on Health Drugs & Medical Supplies US$ Per Capita (Nominal) Per Capita Spending on Drugs Source: Authors’ calculations based on government data Source: Authors’ calculations based on government data 10 FY2017/18 and only increased slightly in FY2018/19. However, the increment in FY2018/19 did not reach the FY2014/15 level. This has negative implications on access to quality and efficacious drugs, and health outcomes. According to results from the Harmonized Health Facility Assessment, on average, health facilities countrywide had only 38 percent of the essential medicines they should have, and no health facility had all 24 essential medicines at the time of the survey (World Bank, 2019). Public Expenditure on Health by Level of Health care The government has been spending more money at Figure 13: Public Expenditure on Health by Level of Health Care district level. As shown in Figure 13, the share of total 100 public expenditure on health at district level has been 90 16% 23% 16% 29% 25% the largest, with an average of 61 percent per annum 80 over the period under review. Despite the slight 70 decline in the share spent at district level in FY2017/18 60 Percent 65% 65% and FY2018/19, it is still significantly higher than the 50 61% 58% 57% 40 other levels of health care. This suggests that the 30 government is committed to its primary health care 20 strategy. Expenditure at the five central hospitals12 10 19% 18% 16% 14% 17% in the country has been fairly low, averaging about 0 17 percent of total public expenditure on health per 2014/15 2015/16 2016/17 2017/18 2018/19 Central Hospitals Districts National year over the period under review. This could have Source: Authors’ calculations based on government data negative implications on the provision of quality specialized hospital services including management of COVID-19 cases. This is because provision of health care at hospital level is more expensive than primary health care. With the advent of COVID-19 and rising burden of non-communicable disease, the need for more specialized hospital services has come to the fore, which means that the government has to find a balance between primary and hospital care. Assuming the number of COVID-19 patients requiring specialized hospital care increases, there will be immense pressure on the health system, especially on the hospital sub-sector which is ill-prepared to cope with the pandemic. Currently, Malawi only has 1.3 hospital beds per 1,000 people,13 six intensive care units, and 25 intensive care unit beds serving a population of 18.6 million (Manda-Taylor et al. 2017). Growth in Public Expenditures on Health by Individual Districts While overall spending at district level is high, there are variations with regards to the level and growth of spending across districts. A review of the distribution of public expenditure on health by individual district shows high nominal increases in spending across all districts, ranging from 29 percent to 105 percent between FY2014/15 and FY2018/19 (Figure 14). Though this could be attributed to an increase in the population, this is not necessarily the case. For Lilongwe, which has the largest population of all 28 districts in Malawi, the growth in health expenditure in FY2018/19 as compared to FY2014/15 was only 61 percent. Moreover, in per capita terms, public expenditure on health in Lilongwe was lower than all the other districts in Malawi. This can be attributed to its large resident population and frequent movement of people to the city to access health care at Kamuzu Central Hospital (Figure 15). However, there are other factors such as high disease morbidity and mortality that could also influence variances in health spending across districts. Most of these factors are captured in the 2008 formula for allocating financial resources from the center to the districts, but this formula has not been effectively applied. This is discussed below. 12 The five central hospitals in Malawi are: Queen Elizabeth Central Hospital (Blantyre), Zomba Central Hospital and Zomba Mental Hospital (Zomba), Kamuzu Central Hospital (Lilongwe), and Mzuzu Central Hospital (Mzimba). 13 https://data.worldbank.org/indicator/SH.MED.BEDS.ZS?locations=MW 11 Figure 14: Percentage Growth in Spending by Districts: 2014/15 vs 2018/19 6B 120 105% 99% 5B 100 90% Total Spending-MK Billions Growth in Spending (%) 4B 68% 80 61% 3B 60 43% 2B 36% 40 29% 1B 20 0B 0 Phalombe Mulanje Dowa Machinga Chikwawa Zomba Thyolo Nkhata Bay Nkhotakota Dedza Balaka Karonga Neno Nsanje Salima Mwanza Rumphi Mzimba Chiradzulu Ntchisi Mchinji Lilongwe Ntcheu Blantyre Mangochi Kasungu Chitipa Total 2014/15 Total 2018/19 Percentage Growth 2014/15 vs 2018/19 Source: Authors’ calculations based on government data Figure 15: Per Capita Spending by District: 2018/19 6B 10000 8795 9000 5B Total Spending - MK Billions 8000 6636 6330 7000 Per Capita Spending 4B 6000 3B 5000 3521 4000 2B 2218 2218 3000 2000 1B 1930 1000 0B 0 Likoma Neno Rumphi Mwanza Nkhata-Bay Salima Nsanje Thyolo Nkhotakota Karonga Balaka Phalombe Chikwawa Dowa Chiradzulu Chitipa Ntchisi Mulanje Zomba Ntcheu Mzimba Mchinji Machinga Kasungu Dedza Mangochi Blantyre Lilongwe Total 2018/19 Per Capita Spending 2018/19 Source: Authors’ calculations based on government data The existing needs-based formula for allocating financial resources to districts is not being used. Over the years, Malawi has developed four formulas for distributing financial resources from the center to districts to achieve efficiency and equity objectives. The first formula was developed in 2001 using population size as the key variable. This formula was revised in 2002 to include variables on poverty and under-5 mortality to strengthen its ability to reflect need. In 2008, the formula was revised again to include more variables including: stunting; an index for differential costs of service provision; bed capacity; and outpatient utilization (Manthalu et al. 2010). However, in practice, this formula has not been used, and distribution of public funds to districts is based on historical precedence. Specifically, the amount allocated to each district annually is based on the previous year’s allocation, which increases (or decreases) in line with the available budget. This approach perpetuates inequities and explains why health expenditures across districts are not reflective of the disease burden (need) as highlighted below. There are wide variations across the districts between per capita public health spending and health outcomes. As shown in Figure 16, these variations are not reflective of the burden of stunting and under-5 mortality rates. Ironically, stunting and under-5 mortality are among the key variables which were added to the 2008 resources allocation formula. For instance, the percentage of under-5 children who are stunted in Malawi are very high in Mangochi, Neno, and Mchinji and yet the per capita spending is lower in these districts as compared to Lilongwe, Blantyre, Nkhotakota and Phalombe where the levels of stunting are low but per capita spending is higher. Similarly, while under-5 mortality rate (U5MR) per 1,000 live births in Malawi is highest in Mchinji, 12 Mulanje, and Phalombe