Financing the health Millennium Development Goals

1. Financing the health Millennium Development Goals Commonwealth Health Ministers May 2010 Dr. Cristian C. Baeza Partner Leader Global Health Systems Financing Group PROPRIETARY Any use of this material requires specific permission of McKinsey & Company

2. Our discussion today • Significant progress made for achieving the Millennium Development Goals (MDGs) • However, major challenges remain in achieving target health outcomes and in closing face a significant financing gap • Increasing and sustaining MDGs financing depend on two critical challenges • How to sustain and increase the revenue effort for DAH funding in a very challenging international macroeconomic environment? • How to substantially increase MDG funding allocation effectiveness and efficiency, among the complex DAH architecture, across all sectors contributing to health, and within countries?

3. 2 We have witnessed a significant improvement in health MDGs and access to care for populations around the world… • 1990 • 2007 Low, lower middle and upper middle income countries) • Infant mortality rate (0-1 year) • Per 1000 live births • Under-5 mortality rate • Per 1000 live births • Prevalence of tuberculosis • Per 100,000 population • Indicators of health status of the population • Low • Lower middle • Upper middle • Low • Lower middle • Upper middle • Low • Lower middle • Upper middle • Births attended by skilled health personnel1 • Percent • Neonates protected at birth against neonatal tetanus • Percent • Immunization coverage among 1-year-olds (Measles) • Percent • Indicators of access to health services • Low • Lower middle • Upper middle • Low • Lower middle • Upper middle • Low • Lower middle • Upper middle 1 Set of data from the 1990-1999 and 2000-2008 averages SOURCE: World health statistics 2009, WHO, McKinsey Health System Financing Team Analysis, World Bank income level classification

4. Financial protection has also improved significantly, demonstrated by a worldwide decrease in OOP health expenditures • 2000 • 2006 X% Percent • CAGR • Out of pocket (OOP) health expenditures as a percentage of total health expenditures (THE) by geography and income • Global OOP health expenditures as a % of THE -1.4 -1.4 -0.3 -2.6 -1.1 -0.4 -2.2 • 22.3 • 20.9 • Africa1 • Americas • South-East Asia • Europe • Eastern Mediterra- nean • Western pacific -1.6 -2.2 -0.9 -1.6 • Low income1 • Lower middle income • Upper middle income • High income • Global 1 In poor countries, the significant increase in external transfers has been the reason for the growth in health expenditures SOURCE: World health statistics 2009, WHO; McKinsey analysis

5. Eradicate extreme poverty and hunger • Under 5 mortality rate – 88% of 43 low-income countries made insufficient (51%) or no (37%) progress in reducing child mortality rate • Reduce child mortality • Maternal mortality rate – Decrease of <1% per year is well below the 5.5% annual improvement required to meet the target; 42 of 43 countries have high or very high maternal mortality ratio • Access to reproductive healthcare – Only 2% increase (to 41%) in number of births attended by skilled health personnel from decade of 1990s to the 2000s • Improve maternal • health • Access to treatment for HIV– Only 28% of 7.1 million people in low- and middle-income countries had necessary treatment for HIV by 2006 • Incidence of malaria–Little or no improvement has been seen since 2000 on use of artemisinin-based treatments among African children • Combat HIV/ AIDS, malaria, and other diseases …yet, there are major challenges remaining to reach the Health, Nutrition and Population (HNP) Millennium Development Goals • HNP-related MDGs • Recent status reports for selected HNP sub-goals • Reduce the hunger rate – Progress in reducing hunger is now being eroded by the worldwide increase in food prices • Out-of-Pocket health expenditures continues to play a significant role in impoverishment SOURCE: The Millennium Development Goals Report 2008, Reich et al (2008), High-level Taskforce on International Financing for Health Working Group 1 (2009), “Countdown to 2015” (Lancet, 2008), Malaria & Children (UNICEF 2009)

6. 7 • Development assistance for health (DAH) more than doubled between 1995 and 2007 in real terms • Net official development aid (ODA) as a percentage of Gross National Income (GNI) increased to 0.33% in 2005 and trended upward In response to this challenge, donor funding has increased significantly in the last decade … • Annual Development Assistance for Health (DAH) • $b (in constant 2007 dollars) • +163% • 1995 • 2007 SOURCE: Murray et al. (Lancet 2010), World Bank Strategy 2007, HLTF 2009, McKinsey Team Analysis

