1. Policy Framework for the Introduction of Budget Norms for Health Sector
Budget at the Sub-National Level and for Revision of the Expenditure
Assignment in the Lao PDR: A Concept Note
Jean-Marc Lepain
Intergovernmental Fiscal Advisor
Public Finance Specialist
March 1st, 2010
Based on the new Budget Law approved by the National Assembly in December 2006, and on the
Prime Minister’s Implementation Decree of April 2008, the Ministry of Finance is planning to change
the budget formulation procedure by introducing budget norms. The objective of the present
Concept Note is:
(a) To define the general policy framework for the introduction of sector budget norms, including its
relation to the more global objectives of the Budget Law such as promulgation of principles for better
efficiency and transparency and introduction of a General Purpose Grant to finance all provincial
recurring expenditures;
(b) To identify issues associated with the health sector expenditure assignments such as vertical and
horizontal responsibilities for service delivery, service financing, management (planning, budgeting,
budget execution, project implementation management control and reporting) and issuance of
regulation;
(c) To define the general principles for the architecture of sector budget norm formulae in relation to
provinces, districts and the health facilities associated to these different levels of service delivery;
(d) To present the best options for the selection of indicators, cost units and weighting ratios to be
used in the design of the sector budget norms formulae;
(e) To identify data collection requirements for the regular updating of the budget norm formulae
and their application to budget formulation at the sub-national level;
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2. 1. Background
1.1. Legal Framework
The new Budget Law considers the implementation of budget allocation norms essential as a basis
for recommending targets for the budget allocation to each provinces and each sector within the
framework of the consolidated state budget and as a key component of a formula based system of
intergovernmental transfers. The Prime Minister’s Implementation Decree (No 25/PM 208) provides
further guidance and gives to the Ministry of Finance full authority for developing (a)
intergovernmental transfers mechanisms through general and earmarked grants and (b) budget
norms for allocation of recurrent and investment expenditures in close cooperation with sector
ministries, the Ministry of Planning and Investment and PACSA.
Article 3 of the Revised Budget Law defines budget norms as “recommended targets in determining
allocations to sectors and localities based on characteristics, standard of works and specifics of each
sector and locality” and Article 6 stipulates that “Budget allocations to sectors and localities shall be
based on the budget allocation norms”.
The Prime Minister’s Implementation Decree No 25/PM dated 14-02-2008 provides more details.
Article 11 assigns the responsibility of preparing budget norms to the Ministry of Finance and
implementation will be conducted through another Prime Minister’s Decree.
Article 19 of the Prime Minister’s Decree distinguishes between budget norms for recurrent
expenditures and budget norms for investments.
Article 20 defines the two types of grants on which the Intergovernmental Transfer System will be
based. A “General Purpose Grant” will be established for the financing of provincial recurrent
expenditure. “Earmarked Grants” will be allocated for “the implementation of programs and
investment projects assigned in addition by the Government” and for “resolution of emergencies and
urgent issues relating to natural disasters, defense, security, and epidemics not included in the
localities’ annual budget”. It is probable that the scope of earmarked grants will need to be
broadened to cover needs of some provinces in excess of what they would received from a strict
application of sector budget norms and aggregated budget norms.
Article 23 mentions that a new revenue and expenditure assignment between provinces, districts
and cities will be prepared by the Ministry of Finance. The article mentions specifically “(the) sharing
of responsibilities for investments and development of general education public schools, more
specifically of kindergartens, primary and lower secondary schools”. This article provides the legal
basis for modifying, if necessary, the expenditure assignment and supervisory duties between District
and Provincial Education Offices, and for introducing school block grants.
Within the framework of the Budget Law, a new Prime Minister Decree will be issued for the
introduction of budget norms. It is assumed that a new decree will cover budget norm
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3. implementation for the Education sector and the Health sector. The decree will (a) modify some of
the technical provisions of the former decree if necessary, (b) provide budget norm formulae at the
disaggregate level for the two sectors and (c) reflect policy principles that will be established in more
detail by the policy framework for budget norms and intergovernmental transfers and (d) clarify the
expenditure assignment and modify if necessary responsibilities for planning, budgeting, managing
and reporting the utilisation of funds allocated to each sector at the sub-national level.
In a second stage, the Ministry of Finance will (a) extend the budget norm system to other sectors
and (b) prepare aggregated budget norms that will become part of the system of intergovernmental
transfers.
1.2. Sector Profile Summary
The health indicators of the Lao PDR have been improving steadily over the past three decades but
remain well below international standards. Life expectancy has risen from 51 years in 1995 to 61 in
2005 (Census 2005) and infant and mother mortality has dropped significantly while remaining still
very high compare with more advanced countries. There has also been significant progress in the
control of malaria and tuberculosis. The country has been less successful with its immunization
programmes while improvement in access to clean water and sanitation remains slow. Access to
curative medicine for the poor remains a concern and health facilities tend to provide services to the
better-off group of the population involving significant geographic disparities.
The lack of systematic data collection and the weakness of the reporting system between provinces
and MOH is a serious obstacle to the development of more effective policies. Financial Management
Systems in the health sector remain weak and do not ensure transparent execution and effective
monitoring of public spending.
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4. Main Statistics
Central hospitals 4
Curative centres 3
Regional hospitals 4
Provincial hospitals 12
District hospitals 127
Health centres 793
Village drug kits 5561
Private clinics 254
General Practitioners 4300
Specialized doctors 2000
Post-graduate health workers 600
Nurses and paramedics 4900
(Source: MPI, Statistics Year Book 2008)
1.3. Trends in Health Sector Financing
Lao PDR’s public and private health spending is low compare with that of other Asian countries.
The total recurrent health budget represents an allocation of $10.31 per capita. Although this
amount is an improvement compared to the $8.70 of 2002 the health budget has fallen from 2% of
GDP in 2002 to 1% and the government share is less than half of the amount with $4.71 per capita.
This reflects the fact that households are shouldering an increasing share of health expenditure. In
2003, WHO estimated that 60% of national health expenditure consisted of household expenditure,
30% consisted of donor funding and 10% consisted of domestically financed government
expenditure. Although today new data is not available, there is no reason to believe that the trend
has improved. The health budget is struggling to keep pace with inflation and a population growth of
2.4% per year, while donor assistance grows at a rate well below the GDP. Without revising its
current priorities, the Government, in order to avoid a funding gap for staff and salaries had no
choice than to limit the recruitment of new staff and to decrease the share of non-wage expenditure
in the recurrent budget.
The health budget has experienced a negative trend from 2004 to FY2007/09 going from 4.1% of the
total budget to 3.8%. This has been mostly due to the fact that donor assistance while still remaining
very high is not growing at the same pace as the GDP and government revenues. In practice the
Government share in the health budget has grown from 0.33% of GDP to 0.40%. FY 2008/09 saw a
major surge in the health budget, due largely to an important increase in donor assistance (+154%), a
major contrast from the following year (-34%). The health budget has risen from 3.8% of total budget
to 6.3% and from 0.8% of GDP to 1.25%. However, the Government share of the health budget has
remained stable at 0.40% of GDP.
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5. Based on FY 2008/09 figures, recurrent expenditures represent only 30% of the health budget.
However 84% of the investment budget is financed by donors and an important portion of these
expenditures cover recurrent routine expenditures. Funds allocated to the provinces represent only
33.3% of the Health Budget, but again we can assume that a significant part of the centrally managed
investment budget covers provincial recurring expenditures.
In FY2009/10, Nam Theun 2 revenue provides 1.2 M USD representing 2% of the health budget.