districts, per capita spending is lower than other districts with low U5MR. For example, Likoma district has low U5MR and stunting but its per capita health spending is much more than other districts and cities with higher U5MR and stunting levels. These variations are also not explained by social or economic needs. Figure 16: Per Capita Expenditure by District vs Health Outcomes A. Stunting in Children Under-5 B. Under-5 Mortality Rate 10,000 50 10,000 140 120 8,000 40 8,000 Per Capita Spending (MK) U5MR per 1,000 live births Per capita Spending (MK) U5 Children Stunted (%) 100 6,000 30 6,000 80 4,000 20 4,000 60 40 2,000 10 2,000 20 0 0 0 0 Mangochi Neno Dedza Mchinji Ntcheu Ntchisi Dowa Mzimba Machinga Lilongwe Balaka Mulanje Zomba Kasungu Thyolo Salima Blantyre Nkhotakota Chitipa Chikwawa Nkhata-Bay Chiradzulu Rumphi Nsanje Phalombe Mwanza Karonga Likoma Mchinji Mulanje Phalombe Neno Balaka Dedza Lilongwe Ntchisi Machinga Ntcheu Salima Nkhata-Bay Mangochi Chiradzulu Blantyre Dowa Nkhotakota Chikwawa Rumphi Kasungu Karonga Thyolo Likoma Nsanje Zomba Chitipa Mzimba Mwanza Per Capita Spending-2018/19 Stunting Per Capita Spending-2018/19 U5MR Source: Authors’ calculations from government data and Malawi 2015-16 Demographic and Health Survey There are several explanations for why the 2008 formula was not fully applied. These include: (i) redistribution of existing financial resources was not possible, (ii) the total resource envelope did not grow enough to achieve optimal distribution of the additional resources to operationalize the formula, and (iii) there was wavering political support to implement the formula due to regular changes at ministerial level at the MOHP. In 2019, a new formula was developed by updating data on population size, disease burden and coverage rates, unit costs of treatment, and cost variations across the districts (Twea et al. 2020). The 2019 formula is also aligned to the country’s health benefit package, the EHP, which aims to advance the principles of health maximization, cost-effectiveness, and equity (Twea et al. 2020). To achieve its goal of increasing efficiency and equity in resource allocation, the MOHP needs to fully apply the 2019 allocation formula to both government and donor resources. Currently, the formula is only intended for government resources, which constitute 24 percent of the total spending in the health sector. This leaves out the largest financier, the donors, who contribute 58 percent of the total spending in the health sector. Furthermore, considering that this formula only focuses on the allocation of financial resources for drugs and operational grants in the public sector at district level, the MOHP also needs to look closely at the funding and distribution of human resources, infrastructure, and equipment. As presented in the next sections, consolidated funding on these items is high, especially for human resources. For instance, if this formula had been applied in FY2018/19, it would only have influenced 27 percent of the total public funds at district level (Figure 18) with no impact on the funding for human resources. Therefore, optimal funding and distribution of human resources, infrastructure, and equipment are key to promoting equity of access. Public Expenditure on Health by Key Health Systems Inputs – National Picture Half of the total public funds in the health sector in Malawi are spent on personnel emoluments (Figure 17). Over the period under review, an annual average of 51 percent of total public expenditure on health was on personnel emoluments. The public sector health wage bill, as a share of total public expenditure on health in Malawi, is fairly low except if compared to some of the lower middle-income countries in the African region such as Angola, Tanzania, Kenya, and Lesotho (Table 3). After personnel emoluments, expenditure on ORT comes second, followed by expenditures on drugs and medical supplies, and lastly infrastructure development. During 13 the final two years of the review (FY2017/18 and FY2018/19), expenditure on drugs and medical supplies, as a share of total public expenditure on health, remained constant at 16 percent (Figure 17). Compared to the share of spending on drugs in other African countries, Malawi’s share is significantly lower that the African regional average of 33 percent (Bennett, Quick, and Velasquez 1997). The current level of funding only caters for a six months’ supply, which leads to persistent shortages at hospitals and health centers. Figure 17: Public Expenditure by Key Health Table 3: Public Health Sector Wage Bill as a Share of Total Systems Inputs Public Expenditure on Health 100 3% Country Wage bill as Source 5% a share of GHE 16% 13% 12% 90 22% 23% 80 16% Zambia 62 PER 2018 16% 70 23% Zimbabwe 60 HFSA 2019 17% 21% 21% 60 22% Seychelles 54 PER 2014 Percent 13% 50 40 Malawi 51 PER 2020 30 Angola 44 PER 2017 55% 52% 51% 49% 49% 20 Tanzania 43 PER 2020 10 0 Kenya 41 PER 2014 2014/15 2015/16 2016/17 2017/18 2018/19 Personnel Emoluments ORT Drugs & Medical Supplies Development Lesotho 35 PER 2017 Source: Authors’ calculations based on government data Source: Authors’ review of health PERs in Sub-Saharan Africa Development expenditure in Malawi’s health sector has varied considerably in recent years. As shown in Figure 17, development expenditure as a share of total public expenditure on health has varied from 5 percent in FY2014/15 to 16 percent in FY2015/16, and was between 12 and 13 percent in FY2017/18 and FY2018/19. The main areas for the expenditure on development were physical structures and medical equipment, which constituted about 98 percent of total expenditure on infrastructure development. Increased spending on infrastructure is one of the goals outlined in Malawi’s HSSP II, which among other things seeks to increase physical access to health facilities by rehabilitating and expanding health infrastructure countrywide. Public Expenditure on Health by Key Health Systems Inputs – District Level Similar to the overall picture on public spending on health by key health systems inputs, the share of spending on personnel emoluments at district level is high. As highlighted in Figure 18, the share of spending on personnel emoluments increased from 65 percent Figure 18: Expenditure by Key Health Systems Inputs in FY2016/17 to 73 percent in FY2018/19. Due to at District Level the large expenditure on personnel emoluments, 100 expenditure on ORT is very low. This affects service 90 23% 29% 25% 19% 18% delivery activities such as outreach and supportive 80 10% 9% 13% 10% supervision at district level. Moreover, since the bulk 70 9% 60 of resources at district level are spent on personnel Percent 50 emoluments, it will be increasingly difficult for the 40 government to recruit additional health workers in 64% 62% 65% 71% 73% 30 the public health sector and/or make efficiency gains 20 through existing funding. Finally, at 18 percent of 10 total public expenditure on health at district level, 0 2014/15 2015/16 2016/17 2017/18 2018/19 spending on drugs and medical supplies is low. This Personnel Emoluments ORT Drugs & Medical Supplies has negative implications for the supply and access Source: Authors’ calculations based on government data to quality and efficacious medicines in the country. 