Report No. 1 2343-PH Philippines Devolution and Health Services: Managing Risks and Opportunities May 23, 1994 Country Department I Population and Human Resources Operation Division East Asia and Pacific Region Office FOR OFFICIAL USE ONLY MICROGRAPHICS Report No: 12343 PH Type: SEC Document of the World Bank This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization CURRENCY EOUIVALENTS ANNUAL AVERAGE 1986-1993 1986 US$1.00 = P. 20.4 1987 US$1.00= P. 20.6 1988 US$1.00 = P. 21.1 1989 US$1.00 = P. 21.7 1990 US$1.00 - P. 24.3 1991 US$1.0C = P. 27.5 1992 US$1.00 = P. 25.5 1993 US$1.00 = P. 27.5 FEICAL YA GovernMent - Jamnary I to December 31. ACRONYMS ALOS - Average Length of Stay API - Annual Rate of Parasitic Incidence ARI - Acute Respiratory infecdon BCG - Tuberculosis Vaccine BF - Promotion of Breastfeeding BHS - Bareagay Health Stations CARI - Control of Acute Respiratory infections CDD - Control of Diarrheal Diseases COA - Commission on Audit CHSA -Comprehensive Health Service Agreement DA - Department of Agriculture DBM - Deparment of Budget & Management DENR - Departmnent of Environment& Natural Resources DOH - Department of Health DSWD - Department of Social Welfare & Development EPI - Expanded Program of Immunization FHSIS - Field Health Service Information System FIC - Fully Immnized Child FNRI - Food & Nutrition Research Institute GOP - Government of the Philippines IDA - Iron Deficiency Anemia IDD * Iodine Deficiency IMR - Infant Mortality Rate IPHO Integrated Provincial Health OffiMe IRA - Internal Revenue Allotment LGC - Local Government Code LGU - Local Government Unit MH - Maternal Health MCH - Maternal Child Health NCHS - US National Center for Health Stastics NCR - National Capital Region NEDA - National Economic Development Authority NGO - Non Govenmment Organization NTP - National Tuberculosis Control Program ORS - Oral Rehydration Solution PEM - Protein-Energy Malnutrition PNG - Papua New Guinea RHU - Rural {ealth Unit TF-IMR - Task Force on Infant Morality Rate VAD - Vitanin A Deficiency FOR OFFICIAL USE ONLY PHILIPPINES DEVOLUTION AND HEALTH SERVICES: MANAGING RISKS AND OPPORTUNITIES Table of Contents PaQe No. EXECUTIVE SUMMARY ............................. I. PERFORMANCE AND STRUCTURE OF THE PHILIPPINES HEALTH SYSTEM - PRE-DEVOLUTION. A. Introduction . B. Health Status. 2 C. Health Delivery System: Structure and Evolution .11 D. Public Health Programs Performance 22 E. Health Expenditure and Finance 31 P. Implications for the Devolved System 39 II. DEVOLUTION OF HEALTH SERVICES IN COMPARATIVE PERSPECTIVE . .42 A. Health Provisions of the Local Government Code of 1991 .42 B. Implementation Progress .46 C. Organizational Types of Decentralization in Comparative Perspective .47 D. Potential Economic Effects of the LGC Health Provisions .so III. FISCAL IMPACT OF DEVOLUTION .63 A. Introduction .63 B. Local and Central Fiscal Context 64 C. Local Government Fiscal Behavior 1991 65 D. Estimating the Fiscal Gap .67 E. Conclusions and Implications for Policy 80 Annex 3A: Determinants of Local Health Expenditure Regressions 82 Annex 3B: Determinants of Locally Raised Revenues Regressions. 85 Annex 3C: Interviews with Local Executives .88 IV. ORGANIZATION AND MANAGEMENT ISSUES UNDER DEVOLUTION 89 A. Introductin .89 B. Scope of Devolution Induced Change.... 90 Ts douent has a restictcd distnbution and may be used by ecipiens only in the peonnan of their oflicisl dutis Ils contents may oot othewise be disc1oed thout Wold Bon& authrzto. C. Managing Change: Organizational Structure ........................... 91 D. Managing Change: Management Systems ... 95 S. Ma.-.aging Change: Basic Health Programs ............................. 98 P. Policy Objectives and Implementation.. 103 Annex 4A: Retained Programs ........... - 110 Annex 4B: A Comparative Note on Managing Decentralization: Chile's Health Services ............. 111 V. MAKING DEVOLUTION WORK: ISSUES AND OPTIONS 115 A. Introduction ..15............ 1 B. Net Assessment of Health Services Devolution ..15............ 1 C. Actionable Policy Issues: Near Term... 118 D. Actionable Policy Issues: Longer Term. 124 B. The Future Role of the DOH ............ 127 Annex 5A: Actionable Issues and Ir.terventions ................. 129 Annex 5B: Improving Provincial Hospital Efficiency .................... 133 Annex 5C: DOH-LGU Assistance Mechanism Design and Implementation Issues ........................ 140 Annex SD: Expanding an Underdeveloped Public Health Program - The Case of Nutrition ......... 145 This report was prepared by a team composed of: Christopher Chamberlirr (mission leader)* Fadia Saadah (public health); Stanley Scheyer (public health policy); Richard Heaver (nutrition); Shaikh Hossain (health financing); mario Taguiwalo (consultant, institutions); Joseph Kutzin (hospitals); Charles Griffin (private sector); Larry Schroeder (consultant, comparative context); Benjamin Diokno (consultant, fiscal issues); James Herm (consultant, organization and management); Angela Murphy (formating and word processing). The coc eration and contributions of the Philippines Department of Health, the Department of Budget and Management, and local government governors, mayors and health staff are gratefully acknowledged. List of Tables Table 1.1 -Infant Mortality Rates in Selected Asian Countries, 1970-90 .................................................. 5 Table 1.2 -Mortality Rates (per 100,000 population) for the Ten Leading Causes of Death, Philippines, 1985-9 .............8 Table 1.3 -Basic Nutrition Indicators for Selected Asian Countries (1987) ............... 9 Table 1.4 -Fertility Declines in Thailand, Indonesia, and the Philippines ... Table 1.5 -Total Health Care Expenditure (Mil Peso) .12 Table 1.6 -Department of Health Expenditure (Mil Peso) .32 Table 1.7 -Patterns of Public Health Expenditure in Selected Asia Countries (Average 1980-89) ............................. 32 Table 1.8 -The Department of Health Ex.penditures (Mil Peso, 1980 Price) .34 Table 1.9 -Uses of DOH Expenditures (Mil Peso, 1980 Prices) .35 Table 1.10 -Percent Share of The Sources of Financing Public Health Expenditure .36 Table 1.11 -Medicare Claims, Reimbursements, and Support Values 1987 .37 Table 2.1 -Cost of Devolved Functions .43 Table- 2.2 -Devolved DOH Assets and Personnel by Function and Destination .......... 44 Table 2.3 -organizational Types of Health Service Decentralization ................ 49 Table 2.4 -Possible Effects on Efficiency and Equity of Health Services ...... 61 Table 3.1 -Expenditure Program, Gross Net of Debt Purden, 1991-93 (in billion Pesos) .65 Table 3.2 -Ratio of LGU's with Fiscal Risk. 71. Table 3.3 -Internal Revenue Allotment, 1990-193 (in billion Pesos). 77 Table 4.1 -Role Assignment Matrix .93 Table 4.2 -Potential "Trade" Between Levels of Government .105 Table 5.1 -The Potential Benefits and Costs of Health Service Devolution in the Philippines .................. 116 Table 5.2 -Policy Objectives and Interventions for Devolution Management .120 Table 5.3 -Macro Options for DON Organizational Future .128 Figure 1.1 -Infant Mortality Estimates, Philippines, Selected Data Sources ................................................. 4 Figure 1.2 -Infant Mortality Rates and Per Capita GNP in 14 Asian Countries, 1989 ............... 6 Figure 1.3 -Percentage Malnourished Children under 6, Philippines, 1978-90 ................................................. 10 Figure 1.4 -Macro Health System Structure .13 Figure 1.5 -Population per Private and Public Hospital Bed with Provinces grouped by Household Income in 1988, for 197?, 1983 and 1S90 .17 Figure 1.6 -Populacion per Facility Ranked by Income, 1990 .18 Figure 1.7 -Household Utilization of Health Facilities by Income Decile, 1987 .19 Figure 1.8 -The Growth of Hospital Beds, 1972-1990 .21 Figure 1.9 -Immunization Coverage for All Antigens, Routine Report, 1980-1990, Philippines, DOH ............................. 24 Figure 1.10 -Degree of Prevalence of Schistosomiasis in Terms of Low, Medium, and High, 1986-91, Philippines, DOH ............. 28 Figure 1.11 -Expenditure on M:edical Care in Rural Areas, 1988 Expenditure Survey .................... ............ 37 Figure 3.1 -Municipal Fiscal Risk Against Real Property Assessment. 74 Figure 3.2 -Provincial Fiscal Risk Against Household Income .75 Figure 3.3 -City Fiscal Risk Against RPA .76 Figure 3.4 -Provincial Fiscal Risk Against Devolved Health Expenditure .79 Figure 3.5 -Municipal Fiscal Risk Against Devolved Health Expenditure .80 Figure 4.1 -Macro Health Systems Structure - Current and Future .92. Figure 4.2 -Existing Activities, Channels and Timings for the Distribution of National TB Program Logistics ........... 97 Figure 4.3 -Trade Potentials & Patterns of Resources and Functions .... 107 Figure 5.1 -Provincial Hospital Operational Efficiency Indicators, Philippines, 1990 ...................................... 137 A. Provincial Tertiary Hospitals - By Provincial Income B. Provincial Primary and Secondary Hospitals - By Provincial Income C. Provincial Tertiary Hospitals - By Region D. Provincial Primary and Secondary Hospitals - By Region List of Boxes Box 4.1 -Health Program Checklists for Devolution Management ....... 101 EXECUTIVE SUMMARY Tntroduction 1. Secretary Juan Flavier of the Philippines Department of Health (DOH) asked the World Bank to analyze the likely impact of the 1991 Local Government Code on the delivery of public health services. The DOH was concerned that the rapid and far-reaching decentralization mandated by the Code would impose a wide array of problems on the health system and result in sharply diminished performance. The Code has now been imnplemented, and local and central health officials are adapting to the new system. The major findings of this report are twofold: first, the balance between the risks and opportunities of the devolution of health services is a "close call"; second, several of the risks could seriously affect the performance of the national disease control programs unless they are immediately addressed by central and local goverrments. A. Background 2. The Philippines is currently implementing the 1991 Local Government Code (LGC). As a result, local governments will receive additional grants frou the national government and assume responsibility for delivering and financing selected services, including public health services. The resources are provided in the form of central internal revenue allotments that local governments are free to allocate among and within various sectors. 3. The public health system, perhaps the most affected sector within the national government, is undergoing a far-reaching structural and functional transformation. All the DOH facilities at the local level and over half of its staff (45,700) have been devol-ed to local governments at the barangay, municipal, provincial and city levels. Public health services and hospital operations at these levels are no longer subject to central financial or managerial control. In terms of the scope of health services, personnel and facilities involved, the number of local governments participating, and the high degree to which authority is being decentralized, the experience stands out as one of the most ambitious health decentralization initiatives ever undertaken in Asia. 4. There has been considerable debate in the Philippines concerning this initiative. Health services under the central Government, while improving in recent years, have not adequately addressed certain public health problems. Malaria is still endemic in some areas. Infant and childhood diseases are still among the leading causes of death. Acute respiratory infections and diarrhea, two leading killers, have not been controlled. Family planning and nutrition services are undeveloped. Thus, a substantial agenda is still unmet and must be tackled under a transformed public health system, now under the authority of 1,600 local governments. ii 5. Some of the key public health programs still require central management and direction to assure national coverage and consistent technical approaches, a task made much more difficult by the devolution of health services. rhe incentives for local support of public health are incomplete because some benefits from their programs "spill over" to other jurisdictions. Also, localities may choose to support sophisticated clinical services and facilities and reduce their support for preventive programs which have only weak public demand. In addition, they may also direct services to their better-off constituents, leaving the poor underserved. 6. Yet, the same factors that threaten the public health system under devolution are also a source of optimism: local governments will be more accountable for the services they provide, and they will adapt services more closely to local needs and popular preferences. Further, inefficiencies arising from cumbersome central control will be %orrected more readily by autonomous local managers more conscious of cost; the public will be more willing to help pay for services if these are more responsive to local needs. 7. The risks and opportunities thus present the Government with urgent policy questions. Can the nLew decentralized system be made to work as well or better than its predecessor or will the initiative be overwhelmed with serious flaws? If it is worth pursuing, how should the potential problams be addressed and minimized? Finally, which issues must be resolved in the short term, and which can be postponed? 8. To answer these questions, the report first analyzes the performance of the pre-devolution health system (pre-1993). It idertifies its strengths and weaknesses, and for the key public health programs, such as TB, malaria, immunization and other disease control programs, it assesses how they may respond to the new decentralized system that is being rapidly introduced. The report then analyzes the risks and opportunities in three areas: (a) First, local governments face new incentives in budgeting for and managing health services under the decentralization law (the Local Government Code of 1991 or LGC). Theoretical and comparative data are used to explore the likely responses of local governments to the new arrangements and the impact of these responses on the efficiency and equity of the new system. Many of the expected benefits of decentralization are founded on the incentive structure for local decision makers, but potential problems arise from this autonomy, especially from the point of view of national health objectives, such as meeting the health needs of the poor and assuring adequate financial support for national public health programs; (b) Second, there is the issue of the adequacy of financial resources devolved to local governments and whether the latter will allocate sufficient resources for health services. Many observers expect that resources will not be adequate to support health and other devolved services. However, using actual fiscal data, the report estimates the underlying fiscal balance of each local government for 1993 (the first year of devolution) and the results do not iii support earlier ?essimistic views on resource availability; (c) Third, organizational and management issues will surely materialize from the LGC. This Code was passed so as to empower local governments with new responsibilities and resources, not to improve the performance of the health system Rer se. Thus, there are a number of organizational asymmetries, gaps and unintended incentives in the decentralized health system that may seriously disrupt the management of national public health programs in the Philippines. 9. The approach taken in this report does not seek to identify a model decentralized system or structure to which the Philippines should aspire. This is the result of two factors: first, the LGC has already determined major features of the structure, and the Code is not likely to be repealed; second, the literature on dec'-ontralization provides little guidance on the question. Opinions range widely o'a the efficacy of decentralized vs. centralized organizational arrangements. Further, the literature is notably sparse in rigorous quantitative assessments of the impact of different decentralized structures on health service performance. 10. Thus, rather than seek to identify a model decentralized structure, the report focuses the analysis on actors, incentives and structures in the new system, identifies risks and opportunities (potential costs and benefits), and adopts a step by step approach to irncrease the new system's net benefits. The analysis will therefore lead to some implicit model of a 'better' decentralized structure, but it will not attempt to define a "best" system. B. Performance of the Pre-Devolution National Health System 11. The health system is characterized by a rough parity between private and public sectors in terms of health expenditure, number of hospital beds and manpower. thus creating a truly mixed system. The centralized public system was composed of a vast network of hospitals, clinics and health stations over the entire country, while the private system of hospitals, outpatient clinics and private practitioners also expanded to attain national coverage. The two sets of health pro-icers have competed for Uients in various health markets and have benefited from public subsidies and incentives. 12. The performance of this national system was less than exemplary from the late 1970s to the mid 1980s, when a protracted stall in the decline of the infant mortality rate (IMR) at around 60 per 1,000 live births let the Philippines fall behind other Asian countries for this key indicator of public well being. In the late 1980s, the DOH, with substantial inflows of foreign assistance, launched an effort to upgrade the performance of key public health programs (expanded program of immunizations [EPI], malaria, TB, maternal and child health, etc) and attempted to target the benefits of these programs to areas at highest health risk and of lowest socio-economic attainment. iv 13. Results bave been impressive, both in the higher coverage rates for public health programs, and potentially, in terms of tneir impact on the INR (survey results should be available soon to determine the 1992 IMR and the child mortality rate). The EPI, malaria control, and schistosomiasis programs in particular have performed very well. Immunization rates for the six basic childhood diseases rose sharply in the second half of the 1980s with all except tetanus toxoid reaching over 70 percent of the target population, a result confirmed by household surveys. The annual rate of parasitic incidence or API for malaria declined by half between 1987-1991. EPI not only expanded coverage, but did so in an equitable fashion (with support of local governments), and coverage rates for poor and better off regions converged at higher levels. 14. However, the DOH priority disease control programs have not been equally successful, with some just starting to expand and others such as family planning/women's health and nutrition undeveloped, with little impact in the field; and, their level of development partly determines how they may fare under che new, decentralized structure. As meintioned above, EPI has done well, and local commitment, support and demand for child immunization services have followed program development. Thus, EPI is among the DOH programs least likely to suffer management disruptions or diminished funding from local governments. 15. The malaria program, on the other hand, has a long history of fluctuating effectiveness, probably due to lapses in coordination and uxnsustained effort to control the vector, to identify active cases, and to administer treatment. Although the program will be partly retained by the DOH, field operations depend on the active participation of local health staff. As a classic "public good" program in which much of its activities benefit society in general, local support for it may vary widely, which in turn, would affect its national scale and reduce its technical standards. 16. Programs to control acute respiratory infections, nutrition, and family planning have less to lose from decentralization, but there is an urgent need for these programs to be more effective, nationwide. Thus, expanding such undeveloped natiou..Al programs under a highly decentralized system will present the DOH with a difficult challenge. Not only will many local governments need to be persuaded to implement them in a consistent manner, but this will have to be done in a way that other programs do not suffer reductions in local support and effort. 17. Another important feature of the pre-devolution public health system is the pattern of public finance. Public funds have had a clear bias in favor of hospital construction and recurrent costs, despite recent efforts to increase spending on basic and preventive services. Thus, the pre- devolution system will pass on a large hospital infrastructure to provincial governments, the costs of which may prove as burdensome to them as to the DOH. However, the regioral distribution of DOH expenditure on facilities and services has been in most caszs modestly progressive, meaning that public health spending has benefited the poor disproportionately (a major achievement for a public system). The private system, while impaired by a proliferation of inefficient small hospitals, is nonetheless well distributed throughout the V country and apparently is not being forced out of local markets, at least not yet, by the competition posed by public facilities and services. 18. Similarly, the overall health system has produced more than adequate manpower to meet the demand of the DOH and the private sector. In the late 1980s, the average graduating class of physicians was equal to 17 percent of the entire stock of practicing physicians in the country. Another strength of the former system was the successful DOH effort to devolve administrative authority to provincial health offices. Although well short-of the fully devolved structure now in place, this effort nonetheless built a substantial local capacity to manage health facilities and services at the provincial level. 19. As a prelude to devolution, the balance between strengths and weaknesses would seem to indicate that the health system achieved a wide- ranging rebound in performance compared to the mid 1980s, and that local governments have inherited a system more characterized by improving performance than systemic inefficiencies or inequities. However, decentralization could disrupt a number of public health disease control programs due to their vulnerability to divided responsibilities, loss of scale and coordination, and weak local demand. C. Risks and Opportunities in the Devolved System 20. Turning to the three areas of concern under the devolved system, this section assesses the net impact of devolution on the efficiency and equity of the public health system. First, the framework of analysis is described. Next, the new incentive structure for local government decision makers is assessed in terms of its likely impact on efficiency and equity of local health services. This is followed by sections on fiscal issues and organizational and management issues. Analytical Framework 21. Attempting to estimate the performance of a newly decentralized health system first roquires an analytical framework. The Secretary of Health articulated the importance of achieving increased efficiency and equity under the new decentralized system. The issues raised about devolution of health services, as noted above, deal with the adequacy of financial resources, mismanagement by local government officials, potential increases in costs, and the impact on the poor. The framework for the report should respond to these concerns and issues. 22. The framework chosen for this report is based on a cost-benefit approach. In moving from a centralized to a decentralized system, what are the likely costs and benefits (risks and opportunities) to the performance of the system and what will their impact be on the system's objectives? 23. To assess likely costs and benefits, three questions are addressed. Will resources to finance the system increase or decrease? Will these be put to the most effective use? And, will the production costs to deliver health vi services rise or fall? The answers to those questions will affect the two critical objectives for the performance of the system: first, that the system operate efficiently, so that outputs (health services) are obtained for the least cost and that the level of output responds to both local and national priorities for health services; and second, that the new system deliver its benefits equitably. Local Incentive Structure 24. A major source of change is the new set of rules for local governments, as created by the LGC. These rules for raising, budgeting and managing resources establish new incentives for local governments; local officials can be exrected to respond to these incentives as they budget for and manage the health services devolved to them. Using theoretical perspectives and evidence from other countries, what will be the likely impact of the new incentive structure on the equity and efficiency of the new health system? 25. Efficienay. From the point of view of production or technical efficiency, decentralization on theoretical grounds could be expected to yield substantial gains in minimizing costs through more accountable local decision making, greater cost consciousness and innovation in how public services are produced, and more attention to cost recovery. Evidence from various countries is replete with examples of innovative, cost-reducing approaches to decentralized health delivery. For example, local governments in Nigeria turned to leasing as opposed to purchasing vehicles to deliver immunization services at considerable savings. 26. As for the overall economic efficiency of a decentralized system, the evidence suggests that localities will support health services at a level more in line with local requirements and may also integrate health services more efficiently with related services in sanitation, nutrition and education. Local governments can be expected to employ cost recovery more readily, which would help match health services more closely to local demand. Fiscal autonomy generally can be expected to increase the willingness of individuals to contribute towards public services, and decentralization will thereby lead to greater overall revenue effort. 27. But from a national point of view, local decisions may not be optimal. Risks are attached to over-spending on capital projects, such as duplicate hospital services or specialized clinics, and under-funding operations and maintenance. Such problems are not unique to decentralized arrangements, but they may be exacerbated by them. Poor administration of personnel, particularly political interference in personnel matters, can increase the costs of producing health services, and this has been found to occur more readily in locally controlled health delivery systems. Finally, production costs for national disease control programs may increase under decentralization due to inconsistent local participation and consequent loss of economies of scale, as could be the case in malaria or schistosomiasis control. Underspending on "spillover' services such as communicable disease vii control may reduce economic efficiency, as would over-investment in purely curative services. 28. Based on the comparative and theoretical evidence, the efficiency effects of decentralization in the Philippines should be positive, but much of this potential benefit will need to be facilitated through the training of health managers and information campaigns to inform the people of their opportunities to shape local health services to their needs. Such health education efforts, as performed by the center, will be a crucial input to a successful decentralized system. 29. Equity. The equity impact of decentralization is a source of concern. On theoretical and comparative grounds. it is apparent that local government leaders are subject to strong incentives to direct services to the better off groups in their constituencies. Although there are exceptions, it is the potentially negative effect on low-income households or poor regions that is most commonly given as an argument against decentralized health service provision arrangements. Such disparities increased in Mexico and Papua New Guinea. A frequent outcome is that poorer local governments tend to allocate smaller proportions of resources to health services and are relatively less capable of processing requests for special assistance. In the Philippines, the central DOH had developed a moderately egalitarian distribution of facilities and services, an achievement unlikely to be improved by the local provisioning process set up by the LGC. 30. The comparative perspective, therefore, indicates a potential trade-off between efficiency gains and equity losses, if corrective interventions from the center are not taken. A second potential trade-off could occur between national and local health objectives, so that local needs for clinical and curative care are more accurately met, but key public interventions in communicable disease control and prevention are underfinanced at the local level. Local Government Fiscal Issues 31. The debate in the Philippines over health service devolution has often focused on the adequacy of local financial resources to support public health services and the potential misallocation of such resources. Concerning the adequacy of resources, it has been argued that the LGC would not provide sufficient additional revenues to cover the costs of supporting the devolved services, including healthi, and that the poorest local governments would be especially hard hit in fiscal terms. The second strand of the debate has addressed the allocative behavior of local governments and their allegedly low interest in adequately budgeting for health services. 32. Adeguacy of Local Resources. Expected total revenues and expenditures for each local government for 1993 were analyzed, including the central revenue grants (IRA) and local tax income on the revenue side, and the local expenditures on all services plus the annual recurrent costs of devolved functions on the expenditure side. viii 33. The results show the following: 13 of 73 provinces (17.8 percent) will have insufficient revenue to cover total expenditures; 109 of 1,533 municipalities (7.1 percent) will have insufficient revenues (based on a sample of 533 municipalities); and none of the 60 cities will be so burdened. The remaining localities will all be in surplus, with revenues exceeding expected expenditures. These results indicate that the overall, first year, fiscal impact on local governments is favorable with small proportions facing a deficit as a result of the LGC. The total fiscal deficit faced by the 13 provinces is only P270 million or about three per cent of 1993 provincial IRA. Municipalities were burdened with about P420 million (also three per cent of 1993 municipal IRA). 34. This relatively favorable outcome on the fiscal effect of the LGC could be improved further with more local efforts to increase tax revenues. This would reduce, but not eliminate, the proportion of localities in deficit. This suggests that local governments may wish to intervene on the cost side as well as to balance budgets. It also suggests that the center, if it chooses to address this issue given its relatively modest dimensions, may wish to target short-term augmentation resources to only those poorer localities with large deficits and more urgent health problems. 35. It should be emphasized that these are estimates for 1993 using various assumptions. The resulting fiscal surplus or deficit shows an "underlying" fiscal impact, and does not take into account the budgeting decisions of local governments over the course of 1992 and 1993, as additional revenues and devolved services were transferred to them. These responses, as would be expected, have quickly found expenditures to consume the surpluses, while deficit localities have been forced to shrink expenditures to attain balanced local budgets, a legal requirement. Thus, to compute deficits and surpluses, the approach in this report assumes that local governments will finance all devolved functions fully, and that the central revenue grants would be fully distributed to local governments in 1993 for the first time. 36. Another such estimate of local fiscal gaps has been calculated by the Department of Budget and Management, using a different methodology and assumptions. Those results indicate a higher number of provinces in "deficit" (see Chapter III). 37. Two other findings are notable from this fiscal analysis. First, the underlying fiscal "surplus" for all cities totals nearly P4 billion, a substantial transfer from the center, and a source of concern given its budget constraints. Provinces and municipalities, as groups, also enjoy substantial net surpluses. The implications for health spending need to be kept in mind; if such localities allocate surpluses according to the share of health in the budget, the additional health spending above pre-devolution levels would be substantial. 38. The second finding is that the distribution of fiscal "deficit" across local governments is not concentrated in the poorest governments. In fact, for municipalities, the fiscal burden increases slightly with the tax ix base; for provinces, fiscal deficits fall evenly on wealthy and poor governments. The fiscal balance also seems to follow the size of the devolved health costs, meaning that localities, especially provinces, with higher recurrent cost burdens of devolved health staff and facilities will tend to have lower surpluses/ higher deficits. The devolved health expenditures, therefore, will play a significant role in determining local fiscal status, and local governments in deficit will need to examine health expenditures carefully. In that regard, hospital recurrent costs will be of direct concern to provinces. There will be ample room for improving the operational and financial efficiency of devolved provincial hospitals, an area of considerable local interest and an opportunity for the DOH to lend technical assistance (see annex SB for a discussion of hospital issues). 39. Allocation of Resources. How local governments will allocate revenues toward their expenditure responsibilities, specifically in regard to health services, is difficult to predict. Analysis of 1991 local health expenditure can only provide some clues. The 1991 data show that health spending per capita is positively related to the wealth of the local government, meaning that local funding for health services in the pre- devolution period followed local government revenue. This is consistent with the comparative perspectives reviewed above, that equity objectives may not be well served by decentralization. However, as noted above, the large surpluses accruing to local governments, including poor local governments, afford an opportunity to raise local health spending over pre-devolution levels. 40. In sum, the fiscal dimension of the LGC, once thought to be a major cost/risk issue, is more likely to be a minor problem, with most local governments, including the poorer governments, enjoying substantial discretionary resources above what they will need to support devolved functions and their own programs. Thus, resource availability would appear to be adequate or even generous, and distributed fairly; however, the way in which local governments will spend these resources is a source of concern. Past behavior indicates that the poorer local governments will be less inclined to support health services than their wealthier counterparts. Consequently, spending disparities may widen between rich and poor localities despite "surplus" revenues. Organizational and Management Issues 41. The LGC contains specific provisions for health service management and therefore imposes arrangements that will have impacts on efficiency and, to a lesser extent, on equity. Thus, the risks and opportunities to the health system can also be approached from an organizational and management perspective. 42. On the plus side, the Code allows the DOH to retain a number of key functions that are best carried out at the central level, such as health information and education, foreign-assisted projects, licensing and accreditation. This array of retained functions presents the DOH with substantial opportunities to influence local health policy and implementation, x without compromising the autonomy of local decision making, from which many of the benefits of a decentralized system would be expected to flow. 43. On the risk side, the LGC imposes change of control on nearly every management function and public health program under the DOH. Understandably, there will be a number of organizational asymmetries, gaps and unintended incentives which, taken together, pose a high risk of substantial costs to the national public health system. These issues are the most urgent of any single group of devolution-imposed risks and will need to be addressed soon by the national and local governments. 44. The organizational issues arising from the Code can be summarized as follows: (a) Potential loss of technical integrity. The LGC creates separate, autonomous health departments in 75 provinces and 1,533 municipalities, subject to loosely defined national standards of public health services. There is a risk that individual localities may politicize personnel selection and underfinance technical support so that technical quality suffers. Such issues as supervision, training, reliable medical supplies and equipment, and links with higher-level facilities are subject to local policy and priorities. Local health boards are mandated by the LGC to promote technical standards, but the health board role, essentially advisory in nature, lacks the authority to set health policy or enforce technical standards. Loss of technical integrity will lower the output of services, but without lowering costs. (b) Local capacity/authority asymmetries. The LGC effectively stratifies local health service delivery by assigning basic outpatient services and disease control services to municipalities, while assigning hospital services to provinces. This stratification does not correspond to previously developed management capacities, effectively burdening municipalities with responsibilities for which they are poorly prepared, and removing public health service responsibilities from provinces where capacities had been relatively well developed. This asymmetry in authority and capacity is particularly worrisome for the delivery of public health programs at the municipal level. Costs may rise at the municipal level, but yield no improvement in service. (c) Loss of provincial-level health service management. This asymmetry is further aggravated by the absence of provincial coordination and overall management of the basic public health programs. The LGC excuses provincial governments from such responsibilities and faced with their own budgetary pressures, provinces face an incentive to cut back on their support for public health program management. Without a provincial intermediary to funnel centrally provided program inputs to key public health programs, the performance of such flagship disease control programs as EPI, malaria control, TB xi control and other maternal and child health programs can be expected to decline in the near term. (d) Possible breakdown of health management systems. Another issue arising from the above problems of stratification and loss of provincial level mane-gement is the expected deterioration in two key health management systems: the information system (and with it national health planning) and the logistics and procurement system. If the local delivery system is allowed to fragment into over 1,600 separate, uncoordinated health systems, then procurement and logistical arrangements to deliver central medical and other program inputs to the local service delivery points will be placed under considerable stress. In addition, the lack of incentives for local governments to send management information up to the DOH indicates a possible rapid breakdown of a nationally integrated health service management information system. This would seriously complicate development of provincial and national level health policy and planning functions as well as efforts to target central resources to areas of local need. Again there is the potential for program performance problems and cost increases as local governments attempt to create such management capacities for themselves. (e) Absence of a center/local assistance mechanism. Finally, the LGC makes no detailed provision for a new mechanism through which the DOH can direct assistance. It no longer has direct control over local service budgets and their targeting, a convenient central mechanism through which foreign assistance once flowed to local service delivery points. This affects both current projects and any future ones supported by donor assistance. Given the equity and efficiency rationale for selective DOH intervention at the local level, the development of a new assistance mechanism allowing the DOH to target project funds is receiving close attention. Net Assessment of Health Services Devolution 45. Reviewing these likely risks and opportunities, it is difficult to assert that the balance is either strongly negative or positive; rather, the net impact on efficiency and equity of the health system seems to be a "close call". There is a clear potential for some net efficiency gains and a roughly parallel potential for some net equity losses. A decisive benefit relates to the relatively positive effects on resource availability to local governments; if the analysis had demonstrated that a majority of localities would be unable to cover estimated expenditures as a result of the LGC, the net assessment might well have shifted into the high-cost column. D. Policy and Management ResRonses to the LGC 46. Because the LGC imposes potential costs and benefits so widely throughout the health system, the close call outcome creates a demanding xii management challenge for the DOH and local governments. There is no basis for complacency; indeed, the provincial-municipal management problems contain large downside risks. Moreover, it will not be possible to target one or two single areas of high risk, but instead managerial attention will be spread across several categories of issues with high impact on efficiency and equity objectives. The DOH and its local government partners will need to agree on a policy framework and a corresponding set of near-term and longer-term priorities for action and implementation. Policy Actions - Near Term 47. From DOH policy statements and the analysis in this report, several policy objectives for devolution management can be defined for the near term, that is, over the transition period during which the new proprietors of the health system will seek to stabilize the management and performance of the system. These include: (a) Sustaining equitable and efficient performance of the leading disease control programs; (b) Reconstituting provincial public health program management; (c) Building local management capacity; (d) Strengthening local empowerment and self help. To attain those objectives, the management interventions listed below have emerged as high near-term priorities. 