Because of a significant decrease in donor assistance (-16.4 M USD) the health budget dropped to
5% of the total budget and to 1% of GDP, but the government share raise from 0.40% of GDP to
0.46%.
Health Budget Trends
2005/06 2006/07 2007/08 2008/09 2009/10
(actual)
Health Budget/total Budget 4.06% 3.71% 3.85% 6.33% 5.06%
Health Budget/GDP 0.68% 0.58% 0.79% 1.25% 1.00%
Recurrent Budget/Health Budget 42.53% 47.26% 44.20% 28.17% 38.30%
Government Share/Health Budget 47.93% 54.27% 50.20% 31.91% 45.75%
Health Government Share/GDP 0.33% 0.31% 0.40% 0.40% 0.46%
It is clear that the current level of funding is insufficient for reaching the objectives of the Millennium
Development Goals. However, taking advantage of the preparation of the 6th Five Year Development
Plan, it is important to develop stronger macro-fiscal objectives linked to human development
objectives.
1.4. Horizontal imbalance
There is a very high horizontal imbalance in the health sector compared to other sectors. While for
the general provincial budget the imbalance indicator is of 2.8 for in FY 2008/09 (Xekong receive 2.8
times more per capita than Vientiane Capital), the imbalance indicator in the health sector is 4.9
(Khamouane receives 4.9 times more per capita than Champasak). Six provinces, representing 52.5%
of the total population receive less than the national average per capita, indicating that provinces
with large population tend to allocate less to their health budget.
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6. There is no correlation between the health allocation per capita and the poverty index. Among the
group of six provinces that receive less than the national average, two are among the richest
(Vientiane Province and Champasak with a respective poverty index of 1.17 and 1.18), while the
other four are among the poorest (Saravanh has a poverty index of 1.54 and Houaphan of 1.52)
As user fees represent an important source of funding for hospitals, the poverty index appears as a
good indicator of their auto-financing capacity. For that reason, a total equalization of budget
allocation does not appear desirable, but a budget allocation better aligned with poverty will
represent a considerable improvement.
2. General Policy Framework for Budget Norms and Intergovernmental Transfers
The development of budget norms for the Health sector has to be put in the perspective of “The
Policy Framework for the Implementation of a Budget Norm System and a System of Unconditional
and Conditional Intergovernmental Transfers” developed by the Ministry of Finance for guiding the
development of sector norms.
The objectives of the budget norm system are defined as follows:
(1) Ensure that the rational distribution of fiscal resources across sub-national jurisdictions is
done in a transparent equitable manner;
(2) Ensure that fiscal resources allocated to sub-national jurisdictions (provinces and
districts) are administered in line with the Government development objectives.
(3) Ensure that all provinces and districts receive sufficient funding to deliver public services
with equal standards according to the mission given to them by the central Government and
in a manner that takes into account the characteristics of the population to be served and
the cost of service delivery in each geographic area;
(4) Improve financial management at the local level, including planning, budget formulation,
budget execution and reporting;
When applied to the health sector these principles mean:
 Correcting existing vertical imbalance will require the introduction of a sector ceiling that will
apply to both the central government and the provinces;
 Existing imbalance in fund allocation between provinces must be corrected on the basis of
existing health facilities and not on the basis of population;
 Equity of fund allocation between districts must be ensured;
 Mechanism for a better alignment of sub-national planning and budgeting with national
priorities and policies must be put in place;
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7.  More unified types of services must be provided across provinces with a list of services that
should be delivered in all provinces and all districts;
 Other aspects of the expenditure assignment must be clarified;
 Missions of health facilities must be aligned with the fiscal capacity of the Government;
 The Government must ensure that sufficient funding is channelled to local health facilities for
them to accomplish their mission within the constraints of the fiscal capacity of the provinces
and of the central Government.
 A clear policy regarding user fees and out of pocket expenditures must be put in place with
clear identification of expenditures that must be totally covered by the budget and
expenditures that must be covered partially or totally by technical revenues, with the
objective of reducing out of pocket expenditures for the poorest segment of the population.
The system will use three types of norms:
(a) Sector budget norm(s) used for the calculation of each sector budget for each province;
(b) Economic norms that provinces will use for allocating funds by economic categories to
the various types of health facilities;
(c) Economic norms that will apply to line-ministries at the central level and that will not be
part of the Intergovernmental Transfer System.
The objective is to develop a transfer system that will be based on the following components:
(a) One single unconditional transfer covering the total recurrent budget (General Purpose
Grant).
(b) A number of conditional grants to cover additional recurrent expenditure for a limited
number of provinces such as:
(i) Provinces having sectors with structural expenditure needs above the level of funding
provided by the unconditional grant;
(ii) Provinces facing temporary revenue shortfall;
(iii) Provinces having unexpected expenditure needs due, for example, to natural
calamities
(c) Conditional grants for financing large investments or specific programmes managed vertically
but implemented at the provincial level.
The calculation of the General Purpose Grant will be based on an aggregated norm formula that will
reflect the different sector components of the grant. The total amount of the General Grant will not
be less than the aggregated amount of sector budgets based on budget norms.
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8. The general purpose grant will be either the result of the aggregation of all sectoral budget norm
formulae or a more aggregated formula that will not necessarily reflect the different sub-formulae.
3. Scope of budget norms
In a first stage the introduction of budget norms will cover only non-wage expenditures for MOH
central budget as well as health sector provincial budgets. However, a model will be developed in
parallel to prepare the next stage combining both wage and non-wage with the objective of
preparing comparative costing and identifying potential issues.
In practice, formulae that aggregate wage and non-wage are very similar in structure with formulae
for non-wage only. The difference lies in the level of financing associated with the cost units of the
formula such as the allocation per capita, per doctor or per medical case. Such formulae are usually
neutral on the level of staffing but also require a flexible employment policy driven by a fiscal
envelope for salary and not by the number of civil servant. Developing aggregated formulae in
parallel with non-wage formulae will tell us if the theory is verified in Lao PDR. It will give us a new
fiscal model that will tell us if such formula can be implemented without revising hospital staffing and
where the staffing gaps are.
Non-wage expenditures are defined as all line-items of chapter 12 of the budget nomenclature and
line-items of chapter 16. A more detailed review of hospitals’ budget will be necessary to see if there
is any need to include line-items from section 13.
4. Sector ceilings
The development of budget norms must start from the calculation of an earmarked fiscal envelopes.
Determining the size of the fiscal envelope available for non-wage budget norms and for aggregated
norms requires sector ceilings which are normally based on the national Medium Term Fiscal
Framework (MTFF). In the absence of a formal MTFF, sector ceilings can be determined by
percentage of GDP and percentage of the total national budget. However, MOF’s Fiscal Policy
Department is already engaged in the process of developing a MTFF and we can expect that it will
become operational by the time budget norms are implemented.
The introduction of sector ceilings in Lao PDR is a difficult issue because of the changes it requires in
current practices of budget formulation and the contradiction between provincial autonomy and the
fiscal discipline required for the implementation of national policies.
The recurrent budget is split into two fiscal envelopes: one for line-ministries and one for provinces.