14 4. EFFICIENCY AND VALUE FOR MONEY 4.1 INTRODUCTION This section analyzes the pathways through which resources in the health sector could be wasted, traced from financing to health outcomes. The analysis was undertaken by looking at three pathways: (a) potential inefficiencies in the allocation of funds and/or purchase of key health systems inputs (such as ORT, human resources, drugs and medical supplies, medical equipment, and physical infrastructure); (b) potential inefficiencies in transforming the available inputs into quality health services and outputs given the country’s total CHE per capita; and (c) ability to translate available health services and outputs into better health outcomes. The latter is in fact a value-for-money or effectiveness analysis. This process is depicted in Figure 19. While the previous sections provided information on the level and composition of health expenditures, and allocation of funds by level of health care and key health systems inputs (first pathway), the subsequent analyses provide further insights into the first pathway as well as the second and third pathways. Figure 19: Pathways for Potential Ine ciencies in the Health Sector Financing Inputs Production of Improved Services & Outputs Health Outcomes • Total current health • CRT • CRT • Health status expenditure per capita • Human Resources • Service packages for • Patient satisfaction maternal, child health 1 • Drugs and medical 2 and nutrition 3 • Risk protection supplies • Outpatient and • Medical equipment inpatient admissions & physical infrastructure • Universal Health Coverage Index • Health Access and Quality index Source: Adapted from Hafez, R., ed. 2020. Measuring Health System Efficiency in Low- and Middle-Income Countries 4.2 PUBLIC FINANCIAL MANAGEMENT One of the major causes of inefficiencies in the health sector in Malawi is the weak PFM system. Effective management of public expenditures on health is essential to increasing coverage and achieving better health outcomes in Africa (Kutzin, 2016). As part of this PER, a comprehensive assessment of the ability of the PFM system to facilitate quality health service delivery was conducted at district hospitals and health centers.14 The results show inadequate compliance with existing guidelines on the management of public funds, especially at government health facilities. For example, while health expenditures at district level are in excess of the budgeted amounts, there are persistent delays in the transfer of the funds, and inter-sectoral borrowing of earmarked funds also occurs. Delays in funding means that the money is not remitted as planned, which results in monthly disbursements being unpredictable. In addition, budgetary releases to districts are not usually communicated to the health providers and this often leads to poor accountability. 14 In line with the Local Government Act of 1998, operational budgets for the health sector were devolved to the district councils in 2005. As such, health service delivery at community, primary, and secondary levels is under the mandate of the district councils, while provision of tertiary- level services is the responsibility of the MOHP. 15 Planning and budgeting processes are in place at district level, but they do not effectively support prioritization of activities. Service providers at district hospitals and health centers are usually not informed about the available funding or ‘in-kind’ support for the following year. In addition, participation of service providers in the planning and budgeting processes is marginal, which weakens the prioritization process. Further, by using vertical programs, donors also contribute to fragmentation of the planning and budgeting, delivery, and monitoring and evaluation systems in the health sector. For instance, in addition to the existing government system, there are multiple financial management and monitoring and evaluation systems that are managed by donors. This practice is in conflict with the Paris Declaration on Aid Effectiveness and the Accra Agenda for Action. Service providers are not recognized in the budget. Most health services in Malawi are delivered at primary health care facilities (district hospitals and health centers). These facilities are managed by district health management teams (DHMTs) and are not categorized as spending units or cost centers. The DHMTs are in charge of accounting, financial management, and monitoring and evaluation, which is a conflict of interest. While financial management systems are in place to identify spending by economic classification at the DHMT level, it is not possible to determine the amounts spent by individual hospitals and health centers or how this relates to the volume of services delivered, quality, or need. There are no comprehensive financial reports covering all levels of government. Financial reporting at district level is done through the Navision accounting software, while at central government the financial management information system (FMIS) uses a different application, called Epicor. These two systems are not integrated, making it difficult to generate comprehensive financial reports across all levels of government. Moreover, donor financing is generally not captured in the FMIS, which leads to only partial financial reporting. Given that about 60 percent of total health expenditure in Malawi is provided by donors, this means that a large part of health expenditure is not routinely reported. Therefore, it is difficult to establish a link between total expenditures (financing), inputs, service delivery outputs, and outcomes. Consequently, evaluating the effectiveness of spending in the health sector in Malawi is challenging. Execution protocols emphasize control over flexibility. Budget execution protocols at district-level government health facilities require input-based controls of the line-item budget with limited opportunity for virement. Major adjustments, such as shifting funds across budget lines, require a supplementary budget. These rigidities have prompted DHMTs to avoid using the electronic system and opt for manual accounting that bypasses internal controls. While this provides greater flexibility, it undermines the Public Finance Management Act No. 7 of 2003 and raises concerns on accountability. Furthermore, manual accounting raises accountability concerns, and contributes to the accumulation of arrears. Therefore, there is need for greater flexibility around budget execution at the district level. Lessons can be drawn from health facilities managed by CHAM. CHAM facilities receive a global budget and have greater flexibility on how they spend money. The PFM system at CHAM facilities provides a more conducive environment for health service delivery than the system at government facilities. A summary of the consolidated scores for all the health facilities which were visited is provided in Table 4. The scores are aggregated for all the health facilities and examined by provider type or managing authority (i.e. government versus CHAM) at each stage of the budget cycle. In general, PFM processes at government facilities are considerably more restrictive than those at CHAM facilities especially at budget formulation and evaluation phases of the budget cycle. At the budget formulation stage, PFM practices are considerably less supportive for government than for CHAM facilities on aspects of efficiency, accountability, and quality. At budget evaluation stage, government facilities perform poorly than CHAM facilities on accountability, equity, and efficiency. 