48. Negotiation of Provincial Intermediary Role. To address the stratification of the new system and the loss of provincial management of basic services, one approach would be to trade DOH resources for a restored provincial public health system. The restoration of provincial responsibility for the key public health programs (EPI, TB, malaria, schistosomiasis, maternal and child health, etc.) would be the objective of such 'trades.' 49. Restoring the provincial intermediary role is based on the clear "trading" opportunities between levels of government, each of which have specific needs for public health commodities and support services that can be supplied from within the national system, but do not have assured access as a result of the LGC. It is, therefore, possible that the central as well as provincial and municipal governments will have an active interest in negotiating such trades so that they can sustain public health services without having to establish, at considerable cost, individualized procurement and service support arrangements. 50. Thus, the DOH might trade medicines, vaccines and training services to municipalities, in return for a regular flow of management information and municipal agreement to participate in provincial planning and management of xiii public health services. Provir.es might trade their resumption of managerial services over disease control programs in return for access to DOH financial and project assistance and hospital management assistance. These arrangements need not involve additional resources from the DOH; existing foreign-assisted projects and regular DOH budget support would cover the flow of resources to local governments. 51. Such trades or agreements between the DOH and provincial governments (and component municipalities) are the alternative to the many ad hoc arrangements that would likely emerge in patchwork fashion, locality by locality, program by program, system by system, and donor by donor. The LGC encourages such a patchwork approach because it provides for such a high degree of local autonomy over revenues, program choices and their management, 52. The DOH has proposed the negotiation of a "Comprehensive Health Services Agreement" with each province and its component municipalities. A Health Development Fund would account for the annual flow of DOH resources to the province and its municipalities. The Agreement would set out the local and central responsibilities for public health program management and delivery, with the province as the primary partner of the DOH. The Fund would make available the flow of program resources to local governments in return for signing the renewable agreements. 53. Municipal Health Management Canacity. The LGC now imposes responsibility for personnel management, logistics, training, budget preparation, overall planning, and expenditure management under the authority of municipal health staff who have limited experience in such functions. Provincial staff performed many of these functions in the centralized system. Thus, upgrading health management capacity and obtaining interim management support will be an urgent priority for many municipalities. This problem applies especially to larger municipalities with multiple facilities and large staff complements, and to municipalities with a large complement of new or inexperienced staff. Municipal facilities are the delivery points for most public health services, and serious management failures at this level will have a large impact on program performance. 54. The severity of this potential problem will be contained in the short term by the persistence of past linkages with provincial program coordinators and supervisors. These habits, however, will steadily diminish unless renewed, and relatively new management skills will need to be introduced so that the municipal health offices are able to present their budgetary needs convincingly and demonstrate efficient management of resources to local government executives and legislators. A provincial role in providing management support to municipalities would be a logical component of a restored "provincial public health system." 55. Health Education. Preparation of a national campaign to inform the public of its new responsibilities in the decentralized public health system would be a high impact intervention for the DOH in the near term. Vocal, persistent, popular demand for quality health services from local governments is a vital step toward local empowerment and the best guarantor that such services will be delivered. xiv 56. Center-Local Assistance Mechanism. 1stablishing a new project assistance mechanism will be a fundamental prerequisite to building the DOH partnership role with local governments. It will require many steps and sub tasks, covering such issues as funds flow, definition of targeting criteria and cost-sharing formulas, and project development procedures and capacities. A workable, functioning mechanism would be a substantial contribution to the credibility of DOH offers of assistance to develop new public health services and help address equity concerns, while also attracting foreign donor finance. Local governments will participate in the Comprehensive Health Service Agreements partly based on expectations of future DOH assistance flows. 57. The most crucial elements in the design of such a mechanism are the choice of instrument (revenue grant vs. project assistance) and the targeting and cost-sharing criteria. The risks involved in poor design of the mechanism are substantial. For example, formula-driven revenue grants, even if earmarked for health spending, may have the effect of merely substituting for local resources in the financing of health services, so that no additional resources are made available to health. Another risk is that such assistance may depress local tax effort, thus perpetuating dependance on central resources. 58. If more discretionary instruments are used, such as project grants, a number of advantages ensue. The purposes of the grant can be controlled, the benefits can be well targeted to beneficiaries, and cost-sharing arrangements can be speci.fically tailored to local fiscal conditions. Moreover, donors will be more comfortable with such an arrangement. Even if clearly preferred as an assistance mechanism, the project grant (or loan) mechanism must be administered in a transparent fashion to assure accurate and equitable targeting and cost-sharing conditions, and poorer localities with low administrative capacity must be assisted in preparing project proposals. 59. Improving Provincial HosDital Efficiency. Although less urgent than other issues from the national point of view, the need to improve hospital efficiency, both operational and financial, will be a high priority for local governments and an important area for potential benefits from decentralization. Hospital recurrent expenditures will absorb a large part of provincial budgets and are an important factor in explaining provincial fiscal deficits. Therefore, governors may seek to raise efficiency and increase hospital revenues to ease overall budgetary pressures. 60. Analysis of operational efficiency data for all provincial hospitals reveals several interesting facts. First, financial efficiency (the proportion of revenues over total operating costs) is very low, averaging about 5 percent. This could be increased, especially in wealthier catchment areas. Second, operational efficiency occurs over a wide range, indicating that many hospitals fall ir:to the "less efficient" category and could benefit from quality improvements, consolidation, or even privatization. Some hospitals are overutilized and may require better demand management and capacity expansion. Moreover, both rich and poor provinces have similar efficiency problems. xv 61. The DOR can play an important role in assisting provincial health offices to undertake effective hospital management improvements that will benefit both efficiency and equity objectives. Such assistance will also be a tradable service in the negotiation of a provincial role in managing public health disease control programs. Policy Actions - Longer Term 62. A number of issues are more appropriate to action in the longer term, not because they are any less important, but their impact on health program performance is slower. These issues are listed below. 63. Reform of the Management Information System. For the near term, the DOH and local governments may agree to continue the Field Health Service Information System as it was operating prior to devolution. However, that system will need to be reformed to respond more directly to local government information needs and be oriented to DOH assistance flows to local governments. 64. Health Plarming. Similar recommendations apply to the area-based health planning system introduced by the DOH in 1989. Its use should be sustained until the provincial intermediary role is well established and a more locally adapted planning system can be designed and installed. 65. Personnel Management Reform. Establishing an integrated personnel management system allowing for inter-governmental transfers, promotions and secondments would be a positive development for morale and efficiency. In addition, salary scales may need to be adjusted to allow local governments to recruit for service in less desirable locations. 66. Assessment of Procurement and Logistics System. The procurement system for the public health system has already beer. decentralized to a large extent and may be better adapted to a decentralized framework than other management systems. However, the newly devolved arrangements will create opportunities for efficiency gains, such as local pooling of procurement needs and concentration of procurement authority. An assessment of the procurement and logistics system should be undertaken after the devolved system has operated one or two years. 67. Modification of the IRA Formula. Due to the large fiscal surpluses accruing to cities and for other reasons, members of the national legislature have introduced bills to revise the revenue sharing (IRA) formula, as set down in the Local Government Code. Although the IRA formula appears to favor some local governments over others, the analysis in this report indicates that the formula is relatively benign in its fiscal impact on both poor and better off localities. Before a revision is legislated, several risks will need to be taken into account, such as the impact on local budget decision making, the distributional effects of a new formula and the relative expenditure needs of cities as opposed to provincial and municipal local governments. The surpluses generated by the current IRA formula for cities might prove to be less of a windfall than is apparent from the "surplus" estimations. Moreover, other policy interventions might be more appropriate to address the problem, xvi such as further devolution of expenditure responsibilities to local governments. Additional analysis of this complex question could help determine whether an intervention is needed, and if so, how it should be designed to optimize the impact in both efficiency and equity terms. 68. Pooling of Resources and Other Efficiency Gains. Local governments will encounter opportunities to collaborate in the production of health services so as to avoid duplicated and unnecessary expenditures. However, the local response to these opportunities may benefit from encouragement and information on best practices from the DOH so that local governments more fully understand the benefits of such efficiency improvements. E. The Future Role of the DOH 69. This report assumes that the DOH will seek to establish itself as a full partner with local governments in the delivery of equitable and affordable health services for the entire public. This role has been eloquently articulated by the Secretary of Health, Dr. Juan Flavier. In particular, the DOH role would include responsibility for assuring that national health programs addressing communicable and preventable diseases are implemented consistently and equitably throughout the country. 70. Such a partnership role is not ordained by the Code, nor predicted by the decentralization experience of other developing countries. Central ministries of health in many cases have withdrawn into a regulatory and information-processing role, with minimal accountability for or involvement in the performance of the local health delivery system. This might be appropriate for more developed economies where differentials in health status and service access have been minimized, where the major communicable diseases have been controlled or eliminated, and local capacities to finance and manage public health services are advanced. But for the Philippines, inequities and service shortfalls are widespread and may well intensify under the devolved arrangements for public health services. Local capacities to deliver services are highly variable, and public health problems still require concerted, coordinated control efforts. 71. The newly decentralized system opens a vast potential for local variation in the level and purposes of health spending. In many cases, local decisions on health policy and financing may not be optimal from a national public health point of view. To pursue a full partnership role, the DOH will need to develop a broad range of instruments and capacities, including project assistance and incentives, regulatory pressures, public information campaigns and technical assistance. These can be deployed to influence governments, help develop their management capacity, and push their allocation of resources towards the most urgent public health problems affecting the most vulnerable, least able to pay groups. 72. How the Department will build the necessary capacities, obtain the necessary cooperation from LGUs, and secure sufficient external financial resources to fulfill its partnership role are its fundamental challenges for the rest of the decade. Chapter I. PERFORMANCE AND STRUCTURE OF THE EHILIPPINES HEALTH SYSTEM PRE-DEVOLUTION A. Introduction 1.1 The Philippines is currently implementing the provisions of the 1991 Local Government Code (LGC). As a result of the LGC, local governments will receive additional grant resources from the national government and will assume responsibility for delivery and financing of selected public services, including public health services. The public health system, as arguably the most affected sector within the national government, will undergo a far- reaching structural and functional transformation. All the DOH facilities at the local level and over half of its staff will be devolved to local governments at the barangay, municipal, provincial and city levels. Public health services and hospital operations at these levels of local government will no longer be subject to central financial or managerial control. 1.2 Decentralization of health services will incur costs and benefits. Organizational change of this magnitude can be expected, at a minimum, to impose short-term declines in service output during the transfer of infrastructure and staff to local governments. After that "changeover" phase, the expected longer-term benefits of a decentralized system can begin to emerge, such as services better matched to local preferences and more innovative and efficient production arrangements. On the cost side, decentralization may result in a less effective targeting of services to the poor and the vulnerable. Thus the potential for trade-offs exists, between the attainment of higher efficiency at the expense of equity. 1.3 Many of the costs and benefits of decentralization arise from the specific provisions of the law itself. Unintended impacts on resource availability or on management functions may work through the system causing substantial additional losses or gains in efficiency and equity. Thus, the Local Government Code must be carefully assessed to determine the potential impact of the incentives it creates and the structure it imposes. The major questions for this study, therefore, can be framed as follows: (a) What are the potential costs and benefits of moving from a centralized to a highly devolved health system in the Philippines and what are the expected impacts of those costs and benefits in terms of equity and efficiency objectives? (b) Which cost and benefit issues merit policy attention in the near term to assure continuity of program performance and positive health impact? (c) Which cost and benefit issues could be deferred to the longer term to reform a maturing, devolved public health system? 1.4 Two assumptions underpin these questions. First, it is assumed that devolution as directed by the Local Government Code of 1991 (LGC) 2 is a political fact of life that cannot be substantially altered in the near term. The genesis of the LGC was fundamentally political, and the political forces in support of the Local Government Code of 1991 will continue to hold sway over those opposing it. 1.5 The second assumption is that the central Department of Health will seek to establish itself as a full partner with local governments in the delivery of equitable and affordable health services for all the people of the Philippines. If devolution is seen to impose high potential costs in specific areas, then it is assumed the DOH will seek to compensate or correct for those costs with the tools and resources at its command. 1.6 Because the devolution of services and infrastructure to local governments is currently in process, it is not yet possible to measure performance of tte new system and quantify the cost and benefit impacts of the central compared to the devolved system. That analysis will need to be undertaken a few years hence. With the objective of providing timely policy input, this report, instead, uses a combination of past, current, and comparative evidence combined with theoretical perspectives to construct a likely array of cost ar.d benefit impacts, from which policy implications are drawn. The evidence for cost/benefit findings can be grouped as follows, with each corresponding to a chapter in the report. (a) Pre-devolution performance of the national health system. (b) Comparative and theoretical perspectives on decentralization. (c) Local government fiscal issues. (d) Organizational and management issues arising from the LGC. 1.7 Chapter I begins the assessment of costs and benefits, focusing on the performance and structure of the former centralized system of public health and its interaction with the private sector. The strengths and weaknesses of the former centralized system will to varying degrees carry over to the r local government proprietors of the devolved structure, creating potential costs and benefits. Thus, Chapter I first examines health status in the Philippines, followed by the structure and evolution of the public and private system, the performance of public health programs, health expenditure and finance issues, and a final section summarizing the cost and benefit implications of the former system for the new devolved system of public health services. B. Health Status 1.8 This section of the chapter reviews the evidence on health status and its distribution regionally and by different population groups. The main sources of information on mortality, morbidity, and nutrition are the DOH reports, vital registration, census records, and a series of specialized surveys. Surveys are the most reliable source of data on the health indicators and their differentials. 3 Infant Mortality: Levels. Trends and Differentials 1.9 At the national level, widely differing estimates from different data sources hinder a clear-cut conclusion on the levels and trend of infant mortality in the Philippines. For trends, infant mortality estimates from vital registration, for example, illustrate a declining trend reaching as low as 30.1 in 1988 (Figure 1.1). The National Demographic Surveys (1983 and 1988) and the Contraceptive Prevalence Survey (1986) all present a flat pattern of infant mortality between the late 1970s until the mid-1980s. For the earlier period from the mid-1960s until the mid-1970s, the direct estimates also show a flat pattern, as does the 1978 Fertility Survey (not shown in Figure 1.1). 1.10 Figure 1.1 also illustrates the magnitude of difference between the different sources and methods of estimation of infant mortality levels in the PhilippinesL'. Although the various surveys show a flat pattern of the IMR, the estimates differ significantly on thse overall infant mortality level. The indirect estimate from the National Demographic Survey of 1988, for example, gives an IMR of 65 infant deaths per 1,000 live births for the reference period of 1986; the direct estimate from the same survey has been reported as 52 deaths per 1000 live births. 1.11 In view of these conflicting results, a Task Force for examining the issues on infant mortality estimates (TF-IMR) was established in July, 1991 in the Philippines. In its final report, the TF-IMR recommended the adoption of rates derived from indirect (higher than the direct) estimates based on the demographic surveys. The TF-IMR chose to discard rates derived from the vital registration system as a result of high levels of under- reporting. In choosing the indirect estimates, the TF-IMR cited the robustness of the indirect techniques, but no explanation for the unusually large difference between the direct and indirect measures was provided. Consequently, there remains some uncertainty concerning actual levels of the IMR over time. .1/ Indirect measures are based on the Brass method for estimating infant and child mortality measures using data on number of children ever born and children surviving by age of mother or duration of her marriage. These methods are robust to data errors, especially in dating of events. However, they are not very accurate in providing measures of infant mortality in the immediate past prior to the survey date since those are based on measures derived from a selective age group of mother i.e. 15-19 years old. 4 Figure 1.1 Infant Mortality Estimates. PhilipRines. Selected Data sources 80 \ --Vital Regist. C Aensus- 1980 \s tN1S-1983-D 60 + M O- 1983 -I -Ea- N0S-1988-D 7 --O N -1988-1 t G ^ Ps- 1986-D 40 - C GPS-1986-1 20 ,,, ,,1 ,,,l, 1960 1966 1972 1978 1984 1990 Year Source: "Final Report of the Task Force on Infant Mortality Rate," November 1991 1.12 Trends on the other hand, of infant mortality are more consistent across the different data sources, especially those derived from surveys. Despite reservations concerning the true level of the IMR, these sources clearly reflect a stalling in infant mortality decline between the late 1970s and mid-1980s. The 1990 census provides a less reliable estimate for the IMR at the end of the decade, and it points to a slight decline in infant mortality during the latter part of the 1980s. If such a decline is true, it will coincide with a period of rising economic indicators and serious efforts by the DOH in terms of providing preventive and curative care, especially for children and mothers. 1.13 Regional differentials in IMR are also significant. Rates are lowest among NCR and Region III (NDS indirect estimates for these two regions are 46 and 49 respectively) and highest among Regions XII and VIII (NDS indirect estimates are 104 and 89 respectively). In terms of time trends, the regional experience is mixed, reflecting flat, increasing, as well as 5 decreasing patterns of infant mortality. Unfortunately, provincial level data are not available for a more detailed analysis. 1.14 The apparently flat trend in IMR estimates is an unusual occurrence for East Asia. Table 1.1 places the Philippines IMR performance in comparative perspective using data for Asian countries from 1970-1990. Among the selected countries, the Philippines had rates comparable to those of Thailand and China in the period 1970-75. Over the ensuing 20 years, rates dropped to 32 and 31 for China and Thailand respectively, a decline that was not paralleled in the Philippines. Indeed, using either direct or indirect estimates of the IMR, the Philippines shows the lowest percentage decline in the region. Table 1.1: Infant Mortality Rates in Selected Asian Countries. 1970-90 % decline Country 1970-75 1975-80 1980-85 1985-90 1970-90 Bangladesh 140 137 128 110 21% China 61 40 39 32 488 India 135 126 110 99 27% Indonesia 114 105 95 82 28% Korea, Rep. 47 35 30 20 57% Lao PDR 145 135 122 110 24% Malaysia 42 34 28 18 57% Nepal 153 147 139 127 26% Philippines'- 64 52(60) 51(61) 52(61) 19%(6%) Thailand 65 53 38 31 52% Viet Nam 90 62 53 46 49% Source: World Bank Data File 1.15 If infant mortality and per capita income are plotted for Asian countries, as in Figure 1.2, it is apparent that the current Philippines IMR, while above the regional mean for its income level and far short of the achievements of Thailand and China, is not in the outlier category. This would suggest a linkage between national economic progress and the IMR. a well known relationship in inter-country comparisons. Estimates for the Philippines are derived as follows: the 1970-75 estimate was provided by the World Bank, Population and Human Resources; the 1975-90 estimates are derived from the direct estimates of mortality using the NDS-1988 data (as reported by the Philippines Task force on Infant Mortality (TF-IMR). The values in parenthesis represent the suggested values by the TF- IMR, based on indirect estimates, for an equivalent period. 6 Figure 1.2: Infant Mortality Rates and Per Capita GNP in 14 Asian Countries. 1989 140 120 0 Q 100 5 4 UU 42 60 - Phpinesl 40- 20 50 10 1500 2000 2500 3000 3500 4000 4500 Per Capita GNP Source: World Bank Data File Determinants of Infant Mortality 1.16 Several hypotheses can be advanced to explain the stall in the IMRa. Income growth seems to play a significant role in reducing infant mortality in the Philippines; over this period of mortality stall, the growth in household income as measured by household surveys also stalled, even while per capita GNP showed modest gains. In a cross-sectional analysis of household income and the IMR, however, income does not emerge as a signifip-ant variable, probably due to the single point estimate of income contained in the cross sectional survey data. Education of mothers, however, is indicated as an important determinant with cross-sectional analysis. The educational system in the Philippines has compared well with other developing countries, /3 Evidence for this section is drawn from World Bank, "Philippines: An Opening for Sustained Growth", 1993; a background paper analyzing Infant Mortality using the 1988 National Demographic Survey; and various secondary data sources. 7 but there are indications at the sectoral level of stalled improvement during the 1980s (parallel with the IMR) for cohort survival rates, an important indicator of educational efficiency and equity. Fertility rates also show a slow rate of decline since 1970 compared to other Asian countries. 1.17 Environmental variables (safe water, household sanitation) are indicated as significant correlates of the IMR outcome in a regional analysis regression, but it is not clear how access to such services may have contributed to the stalled IMR. Public health expenditure and a key public health output affecting infant and child health (DPT immunization levels), emerge as highly significant explanatory variables in the regional analysis. Those regions that managed reductions in infant mortality during the 1980s also were targeted with primary care and public health expenditure. 1.18 In the Philippines, determinants of IMR variation by household or by region are, therefore, likely to be similar to those reported for other countries. Explaining the IMR stall over time is a more difficult question. Some of the macro and sectoral indicators also show stalled performance, but these correlations amount to hypotheses, not findings. The duration of the IMR stall is an unusual occurrence in East Asia. If the IMR does not resume its expected decline in the late 1980s and early 90s, health policy assumptions will need to be reassessed and research on IMR determinants would be a high priority. Leading Causes of Mortality 1.19 Infectious and preventable diseases still represent the leading causes of death in the Philippines. Reports on infant mortality point to respiratory conditions and diarrheal diseases as the major killers among children under one year of age. In addition, nutritional deficiencies as well as septicemia and problems related to the birth event are classified among the ten leading causes of infant mortality. This mortality profile has lead the DOH to expand several public health programs addressing these main causes of death, namely respiratory infections and diarrhea. 1.20 Table 1.2 reports on the leading causes of death for the total population over a 5-year period. The Table shows that in 1989, the leading cause of death was pneumonia, followed by diseases of the heart and vascular system, tuberculosis, malignant neoplasms, diarrheal diseases, kidney disorders, and septicemia. Most of these causes are preventable and infectious in nature. An increase in the level of heart diseases and malignant neoplasms is also noted. This increase could be a reflection of better reporting or of a real increase in mortality risk. If mortality from chronic ailments is truly on the rise, such an increase could have important implications for public health services and the need to adapt them to a more demanding and expensive-to-treat range of conditions. The change in the disease pattern could vary regionally as well, thus affording local governments an opportunity to tailor local health services accordingly. 8 Table 1.2: Mortality Rates (Rer 100.000 goDulation) for the Ten Leading Causes of Death. Philippines. 1985-89 Year Disease 1985 1986 1987 1988 1989 Pneumonia 96.7 90.4 91.3 91.8 77.0 Diseases of the Heart 66.3 69.9 66.0 65.1 74.6 Diseases of the Vascular System 49.7 52.5 49.6 51.5 56.1 Tuberculosis (All Forms) 57.9 54.6 55.2 54.0 43.8 Malignant Neoplasms 33.2 32.8 33.4 33.9 36.5 Accidents 18.4 18.5 19.1 17.7 19.6 Diarrheal Diseases 21.1 19.4 23.2 21.8 13.5 Measles 14.7 11.2 13.8 16.1 11.2 Nephritis, Nephrotic Syndrome, 10.0 9.4 9.4 9.4 8.5 and Nephrosis Septicemia - - - 7.5 8.2 Source: DOH, "Philippines Health Statistics," 1985-1989 Nutritional Status 1.21 The nutritional problems in the Philippines are characterized by. protein-energy malnutrition (PEM) and micronutrient deficiencies. Tle available data show overall improvements in nutritional status during the second part of the decad, after a deterioration in the early 1980s. Continuing problems include protein-energy malnutrition (PEM), particularly among pre-school and school children, iron deficiency anemia, vitamin A deficiency, and goiter or Iodine deficiency. 1.22 Dietary Intake. The mean per capita caloric intake has remained inadequate over the last decade. Nationwide surveys conducted by the Food and Nutrition Research Institute (FNRI) in 1978 and 1982 showed that the caloric intake of Filipinos was about 89 percent adequate compared to the RDA. During the economic crisis in the 1980s, further declines in caloric intake are hypothesized and in 1987, it recovered slightly to 87 percent of the recommended allowance. Chronic dietary energy deficiency is particularly of concern among preschool children, and pregnant and lactating mothers. The mean energy intake of preschool children comprised only 65 percent of their RDA, while pregnant and lactating mothers barely reached 70 percent of their desirable caloric intake levels. In comparison, the results from the 1989-90 survey reflect improvements in the overall nutritional status. This mixed picture on dietary intake is reflected in both protein-energy malnutrition and micronutrient deficiencies, as discussed below. 1.23 Protein-Energy Malnutrition (PEMO. PEM refers to a range of clinical disorders due to a deficiency of protein or calories or both. It is indicated by the growth, weight and height of children and weight and height of adults relative to established standards. The internationally accepted 9 standard is the US National Center for Health Statistics (NCHS) Standard. Table 1.3 compares the malnutrition rates for the Philippines with three other Asian countries using minus two standard deviation of the NCHS standard as the cut-off point for malnutrition. Underweight, wasting and stunting rates among children under five in 1987, respectively, put the Philippines at an advantage relative to Indonesia but in a worse position relative to Thailand. The Philippines has the highest percentage (18 percent) of low birthweight in comparison to the other three countries. Table 1.3 Basic Nutrition Indicators for Selected Asian Countries (1987) % of Children Under Five % Low Country Birthweight Underweight Wasting Stunting China 6 21 8 41 Indonesia 14 51 11 46 Philippines 18 33 7 42 Thailand 12 26 10 28 Source: World Bank Data File 1.24 Trends in malnutrition rely on the Filipino standards for malnutrition. Figure 1.3 shows that underweight, a measure of current undernutrition among children under six, shows a decline from 21.9 percent in 1978 to 17.2 percent in 1982, increasing slightly to 17.7 percent in 1987, then decreasing to 14 percent in 1989-90. The prevalence of moderate and severe underweight has been declining, while milder degrees of underweight children (not shown) remain high at about 50 percent. This is partly attributed to shifts from severe to moderate and to mild malnutrition. Wasting among the under six, a measure of acute malnutrition, has declined slightly. 1.25 Micronutrient Deficiency. A series of micronutrient deficiencies affect health status in the Philippines. The three major health problems are: Iron Deficiency Anemia (IDA); Iodine Deficiency (IDD); and Vitamin A Deficiency (VAD). IDA is perhaps the most prevalent nutritional deficiency in the country. The 1987 National Nutrition Survey indicated that the prevalence of anemia has increased compared to results of the 1982 survey. Iodine deficiency is also common in the Philippines to the extent that the country is classified as the most goitrous country in Southeast Asia. Vitamin A Deficiency (VAD), as evidenced by night blindness and Bitot spots, occurs in clusters of high prevalence coinciding with low economic status. 10 Figure 1.3: Percentage Malnourished Children under 6. Philippines. 1978-90 25 Percentage 2S0 20 ..................... ................... ............................................................ 15 1 ........ ....... . .. 5 _ ... g 1.......-................. Underweight Wasted Stunted Wasted & Stunted Nt Inourished Children 0-6 Years 1978 M 1982 MM 1987 2 1989-90 Source: National Nutrition Surveys, 1978-1990 Fertility 1.26 Table 1.4 presents the Philippines' fertility levels and their rate of decline in comparative perspective. Similar to the pattern for the IMR, the Philippines performance lags behind two countries that began with similar demographic profiles and launched their family planning programs at roughly the same time. Analysis of this differential performance has isolated the level of family planning program effort and its consistency over time as the major factors affecting the lower Philippines' performance. Indeed, the Philippines falls behind all East Asian countries except China (which began the period with the highest CPR in East Asian developing countries) in terms of the annual percentage increase in contraceptive prevalencei4. As a determinant of health status, and with direct causal links to infant mortality risk, the TFR performance of the Philippines may be a contributing factor to the recently flat trend in the IMR. "4 World Bank, "New Directions in the Philippines' Family Planning Program", Population and Human Resources Division, Country Department II, Asia Region, October 1, 1991, pp. 44-50. 11 Table 1.4: Fertility Declines in Thailand. Indonesia. and the Philippines Country 1965\69 1988 Decline Thailand 6.30 3.0 3.30 Indonesia 5.57 3.4 2.17 Philippines 5.72 4.3 1.42 Source: World Bank, "New Directions in the Philippines' Family Planning Program", Population and Human Resources Division, Country Department II, Asia Region, October 1, 1991, pp. 45. Conclusions on Health Status 1.27 In reviewing the key health status indicators for the Philippines over time, there is no basis for complacency. Fertility has declined slowly, and key measures of malnutrition are comparatively high (low birthweight) or increasing (micronutrient deficiencies such as maternal anemia and iodine deficiency). On the leading causes of mortality, there is some evidence of increasing rates of chronic diseases affecting adults, but infectious and preventible diseases still represent the leading causes of death. The most striking phenomenon in measures of health status in the Philippines remains the apparent stalling of the IMR decline from the late 1970s to the mid 1980s. The performance of the IMR after 1986-87 may prove to show some improvement. overall, health status achievements are mixed; the new decentralized health system will need to accommodate initiatives to address relatively poor outcomes in fertility and nutrition, while sustaining public health programs that are targeted to at-risk children and mothers. C. Health Delivery System - Structure and Evolution 1.28 Introduction. The structure of the Philippines health system is dominated by a single characteristic, the roughly equal shares of the public and private sectors in terms of health expenditure (Table 1.5). The roughly equal size of the two sectors is also reflected in the public and private shares of personnel and facilities, both of which are widely and, in some cases, abundantly available throughout the country. 1.29 The well balanced presence of both public and private providers suggests they may either compete or complement one another in various regional and service markets and that they should enjoy comparative advantages in specific sub-sectors. In addition, private and public health infrastructure is distributed differently in response to 1^cal income levels and health risk, an equity issue of considerable interest given the Local Government Code. And finally, the evolution of the public system has deconcentrated some authority and responsibility from central to local components of the public delivery structure, another important precursor to the devolved system. These three issues and their implications are covered in this section. 12 Table 1.5: Total Health Care Expenditure (mil Peso) Percent Share National Public Private Total Public Private 1981 2736 5143 7879 34.7 65.3 1982 3309 6014 9323 35.5 65.5 1983 3921 7025 10946 35.8 64.2 1984 3596 8760 12356 29.1 70.9 1985 3779 6052 9831 38.4 61.6 1986 4870 6116 10986 44.3 55.7 1987 6582 6786 13368 49.2 50.8 1988 6874 6771 13645 50.4 49.6 1989 8587 7312 15899 54.0 46.0 1990 9085 7823 16908 53.7 46.3 Source: Except 1985 and 1988, private expenditures are based on NEDA and staff estimates. Public expenditures are from Orville Solon, Alejandro Herrin, et al, "Health Sector Financing in the Philippines," 1991. Structure of The Public System (Pre-Devolution) 1.30 The pre-devolution public system has had both central and local dimensions. At the central level, the Department of Health has presided over a national service delivery structure operating out of basic health and hospital facilities located at the Barangay (village) level, and up to the municipal, province, regional and national level (see Figure 1.4). The notable exception is found in the 60 chartered cities in the Philippines which have direct authority over their health delivery systems, subject only to supervision and regulation from the DOH. Thus, decentralization of health services has long been the case at the chartered city level. 1.31 The central DOH in Manila has been organized into five offices, each headed by an Undersecretary reporting to the Secretary of Health. The five offices have managed respectively: (a) Public health services(the major disease control programs, such as malaria, EPI, and TB); (b) Hospital services (management of national medical centers, regional hospitals, and the provincial level general hospitals); 13 Figure 1.4 Macro Health System Structure [urretil MatitrDa oa Kegs I. I Il F l l [ Offices ... .. .. .. . .... Provlnces Ice HospItalS IIospIialI * Districts | _ It#_ |Dist.H.Officea ~I -I) tIt urlion icipal I a ,',1 ' it::: osia s 1 1 111 RHU :::a 'r.'t:: AMIher 5 hS 1>S 516I ovr. a Oovn£MI* C a sro kp.wIa pal ii iti ii * llf ttSetwwe iaO Ita at t it The Public (c) Standards and regulations (drugs, laboratories, facility and professional licensing, etc.); (d) Management services (finance, procurement, administration, personnel management, etc.); 14 (e) A fifth group of services (planning, health education, foreign assistance coordination, etc.) reporting to the Undersecretary and Chief of Staff. This configuration will be revised by the current administration, both to reflect new program priorities and to incorporate the new mix of the Department's responsibilities given the devolution of services. 1.32 Deconcentration Initiatives: At the regional level, the Department has supported regional offices to oversee local health service delivery and personnel management, provide centrally procured supplies, medicines and equipment to lower level facilities, and conduct in-service training. At the province level, a reorganization in 1982 merged the Provincial Hospital and the Provincial Health Office into a new Integrated Provincial Health Office (IPHO), with the Provincial Health Officer in charge of both hospital operations (provincial and district hospitals) in the province as well as the provincial technical staff that assisted the primary service units (Rural Health Units and Barangay Health Stations). Direct supervision and control over the primary service units were undertaken by the District Hospital, later reorganized as a District Health Office. Budgetary releases from the central Department of Budget and Management first went directly to the IPHO, bypassing the Regional Office, and were later revised to flow directly to the District Health Office as well. The Provincial Health Officer was allocated expanded authority over budgetary actions, personnel actions and operational decision making during this period (1982-87). 1.33 The province-wide unification of the two basic professional tracks of government physicians was undertaken in the face of a long tradition separating public physicians into curative and clinical care represented by the hospitals, and the public health and preventive/promotive services represented by the old provincial health offices. The objectives of this structural change were to streamline management, lower unit costs, eliminate administrative overlaps, and promote effective hospital referrals from the field level, among others. No empirical study has assessed the impact of these changes, but the DOH views the integrated arrangements as effective. The question of their suitability for a devolved system of health services has both positive and negative aspects. On the negative side, the close administrative, logistical, and technical links of the primary service units (RHUs and BHSs) to the Integrated District and Provincial Health Offices has been a fundamental feature of the system. These linkages would seem to be vulnerable to disruption under the requirements of the Local Government Code to devolve primary service units to municipal governments and place the hospitals under the provincial authorities. 