Provinces get a fiscal envelope that is disaggregated by economic categories. Then provinces allocate
the envelope of each category to sectors. As a consequence it is not before February, the fifth month
of the current fiscal year, that MOF gets to know the total forecasted expenditure by sector. These
constraints imply that sector ceilings needs to be disaggregated into two sub-ceilings, one for the
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9. Health Ministry at the central level and one for the province. As the provinces, under the existing
budget law, are free in their allocation of funds to the sectors, and as budget norms are purely
indicative, there is no mechanism that can ensure that the total of provincial allocations to the health
sector will fit within the sector ceiling. As a consequence the health sector sub-ceiling for central
spending will be a binding ceiling while the sub-ceiling for provinces will be an indicative ceiling. This
approach weakens considerably the concept of sector ceiling as instruments of fiscal discipline and it
means that there is no mechanism to align provincial spending with national priorities.
In that context, budget norms will become the most important instrument of fiscal discipline and the
Government’s meeting or not meeting its targets will depend on how effective the fiscal discipline is
at the provincial level.
Compared to the Ministry of Education, the Ministry of Health is lagging behind in the development
of its planning and budgeting tools. There is no sector macro-model comparable to the Education
Sector Development Framework and the process of developing a MTEF (Medium Term Expenditure
Framework) based on provincial expenditure need assessment has not started yet. To understand
the role that budget norms will play in the future it is necessary to look at how the different elements
of the planning and budgeting system are linked together.
The sector MTEF is an instrument to assess expenditure needs. It must be developed in a bottom-up
approach based on a three year sector plan developed by each province on the basis of the national
sector development framework under the responsibility of MOH’s planning department. A Provincial
Multi-Year Plan will be developed using either real cost units, or indicative cost units provided by
MOH. Provincial multi-year plan will be revised every year and consolidated into the national MTEF
with the appropriate adjustment to fit the national ceiling provided by MOF. Once developed, the
MTEF will become the natural tool for revising budget norm formulae as components of the budget
norm formula will result from the aggregation of the cost units used in the MTEF.
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10. For the sake of budget norm preparation, in the absence of a MTFF, MOF’s Fiscal Department will
need to project sector ceilings starting from FY 2010/11 as the reference year, up to FY 2013/14.
These sectors ceilings will be entered in the macro-fiscal model that will be used for testing and
selecting budget norm formulae. The ceilings at this stage are a purely indicative and should not
represent a commitment from MOF.
Based on sector ceilings, MOF will recalculate each year budget norms using its macro-fiscal model.
The formula structure and the various ratios will remain unchanged. Only the fix amount per capita
or per staff will be adjusted.
MTFF Fiscal Planning Process
Sector Ceiling Provincial Ceilings
MTEF Budget Norms Provincial Budget
Sector Provincial Plan Cost Units
5. Staffing
The number of doctors and nurses has been identified as the main cost driver for the health sector
and we expect staffing numbers to be an important component of the different budget norm
formulae. The number of doctors and their specialisation has a direct impact on the type of service
provided, the number of patients treated and the costs associated with the treatment.
Medical staff appears to be relatively rationally distributed across provinces according to population
size. Horizontal imbalance in staff allocation exists but is mostly driven by the existence or non-
existence of medical facilities and their type. However, even when health facilities exist at the
district level they have a chronicle shortage of qualified staff, especially doctors, as it is difficult to
convince doctors and qualified nurses to work in districts. Provinces tend to concentrate qualified
staff in the provincial hospitals and allocate limited resources to the district level. However,
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11. provinces that allocate more health workers to the district level have better health indicators. There
is a slight bias in staff allocation in favour of smaller provinces which tend to have more medical staff
per inhabitant. It might be an indication that different norms might apply to provinces with different
population size.
The number of health workers in Lao PDR is relatively high compared with neighbouring countries or
countries with a similar level of economic development. The real problem is the uneven distribution
of staff among the different types of health facilities and the shortage of non medical staff. Most of
the sector management functions are staffed with doctors and qualified health workers either at the
Ministry of Health or in Health Provincial Offices and hospitals. Most of the planning, budget and
reporting functions are performed by medical staff, reducing significantly the number of doctors and
nurses available for providing health services. There is also a notable shortage of doctors in some
medical specialities and the ratio of nurse to doctor tends to be very high, either pointing at some
inefficiency as is the case for central hospitals or to the fact that there is a shortage of doctors in
district-level facilities.
In practice, because most districts and some provinces face difficulty in recruiting high-level and mid-
level health professionals, they fill vacancies with lower level staff, with the result that district health
facilities in aggregate have excessive numbers of low level staff, and provincial facilities have
excessive numbers of general practitioners and insufficient numbers of specialist doctors and also
some categories of mid-level health workers.
District-level facilities account for the majority of health workers. However the bulk of the staff at the
district level is mid- and low-level (88%). Doctors represent only 6% of district level staff. Health
Centres are mostly served by low- and mid-level staff, respectively 81% and 18%. (Source: WHO,
Human Resource for Health, June 2007).
In the first stage of budget norm implementation, budget norm will apply only to non-wage recurrent
cost. However budget analysis has shown that there is a very strong correlation between non-wage
expenditures and staffing. In a second stage, budget norms will apply at an aggregated level and will
cover wage and non-wage expenditures. It is expected that an aggregated formula will be neutral in
terms of volume of salaries during the first years because the formula should be designed in a way
that will guarantee the present fiscal envelope for salaries.
MOH has developed norms for the number and category of health care workers which should be
employed in each type of health facility at the provincial and district levels (though norms and
standards for regional hospitals are still under development). However these norms have been
prepared without consideration for the fiscal capacity of the Government and of the provinces and
for that reason cannot be applied. The MOH has a five year plan for progressively filling the gaps
between actual staffing and the standards set by these norms, taking account of natural attrition
rates but this plan is not cost allocated nor prioritized and cannot replace a full scale cost allocated
and prioritized sector development plan
Knowing that the misallocation of staff is one of the major problems of the health sector, this
approach has two consequences for budget norms:
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12. 1) The number of doctors is not a sufficient indicator of financing needs. It might be necessary
to distinguish between general practitioner and specialized doctors. It might also be
necessary to include in the formula other staff. Considering that 14 position types have been
identified and considering that each position type requires different levels of qualification; it
is not possible at this stage to define the level of disaggregation required by the budget norm
formula. However our recommendation is to keep it as simple as possible.
2) It is recommended that before introducing aggregated budget formulae covering wage and
non-wage, to identify staff allocation inefficiency and to distinguish between structural
inefficiencies (shortage of doctors in some medical specialities, unwillingness of qualified
staff to work in districts) and administrative inefficiency that can be corrected.
3) The introduction of budget norms in the health sector should be conducive to a revision of
the staffing norms prepared by MOH to align them with the budgetary capacity of the
provinces. Different types of staffing norms can be considered for provinces with different
population size or different size of hospitals (based on the number of patients treated per
day, for example).
6. Capital Investment and donor funded projects
In FY2009/10, investments represent 69.8% of the sector budget with 81% of the fiscal envelope
provided by foreign assistance. In practice, there is confusion between real physical investments and
donor funded projects which often finance the routine recurrent expenditures (such as vaccines,
drugs, disease control programmes, trainings, subsidies for treating poor population, etc.)
Additionaly, Nam Theun 2 revenues are allocated via the investment budget process (around USD 1.2
M this year) and also finance a mix of capital expenditures, human capital development and health
expenditures for the poor, which for the most part are recurrent.
Additionally some donors finance directly health institutions and their contribution appear neither in
the national budget nor in the provincial budget.
This situation has several consequences:
 Neither MOH, nor MOF, nor MPI know the real level of investment in the health sector either
at the national level or at the provincial level.
 It is not possible to know the share of recurring expenditure in the health budget.