7. a • Overall public financing in developing countries 2 has nearly doubled during the period • This includes DAH to government which likely distorts the increase for SSA • Health spend as a proportion of GDP was flat 3 for low income countries 2000-2006 • Growth in spend has been driven primarily by growth in GDP rather than increased fiscal allocation … and overall public funding has also increased significantly in most regions, driven primarily by GDP growth in Asia and Latin America • Growth in public financing of health in all developing countries • $b (in constant 2006 dollars) • ~244 • Other1 • 4 • 19 • SSA • 48 • N. Africa • +88% • ~130 • 3 • Latin America • 9 • 25 • Asia • 1995 • 2006 • NUMBERS ARE APPROXIMATE Note: Numbers were approximated based on Figure 1A from the Lancet article 1 Other includes Oceania and Caribbean 2 This includes all developing countries, not just low income 3 CAGR for THE as % of GDP (2000-2006) is as follows: low income = 0.0%, lower middle = 0.4%, upper middle = 0.5%, high income = 1.9%) SOURCE: Murray et al. (Lancet 2010), WHO, McKinsey analysis

8. 5 Nevertheless, significant additional funding is needed to achieve the health MDGs • NUMBERS ARE APPROXIMATED • BASED ON MULTIPLE REPORTS • Distribution of gap by geography1 • Percent, 100% = $32b 1 • Estimated annual funding gap for the health MDGs • Non-SSA • $b in 2015 • High-level Taskforce • on International • Financing for Health • (2009) • SSA • 36-45 • Distribution of gap by health MDG2 • Percent, 100% = $32b 2 • HIV/AIDS (#6) • Under-5 • mortality (#4) • Malaria/TB (#6) • 22 • Maternal • mortality (#5) 1 Based on 2009 Taskforce analysis (median estimates under “no change” scenario) 2 Based on 2002 World Bank analysis adjusted to DAH levels in 2006 SOURCE: High-level Taskforce on International Financing for Health Working Group 1 & 2 (2009), Goals for Development (World Bank 2002)

9. A We face two key challenges in financing the health MDGs… • Generating Necessary Revenue • Ensuring funding through sustaining and increasing the revenue effort for DAH funding in a very challenging international macroeconomic environment • B • Improving Allocation Effectiveness • Maximizing impact through substantially increasing MDG funding allocation effectiveness and efficiency, among the complex DAH architecture, across sectors contributing to health, and within countries SOURCE: McKinsey Health System Financing group (2009); High-level Taskforce on International Financing for Health Working Group 2 (2009)s

10. B • B3 • B2 • B1 • Innovating and improving existing sources of donor funding • A1 • A2 • 2. Facing the impact of the global financial crisis • 3. Sustaining and Leveraging existing public/ private domestic funds Revenue: Raising necessary funds • A • Revenue • Allocation • Bilateral (Traditional) donor sources • Innovative financing sources • Optimizing allocation across existing funding vehicles (institutions) • Funding Vehicles for Health (e.g. World Bank, Global Fund, GAVI) • Improving efficiency, and alignment in allocation from existing funding vehicles to countries • Individual country level • A3 • Creating incentives for results in allocation from MoF to Sectors at national and sub-national/ agency level budgets • Sub-national executing agencies SOURCE: High-level Taskforce on International Financing for Health Working Group 2 (2009)

11. A1 • Solidarity levy (e.g., airline tickets, tobacco) • 0.1 to >10 • <5 • Private foundations • The Bill & Melinda Gates Foundation • The Carso Foundation (Carlos Slim Hélu) • Align funding time with needs (e.g., IFFIm) • 1-10 • 5-20 • Public resources for private giving (e.g., DeTax) • 1-10 • <5 • Corporate funds • African Health Initiative (Exxon) • The Coca Cola Foundation • Leveraging lending instruments (e.g., buy- downs) • 0.1 • <5 Both bilateral and “innovative” donor sources have increased in recent years… but, the financial crisis entails a significant challenge… • Traditional donor sources • Innovative financing sources • Selected examples of innovative financing mechanisms • Types of traditional donor sources • Representative examples • Revenue • $ billions • Cost • % of rev. • Public funding from donor and multilaterals • PEPFAR • DFID • SIDA • IDA • While donor funding has increased greatly over time, volatility significantly affects aid effectiveness SOURCE: High-level Taskforce on International Financing for Health Working Group 2 (2009)