1.34 On the positive side, the progressive deconcentration of authority in the public health system down through the hierarchy has partially prepared local DOH health staff for devolution. Indeed,. since 1954, the DOH has been progressively decentralizing with succeeding reorganizations. First, the vertical disease program bureaus gave way to regional health offices. Then the rural health unit network was created, and the provincial health offices established. Finally, the integrated provincial health offices emerged, as noted above. Thus, at the time of devolution, the management of health 15 services had been heavily deconcentrated to the provincial level. A few remaining technical and administrative authorities remained at the regional and central offices, but many of the essential conditions for effective decentralization at the provincial level were in place. These included: (a) An operative provincial health planning capability, producing locally formulated plans consistent with national health policies and programs; (b) A provincial budgeting system that translated planning, strategies and targets into budget proposals; tc) A provincial health and management information system generating data for planning and operational decision making. 1.35 These capacities, however, remained within the DOH hierarchial health system, and were not folded into the administrative hierarchies of local provincial or municipal governments. Municipal mayors and provincial governors, however, have typically coordinated health initiatives with local DOH health officers, and in many cases they have augmented with in-kind and budgetary resources the DOH operations within their jurisdictions. Thus, a mayor might finance the construction of an additional room for the Rural Health Unit, or the governor might purchase needed medical equipment for a local DOH hospital. In addition, many local governments, especially at the provincial level, have financed their own parallel health facilities and services on an ad hoc basis. The scale of these additional public expenditures has been modest; over the 1986-1989 period, local governments have accounted for around 10 percent of total public health expenditure. Local fiscal issues will be taken up in Chapter III. Structure of The Private Health System 1.36 Private providers of health services are not organized into an hierarchial structure, as is the public sector, nor are they tightly regulated to locate in specific areas or provide specific services. Structure, therefore, is more the product of a web of incentives and competitive forces affecting many independent actors, whereas political and administrative decisions, centralized within the DOH, have dictated public sector structure and distribution. 1.37 The private health sector in the Philippines is composed of thousands of single-proprietor outpatient clinics, over a thousand hospitals of all sizes and types ranging from 5-1,000 beds, thousands of stores selling drugs, several large chains of drug stores, and uncounted thousands of traditional healers and birth attendants. NCOs are a substantial presence in the health sector, but precise numbers are not available. Real output of private medical services, measured by gross value added, was 1.3 billion pesos in 1989. Between 1986 and 1989, the average annual rate of growth of real output in private medical ;ervices was 6.6 percent. Private medical output was concentrated (40.5 percent) in the National Capital Region, but faster rates of growth were registered for several other regions. 16 1.38 The private hospital system is dominated by primary level operations in the form of single proprietorship, family-owned, for-profit enterprises. A small proportion are operated as limited liability corporations or through corporate foundations; the non-profits are operated by parishes, churches, unions, and cooperatives. Most for-profit private hospitals begin as part of a private practice of a physician-owner, expanding to a few beds from an outpatient clinic, and staffed by a husband and wife team. Secondary hospitals typically expand from successful family-run primary concerns. Private tertiary hospitals, managed by outside professional managers, have more complex decision structures, with administrative and medical departments separated. A recent facility survey concluded that the family based primary and secondary hospitals consistently displayed managerial weaknesses, low capitalization, and medical skills limited to the owners themselves. On the other hand, small public hospitals, according to the same survey, enjoyed distinct advantages owing to their integration into a hierarchy of public hospitals and higher level management able to provide technical, logistical and administrative standards and backup. Private/Public Comparisons and Interactions 1.39 Distributional Eauitv of Facilities. Below the regional offices, the DOH has constructed a vast network of facilities, from provincial and district hospitals to Rural Health Units and Barangay Health Stations. Has the distribution of such facilities been dictated by anti-poverty considerations or has it followed income levels? In the case of provincial hospitals, the level of bed capacity in provincial public hospitals is still unequally distributed, ranging from a low of 6,172 people per bed in Quirino to as high as 104 people per bed in Rizal in 1990. The inter-provincial distribution of public bed capacity is slightly positively associated with per capita income levels. Thus a 10 percent increase in provincial income is associated with a relatively low, but still positive 2 percent increase in the availability of public hospital beds in a province. 1.40 Private hospitals were once concentrated in the richest provinces and cities, leaving the poorer and rural markets to the public sector. This is no longer the case. Figure 1.5 presents all 75 provinces grouped into deciles of average per capita income along the horizontal axis, from poor to rich, with population-to-facility ratios on the vertical axis.5 As can be seen from Figure 1.5, private hospitals are distributed roughly in the same pattern as public hospitals in 1990. This compares favorably with the 1972 distribution, which was quite regressive. However, it can be assumed that the improvement was a result of the rapid growth in primary private hospitals (see Figure 1.8 below). 1.41 Rural Health Units and Barangay Health Stations are at the next two lower levels of public service delivery and proyide preventive services directed at maternal health and communicable diseases of infancy and f A progressive distribution would be reflected in an upward sloping line, and a regressive distribution in a downward sloping line. 17 Figure 1.5: Population per Private and Public Hospital Bed with Provinces Grouped by Household Income in 1988, for 1972, 1983, and 1990. People Per Bed 161000 14,000 1t2,000 e Private 1972 10.000 \-1- Government 1972 8U00 **- Private 1988 8.000 -6- Government 1988 05o00 * -X- Private 1,90 -.- Government 1980 4,000 .- 3-: 2,000 0 Poorest 2 3 4 RIchest Provlncial Income Quintie, 1988 childhood. A similar exercise was performed to measure the distributional equity of these facilities on a provincial basis. As can be seen in Figure 1.6 below, RHUs are slightly regressively distributed compared to BHSs, but both reflect an effective DOH policy effort to serve poorer regions of the country. This effort has not been entirely effective in the case of RHU's, as the lower income provinces tend to be lightly populated and remote, necessitating lower catchment populations so as to limit the distance traveled to the facility. No information is available for private clinics. 1.42 Public Hospital ODerational and Financial Efficiency. Public provincial hospitals, which will be discussed in more detail in Chapter 5, display reasonable ranges and levels ' operational efficiency. Although the secondary public hospitals include a Large number of performance outliers, the distribution of operational efficiency is still concentrated at reasonable levels of bed occupancy. Bed turnover rates and length of stay, however, are 18 Figure 1.6 Paopuldatlon Par FacU Rnked By bome. 1990 lbu'ru nd m a sAd Sm~~~ f DmOND d so 40 .............................I...................... source:.....Ann.al Report 1990 .0 .................................................... O ~~~~~~~~~~~~~~~~~~~~~~~~~~~~. fIt 9 4 6 e 7 a 9 10 PM* NV m Do" Source: DOH Annual Report 1990 unusually high compared to other countries, while average length of stay is unusually low. These findings point to the need for further analysis of the caseload of public hospitals and of the quality of data recording. Financial efficiency is uniformly low, with revenues covering an average of only 5 percent of costs. How the operational rates compare to private hospitals could not be determined with available data. Thus, although there are questions about data quality, the overall picture is not an unfavorable one for operational efficiency of DOH provincial hospitals. 1.43 Utilization By Household Income. Evidence from the National Health Survey of 1987 confirms the positive findings on distributional equity. Figure 1.7 below shows the percentage of households in each of seven income group deciles using different types of facilities. Although far from perfectly targeted, subsidized public facilities enjoy higher usage by poor households and lower usage among the higher-income households; the reverse is true for private hospitals and clinics. The case is less convincing for public hospitals, which show a weakly progressive trend. 1.44 ianpower. Total DOH manpower in 1992 amounted to over 70,000 staff distributed throughout the central and local system. The rate of growth of the number of DOH doctors and nurses over the last half-decade does not appear to have kept up with the rate of growth in the population, as the population 19 Figure 1.7: Household Utilization of Health Facilities by In'.ome Decile. 1987 PuMi of Hh Usin aei 40--.. .. .I s c-;I ooms Deo SO' _-----------------------_ -------- -s ; -------- Sosa NMisuuI Hmltb Sway. Ia.? O- ~ ...... . ,-, .. OO3 OH 0- per DOH doctor rose from 6,423 in 1985 to 8,825 in 1989. Similarly, the ratio of population to nurses also increased during this period. DOH midwives and dentists, however, show improving population ratios. Private physicians in practice amount to 58 percent of the total number of public and private doctors, which is estimated at 18,293 in 1987. These figures, however, do not indicate the extent to which public sector physicians are engaged in private practice after hours. In terms of distribution, about a third of public and private physicians and nurses were found to be practicing in Metro Manila and the nearby provinces in Southern Tagalog, areas which account for about one- fourth of the country's population in 1987. This pattern is a marked improvement over that prevailing in 1970, when about half of physicians and nurses were concentrated in and around Manila. 1.45 Using 1990 data, when public hospital doctors per bed are included in a statistical relationship, the elasticity with respect to provincial 20 household income per capita turns out to be +1.37 which clearly suggests that poorer households have proportionately less access to doctors in public hospitals. This relationship indicates the ratio of doctors per public hospital bed is lower in less developed provinces and in turn manifests an inequitable health manpower allocation problem in the public sector. This pattern is not surprising given the longstanding problem of attracting doctors to serve in the more remote, less developed locations. 1.46 The DOH and private sector manpower complement is drawn from a large and productive medical education establishment in the Philippines, both public and private. The number of medical schools more than doubled between 1975 and 1990, from 10 to 26. The number of nursing schools grew from 73 to 126. Only four of the medical schools are government-owned and only seven are located in Metro Manila. The flow of new medical personnel into the DOH and the private sector seems to be more than adequate. Between 1986 and 1988, these schools graduated an average of 316 new physicians, 4,897 nurses, 6,062 midwives and 1,573 dentists per year. For physicians, the graduating class was equal to about 17 percent of the 1987 stock of practicing physicians in the country; for nurses the comparable proportion was 22 percent. The stock of medical personnel is expected to grow by over 3 percent annually for the foreseeable future, according to a 1988 estimate. Overall, medical manpower availability is not an issue in the Philippines; the problem is equitable geographical distribution of DOH doctors, as noted above, and possibly other categories of manpower in the poorest localities. 1.47 Private-Public HosRital Competition. There are a number of indirect indications that private and public sector health providers compete with one another, especially at the hospital level. For example, primary and secondary hospitals appear to be co-located all over the country, as discussed above. Other evidence comes from the National Health Survey of 1987. Utilization behavior shows that the poor use private hospitals and the rich, to a lesser extent, use public hospital facilities, as can be seen in Figure 1.7 above. This suggests competition for clients. (It should be noted that high utilization by the poor does not answer whether the poor are receiving adequate care for their illness.) The growth of hospitals also suggests a competitive relationship, as presented in Figure 1.8 below. Total public hospital capacity has grown steadily from 1972 to 1983, and again to 1990. Private bed capacity grew dramatically in the first period, but contracted in the second, from 1983-90. Many provinces (36 per cent) experienced both a gain in public beds and a decline in private beds over the 1983-1990 period, further indirect evidence of a competitive relationship. 1.48 This body of indirect evidence raises the question of whether competition may be strong enough to cause the displacement of private by publ4t hospitals due to public subsidies and low, below-cost fees. If this occurs, it would support some constraints on public hospital expansion and selective reductions in public hospital capacity, particularly by the provincial governments which will assume control of all provincial and district hospitals. 21 Figure 1.8: The Growth of Hoapital Beds. 1972-1990 ~ | , ,Elo_. *1972 . . . E ~~~~~1983 0 10 20 30 40 s0 Thousands 5mmnw. DOO UskeinBEmman% Amami Uist of Ussuu Hepisk 1.49 Based on provincial hospital data for 1990, regression analysis yields tentative support for the absence of any significant substitution effect. A one percent increase in public bed per capita is associated with a 0.38 rise in availability of private bed per capita. To substantiate this finding, a separate bivariate regression between provincial private hospital bed per capita and GDP per capita shows a positive relationship -- reflecting that private sector hospital growth is autonomous of public bed capacity and responds to income growth, perception of public hospital services and time costs. 1.50 Substitution can also be examined at a more specific level of hospital capacity, so that competitors are more closely matched. V.1en tertiary, secondary and primary hospitals were regressed separately, a somewhat different picture emerges. Data for 1980-90 show that public tertiary hospitals tend to substitute for private tertiary hospitals but the complementarity between public and private hospitals still prevails at the primary and secondary levels. Overall, these results show a weak substitution effect of public for private hospitals, but provincial authorities will need to take account of private sector hospitals in order to ensure complementarity of public facilities. 22 Conclusions 1.51 From this discussion of the structure and evolution of the public and private health sectors in the Philippines, several issues stand out as particularly relevant for policy under a decentralized system of service delivery and finance: (a) The public and private sectors are roughly equal in expenditure share and hospital beds, and nearly so in terms of doctors, creating a truly mixed system. (b) Competition between public and private providers, notably hospitals, is such that public hospital capacity has not expanded to the point where widespread displacement of private facilities has taken effect. This indicates that the proximity of public and private hospitals and the interaction between them may be productive, but further expansion of the public sector will need to ensure complimentarity with private facilities. (c) Public facilities are located reasonably well with respect to equity, but could be further improved for provincial hospitals and RHUs. Some poorer localities may need to expand facility access to meet health needs. Private hospitals also seem to be well distributed across provinces. (d) Public sector management has been deconcentrated to the provincial level, a helpful precursor for the devolved system. However, the Local Government Code assigns substantial management authority even lower - to the municipal level. (e) Supply of health personnel is plentiful and does not pose a constraint at the present time, but the distribution of public and private health personnel could be improved. D. Public Health Programs: Performance. Eouitv and Strategv 1.52 This section of the chapter assesses the performance, equity and operational priorities for the major public disease control programs and other important public health services. The central questions addressed here include: How have the programs been working in terms of coverage rates and other measures of performance? Hasa the DOH allocated effort and resources to the most prominent causes of mortality and morbidity? What are the priority changes in the programs to sustain or improve performance under the devolved system of public health? 1.53 Public Health Programs include both preventive and curative services. Several of these have been classified as priority programs and have received resources from the DOH as part of the targeting strategy for main health problems and for enhancing preventive health services. Some of the high priority programs include maternal and child health (MCH), malaria 23 control, schistosomiasis control, and TB control. Nutrition and family planning, although within the purview of the Department, have not been priority programs in recent years. Foreign assistance to some of these programs has been substantial and appears to have increased overall resource levels for several public health services. Other public health indicators, such as access to safe water, levels of air and water pollution, and household sanitation also play an important role in determining health status, but have not received significant programmatic attention from the DOH. 1.54 Maternal and child health program (MCH): This program includes five activities, namely, the Expanded Program of Immunization (EPI), Control of Diarrheal Diseases (CDD), Promotion of Breastfeeding (BF), Maternal Care (MC), and Control of Acute Respiratory Infections (CARI). 1.55 EPI : The EPI program was launched in July 1976 by giving BCG vaccines to school entrants. By 1983, all six antigens for the six immunizable diseases were made available for all targeted children. In 1986, a change in government resulted in a goal of universal child immunization. With a high level of support by national government and top level management of DOH and local governments, the program has been able to achieve improvements in program management that have lead to impressive results as illustrated by data from both routine reporting and standard surveys. Cluster surveys conducted between 1987 and 1988 estimated BCG coverage at 88 percent (ranging 58-99 percent), DPT3 coverage at 67 percent (ranginge 37-84 percent), OPV3 coverage at 67 percent (range 37-83 percent), measles coverage at 49 percent (ranging 24-74 percent) and fully immunized children (FIC) at 41 percent (ranging 20-61 percent)'. The surveys and the routine reporting indicate a better performance in the provinces as compared to the cities, vwhich were not a high priority for program efforts, and a relatively poor performance of tetanus toxoid with provincial coverage rates ranging from 3-70 percent. A similar result is noted in the routine reporting where overall tetanus toxoid coverage was reported to be as low as 47 percent in 1990 (Figure 1.9). Most EPI services are delivered by DOH facilities (85 percent) at the RHU and BHS level. 1.56 Another measure of EPI Program success is the change in regional coverage rates from 1980 to 1990. Not only are 1990 coverage rates generally higher than 1980, but they are more evenly distributed across the regions, showing a stable relationship with regional income. EPI is clearly a program that must be sustained at its high level of achievement, both as a factor 6 The results of the cluster survevs increase confidence in the data generated by routine reporting; 67 percent of the areas surveyed give estimates of coverage that are within 10 percent of the routine reporting estimates. 24 Figure 1.9: Immunization Coverage for All Antigens. 1980-1990 100 overage 80 60 I 20 - 1980 1982 1984 1986 1988 1990 Year 71T2 I Bt -- IPT3 -- GOV3 -)n Msles - FIC Source: DOH Service Reports, Annual Reports affecting child health status and as an indication of what can be achieved in public health. Challenges for the EPI program in the near future include: (a) Reaching pockets where coverage is still low. There are some barangays and municipalities that are relatively unreached; measles outbreaks point to these pockets. The reason for their poor performance has been attributed to such factors as lack of midwives, difficult terrain and/or weather, low priority cities for program managers, and conflict between local political officials and health staff. (b) Maintenance of an adequate cold chain and logistics system. Although cold chain equipment is generally sufficient, there will be a need for overall maintenance of equipment and for replenishment within 3-5 years. It is important that in view 25 of the changes in the organizational structure of the health services and implementation of the LGC, that such resources for the EPI program be maintained and coordinated; (c) Building on the program's current success so as to eradicate some of the immunizable diseases. 1.57 Control of Acute Respiratory Infections (CARI): Acute respiratory infections are still the leading causes of death among children under five years of age. The 1981-85 average incidence rate of ARI-related diseases among the 0-5 age group is 59/1,000 while the mortality rate is 5/1,000. Deaths caused by the six notifiable ARI-related diseases (pneumonia, measles, bronchitis, influenza, pertussis and diphtheria) comprised 35 percent of all deaths for children under five years. In response to the importance of ARI, especially among children, the CARI program was commissioned by the Secretary of Health in 1987. The first five years of the program have focused on capacity building and include activities such as: training, provision of essential equipment, drugs, supplies, upgrading of health centers and hospital facilities, refinement of management systems such as drug procurement and distribution, field monitoring and supervision, and referral systems. 1.58 Several issues and constraints that limit the program's success have been identified. These are: (a) inadequate and irregular drug supplies in facilities and lack of trained personnel; (b) a need for funds for wider geographic distribution of program, and; (c) a need for standardized reporting and recording systems of ARI cases. The main issues in the next phase of the program are: (a) Ensuring quality of CARI training under the devolved system; (b) Securing quality case management through routine monitoring and supervision. Hence, after the devolution of services, the local government units will be expected to continue their support for ARI training, and ensure continuing purchase of essential drugs and equipment. 1.59 Control of Diarrheal Diseases (CDD) : The CDD program in the Philippines was launched in 1980. The program involves early treatment of dehydration among children under six years, oral rehydration solution (ORS) distribution, health workers' training and public education. Evaluating the success of the program in reducing morbidity and mortality is very complex and has not yet been done. Water supply, an effective intervention to prevent diarrhea, is outside the authority of the CDD program. At present, data from a baseline MCH survey conducted in 1991 are available and indicate that 25 percent of all cases of diarrhea among children under five were treated with ORT. The main challenge for the program is to maintain the initiatives started since 1987. In addition, maintaining the level of commitment, n This is a baseline survey, conducted by the DOH Child Survival Program in 1991, and sponsored by USAID. 26 training and quality of services as the program moves from "tinstallation" phase is crucial. 1.60 Maternal Health vMH): Maternal health status in the Philippines is poor, with 45.2 percent of pregnant women and 50.6 percent of lactating mothers suffering from iron-deficiency anemia. Goiter prevalence among pregnant women 13-49 years was estimated at 30 percent in 1987. Only 20 percent of deliveries are assisted by a doctor and about 75 percent of all births take place at home. Data from the 1991 MCH survey also show that only 48 percent of all pregnant women had three prenatal care visits or more (80 percent received care from the public sector and 20 percent from the private sector). The program's target by 1993 is to increase this estimate to 60 percent. 1.61 Overall, the coverage of maternal health services has shown some improvements but the performance has not yet reached the targets set by DOH. For instance, the NHS results for the 1981 and 1987 surveys indicate that the percentage of births attended by a physician increased from 17.6 percent to 21 percent in 1987; the percentage of deliveries taking place at a hospital also increased from 17 percent to 21 percent; and the number of women who received any prenatal care (one or more visits) increased from 73 percent to 82 percent. However, given the low maternal health status that still prevails, the program has several challenges to improve its coverage and quality of services. Some of these measures that the program could undertake include the development of better technical guidelines and training on maternal health care services and education. In addition, the referral system to handle the obstetric emergency cases should be strengthened through improvements at the hospital level and the coordination between tl1 hospital staff and the rural health units. This coordination will become ore problematic under the decentralized system. 1.62 Malaria Control: Malaria is one of the most important tropical parasitic diseases in the Philippines. The Malaria Control program was designed to reduce malaria to a level that no longer constitutes a public health problem, and includes: (a) drugs and equipment for epidemiologic surveillance and treatment and (b) pesticides, equipment, and vehicles for vector control, including residual spraying and elimination of breeding sites. 1.63 The measure of program effectiveness is based on annual parasitic incidence (or API, which includes both active case detection and passive cases presenting at DOH health facilities). This measure is not strictly a measure of incidence, but given the difficulty of employing a strict measure of new cases, it is usually adopted by malaria programs in developing countries. The measure is also based on service statistics, hence, the level of effort to promote the services that will affect the incidence rate. The latest available measure of API is the 1991 estimate at 7.28/1,000, which is above the programs's target of 5.2/1,000 for 1992, but which shows a sustained decline since 1987 when the API was 15. 1.64 Major challenges for the malaria control program are the attainment of already difficult targets given the devolution of services. Although malaria control is to be largely retained by the central DOH, obtaining local 27 cooperation in overcoming implementation problems will be a challenge for the program. Under the newly devolved system, regional offices and malaria personnel based there will continue to be directed by DOH; some staff working at the provincial level will also be paid and managed by DOH, but they will be under the de facto management of local government authorities. At the municipal level, the malaria control effort has relied on municipal staff for treatment and in some areas for finding cases. Continuation of municipal/provincial cooperation will be essential for effective malaria control. 1.65 The performance history of malaria control in the Philippines shows wide variation in the API, and various organizational changes have depressed control efforts. A similar impact is possible from devolution. Thus, despite the retention of central control over the program, breakdowns in coordinated anti-malaria activities may lead to missed API targets in the near term or even declines. 1.66 Schistosomiasis : The main goals of the schistosomiasis control program are to provide curative care through case finding and treatment and preventive care through public health education and to the extent possible, snail control and environmental sanitation. The population at risk in the endemic areas is more than five million, with national prevalence estimated at 6.3 percent in 1988. The program aims to bring down the prevalence of schistosomiasis by 15 percent annually to reach a low of 2.4 percent in 1994 and to eradicate it in one province (Bohol). 1.67 Overall, the program has been successful in reducing the prevalence rate of schistosomiasis in endemic areas. Figure 1.10 shows that between 1986 and 1991, an increase in the number of provinces classified with low prevalence and a decrease in those classified with high prevalence have been noted (among 24 provinces with endemic schistosomiasis). These results are encouraging and correspond with a period when additional donor resources were made available. Major challenges for the schistosomiasis program, as a retained activity under the devolved system, are parallel to the issues affecting malaria control, as discussed above. 1.68 National Tuberculosis Control Program (NTP): TB continues to be an important public health problem. It has consistently ranked among the top five causes of morbidity in the Philippines throughout the past three decades. The data show that since 1980, the decline in TB mortality rates has been minimal and the increase in morbidity rates might be a reflection of a more active program in terms of case finding. A national survey for TB was conducted in 1981-83. The results reported a prevalence rate of 6.6/1,000 population for sputum positive. The estimated annual risk of infection is 1.8 percent. Compared with other Asian countries, the Philippines has one of the worst TB situations. 1.69 The TB control program involves case finding, holding and treating infected persons, using the sputum exam as a diagnostic tool and short-term chemotherapies as the preferred drug regimen. By 1990, the program was successful in establishing active case detection in 80 percent of the 28 Figure 1.10: Degree of Prevalence of Schistosomiasis in Terms of Low. Medium and High. 1986-91 No. of Provinces 16 14 ... ...... 12 .... .............. . ............ .-.... . ....... ...... 1i......... ......... ....... .... ......... 8 ...... .... ..... ........ ... ... ... 6 - .......... 42 .. .... 1986 1987 1988 1989 1990 1991 Year _ Low Mediun 5 Hgh .CR prealence = Lw 5-1D! prevIencet >=I C premhlenceztH Source: DOH Schistosomiasis Service provinces. The program has received substantial expenditure support from the DON and donors. A recent evaluation indicated the achievements in expanding the scope of the program, but pointed to quality issues relating to training, diagnosis, and case holding. 1.70 Under devolution, the program will be partly retained by the DOH, and program drugs will be supplied to local health authorities. Local cooperation, however, will be crucial for sustaining case finding and treatment, and in raising the overall quality of the program. 1.71 Family Planning: The population has been growing at an annual rate of 2.4 percent. Contraceptive prevalence is still relatively low, with a CPR of 36.1 percent of currently married women (all methods) in 1988, although this figure had improved from the low CPR rate of 17.4 percent in 1973. The delivery of family planning services has passed through several iterations, hence, the program's organization and management has suffered from blurred responsibilities for policy implementation as well as changes in leadership and vacillating political support. Under the current program, DOH has the lead responsibility for family planning policy and implementation, but services are to be devolved. 1.72 The program's current strategy is based on the twin concerns for the health of women and children (health risk criterion) and the child bearing preferences of mothers (fertility preference criterion). The first step of implementing the program was to establish DOH as the main technical and service resource for family planning. There is presently a need to expand 29 access to family planning services nationwide through existing health facilities where such services are either not available or provided at a minimal level. A facility survey of 228 DOH family planning facilities in four regions showed that basic equipment, supplies and IEC materials for family planning were often missing or in short supply. 1.73 With the devolution of services, the program must consider the autonomy of local governments, which will decide for themselves the level of program effort in their jurisdictions. A coordinated national program will require determined national leadership and careful technical preparation. For example, on tne technical side, the new program will need to define clients and their characteristics, ensure coordination of inputs, and develop a reliable logistics system to provide consistent services. 1.74 Nutrition Program: The DOH is one of many government agencies involved in nutrition in the Philippines. The programs are run through such departments as Agriculture, Education, Culture and Sports, Social Welfare and Development and also through the National Food Authority. 1.75 The DOH developed a plan for a Comprehensive Nutrition Program in 1991, focusing on micro-nutrient supplementation and protein-energy (PEN) interventions. No funding for this program has yet been secured. The current DOH program aims to provide pre-natal care, including micro-nutrient supplementation and education, nutrition education to parents of young children, and iron and vitamin A supplements to at-risk pre-schoolers. The DOH also runs an annual netional child growth monitoring program called Operation Timbang with referrals of at-risk cases to other agencies. Performance is, however, modest. The DOH supplementation programs reached only 12 percent and 20 percent of pre school and primary school children respectively in 1990, and spending on the nutrition program amounts to less than one percent of the DOH budget. The most significant nutrition-related program in the Philippines is not in the DOH; the National Food Authority spends over a billion pesos a year on agricultural and food price stabilization, a program poorly targeted to those nutritionally at risk. 1.76 The DOH has a workable plan in its Comprehensive Nutrition Program, but funding for this effort will need to be partly obtained from reallocations from other less effective and targeted nutrition programs. Like the family planning program, any effort to rapidly expand a national nutritional program through the DOH must confront the potential fragmentation of program authority and implementation created by the Local Government Code. The DOH will need to build new coordinating and assistance mechanisms through which priority public health programs can be expanded and strengthened on a national scale and with the collaboration of local governments. Conclusions 1.77 DOH's public health programs have been successful tools to implement the Department's principal objective, i.e. to focus on primary and preventive health care and to ameliorate the main public health problems in the country. The DOH approach of targeting services for main health problems, through a mixture of curative and preventive interventions, has addressed the 30 "right" set of priorities. For instance, the focus on MCH services is highly appropriate given the poor health status of both women and children and the cost-effectiveness of preventive services in this area. Similarly, the stress on malaria, schistosomiasis and TB for both preventive and curative care, targets problems with a high public health impact. 1.78 As for the success of these programs in achieving their goals, most of the information at this stage relates to their coverage (process) and not health impact. EPI, for instance, has been a big success story for the DOH. Malaria control has made impressive strides in recent years. CDD and MS have shown improvements but still have a long way to go, and CARI is in the process of being institutionalized. Maternal care, in particular, will need to be developed to cover obstetric emergency cases. On the other hand, the nutrition and family planning programs may need basic redirection, given their current performance and budgetary support. On the equity side of performance, the programs for which regional data are available show an impressive improvement in the distribution of program benefits among regions, further evidence that public health services are well targeted in the Philippines. The fact that EPI and MH interventions are dominated by public sector providers over private clinics and hospitals reinforces the positive findings on the performance of public health programs. 1.79 - Future strategies for these programs will be affected by the level of their program effort and coverage rates, the extent to which delivery of services can be coordinated between central and local governments and various technical and logistical issues that would be present with or without devolution. These issues will be explored in more depth in Chapter IV. From this review of past performance, however, it can be concluded that (a) Devolved high priority/high performance programs cannot be allowed to slip significantly, and systematic efforts by DOH staff to prepare localities for full responsibility for their management must be given high priority (EPI, CDD, MH). (b) High priority/good performance programs (malaria, schisto, TB) must take steps to ensure that retained staff continue to perform in the devolved setting and that local support and cooperation is forthcoming from LGUs, due to the importance of properly timed and coordinated interventions for effective disease control. Malaria control seems to be particularly vulnerable to devolution. (c) High priority/low performance programs (CARI, family planning, nutrition) face substantial obstacles to their rapid expansion in a centralized environment, more so in the potentially fragmented conditions of the devolved context. 31 E. HEALTH EXPENDITURE and FINANCE Introduction 1.80 This section examines patterns of health finance, primarily in the public sector. Long standing issues in the financing of health in the Philippines have come into more clear and urgent focus due to the devolution of health services to localities. The allocative efficiency of DOH expenditures, as a proportion of the total government budget, and between various categories of health expenditure, is at issue, because past trends of central spending will be transferred, in part, to local governments. It will be their responsibility to either preserve or modify such trends. The relatively modest system of social health insurance in the Philippines, Medicare, may undergo changes in claims activity as a result of devolution, and its past performance therefore needs to be reviewed. These issues are analyzed here to establish the financial context of devolution, and to introduce the fiscal analysis of devolution to follow in Chapter III. DOH Expenditure Trends 1.81 Data showing the structure and evolution of DOH expenditure since 1980 appear in Table 1.6. Generally, DOH expenditures in the Philippines have grown modestly in real terms but have been affected by swings in macroeconomic performance. Except for the 1984-86 period, overall DOH spending remained fairly stable at around 0.4 to 0.6 percent of GNP. In 1990, the DOH budget rose to nearly 0.7 percent of GNP but dropped significantly in 1991. Correspondingly, the share of the DOH budget in public expenditure shows a similar pattern of fluctuation. The spending levels and fiscal efforts in the Philippines are nevertheless low compared to other Asian countries: In the 1980s, public expenditure on health in 14 Asian countries averaged about one percent of GNP, and five percent of total public expenditure, compared to .6 percent and 3.3 percent respectively for the Philippines (Table 1.7). 32 Table 1.6: Department gf Health Expenditure (Mil Peso) -Percent Share in- Current 1980 Public Year Prices Prices GNP Spending 1980 1240 1240 0.50 3.3 1981 1521 1369 0.55 3.5 1982 1813 1506 0.58 3.7 1983 2011 1497 0.61 3.6 1984 1873 929 0.39 2.8 1985 2437 1018 0.40 2.8 1986 3216 1331 0.55 2.7 1987 3811 1465 0.62 2.7 1988 5073 1778 0.63 3.0 1989 6109 1944 0.73 3.0 1990 7505 2115 0.67 2.9 1991 7172 1732 0.57 2.4 1992 10227 2550 0.60 2.6 Average 4154 1574 0.57 3.0 a/ General Appropriation Act Source: DOH, OBM, Commission on Audit Table 1.7: Patterns of Public Health Expenditure In Selected Asian Countries (Average 1980-89) Health Expenditure As % of GNP Public Spending Bangladesh 0.7 4.3 China 1.1 4.4 India 1.2 6.5 Indonesia 0.8 2.6 Korea 0.6 2.6 Malaysia 2.5 6.2 Myanmar 1.0 6.5 Nepal 0.7 3.1 Papua New Guinea 3.3 9.2 Philippines 0.6 3.3 Sri Lanka 1.4 4.1 Thailand 1.0 6.1 Viet Nam 0.6 3.3 Source: World Bank Data File. 33 1.82 During 1983-86, the burden of external and domestic debt and the narrow tax base severely limited the public resources available to finance health expenditures u. Recovery in the economy combined with the Aquino administration's commitment to human resource development enabled the government to allocate more resources to the social sectors (including health). In 1991, once again a range of adverse developments--including the Gulf conflict and requirements for deficit contraction--reduced the central government allocation to health. The intensity of the crisis was not severe compared with the earlier period of economic adjustments, but it was enough to cut real spending back to the levels of 1988. Prospects for a resumption of growth in DOH spending, albeit from a lower base-post-devolution, appear favorable. 