 It is theoretically possible to know to which provinces donor funding flows, but in practice
this is never done because reporting is on a per project basis and there is no consolidation of
data.
 Donor money might be spread unevenly. At the moment, we cannot tell if donor assistance
increased or decreased horizontal imbalance. If we look at the provincial budget, only nine
provinces beneficiate from donor funded project. But it is only part of the reality because the
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13. most important part of donor assistance is channelled through projects implemented at the
provincial level but managed centrally.
 There is no legal definition of investment and without an inventory of fix assets it is
impossible to access correctly the level of funding required for maintenance.
Recommendations:
1) MPI budget should also be disaggregated by line-item or by economic categories. The most
obvious line items are: (i) physical infrastructures, (ii) medical equipments, (iii) IT equipments
and software, (iv) recurrent routine expenditures (v) training and (vi) social transfers.
2) Cost of centrally managed programmes should be reflected in provincial budget, or more
likely in health institution budgets.
3) Investment in fix asset should be limited to the maintenance capacity of the province, or in
the case of medical equipment, to their replacement capacity based on the life expectancy of
the asset.
7. Non-wage recurrent expenditures
The State Budget allocation system treats non-wage recurrent costs as a residual after salary,
investment and other non-discretionary spending are deducted from the macro budget ceiling. The
historical trends point toward a reduction of non-wage recurrent expenditures in favour of salary and
investment. As a consequence it is not possible to develop policies based on improvement in service
delivery. This does not take into account that health services have high non-wage cost for service
delivery which cannot be set up independently by the type of service provided.
The consequence of this budget formulation process is a drastic reduction in the quality of services,
lack of maintenance of existing equipments and infrastructures and less effort to reach remote
population. To conciliate the shortage of funds for financing non-wage expenditure, hospitals have
developed policies to increase revenues from user fees and profit generated by the drug revolving
fund. MOH has assigned a significant share of donor assistance to population outreach and routine
expenditure of priority programmes, such as the immunisation programmes which normally should
be fully financed by the Government. The consequence is that programmes more fundamental in
reaching the Government’s objectives are also the more dependent on external financing.
The introduction of non-wage budget norm can partially remedy this situation, but two types of
clarification are required:
 Expenditures that must be financed 100% from budget funds must be distinguished from
those that require a mix of budget funds and user fees.
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14.  Activities that must be funded by the Government must be distinguished from those that can
be funded by donors.
The recommendation is that basic infrastructure maintenance, utilities and transport should be
considered as recurrent expenditure that should be financed 100% by government funding and as
such covered by budget norms.
8. Revision of the expenditure assignment
There is a consensus that budget norms must be implemented on the basis of the existing de
facto provincial expenditure assignment. For that reason it was necessary to document
existing responsibilities for expenditure assignment at the central, provincial and district
levels as well as identifying existing and potential mismatches that can become a source of
difficulties. Clarification of the expenditure assignment is the first and fundamental step in
the design of any system of intergovernmental finance. As a consequence, this concept note
does not focus on broad structural issues such as the devolution of authority to the
provinces but rather on small technical reforms such as better design of programmes, new
accounting rules for hospitals, improved budget classification for investment, etc. These
technical reforms do not require any change in the existing legislation and can be done
incrementally.
There is a risk that the introduction of budget norm might “freeze” the existing mismatch in
the existing assignment because budget norms will be based on the existing provincial
budget which does not reflect the totality of provincial expenditures. However this risk will
not become significant until a full-fledge system of intergovernmental transfer system is put
in place. It will allow between three to five years revising more deeply the expenditure
assignment.
The expenditure assignment can be broken down in four components or dimensions: (1)
responsibility for delivering services, (2) responsibility for administering the service, (3)
responsibility for financing a service and (4) responsibility for setting standards, regulations
or policies guiding the provision of services.
Based on the review of the expenditure assignment framework conducted in February 2010
with the assistance of a World Bank expert, a number of recommendations have been
formulated for clarifying some aspects of the existing assignment of responsibilities in the
four dimensions mentioned above which might have implication for budget norms. It is
relevant for budget norm development to identify any aspects of the expenditure
assignment that might be ambiguous, in contradiction with the present Government policy
and its objectives, or the cause of misallocation of human and financial resources. In practice
the existing system is an unwieldy mix of decentralization and deconcentration of
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15. government activities, with donor financed projects managed in a deconcentrated manner
and health facilities managed in a decentralized manner and the same contradiction found in
the planning and budgeting process.
8.1. Lack of a standardized programme structure
The introduction of budget norms and formula based financing in a field as complex as public health
requires, if not full-fledge programme budgeting, at best, a minimum element of programming in
order to know which programme falls under the responsibility of the province and which programme
falls under the responsibility of the Ministry of Health at the central level. Only then, programmes
can be linked to specific budgetary envelopes.
The Ministry of Health used two types of programmes which are not easy to distinguish and which
have significant overlap. There are six programmes itemized below that we can call organizational
programmes because they have a linkage to the organization structure and to some extent to
budgeting, and eleven priority programmes that seem to be mostly used for policy planning.
(1) Preventive Medicine and Health Promotion
(2) Control of Food and Drug Quality and Procurement
(3) Health Research
(4) Planning and Management
(5) Curative Medicine
(6) Human Resource Development
According to existing plans, these six organizational programmes are those that will be used for the
preparation of the Medium Term Expenditure Framework (MTEF)
The eleven priority programmes are:
(1) Planning and Management
(2) Human Resource Development
(3) Health Finance
(4) Health Education
(5) Infectious Disease control
(6) Primary Health Care
(7) Maternal and Child Health
(8) Nutrition
(9) Hospital Services
(10) Medical Laboratory Technology
(11) Essential Drugs
Thirty one sub-programmes are managed under the priority programmes.
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16. The overlap between the two types of programmes is obvious and will create confusion in the
planning and budgeting process. The difficulty stems from the complexity to map programmes
according to organizational structures, especially at the hospital level where it becomes difficult to
identify who is responsible for what due to the mismatch between the two types of structures.
Programmes could be organized as 1) vertical programmes that do not deliver service directly to the
public but will link the functions such as Policy Planning, Management, Human Resources
Development, etc. performed at the central of MOH to the provincial level. and 2) horizontal
programmes in charge of delivery of services to the public and which bear clear responsibility
assignment in hospitals and health centres. Horizontal programmes could also better reflect the
traditional organization of public health services which differentiate between primary health care,
secondary health care (first level referral hospitals), and tertiary health care.
We can formulate three recommendations:
1) MOH should use the opportunity of the preparation of the 6th five year plan to merge the
two types of programmes and to design a more coherent structure in which clear
responsibility assignment amongst the health facility organizational structure, programmes
and health services to be delivered are outlined.
2) Programmes and sub-programmes that are significantly dependant on donor funding should
be managed centrally and excluded from the scope of budget norms;
3) Programmes that are managed centrally but delivered at the provincial level should be
reflected in the provincial budget, probably through conditional grants, in order to measure
their impact on horizontal and vertical imbalance.
8.2. Clarification in the responsibility for health service delivery
Complexity in the horizontal division of responsibilities for health services between districts,
provinces and central level needs to be understood to determine budget norms for health. The
allocation of responsibilities across levels of administration does not align with the distinction
between primary health care, secondary health care (also called “first level referral hospital”) and
tertiary health care (which provides a second level of referral for complex cases/interventions).