16 Table 4: PFM Environment by Budget Phase and Managing Authority Service Delivery Measures Budget phase Managing Authority Efficiency Equity Quality Accountability Government D+ C C D+ Formulation CHAM B+ C B B Government B B C+ B Execution CHAM B A A A Government C D B C Evaluation CHAM B C B A Source: Authors’ construction from survey data The PFM environment is much worse at health centers as compared to hospitals, but CHAM facilities still outperform government facilities (Table 5). The differences in performance between health centers and hospitals can be attributed to differences in management capacities. In general, PFM processes that apply at health centers are considerably more restrictive than those that apply at hospitals. This is the case throughout the budget cycle but is most visible in certain aspects of budget formulation and execution. Further, health centers are generally weaker in performance on accountability, efficiency, and quality at all phases of the budget cycle for both government and CHAM. Table 5: Budget Formulation, Execution and Evaluation by Facility Ownership Health Centers Hospitals Budget phase Managing Authority E1 E2 Q A E1 E2 Q A Government D D D+ D+ D+ D C D Formulation CHAM D D C D+ B+ C B B Government D+ D D D+ C+ D D+ C+ Execution CHAM D+ C C D+ B B A A Government D D D D+ D D D C Evaluation CHAM C C D C A A A A Source: Authors’ construction from survey data E1=Efficiency E2=Equity Q=Quality A=Accountability 4.3 TECHNICAL EFFICIENCY Despite the relatively high expenditure on personnel Figure 20: Number of Doctors per 1,000 Population, FY2018/19 emoluments in Malawi, there is still a critical 0.04 shortage of clinical health workers. As shown in 0.029 0.03 Figure 20, in FY2018/19, the number of doctors per 0.024 0.022 0.03 1,000 population was less than one across all 28 0.020 0.017 0.02 districts in the country. Moreover, the distribution 0.015 0.013 0.012 0.012 0.012 0.011 0.02 of doctors varies by district, with most doctors in 0.010 0.009 0.008 0.008 0.008 0.007 0.007 0.01 the country working in Blantyre, which has 0.029 0.006 0.005 0.005 0.005 0.005 0.005 0.005 0.004 0.004 0.01 doctors per 1,000 people, compared to Machinga and Chitipa districts which have just 0.004 doctors 0.00 Blantyre Nkhata Rumphi Nsanje Salima Nkhotakota Ntchisi Zomba Mzimba Lilongwe Karonga Thyolo Dowa Chikwawa Dedza Phalombe Balaka Chiradzulu Mchinji Mwanza Neno Mangochi Mulanje Kasungu Ntcheu Chitipa Machinga per 1,000 people. Staffing levels in the other two cities in Malawi (Lilongwe and Zomba) are lower than Blantyre but better than most other districts. Source: Authors’ calculations based on government data 17 Since most doctors in Malawi work in hospitals, hospitals in rural districts find it difficult to attract doctors. The uneven distribution of doctors may also be due to the high number of government and privately-owned tertiary hospitals in the three cities (Blantyre, Lilongwe, and Zomba). There is a direct relationship between public health expenditure per capita and availability of clinical staff (Figure 21a). This means that the distribution of health workers is a key factor in how financial resources are distributed in the public health sector in Malawi. Furthermore, Figure 21b shows that there is an inverse relationship between the availability of health workers and total outpatient visits. Generally, districts with lower staffing levels see more outpatients than those with higher staffing levels. This scenario is prevalent in cities and districts with large populations because these locations often have scale efficiency (i.e. lower unit costs of service delivery). In districts with high staffing levels but low outpatient visits, the implication is that some of the health workers are being underutilized. This is explained below. The other possible explanation is that the quality of outpatient services is poor in districts with high staffing levels, hence the low utilization. As revealed in previous sections, high expenditure on personnel emoluments but low spending on medicines and other medical supplies contributes to limited access to quality and efficacious medicines in the country. To address this problem, there is need to improve resource allocation so that there is optimal distribution of financial resources across all key health systems inputs. Distribution of human resources, medicines and other essential health commodities should be aligned to the need of each district. Figure 21: Productivity of Health Workers by Districts – FY2018/19 A. Per Capita Spending vs Staffing Levels B. Staffing Levels vs Outpatient Visits 23 2,500,000 Lilongwe Total Clinical Staff per 10,000 population 21 Rumphi Neno 2,000,000 19 Total Outpatient Visits Chiradzulu 17 1,500,000 Blantyre Mwanza 15 Mzimba Zomba Zomba Salima Nkhata -Bay Dowa Balaka Nsanje 1,000,000 Mangochi Thyolo Nkhotakota 13 Chitipa Mzimba Ntcheu Nkhotakota Kasungu Mulanje Ntcheu Mulanje Dedza Salima Mchinji Karonga Ntchisi Nkhata-Bay 11 Thyolo Machinga Phalombe Chikwawa Ntchisi Dowa 500,000 Chiradzulu Dedza Kasungu Karonga Neno Chikwawa Phalombe Balaka 9 Mangochi Chitipa Rumphi Nsanje Mwanza Machinga Mchinji Lilongwe Blantyre 7 0 1,500 2,500 3,500 4,500 5,500 6,500 7,500 7 9 11 13 15 17 19 21 23 Per capita Public Health Expenditure (MK) Total Clinical Staff per 10,000 Population Source: Authors’ calculations based on Government data Absenteeism among core health workers in Malawi exacerbates staff shortages, leads to wastage of resources, and contributes to poor quality of health care. According to results from the Harmonized Health Facility Assessment, 18 percent of the health workforce countrywide were absent at the time of the survey (World Bank, 2019). While this is lower than other countries in Africa [i.e. Mozambique (24 percent), Madagascar (27 percent), Uganda (47 percent), and Kenya (53 percent)]; having 18 percent of the health workforce absent on any given day creates a significant challenge for providing timely, efficient, high-quality health services. It also leads to wastage of resources and poor health outcomes. The annual potential savings from absenteeism is estimated at US$15 million and this is equivalent to 8 percent of the total public expenditure on health. The MOHP needs to identify and address the underlying causes of absenteeism. 