1.83 Composition and Allocation. Table 1.8 displays the composition and allocation of central government spending on health from 1980 to 1991 in real terms. During the 1984-86 period, sharp fiscal adjustment created significant changes in the composition and allocation of sectoral expenditures. The data show that the main burden of economic adjustment fell on investment expenditure, as the proportion of the DOH budget devoted to recurrent expenditure rose from 86 percent to 95 percent and capital outlays fell from 13.6 percent to 5.9 percent. From 1987 to 1990, capital expenditures returned to the earlier upward trend, but in 1991, the sharp reduction in the DOH budget led to another compositional shift which reduced capital outlays from 12 percent in 1990 to a mere 4.4 percent in 1991. S As a share in GDP, public external debt increased from 47% in 1983 to 70% in 1986. Likewise, domestic public debt rose from 16% to 24% during the same period. 34 Table 1.8: Department of Healtb Expenditures (Mil Peso, 1980 Prices) 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 199121 Recurrent 1160 1293 1390 1293 878 933 1252 1313 1595 1688 1858 1655 Personnel Services 436 475 482 469 305 413 355 447 614 757 842 717 M & 0 Services" 724 818 909 824 573 520 897 867 981 931 1015 938 Capital 80 76 115 204 51 85 78 151 182 256 259 77 Equipment 29 32 41 83 12 39 35 45 47 87 81 lnastrture 51 44 75 121 38 46 43 106 136 169 178 Total DOH 1240 1369 1506 1497 929 1018 1331 1465 1778 1944 2117 1732 As % of DOH Expenditure 100 100 100 100 100 100 100 100 100 100 100 100 Recurrent 93.5 94.5 92.3 86.4 94.6 91.6 94.1 89.7 89.7 86.8 87.8 95.6 capital 6.5 5.5 7.7 13.6 5.4 8.4 5.9 10.3 10.3 13.2 12.2 4.4 As % of Recurrent Expenditre 100 100 100 100 100 100 100 100 100 100 100 100 Personnel Services 37.6 36.7 34.6 36.3 34.7 44.3 28.4 34.0 38.5 44.8 45.3 43.3 M & 0 Services" 62.4 63.3 65.4 63.7 65.3 55.7 71.6 66.0 61.5 55.2 54.7 56.7 1/ Maitnance & Operations 2/ General Appropriations Source: DOH, OMB 1.84 Allocation by Functions. Table 1.9 summarizes trends in the functional allocation of overall central government expenditure among four program areas during 1981-90 in real terms. Although the data for 1981-85 is taken from one source (Intercare Study on Health Care Financing) and the 1986- 90 data was prepared by the DOH, the methodologies used are similar, and the complete data set is presented. Tne main feature of these trends is the significant reallocation of real expenditure out of preventive care towards other categories of health spending from 1986 to 1990 and the growth in real terms of curative spending over most of the period. The recent growth in curative spending parallels the growth in infrastructure spending from 1986 through 1989, when hospital construction expanded rapidly. This has helped to maintain curative spending at a roughly constant 65 percent of total DOH expenditure. As for real spending on preventive services, in 1990 it was lower than the 1981 level and only 14 percent of total public health spending, down from 25.8 percent in 1986. Another notable feature is the sudden growth in the administrative category from 1987 to 1989. Part of this may be due to salary adjustments in 1988 and possibly to capital spending for administrative buildings, but breakdowns of this category into recurrent and capital expenditures are not available. 35 Table 1.9: Uses of DQO Expenditures (Mil Peso, 1980 Prices) Preventive Curative Year Care Care Traihing Administrative ToW Amount A Amount AMQu A AMount A Amount .- 1981 393 24.3 1061 65.5 14 0.89 151 9.3 1620 100 1982 459 26.4 1164 66.8 12 0.67 108 6.2 1743 100 1983 459 23.2 1362 68.8 10 0.53 150 7.6 1981 100 1984 277 24.6 740 65.7 7 0.62 102 9.1 1126 100 1985 141 13.9 794 78.5 6 0.58 71 7.1 1012 100 1986 367 25.8 961 67.5 17 1.19 79 5.5 1423 100 1987 418 25.6 1121 68.8 13 0.83 78 4.8 1630 100 1988 339 18.5 1345 73.6 16 0.90 127 6.9 1827 100 1989 402 18.1 1391 62.6 18 0.79 412 18.5 2222 100 1990 317 14.3 1445 65.4 22 1.00 425 19.3 2209 100 Note: Estimates from 1981 to 1985 are from INTERCARE Estmates from 1986 to 1991 are from DOH, OMB Source: Basic Data from General Appropriaton Acts 1.85 Preventive and curative categories of spending need to be interpreted with care. They are broadly reflective of hospital and non- hospital public health spending priorities, but are not mutually exclusive. For example, district and provincial hospitals, as a result of the integration of hospital and preventive service management in the Integrated Provincial Health Office in the early 1980s, perform many "preventive" health functions, such as administration and supervision of the delivery of such services in lower level facilities. The DOH in recent years has made laudable efforts to raise public health spending and direct more of it towards public health needs at the community level. These efforts have produced erratic results, however, as measured by the preventive care category of expenditure, due to sustained real growth in curative and administrative categories. The prospects for shifting the composition of spending toward preventive services are unclear given the devolution of services (see Chapter II). Sources of Health Financina 1.86 The financial sources of total public health spending, as shown in Table 1.10, indicate that the share of domestic financing from national taxes is the highest, over 80 percent on average; the balance was financed through non-tax revenues (4.1 percent), local government budgets (9.9 percent) and external grants and loans (4.1 percent). Over the last half of the decade, growth in local government spending on health has not kept pace with the expansion of the national health budget. Moreover, local governments on average have allocated only 5 percent of their budgets to health. This should shift considerably as a result of the devolution of services, as discussed in Chapter III. The decline in the proportion of operating income is another important trend, pointing to the relatively unexplored option of increased fee 36 collection from those able to pay for curative services as a supplement to local health revenues (post-devolution). Table 1.10: Percent Shame of the Sources of Funncun Yublic Healtb Expenditure Avemge 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 (1981-90) Nadonal Gov. 87.2 86.5 86.8 83.7 79.6 82.7 85.1 89.6 91.3 88.1 86.0 Taxes 80.4 81.3 81.9 79.5 75.4 80.1 81.8 85.4 88.9 85.1 82.0 Operain Income 6.8 5.2 4.8 4.1 4.2 2.5 3.3 4.2 2.4 3.0 4.1 Lcal Govt 10.3 9.4 8.9 11.7 13.3 8.2 8.7 9.0 8.0 11.0 9.9 PoreignLoana&Credlts 2.5 4.1 4.4 4.6 7.1 9.1 6.2 1.3 0.8 1.0 4.1 TOTAL 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 Source: Commission on Audit 1.87 The sources of private spending on health are dominated by family expenditure, that is, out-of-pocket payments for health services. Out of total health spending in 1988, the .private sector accounts for roughly half, and family spending over 42 percent of total health spending. Private insurance accounts for less than 2 percent of total spending and compulsory insurance, or Medicare, just over 5 percent. From the 1988 Family Income and Expenditure Survey (FIES), the distribution of household spending on health shows a slightly progressive pattern similar to utilization patterns discussed earlier; as household incomes rise, the proportion of household income spent on health also rises, slowly, from 1.2 percent to 1.9 percent. For rural areas, the rise in the health share is steeper, from 1.2 to 2.3 percent, as shown in Figure 1.10 below. This may reflect successfu. DOH targeting of services in rural areas, but this is speculation. Health Insurance and The Medicare SXstem 1.88 As noted above, about 5 percent of total health spending is in the form of Medicare reimbursements to public and private hospitals for inpatient services. The Medicare Program, launched in 1972, is a compulsory program covering public and private salaried employees, retirees, and the self- employed. Medicare does not cover those working in the informal sector. Enrollment, however, is well below its potential, with only 4.6 million employees and their families covered out of a total target group of 21.8 million employed. Nonetheless, with dependents included, Medicare serves about 23.5 million people, or 38 percent of the population. The premium is 2.5 percent of salary, divided equally between employees and employers. In 1990, premium collections and benefits paid were almost equal at jilst over P1.1 billion, still leaving substantial reserves in the system, however, of over P5 billion. 37 Figure 1.11: Expenditure on Medical Care in Rural Areas. 1988 Numbw of N eu __srlo 1dN uu 1600- -2.5 1400- ..... ... ..... .... .. .. . . ...... 1200 Xl 1000 ..t.. .. .3............. OHOUW.. -. . . 600- 400- 200- Anmid Ino.w CaIgou MThusee) SRI - ef as houseboWn I _u Source: 1988 Family Income and Expenditure Survey 1.89 The Medicare Program reimburses private hospitals more frequently than public facilities; a 1990 survey reported that 76 percent of hospitalizations were for private hospital confinements, and the rest public. Average length of stay in two recent surveys of Medicare hospitalizations has averaged over five days for public hospitals and under four days for private hospitals. Charges at public hospitals for the purposes of billing Medicare have been set close to Medicare reimbursement rates, with the result that the "support value," that is, the proportion of total costs paid by Medicare, averaged 85 percent in public hospitals and 24 percent at private hospitals. The actual amount paid by Medicare to private and public hospitals per claim, as would be expected, is closer. See Table 1.11, which presents the two Medicare Funds, GSIS and SSS, separately. GSIS serves government employees and SSS serves private employees. 38 Table 1.11: Medicare Claims. Reimbursements and SuDlort Values. 1987 HOSPITAL AVER. SUPPORT FUND TYPE AVER. CLAIM REIMBURSEMENT VALUE (Pesos) (Pesos) percent GSIS PRIVATE 1480 395 26.7% PUBLIC 694 445 64.2% SSs PRIVATE 1803 527 29.3% PUBLIC 869 627 72.2% Source: Orville, Solon, et al, nHealth Sector Financing in the Philippines, vol. II," 1991. 1.90 Several important distinctions e-rge from this and other data on the financial performance of Medicare through private and public hospital facilities. Although average claim amounts differ markedly, actual reimbursements based on standard Medicare rates, are much closer. The level of activity, however, in private hospitals far exceeds that in public hospitals. The new decentralized public hospital system may behave differently toward Medicare than in the past. As they are able to retain hospital revenues at the provincial level, public hospitals under provincial authority may well seek to raise their level of Medicare revenues. This could be done, in principle, by processing a higher number of claims per year, and raising average claim amounts. Provincial interest in this potential revenue source is already well advanced. Conclusions 1.91 When placed in the context of the rapid decentralization of health services to local governments, patterns of health finance and expenditures present a number of efficiency problems and opportunities to correct them. These can be summarized as follows: (a) Levels of central expenditure on health have fluctuated in response to changing macro-economic conditions and budgetary constraints. By devolving nearly half of total DOH expenditure to local governments, the Local Government Code has afforded the localities the opportunity to achieve a more sustained, stable health expenditure performance, especially if internal revenue allotments under the Code are adhered to by the central government. (b) Allocative choices in support of hospital-based services and the inconsistent support of preventive services have been a notable aspect of DOH expenditure trends and will be transferred in part to local governments. Although provinces may seek to contain hospital 39 costs, the outlook for an increased share of health spending on preventive programs remains problematic. (c) Tax revenues have long been the major source of finance for government health services. Low operating income at just 4 percent of total public hospital spending will certainly capture the attention of provincial authorities in the devolved system, as they adjust to carrying large health budgets. Fees charged to those who can afford to pay would further improve the targeting of public expenditure to the poorer income groups, who spend a substantial portion of their low income on health care. (d) Medicare has been lightly utilized by the public hospital system, a pattern that may change in response to local initiatives to raise hospital revenues. F. Structure and Past Performance: ImDlication for the Devolved System 1.92 In the period leading up to the devolution of health services, the public system corrected many of the earlier unfavorable trends in program performance. There has been some irony in these developments. From the DOH perspective, successful efforts to deliver basic services more equitably and efficiently since the late 1980s have "fixed" a system that the Local Government Code now vill dismantle. 1.93 The irony of an improving system earning its own dismantlement, nonetheless, implies some clear benefits for the devolved system now taking shape. From the equitable distribution of facilities to the sharp upturns in basic health program performance, the DOH has established a firm foundation and positive momentum for the new devolved system in many respects. However, some of the strengths of a centralized system are not necessarily of benefit to a devolved one, and some performance shortfalls of the former can exert disproportionate negative impacts in the new setting. The interaction between the private and public system is also an important aspect of costs and benefits. This section, therefore, summarizes the potential costs and benefits for the newly devolved system that arise from the structure and performance of the former centralized system. It is expected that costs will erode the performance of the devolved system, while benefits will sustain or improve performance, in terms of equity or efficiency objectives. 1.94 Potential Costs: (a) The IMR stall since the late 1970s poses a question, more than a discreet potential cost. If the stall continues into the early 1990s or if the rate of decline is found to be very slight, the overriding policy question for the new local proprietors of the health system will be what to do about infant mortality, and how to adjust health program priorities from the model followed by the DOH. If the TMR is found to have resumed a more robust rate of decline, this potential cost is minimized. 40 (b) The integrated provincial public health system concentrated management capacity at the provincial level, and installed almost no such capacity at the municipal level to which the Local Government Code allocates substantial health management and delivery authority. A mismatch of capacity and authority looms at the municipal level and underutilization of such capacity may be the case at the provincial level. (c) Weak outcomes for public programs in fertility reduction and nutritional improvement need strengthening, but with little preparation or sensitization of local public officials (as in the case of EPI and other high performing programs), the underdeveloped programs may remain in a low demand, low local effort state, unless the center actively promotes them. (d) "Retained' public health programs, such as malaria control, require vertical and regional coordination to achieve consistent results. Such coordination is made more difficult. (e) An erratic trend in overall levels of DOH expenditure, coupled with fluctuations in capital and recurrent shares and a declining preventive share indicate a need for more consistent levels of health funding and for expansion of support for preventive, basic services. It is unclear whether local governments will be inclined to alter these past spending trends. (f) Low levels of operating income from public hospitals combined with modest claims directed to the Medicare insurance system leave devolved hospitals with low overall financial efficiency; thus, they require further public subsidy from their new proprietors, the provincial governments. 1.95 Potential Benefits: (a) The public system has improved program performance across an important group of disease control programs, including EPI, maternal health, TB, malaria, and schistosomiasis control. Led by EPI, the public programs have been targeted to high risk, poverty areas, thus leading to the hope that the infant mortality rate may have resumed its path of decline in the late 1980s and early 1990s. (b) DOH choice of public health program priorities for funding and expansion, in both preventive and curative dimensions, has been sound (but not complete) in terms of disease and mortality patterns. (c) Public and private sector hospital facilities are co-located so as to compete with each other, but without widespread displacement of public for private facilities. Public hospitals also enjoy reasonable levels of operational efficiency. This environment creates an array of feasible options for improving hospital performance at the provincial level. 41 (d) Management of the public system is substantially deconcentrated to the provincial level, with local DOH staff able to plan and manage basic service delivery and hospital operations. (e) The availability of health personnel in the public and private sector is not constrained by annual production of medical and nursing schools, which are largely private. (f) The distribution of public facilities, from village level health stations to provincial tertiary hospitals, is neutral or only slightly regressive with regard to provincial per capita income, and is thus a firm foundation for local support of equitable access to public services. (g) Utilization of public facilities is also mildly progressive, with the wealthier households using private more often than public hospitals and the poor more heavily using basic service facilities than the better off. 1.96 As a prelude to devolution, the above balance between costs and benefits would seem to indicate that the health system may well have achieved a wide- ranging rebound in performance after a period of stagnation, and that local governments will inherit a system more characterized by strengths than systemic weaknesses. What they do with it is more a question of management and finance rather than deep structural problems requiring a fundamental reordering of programs and priorities. 42 Chapter II: DEVOLUTION OF HEALTH SERVICES IN COMPARATIVE PERSPECTIVE A. Health Provisions of the Local Government Code of 1991 2.1 The Local Government Code of 1991 incorporates all previous legislation on local government affairs, further decentralizes central revenues and services to local governments, and expands their administrative autonomy with respect to raising local revenue and conducting operations. Fiscal decentralization was a major concern during the Aquino Administration and an important goal of local government executives who desired more fiscal and operational autonomy. The passage of the legislation in 1991 was the result of a broad-based political consensus favoring an increase in the accountability and responsiveness of local governments. The Code was scheduled to be fully implemented by July 1992; by July of 1993, the implementation process was nearly completed. 2.2 The term devolution is used in this study to refer to the process by which the central government decentralizes authority and resources to the local governments; in the literature of decentralization, devolution is also understood to mean the most complete degree of decentralization in which autono.mous local governments are empowered to raise revenues and operate public services under broad national guidelines. In both senses of the word, the Philippines LGC is an instance of "devolution.' 2.3 The LGC devolves centrally provided services from the Departments of Agriculture, Environment and Natural Resources, Public Works and Highways, Social Welfare Development, Budget and Management, and Health to three different groups of localities (cities, provinces, and municipalities). Although the Code specifies that the village or barangay will also receive additional revenues and service delivery responsibilities, apparently municipalities will oversee and directly manage the devolution of revenue and services at the barangay level, at least for the near term. Therefore, barangay-level data are not indicated in the chapter. Another modification to the Code is that decentralization of school construction to local governments was shelved, subsequent to the passage of the LGC. 2.4 The most affected central Departments are Health, with approximately 39 percent of its 1992 budget appropriation devolved to LGUs, and Social Welfare and Development, with 53 percent of its budget devolved. Health, however, accounts for by far the largest absolute amount of devolved expenditure at P4.2 billion, well above the Department of Agriculture at P1.2 billion (see Table 2.1). 43 Table 2.1: COST OF DEVOLVED FUNCTIONS As ofJune 30, 1923 (In million pesos) A% of Cost of Devolved Functions to 1992 Estimated Cost of 1992 Authorized Agency Appropriations Agency Devolved Functions Agency Appropriations DSM 193.2 456.7 42.0 DSWD 742.6 1,388.6 53.0 DENR 87.6 4,631.4 2.0 DOH 4,175.9 10,628.2 39.0 DA 1,160.0 4,815.7 24.1 Phil.Gamefowl 0.615 14.6 4.0 Commission Nat'l Meat 0.693 29.6 2.0 Inspection Commission TOTAL 6,360.6 21,964.8 28.8 Source: Department of Budget and Management. 2.5 The devolved functions and their corresponding expenditures for recurrent and capital expenditures vary widely from department to department. The devolved DOH expenditures are predominantly recurrent, supporting personnel services and maintenance and operation costs of the devolved services, while the devolved capital budget is very low, at about P50 million. Table 2.2 presents what will be handed over to LGUs in accordance with the LGC. The involvement of cities, as can be seen, is minimal due to the low level of DOH assets and staff to be devolved to them. Large cities in the Philippines are chartered and have administered and financed their own health systems for many years. Overall, 45,700 DOH staff were eligible for devolution to local governments. 44 Table 2.2: Devolved DOH Asisets and Personel by Function and Destination Destination of Devolved Assets and Personnel DOH Functions Cities Provinces Municipalities (Barangay) Basic Realth Care 2,299 Rural Health Units (Primary Health Care, 10,683 Barangay Health EPI, Maternal & Child Stations Health, Dental Health, 210 Puericulture Centers Nutrition, Family Municipal Maternity Planning, Comm. Disease Clinics Control, Etc.) Municipal and Barangay l ______________________ _______________ DOH Staff Hospital Services 596 Provincial, (Curative and District and Preventive Services in Municipal Primary, Secondary, and Hospitals & Tertiary Facilities) Infirmaries District & Provincial DOH Hospital Staff Administrative Service 60 City Health 70 Integrated Officers Provincial Health Offices Assistant City (IPHO) Health Officers IPHO & DHO ________________________ Staff .quipment and Supplies Current Current Current Inventories Inventories Inventories Source: DOH 2.6 In devolving such a large quantity of DOH personnel and assets, the LGC places a large and variable fiscal burden on different categories of localities. To finance these new responsibilities, the LGC provides for the allocation of central revenues to localities on a revenue sharing, non- earmarked basis. For 1993, 35 percent of internal revenues collected in 1990 will be distributed to local governments according to a two-tiered formula that allocates on the basis of the type of locality (city, province, municipality, barangay), and then within each type of locality, allocating to individual local governments on the basis of a formula that incorporates population, land size, and equal shares. The resulting 1993 Internal Revenue Allotment to be transferred to local governments represents a substantial net 45 increase over 1991 and 1992. The resulting fiscal balances and the share of health in local revenue sharing in budgets are covered in the next chapterM. Local governments are then free to spend these resources for purposes as they see fit, subject to oversight by the next level of government, and with the requirement that "basic services" are supported consistent with national standards. If health conditions deteriorate or health emergencies ensue in a particular locality, then the LGC provides for central DOH intervention, in consultation with the locality and at the direction of the President, to "assume direct supervision and control over health operations in any local government unit for the duration of the emergency, but in no case exceeding a cumulative period of six months" (LGC, section 105). The LCC also empowers the DOH to direct "augmentation" resources to those localities unable to meet local health needs. 2.7 The LGC mandates institutional changes at the local level, including the creation of local health boards at the municipal, city and provincial levels. The boards are to include the LGU chief executive as chairman, the local health officer as vice-chairman, the chairman of the health committee in the local legislature, a representative of the private sector or non-governmental sector, and a representative of the DOH. The authority of the health boards, however, is limited to an advisory role with regard to health policy and standards, and to proposing the health budget to the local legislature. 2.8 The LGC also identifies the "retained" activities of the DOH, thus establishing functional boundaries for public health, in broad terms, between the DOH and the LGUs, as presented in the DOH draft "Rules and Regulations Implementing the Local Government Code of 1991." The retained assets and staff are strongly concentrated in hospital facilities at the regional and national level, the health delivery structure of the National Capital Region, the central administrative offices in Manila, and the regional health offices. Out of some 75,000 DOH staff, 30,000 will be retained in the above locations. The DOH retains key functions in regulation and accreditation, health information and education, surveillance, research and national health policy areas, and is charged with managing technical and financial assistance to local governments. In-service training is a joint responsibility, but DOH retains its capacity to conduct training of both retained and devolved health staff. All foreign-assisted projects, including those supported by the World Bank, remain under the direct control of the DOH. A major DOH modification to the LGC is the retention of disease control programs covered by international agreements, namely the malaria, TB, and schistosomiasis programs. They are also heavily supported by foreign assistance. For a more detailed discussion of the fiscal implications of the Local Government Code, see World Bank, The Philippines Fiscal Decentralization Study, January, 1993. 46 2.9 The most salient feature of the LGC for the DOH is the transfer of service delivery ii.frastructure and funding to local governments, thus removing from direct DOH management and control the national service delivery apparatus from the province down. DOH retention of the national and regional hospitals imposes heavy recurrent expenditure burdens for these more sophisticated tertiary hospital services, but will enable the Department to play a leadership role in hospital management reform if it so chooses. For the .road-based local health delivery system, however, DOH will command a revised set of functions and within them, options for future emphasis and operational effort. These can be broadly categorized as regulatory activities, information gathering and dissemination activities, and augmentation and assistance activities. DOH also retains its existing, general mandate for the "promotion, protection, preservation or restoration of the health of the people", now a more complex and challenging responsibility in light of the provisions of the LGC. How best to fulfill that responsibility, using the new array of functions and interventions available to it, is the over-arching strategic issue for the post-devolution DOH. B. ImDlementation Progress of Health Service Devolution 2.10 Progress on the implementation of the LGC has been slowed by a number of factors. The health sector has posed considerable difficulty due in part to the large numbers of facilities and staff to be devolved and the management burdens this has imposed on the DOH, as well as the uncertainties concerning the willingness of localities to receive and pay the salaries of devolved staff. Local governments have slowed implementation out of concern over the lack of reliable financial data on the cost of sustaining devolved health functions and assets. As of late June 1993, however, substantial progress had been achieved. (a) Of the 45.,700 DOH staff to be devolved, 97 percent had been accepted by local governments. Of the 1,371 staff not accepted, one province and the 13 municipalities in Metro Manila account for 1,148 or 84 percent of the total. (b) Most facilities involved in devolution were handed over to provincial and municipal authorities. 2.11 Through various consultations and surveys, the DOH has obtained feedback from its own staff and from local government officials on their receptivity to devolution. Many of the concerns expressed by DOH staff and managers pertain to security of tenure under local governments, the maintenance of salary and benefit levels, the continued technical integrity of health service management, the level of local government budget support to be accorded to health services, and the ability of newly created local health boards to play a leading role in health policy and health budgeting. Predictably, local chief executives and legislators identified funding uncertainties in the allocation of internal revenue allotments from the central government and requested more assistance from the DOH or from other central sources of augmentation funds. Opposition to the LGC and its health provisions, however, was not heard from most local executives, a finding 47 confirmed in the high rate of personnel acceptance that has subsequently taken place. 2.12 Skeptical responses to decentralization on the part of central health staff is a common reaction cited in evaluations of decentralization efforts in other countries. Papua New Guinea is a case in point: according to a recent study-, politicians in PNG supported health decentralization, but the Department of Health staff opposed it, resulting in "inadequate preparation for the transfer of power." Measuring the potential impact of this subtle dimension of the devolution process in the Philippines is not possible, but it does raise levels of risk for the devolution process and for the performance of the health system during the process. C. Organizational Types of Decentralization in Comparative PersRective 2.13 The Philippines LGC and its provisions for the health sector place the Philippines in the company of many other countries that have undertaken to decentralize public health services. This comparative context can be assessed in two ways: from an organizational perspective and from a cost-benefit perspective. This sectior examines the evidence on organizational types of decentralization, focusing on the functional scope, degree and level of decentralization and the amount of time involved in preparing for and carrying out the process. Table 2.3 presents the position of the Philippines relative to Thailand, PNG, Malaysia, Indonesia and India. As can be seen, the Philippines is well to the "high" side of the spectrum. Generally speaking, developing countries tend to decentralize as incomes and local governmental capacities rise, but there are many exceptions, India and PNG among them. The four organizational criteria presented in Table 2.3 are explained below. 2.14 The functional scope of decentralization refers to the range of services decentralized, such as personnel, budget, planning, procure-sent, revenue mobilization, training, management information, and so on. The Philippines has chosen within health to decentralize a broad array of programmatic and management activities. The LGC also transforms financing arrangements for these services. As such, the LGC provides for a far-reaching version of decentralization in functional terms.& v Thomason, Jane A., William C. Newbrander and Riitta-Liisa Kolehmainen-Aitken, Decentralization in a Developing Country: The Experience of Papua New Guinea and its He2A_h Service. (Canberra, 1991), p.146. v At a more general level, functional scope could also be used to measure the number of public sector services affected by devolution, and again the Philippines would be placed to the right side of the spectrum. See Jerry M. Silverman, 1992, "Public Sector Decentralization", World Bank, Washington, D.C. for a further discussion of structural issues. 48 2.15 The degree of decentralization is partly a function of scope, but reflects more directly the level of local autonomy built into a decentralized system. Deconcentration, for example, would involve the shifting of some management decision making downward within a national service, but retain overall authority and accountability for the service or activity at the higher level. The principle agency model transfers some service responsibility to local government, but again under the authority of the center. Devolution, on the other hand, would decentralize authority, accountability, and responsibility to the lower level of government, and empower that level to raise resources to support those services. The degree of decentralization is also affected by the legal basis of the local entities, from lower level structures within national departments, as in the former DOH structure, to truly federal arrangements based on autonomous legally chartered local governments in control of services. The degree of decentralization created by the LGC places the Philippines at the devolved end of the spectrum. 2.16 The level of decentralization refers to how far down within an administrative or governmental hierarchy the changes take effect. The level might be confined to a high tier of government, such as provincial governors or regional administrators, or it might include within its application lower levels, such as towns, counties, villages, or corresponding administrative entities, such as districts. The Philippines LGC, added to earlier changes in the law, again places the country at or near one end of the spectrum in that local governments down to the municipal level are included, creating in the case of health services, over 1,600 different local entities in control of most health services within their boundaries. 2.17 Finally, the rate of change involved in preparing for and implementing decentralization can vary from a short-term shift in authority and responsibility, to a gradual, incremental change over a long period of time, in which changes in functional scope, degree, and level are introduced in small steps. The Philippines health system has undergone many changes in the past two decades, as outlined in Chapter I. These have "deconcentrated" responsibility for various programs and services down- to regional, provincial and district level health administrators. Local governments have also long functioned in the Philippines. Like PNG, the Philippines thus undertook a protracted period of preparations, after which a short period of accelerated implementation took place. 2.18 Decentralization is a lively subject in the development literature, with opinions ranging widely on the efficacy of decentralized vs. centralized organizational arrangements. The literature is notably sparse in rigorous quantitative assessments of the impact of different decentralized structures on health service performance. This may be due to the difficulty of obtaining an appropriate data set and the problem of isolating the impact of "decentralization" from the many other factors that affect health system performance and health status. 2.19 How the organizational variables listed in Table 2.3 correlate with service or health outcomes across countries would thus be difficult to 49 Table 2.3: Oranizational Tvnes of Health Servige Deraizadon ORGANIZATIONAL LOW MEDIUM HIGH FUNCTIONAL THAILAND MALAYSIA, PNG PPNES, SCOPE INDONESIA IEDMA Not Affected Planning, Budget Person. Mgmt, Preparations, Revenue and Day-to-day Program Mgmt. Expend. Contol, Procurement, Training, IEC, Prog. Mgmt, Etc. DEGREE OF THAILAND INDONESIA PNG PHILIPPINEB, SERVICE INDIA AUTONOMY Centralized Lower level servie Servie Implemented by local National Service decision makig governments under National Service Under (Deco-neaton) Audhority (Principle Agency) Complete Authority of Local Governments (Devoluton) LEVELS PHHJPES AFFECTED THALAND MALAYSIA INDIA. PNG INDONESIA Cities, Towns, Naion System Provinces, States Villages Administative Regions or Districts RATE OF CHANGE THAIAND INDUI INDONESIA PNG, PHILIPPINES None To Date Evolutionary Slow Change Change Accelerated Change, Rapid Change Source: World BsanLc Staff Assessments analyze. Similarly, any attempt to define a "model" decentralized structure fixed in international experience would also be unproductive, given the lack of consensus in the literature. 2.20 However, given the sweeping provisions of the LrGC for health services and the rapid shift of the Philippines rightward on the spectrum for all organizational measures, it can be concluded that the LGC should be seen 50 as a sharp, "regime break" type of change in central-local relations. As such, it suggests added risk for health services in the near term. The next section surveys theoretical and comparative estimates on the potential costs and benefits to efficiency and equity in moving from a central to a highly devolved system. D. Potential Economic Effects of the LGC Health Provisions 2.21 The new Local Government Code of 1991 changes the rules to give local government units (LGUs) greater "powers, authority, responsibilities and resources." In so doing, there is likely to be considerable uncertainty regarding how those powers and resources will be used by local governments. These reactions to the LGC will have major possible implications for the way health services (as well as other devolved services) will be provided throughout the country and, hence, on the state of health of the population. 2.22 Only empirical analysis over the next few years will be able to ascertain the net effect of the devolution policy. Nevertheless, by relying on theoretical principles and experiences in other countries or even other sectors, it is possible to suggest the sorts of effects that the policy could have on the allocation of resources and health service outcomes. Evaluation of likely outcomes requires first a brief theoretical perspective, followed by a discussion of the possible effects of devolution policies on the availability of resources, their allocation to health services, and then, how those effects relate to efficiency and equity objectives. Theoretical Context for Decentralization 2.23 The ultimate objective concerning the flow of health services is, of course, that everyone in the Philippines, including the poor, have access to the highest quality of services that are affordable. In order to evaluate more systematically the possible effects of a devolved system of health service delivery it is necessary to consider a subset of objectives which would affect the achievement of the goals of access, quality and affordability. 2.24 Under the devolved system of governance being implemented, responsibility for health provisioning (decisions on how services are to be financed and produced) is given to local government units and, therefore, may differ substantially from community to community. That is, local preferences may result in quite different provision outcomes across localities. Although public sector bodies will make these provision decisions, the production of health services is not limited to the public sector. One important provision decision concerns who will be given the responsibility to carry out, or produce, those activities, the public sector or the private sector. The objectives for such decisions involve the attainment of efficiency and equity. How these objectives might be pursued in a decentralized health system are discussed briefly below. 2.25 Technical Efficiency. Technical efficiency focuses primarily on the production of services. If the maximum amount of benefits from health 51 services are to be derived from the limited resources devoted to this service, it is necessary that the services be produced at the 'Lowest possible cost that maintains acceptable quality. Costs depend, in turn, on the quantity of inputs utilized and the price of these inputs. 2.26 Different mixes of inputs may yield similar health effects but at quite different costs. This is particularly the case for the different mixes of preventive and curative services. Since many production techniques require a certain, fixed amount of inputs regardless of how extensively they are used, greater utilization of these inputs will result in lower per unit costs. Thus, the cost per unit of hospital services rendered will be less if all beds are being utilized. Similar economies can be achieved by ensuring that certain expensive services are not underutilized -- a result which can arise if there is unnecessary duplication of these services. Finally, bulk purchases of inputs may result in lower unit prices which again can lead to production economies. If each and every local government unit were to attempt to directly produce these services, it is less likely that such economies will be enjoyed than if larger production units are used to produce the services. Thus, more technically efficient outcomes may be achieved if the various provision units, i.e., the local governments, are willing to contract or combine with private or other public producers of health services. 2.27 Technical efficiency is also affected by production management practices. Effective management will depend, in part, on the technical abilities of the managers; poorly trained administrators may simply not know how to combine inputs in order to produce health services at a low cost. In addition, if managers are not accountable for the costs of services and have no incentive to keep these costs as low as possible, technical efficiency is unlikely to be achieved. Devolution can affect management practices, particularly if production responsibilities are retained by each local government unit. 2.28 Another aspect of technical efficiency, particularly as it relates to management, concerns the flow and costs of information. It is often suggested that one attribute of highly centralized arrangements is that decision making is slcwed and probably made more costly because of the need to transmit information and decisions up and down a multiple-layered management structure. By decreasing the number of layers in a hierarchical system, decision making costs should be lessened even with public production units. 