There are good reasons for this in terms of the most efficient configuration and use of the network of
health care facilities. Health centres and District Hospitals Type B provide primary care. But hospital
outpatient departments for all levels of hospitals also provide primary care services for the nearby
community within in their district. District hospitals Type A, Provincial Hospitals and most Central
Hospitals all provide secondary care - first level referral services – for the populations in the districts
closest to them. Provincial hospitals provide some additional province-wide services not provided by
District Hospitals Type A. This complicates the definition and costing of the health budget
responsibilities of districts and provinces.
16

17.  Provincial hospitals are also district hospitals in their own district which means that the cost
of providing primary health care in that district is shouldered by the provincial budget, not
the district budget.
 Four provincial hospitals (Champasak, Savannakhet, Luang Prabang and Oudomxai) will be
upgraded / expanded to become regional hospitals, each providing a wider range of
specialist services for a group of three to five provinces. There will not be separate regional
and provincial hospitals in these provinces. Once fully implemented, these hospitals are
likely to have more staff relative to population size than other provincial hospitals. Cost per
hospitalization and cost per staff are likely to be higher in these hospitals because of the
greater intensity of treatment of more complex cases. However, potential for earning user
fees is also likely to increase when these hospitals are upgraded.
 Selected districts in each province have District hospitals Type A, which function as inter-
district hospitals that provide surgical services for 3 - 4 adjacent districts, while most of Type
B hospitals are little more than heath centres with one or two doctors. Type A district
hospitals have significantly higher staffing and higher costs per hospitalization or per staff
than Type B district hospitals (which provide primary care only).
 Although health centres are established as secondary budget units, they operate under the
supervision of district hospitals that manage staff, provide drugs and medical equipments,
collect proceeds of drug sales and manage through them a number of health services.
Respective responsibility of the District Hospital and of the District Health Office in relation to
health centre is relatively unclear. There might be some advantages in considering health
centres as an extension of district hospitals and providing more management and financial
integration.
 A number of districts do not have district hospitals, either because the population is too
small or because means have not been given the district to create one.
These considerations bring an important number of recommendations:
1) The complete equalization of health expenditure, either in total or by main categories is not
desirable as long as provinces do not have the same type of health infrastructures and the
same coverage of the population.
2) In the case of Regional Hospital, it is not clear yet if the additional funding required should be
channelled to the provincial budget using budget norms and transfer formula. A conditional
grant might be a better instrument.
17

18. 3) It is not recommended to disaggregate the provincial health budget by district. The existence
and the type of heath facilities existing in one district is what should be the driver.
8.3. Integration of vertical programmes and project in health sector budgets
As previously mentioned in section 8.1, there is a need to clarify and consolidate definitions of the
vertical programs in order to clarify their source of financing. Currently each project is treated as a
separate vertical program. In practice, a precise definition of project should be introduced and
projects should be grouped under programmes and sub-programmes.
Many countries with decentralized health systems use some central financing and coordination
mechanism for managing – particularly programmes that require nationwide coverage, such as
certain disease control programs, and nationwide logistics management for distribution of vaccines,
drugs and commodities. In Lao, the major programs with vertical elements (in approximate order of
“verticality” are: EPI childhood immunization program, tuberculosis control, malaria and dengue
control, HIV/AIDS, mother and child health, and nutrition. In all of these programs, some healthcare
workers in HCs and DHOs are involved in the delivery of the program, while PHOs play a substantial
role in coordination, management and monitoring of the program.
Decisions will be needed after donor support ends to clarify MOH’s policy on which input should
remain centrally financed and managed (e.g. vaccines), which input should remain PHO-financed and
managed (e.g. outreach and supervision and monitoring). This is not a major issue of concern at this
stage. It is reasonably straightforward to identify the major centrally financed inputs to the larger
vertical programs and exclude them from costing of provincial and district health services. Some
available costing of district health services already exclude these (e.g. the BTC–LUX costing of district
health services), but there may be a need to update the list of centrally financed inputs if large
amounts of central donor support are introduced for MNCH and nutrition programs.
In terms of budget norms the main issue is the capacity of MOH and MOF to monitor the allocation
of vertically managed programmes to the province. Ideally this should be done through centrally
managed grants – as apparently envisaged by the new budget law. In the case where a grant would
be implemented it would be necessary to decide who of MOF or MOH will be responsible to
allocating the grants to the province. It also proposes the introduction in the current budget process
of a certain element of programme budgeting.
8.4. Planning and budgeting
One of the weaknesses of the planning process in the Lao PDR is that there is no strict distinction
between policy planning, which should be the responsibility of MOH at the central level, and
implementation planning, which should be the responsibility of the provinces. Policy planning follows
the deconcentration model while implementation planning follows the decentralization model
resulting in conflicting outcomes and difficulties in reporting and data collection.
Planning at the provincial level appears disconnected from planning at the central level due to the
absence of common tools and to the large autonomy of provinces. In theory, provinces must be
guided for planning and budget preparation by the Five Year Plan and policy; in practice because
18

19. there is no quantitative objectives assigned to provinces which leaves little incentive for provinces to
align their planning activities with national priorities.
Provincial planning is also disconnected from national budgeting and as a result provincial budget
suffer from systematic cuts that force districts to go through an additional revision phase of their
plan when budgets are announced. The provincial planning and budgeting process is probably one of
the longest in the world and in the base case scenario lasted fifteen months.
The introduction of a Sector Development Plan (on the model of the Education Sector Development
Framework) and of a MTEF could solve partially the problem. Sector Development Plan and MTEF
should be approved by the Cabinet and become instruments of national policy on which provincial
plans and budgets should be aligned.
8.5. Linkage between investment and maintenance cost
There are indications of excessive allocation of capital expenditure relative to non-wage expenditure
resulting in poorly maintained infrastructure. The fact that budget norms will be introduced for
investment offers an opportunity to link investment norms to non-wage recurring norms. The usual
practice is to allocate a fraction of this investment to recurring expenditure for maintenance. MPI is
already calculating the maintenance cost of new investments. Considering that MPI is not very
advanced in the development of investment norms, we have not considered this linkage in the
budget norm formula, however, a revision of the formula will be possible when MOF moves from
non-wage recurrent norms to aggregated norms.
8.6. Accounting and reporting
Accounting and reporting at the health facility level show a number of weaknesses which are directly
linked with the expenditure assignment framework. The sector is struggling with the fact that
provinces as such do not have any obligation to report to line-ministries and at the central level only
a fraction of hospital budget is reported, albeit, with considerable delay.
a) Absence of double entry accounting
Health facilities, as yet, do not use double entry accounting and there is no uniform system for
accounting and reporting. Several health institutions have tried to implement accounting packages
but have been struggling with technology issues as well as the fact that those packages need
customization for implementation in the health sector. MOH is developing a new policy framework
for hospital management. A software pilot project has started in Vientiane at the Child and Mother
Hospital and we expect the project to roll-out in the provinces at a later stage. Considering the
shortage of IT manpower in the provinces, this process is likely to take several years. However an IT
package cannot solve financial reporting issues in the absence of precise regulation. Considering that
19

20. hospitals not only deliver public services but have commercial activities the accounting law should
apply to them as distinct entities from the provinces or MOH.
b) Specific accounting rules are required
The introduction of accounting IT systems cannot solve all financial management issues unless
precise accounting rules are prepared for the health sector. The general chart of account should be
adapted to hospital activities and precise accounting rules should be introduced. The manner in
which the drug fund is integrated into the hospital accounting system is especially critical.
c) Drug Fund revenues, users fees and technical revenues
Hospitals prepare their budget for their own internal management purpose, but it does not seem
that these budgets are systematically discussed with provincial authorities. Most hospitals do not
report the user fees or technical revenues they collect, or they report them partially for tax purpose.