18 Malawi performs better than most low-income countries Figure 22: UHC Index for Low-Income Countries in SSA, 2017 in SSA in terms of service coverage (Figure 22). To .6 benchmark Malawi against other countries, the Rwanda universal health coverage (UHC) service coverage Zimbabwe .5 index was used (WHO, 2019). The UHC index is a Mozambique Malawi UHC service coverage index single indicator computed from 14 tracer indicators Burundi Tanzania Togo .4 to monitor coverage of essential health services as Ethiopia Burkina Faso Niger part of Sustainable Development Goal 3: “Ensure healthy lives and promote well-being for all at all Central African Republic ages” (WHO, 2019).15 With a score of 46 in 2017, .3 Malawi tops countries with similar per capita total Madagascar current health expenditure such as Tanzania, Togo, 20 40 60 80 100 120 and Burkina Faso (Figure 22). Malawi’s UHC index CHE per capita, US$ is also slightly higher than the SSA regional Source: Authors’ calculations based on WDI data average of 44.16 Malawi needs to sustain this good performance and improve further through efficient utilization of available resources. 4.4 VALUE FOR MONEY Malawi performs better than most low-income countries in SSA in transforming available health services and outputs into better child health outcomes. Comparing its UHC index score to its level of under-5 mortality (Figure 23) shows that Malawi’s performance is better than other low-income countries in SSA. However, Malawi has relatively higher maternal mortality than other low-income countries such as Mozambique, Burkina Faso, and Madagascar, despite having a higher UHC index score. In other words, Malawi is not effective at translating available services and outputs into better maternal health outcomes. This could be attributed to the low quality of maternal health care as outlined in the 2015-16 Demographic and Health Survey. The survey shows that while the percentage of births occurring at a health facility (91 percent) and the percentage of births attended by a skilled provider (90 percent) are high in Malawi, the quality of antenatal and maternal delivery services are poor (NSO and ICF, 2017). Further, critical shortage of key health systems inputs (human resources, medicines and medical supplies, poor/inadequate infrastructure), and poor governance and accountability also contribute to provision of low-quality maternal health care in Malawi (MOHP and ICF, 2014). Consequently, Malawi’s score of 32.2 on the health access and quality index is low (Fullman et al. 2018). This index measures health care access and quality for diseases and injuries considered amenable17 to health care. The top 10 causes of amenable death and disability in Malawi are presented in Figure 8b above. 15 Essential health services are services that all countries, regardless of their demographic, epidemiological, or economic profile, are expected to provide. The package of essential health services includes reproductive, maternal, newborn and child health; infectious diseases; non- communicable diseases; and service capacity and access. 16 https://data.worldbank.org/indicator/SH.UHC.SRVS.CV.XD 17 The HAQ index incorporates 32 causes of disease and injury which in the presence of timely and quality health care should not result in death. These diseases and conditions include maternal and perinatal mortality; infectious diseases; neoplasms; nutritional, endocrine, and metabolic diseases; neurologic disorders; cardiovascular diseases; respiratory and digestive system diseases; genitourinary system diseases; and external causes. https://www.paho.org/hq/dmdocuments/2013/annex-basic-indicators-2013.pdf. 19 Figure 23: Translation of Outputs in Health Outcomes A. UHC Index vs Under-5 Mortality Rate B. UHC Index vs Maternal Mortality Ratio .6 .6 Rwanda Zimbabwe Zimbabwe UHC Service Coverage Index UHC Service Coverage Index .5 .5 Malawi Malawi Mozambique Mozambique Tanzania Togo Togo Tanzania Burundi Burundi .4 Ethiopia Burkina Faso .4 Burkina Faso Ethiopia Niger Niger Central African Republic Central African Republic .3 .3 Madagascar Madagascar Somalia Somalia 20 60 80 100 120 200 400 600 800 1000 1200 Under-5 Mortality per 1,000 live births Maternal Mortality per 100,000 live births Source: Authors’ calculations based on WDI data For service coverage to translate into improved outcomes, there is a need for greater focus on health care quality. This could be achieved by reprioritizing public spending on health so that there is an optimal balance between spending on personnel emoluments and other key health systems inputs. Having a better mix of service inputs and reconfiguring the financing mechanism from an input-based to a results-based financing system is also critical. 20 5. EQUITY ANALYSIS 5.1 INTRODUCTION Attaining equitable access to quality health care services is one of the key features of Malawi’s national health policy. The national health policy is operationalized through the HSSP II, whose goal is to “move towards UHC of quality, equitable and affordable health care with the aim of improving health status, financial risk protection and client satisfaction” (MOHP, 2017 p. 27). Having a national health policy and strategic plan in place affirms the government’s commitment to achieving the health-related Sustainable Development Goal, and UHC.18 Aligned to the HSSP II is the EHP, where Malawi has defined a list of priority interventions and services for which financial resources are allocated. The EHP is commensurate with the health maximization principle, equity, continuum of care, complementarity of service provision, and available resources. The government provides free EHP services through all government health facilities, and where there is no government facility, CHAM health facilities are contracted (as outlined in SLAs) to provide a package of selected health services for free. This section uses two population-based surveys, the Integrated Household Surveys 3 and 4 produced in FY2010/11 and FY2016/17 respectively, to answer the following equity-related questions: (i) What is the composition of health spending at household level and how do the spending patterns differ across households from different socio-economic backgrounds? (ii) Do certain households experience hardship or catastrophic expenditure when accessing health services? (iii) How are the health services utilized across households from different socio-economic backgrounds? The analysis focuses on the financing and distributional impact between FY2010/11 and FY2016/17 across districts and income groups to determine whether regions with poor health outcomes and poor households have benefited from public resources over the years. The study does not look at each individual health strategy or reform per se but seeks to establish if the health system as a whole is pro-poor. 5.2 SPENDING ON HEALTH SERVICES AT HOUSEHOLD LEVEL What is the composition of health spending at household level and how do the spending patterns differ across households from different socio-economic backgrounds? Though out-of-pocket expenditure on health as a share of total current health expenditure has been increasing consistently since FY2012/13 (Figure 24), poor households have not been affected. This is highlighted in Figure 25a, which shows a decline in total household spending on health as a share of total household expenditure among the poorest households. Conversely, for more affluent households (quintiles 2 to 5), there has been an increase in total household spending on health as a share of total household expenditure 18 SDG 3, target 3.8 requires all countries to “achieve universal health coverage, including financial risk protection, access to quality essential healthcare services and access to safe, effective, quality, and affordable essential medicines and vaccines for all.” https://unstats.un.org/sdgs/ metadata/?Text=&Goal=3&Target=3.8 21 between FY2010/11 and FY2016/17. However, when Figure 24: Out-of-Pocket Expenditure on Health as a faced with illnesses requiring medicines, the burden Share of total CHE on poorer households has increased, while remaining 14 12.4 12.7 12.7 steady for the wealthiest quintile of households 12 10.9 10.8 10.2 (Figure 25c). The increasing household spending on 10 9.0 medicines between FY2010/11 and FY2016/17 for 8.1 8 most income groups could be attributed to inadequate Percent 6.6 public spending on medicines over the years as 6 highlighted in earlier sections. Persistent shortages 4 of medicines at government health facilities prompts 2 households to buy them from private drug stores and 0 pharmacies. 