2.29 Economic Efficiency. A primary argument for the involvement of the public sector in providing services, including health, is based on economic efficiency. This argument concerns the fact that, at least for some health services, persons other than the recipient of the service derive benefits (?ositive externality). Thus, it is expected that an individual will underconsume health services since he or she will not be concerned with the benefits that these services may yield to others. An example is the control of communicable diseases, such as TB. Individuals will attempt to treat their infections, but not adequately to control transmission of the disease to others. This problem also occurs for public goods -- those services, such as environmental control of malaria or schistosomiasis parasites, that cannot be 52 "marketed' to individuals even though they derive large benefits from the service. 2.30 A related aspect of economic efficiency concerns the match between the services providel and the needs or wants of the citizens. Demand for services varies from individual to individual and from one group to another. If the mix of services does not reflect these differences in demand, inefficiencies can result. These two aspects of economic efficiency (positive externalities and local preferences) are at the heart of the issues associated with centralized versus decentralized decision making. What complicates them is whether they are evaluated on a national or more localized basis. 2.31 From the local perspective, the fact that preferences for public services (including health) may differ across localities constitutes a principal argument for decentralization of public sector decision making. When there are localized differences in demands for public services, allowing each locality to choose that mix of services which most closely reflects localized preferences will yield a greater flow of benefits than attempting to set uniform public service mixes nationally. This will mean, of course, that some localities may allocate greater amounts of their resources for health services than what the DOH or the GOP regards as desirable while other localities may allocate significantly fewer resources towards this effort than central decision makers view as optimal. 2.32 From a national perspective, unlike many local public services such as barangay and municipal roads and street lighting, the benefits of some health services will probably benefit non-residents of that locality. Such may be the case, for example, when vaccinations against communicable diseases lessen the likelihood of a nation-wide epidemic. But, just as individuals' consumption of services with these external or spillover effects are likely to result in inefficiently low amounts of consumption, local public decision makers may ignore these spillovers when determining how their limited resources are to be allocated both between health and non-health spending and among various types of health services. By allowing more narrowly focused local jurisdictions to choose the mix of services, the overall allocation to health may be inefficiently small. The GOP decision to retain, at least partly, malaria, TB, and schistosomiasis control within the DOH conforms with the public good/externality aspects of these programs and the economic rationale for providing them centrally. For other disease control programs, such as EPI, the case is less clear, but they have been devolved, nonetheless. An important question for the DOH to resolve is whether local government tends to underfinance such programs. 2.33 Eguity. The distribution of health care is equally important to efficiency considerations. Devolution may very well have equity effects. Just as the devolution of decision-making powers can result in different localized mixes of services (both between health and other services and among various types of health services), it has the potential to alter which groups are served. In spite of Rule V, Article 24 in the Rules and Regulations Implementing The Local Government Code of 1991 which specifies that "each LGU shall be responsible for a minimum set of services and facilities in accordance with established national policies, guidelines, and standards" (p. 24), it is quite possible that the mix of services provided will favor some income groups relative to others. 53 2.34 There are other reallocations associated with the devolution policy that will result in outco .es which may not be deemed equitable to all since they do not adequately reflect relative needs. For example, since a substantial portion of LGU revenues are to be derived from a formula-based sharing of national taxes, the resulting allocation may not correlate closely with local health needs across regions, provinces, cities or municipalities. Similarly, the provision of services within a locality may discriminate unfairly against particular socio-economic groups, for example rural vis-a-vis the more urbanized portions of municipalities. 2.35 Tradeoffs. There are generally tradeoffs that must be made among these objectives. The discussion of the possible gains and losses to economic efficiency when viewed from the local and national perspectives illustrates one of these tradeoffs. Another possible tradeoff is that between efficiency and equity objectives. While devolution may lead to more efficient outcomes (both in terms of technical and economic efficiency), these gains may be obtainable only by giving up some equality in services. Local ResRonses to Devolved Arrangements 2.36 The flow of health services within any locality will be affected principally by the: (a) Availability of resources (resource mobilization); (b) How effectively the resources are used (resource allocation); (c) The price of goods and services on which those resources are spent (production costs). 2.37 Devolution may affect each of these factors. The underlying assumption is that individual decision makers, both inside and outside the public sector, will respond to the new incentives created by the change in the "rule structure" which governs how resources are allocated. This section focuses on the various types of provision and production decisions which local government units may take in response to the LGC. The next section then considers how these responses may affect the resulting technical and economic efficiency as well as the equity of health service provision in the Philippines. 2.38 Resource Mobilization. A substantial portion of the new Local Government Code is devoted to finances, both revenues that can be raised locally by the LGUs and revenues that are received in the form of the internal revenue allotment. The effect of these changes on LGU finances and their capacity to support devolved health services is taken up in detail in Chapter III. Generally speaking, the new Code has not substantially altered the 54 types of revenues that can be mobilized by local governments in the Philippines,g but has expanded central revenue sharing grants. 2.39 Part Seven of the "Rules and Regulations Implementing the Local Government Code of 1991" specifies that all LGUs "may impose and collect fees and service charges for any service rendered by LGUs in an amount reasonably commensurate to such service... "(emphasis added). Apparently, the funds will be deposited in the General Pund of the LGU. This arrangement has the advantage of providing the incentive for LGUs to impose and collect such fees, an effect which would not arise if the funds were to revert to the national government treasury. 2.40 One of the arguments commonly made for fiscal decentralization is that greater local fiscal autonomy can increase the willingness of individuals to contribute towards public services. The expectation is that devolution creates a closer linkage between resources mobilized and services rendered, thereby leading to a greater revenue mobilization effort. This is particularly the case where direct user charges are levied on services amenable to such fees. 2.41 The new Code allows local governments greater scope for borrowing funds, primarily by permitting them to borrow from a larger number of lenders (or by issuing debt instruments). However, whether local governments take advantage of this provision, for example, by borrowing to finance capital improvements in hospitals or other health facilities, is difficult to foresee. Past use of credit financing has generally been quite limited and restricted to projects with a more direct, income-earning potential such as markets. 2.42 Finally, the provision of Section 17 of the Code (and Article 31 of the Rules governing that Code) provides for national augmentation or direct provision of basic services under the control of LGUs. However, such additional resources can also lessen the willingness of an LGU to mobilize resources locally. Unless well designed, subventions by national government Departments to provide or augment basic services can have the effect of decreasing local revenue efforts and willingness to pay. 2.43 Reallocation of Local Government Sgending. Regardless of how local governments respond in terms of resource mobilization, the devolution policies may result in a reallocation of spending by LGUs between basic service functions. The new Code broadens the scope of local government activities by adding responsibility for the provision of various services, including health. The question, then, is whether certain types of local spending will receive preferable treatment vis-a-vis others. # See World Bank, 1992, The Philippines Fiscal Decentralization Study, Report No. 10716-PH, Infrastructure Operations Division, Country Department I, East Asia and Pacific Region (Washington, DC: The World Bank) for a complete discussion of the revenue implications of the new Local Government Code. 55 2.44 Chapter III presents evidence on past local government allocations to health services in the Philippines. But the outcomes of a budget process are particularly difficult to predict, and furthermore, under a devolved system, there may be considerable differences in these responses across LGUs. One might argue that since Sec. 17 of the Code (and Article 25 of the Rules) specify that each local government unit is to be responsible for insuring a minimum set of basic services, thete will be little reallocation of resources by local governments and that any reallocation which does occur will be in line with local needs. 2.45 Other provisions in the Code may, however, result in spending effects which alter the flow of funds, specifically for the support of health services. The new law contains other spending mandates. For example, in addition to the usual balanced budget requirements, each city, municipality, and province must provide at least 1,000 pesos to each barangay; no LGU can assume debt that would require more than 20 percent of its regular income to service. Also, five percent of estimated incomes must be set aside for calamities (Article 419). These provisions can affect the ability of LGUs to budget for their specific needs. Additionally, there are limitations regarding the maximum amounts that may be appropriated for personnel services (Article 420); further, a minimum of 20 percent of IRA allotments must be appropriated for contained in the local development plan (Article 384). 2.46 Whether any of these provisions will result in a realignment of spending patterns is unclear; one factor that could relates to the budget- making process itself. A variety of actors, some not previously involved in budgeting at the local level, will play roles in formulating the budgets of LGUs. The groups most relevant to allocations to health services include the local finance committee, the head of the health office, the newly constituted Local Health Boards, the local chief executive and the concerned sangguniang (legislative body). As a result, political motives may lead to expenditure initiatives that favor new capital investments (which attract the attention of voters) over recurrent spending. This incentive has, for example, been used to explain why political decision-makers are willing to forego maintenance of existing capital and to spend, instead, on new capital facilities.2 In a similar vein, local politicians may feel that spending on activities such as roads or water systems will have a greater political impact than will spending on health care services. This is not to suggest that local budget makers will reallocate all funds from services like health to activities such as roads; however, there may be strong incentives to shift funds, at the margin, in this manner. Although health expenditure has been popular politically in the case of medicines and hospitals, past evidence supports the idea that localities may prefer spending purposes (see Chapter III) other than health. E For example, Heller argues that operating and maintenance spending "are politically less appealing and visible than new investment projects." Heller, Peter S., 1991, "Operations and Maintenance", in Public Expenditure Handbook; A Guide to Public Policy Issues in Developing Countries, Ke-young Chu and Richard Hemming, eds., Washington, D.C. 56 2.47 Reallocations within Health. Even within the health sector, there are a variety of services that are to be supported by the LGUs. Again, the outcome of the budget process has the potential to lead to a reallocation of services relative to the service mix that resulted prior to the new LOC. For example, even at the barangay level, important choices may have to be made concerning the relative amount of support to be given to health and dayeare centers. Similar choices will be faced at the municipal level where there may be tradeoffs among basic curative services, dental care, environmental inspections and preventive maternal and child care services. What was seen as the optimal mix prior to devolution may no longer be seen that way when there is greater involvement of locally-elected officials and local private sector or NGO representatives in the process. 2.48 Another important choice for health spending will concern the mix between new capital spending and support for recurrent expenditures. Again, there may be stronger incentives for locally elected officials to favor new capital investments which can have more substantial political returns than improvements to recurrent expenditures. This would be felt particularly at the provincial and city level, each of which fund hospital operations. 2.49 Production of services. Devolved decision making can also affect the methods used to produce health services. With greater local control, information necessary for decision making will be more accessible with fewer delays. It is also likely that production techniques can more easily be adapted to fit local circumstances than in a centralized system which is likely to rely on uniform practices. Furthermore, where health service producers are answerable to individuals residing locally, they may be more accountable than under more centralized and bureaucratic systems. 2.50 Devolved decision making should also increase knowledge about locally available, private producers cf health services. As such, devolution has the potential of leading to a greater collaboration with the private sector, including such options as contracting with private providers or even privatization of some health services. Dental care might be one such service. In any case, by avoiding highly standardized health service production techniques, devolution is more likely to lead to innovative methods of service delivery than would occur in a highly centralized system, and to lower production costs. 2.51 On the other hand, local decision makers, particularly if the process is highly politicized, may make production decisions that, while politically expedient, do not result in improved health services. For example, some provinces might have an incentive to attempt to produce sophisticated tertiary or specialty hospital services, rather than refer patients to regional or national facilities. Or, they may be inclined to, for political reasons, procure locally and in small quantities, various items that would enjoy significant cost savings if procured on a larger scale (by the center or by a group of LGUs). The local health boards which include representatives of the DOH as well as the private sector and NGOs may be able to influence decisions so as to avoid these inefficiencies; however, it remains to be seen how effective they will be given their advisory role. 57 Efficiency and Equity Effects of Health Service Devolution 2.52 These likely changes in incentives faced by local decision makers obviously have potential implications for the technical and economic efficiency of health services as well as possibly important equity effects. These effects can be provisionally predicted on the basis of both deductive arguments as well as from the outcomes of similar experiences in other developing countries. Caution must be exercised in drawing too many implications from other country experiences since decentralization has always taken so many different structural forms (see Table 2.3). 2.53 Technical Efficiency. As suggested above, there are several, somewhat intertwined arguments favoring an improvement in technical efficiency associated with devolution. They include: (a) That local decision making will be more accountable regarding the use of resources; (b) That decision making costs will be lower; (c) That decentralization will promote greater innovation concerning the delivery of services; (d) That cost-recovery efforts will be promoted through increased local involvement in the health sector. 2.54 Generally, these arguments rely on the expectation that devolution, which creates a closer and more obvious link between service providers and those financing the service, will provide an incentive for LGUs to increase the efficiency of their production of health services. 2.55 Experience in health services in some other developing countries does suggest that greater localized autonomy can yield some of these benefits from decentralization as listed above. For example, a WHO review of experience in Chile showed that decentralization resulted in quicker management decisions, particularly on staffing matters.Y Likewise, in Nigeria, the local government in Oji River recognized that, by leasing and borrowing vehicles for a short period of time, it could conduct an immunization campaign in outlying areas without incurring the expense of L Mills, A, J.P. Vaughn, D.C. Smith and I. Tabebzadeh, 1990, "Health System Decentralization: Concepts, Issues, and Country Experience." Geneva, WHO. 58 purchasing additional vehicles.7' Similarly, local community groups in San Paulo, Brazil have contracted out for child care services, an innovative approach to service production that could be experimented with by the Rural Health Units in the Philippines.Y 2.56 International experience suggests that achieving these technical benefits can be offset by factors related to shortages of trained personnel, especially those with managerial skills. Vaughan notes that "Decentralization often increases the total number of health workers required...". but by itself, devolution does little to expand the number of trained health workers. Another personnel-related issue is the potential politicization of the personnel management function, as local executives become engaged in hiring for the health service, as happened in Chile (see Chapter IV). 2.57 It is also the case that shortsighted or purely politically motivated decisions can lead to health service provision decisions which result in uneconomic duplication of services or a disregard for the longer term recurrent cost implications of capital spending. For example, in Oyo State in Nigeria, 11 of 35 communities were observed t3 be building new health centers without recognizing their longer-term recurrent costs.9 The steady growth in public hospital beds on a national scale (Chapter I) attests to the preference in the Philippines for capital expenditure by centralized decision makers. 2.58 Economic Efficiency. Devolution provides considerable potential for enhanced economic efficiency; however, there are possible downside risks associated with this objective. Nearly all observers note that decentralization can result in a closer match between service requirements and services rendered. Likewise, local autonomy has the potential to strengthen willingness to pay at the local level. However, as previously noted, this willingness can be subverted by either constraints placed on local resource mobilization or by large inflows of central government funds. Furthermore, experience with decentralized health services in Mexico indicated that, in the face of economic crisis, "the decentralized states did not show greater local 7/ Ayo, Dele et al, 1991. "The Experience in Nigeria with Decentralization approaches to local Delivery of Primary Education and Primary Health Services," Burlington, VT, Associates in Rural Development. v Campbell, Tim, et al, 1991, 'Decentralization to Local Government in LAC: National Strategies and Local Response in Planning Spending and Management," World Bank, Washington, D.C. L Garnier, Maurice et al. 1991. "Decentralization: Improving Governance in Sub-Saharan Africa," Burlington, VT Associates in Rural Development. 59 government involvement in finance than those states which remained centralized"w. 2.59 Where local decision makers realize that health benefits may be achieved from several local services, such as education, nutrition and sanitation, it is more likely that the combination of services provided by local decision makers will yield more of these benefits than in the case of allocation by national government departments operating independently of each other. In the Philippines, such decision making processes may take years to develop the necessary transparency and improved economic efficiency over the centralized system. 2.60 Furthermore, decentralized decision making is not costless, particularly when it is effective and includes a wide variety of groups. Countries such as Botswana, Chile and Sri Lanka illustrate these complexities; in addition, complexities lessen the degree of predictability of outcomes. For health in the Philippines, local health board involvement in budget decisions is essential, but as noted above, it adds a layer of government with only an advisory role. Such complexities are, however, a price that has to be paid if the results are to reflect local preferences. 2.61 Where extensive spillovers of benefits accrue, localized 'iecision making may under-provide the service. This may have been the case in some provinces of PNG in regard to child immunization. The empirical literature does not, however, suggest that these issues are especially problematic in the case of decentralized health care. It may be the case that the internal benefits of the service are sufficient to lead to reasonably efficient outcomes for most "spillover" interventions. This is an issue of considerable interest, and the Philippines will need to monitor carefully the local support for programs with spillover effects or of a public good nature, such as EPI, TB, CARI, malaria control and so on. 2.62 Eguity. One important potential advantage of devolution is that it permits locally elected officials to act in ways which best serve their constituents; doing so will maximize the likelihood of reelection. This can, however, result in spending patterns which yield benefits primarily for particular subgroups within a locality who supported the official rather than for the locality as a whole. It is the potentially negative effects on low- income households or poor regions that are most commonly given as an argument against decentralized public service provision arrangements. For example, it is generally asserted that devolved local governments should not attempt to achieve major interpersonal redistributions of income since, if households are geographically mobile, higher income households will move away from the locality while poor households will be attracted. A politically-based argument is that higher-income voters may have disproportionate power at the local level in many developing countries; thus, devolved political powers are unlikely to result in pro-poor spending policies. It is also argued that 19 Gonzalez-Block, Miguel et al, 1989, "Health Services Decentralization in Mexico: Formulation, Implementation and Results of Policy." Health Policy and Planning 4 (4); 301-315. 60 jurisdictions in poor regions will not have the resource base to afford pro- poor expenditure programs while wealthier areas, which could afford such policies, have fewer need for them. 2.63 These are, obviously, strong arguments and probably apply to the Philippines. Moreover, it is important to realize that the arguments assume that a more highly centralized regime would have provided better quality and more services to the poor. In the case of the Philippines, the evidence suggests that over the 1980s, particularly in the second half of the decade, the DOH was able to improve the equity impact of services, and in some instances did so impressively. In this context, the likely equity effects of devolution may erode recent gains in the Philippines, in the absence of compensatory interventions by the center. 2.64 It is hard to find evidence that devolution results in an improvement in health service equity. Indeed, while theoretical or conceptual discussions of decentralization of health services sometimes argue that such arrangements can reduce inequalities of services, the evidence is strong that such outcomes seldom occur. For example, the extensive review of decentralization experiences in Papua New Guinea concluded that: Many of the inequalities in the distribution of resources which preceded decentralization have been perpetuated.... A review of the ratio of health personnel to population among provinces suggests that the distribution of staff has become more inequitable in recent ye.ars.... The richer, more advanced provinces are generally advancing at a greater pace than the disadvantaged provinces. Efforts at the central level to effect real redistribution of resources, such as through the National Public Expenditure Plan and the Lesser DevEloped Areas Scheme, have had little real redistributive impact. nW 2.65 In a review of the various effects of decentralization initiatives in Latin America, it was found that in many countries "local governments that are being given authority for poverty matters, are responsive to needs of the urban poor, but appear not prepared to translate these concerns into budgetary outlays." The positive responses appear to have been the strongest in larger, urbanized and wealthier jurisdictions but were not great in small, rural, poor municipalities. Municipalities in Chile and Brazil have actively assisted in anti-poverty programs by finding families who are eligible and by "making adjustments in programs in accordance with local needs, and delivering assistance directly or by contract"21. Such reactions are, of course, exactly what would be desired for decentralization policies to be effective equity-enhancing instruments. The Chilean case is a special one, with impressive accomplishments in both efficiency and equity terms (see Chapter IV for a review of Chile's managerial approach to "Municipalization'). w Thomason, Jane A. et al, 1991, OPCIT, pp 142-3. 2 Campbell, OPCIT, p. 35. 61 2.66 An evaluation of the equity impact of decentralization of health services in Mexico reaches the interesting conclusion that it led to a reconcentration of federal (central) power primarily due to a greater control over the flow of federal resources unencumbered by bureaucratic controls.' Nevertheless, the resulting flow of resources still did not provide significant benefits to the majority of the poor living in rural areas. The authors conclude that "The political and public health results of decentralization in Guerrero [a Mexican Statel point to the amplification of the health differentials between the rural and the urban areas, and between those sectors of the economy engaged in the regional and national produce markets, and those generating foreign exchange through tourist services." Table 2.4: Possible Effects on Efficiency and Equity of Health Services TECHNICAL EFFICIENCY Benefits Costs 1. Greater accountabilitv 1. Lower quality management 2. Lower costs of production decisions 2. Unnecessary duplication 3. Greater innovation 3. Personnel mismanagement 4. Cost recovery 4. Over building of capital assets. ECONOMIC EFFICIENCY Benefits Costs 1. Match local preferences 1. Ignore spillovers 2. Higher resource mobilization 2. Provision decision costs 3. Coordination with non-health services (local allocative process) EQUITY Benefits Costs 1. Benefit-based financing 1.1 Regional disparities 2. Ability-to-pay disparities 2.67 Conclusions. It is not possible to predict with certainty the outcomes that will occur under a particular devolved system; furthermore, by ILI Gonzalez-Block, OPCIT. 62 its very nature, in a highly decentralized system there are likely to be different responses in different LGUs. Nevertheless, the new system in the Philippines is likely to affect the ability of local governments to finance health services and, with greater local autonomy, may influence their willingness to spend on various types of health services vis-a-vis the prior system. 2.68 Based on both conceptual theory and analysis of similar experiences in other countries, it is possible that over time, both the technical and economic efficiency of health care may be improved under decentralization. Still, these outcomes are not certain since there can be offsetting effects depending upon the technical and managerial expertise available in the LGUs as well as the willingness of local decision makers to insure that limited resources are spent efficiently (both technically and in a way which reflects demands for the services). Further, since some health services provided at the local level can yield important national benefits, a decentralized system may result in suboptimal levels of these services. 2.69 One must also be less sanguine about the likely equity effects of the devolved system of health service &eL'very. First, under the IRA grant system, there will be no built-in method fow greater resources to be transferred to those LGUs with greater health care needs. Second, both the theory and experience suggest that decentralized decision-making arrangements do not work especially well at improving equity of health care services. 2.70 The potential problems of spillovers and, even more, that of inequities suggest that some combination of central augmentation grants and mandates be designed and implemented. The augmentation grant can be used to help equalize resources so that poorer LGUs can provide health services beyond those affordable under the local financing mechanisms prescribed in the Local Government Code. There are, however, certain policy issues that must be addressed in the design of such a program--especially the design of the grant scheme to insure that the fiscal incentives it creates do not result in unintended outcomes. This policy issue is taken up in Chapter V. 63 Chapter III: FISCAL IMPACT OF DEVOLUTION A. Introduction 3.1 This chapter approaches the cost-benefit question from a fiscal perspective. As indicated in Chapter II, the local delivery of health services will be affected by the availability of resources and how they are allocated. This chapter addresses, therefore, the following issues: (a) What are the determinants of past LGU fiscal behavior in regard to health spending and what, if any, are the implications of such behavior for local government allocation of new IRA resources? (b) What will be the fiscal impact of the new local revenues and the new local costs introduced by the LGC for individual LGUs, and is that impact distributed progressively or regressively? (c) What are the determinants of the fiscal gap for provinces, municipalities and cities and in particular, how important are devolved health costs? (d) What are the policy implications of these findings for local revenue augmentation by the center and for DOH assistance efforts? 3.2 Debate on the fiscal impact of the LGC has generated various attempts to estimate fiscal outcomes for individual and groups of LGUs. Hypotheses have been advanced along the following lines: (a) that the LGC would impose fiscal hardship on poor provinces and municipalities; (b) that only cities, as a group, would be clear winners; and (c) that provinces, due to high hospital costs, would be uniformly burdened by the LGC. The likely fiscal impact of the LGC is, therefore, a key element in the overall cost-benefit question. If it is found that the LGC imposes fiscal burdens on most local governments, then the cost of devolution would rise significantly. If such fiscal burdens do not materialize and local governments are seen to receive sufficient revenues as a result of the LGC, then the resource issue does not arise. 3.3 This chapter first presents background data, then examines evidence on past allocative behavior of local governments with regard to health services, and next analyzes the estimated fiscal gaps for local governments in 1993 as a result of the LGC provisions. A final section summarizes findings and discusses implications for policy. 64 B. Local and Central Fiscal Context 3.4 Local GovergXent: Aggregate local government health expenditure represents a small share (9.9 percent during the period 1981-90) of total financing of public health expenditure. After a significant decline in 1985, followed by a strong recovery in 1986 (5.8 percent) and 1987 (17.9 percent), growth in local health expenditures was relatively low from 1988 to 1991. The fiscal data indicate that growth in local government spending for health services has not kept pace with the expansion of the national health budget. 3.5 Significant variations exist in the levels of health expenditures by types of local governments. Average local government health expenditures per capita were quite low for both provinces and municipalities. City governments, on the other hand, spend more on health -- an average of P29.10 or ten times more than what provincial governments spent (P3.14). These patterns are largely a response to patterns of central DOH spending, which have favored provincial and municipal level services, while cities have been responsible for financing their health services. The fiscal data also suggest considerable variation in the spending levels within each type of local government, but the variation in per capita health expenditures is much higher among municipalities than cities and provinces, as many municipalities have not allocated any resources for health. 3.6 National Government. The Local Government Code of 1991 provides that LGUs shall have a share in the national internal revenue taxes based on the collection of the third fiscal year preceding the current year as follows: (a) on the first year the Code is in effect, 30 percent; (b) on the second year, 35 percent; (c) on the third year and thereafter, 40 percent. For 1993, the corresponding amount is P36.4 billion.J The IRA shall be released, without need for further action, directly by the Department of Budget and Management to the LGUs concerned in accordance with Section 286 of the 1991 Code. 3.7 The authorized IRA level for 1993 represented a significant increase in the amount of resources going directly to LGUs. From 1991 to 1992, IRA increased in nominal terms by 113.0 percent while the budget net of debt service increased by 9.8 percent. For 1993, IRA will increase by a hefty 72.3 percent compared to only a 3.9 percent increase in total national government spending net of debt service. In real terms, while government spending net of debt service is projected to decline by 3.1 percent, IRA will increase by an impressive 65.3 percent (see Table 3.1 below). Part of the real decline in government spending can be accounted for by the shift of devolved programs to local governments that was equal to about P6 billion in 1993. If calaculated in the total, growth of real government spending was zero in 1993, still low compared to growth of the IRA.9 IL In fact, Republic Act 7645, otherwise known as the 1993 General Appropriations Act, appropriated P37.1 billion. EL The impact of the LGC on actual government finances is analyzed in detail in World Bank, Philippines: the Fiscal Decentralization Study, East Asia and Pacific Region, 1993. 65 Table 3.1: Ex,e_m P1m. Gross and Net of Debt Burden. 1991-93 (In billion vesos) Particulars 1991 1992 1993 Growth Rates Aald Est. Proj. Nomina Real 91/92 92193 91/92 923 (1) Total Exp. 283.3 304.8 330.2 8.8 7.1 0.1 0.1 (2) Debt Service 101.2 113.0 126.5 11.7 11.9 3.0 4.7 (3) Net Lending 5.6 1.5 2.2 (73.2) 46.7 81.9 39.7 (4) Debt Burden 106.8 114.5 128.7 7.2 12.4 (1.5) 5.4 (2) +_(3) (5) Expenditure 176.6 193.9 201.5 9.8 3.9 1.1 (3.1) pOgram net of debt burden (1) - (4) _ (6) ItA 10.0 21.3 36.7 113.0 72.3 104.3 65.3 Memo item GNP (billion) 1251.7 1394.1 1558.8 Inflation Rate 18.7 8.721.3 7.0 Source: Department or ucget anda Management C. Local Government Fiscal Behavior. 1991 3.8 In order to analyze past LGU fiscal behavior, fiscal and socio- economic data were collected from a cross-section of 71 provinces (from a total of 75), all 60 cities, and 515 municipalities (from a total of 1,533). The sample municipalities came from one 'rich' and one 'poor' province in each of the 14 administrative regions. All Metropolitan Manila local government units were included in the statistical analysis. 3.9 The questions addressed included: What are the determinants of the variations in per capita local health expenditure among local governments in the Philippines? And, second, what are the determinants of the variations in per capita locally raised revenues among local governments? Although the predictive value of past fiscal behavior is weak for the post-devolution situation, the overall relationships between variables will provide a useful set of hypotheses. Thus, the first question is important for policy because it will indicate the effect on local health spending by such variables as the IRA share, 'wealth' of the community, locally raised revenues, and other socio-economic variables. For the second question, it will be helpful to know what factors have affected the LGU's willingness and ability to raise taxes from local sources, especially if many are found to be in deficit, post devolution. In both cases, the results for cities will be of particular interest, as they have supported their own health service delivery system with only minor support from the DOH. 3.10 Per Capita Health EU2enditures: The results of the linear regression showing the relationship between per capita health expenditures and the above 66 determinants are listed in Annex 3.A. Different equations were run for provinces, cities and municipalities. 3.11 The proportion of variation explained is high for municipalities, but relatively low for provinces and cities. Based on the results the following conclusions appear warranted. 3.12 First, per capita health expenditures are significantly higher where locally raised revenues are higher. This conclusion holds for both cities and municipalities but not for provinces. This positive relationship suggests that the provision of health services is a normal good. A plausible explanation why the relationship is not significant for provinces is that prior to the 1993 LGC, provinces had very limited taxing powers and therefore relied less on locally raised revenues. 3.13 Second, the size of the population is positively associated with higher per capita health spending, disputing the hypothesis that there may be scale economies in the provision of health services. This result is quite strong in the case of provinces and municipalities, but statistically insignificant in the case of cities. A plausible explanation for this outcome is that given the extremely low level of health services provided by most provinces and municipalities, scale economies have yet to be attained. 3.14 Third, the variables for the revenue class of LGUs are statistically significant with the coefficients becoming more and more negative as the local community becomes poorer. These results which hold for all levels of local governments, suggest that as poorer communities become constrained by their limited budgetary resources, they are less willing to provide health services for their local residents. This is consistent with the results for locally raised revenues (para 3.12), and is also supported by the significance found for the level of per capita allotments (centrally provided grants) in the case of municipalities. 3.15 Fourth, per capita health spending is lower in provinces with higher urban population. Although this result is counter-intuitive, it can be explained by some institutional factors. In highly urbanized provinces, there is a strong likelihood that cities may have been providing a significant share of local health services. Further, urbanized provinces are more likely to be the beneficiaries of national government-sponsored regional and provincial hospitals. In short, there is less pressure on urbanized provinces to provide for health services because such is already provided by both the Department of Health and the cities within the province. 3.16 Locally-Raised Revenues: The above regression results indicate an important finding: the positive association between per capita health spending and locally raised revenues. But what explains the latter? The regression results are shown in Annex 3.B. Except for provinces, the proportion of the total variation explained is high. Based on these results, the following conclusions appear appropriate. 3.17 First, provinces with low household income are less able to raise local taxes. But, because household income is available only for provinces, the hypothesis cannot be validated for cities and municipalities. However, if per capita assessed value is used as a proxy for wealth of the local 67 community, a close association between community wealth and ability to raise local taxes can be statistically established for all levels of local governments. 3.18 Second, locally raised revenues are higher where the population is more numerous. This result has been statistically established in the case of cities and municipalities but not for provinces. 3.19 Third, there is no apparent relationship between the level of centrally provided grant funds to localities, and locally raised revenues. 