It is important that all user fees and technical revenue be fully reported.
d) Absence of mandatory financial statements
Under the present accounting law, hospitals as economic entities as well as budget users have a
theoretical duty to publish financial statements but no secondary legislation or regulation has been
put in place. Considering the nature of their activities, hospitals should have a Profit and Loss
Account and a Balance Sheet.
e) Reporting obligations
The fact that Hospitals have commercial activities that make them dependent on their own revenues
and that they can have large payable and receivable accounts, underlines the fact that hospitals are
not just budget users but also economics entities that should use the same reporting procedures as
ordinary budget users. These economic activities represent a financial risk for the Government, just
like State Owned Enterprises (SOEs). The risk that a hospital goes bankrupt cannot be excluded and in
that case the central Government, not the province, will be responsible for the bail-out. This shows
that, like SOEs, the Central Government has the responsibility to monitor the financial position of
large hospitals. It cannot be done through the usual budget control procedure, but only through a
specific reporting mechanism, probably once a year when financial statements will be published.
Specific regulation must be put in place not only to define reporting obligations of hospitals, but also
for defining the respective responsibilities of MOF and MOH in monitoring the hospital’s financial
position.
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21. 8.7. Hospitals’ legal status
Hospitals and health centres operates as secondary budget units, a status which is not well defined in
the new Budget Law and that by itself would require some clarification. However, by the fact that a
substantial part of provincial and district budget comes from users fees and technical revenues
hospitals are not ordinary budget users. In practice they operate more like subsidized State Owned
Enterprises. The current legal framework of hospital activities cannot provide a satisfactory solution
for many expenditure assignment issues linked with financial management. As in most countries,
hospitals must be granted a special legal status that will define their mission, their financial
autonomy and their reporting obligation.
8.8. Staffing
Despite the issue of structural staff misallocation which has been identified in section 5 of this
Concept Note, it does not appear that the current practice of staff management will be an obstacle
to the implementation of sectoral budget norms.
Budget norms cannot be an instrument for managing staff allocation and these two processes must
be kept separated. A general purpose grant combining wage and non-wage allocations will not offer
any mechanism for constraining salary expenditure as a share of the technical revenue. However
technical norms can warrantee that health facilities receive the minimum level of funding for
covering well-identified recurrent expenditure such as building maintenance, utilities and transport.
While user fees play an increasing role in health service financing, hospitals are moving toward a
model in closer resemblance to the private sector. As a consequence there is growing contradiction
between the financial autonomy granted to hospitals and the rigidity of the staff allocation system.
Hospitals have overcome staff allocation constraints by using user fees and proceeds from drug sales
in the hiring of contractual workers. However the consequence is an increased dependence on
unreported technical revenues which becomes an obstacle for lowering the cost of medical services
for the population. Health Centres and District Hospitals of Type B which do not have the capacity to
generate substantial technical revenues, also do not have the financial resource for recruiting
contractual staff. This situation aggravates the vertical imbalance between provincial hospitals and
district health facilities.
From an expenditure assignment point of view, a contradiction exists between the very centralized
process of staff allocation and the highly decentralized process of planning and budgeting for delivery
of public services. However, the fear that it could present an obstacle for moving from non-wage
budget norms to aggregated budget norms (wage + non wage) is highly exaggerated and is based on
the misconception that an aggregated formula should have two components: one for wage and one
for non-wage. In practice, the same formula structure can be used. It only requires an adjustment of
the cost units and maybe some of the weighting ratios.
21

22. 8.9. Lack of budget comprehensiveness of provincial budget
According to the principles of budget unity and budget comprehensiveness, all Government
expenditures should be reflected in budget formulation and budget reporting at the provincial level.
However, provincial budgets do not capture all sector expenditures made at the provincial level.
Programmes and projects financed centrally are not reflected in provincial budgets although their
delivery mechanisms are purely provincial. The investment budget of MOH in FY2009/10 represents
84% of the total central budget. The bulk of that investment budget is of course financed by donors.
We can assume that a significant part of that budget goes to the provinces and we can also assume
that a significant part is spent in the provinces on routine recurrent expenditures of so called
vertically managed programmes and projects which are delivered locally using local staff paid by the
provincial budget. Presently, there are no means to know where the money flows or how to
consolidate allocations to the different projects, province by province. In theory the implementation,
this year, of the new chart of account makes possible solving this problem. In practice it would
require a decree indentifying the programmes requiring a special procedure and providing detailed
instruction for accounting and reporting.
Recommendations:
1) The revised programme structure must be used for accounting and reporting;
2) Instructions must be issued for using location codes in an appropriate manner. It is not
known yet if general instructions are sufficient or if instruction must be given programme by
programme.
3) Programme reporting must be standardized as much as possible, knowing that different
donors have different reporting requirements. Already hospitals complain that reporting
becomes too difficult;
4) Vertically managed programme accounting and reporting should be the responsibility of the
Ministry at the central level, but in most cases data must be collected from the provincial
level.
8.10. Taxation of the drug revolving funds
Based on a Prime Minister Decree many provinces (but apparently not all) raise taxes on the drug
revolving fund. As such taxes are not mentioned in the Budget Law, it can be considered as obsolete.
In any case, a tax on the drug fund encourages hospital to raise their price schedule and does not
seem compatible with the Government’s objective of lowering the cost of medical services. Clearer
instructions must be prepared.
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23. 9. User Fee policy
From a budget norm view point, user fees are involved in two important issues: (a) there is not yet a
clear policy about “which source of finance pays for which costs” between state budget and user
payments/third party payments, (b) the poverty reduction component of the budget norm formula
must be used for reducing user fees and a system must be put in place for a better monitoring of
user fees with a clearer policy framework.
9.1. Mechanism for collecting technical revenues
Technical revenues are collected through three essential mechanisms: profit from the drug revolving
fund, user fees for medical services, and third party finance scheme.
The drug revolving fund adds to the cost of drugs at a mark-up of 25%. In theory a fixed portion of
the profit generated goes to different activities, but in practice there is a lot of flexibility. There are
serious drawbacks with this system. Hospitals are encouraged to sell more drugs than patients need.
Hospitals are becoming so dependent on the drug fund that they are trying to expend its activity by
all means as a way to avoid cash restrictions;
Fee schedules for medical decree are determined by a MOF decree in consultation with MOH and
promulgated by a Prime Minister Decree. However most of the hospitals do not follow the schedule.
Central Hospitals complain that prices are set too low for cost recovery while provincial hospitals
complain that prices are too high and not affordable by the population. Several issues require
attention:
 MOF should not get involved in determining or approving fees for medical services,
 The process for determining user fees should be flexible enough to allow a revision at least
once a year;
 Cost of services and affordability vary from province to provinces. Hospital should have a
certain flexibility in setting price schedules, but MOH is responsible for determining only the
maximum charge
Third party financing schemes (social health insurance, SHI for civil servants and formal sector, CBHI,
HEFs) aim to reimburse user fees for hospital services, on a basis that assumes some costs are
financed from budget or donor sources. (Some HEFs reimburse hospital user fees and transport and
food costs on a fee-for-service basis.) However, there is a wide range of capitation rates these
schemes pay, and a study indicates that capitation rates are below cost. The Curative Care Law
specifies items that may be covered by user fees, but is permissive. The PM-approved decree 3 on
the fee schedule does not seem to be based on a clear set of principles or objectives about what user
fees should cover. Clearly the reduction of patient out-of-pocket expenditure is linked to the
expansion of third party financing schemes and to a more realistic reimbursement of hospital costs.