12. 9 • 6 • A2 • 3 • 0 • -3 • 1970 • 75 • 80 • 85 • 90 • 95 • 2000 • 05 • 10 … the current economic crisis has significantly impacted both developed and developing countries • World • Advanced economies • Emerging and develo-ping economies Percent • Historical and forecasted GDP growth • Key characteristic of the economic crisis • Getting better but still high uncertainty on future evolution of the crisis • Global growth in 2009 fell to 0.45%when measured in terms of PPP and to turn negative when measured in terms of market exchange rates 1 • GDP declinedby 4-6% in the Euro Area in 2009 (World Bank, 2009) • In USA growth to turned negativein 2009 (IMF, 2009) • Growth in emerging and developing countries fell from 6.25% in 2008 to 3.00% in 2009 • Volatility(e.g., rapid changes in currency exchanges and country financial risk) hasincreased significantly 1 World Bank forecasts SOURCE: International Monetary Fund; World Bank; McKinsey analysis

13. A2 In many developed countries, health expenditures decrease in times of economic crisis, but its impact on health is unclear… Evolution of health expenditures across EU countries within 2 years from negative GDP growth • 1980–83 • 1988–93 • Countries reportingat least one year ofnegative GDP growth • 131 • 172 • Countries with increasing health spending • Countries withdecreasing health spending • A large number of EU countries lowered health expenditure after an economic downturn • Reduction in expenditures, however, often occurred with a lag (1-2 years) after the economic downturn 1 Austria, Belgium, Denmark, Germany, Iceland, Ireland, Luxembourg, Netherlands, Portugal, Spain, Sweden, Switzerland and UK 2 Belgium, Czech Republic, Denmark, Finland, France, Germany, Greece, Hungary, Iceland, Italy, Norway, Poland, Portugal, Spain, Sweden, Switzerland, UK SOURCE: OECD Health Data 2008; McKinsey analysis

14. A2 …whereas, significant evidence from developing countries indicate a link between financial crisis and worse health outcomes • Specific developing country examples • Overall findings • Drop in health spending2 • Over 1 million excess deaths1 occurred in the developing world during 1980-2004 in countries experiencing economic contractions of 10% or greater • Nutrition levels usually worsenduring and after a crisis, leading to longer term health repercussions • Effect of crisis materializes through different channels • Lower utilization (often not recovering till long term after the crisis) • Higher cost of services due to input (e.g., drugs) local price increase • Country • Impact on health status • Utilization • Argentina (2001-2002) -22% • Less frequent consumption of preventive medicine for children (38% of total households and ~60% of poorest ones) • Indonesia (1997-1998) -10% • Drop from 53% to 34% in health care service utilization • Direct health outcomes • Mexico (1995-1996) -7% • ~7% increase in child mortality • Peru (1990) N/A • 2.5% increase in infant mortality • Nutrition • South East Asia (1997-1998) -15% • Increased prevalence of micro-nutriment (e.g., vitamin A) deficiencies in children • 22% increase in anaemia among pregnant women 1 Infant deaths 2 Measured over the period indicated as Government Health spending per capita (PPP adjusted) SOURCE: UNICEF 2009; World Bank; Scholars’ articles; McKinsey analysis

15. Total leverage in US and parts of EU at historic high • General Government Fiscal Balance • US and European total debt as % of GDP • Percent of GDP • A2 • World • Advanced economies • Emerging and deve-loping economies • 2 • 0 • -2 • -4 • -6 • -8 • 2000 • 02 • 04 • 06 • 08 • 10 But this is are very different crisis as compared to previous ones, further complicating the crisis and its potential long term effects in DAH • Main differences with previous economic crises Crisis propagation • Ongoing crisis originatedin developed countries after an unprecedentedborrowing spree – further increased by current anti- cyclical fiscal effort to address crisis • Unprecedented global wealth destruction • Economic downturn has been from capital markets onto the world real economy • Industry structure and consumer behaviour will remain in flux, creating new sources of volatility Country positioning • Developed countries • Total leverage is at historical high in US and Europe • The story of fiscal imbalance and public debt is ongoing and uncertaint • Developing countries • On one hand, better positioned vs. the past due to better fiscal balance • On the other, unable to rely on increasing exports to developed countries … • … and on lower availability of capital, also at higher costs European debt level currently already at 300% in 2008 • 350 • 300 • 250 • 200 • 150 • 100 • 2008 • 90 • 1920 • 30 • 40 • 50 • 60 • 70 • 80 SOURCE: International Monetary Fund; McKinsey analysis