3.20 Conclusions. The results of the statistical analysis suggest that greater mobilization of taxes from local sources may have a positive effect on per capita health spending. This relationship is statistically significant for cities and municipalities but not for provinces. Therefore, efforts to raise local taxes may, based on past behavior, result in higher local government spending for health services. But would higher central government revenue grants to local governments increase or decrease the local tax effort? Theoretically, two opposing forces are at work. First, LGUs may decrease the local tax effort as more resources in terms of grants flow from the central government. Second, there is a possible stimulative effect: as more resources flow from the central government, local governments may initiate new projects or expand existing ones, thus requiring LGUs to increase local revenue collection. The behavior is so diverse that a statistically significant pattern is not borne out by the analysis. 3.21 What this suggests, however, is the need for close monitoring of the fiscal behavior of local governments in the near term. If past performance continues, the decision of the LGU to collect less from local sources in response to higher IRA would mean lower incomes for this class of LGUs in general and lower spending for health service delivery in particular. On the other hand, if the taxation response of LGUs to higher IRAs is positive, greater spending for health services is likely. The challenge facing the DOR will be to structure its assistance proposal so that local governments are encouraged to collect taxes and spend for health, issues to be taken up Chapter V. D. Estimating the Fiscal Gap 3.22 The concern in this section is the fiscal risk of devolution at the level of each local government unit. Fiscal risk is defined as the impact on the local budget of fiscal "deficits" or "surpluses' resulting from the implementation of the LGC. The risk to the national government, specifically its ability to maintain fiscal balance, is discussed above (paras. 3.6 and 3.7). 3.23 Review of Existing Studies. Various attempts have been made to estimate the impact of devolution on the fiscal balance of local governments. In a recent World Bank study, it was argued that the impact of devolution on fiscal balance will be different for each level of local government. The results of the simulation (using 1990 data) show "that the provinces and municipalities will suffer a shortfall in additional IRA relative to expenditures responsibility under all revenue sharing assumptions while cities and barangays will be receiving more revenues than expenditures." The reason 68 is that provinces and municipalities are expected to take on the cost of devolved health expenditures, the single largest scurce of devolved expenditures; most cities, on the other hand, already have health offices and are not expected to absorb a large number of the Department of Health field staff. Since at the time of that study, a detailed breakdown of the cost of devolved functions by local government unit was not available, the simulation was limited to the level of local governments (provinces, cities, municipalities and barangays) rather than the individual LGUs. Furthermore, on the spending side, the analysis was limited to total government expenditures per capita per LGU. 3.24 In a separate exercise, the Department of Health attempted to estimate the financial implications of the new LGC on local budgetc. Recognizing that the fiscal gaps are likely to occur for provinces and municipalities, the DOH study looked at prototypes of relatively poor (4th, 5th, and 6th class) provinces and municipalities under varying average cost of health services assumptions (recommended, moderate targeting, and lowest acceptable). The analysis showed large deficits for all categories of provinces and municipalities, but its cost and revenue estimates were based on incomplete data. 3.25 In a series of exercises, the Department of Budget and Management also estimated the effect of devolution on the fiscal balance of local governments. DBM, using an incremental approach, estimated the increase in interna'l revenue allotment of each local governmeut unit compared to the increase in the cost of devolved functions. In the case of provinces, income was adjusted for the realizable income from devolved hospital operations. The estimation procedure was applied to all local governments. 3.26 DBM estimates show that the total realizable increase in income due to the new Code will exceed all the mandatory claims including the cost of devolved functions.> This conclusion holds for all levels of local governments: provinces, cities, municipalities and barangays. Under this incremental approach, the excess of the additional income over total mandatory claims is estimated at P146.7 million for provinces, P2.7 billion for cities, P1.3 billion for municipalities, and P2.6 billion for barangays. 3.27 But this broad picture conceals the likelihood that many local governments may be financially distressed as a result of the implementation of the Code. DBK estimates that 47 (61 percent) out of 77 provinces and 274 (17.8 percent) out of 1,542 municipalities will have negative fiscal balances. Under this approach, none of the cities and barangays will be financially distressed owing to devolution. And even for the financially distressed provinces and municipalities, the total financial gap is much lower (only P643 million) than what was projected in other studies. 3.28 A comparison of incremental revenue and costs serves an important purpose. However, one of its limitations is that it provides no insights on S The cost of devolved functions is based on the most recent estimate (20 March 1993 version) of the Department of Budget and Management. 69 what magnitude of policy reforms may be required in order to bridge the financing gap, such as using the new local powers to increase local tax revenues and other measures. On the cost side, the high number of provinces at financial risk can be attributed to the inclusion in their future expenditures additional provision for development projects (over and above the legally mandated 20 percent of IRA for development activities) and spending for calamities based on past levels. 3.29 Manasan (1992), in a recent study, addressed both the aggregate dimension of the fiscal gap and the effects of the LGC on individual LGUs. The results show that the combined IRA shares (for provinces, cities, and municipalities) will exceed the inflation-adjusted cost of devolved functions and the pre-devolution expenditures of local governments. Based on 35 percent IRA share, the excess will be about P600 million. 3.30 For the LGU-specific impacts, the Manasan study looked at four sample LGUs, namely: an urban, industrial, first-class province; a rural, agricultural, third-class province; an urban, industrial, first-class municipality; and a rural, agricultural, sixth-class municipality. As expected, the results derived from the aggregative analysis conceals the differential impact of devolution on the fiscal position of individual local governments. The various simulations based on actual data from a number of these LGUs suggest that lower-income class provinces will tend to have financial difficulties as a result of the implemnentation of the new Code. In the case of municipalities, both the higher and lower class LGUs will face financial difficulties. 3.31 Although well designed, Manasan's study also has limitations due to the uncertainties surrounding IRA allocations and the cost of the devolved functions. Much of the uncertainty has since been resolved. This now permits a more comprehensive approach to analyzing the fiscal LGC impact on individual LOUs, which is presented below. Fiscal Gags Based on Total Approach 3.32 The "total approach" to estimating LGU fiscal gaps uses total revenues and total expenditure estimates for 1993 for each LGU, assuming full implementation of the Local Government Code as of January 1993. As such it will provide an underlying estimate of fiscal impact, but not the actual impact, because LGUs have already allocated revenues and cut costs for 1993 based on their plans and programs. However, this approach enables a recreation of the starting point for each LGU post-devolution, similar to the DBM methodology. It should be emphasized that the assumptions used for local expenditure obligations and revenue flows can be modified to produce different results. Those used in this exercise are cautious on the expenditure side; other approaches, equally useuful, have assumed higher obligations. 3.33 Methodology. Fiscal gap for each local governmen.- is defined as the difference between total revenue and total expenditure. Its estimation first requires the careful adjustment of revenue and expenditure data at the local government unit level based on the 1991 audited financial reports. 70 Fiscal year 1991 was used because it is the most recent year for which Commission on Audit (COA) financial reports are available. It also serves as a baseline year for analyzing the impact of the Local Government Code which was implemented in 1992. 3.34 In this study, total revenue is defined as the sum of real property tax revenue, taxes on goods and services, other taxes net of internal revenue allotment, operating and service income, income from public enterprises and investments, miscellaneous income, capital revenue, grants and aids, and the 1993 internal revenue allotment as estimated by the Dapartment of Budget and Management. Only 80 percent of the 1993 IRA is included in the total revenue because under the Code, 20 percent of the allotments shall be set aside as development funds. On the other hand, for provinces, income from hospital operations is added to the total amount. 3.35 Total expenditures include those on general public services; education, culture and sports/manpower development; health, nutrition and population control; social security, labor and welfare/employment; housing and community development; other social services; economic services; other purposes and total cost of devolved functions from the Departments of Agriculture (DA), Environment and Natural Resources (DENR), Budget and Management (DBM), Social Welfare and Development (DSWD) and Department of Health (DOH). For consistency with the revenue data, all development funds -- the 20 percent development fund, barangay development fund and municipal development fund -- were excluded from total expenditures. 3.36 For each level of government, the responsiveness of the fiscal gap to increased local tax effort scenarios is tested, using different scenarios (see annex 3.C for discussion of local bo-;ernment perspectives on raising tax effort). The taxes involved are real property taxes, local business taxes and public enterprise taxes. 3.37 The cost of devolved functions was provided by the Department of Budget and Management. A slightly larger sample of LGUs was used for this section: 73 provinces, 60 cities and 535 municipalities. The costs of devolved functions represent a 1993 baseline from which local governments will adjust expenditures in subsequent years. Thus, both on the revenue and expenditure sides, local governments will be able to respond to the estimated fiscal gap, and indeed already have done so in the first half of 1993, thus erasing these estimates of "surpluses" and "deficits".& Results of Analysis 3.38 Provinces. Based on available data, 13 of 73 provinces (17.8 percent) will not meet the fiscal requirements under the Local Government Code. This is well under the DBM estimate, even though both estimates share the same data on costs for devolved functions. One important methodological 4 The LGC prohibits local government enactment of deficit budgets. Total budgeted expenditures must be matched by revenues or borrowing 71 difference, as noted earlier, is DBM's inclusion of several expenditure items that push up the number of provinces in deficit.1 3.39 Turning to tax effort scenarios, if extreme measures are assumed -- a 100 percent increase in real property, and a 25 percent increase in both local business tax collection and public enterprise income -- only eight provinces (11 percent) will be in deficit. These results are summarized in Table 3.2 below. "Policy Changes' in the table refer to the "extreme measure" scenario for provinces and municipalities. Table 3.2: Ratio of LGUs in Fiscal Deficit Class and type of LCUs Provinces Cities Municipalities 1. Before policy changes First 17.24 0.00 71.43 Second 6.67 0.00 25.00 Third 36.36 0.00 11.54 Fourth 14.29 0.00 5.71 Fifth 22.22 0.00 5.63 Sixth 0.00 0.00 7.92 TOTAL 17.81 0.00 8.22 2. After "Extreme Measure" Policy Changes First 13.79 0.00 42.86 Second 0.00 0.00 0.00 Third 18.18 0.00 7.69 Fourth 14.29 0.00 4.29 Fifth 11.11 0.00 5.31 Sixth 0.00 0.00 7.92 TOTAL 10.96 0.00 6.73 Note: The IRA used is 80 percent of DBM estimates. Expenditures net of continuing accounts. Source: World Bank staff estimates from Department of Budget and Management Data E The DBM approach includes reservation of 5V of the IRA for the Calamity Fund. This is not included in the results presented here due to the doub.e counting of calamity expenditures that would result, because the 1991 LGU expenditures data include calamity expenditures. Nonetheless, if the LGU fiscal data are subjected to a second calculation, by reducing total revenue equal to 5% of the IRA, the results yield a modest increase in the number of LGU's in deficit, from 13 to 17 provinces and from 44 to 54 municipalities. 72 3.40 Analyzing the results by class c' province, the following observations appear appropriate. Five provinces (17.24 percent) in the first class category will not meet the fiscal requirements under the Local Government Code. If "extreme measures' are taken, the improvement in the fiscal picture will be marginal: four instead of five provinces (13.79 percent) will have a negative fiscal gap. Only one second class province would be in fiscal deficit, and this would be remedied by the tax scenario. For provinces in the third class category, only four (36.36 percent) will not meet the fiscal requirements under the Local Government Code. If the "extreme measures" are implemented, the number of provinces at risk will be reduced by half: only two (18.18 percent) instead of four (36.36 percent) provinces will be financially threatened. The same result applies to fifth class provinces; the tax measures will reduce the number of provinces in deficit by half. 3.41 The number (percentages) of provinces in the following categories will not meet the fiscal requirements under the Local Government Code: one (14.29 percent) of the fourth class provinces, and none of the sixth class provinces. The implementation of policy measures will not affect the status of the above provinces. 3.42 Cities. The results of the analysis show that none of the 60 cities will experience fiscal deficits under the 1991 Code. As mentioned earlier, the incremental IRA allocations for chartered cities far exceed the cost of devolved functions. 3.43 Municipalities. The results of the analysis (see Table 3.2 above) show that 44 (8.22 percent) of the sample municipalities will not meet the fiscal requirements under the Local Government Code. If the income class proportions are applied to all 1,533 municipalities, the number expected with a fiscal gap is 109 (7.1 percent). If extreme tax measures are undertaken by municipalities -- a 100 percent increase in real property tax collection and a 25 percent increase in both the municipal business taxes and public enterprise income -- there will be a modest improvement in their fiscal position. The improvement is, however, quite significant for the relatively affluent municipalities. For first class municipalities, the proportion of those with potential fiscal risk would decline from 71.43 percent to 42.86 percent, and if extreme measures are undertaken, none of the second class municipalities would be faced with a fiscal gap (see Table 3.2). 3.44 A surprising result for municipalities is that a high proportion of first class municipalities are unlikely to meet the fiscal requirements under the Local Government Code. This result contradicts the hypothesis and results of previous studies that poorer local governments are more likely to have financial difficulties than richer LGUs. Distribution of Fiscal Risk 3.45 Generally, the distribution of fiscal deficit status is more concentrated in the higher income class municipalities than the lower. If fiscal risk for municipalities is plotted against real property assessment per capita, a rough proxy for municipal community wealth, the scatter plot (Figure 73 3.1 below) also shows a modest relationship betwaen negative fiscal risks and the wealth of the municipality. The wealthier municipalities are concentrated in metro Manila. Fiscal risk is used as an index of fiscal burden resulting from the Local Government Code. The amount of surplus (or deficit) is pltaced over total revenues, with the resulting percentage equal to "fiscal risk" for that locality. 3.46 For provinces, a more precise measure of wealth is available in average household income which is plotted against fiscal risk in Figure 3.2. Here there is no apparent relationship between the two variables, indicating that fiscal balance is not well correlated with wealth at the provincial level. This finding is consistent with the flat distribution of fiscal deficit across revenue classes as seen in Table 3.2. 3.47 For cities, the distributional pattern of the LGC allocation formula can be seen in Figure 3.3 in which fiscal risk is plotted against the tax base (Real Property Assessment per capita or RPA). Fiscal risk is, of course, positive for all 60 cities, and again there is no relationship between the two variables. What is more notable is the high level of positive fiscal risk for many cities, with some reaching as high as 96 percent (fiscal surplus over total revenues). Even with the pervasive imbalance between additional devolved costs and IRA revenues for cities, such surpluses are high indeed. 3.48 Using the chapter's "total approach" to computing fiscal balances, the total surplus for cities is around P4 billion, or just under half the total IRA allocation for cities of P8.4 billion. The cities therefore, will enjoy a budget windfall of substantial proportion, about P68 million each on average, or P313 per capita in FY93. How cities chose to allocate their additional revenues in FY93 and elect to do so in subsequent years will affect a broad range of services, including health. 74 Figure 3.1: Municipal Fiscal Risk Against Real Property Assessment FISCAL PISK AGAINST PPA wiN ICn4LITIm 1-~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~, 0.91 0.a a's a's~~ 0.3 0.1 -0.4 -0.5 -0.8 -U., -a.4. l -U..~ ~ ~ ~~~rpAnB 75 Figure 3.2: Provincial Fiscal Risk Against Household Income FISCAL RiSK AGAINST AVE HH INCOME MROINCE 0.4~0 [hs~~ an" I -~~a.s 0.1 a o aob U l 0 00 a am 0 0.4 0 I 10~ 8 0 e D03 0 ~~~~~an 3 )~~~~~~~AEA HOUMIM IMCE I~~ _ ..~ 76 Figure 3.3: City Fiscal IUsk Against RPA F ISCAL RISK AGAINST RPA 0 E U.. r . 1 ~~~~~~~~~~cirls 0.7 a CPU = 0.0 -c 0.1 0 0.5 4 0000 0.4 0 a a X 0.3 0 0 0.2 00 i 0 0.1 0 0U a 4 a . . . .I Is _ - 3.49 It should be noted however, that the IRA windfall for urban residents does not produce an equally large per capita revenue advantage over that of provincial inhabitants. Table 3.3 below shows the IRA funds for each level of local government. IRA flowing to provinces, municipalities, and barangays reach the same population subgroup (about 48 million people). City residents benefit mainly from city IRA. In per capita terms, therefore, the provincial population will receive P592 per capita compared to P654 per capita for the chartered cites, a differential somewhat less than would be expected given the large surpluses accruing to cities. 77 Table 3.3: INTERNAL REVENUE ALLOTMENT, 1990-1993 (In billion pesos) Particulars 1990 1-91 1992 1993 Provinces 2.25 3.01 4.53 8.44 Cities 1.88 2.50 4.53 8.44 Municipalities 3.37 4.51 6.70 12.48 Barangays -- - 3.95 7.34 TOTAL 7.50 10.02 21.33 36.70 Source: Department of Blidget and Management 3.50 The large surpluses accruing to cities are, however, well known to policy makers in the Philippines. The Internal Revenue Allotment formula is already the subject of pending legislation to redistribute central revenues to the different levels of local government so as to correct for the perceived imbalances. However, the extent to which the Internal Revenue Allotment formula has provided the chartered cities with an unjustified revenue windfall is not clear, either in terms of expenditure needs or tax base of the chartered cities compared to the rest of the country. Moreover, any future modification in the IRA formula will have distributional impacts among LGUs, another important consideration. Ajustment of the IRA formula will need, therefore, to incorporate calculations of the optimum size of the reallocation and its distributional effects among cities as well as provinces and muncipalities. 3.51 Another important aspect of the large surpluses generated by the IRA formula is the potential impact on total health spending. Even if provinces, cities, and municipalities allocate surpluses at less than the share of health in their first year budgets, the additions to total health spending, above pre-devolution levels, will be substantial in the vast majority of localities that are in the 'surplus" category. Explaining the Fiscal Gap 3.52 Which variables best explain why LGUs are likely to incur financial difficulties as a result of the new Code? Since the previous exercise shows that cities are not likely to face financial difficulties as a result of devolution, the statistical analysis of the determinants of fiscal gap is limited to provinces and municipalities. 78 3.53 For provinces, it is useful to examine the cost of devolved functions, particularlv the cost of health services devolved to provinces. These are almost exclusively in the hospital recurrent cost category. Figure 3.4 plots fiscal risk (deficit or surplus over total revenues) and devolved health cost for each province. It can he seen that fiscal risk tends toward deficit as devolved health costs rise. This reflects the high proportion of devolved provincial health costs in both the total devolved costs and in relation to total provincial revenues. A multi-linear regression also singles out devolved health costs, as the total number of provincial hospital beds is a significant variable explaining less favoraole fiscal status. 3.54 For municipalities, a similar relationship holds, as seen in Figure 3.5, but not as strongly as for provinces. Only as devolved health costs become quite high do municipalities move more predictably into deficit. As indicated in Table 3.2. higher proportions of ealthy municipalities are expected to be in deficit; these same localities would appear to have large DOH expenditure requirements. 3.55 The fiscal picture for local governments is not as gloomy as Aarlier depicted by studies and concerned local and national officials. This is not to say that the fiscal risk of devolution can be dismissed by government as unimportant. The performance of local governments in the delivery of the devolved functions should be closely monitored. 3.56 At the national level, evidence from this and other studies indicates that the central government may face a risk of a rising public sector deficit if the increase in the share of local governments of internal revenue taxes is not accompanied by a corresponding reduction in the size of the central government bureaucracy and the devolution of other functions (such as the school building program). The policy implications of this potential problem are beyond the scope of this study. 3.57 At the local level, estimates of the official government and this study show that the cost of central government intervention to address serious fiscal gaps and assure efficient health service delivery may not be as costly as previously thought. The total fiscal gap for provinces is on the order of P272 million and P418 million for munic'palities, or a grand total of P690 million. Moreover, the distribution of the fiscal gap across municipalities 79 Figure 3.4 Provincial Fiscal Risk Against Devolved Health Expenditure FISCAL PISK AGAINST DEVOLVED HEALTH eXP F4tWINC 0.5 _- a's 02 a D a a 0 O a O 93~~~~~~ M 3 0 0 10 a3 a 1CO wealth an . Itene If sarl increae ta aolcinefot eeptit 5.1 1 13 a a a3 a L~~~~~~~~A 0~~~~ -5.3 icMr iI i onh) CMLED0~U HEWLLTH E4DITUNM and provinces is relatively neutral or progressive with regard to measures of wealth and revenue. If sharply increased tax collection efforts were put into place, this total fiscal deficit would be nearly cut in half. For some localities, reductions in expenditure may prove to be justified in some sectors. 80 Figure 3.5: Municipal Fiscal Risk Against Devolved Health Expenditure FISCAL PISK AGAINST DEVOLVED HEALTH EXP MMLI ICIALJTIM I 0.1 0.U 03 - 2 0.5 I~~~0 ILY 13 LT Cs -0.2 -0.3 -0.1 -0.1a -0.8 -0.9 lad IS ianuM 0OOLYE HEALTH UcagoiiUJN E. Conclusions and Imglications for Policy 3.58 Fiscal Augmentation Mechanism. How should a short-term fiscal augmentation mech nism be designed? Estimates of the fiscal gap show that first class provinces are as likely to face financial difficulties because of devolution as fifth class provinces. None of the sixth class provinces are financially at risk as a result of the Code. This surprising result suggests that the risk faced by more affluent provinces arises from a reason different from that of poorer provinces. In the case of the former, it is perhaps more due to the overinvestment in hospital facilities in the past (as seen in Figure 3.4), which they now have to staff, equip and maintain rather than lack of fiscal resources. For sixth class provinces, the absence of financial risk does not mean that the poorest provinces have adequate resources to provide health 81 services; rather, it is that such services have not been heavily provided to these poor provinces in the past. 3.59 In the case of the municipalities, the low overall fiscal risk may arises from the low provision of health services in the past, as the cost of devolved DOH functions ranges below 20 percent of total expenditures in the rural municipalities. Health expenditure thus plays a less significant role in determining the fiscal balance than in the provinces, as seen in Figure 3.4. 3.60 These conclusions suggest the need for a differential mode of intervention for rich and poor provinces. For the richer provinces in deficit, DOH should assist local officials to identify cost-effective measures for health service delivery, with short-term financial assistance to cover recurrent costs. It would be counter-productive, however, to continue such assistance in future years, as it would deter provinces from constructing a sustainable budget. For the poorer communities, both technical and financial assistance may be appropriate. 3.61 For municipalities, a high proportion of first class local governments (71 percent) may face financial risk as a result of the new Code. The likelihood of fiscal risk for second to lower class of municipalities ranges from a low of 5.63 percent (fifth class) to a high of 25 percent (second class). This pattern would also suggest a careful targeting of augmentation resources and technical assistance to those lower-class municipalities facing high fiscal risk, while attempting to limit resources to the wealthier municipalities in the short term as a transitional measure. 3.62 These arrangements for argumentation should be seen as a near-term activity arising from the financial asymmetries of the Local Government Code. LGUs are empowered to reallocate revenues, streamline costs, as well as enhance local revenues. Moreover, the IRA flow in 1994 is scheduled to rise from 35 percent to 40 percent of the internal revenue base. Assistance from the center should shift from the augmentation instrument to a more flexible, targeted- assistance approach, based on health project assistance and cost sharing. 3.63 Ecuity Implications. An important consideration for such longer-term targeted assistance arises from the evidence presented in this chapter on past 1991 fiscal behavior of LGUs. Per capita health expenditure increases with the wealth of the local community. Health expenditure is also positively correlated with per capita locally raised revenues. Furthermore, some anecdotal evidence based on interviews with local chief executives suggests that large, urban LGUs are likely to raise taxes more than smaller, rural LGUs (see Annex 3C). The important implication of these results is that in the absence of national government intervention in terms of targeted grants, health services may be under provisioned in poorer communities in future years. 3.64 These findings highlight the equity concerns identified in Chapter II. They also point to the need for fiscal performance criteria in the allocation of grant resources to JXUs in order to stimulate higher health spending per capita and greater local tax effort. These issues will be taken up in more detail in Chapter V. Annex 3A, p. 1 of 3 TABLE 2: DETERMINANTS OF PER CAPITA LOCAL HEALTH EXPENDITURES, PROVINCES …---------------------------------------------------------------- Variahles and E..uation 1 2 3 …--------------------------------------------______---_---------- _onstant 2.17 0.79 5.47 (2.59)** (0.74) (2.79)$* Average Household Income -- 7.771D-05 -- (2.77)** Per Capita Assessed Value 0.00055 -- -- (2.08J* Dummy Variable for Class of Local Cov't Di -- -- -1.28 (1.94)* 02 -- -- -1.10 (1.50) _3 -- -- -1.62 (1089) D4 -- - -- -2.75 (3.01)** D5 -- -- -5.59 (2.82)* * Population 1.734D-06 1.568D-06 -- (3.10)** (2.85)** Land Area 2.979D-05 3.61OD-05 -_ (0.31) (0.39) Poverty Index -- -0.021 (1.09) Per Capita Allotments -0.0059 -0.0058 0.0069 (0.90) (0.91) (0.76) Urbanization -0.081 -0.0805 -0.071 (4.27)** (4.33)** (3.92)** Population Density -- -- 0.003 (1.65) Locally-raised revenues -0.024 -0.01 -0.022 (0.80) (0.39) (0.87) R2 0.26 0.30 0.31 …--------------_---_--------------------------------------------- Note: The absolute value of t-statistics ave. in parenthesis. $ Coefficient is significant at 5 percent level. ** Coefficient is significant at 1 percent level. 9i Annex 3A. page 2 of 3 TABLE 3: DETERMINANTS OF PER CAPITA LOCAL HEALTH EXPENDITURES, CITIES ----------------------------------------------------------------- Variables and Equation 1 2 3 ----------------------------------------------------------------- Constant 11.67 8.34 10.56 (1.17) (0.75) (0.95) Per Capita Assessed Value -0.0015 -- (0..99) Dummy Variable for Class of Local Cov't DI -- -10.08 -4.57 (1.24) (0.59) D2 -- -5.14 2.39 (0.45) (0.22) D3 -- -30.64 -20.59 (2.51)** (1.88) D4 -- -42.01 -24.20 (2.03)* (1.32) D5 -_ -45.49 -27.22 (1.72) (1.10) Population -- 8.258D-06 -- (0. 58) Land Area -- -0.0199 -- t1.80) Per Capita Allotments 0.0101 0.076 0.03 (0.37) (1.92) (1.03) Population Density 0.0002 -- 0.0003 (0.39) (0.58) Locally-raised revenues 0.14 0.086 0.09 (2.64)** (2.53)** (2.72)** R2 0.21 0.26 0.22 …---------------------------------------------------------------- Note: The absolute value of t-statistics ave. in parenthesis. * Coefficient is significant at 5 percent level. ** Coefficient is significant at 1 percent level. 84 Annex 3A, page 3 of 3 TABLE 4: DETERMINANTS OF PER CAPITA LOCAL HEALTH EXPENDITURES, MUNICIPALITIES Variables and Equation 1 2 Constant 9.65 -0.19 (4.30)** (0.50) Per Capita Assessed Value -- 4.410D-05 (1.55) Dummy Variable fcr Class of Local Cov't D1 -0.11 -- (0.04) D2 -4.21 -- (2.53)** 03 -6.42 -- (3.75)** 04 -8.04 (4.45)** 05 -9.17 (4.25)** Population -1.325D-05 2.116D-05 (1.56) (4.04)** Land Area -0.002 -0.001 (2.04) (1.80) Per Capita Allotments 0.005 0.006 (2.11)* (2.60)** Locally-raised revenues 1.691D-07 1.539D-07 (18.19)** (16.43)** R2 0.66 0.64 Note: The absolute value of t-statistics ave. in parenthesis. * Coefficient is significant at 5 percent level. ** Coefficient is significant at 1 percent level. 85 Annex 3B, page 1 af 3 TABLE 5: DETERM4INANTS OF LOCALLY RAISED REVENUES: PROVINCES …___________________________________________________________-___ Variables and Equation 1 2 3 …---------------------------------------------------------------- Constant 7;.9 -4.21 32.35 (1.09) (0.84) (3.89)** Average Houisehold Income -- 0.0003 -- (7.17)* Per Capita Assessed Value 0.005 (5.21)1* Dummy Variable for Class of Local Cov't Di -- -- -2.71 (00.63) 02 -1.28 (0.26) 03 -- -- -5.52 (0.95) D4 -- ---8.89 (1.37 ) D5 -- -- -8.33 (0.71) Population 2.273D-06 -- 1.308D-06 (0.98) (0.33) Land Area -0.0006 -- -0.0011 (1.56) (2.04)* Urbanization -0.118 -0.133 -0.16 (1.52) (1.60) (1.67) Per Capita Allotment 0.016 0.026 -0.021 (0.60) (0.83) (0.48) Poverty Index -0.098 -- -0.240 - (1.31) (2.76)** Population Density -- 0.021 -- (2.50)** R2 0.42 0.20 0.16 …---------------------------------------------------------------- Note: The absolute value of t-statistics ave. in parenthesis. S Coefficient is significant at 5 percent level. *1 Coefficient is significant at 1 percent level. Annex 3B, page 2 of 3 TABLE 6: DETERMINANTS OF LOCALLY RAISED REVENUES: CITIES Variables and Equation 1 2 3 Constdnt 161.86 13.91 55.89 S3.89)** (0.58) (2.35)* Per Capita Assessed Value -- 0.022 0.021 (11.15)** (9.53)** Dummy Variable for Class of Local Covt Di -51. 54 (1. 59) D2 -18.71 -- -- (0640) D3 -44.13 -_ __ (0.89) D4 -48.02 -- -- (0.57) D5 -123.52 -- -- (1.16) Population 0.0001 0.0002 -- (2.07)* (4.30)** Land Area -0.07 -0.04 -- (1.42) (1.97)* Per Capita Allotments -0.028 -0.003 -0.106 (0.17) (0.04) (1.66) National Capital Region 117.37 -61.85 38.97 (1.42) (1.28) (0.75) Population Density -- -- 0.003 (1 44) R2 0 44 0.83 0.79 ----------------------------------------------------------------- Note: The absolute value of t-statistics ave. in parenthesis. S Coefficient is significant at 5 percent laiel. *5 Coefficient is sigrificant at 1 percent level. 87 Annex 3B, page 3 of 3 TABLE 7: DETERMINANTS OF LOCALLY RAISED REVENUES: MUNICIPALITIES Variables and Equation 1 2 3 Constant -12672514 -36468323 50573380 (7.04)** (3.38)** (4.88)** Per Capita Assessed Value 667.83 -- -- (5.27) * Dummy Variable for Class of Local Cov't Di- 3985424.7 -39053369 (0.29) (2.50)* D2 -- -8156e3.12 -45387784 (0.08) (4.08)8* D3 -- 11110981 -48954828 (1.13) (4.67)** D4 -- 22447872 -48901590 (2.20)* (4.71)8* D5 -- 28210807 -49074892 (2.66)8* (4.64)** Population 347.18 497.50 -- (12.32)8* (13.88)** Land Area -8804.40 -3207.43 -- (2.51)* (0.88) Per Capita Allotments 34909.12 25218.61 -8695.69 (2.68)8* (2.09)8 (0.65) National Capital Region 22723783 9432302.7 61394558 (2.68)** (0.94) (5.30)8* Population Density -547.87 -379.17 (2.03)* (1.21) R2 0.56 * 0.57 0.41 Note: The absolute value of t-statistics ave. in parenthesis. * Coefficient is significant at 5 percent level. %* Coefficient is significant at 1 percent level. 88 ANNEX 3C INTERVIEWS WITH LOCAL GOVERNMENT EXECUTIVES Based on interviews in early 1993 with 25 local chief executives -- 13 governors, four city mayors and eight municipal mayors -- the following statements, although not conclusive, appear warranted. First, most local governments are aware of the activities they have to do to increase local tax yield. Most have organized the appropriate committees and task forces to conduct studies, many have conducted public hearings on specific tax proposals, and sCAe have taken the initial steps in the computerization of the tax collection system. Second, most local governments are aware of the potential decline in real property taxes because of the downward adjustment in the assessment level for residential properties and the exemption of residential buildings and other structures with a fair market value not exceeding P175,000. Yet, only a few LGUs have actually revalued real properties in their jurisdictions. Third, some local chief executives understood that one likely outcome of the decentralization process would be competition among local communities in the country in attracting and retaining business and investors in their respective jurisdictions. Thus, some local governments have adopted a wait-and-see attitude in setting the appropriate local tax rates. But while the awareness level among local chief executives is high, the adoption of necessary reforms has been rather slow. There is one plausible explanation: resistance to reforms for political reasons. Some local chief executives, especially those coming from small communities, talkeed of the adverse political consequences of implementing fully the revenue mobilization measures as proposed in the 1991 LGC. If true, the full implementation of reforms is more likely to occur in large urban and impersonal communities than in small, rural, personalistic provinces and towns. 89 Chapter IV. ORGANIZATION AND MIUGEENT ISSUES A. Introduction 4.1 This chapter approaches the analysis of the costs and benefits of devolution from an organizational and management perspective. In Chapter II, the comparative analysis placed the Philippines well to one side of the decentralized spectrum in terms of several structural criteria. This Chapter pursues a more micro level analysis and identifies some organizational sources of potential teclnical and economic efficiency changes arising from devolution, and recommends management interventions to minimize losses and increase the gains. 4.2 Using an organizational and management approach leads to several working assumptions. These include the following: (a) The devolution of health services in the Philippines can be considered a large-scale organizational change, which is defined as irreversible, fundamental and functionally pervasive, with high management requirements. (b) Success or failure in large-scale organizational change should be measured, in the case of a public health delivery system, in terms of the impact on health service outputs and ultimately in their impact on health outcomes. Organizations can become preoccupied with other outcomes, such as budgetary levels, loss or gain of authority, changes in staff levels, changes in organizational structure, or development of new management processes; but, as worthwhile as these objectives may be, the variable on which top management should focus is service output and its impact on health status. (c) A basic principle of managing organizational change is to make the assignment of accountability, authority and responsioility clear w4thin an organization and, where possible, to integrate all three for specific functions. Frequently in the public sector, staff are given responsibilities and held accountable without the requisite authority to effectively implement their responsibilities. (d) From an organizational perspective, health services (programs such as EPI and TB control) and management systems (such as logistics, procurement and management information) are equally important to successful management of large-scale organizational change. (e) The phasing of the devolution process, despite delays and alterations of the process, can be expected to occupy three periods: "changeover," by which is meant the process of transferring authority of DOH personnel and assets to local governments, a short-term period now complete; "transition," by which is meant the one-to-two-year period of adaptation and 90 intense managerial attention to the problems of delivering health services under a decentralized system; and "stabilization," by which is meant the successful resolution of most major near-term management issues and the smoothing of fluctuations in health service performance. 4.3 The chapter will first summarize the scope of devolution-induced change as applied to specific DOH programs and to DOH management systems. The chapter will then turn to structural linkages in the new devolved system, followed by discussion of selected programs and management systems for more detailed analysis of potential efficiency gains and losses. It concludes with a summary of recommended management options for minimizing efficiency losses. Chapter Annex 4B summarizes the management of decentralization in Chile's health services and relates the major lessons to the Philippines experience. B. Scone of Devolution Induced Change 4.4 To identify costs and benefits of the large-scale organizational change precipitated by the LGC, it is first appropriate to discern where such change is taking place within the public health system. The LGC is sweeping in its provisions for the public health sector, but its impact on different health programs and health management systems is likely to vary considerably. To gain a better understanding of this differential impact, DOH managers were interviewed and asked to complete spreadsheets on the changes in control affecting their activities as a result of devolution. The results of this exercise can be summarized as follows: (a) Disease control programs vary in their preparation for devolution. Some, such as EPI, have delegated responsibility for most service delivery management to provincial-level DOH staff. Other programs have retained direct central control over some delivery staff and activities, as in the case of the TB, malaria and schistosomiasis programs. (b) The management systems within DOH (such as for personnel, facilities and equipment, the management information system and the overall health planning function) will all undergo pervasive shifts in responsibility and authority from the DOH down to local governments. As such, the management system dimension is an area of concern during devolution, roughly equal in downside risk of performance shortfalls to the public health programs themselves over the transition period and beyond. (c) Municipalities and provinces are the most affected levels of government; cities are not heavily involved and barangays will still be part of the municipal-level health system. Municipalities and provinces will need to establish entirely new administrative entities within local government to control the devolved services. This involves considerable risk, particularly for municipalities, where there has been little 91 past development of managerial experience within the DOH system. 4.5 These findings suggest that the impact of the code will be felt very widely throughout the public health system, both in disease control programs and health management systems. To manage the effects of such change, the new structure will need to be clearly defined, in terms of authority and responsibility over the affected programs and management systems. If such assignments are left open to debate and negotiation, the performance of key health programs will be affected negatively. Thus, the next section examines the structure of the local health system as established by the LGC. C. Managing Change: Organizational Structure and Relationships 4.6 The LGC was written to empower local governments, not necessarily to improve health service organization or management. Understandably, there are a number of organizational asymetries, inconsistencies, and gaps arising from the LGC, which, taken together, pose a high risk of substantial costs to the national public health system. 