0 1 2 3 4 5 6 7 8 /1 /1 /1 /1 /1 /1 /1 /1 /1 09 10 11 12 13 14 15 16 17 20 20 20 20 20 20 20 20 20 Source: Authors’ construction from Malawi National Health Accounts Figure 25: Level and Composition of Household Spending on Health by Income Quintile A. Total Households Spending on Health as a Share of B. Outpatient as a Share of Total Households Total Household Expenditure Spending on Health 2.5 35 30 2.0 25 1.5 20 Percent Percent 1.0 15 10 0.5 5 0.0 0 Poorest Q2 Q3 Q4 Richest Poorest Q2 Q3 Q4 Richest 2010/2011 2016/2017 2010/2011 2016/2017 C. Medicines as a Share of Total Households D. Hospitalization as a Share of Total Households Spending on Health Spending on Health 80 25 60 20 15 40 Percent Percent 10 20 5 0 0 Poorest Q2 Q3 Q4 Richest Poorest Q2 Q3 Q4 Richest 2010/2011 2016/2017 2010/2011 2016/2017 Source: Authors’ calculations from Malawi IHS 3 and 4 22 5.3 CATASTROPHIC HEALTH EXPENDITURE Do certain households experience hardship or catastrophic expenditure when accessing health services? Studies on catastrophic health expenditure are anchored in the notion that health care payments should not exceed a given threshold such that the household’s experience financial hardship when assessing health care services (Wagstaff and van Doorslaer, 2003). Households with health care expenditures above an acceptable threshold are regarded as experiencing ‘catastrophic health expenditures.’ In the literature, the commonly used threshold values for assessing catastrophic health expenditures are 10 percent for total household expenditure and 40 percent for non-food expenditure (O’Donnell et al. 2008). The incidence of catastrophic health expenditure is computed as a proportion of households, expressed by head count, that incur catastrophic payments for health care. In our analysis, we used the 40 percent threshold, which means that we estimated the proportion of households spending more than 40 percent of their total non-food expenditure on health. The results show that between FY2010/11 and FY2016/17, the proportion of households in the lowest quintile (poorest) incurring catastrophic health payments decreased (Figure 26a). However, the proportion of households incurring catastrophic health payments for all other households (quintile 2 to 5) increased between FY2010/11 and FY2016/17 (Figure 26a). Further, between FY2010/11 and FY2016/17, the incidence of catastrophic health payments also increased significantly in rural areas while there was a reduction in urban areas (Figure 26b). This is not surprising since large parts of Malawi are predominantly rural. As such, findings in Figure 26b are triangulated. Thus, we conclude that despite having a free health care policy and the existence of SLAs with CHAM facilities, catastrophic health expenditures are still prevalent in rural areas in Malawi. Therefore, the chances of poor households being exposed to financial hardships when accessing health care, and being pushed into poverty, are very likely. Figure 26: Percentage of Households Spending Above 40 Percent of their Total Non-food Expenditure on Health A. Income groups B. Urban-Rural 2.5 2.0 2.0 1.6 1.5 1.2 Percent Percent 1.0 0.8 0.5 0.4 Q1 Q2 Q3 Q4 Q5 Q1 Q2 Q3 Q4 Q5 Rural Urban Rural Urban 0.0 0.0 2010/2011 2016/2017 2010/2011 2016/2017 Source: Authors’ calculations from Malawi IHS 3 and 4 23 5.4 EQUITY OF ACCESS TO HEALTH SERVICES How are health services utilized across households from different socio-economic backgrounds? Equity of access to health services in Malawi has improved over the years. Between FY2010/11 and FY2016/17, there was a slight increase in spending on outpatient visits as a share of total household spending on health among the poorest and richest households but overall, the poorest households continued to experience a lower burden (Figure 25b). Furthermore, household spending on hospitalization declined across all income groups during the period under review (Figure 25d). This may be due to increased utilization of free health services at government and CHAM health facilities by the poorest households. As shown in Figures 27a and 27b, there was an increase in the utilization of health services at government and CHAM health facilities by the poorest households between FY2010/11 and FY2016/17, while there was a decline in utilization for the richest households. However, the poorest households were consuming more health services at government health facilities as compared to CHAM health facilities. Further, despite the decline in utilization for the richest households in FY2016/17, they still continued consuming more health services at CHAM facilities as compared to the poorest households (Figure 27b). Low utilization of health services at CHAM facilities by the poorest households could be associated with the user fees applicable at CHAM facilities for services not covered under the SLAs, and for CHAM facilities that do not have SLAs with the government. There is need to increase the number of SLAs between the government and CHAM. Figure 27: Utilization of Health Services by Income Quintiles A. Government Health Facilities B. CHAM Health Facilities 25 35 30 20 25 15 20 Percent Percent 15 10 10 5 5 0 0 Poorest Q2 Q3 Q4 Richest Poorest Q2 Q3 Q4 Richest 2010/2011 2016/2017 2010/2011 2016/2017 Source: Authors’ calculations from Malawi IHS 3 and 4 Utilization of outpatient and inpatient services at government, CHAM, and private health facilities is higher among the rich than the poor (Figure 28). This is despite the increased utilization of health services among the poorest households at government and CHAM health facilities between FY2010/11 and FY2016/17. The reason for this is that rich households continued consuming more health care services at CHAM and private health facilities in both FY2010/11 and FY2016/17 in addition to what they consume from government facilities. Further, while utilization of health services increased among the poorest households, there are still a large number of poor households in quintile 2 that may not have benefited. Malawi is the sixth poorest country in the world and 69.8 percent of the population lives below the international poverty line of US$1.90 per