23

24. 9.2. Dependence on user fees
Hospitals and health facilities have become highly dependent on user fees and technical revenues.
Survey of central hospitals shows that in some provinces, technical revenues cover 70% to 80% of
their budget. In the case of Vientiane Province’s Hospital, technical revenues cover 72% of the
budget and direct donor assistance 3%. Government salaries represent only 10% of the operating
cost. Out of the 25% of operating cost financed by Government funding, it is not possible to know
how much comes from the donor funded investment budget as the hospital budget does not make
such distinction. However, we can estimate that only 15% of the hospital budget is financed by the
domestic budget.
9.3. Need for a more comprehensive and flexible policy
The draft of the Health Finance Strategy does not make clear recommendations about the future
basis for setting user fees. It hints at a range of options without explicitly discussing them. There is
not yet a consensus within the health sector about this issue. Considering the dependence of health
facilities on user fees, there is a need to define a more comprehensive and flexible policy.
9.4. Users fees and budget norms
There is a need to reach a practical consensus on some of these questions as a basis for deciding
what expenditures and costs to include in budget norms. There may be some consensus on a need
for the budget to cover all the recurrent costs of basic mother and child health services and priority
disease prevention programs– which encompasses almost all the recurrent costs health centres and
Type B district hospitals, and a larger share of the recurrent costs of Type A District Hospitals and
province hospitals.
The capacity of health facilities to collect user fees is conditioned by the level of poverty of the
population, therefore, the design of a budget norm cannot ignore the problem of user fees. It will be
necessary to conduct a survey of health facilities in poor provinces to determine how much the
poverty level of the province impacts the hospitals’ capacity to collect user fees. When we have more
precise data, we will be able to assess the size of the poverty component in the budget norm
formula.
9.5. Consequence of the introduction of the Single Treasury Account
Under the new Treasury Law that is being drafted, technical revenues are defined as “public money”
and must be deposited into a bank account which is part of the Single Treasury Account. As could be
expected, there is considerable reluctance of hospitals to accept the principle of having their
technical revenues deposited into a Government account. They complain of poor service of the
treasury and of delays in accessing funds which are not compatible with hospitals’ mission.
24

25. However as the Treasury plans to use commercial banks as part of the Treasury Single Account
arrangement, there are ways around that problem. There is the possibility that Hospitals use their
bank account which is part of the Single Treasury Account like a normal commercial sight account
without referring to the Treasury. However it will be necessary to draft specific regulations.
We recommend that MOH prepare a policy paper on user fees and technical revenues covering all
the issues identified.
10. Architecture of the Budget Norm system for health sector provincial budgets
There is wide consensus in the Ministry of Heath as well as in the Province that a high level sector
transfer formula will only partially solve the problems faced by the health sector. The major problem
of the health sector lies in determining the minimum level of funding of health facilities such as
provincial hospitals, district hospitals (types A and B) and health centres. Based on these premises a
consensus has emerged that the health sector financing formula must be facility and district based
because it is these types of facilities, their locations, and the size of the attached population that
drives the budget needs of a district and ultimately of the province.
This new system will require four types of formulae:
-A general formula for sizing the health sector provincial envelope
-A formula for financing provincial hospitals
-Two formulae for financing district hospitals (types A and B)
-A formula equivalent to a block grant for Health Centres
25

26. BUDEGET NORM ARCHITECTURE
Provincial Health Budget (F)
Provincial Hospital Prov.
District Health Budget
(F) Admin.
District Hospital District Hospital
Type A (F) Type B (F)
H.C. (F) H.C. (F) H.C. (F) H.C. (F)
(F) = formula
a) District Heath Budget
At the district level there is no need for a formula. The size of the budget available for district is the
total provincial health budget after deduction of the provincial hospital budget and the Provincial
Health Office budget:
PHA = Provincial Health Allocation
DHB = District Health Budget
PHB = Provincial Hospital Budget
PHOB = Provincial Health Office Budget
Then: DHB = PHA – (PHB + PHOB)
b) Provincial Health Office Budget
At this stage we do not think that there is a need for a budget norm formula for the Provincial Health
Office. We think better to leave that budget to the discretion of the provincial governors (to be
discussed).
26

27. c) Provincial Hospitals and District Hospitals
It is not yet clear if Provincial Hospital and District Hospital Type A can share the same formula.
However we expect that the two formulae will be very similar
District hospitals of Type B appear to be more similar to Health Centre. Usually they have few doctors
and like Health Centres they are mainly operated by nurses.
d) Heath centres
Health centres do not work as independent entities but work under the supervision of a District
Hospital. It might be better to allocate a single budget covering the district hospital and the health
centre attached to it rather than give to health centre a block grant based on the number of staff.
Population out-reach activities appear to be mostly financed by vertical programmes and the size of
the required budget does not appear to be directly linked to the attached population.
e) Regional Hospitals
The mission of regional hospitals is not yet defined clearly enough to see how a dedicated budget
norm formula could be designed for them. The difficulty stems from the fact that regional hospitals
might not offer all the same type of services and that the percentage of patients from other
provinces susceptible of using the services is not known.
The recommendation is to apply to regional hospitals the same formula as for provincial hospitals
and to add an earmarked grant to cover the difference in cost of service delivery. The earmarked
grant will come from the central budget and should be managed either by MOH or MOF.
11. Structure of budget norms formulae
10.1. Formula for provincial allocation
The members of the budget norm team have reviewed six possible approaches for designing the
formula for provincial health allocation: (1) approach based on salaries, (2) approach based on the
number of health workers, (3) approach based on capitation and case payments, (4) approach based
on capitation, needs and costs, (5) approach based on the cost of infrastructures (such as beds) and
programmes, and (6) approach based on cost of service delivery.
In July 2009 when the first concept note was discussed, MOH had indicated its preference for a
formula based on the number of health workers, possibly with a second component to reflect either
the numbers of cases or needs and cost. The idea was to provide an incentive for doctors and nurses
to treat more patients in a more efficient manner. Further investigations have confirmed that it
seems to be the right approach, although it was decided to drop the idea of taking into consideration
27

28. the number of cases. It would be very difficult to keep track of the number of patients treated and
by whom. The conclusion is that the incentive system will have to be kept separate from the budget
norm system, at least for the time being until more efficient IT systems are put in place.
During the consultations we had with health authorities at the provincial and national levels, a
growing consensus has emerged to consider that the size of the provincial budget is driven by three
essential factors: (i) the size of the population, (ii) the number and types of health facilities in the
province territory and (iii) the population poverty level. As a consequence we think that the budget
norm formula must reflect these three components.
Out of these three components the number and type of facilities seems to be the determining factor.
No matter what the size of the population is, if there is no institution to deliver health service or only
small ones, there is no need for a large health budget.
In order to capture the budgetary needs of health facilities, the staff number, and more explicitly the
number of general practitioners and the number of specialists appear to be the best indicators. What
is not yet apparent is the number of staff categories that need to be taken into consideration by the
formula. In many health facilities there is no doctor and it is necessary to take into consideration the
number of nurses. However, in provincial hospitals and in district hospitals of type A we can consider
that nurses are attached to doctors and taking into consideration the existing number of nurses and
paramedical staff, this could encourage some inefficiency.