4.7 Figure 4.1 presents the public health sector organization at the pre- and post-devolution stage. Seen next to one another, these graphics indicate the considerable structural and relationship changes which are to take place as a result of the LGC. The central DOH and its Field Health Units will lose their lines of direct authority over provincial and municipal health administration, but they will gain participation in the newly created local health boards through formal representation. As indicated in Chapter II, the boards will interact with other branches of local government on health management issues, creating a more complex local decision making environment than under the centralized system. These new actors include the chief executive, the legislature, the development council, and the local health office reporting to the chief executive. Two issues arise. First, where should DOH construct its institutional linkages with local government? Second, how could the local health planning and budgeting process be better institutionalized under the Code? Institutional Linkages 4.8 DOH-LGU Links. The remaining DOH links wilh local governments, although much reduced, are nonetheless extensive. The DOH is formally represented on all local health boards. In addition, it still budgets for and is expected to provide or deploy at the local level such items as TB and malaria control teams, a supply of drugs and vaccines under the TB, EPI, CARI, malaria and other programs, equipment for the EPI program, tireign-assisted project inputs of various kinds including hospital equipment, training of technical personnel, and IEC materials distribution, among many others. If these inputs are not delivered on time to service delivery points, loss of efficiency and the disruption of services are inevitable. Thus, the DOH will 92 FIGURE 4.1 Macro Health System Stricture Macro Health System Structure tobrbt) , fhotwel rT 7 I I I t I1 1TT 1- I I I I I IW,. 1 I ' I I~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ ~~~~~~~~~~~~~~...... ..... .......... 1:. , ttrlc. , ...tffi ,c !5 t9tePc lou.t4laI_D.tldj 9t' _it. _ _ _. P i | cts I t7 ,r41 A I;3.S I tI*I _r,*_ tl.r54.5 1 4 CS C 3 E . . * E Citla C 1:27 my. t1:144. The Public nThePublic ~~~~~~~~~~~- ? * S I .4. ,. , -._ 93 need to establish in the near term, productive, responsive linkages with local governments (LGUs) to assure the regular flow and use of central program resources. 4.9 A logical institutional choice for DOH-LGU linkage would be the local health boards, on which DOH is granted formal representation. However, the health boards are permitted only an advisory role by the LGC. As discussed in Chapter II, local executives will seek to extend their political authority over health budgets and operations, including personnel and procurement. The extent to which this occurs presents some risk for the technical integrity of the delivery system. 4.10 The DOH staff in concert with local health offices should, therefore, take steps to institutionalize local decision making within a sound technical and managerial context as soon as possible. It will be important that this be established at the outset, for it will be much harder to change perspectives and processes once they are begun. A promising scenario would be that local chief executives decide to delegate planning and operational responsibility, authority, and accountability to their respective health offices in association with respective health boards. The matrix in Table 4.2 below suggests one way in which such assignments could be arranged. Table 4.1: ROLE ASSIGNMENT MATRIX TAM DOH/ GOVERNOR Health Health Local FUNCTIONS Field or MAYOR Office Board Legislative EalPlCS Health Manager(s) Council Unit Capital C C R A/A C Investment Planning Program C I R/A/A C I Planning Recurrent I C C I Budget R/A/A Approvals Program I R/A/A C I Operations KEY: C- Consulted & maybe no-objection clearances; I - Informed & involved; R - Primary responsibility; A/A - Authority and Accountability (should not be separated) 94 4.11 As can be seen, the role of the health boards in this matrix has been significantly enhanced with authority and accountability for capital investment planning and recurrent budget approvals added. The health boards should be the vehicle with which to build active relationships between the community and health services, effectively playing the role of matching local services to local preferences. Community-origin board members should develop specialized knowledge about health needs and services so that they can make such informed decisions. Ideally the Legislative Councils would delegate most of their decision authority to the health boards regarding health budget allocations. The health boards would in effect become a sub-committee (with clear authorities) for the Legislative Councils. If the role of health boards is enhanced along these lines, their membership would benefit from orientation to health planning and budgeting principles and procedures. The DOH or its Field Health Units could organize such assistance efforts. 4.12 With the exception of the DOH representative and the local health officer on the health boards, it is likely most boards will contain many of the same persons who also sit on the Legislative Councils. However, the converse would not be true. Therefore, if the boards have no real authorities, and are unable to gain such authority from the Chief Executive and the Legislative Council, then their functional value would seem quite limited. The DOH might wish to develop other linkages for partnerships with local governments. This would involve dealing directly with LGU executives themselves. In the near term, this may be the most effective arrangement, particularly at the provincial level. However, the provincial role in the local health delivery system has been profoundly altered by the LGC. 4.13 Provincial-Municigal Links. An important flaw in the design of the health system devolution is the stratification of the local health service structure. The LGC creates a hospital service strata at the provincial level and a basic services strata at the municipal level, both in the hands of autonomous local governments, with weak requirements for vertical integration of the provincial-municipal public health system. 4.14 At the provincial level, there are strong institutional antecedents for creating an autonomous "horizontal" organization. This provincial deconcentration, however, did not reach down to the municipal level, where health facilities and staff were vertically managed from either district health offices or the integrated provincial health offices. Supervision, logistics, management information, planning, procurement, personnel management, training and other functions were organized to flow back and forth in a vertical fashion, with provincial control over municipal level decision making. The LGC now bestows these functions on municipal governments, which are much less prepared than provinces to integrate and carry out these functions on an autonomous basis. By requiring municipalities to manage basic health services in which they have little management experience and removing such authority from provinces where such experience was well developed, the LGC has mismatched local capacities and authority. Moreover, the effective severing of vertical linkages poses a serious potential loss of efficiency in the delivery of critical service inputs for basic services. Another potential source of inefficiency is in local procurement of medical supplies and 95 equipment, if large-scale procurement at the central or provincial level could yield lower costs. To preempt or minimize such losses, a recreation of pre- devolution vertical linkages is a logical corrective step, a subject taken up in the concluding section of the chapter. D. Managing Change: Organizational Management Systems 4.15 For those management systems subject to large changes in control, it is possible to indicate some of the managerial considerations involved in sustaining and improving their efficiency under the devolved framework. 4.16 Health Planning. One of the most critical management processes in local health provisioning will be health planning, particularly of capital and recurrent expenditures. These planning decisions are most at risk of inappropriate interference, because they are the "big" decisions over resources and their allocation. 4.17 Prior to devolution, health planning under the DOH had been carried out under "area based planning," a data intensive, ground up interactive process identifying health needs and resource requirements from the basic services level up to the provincial hospital level. Area-based planning was carried out in most provinces for the last three years, and the DOH evaluated the Drovincial planning outputs each year. The results indicate the development of a substantial planning capacity at the provincial level. Although unevenly implemented, the process has helped further develop an equity orientation in the allocative process. Managers at the provincial level should therefore be able to present and defend such outputs to local government executives and legislators. 4.18 Obstacles to the effective use of health planning at the local level will need to be addressed quickly. Provincial authorities should arrange for municipal participation in a province-wide planning process, a key step in recreating vertical linkages between provinces and municipalities, and a topic taken up at the end of this chapter. 4.19 Logistics aad Procurement. A major consideration for the procurement of drugs/vaccines, medical supplies and some equipment is whether the items are available throughout the country. If a specific item is not, then specialized (usually central) procurement will be necessary. Items widely available and not linked to retained DOH programs will be candidates for local procurement. The DOH procurement system has low delivery efficiency and is encumbered by direct monitoring and decision making by the Commission on Audit. 4.20 Most of DOH's logistics and delivery are operated through commercial services; therefore, the DOH is not at risk of deactivating existing staff, major warehousing, and truck fleet if local governments assume more direct responsibility for procurement. While provincial purchasing entities will have some bureaucratic aspects, they should be more responsive to continuing local needs. The possible increases in cost could be matched by 96 demand-driven efficiencies, such as no irrele mint stocks and just-in- time/fresh inventories. 4.21 The efficiency benefits of moving to a more decentralized procurement and logistics system is balanced by the costs of building the requisite skiils, supplier connections, local procedures, and information systems to effectively operate quality procurement. Pharmaceuticals as well as health/medical supplies and equipment are highly technological items, and procurement requires specialized knowledge and systems in order to obtain price advantages. Therefore, while the public sector system can look forward to some long-term efficiency gains for many items procured, it may be some years before the overall system performs better than the existing one. Some scale efficiencies may well be lost. 4.22 Reliable logistical and procurment arrangements for special program-related drugs cannot be over-emphasized. For example, EPI vaccines and cold chain logistics and procurement are inputs essential to service delivery. EPI logistics and cold chain supervision were managed locally by provincial DOH offices. A continuing provincial role will be essential. 4.23 Like EPI vaccines, TB drugs may not be available in local markets and/or their purchase for those who need them may be prohibitively expensive. Figure 4.2 shows a recent estimate of the process of TB drug procurement. The total cycle of procurement takes from 22 to 38 weeks in principle. Of the that time, 60 percent is controlled by the central DOH Procurement and Logistics Service (PLS); 35 percent is controlled by transport and storage providers contracted by PLS; 10 percent by regional and other LGU health offices and barely five percent by the TB Control Service program office. In addition to this being a lengthy process with diffused management, it cannot begin each year until funds are released. This usually does not happen until the second quarter of each year. In the meantime, the tender bid's validity date often lapses. DOH distribution of centrally provided drugs and other supplies has proved to be subject to long delays. This performance will need to be improved, both to insure consistent local participation in national health programs and continued donor confidence in DOH capacities to provide and deliver program inputs. 4.24 Given the present performance issues with DOH procurement and logistics, DOH support for an assessment of how the decentralized procurement system is functioning would be a prudent initiative once the devolved service structure has stabilized. 4.25 Management Information System. The overall information system may be the most critical sub-system for long-term effective operation of a national public sector health system. While control of various functions, resources, and operations may be disbursed throughout the national system, a national public sector health service performing in a unified manner is predicated on each part knowing what others are doing. The direct central DOH information system has been broken up, and provinces and municipalities will control the bulk of this function and the information produced. Local managers will have an incentive to produce management data for their own use, but there will be little reward for passing this information up through other 97 levels of government Figure 4.2 to the central DOH under the devolved Existing Activities, Channels and Timings for setup. Maintaining the Distribution of National TB Program Logistics the existing Field _________________________ Health Service Information System (the pre-devolution DOH System) is therefore going to be Ptajig Retisitin- Pre-idI particularly 2 t fere difficult because the S.Al logo/ middle level ,/ (provinces) will have / of a higher interest in Stok / \ idg hospital and medical Logistics /W\ Ealati services and their related information ls s I ns heu e functions - not \ ding of public health. The \ractsP.O.'s DOH has proposed a Utillttionof back-up cluster Spi \ 2 survey in order to Post Pf'ranc measure key health \ toGS15 service coverage rates and health outcomes for selected Siovte I Receipt of localities and on a bplemtiw Wit quick turn-around basis. But this is clearly a second-best Dl H to solution to a ffic" systematic, service based information ,ormtw C system. 4.26 Health Education and Empowerment for Basic Health Programs. Although the IEC/health education program is not a management system, per se, it will be increasingly important to DOH as it will be DOH's major direct link with most of the public. This channel can be utilized not only for the traditional health education functions whereby the public is given information about health and medicine in order to develop healthy behavior, but also to help families and communities change their practices toward their health service providers. Devolution provides an opportunity for DOH to encourage communities to become more proactive in their relationship with their local health service providers. 4.27 Under the centralized system, responsiveness of the health providers to public concerns was a function of central policy. Area-based planning had been introduced to increase the responsiveness of local services to local needs. Such initiatives, however, were only a step toward the local 98 and popular empowerment that devolution has established (at least, in principle). Now, much of the "watchdog" function should come from the communities themselves. This applies especially to the continuity and improvement of basic health programs. Since the public has little m-eaningful experience in participating in local health service management, there will need to be a strong and continuing effort to provide the public with information about public health priorities for the next three to five years. For a devolved health system to perform better than the past system, informed local community involvement is a fundamental, essential performance ingredient. Improving information flows, as noted in Chapter II, is an important central responsibility and also a demonstrated capacity within the DOH. E. Managing Change: Basic Health Programs 4.28 This section examines the impact of devolution at the health program level, focusing on the continuity of program inputs and management. As a means of assessing change with the public health programs, interviews with program managers were carried out to identify the scope and level of change in program authority as a result of the LGC. For a program such as EPI, for example, managsrs were asked what level of government would have authority over program activities such as vaccine procurement and distribution, cold chain equipment maintenance, technical supervision, staff training and development and so on. Based on these interviews, matrices were completed to indicate where a specific program function was performed pre- devolution and where it would be under the new, decentralized system. 4.29 It is notable that in many cases, DOH managers indicated a high degree of program deconcentration before devolution. Considerable scope for local decision making on program functions had been localized within the DOH hierarchy, even though the center retained overall direction and control. The level of preparedness for devolution suggested by these matrices, at least for EPI and TB, increases the probability that drops in program performance (efficiency losses) can be contained with careful managerial attention and a continuing provincial role in coordinating and supporting municipal delivery of services. 4.30 Devolved and Retained Programs. These program-specific profiles indicate the complexity of the total O&M changes which need to take place. For devolution planning and management of specific programs, there is a need to differentiate between those that will be devolved from those that will be retained by the DOH. Although there are many similarities, devolved programs place nearly all operational personnel under local governments; for the retained programs, most dedicated full-time personnel are paid by and in principle are under the ultimate authority of the DOH. Both retained and devolved programs, however, will rely heavily on local government cooperation and participation in service delivery. 4.31 As noted in Chapter I, two retained programs of (malaria and schistosomiasis control) will need to be managed differently than the devolved 99 EPI and MCH programs. First, some of the retained staff working at the local level may be cut off from provincial-level management and supervision, as provincial managers turn their full attention to hospital administration. Second, the integrity of the logistics system supporting the retained personnel may lapse. For example, supplies of insecticide for malaria sprayers or supplies for the teams testing for schistosomiasis infection may not reach the personnel operating in isolated locations. Third, the consistency of operation over larger geographical areas, a key to effective control, may break down, allowing local outbreaks of the disease to develop and persist. 4.32 These "public good" type programs would be expected, under any decentralized set up, to receive limited local support, because the benefits are not fully perceived by individual households or by the local governments that represent them. Under the LGC-mandated structure, this problem is accentuated by the fragmentation of service activities. To assure a consistent and technically sound program effort, the DOH will need to coordinate and involve local governments in support of these "public good" programs, using various incentives and rewards. 4.33 The "retained" programs (EPI, MCH, etc.) may share the problem of inadequate local demand for them, because benefits "spill over" to other localities. But this should be less of a problem, because services for the programs are delivered to individuals. Issues such as provincial coordination and technical integrity of these programs will be more problematic. 4.34 Human Resources and Pronram Performance. A key determinant of program performance, especially for devolved programs, will be the managerial and technical skills at the local level. EPI and TB have had coordinators and trained staff at regional, provincial, district, city and RHU levels for quite some time. While most of the higher-level staff are part-time for individual programs and there is some turnover of assignment, there is a critical mass of the skills needed to operate these two programs throughout the country. There have been some indications, however, that part-time coordinators of basic health programs at the provincial level may not continue to carry out their pre-devolution functions, as provincial governments turn to their core hospital service activities, and staff are reassigned accordingly. 4.35 DevelopiLig this scale of managerial and technical capacity is not a quick or simple process. In the case of the EPI program, there has been less recourse to full-time field staff and a reliance on RHU and BHS staff to integrate these tasks as part of their MCH services. EPI over time has built up a well distributed quantum of expertise in the program's operation under the centralized framework. This is an asset that will help carry program performance through the transition periods of devolution, thus allowing the central program office time to devise new arrangements for training and technical supervision. 4.36 Program Expansion and "Underdeveloped" Programs. Such programs as family planning and nutrition, on the other hand, present a different set of 100 management problems. For these underdeveloped programs, it is estimated that the capabilities needed to manage and operate effectively would take several years to build even under a centralized system of direct control. Local government participation in program expansion activities such as training, logistics, procurement and service prioritization will be up to each LGU under the new devolved framework. Reaching a meaningful scale of effectiveness under such conditions will be challenging indeed (see Chapter V). 4.37 One difference that should be highlighted is that for family planning programs, supplements to public sector service delivery exist in the form of NGOs and some private sector services. The DOH intends to coordinate and draw on those services, when developing the programs further, which could somewhat reduce the time needed. In addition, the family planning program at various times in the past was a high priority, and this might facilitate progress in reviving it under current DOH leadership. Nevertheless, this program (like all other specialized programs without full-time field staff), will probably compete for LGU staff time. 4.38 Managing Program Devolution. Most public health programs will need to have certain key inputs during the changeover in order for services to continue. These inputs include trained staff, drugs/vaccines, small, uninstalled medical equipment (which may be consumable or disposable), some type of facility, health education information services, registries to record serice statistics, operational funds and management/supervision of all these resources. 4.39 With devolution, the availability of each of these could be modified to some degree, through lapses in planning, negotiation, or implementation. Thus, a central short-term objective of the transition phase, for both the DOH and LGUs, is that the established, high-performing health programs are assured of these inputs. 4.40 To illustrate some of the management issues involved in assuring the availability of program inputs, two sets of checklists are presented in Box 4.1 ; nighlight areas of potential weakness or low reliability; the first for TB ancx the second for EPI. The lack of a clear assignment of responsibility and authority over these functions is a major weaknass of the LGC and needs to be corrected by the DOH. Another important priority is the lead role DOH must assume to sustain popular demand for these two programs throughout the country. A third point is the importance of trained staff already in place. The momentum of past practice and the buildup of staff capacities are important determinants of program performance. 101 Box 4.1: H talth Proo m Checklits for Devolution Manaement (a) Trained staff. e 310 case-finding pqaag (3 peros (a) trained staff - implemendtg stff at all levels have been each) which are crnaty supported under die Word weasoably well ind in EPI, so the main question is Bank-funded PHDP poject wil opeate as tained saff ma training both for exisdng staff wben tderc is a for the near term until progrm funding bpses in 1994. tchnc wdiffcadon in dte progtam and tot new staff lhese staff are crucial in ofder to mintan an average of who replace retir staff. This function the ceral DOR one technician to 30.000 population. Mh shoft to pgaim showd condnue to pbn. opeme, and pay for. medium-enn staff development & tainng program will including the per diem of the asinees. It may be dhfficul aso not be a problem under the retind sutue; to petsuade LOUs to release staff for taining or to pay however, plans wM nsed to be developed by 1994 to the DOH for training sevices. an issue that shouli be continue training if the progrm iS devolved. Munidpal negotad. RHU staff to manage TB drug therapy are in place and should not be affected in the nar tm but thdr technical superison wi laps Unless provincial staff continu that fuctioL (b) Drugsvaccines. The cridc TB dnrgs wiU be centally (b) drugs/vaccines - the vacciews are critical to the supplied for the Immediate future; however, beyond 1994. performance of this service. Tbe prcuement and the arrangement kI unclear. Due to the special nre of diibution should remain under centalized management these drugs and ecowtes of scale. it is preferable that for the foreseeable hem. even if the LGC would sugges cental procumement be coinued for at least the next five othewwise. Only ff commercial chaels with country- years. Contnuity in logisc a ments from the wide distribution could be estabUshed should this function center to provincial and munidcpal evels sbould receive be devolved. (Most industialized counwtes still maintain early management atntion. vaccine procurement and distribution in the pubUc sector. Provicuial partieipation in logistial arnagements may need to be negoiatd. (c) Medicd supplies. These are mosdy lab supplies and also (c) medcal supplies - the procurninof syringes (disposabl should be cenay supplid for the tme be, but their or non-disposable) can be devolved although again procrmet and management could be devolved after economis of scale would argue for centaized 1994195. Logistical problems should be dealt with as procurement. under (b). (d) Smapl un-insled medical equimn The same (d) un-insted medical equipmen - die key equipment is the rec_nmendation applies as for medical suppUes. cold chain refigeration equipmes which also wril hlkely remain under cental procurement. but maintance could poteially be put in the hands of the LGUs. 102 TB Pam (e) lHeith facilities. This aspect should not be affhcted by (e) some tpe of shdter - no change under devolution devohution. (f0 Health education for the public. Due to the rbk of som (0 ht education ionainon to pvide to tbe pubic - lik drop in case detection and nstual- demand 1br services, the IB prmgmun, it should be increased to induc more central health education effots should be innsied so public demd for sis and to asse the partiipnon that the pNgam has muome public demand rather than of loed governments. In bedtb, local preterences for rlying on devolve? rvices to consistenty full this services may lead to under consumption due to lack of ctucial infomation .unation. Iceased DOH distribution infomao regauding bnefits of the sevice. of health education mawils for the next 3-5 years may be desirable. (8) Registic mecord service statstics. Ibe existing () regists t rcord service sttics - the recordiqg system screenig/case deecdonlcase maagement inormaon should not chae, but the supenrision of the process will system seems to function weU and should not be altered as chan loag as the program is not devolved. When it is, the informadon system wll have to be igted Into the devolved information systm (h) Operational funds. Ihe program's cerad fudg wl not (h) opeatonal fhnds - the costs of staff tanig. vaccines. significantly change in quantity. The fiacl central healt edcaion and cold chain equipnmentnay managementof these funds also wi not change need to be finated cetraUy. The staff costs. locll immediately: however, plas would be made by ate end upott facilitie & equlpm ance, of 1994 as to how this pogram will contidue to be infonmadon system opeion, are acvifes more logicail funded. Provincial coordinadon and supervison of this provisoned by each LOU. This will need to be program would focus on continuiy of budget suppoar for negoaed. local Inputs, including persomeL (i) Program manaemeslapeisionand technical (4 mangement superision and tehnca assistance of the assistance. There is lttle need to make major cbanges at progam - prviil partication wil be an imporant this point if provinces can be persaded to continue to fnction to negodtae for the tansiton phase of perfor their ftions togeher with the DOH. The devoin. DOH should continue to decnce_n ma ment and supenision to local governmes as has been done in a number of other programs so that when the program is fuly devolved, it does not cause an *opeaionl sock. A plan to devolve the managemet of the pogm should be based on agraements which define somethg similar to a 'role assignmentinatrix.' 103 F. Managing Devolution: Policy Objectives and Implementation Challenges 4.41 Policy Implications of Large-Scale Change. Evidence presented in this chapter establishes that the public health system will undergo large- scale, fundamental change as a result of the Local Government Code. The changes to the control of basic health programs and management systems affect nearly every activity of the once centralized DOH system, whether these activities were implemented centrally or locally. In the decentralized system, new managerial entities at the municipal level will be created where there were none before. Provincial management will be circumscribed within the hospital sector and largely excluded from the management of basic service delivery, for which significant skills had been developed. The DOH loses authority over staff, assets, and service delivery, but retains an overall accountability for the health status of the people. 4.42 Fortunately, the LGC allows the DOH to retain a number of key functions that are best carried out at the central level: health information and education; norms and standards of health service delivery; regulatory authority, including licensing and accreditation, over public and private health providers; health research and disease surveilance; partial retention of national disease control programs such as malaria, schistosomiasis and TB control; the direct management of national and regional hospitals; control over all health projects financed by foreign loans; and the responsibility to augment the resources of local governments unable to meet local health needs. This array of functions presents the DOH with substantial opportunities to influence local health policy and implementation, without interfering in the autonomy of local decision making, from which many of the benefits of a decentralized system would be expected to flow. 4.43 At the local level, however, the far-reaching structural and functional changes introduced by the Code, while empowering local governments to provide health services, misalign capacity with authority and accountability in important ways--as they transfer authority over basic services to municipalities whose health staff have had little managerial experience. In addition, responsibility for a wide range of service inputs and support activities are no longer clearly assigned. In particular, the provincial coordinating role, once the hallmark of the DOH administrative system, is eliminated by the Code with no effective replacement. The past levels of output efficiency achieved under the centralized system are therefore in danger of temporary and potentially protracted slippage. 4.44 As indicated in Chapter I, basic service facilities are progressively utilized in the Philippines. To the extent that efficiency problems under the devolved system affect basic services disproportionately, the poor may bear an unfair burden from health service shortfalls. 4.45 Managing the early phases of devolution is, therefore, a major challenge for the DOH and local governmeats, all of which share an interest in sustaining health service performance through the changeover and transition periods. If done carefully, local governments and the DOH will be able to reap the potential benefits of decentralization over the longer term. 104 4.46 Restoring Vertical Linkages. Restoration of vertical linkages within the decentralized set up will be a priority for provincial authorities and the DOH. One approach that has been discussed is the construction of "health service trade agreements' between the various levels of government, so that continuity of service inputs and management efforts are assured. This approach would build on the many reciprocal arrangements that have bound together the different levels of the former DOH system. 4.47 Such arrangements will be difficult to negotiate and implement unless the advantages for participation are clear. There would appear to be an imbalance between municipal needs and provincial capacities, so that provinces may be disinclined to provide municipalities with the wide range of support services traditionally undertaken by the IPHO, such as procurement, logistical support, training, personnel management, supervision, and referral access to their hospitals. For provincial governments, the costs of providing these services will impose budgetary requirements above the already high costs of running the devolved hospitals. 4.48 Municipalities on the other hand, will be likely to seek provincial support and coordination especially in the supply of specialized drugs and equipment, technical guidance and supervision, management information, hospital referral privileges and so on, given the costly alternatives of purchasing from the private sector or some other form of self sufficiency. 4.49 From the DOH perspective, the prospect of separately managing its support, supervision, and monitoring for 1,500 municipalities would appear to impose heavy recurrent cost burdens, and argue for the use of an intermediary closer to the municipal level, i. e. provincial governments. Thus, provinces would appear to be in demand to serve as an intermediary and coordinator of provincial and municipal health services. Can such arrangements be successfully negotiated, given the apparent resource imbalances among the levels of government and the provisions of the LGC? 4.50 Potential Inter-Governmental "Trades". Annex Table 4.A presents a rough estimate of trading possibilities among the three levels of government for the resources and functions necessary for a retained health program such as TB. The column on the left lists resources and functions, the next three columns indicate if the three levels of government will supply(l), consume (3) or do both (2) for each of the resources in the post-devolution period. The fourth provides a rough index of cost/demand characteristics of the resources and the fifth column whether they are likely to be traded--that is, if suppliers and consumers are located at different levels of government and the cost/demand index is high (3 or 4). The ratings and codings are illustrative only. 4.51 Similar "trade potential" spreadsheets for devolved programs and hospital services were also prepared. The three spreadsheets yield a summary of trade potential among the three levels of government as summarized in Table 4.2. In the case of medical services/hospitals, cities are also important. However, the potential for provincial-city "trades" of hospital services has not been estimated. 105 Table 4.2: Potential "Trade" Between Levels of Government "Tradable" Scores Retained Programs Devolved Programs Hospital Programs High Potential 16 10 6 Possible Trades 2 8 9 Low Potential 4 4 8 DOH- Averages 1.24 1.55 1.74 Provincial- 2.23 2.23 2.13 Averages t4unicipality- 2.68 2.36 2.17 Averages 4.52 This summary indicates that the retained programs would appear to have a higher potential to establish trading relationships between the levels of government (16 high potential resource "trades") and that DOH is the normal supplier (1.24 average score) and municipalities are the normal consumers (2.68 average score). For devolved programs, the potential for functional "trade" relationships is lower. For hospital programs, the trade potential is quite low, with more low potentials than high potentials, given that cities, provinces and the center are each suppliers/consumers of hospital services. This does not rule out pooling and other cooperative arrangements over the longer term, but in the near term, hospital resources and functions appear to be less tradeable overall than the basic health program resources. 4.53 Figure 4.3 illustrates some of these potential trading relationships using a flow diagram and incorporating major trade items such as drugs/vaccines, service statistics, planning services, medical supplies, uninstalled equipment (also installed for hospitals), hospital referral privileges and so on. The outside flows are through provincial intermediation and processing. The inside flows stop at their first destination. The items shown all have flowed through the former DOH system, and many of the DOH- supplied commodities and management support are still available for local government consumption. 4.54 It should be noted that DOH can augment projects and provide assistance directly to provincial governments. Such cash and in-kind flows may be essential tradeables in winning provincial participation in the large intermediary role required from provincial governments and their health staff. Another incentive for provincial participation is their inherent "stewardship" of provincial welfare and the oversight responsibilities for health services enshrined in the LGC. Provincial governments would find it difficult to insulate themselves from accountability for a sharp decline in basic health service efficiency. In this context, DOH linkages with the provincial 106 governor may be a necessary step, even if such a step enhances local executive authority over technical health issues at the expense of Health Boards. 107 Figure 4. 3 Trade Potentials & Patterns of Resources and Functions DOHL TO PReeMOV.FIJI Hospital Reterral He"pital Privileges Servic Stats. Frar DOH via Prov To Mimi RetoIlnd Plans & Inputs Progroa Hospital Plans & Planning 6uides *" tt Traine Service Statistics guentatlon A Flalael Data Project Funds Project Funds Pitore Ideas Management Training up. vis on Technical Training Froe Mlui. via Prov. to iO)H Operational Guides ProvincialPln PanigIpt iTechnical Assistance |r Plans &L Planning Inputs -i Operational Guides | Provincial ~~Service Statistics Mass Media Support 1 Health ; Service Sati IEC Materials 4 Office Eent Data Operating Systems sirc r ssin 41 Technical Trainees & Proce*iures L -Technical Ideas Cowndities (drugs, Operational Ideas suppl ies, equipment) Evaluation Reports Evaluation Procedures To NMIx OKY From NM1 MY I Special Surveys Devolved Program ateriral Logistics Support Privileges a Procuraomat Epidemic Services Surv li1nce I a Corztr*l iHuicipal Health 108 4.55 Policy Objectives and Options. It has long been clear that devolution of health services would disrupt the centralized health delivery system and result in short-term service slippage and other losses of efficiency. This inevitable short-term impact derives from the dislocations of personnel and asset transfer, absorption of new responsibilities and authority, and other activities in the "changeover" phase. However, the more pressing issue for the DOH and local governments is how to avoid a protracted slippage in service performance over the medium term (the transition phase). 4.56 The LGC has placed DOH precariously between an accountability for the nation's health and the loss of capacity to directly affect it. Localities have inherited a stratified and fragmented service structure encouraging a parochial view of health system performance. The changeover phase of devolution has been complicated by resistance and delays, information gaps, legislative uncertainties, financial i-1certainties and other daunting problems. How accountability and responsibility should be shared among levels of government has been an underlying and persistent question. The answer is closely related to the role the DOH will construct for itself in the decentralized system. 4.57 This chapter has argued from an assumption that the DOH is the only entity capable and interested in seeing the devolved system work well on a national scale. Indeed, official statements of the Department have accepted that responsibility, and the Department is deeply enmeshed in the implementation process. How might DOH leadership of devolution be enhanced over the near term? Several initiatives have been discussed within DOH and in this chapter. Many are now being implemented. These include: a. Elaboration of a time-bound implementation plan so as to focus DOH management resources on the most pressing issues. b. Restoration of pre-devolution vertical linkages, but adapted to the decentralized framework through provincial assumption of coordination, supervision, planning, and an overall intermediary role for basic health services. This would be achieved through DOH management of provincial level "trading sessions" involving the DOH and local governments. c. Assistance to new municipal health offices so as to build management capacity where it is weakest in the decentralized setting. d. Limitation of major new health initiatives (from DOH or local governments) during the changeover and transition phases of devolution, so as not to overload an already stressed system. e. Organization management systems, especially procurement and logistics, to receive highest near term priority because these assure delivery of resources to health programs. f. High-performing basic health programs, such as EPI, schistosomiasis, malaria, TB, etc, to be assured of local 109 support and their input requirements so as to sustain their level of service. g. An education campaign, to be launched by DOH, to inform the public of its new responsibilities and opportunities in the decentralized health system. h. Enhancement of health board authority, supported by local health offices, so as to establish as early as possible a technical and professional management process at the local level. i. Careful planning and execution of program expansion so as to obtain the necessary locpl cooperation and financial support for such key health programs as family planning/women's health and nutritional supplementation. In the case of new or low performance programs, the obstacles to effective expansion will be substantial (in the devolved system). 