16. 2 • A2 • "No change" scenario1,2 … it could lead to a “no change” or even negative revenue growth scenarios for DAH • "Commitments met" scenario1 • Crisis trend (ILLUSTRATIVE)3 • Additional funding • $b • MDG gap range • $36-45b in 2015 • 2009 • 10 • 11 • 12 • 13 • 14 • 15 • 16 • 17 • 18 • 19 • 20 • 21 • 2022 • Time 1 Projections taken directly from High-level Taskforce Working Group 1 analysis through 2015 2 Beyond 2015, “no change” projection assumes constant annual growth rate of 31% matching the 2012-2015 CAGR from the Taskforce projections 3 Crisis trend is illustrative. Assumes 1) tracking “no-change” scenario until 2011 and 2) decreasing level of additional funding of -5% per year after 2011 SOURCE: High-level Taskforce on International Financing for Health Working Group 1 (2009)

17. Public • Private • A3 Development assistance for health (DAH) is essential (particularly in low-income countries but, it remains a fraction of total health spend Breakdown of total healthcare expenditure Percent Low income countries¹ Lower middle countries¹ • Total in 2000 • 62.4 • 37.6 • 100% • 62.9 • 37.1 • 100% • Out-of-pocket • 53.4 • External • 10.2 • Total in 2007 • 58.1 • 41.9 • 100% • 57.5 • 42.5 • 100% • Out-of-pocket • 48.3 • External • 17.5 • While increasing DAH is important, countries have a key say on MDG financing • Effectively channeling country expenditure – particularly OOP – is crucial to attain MDG targets • Sustained and expanded domestic health expenditure should be in line with national plan 1 Income category defined by World Bank country classification SOURCE: WHO

18. 6 • A2 Recent evidence suggests an added complication: increases in external transfers may have resulted in a decrease in ‘fiscal’ allocation to health in poor countries • 2000 • 2006 X% • CAGR Percent • Total health expenditures • as a percentage of GDP • Total health expenditures, excluding external funds, • as a percentage of GDP • External funds as a percentage of GDP • Africa • 0 • -0.7 • 7.0 • 0.6 • 5.1 • 5.5 • 5.5 • 4.9 • 0.4 • Low income • 0.4 • 0.5 • 5.8 • 0.7 • 3.7 • 4.3 • 4.2 • 3.6 • 0.5 • A recent report states that “for all developing countries… for every $1 of DAH to government, the government reduced spending from it’s own sources by $0.46” SOURCE: McKinsey Health System Financing Analysis; World health statistics 2009, WHO, Murray et al. (Lancet 2010)

19. A • A Summary of revenue challenges and opportunities • Existing international donor sources • Improve effectiveness and predictability of funding from existing sources • Continue to develop new ways of raising additional funds • Global Financial Crisis • Biggest crisis on record is may affect country and international donor financing • Likely enhanced difficulty in increasing DAH revenue • Substantial increase in focus on DAH effectiveness at all levels • Increased focus on sustaining country funding. • In-country funds • Create domestic fiscal space • Economic growth • Efficiency in health sector (see allocation section) • Address the “additionality” challenge in donor funds and avoid ‘crowding out’ • Leverage out-of-pocket (OOP) household financing