day (World Bank, 2018). Therefore, though the provision of free health care services at government and selected CHAM health facilities has contributed to improved equity of access, overall utilization of outpatient and inpatient services at government, CHAM and private health facilities is still higher among the rich than the poor. To attain its long-term goal of attaining equity of access to quality health care, the government needs to 24 improve quality of health care services at government health facilities, and also increase access to CHAM and private health facilities in areas where there are no government health facilities. Full application of the existing needs-based resource allocation formula at district level is also important. Figure 28: Utilization Incidence of Outpatient and Inpatient Services: FY2010/11 vs FY2016/17 A. Outpatient B. Inpatient 1 1 Cumulative share of benefits Cumulative share of benefits .8 .8 .6 .6 .4 .4 .2 .2 0 0 0 .2 .4 .6 .8 1 0 .2 .4 .6 .8 1 Cumulative share of popn (Ranked from poorest to richest) Cumulative share of popn (Ranked from poorest to richest) Outpatient 2010/11 Outpatient 2016/17 Line of equality Outpatient 2010/11 Outpatient 2016/17 Line of equality Source: Authors’ calculations from Malawi IHS 3 and 4 25 6. CONCLUSIONS 6.1 KEY FINDINGS Malawi performs better than most low-income countries in SSA in terms of service coverage, and in transforming available health services and outputs into better child health outcomes. However, it is not as effective at translating available services and outputs into better maternal health outcomes. This could be attributed to low quality of maternal health care services. The COVID-19 pandemic could reverse the gains in maternal and child health outcomes that Malawi has registered since 2000. Since the advent of COVID-19 in Malawi, there has been a reduction in the utilization of some key reproductive, maternal, and child health services. This is mainly due to: (i) disruptions in the procurement and distribution of medicines and other essential medical commodities; (ii) greater emphasis on COVID-19 as compared to other essential services; and (iii) patients’ fears of contracting the disease if they enter health facilities. Financing and provision of health services in Malawi are likely to be affected by the COVID-19 pandemic whether the number of cases remains low or increases. Additional investments in the health system are required to: (i) prevent further spread of the disease; (ii) treat the sick; and (iii) maintain the provision of other essential services. This will require additional domestic and external funding but, given the negative impact of COVID-19 on economic growth and resource mobilization worldwide, expenditure on health and other social sectors could shrink rather than increase. Malawi’s total spending on health in per capita terms and as a share of GDP is higher than other low-income countries. However, total health spending per capita estimated at US$39 per year is insufficient to provide essential health care as outlined in the country’s EHP leading to gaps in service delivery. Malawi government’s commitment to funding the health sector is already high. Compared to other low-income countries, government spending on health as a share of GDP and total government spending in Malawi is higher. However, in real terms, public expenditure on health has been decreasing over the years despite the increasing population, and high and increasing disease burden. Donor funding is still the largest source of funding to the health sector but growth in donor expenditure on health has been low since the ‘Cashgate’ scandal of 2013. As a result, households, employers, and local NGOs have significantly increased their spending on health post-Cashgate as compared to the growth in donor and government spending. High dependency on donors to finance the health sector in Malawi poses a potential risk of making health financing unsustainable, which could cause disruptions in service delivery. Since the Cashgate scandal, most donors have opted to provide funding to the health sector through vertical programs and projects. By FY2017/18, about 74 percent of donor funding to the health sector was off-budget. Moreover, most of aid agencies and 26 NGOs use their own planning, financing, procurement, and monitoring systems to manage donor funds. Use of vertical programs and parallel systems negates the five principles on aid effectiveness19 and is a missed opportunity to improve the PFM system in the country. While the three main financiers (donors, government, and households) focus their spending on the top 10 causes of DALYs, government and households’ funding is more aligned to the order of priority of the disease burden. Furthermore, donor funds are often released late and absorption is low due to a number of reporting requirements. Resolving inefficiencies in the allocation and use of donor funds is critically important because donor funding is the largest source of funding in the health sector in Malawi. In line with the national health policy, the bulk of financial resources in the public health sector are spent at district level. However, more than half of the total public funds in the health sector in Malawi are spent on personnel emoluments, which leads to low expenditure on drugs and medical supplies, and ORT. Moreover, expenditure on drugs as a share of total government spending on health at 16 percent in Malawi is significantly lower that the African regional average of 33 percent (Bennett et al. 1997). This level of spending only caters for a six-month supply of drugs, which leads to persistent shortages at hospitals and health centers. Despite the relatively high expenditure on personnel emoluments in Malawi, there is still a critical shortage of clinical health workers and some of the existing health workers are underutilized. Most of the doctors in the country work in Blantyre, which has 0.03 doctors per 1,000 people – already significantly less than the World Health Organization’s recommendation of 1 doctor per 1,000 people. Further, districts with lower staffing levels see more outpatients than those with higher staffing levels, which suggests that some health workers are not fully utilized. Nationwide, the absenteeism rate is estimated at 18 percent of the total health workforce, and this exacerbates staff shortages, wastage of resources, and contributes to poor quality of health care. Predictability of funding is low. Spending is not aligned to the budget and this could be due to weaknesses in domestic resource mobilization at the national level, and gaps in health services planning. Constant expenditures above and below budgetary allocations raise concerns about the credibility of the budget as a planning and resource allocation tool in the health sector. Malawi has a formula for distributing financial resources from the center to the districts, aimed at achieving efficiency and equity objectives. However, the current formula is not being used, leading to wide variations across districts in per capita public health spending and health outcomes. Further, the formula is only applied on government funds for drugs and ORT. These constitute a very small portion of the overall resource envelope in the health sector. Gaps in PFM arrangements have made it difficult to deliver health services at government hospitals and health centers. The PFM system is characterized by inadequate compliance with guidelines, poor accountability, and limited communication and dialogue. Budget execution also emphasizes control over flexibility, which has led to district authorities sidestepping the system. Poor integration of financial reporting systems at district and central government levels also limits budget monitoring and reporting. 