We recommend the following formula structure:
Total Health Provincial Allocation = (Allocation on the basis of medical staff) + (Allocation on the
basis of population) + (Adjustment for poverty level and other cost factors)
Considering the peculiarities of Vientiane Provinces where patients use a centrally managed hospital
and where the incidence of poverty is less than in other provinces, we might have to prepare a
modified formula for that province.
Each component will receive a different weighting.
If we consider (Allocation on the basis of medical staff) + (Allocation on the basis of population) as
the primary envelope, we can start with a weighting of 80% for the allocation on the basis of medical
staff and 20% for the allocation on the basis of population.
The allocation on the basis of poverty can be calculated as a percentage of the primary envelope. For
example, 5% can be allocated to the less poor provinces, 15% for the poorest provinces, and 10% for
intermediary provinces. It will be necessary to conduct a survey of how poverty impacts hospitals’
capacity to collect user fees in order to determine the correct level for the poverty adjustment ratio.
28

29. a) Allocation based on the number of medical staff
If:
(a) is the allocation per general practitioners
(b) is the allocation per specialized doctors
(c) is the allocation per nurses in district hospital type A and B
(d) is the allocation per medical staff in Health Centres (excluding doctors)
Total allocation based on the number of medical staff = (a x number of general practitioners) + (b x
number of specialized doctors) + (c x number of nurses in hospital type A and B) + (d x number of
medical staff in Health Centres)
We need to go to the fiscal modelling stage to know if four staff categories are enough. Other
hypothesises that can be tested are:
 Distinguishing between general practitioner at the province level and district level
 Allocating different amount to nurses in district hospitals type A and B
b) Allocation based on population number
The allocation on the basis of population is justified by several considerations:
 Fairness requires that the provincial allocation to be to some extent proportional to the size
of the population.
 Funding for preventive medicine is directly proportional to the size of the population
 A significant amount of the population based allocation will be used for financing Provincial
Health Offices and District Health Offices but there should be enough funding left to cover
other general activities which are not directly linked to the infrastructure of health facilities.
If (g) is the fix amount per capita, then:
Allocation on the basis of population = (g x total provincial population)
c) Allocation on the basis of poverty and other cost drivers
There has been long discussions to determine if poverty was the only cost driver or if there are other
cost drivers such as access to remote areas, presence of ethnic minorities, prevalence of certain
diseases such as malaria, TB and HIV, lack of access to clean water, etc. The general feeling is that
there is significant overlap in these indicators. People living in remote areas are generally very poor.
Often, but not always, they are members of ethnic minorities. Remote population are more
vulnerable to malaria and TB, etc.
Another reason to select poverty as a good quality need indicator is that the poverty level of a
certain area determines the capacity of heath facilities in that vicinity to collect user fees and
technical revenues.
29

30. To integrate poverty into the budget norm formula, four questions must be answered:
 What is the best indicator of poverty?
 Should poverty be measured at the provincial or district level?
 How to take into account a priority district?
 What should be the weighting of the poverty factor in the formula?
(i) Selection of the poverty indicator
There has been another discussion to determine if the Human Poverty Index (HPI) is a good indicator
of the need of the population and of the capacity of health facilities to collect user fees. First it
should be noted that the poverty index has three components: health measured by longevity,
education measured by the literacy rate, and standard of living which is a composite value sub-
indicator measured by the proportion of the population without access to clean water, health
services, and the proportion of children under the age of 5 years who are underweight. The Human
Poverty Index has a very strong health component and we do not think that other Health Indicators
would perform better, but if a good candidate can be identified, we will test it with the fiscal model
to see if it brings better results. One of the advantages of the HPI is that it is measured every five
years by MPI’s Statistics Office. The number is easily available at the provincial or district level.
(ii) Should poverty be measured at the provincial or district level?
Measuring poverty at the provincial level is the easier approach. It is true that it is an average, but
the total amount of funding available for poverty relief does not depend so much on the level of the
poverty index but on the weighting ratio used. It is easier to use different weighting than to use
different index.
We recommend using the average poverty index for the province without disaggregating by district.
Formulae for hospitals and health facilities can use the district index.
We can work on the hypothesis that the system will distinguish between three levels of poverty:
 First level: provinces with a HPI between 1.10 and 1.20
 Second Level: provinces with a HPI between 1.21 and 1.40
 Third Level: provinces with a HPI above 1.41
According to the first simulation, it is possible to use up to 5 different levels of poverty. Only micro-
fiscal simulation during formula testing can tell us how many levels are required.
30

31. Vientiane Capital might be a special case, because this is the province with the lowest poverty index,
but also because patients have access to central hospitals which are financed directly by MOH’s
budget.
(iii) How to take into account priority district?
The best way to use the poverty index is to create different levels of poverty associated with
different weightings for the poverty component in the budget norm formula. One of the poverty
levels can be associated to the priority district. However it should be used only in the transfers
between the provinces and the districts.
(iv) What should be the weighting of the poverty factor in the formula?
In theory, poverty alleviation funding should be used with two types of activities: outreach of
population in remote areas, and subsidies to reduce pocket expenditures for poor patients. There are
two ways to consider the problem. One way is to consider that we subsidize the patient, and in so
doing, the best approach is to earmark the poverty component of the formula to create a special
fund. The other way is to consider that instead of subsidizing the patient we subsidize the hospital.
Considering that there has not been sufficient time to consider the two options, and considering that
the first option is more difficult to implement, we have been working under the assumption that
poverty reduction funding will be used to subsidize health facilities and not patients.
In theory, the correct level of funding for poverty alleviation can be assessed by comparing hospitals
which have the highest capacity of collecting user fees and technical revenues against hospitals
having the lowest capacity. The other approach is to consider the fiscal capacity of the Government.
Only test with the macro-fiscal model will tell us how much could be allocated for poverty alleviation.
Once again, only the testing of different formulae will tell us what the correct level of adjustment is.
12. Budget Norms for Central Budget
MOF will also implement non-wage budget norms for the central budget of MOH. In the first year,
the non-wage expenditure norm will be calculated on the basis of historical trends as a percentage of
salaries or as a percentage of the recurrent budget.
In the second year of implementation, the Health Ministry will be disaggregated into two main
components: the budget for central ministry operations and the budget of ancillary institutions such
as the medical schools and central hospital. For each type of ancillary institution a non-wage
expenditure formula will be introduced.
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32. 13. Implementation strategy
In FY 2010/11 MOF will implement two simplified formula one for provinces and if one for central
budget. Implementation of full-fledge formulae as described in this concept note will take place in FY
2011/12.
14. Way forward
The present concept note should be reviewed and approved by MOH as soon as possible and
submitted to MOF for approval. According to the PRSO Aide Memoire, approval of MOF is expected
by the end of May.
In order to update the micro-fiscal model, MOF should (i) communicate provincial health sector
budgets for FY 2009/10, (ii) prepare sector ceiling for FY 2010/11 and develop the projected budgets
for FY 2011/12 and FY 2012/13.
MOH should collect budget samples of hospitals and health centres in several provinces representing
different levels of poverty. These budgets should include all user fees, and revenues coming from the
drug revolving fund, and should be prepared in a standard format that will be decided by the team.
Meanwhile the team will start working on the budget norm formula for the provincial health budget.
A notional fiscal envelope for wage and non-wage will be prepared and used for testing several
formulae.
Regarding the health provincial budget for non-wage expenditure, the following elements need to be
determined:
 Unit cost per capital for population based transfers
 Level of disaggregation of medical staff numbers
 Unit cost per levels of medical staff
 Weighting of the three components of the formula (staff number based component,
population based component, and poverty based component).
.
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