20. B • B2 • B3 • B1 • A • Innovating and improving existing sources of donor funding • 2. Facing the impact of the global financial crisis • 3. Sustaining and Leveraging existing public/ private domestic funds • A2 Allocation: The critical imperative of improving efficiency and maximizing impact • Allocation • Revenue • Optimizing allocation across existing funding vehicles (institutions) • Traditional donor sources • Innovative financing sources • A1 • Funding Vehicles (e.g. Global Fund, World Bank, GAVI) • Improving efficiency, and alignment in allocation from existing funding vehicles to countries IHP+ ; HSS Platform; other • Individual country level • Creating incentives for results in allocation from MoF to Sectors at national and sub-national/ agency level budgets • Sector and Sub-national executing agencies SOURCE: High-level Taskforce on International Financing for Health Working Group 2 (2009)

21. vs. vs. • A Challenge for Ministries of Health Transition from owner/guardian of inputs (i.e., health sector investments) to guardian to broader focus on outcomes (i.e., health results) • B1 Need to optimize allocation to existing funding vehicles reaching a right balance between specific health sector investments and multisector investments with health impact • Multisectorial investments with proven health impact (e.g., water & sanitation, employment, HH income, education, other) • Earmark funding for priority diseases • Earmark for health services and systems • While Ensuring Health system strengthening

22. Promote Results-based financing • Ensure Harmonization and alignment • IHP + and other • ‘Address Additionality’ • In line with Macroeconomic conditions • There are various results-based financing (RBF) mechanisms (e.g. output-based aid, provider-payment incentives) and payment is made in response to the achievement of performance targets • Historically, input-based financing has been used which easier to track • However, there is a trend to change to RBF which will require • Change in culture (away from tracking $ flow) • Creation of new capabilities • Establishment of new informational systems and fiduciary rules/roles • Harmonization of processes (e.g. reporting, standards for funding application) across multiple funding vehicles • Alignment of international organizations: • To give in accordance with country strategies • To select receiving countries against a standard basis for need and capacity to efficiently utilize/absorb external resources • Donor funding on top of country fiscal spending (Cf. issues with this from section A1) • Compatibility with macroeconomic performance • Creation of necessary budgetary fiscal space • Synergy with economic growth, funding to all sectors with health impact, avoidance of country economic distortions (e.g.DAH driven price distortions) • B2 Challenges in improving efficiency in allocation from funding vehicles to countries • Issues • Description SOURCE: High-level Taskforce on International Financing for Health Working Group 2 (2009)

23. Promote Results-based financing • ‘The Challenges’ • There are various results-based financing (RBF) mechanisms (e.g. output-based aid, provider-payment incentives) and payment is made in response to the achievement of performance targets • Historically, input-based financing has been used which easier to track • However, there is a trend to change to RBF which will require • Change in culture (away from tracking $ flow) • Creation of new capabilities • Establishment of new informational systems and fiduciary rules/roles • Historically, input-based financing has been used which easier to track • Shifting towards RBF will require: • Change in many donors culture (away from tracking $ flow) • Creation of new capabilities at country and donor level • Establishment of new informational systems and fiduciary rules/roles • Address and avoid potential perverse incentives in reporting and in narrow focus on specific targets • B3 Challenges in allocation within countries: the promise and the challenges on results linked financing • Issues • Description SOURCE: High-level Taskforce on International Financing for Health Working Group 2 (2009)

24. Conclusion: A Renewed Commitment to Achieving the MDGs Addressing the challenges for financing MDGs will require: • A renewed commitment and innovation for generating revenues for DAH, • With equal intensity,setting the capabilities and health system financing arrangements to leverage and efficiently use country level funding (fiscal and household out-of-pocket) • A unified vision and leadership both, at country and international agencies levels that: • acknowledges the challenge of the financial crisis for health but, also the needs beyond, in multiple sectors also contributing to health • avoids fragmentation and confusion in the content and in conveying the message to world leaders • Scaling up of investment in a way that strengthens overall health systems (addressing all determinants of success in achieving the MDGs) • Balancing those investments with investment in multiple sectors beyond health care that substantially contribute to health • A very significant effort to improve efficiency to get more health for the available funding at all levels • Harmonization and alignment in the overall international architecture level • Strengthening health systems at country level with incentives for proven results

25. Financing the health Millennium Development Goals Commonwealth Health Ministers May 2010 Dr. Cristian C. Baeza Partner Leader Health Systems Financing Group CONFIDENTIAL AND PROPRIETARY Any use of this material without specific permission of McKinsey & Company is strictly prohibited