19 In line with the Paris Declaration on Aid Effectiveness, the five principles that make aid more effective are: Ownership, Alignment, Harmonization, Managing for Results, and Mutual Accountability. Several donors that operate in Malawi are signatories to the Paris Declaration on Aid Effectiveness. For more information see https://www.oecd.org/dac/effectiveness/34428351.pdf 27 Although out-of-pocket expenditure on health as a share of the total current health expenditure has been increasing consistently since FY2012/13, poor households have not been affected. The increasing burden of out-of-pocket spending has been borne by wealthy households. Further, the proportion of poor households incurring catastrophic health payments has decreased. However, geographically, the incidence of catastrophic health payments has increased in rural areas while there has been a reduction in urban areas. Equity of access to health services in Malawi has improved over the years but there is room for further improvement. Increased equity of access to health services could be attributed to increased utilization of free health services by poor households at government and CHAM health facilities. However, poor households still consume more health services at government health facilities (where quality of health care is low) as compared to CHAM and private health facilities. Furthermore, overall utilization of health services at government, CHAM and private health facilities is still higher among the rich than the poor. 6.2 RECOMMENDATIONS There is need to sustain the gains made in transforming available health services and outputs into better child health outcomes while scaling-up the delivery of quality maternal health services. This will require addressing underlying issues such as high adolescent pregnancy and teenage marriage rates, low education status of mothers, poor maternal nutrition, and low access to social protection services. Additional financial and material resources will be required to prevent further spread of COVID-19, treat the sick, and maintain provision of other essential health services. At a minimum, the government needs to ensure that existing financial resources in the health sector are not reduced. If an economic crisis forces the issue, the government could consider cutting certain areas of the national and/or health budget to sustain the provision of health services with the least possible impact on health and other social outcomes. For instance, spending on capital items and non-essential services could be cut or temporarily suspended. The government needs to continuously monitor how the COVID-19 pandemic is affecting supply and demand for health services, consistently map how the available resources are allocated and spent, and undertake timely procurement and distribution of medicines and other essential medical commodities. Scaling-up risk communication activities on the pandemic and maintaining the provision of essential health services during the outbreak is critical to reducing morbidity and mortality due to COVID-19 and other diseases. The MOHP needs to improve efficiency in the allocation and use of available resources by: (i) re-prioritizing government spending as highlighted above, and (ii) identifying and addressing root causes of absenteeism among health workers. This could lead to annual savings of US$15 million which is equivalent to 8 percent of the total public expenditure on health. The government could consider developing and implementing a comprehensive health financing strategy to guide resource mobilization, pooling, allocation, and purchasing of health services. The strategy needs to encompass viable strategies for promoting financial sustainability, efficiency, and health system resilience. This is very important because the likelihood of increasing domestic and external funding is very low given the already high level of government and donor spending in the health sector, as well as the reduced revenue generation capacity worldwide. 28 To increase its effectiveness, donor funding needs to be aligned to government systems at both district and national levels. Aligning donor funding to the government system is critical to improving the overall allocation of funds, governance, and accountability in the health sector. Immediate actions include: (i) developing a system for routine mapping and tracking of external funds at both central and district levels, (ii) aligning donor funding to the order of priority of the disease burden, and (iii) increasing predictability of donor funding through the use of joint budgeting, disbursement, financial management, procurement, and reporting mechanisms. The government needs to strengthen health planning and budgeting, and the PFM system. This could be achieved by: (i) comprehensive training and mentorship of district authorities and service providers on health services planning and budgeting, (ii) improving communication and dialogue on planning and budgeting at district level, (iii) increasing flexibility on budget execution at government health facilities similar to the flexibility at CHAM health facilities, (iv) ring-fencing health budgets at district level to prevent inter-governmental transfers, and (v) integrating accounting systems at the district and central government levels to improve financial reporting, transparency and accountability. To achieve its efficiency and equity objectives, the government needs to fully apply the current (2019) district resources allocation formula to both government and donor resources. Furthermore, considering that this formula only focuses on the allocation of financial resources for drugs and operational grants in the public sector at district level, the MOHP also needs to look closely at the funding and distribution of human resources, infrastructure, and equipment. Focusing on the resources allocation formula alone will not lead to the desired improvements in efficiency and equity. There is need to improve purchasing and value-for-money in the health sector. Currently, the health sector in Malawi is characterized by high expenditure on personnel emoluments, critical shortage of clinical health workers, and low utilization of existing health workers. The government could address this problem by: (i) distributing the available workforce optimally across all districts, and (ii) increasing the productivity of existing health workers by introducing PBF schemes. By using PBF, financing to health facilities could be linked to outputs rather than inputs. 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