110 Annex Table 4A Table 4.4 Retained Ptograms Potential Trades of Program Resources & Functios -Post Devolution Caegory of Level of Govermen Cost/ Program Resource and Functions Central Provincial Municipal Demand Tradable? DOH Admin Admin Index Staff and Human Resource Functions Experienced Managerial Staff I 0 3 4 y Technical Assistance Staff I 1 3 4 Y Technical Operational Staff I 0 3 4 Y Operational Support Staff 2 2 2 1 N Management Training 1 3 3 4 Y Tcbaical Training 1 3 3 4 Y Drugs & Vaccines Specialized 1 3 3 4 Y Common 2 2 2 N Medical Supplies 1 3 3 2 N Uninstalled Equipment 1 3 3 2 N Health facility Expansion 1 2 3 4 Y Maintenance 1 2 3 2 Y NeaJth Education rProgran Specific] Mass Media 1 3 3 3 P Interpersonal Activities 1 2 2 2 P bInepersonalMaters 1 3 3 4 Y Information Services System procedures & maintenance 1 2 3 2 Y System operation & data production 3 2 1 2 Y System automation 1 3 3 4 Y Operational Funds 1 3 3 4 Y Management/supervision of Program Program design &strcure 1 3 3 2 Y Program technology 1 2 3 2 Y Program field operations 3 2 1 2 Y Sub-TOTAL- Retained 26 49 S9 Y u16 AVERAGE - Retained 1.24 2.23 2.68 2.91 P-2 STD -Retained 0.61 0.90 0.63 1.04 N-4 cazio ip CODE. I =SUPPLIER 2 =SUPPW ER/CONSUMER 3 = CONSUMER O/Blank = NO Major Role Coat/Demad Index CODE: I Low Cost/Low Demand; 2- Low Cost/High Demand; 3-High Cost/Low Dmanad; 4-High Cost/High Demand Tradsble CODE: Y = Yes-High Potential; P = Possible-Depends on Program; N - No-Low Potetal 111 Annex 4B A Comparative Note on Managing Decentralization: Chile's Health Services' 4.1 In the literature on health system decentralization, the Chilean case stands out as relatively successful, both in efficiency and equity terms. Yet there have been persistent management problems which have limited these gains. This mixed picture is in some respects directly relevant to the Philippine decentralization initiative and provides useful guideposts to attaining efficiency and equity gains. 4.2 Background. Decentralization in Chile was undertaken within a program of health system reform designed to broaden access to basic health services in rural areas, expand the financial base for health services, and provide more opportunity for private sector participation. Launched in the mid-1970s, the decentralization initiatives disbanded the central National Health Service which, under the purview of the Minister of Health, had provided direct budget resources to an extensive national network of basic care and hospital service facilities. Hospitals and overall administrative authority over all public health services were deconcentrated to 27 autonomous health service areas in i country of some 13 million people. These were funded, not from the MOH, but from a separate National Health Fund supported by national budgetary resources and employee and self-employed contributions. 4.3 More radically, the Chilean approach devolved to 325 municipalities (local governments) all facilities and personnel engaged in the delivery of basic health services through clinics, health posts, dental clinics and some small primary hospitals. Unlike the Philippine approach, all public health personnel working at the municipal level were required to resign from the civil service and accept essentially private sector employment from the municipalities. Financing of municipal health services (recurrent costs) was shifted to reimbursements on a facility-specific basis for all services rendered, based on a detailed pre-established fee system. However, this system was designed to support only "minimal acceptable standards" above which the municipalities were expected to finance any improvements from their own resources. 4.4 This effectively established two discreet systems for hospitals and for basic services, as they were separately financed and separately organized, albeit under the supervision of the Health Service Area Directors. The MOH role in the new system was confined to developing national health policies, defining norms and standards, and carrying out broad health planning 'This summary is based on a World Bank sector report "Social Development Progress in Chile," April 17, 1990, Country Operations Department IV, Latin America and Caribbean Region. 112 and monitoring. Central procurement and production of medical supplies, equipment, and drugs, once dominated by a central agency, lost this position, as municipalities and hospitals were permitted to procure from private or public sources. Efficiency changes have been judged to be favorable. 4.5 The "municipalization" began with an initial round of devolution in the early 1980s which incurred serious cost overruns due to municipal demand for fee reimbursement. The process was susperded for several years during a severe recession and then revived in 1987 and 1988 when most of the remaining facilities and staff were devolved. Concurrent with this second round was a major program of centrally-funded capital investments in basic facilities so as to equalize access to preventive and curative outpatient services. This expansion was financed largely through Inter American Development Bank loans. 4.6 Performance of the Decentralized System. Evaluations of the municipal-level services have demonstrated good performance on efficiency and equity grounds. Due to the construction program, service access has much improved and so has the quality of health facilities as measured by installation of water supply, electricity, etc. Average weekly hours of service provided by service personnel also increased and the total number of consultations expanded dramatically. Programs pooled their administrative resources within municipalities, thus reducing duplication. As to innovation in service delivery, there are notable examples of municipalities that have used community groups creatively to address family planning needs. On the. equity side, facilities and services became more evenly distributed across the country, regional health outcome disparities were reduced, and infant mortality continued to decline in the 1980s. The equity gains were strongly influenced by the service reimbursement system, through which national authorities provided powerful incentives for municipalities to produce preventive and basic health services. 4.7 However, a number of problems have hindered the new system. Supervision by health service area staff is weak and infrequent, leaving municipalities relatively isolated from the rest of the health system. Referral upward to the hospital system has not taken place, which is a clear failure. Institutional capacity to plan, evaluate and manage policy development is weak, especially in poorer municipalities. Politicization in the form of "mayoralization" has affected health decision making in some cases. And on the fiscal side, many poorer municipalities have found themselves rationing basic services, as demand has outstripped the capacity of existing facilities and services, and municipal revenues are unable to finance needed expansion. Collaboration with the private sector has not taken place to lessen the public role in service production, nor has pooling of resources across municipalities. Service fee revenues have remained at low levels, as beneficiary classifications have tended to put growing proportions of users in the "no fee" category. 4.8 Implications for the Phili2pines. These findings suggest some of the managerial challenges and strengths that health officials in the Philippines will confront: 113 (a) At the hospital level under the HSAs, central budget support has been adequate, creating an apparent division between the two levels of the system in terms of capacity and quality. The municipal reimbursement scheme has proved inflexible with regard to variable costs and demand, with many rural municipalities under-provisioned and others over-provisioned. This highlights the difficulty of identifying a rational formula for costs that the center will reimburse on a service basis, and indicates some of the complexities the Philippines would encounter if it attempted to move into a "service reimbursement" mode of local government finance in place of the internal revenue allotment. However, the reimbursement approach is a powerful and versatile incentive mechanism, which can be used to pursue both efficiency and equity objectives at the lowest level of service provision. (b) An important equity consideration emerges from the local provisioning process in Chile. Financing of municipal health services involves a complex mix of central support on a reimbursable basis, local revenues, and copayments from beneficiaries. Analysis of this data shows that poorer municipalities (revenue class) allocate less per capita of their own mobilized resources to health, while receiving constant levels of central support in per capita terms. The result is that the total primary care budget per capita follows municipal income class quite closely. The implications from this data for municipal and provincial allocative behavior in the Philippines conform with the conclusions of Chapter 3, namely, that lower revenue class municipalities and provinces have allocated proportionately less to health and may continue to do so with increased central revenue allotments. (c) Some of the efficiency and equity gains noted above seem to have been driven by the expanded capacity created by the ambitious municipal investment program financed heavily by IADB in the mid- 1980s. Capital budget finance for municipalities is available from the central government, thus retaining for the center an active role in health sector investment at the local level. In part, this arrangement parallels the DOH retention of foreign- assisted programs in the Philippines, an avenue through which the center can affect local health investments and indirectly, program content. (d) The difficulties with referral and higher-level supervision of the municipalities points to the likely costs of devolving basic services to one level of government and hospital services to another, and making each autonomous of the other. In the Philippines, the provincial-municipal division is almost complete, more so than in the Chilean system. Problems in restoring some vertical service integration, a vital aspect of basic service delivery, sho-1d figure prominently in the Philippine context. 114 (e) Personnel management at the municipal level in Chile resulted in rapidly rising physician salaries, as municipal competition for "rural" physicians grew, and also in more hours worked per physician in rural municipalities than in urban ones. Although the limited scope of career development opportunities and training have been noted by municipal staff, and retention of staff has proved difficult in rural areas, manpower has not emerged as a substantial constraint to attaining efficiency or equity objectives at the municipal level. More recently, evaluation of the municipal system has pointed to comparatively low salary levels for municipal health staff. The flexibility in salary scales and delinkage from the civil service are major features of this system. The Philippines may need to consider introducing civil service reforms to enable rural municipalities and more remote provinces to "compete" for physicians and other medical personnel. (f) Procurement of medical inputs in Chile has moved toward the Philippines system as an adaptation to their more decentralized organizational structure, and apparently with net efficiency gains. This suggests that a mixed private/public and central/local procurement system, as has been practiced in the Philippines under a centralized system, may be well adapted to the devolved set up. (g) More recent reports indicate a health financing problem in terms of overall public sector spending levels and basic health services. Hospital expenditure is reportedly expanding at the expense of municipal basic health services. 115 Chapter V: MAKING DECENTRALIZATION WORM: ISSUES AND OPTIONS A. Introduction 5.1 This study has developed evidence on the likely effects of devolution on health services. Underlying the report's approach has been a fundamental question. Is devolution of health services likely to incur net benefits or costs to the efficiency and equity objectives of the health system? The time frame for these effects is the medium term; it is unavoidable tha.t in the short term, during the changeover phase, service disruptions will occur that will drive up costs temporarily. 5.2 The answer to the cost-benefit question helps define a policy context for managing the decentralized system. If high net benefits are expected, policy makers can proceed with marginal changes to further improve the system. If there are net costs, the options are more politically difficult and blunt, such as legislated changes to the LGC, DOH assumption of "control" over problematic local health systems, or other emergency, ad hoc arrangements between the national DOH and local governments. If the cost- benefit assessment is a close call, then the participants will need to identify and act on the most promising opportunities to increase benefits while isolating and minimizing the sources of high costs. Because the LGC imposes potential costs and benefits so widely across functions and governments, this latter outcome ("close call") will impose high managerial demands on the DOH and local governments. 5.3 Preceding chapters have addressed the cost-benefit question from different vantage points. These include: the past performance of the health system; comparative and theoretical perspectives on the LGC; the fiscal implications for local government under the LGC; and organization and management issues over the medium term. Each has identified potential costs and benefits incurred in moving from a centralized to a decentralized system. It must be emphasized that much of the evidence is prospective and indicative; empirical analysis of the actual results of devolution will need to be undertaken a few years hence. Given these limitations, this chapter summarizes the findings in a single table of potential costs (risks) and benefits (cpportunities). The chapter then discusses the overall devolution policy implications of these findings and policy issues in more detail, both in the near and long term. The final section addresses the future role of the DOH. B. Net Assessment of Health Services Devolution 5.4 Table 5.1 presents the potent4 l cost and benefit impact of devolution on the efficiency and equity jectives of the health system Those issues that arise from the pre-devolution performance of the health system are listed first, followed by those that arise from the implementation of the LGC. The table rresents the initial cost-benefit position as a result of implementation of the LGC and assumes no corrective action by LGUs or by 116 DOH to improve the net cost-benefit position. An asterisk denotes the issues judged to have "high" potential impact. Table 5. 1: The Potential Benefits and Costs of Health Service Deveobtlon in the Pbhinnnes EFFICIENCY Benefits (Opporunities) Costs (Risks) Pre-Devolution Issues 1. Well developed basic health programs (EPI, 1. IMR stall through mid 80's. malaria, TB, etc) wlinproving performance' 2. High degree of service deconcentration 2. Weak municipal health management capacity* 3. Correct DOH disease control program priorities 3. Underdeveloped national programs in family planning and nutiion, vulnerable malaria program' 4. Well developed private & public hospital 4. Adverse trends in basic service finance sector S. Adequate health manpower availabiliy 5. Skepticism of cental health staff on devolution viabiliy l 6. Public hospital operational efficiency Devolved System Issues 1. Greater local accountabilit (response to 1. Complex local provisioning process (health local preferences) boards role, many actors) 2. Greater innovation and efficiency in local 2. Duplication of high cost services in neighboring localities, provisioning of health services over spending on capital projects 3. Cost recovery and beneficiary payment 3. Local under provision for *spillover" and *public good' potential health programs (malaria, TB, schisto) 4. Adequate total resources for LGUs 4. Comparatively high* scope, degree, level of decentralization S. Public health education program on popular 5. Provincial role in managing basic services role in devolved system * eliminated (oss of vertica integration) * 6. DOH retention of appropriate fwxctions for a 6. Municipal authority/capacity mismatch central department of health* (stratification)* 7. Undeveloped DOH/LGU assistance mechnism* 117 EQUrrY Benefits (Oppomaities) Costs (Risks) PnFDevolutioD __,, 1. Equitable distribution of health facilities* 1. Tendency of lower income class localities to spend .___________________________ less on health in per capita terns 2. Progressive panerns of heaJdh facility uton and out-of pocket expendime 3. Well targeted and effective DOH expenditure Devolved System Issues 1. Equitable distnbuion of local fls; W4-flciz 1. Increasing geographial disparities in access burdens 2. Increasg household dispaties im access H-gbe potential ct 5.5 The Table does not permit a precise quantification of cost and benefit impacts. Thus, it may be more appropriate to speak in terms of risks and opportunities created by the WOC. Overall, the array of risks balanced against the potential opportunities suggests a "close call" net assessment. A major finding, and one initially expected to be in the cost column, is that the fiscal impact of devolution on local governments is generally favorable, with the fiscal deficits affecting relatively few LGUs, many of them well off. For 1994, the LGC mandates a further increase in IRA funds for localities with no attendant increase in devolved program authorities and expenditure, thus further reducing the number of negatively affected LGUs. Had the outcome on the fiscal side been strongly negative, the net assessment may well have shifted toward the "high net costs" assessment. 5.6 Another important factor is the strong DOH performance leading up to devolution, both in terms of equity and efficiency impacts. This has established a more solid foundation than previously expected, and satisfies a basic principle of successful organizational change--that such change be initiated from a position of strength. Another category of benefits is derived from a comparative and theoretical perspective; it points to incentives for strong efficiency gains at the local level, as the provisioning process begins to respond to local preferences and selects innovative and more efficient production arrangements, including cost recovery and collaboration with the private axd NGO sector. In addition, the comparative perspective indicates that the array of functions to be retained by the DOH is sufficient and appropriate for an interventionist Department of Health. 5.7 Under the "Risks" column, three categories of issues can be discerned. The first revolves around organization and management issues. Two key weaknesses in the DOH system leading up to devolution--weak municipal level management capacity and the two "underdeveloped" national programs in nutrition and family planning--have been accentuated by the LGC. Thus the LGC has created a municipal "authority/capacity mismatch," eliminated provincial management of basic services, and disrupted DOH's capacity to channel resources to local service delivery points. Unless corrected in the near term, these problems may cause serious breakdowns in the delivery of basic services at the municipal level and hinder DOH initiatives to expand key services, such as nutrition and family planning. These interrelated issues, 118 therefore, stand out as the most serious near and medium term potential risks of the LGC. 5.8 The second category of costs concerns the equity impact of the LGC. "Increasing disparities' are noted as important tendencies of a highly decentralized organizational structure. As mentioned in Chapter II, local governments tend to serve their more well off constituents out of concern that subsidized services for the poor will attract poor immigrants and erode the tax base. In addition, the LGC does not allocate IRA resources according to poverty or any measure of social deprivation. Consequently, certain localities with heavy concentrations of poor families may find their resources inadequate to address minimal service needs, even if they experience initial fiscal surpluses as a result of the Code. In addition, the analysis of fiscal behavior of local governments shows a strong correlation between per capita health expenditure and wealth of the locality, a sobering clue to the future allocative choices by local governments. The probable equity effects of the Code are thus strongly negative, and stand out as an important area in need of central intervention. 5.9 The third category involves the slower-to-develop issues with respect to the local provisioning process, that is, the incentives for inefficient allocation of revenue between sectors and within the health sector. For example, health programs, such as 'spillover" and "public good" type programs in communicable and vector-born disease control, might lose resources to other sectors, such as transport investments. Within health, spending on capital projects might displace recurrent expenditures on medical supplies, facility maintenance and human resources. C. Actionable Policy Issues-Near-Term 5.10 Although there is a rough balance between risks and opportunities, each is not equally actionable. Some issues that arose in the pre-devolution period created momentum that will carry over to the decentralized system, but these are generally less accessible to policy because DOH no longer controls the activities on a national scale. Local decisions will determine national patterns. For example, the equitable distribution of facilities will no longer be within DOH's reach unless it decides to subsidize local facility construction from its own resources on a very large scale. Similarly, the trends in central finance of health services, such as the declining share of preventive spending, will be subject to local decision making and removed from the DOH direct control. 5.11 Under the devolved system, some of the cost-benefit issues listed ate more amenable to policy action, as they arise within the new organizational structure and impose a new set of costs and benefits on local governments and DOH alike. The most visible cost issues in particular will attract attention and merit corrective action. For example, the loss of the provincial role in management of basic health programs is an urgent issue for the DOH and municipalities, which both need to be assured that program resources will flow reliably down to the municipal level and information will flow back. The DOH could undertake to arrange provincial level "trades" of 119 resources to knit back together a vertically integrated structure. The municipal level mismatch of authority and capacity is another urgent cost issue, which DOH can attempt to ameliorate through training, secondment and a restored provincial management role. The latter measure may need to include expanded authority and accountability over municipal operations. Some of the more incentive-driven issues, such as duplication of services, excess capital expenditure and inequitable targeting of services will be more difficult to influence or change directly by the DOH, as such decisions in principle should respond to local preferences. These are, nonetheless, important problems expected to arise in the devolved system. Influencing such decisions will require considerable effort and resources from the DOH. Foreign assistance with cost sharing will be a key DOH mechanism for influencing such local behavior, as will DOH public education efforts. 5.12 The more actionable issues can be broadly summarized in a policy matrix (Table 5.2.), which is based on a more detailed matrix and timetable in Annex 5A. Table 5.2 presents six categories of interventions directed at four policy objectives for managing devolution over the medium term, and indicates the participants for each intervention/objective. The interventions listed are those with highest potential impact on the "close call" net assessment. Other interventions with less potential gains or with timing likely in the longer term are not included. Issues identified in Table 5.2 are discussed below. Negotiation of a Provincial Role 5.13 As discussed in Chapter IV, the LGC stratifies the provincial health system and creates serious authority/capacity asymmetries, especially for the delivery of basic health programs. Provincial trade sessions have been proposed as one approach to restoring a provincial management role and vertical integrity to the system. Such macro "trades" are the alternative to many "micro" bilateral arrangements, locality by locality, program by program, system by system, donor by donor. However, whatever the level of difficulty to implement macro trades (not to be underestimated), it should be compared to the costs imposed by an uncoordinated, patchwork process of ad hoc micro arrangements between LGUs themselves, between LGUs and the DOH systems and programs, and between LGUs and donors seeking to implement grant financed projects at the local level. Establishing an agreed macro framework for service delivery, information flow, supervision, training, planning and assistance should precede any specialized arrangements for assistance, thus providing a common framework and a workable approach to matching assistance to local capacities and requirements on a national scale. 5.14 The DOH has begun planning for such trades, using "business as usual" as a theoretical starting point, meaning that provincial management roles under the Integrated Provincial Health Office would be adopted by the new Provincial Health Office, that existing provincial personnel would continue to perform the basic management functions as before, that municipal authorities would agree to being supplied, supervised, and monitored from the provincial level as before, that management information would continue to flow 120 Table 5.2: Polcy Oblectves and Intervions for Devoluon Policy Objectives Addressing Restoring Integrated Building Local Strengtening Inequities and Provincial Service Management Local Shortfalls in Delivery System Capacity Empowerment Health Service and Financial _____________ Performance Self Help Interventions 1. Negotiation of Provinces, Provinces, Provincial Municipalities, DOH Municipaities, Intermediary Role (Cities) DOH, (Cities) through Macro Trades of Services and Resources 2. Institutional DOH, Provinces, Provinces, Development and Mn l, Cities Municipalities, Reorganization Cities (DOH, Health Boards) 3. Health Management DOH, Municipahties DOH, DOH, Support for Municipalities Mnicipaliies Municipalities 4. Management Support DOH, Provinces, for Improving Cities Hospital Operational and Fmancial Efficiency 5. DOH/LGU DOH, Provinces, DOH, Provinces, DOH, Provinces, DOH, Assistance Municipaties, Municipalities Municipalities, Provinces, Mechanism Cities Cities Municipali - funds flow Cities - gran targe-ing criteria - cost sharing criteria - underdeveloped program expansion 6. Public Health DOH Education Program . 121 as it has, and so on. Modifications to that basic model would then need to be negotiated, so that a generic "Comprehensive Health Services Agreement" would be signed, committing all three levels of government to carrying out their agreed roles for a period of time. This undertaking is envisaged as being carried out separately for each province and its constituent municipalities and possibly cities as well.' 5.15 The DOH has also proposed that a Health Development Fund or Account be established for each participating province and its component municipalities. The Fund would contain an accounting of all DOH resources, cash and in-kind, that it would make available to each province for public health programs, training, technical assistance, commodities, vaccines, medicines and so on. Upon signing the annual "Comprehensive Health Services Agreement," a given province would then enjoy access to the proceeds of the Fund. Implementation of the Fund and the Agreement may turn out to be confined to "essential' public health programs and the resources that support them, as a first step so as to limit the complexity of the "trade." The two proposals, however, are a promising approach to restoring the provincial management role in public health and the prudent allocation of DOH assistance to local governments. Institutional Development and Reorganization 5.16 Building institutional capacities in the local health boards will be an important complement to the restoration of a provincial health system. Health board authority, if at all possible, should be expanded in order to insure the technical integrity of local health management. 5.17 Reorganization of the DOH, although not analyzed in this report, is a high priority, and it has been engaged in a reorganization and strategic planning process to prepare the Department for its new role in the decentralized system. The partnership role envisioned by the DOH will involve the development of some central capacities that are in short supply, and the restructuring of key offices, such as the regional health offices. The building of a partnership role with local governments raises several questions: (a) Should responsibility for DOH project-based assistance to local governments be assigned broadly in DOH's public health and hospital services or confined to one centralized secretariat? (b) Should the former regional health offices be the DOH focal point for the project identification and preparation work at the local level? (c) Should a health management service be established to concentrate expertise, construct a local government data bank incorporating indicators of program and fiscal performance, and organize technical Department of Health, "Managing Health Services: Post Devolution Perspectives and Strategies," Republic of Philippines, July 1993. 122 assistance on health management to local health offices and health boards? Should the DOH establish within the Hospital Services Office a separate unit to assist provincial governments in hospital management? MuniciRal Health Management 5.18 The priority attached to upgrading municipal management capacities is high, because even with a restored provincial role in managing and coordinating the provincial system, the municipalities will remain legally autonomous and in charge of day-to-day operations and the provisioning process. Municipal facilities are the delivery points for most public health services, and serious management failures at this level will have a large impact on program performance. It is essential to ensure that training, secondment, provincial supervision and other forms of support are made available to municipal health offices which will be newly created and, in some cases, staffed with inexperienced health management personnel. Provincial leadership of this effort would be required and could be built into the basic "trade agreement' between the three levels of government. ImRroving Provincial Hospital Efficiency 5.19 Although less urgent than other issues from the national point of view, provincial governments are likely to place hospital management close to the top of their agenda. Hospital recurrent expenditures will absorb a large part of provincial budgets and are an important factor in explaining provincial fiscal deficits. Therefore, governors may seek to raise efficiency and increase hospital revenues to ease overall budgetary pressures. 5.20 Analysis of operational data for all provincial hospitals reveals that first, financial efficiency (the proportion of revenues over total operating costs) is very low, averaging about 5 percent. This could be increased especially in wealthier catchment areas. Second, many hospitals fall into the 'inefficient" category and could benefit from quality improvements, consolidation, or even privatization. Last, some hospitals are overutilized and may require better management of demand and expansion of capacity. 5.21 The DOH can play an important role in helping provincial health offices undertake measures that will benefit both efficiency and equity objectives. Such assistance will also be a tradable service in DOH's negotiation of a provincial role in managing basic disease control programs. This area of emphasis will complement and draw from the growing experience of the DOH in management innovations in the national and specialty hospitals. For a more detailed discussion of provincial hospital performance and management options, see Annex 5.B. Center-Local Assistance Mechanism 5.22 Establishing a new center-local assistance mechanism will be a fundamental prerequisite to building the DOH partnership role with local 123 governments. It will require many steps and sub-tasks, covering such issues as the flow of funds, design of memoranda of agreement, definition of targeting and cost-sharing criteria, and project development procedures and capacities. A workable, functioning mechanism could substantially contribute to the credibility of DOH offers of assistance, and also attract donor finance. Local governments will participate in provincial trade agreements partly based on expectations of future DOH assistance flows. 5.23 The DOH has taken a number of steps to put a project assistance mechanism in place. Regarding the flow of project funds from the DOH to local governments, various approaches have been studied and a plan for a "trust fund" mechanism has been prepared. This would route project assistance for recurrent expenditure from the DOH to trust funds administered by the recipient LGUs. Disbursements by the LGU would proceed under the oversight of the Regional Health Office Director (a DOH official) and be subject to a specific project agreement between the DOH and the LGU. Capital expenditures would be managed directly by the DOH. 5.24 The DOH has also made substantial progress toward cost-sharing arrangements with local governments under foreign assisted projects. A framework for calculating and negotiating a variable cost-sharing requirement has been prepared for a World Bank-supported project (Urban Health and Nutrition Project). This approach sets the requirement in response to the health spending effort of the local government and its relative wealth (revenue level). 5.25 Another crucial element is the choice of instrument (revenue grant vs. project assistance), since the risks from poor design of the mechanism are substantial. For example, formula-driven revenue grants, even if earmarked for health spending, may merely substitute for local resources in the financing of health services, so that no additional resources are made available to health. Another risk is that such assistance may depress local tax efforts, thus perpetuating dependance on central resources. In addition, if such an instrument is used to alleviate 1993 local fiscal deficits, the wealthier localities with high density of health facilities and staff might capture a disproportionate share of such augmentation funds. As Chapter III demonstrated, many of the "deficit" localities are relatively well off with large endowments of DOH infrastructure. 5.26 If more discretionary instruments are used, such as project grants or loans, the distribution might be politicized and lower-income localities with less administrative capacity might not be able to compete in preparing project proposals. Such instruments are also costly to administer. However, the benefits of the project grant are substantial: the purposes of the grant can be controlled, the benefits well targeted to beneficiaries, and cost- sharing arrangements can be specifically tailored to local fiscal conditions. Moreover, donors will be more comfortable with such arrangements. The DOH is planning to use the project grant or loan as the long-term vehicle for channeling assistance to localities. Even if clearly preferred as an assistance mechanism, it should be administered in a transparent fashion to assure accurate and equitable targeting and cost-share conditions. (See Annex 5.C for a discussion of design and implementation issues). 124 5.27 An important function of a project assistance mechanism would be the channeling of support to expand undeveloped, but high-priority public health programs. The difficulty of undertaking such an effort is substantial, given the competing demands on local resources, the need for many local governments to participate and the low base level of program performance and capacity. Annex 5.D contains a discussion of potential implementation issues that would arise in the expansion of a national nutrition program through local health facilities. Health Education 5.28 Health education and public information will assume a critical importance under the devolved system. Only the DOH has the capacity to conduct national health information campaigns; local governments will limit their information efforts to their own constituencies. More importantly, the DOH can help shape the demand for public health services that serve broad national health goals, and in this way influence the way that local governments support such programs. The DOH, therefore, will need to inform the public that local governments are now in charge of providing most public health servicec, not the national government, and that citizens need to make their needs and preferences known to local officials in charge of health budgets and planning. The DOH can play an important role in achieving the local efficiency gains expected from decentralization through programs to provide the public with accurate health consumer info-rmation. The current DOH leadership has already taken many creative initiatives to fullfill this public information responsibility under devolution. D. Longer Term Issues 5.29 A number of long-term issues identified in the preceding chapters and included in the action plan in Annex 5.A will require managerial attention from the DOH and local governments as the overall system enters the stabilization phase. These issues, therefore, are no less important to the effectiveness of a decentralized system than the medium-term issues identified in Table 5.2, but they are somewhat less urgent. Summaries of the longer-term issues and policy interventions are presented below. 5.30 Reform of the Manazement Information System. For the near term, the DOH and LGUs may agree to continue the Field Health Service Information System (FHSIS) as it was operating before devolution. However, this system will need to be reformed to respond more directly to local government information needs, the reduced service information needs at the center, and the much increased importance of local fiscal data. The DOH is developing proposals to update its management information system. For example, cluster survey capacity is being planned as a necessary back-up system. The fiscal issue deserves emphasis. If the DOH is to allocate resources partly in response to local fiscal performance, then it will require up-to-date information on the budgets and expenditures of local governments. The COA 125 prepares audited financial data for localities which is available one to two years after the fact, while the DOF collects the data in raw form. An important task will be to arrange a collaborative data acquisition mechanism that provides the DOH with fiscal data in a timely fashion, without duplicating the efforts of other branches of government. 5.31 Health Planning. Similar recommendations apply to the Area Based Health Planning System introduced by the DOH in 1989. Although designed as a national planning system, it was based on local DOH officials determining local health needs and the appropriate budgets. In the near term, it will be more effective to convince local governments to continue with Area Based Planning until the provincial health system is restored. Under such conditions, local governments would meet to inform each other and the DOH of their respective priorities and expenditure plans. This exercise, even if not yet linked to DOH assistance, would permit a review of province-wide health activities and the identification of any glaring deficiencies or shortfalls. As the provincial intermediary role develops and minimal participation in a province-wide system is re-established, a planning system more adapted to a decentralized system can be put in place. A coordinated provincial assessment of annual assistance needs for the DOH to consider could be useful. 5.32 Reform of the Personnel Management System. Although all devolved health personnel will remain civil servants (unlike the Chilean experience), the incentives for inter-LGU transfer and promotion are not clear for local governments. Yet, the positive impact on productivity, morale and quality could be high if an integrated provincial personnel management system could be created with links to a national system as well. Another important element in personnel management reform is the salary issue and the ability of the more remote, poor localities to be able to attract the technical personnel required through various salary or bonus incentive arrangements. The degree to which personnel movement is constrained by salary rigidities will be an important issue for further research as the system enters the stabilization phase. 5.33 Procurement and Logistics System Assessment. The procurement system in the Philippines public health system has already been decentralized to a large extent for many clinical and preventive inputs. However, interviews conducted with DOH managers revealed that central procurement experiences long delays for some commodities, while transport and logistics are problematic as well. At present, the DOH retains procurement authority for key public health programs and is expected to distribute the relevant medicines, equipment and vaccines to LGUs. This should afford economies of scale. However, the newly devolved system will create new opportunities for efficiency gains, to which the current system may be less well adapted. For example, local pooling of procurement needs, as well as the transfer of som"e procurement authority up or down in the system, may be more efficient. An assessment should be undertaken as soon as the system stabilizes to identify areas for corrective action and reform. 5.34 Restructuring of the IRA Formula. As the analysis in Chapter III shows, the IRA allocation formula is relatively generous to cities and municipalities and less so to provinees. Total surpluses minus total fiscal deficits still leave P 4 billion in revenue windfall for chartered cities, 126 with smaller net surpluses for provinces and municipalities. Given the budgetary strains of the central government, such a large transfer of resources to local governments represents a major category of central expenditure. The original intent of the Local Government Code was to devolve roughly equal expenditures and revenues to local governments. Thus, the Philippine legislature is considering legislation to revise the IRA formula. Other approaches could be examined, however, such as devolving additional expenditures. 5.35 Altering the IRA formula, moreover, carries risk. For example, it is apparent that any revision will alter incentives And signals now familiar to local governments, and open up the forwula to further periodic revision. This would diminish the benefits expected from informed, autonomous local decision making on budget matters. In addition, it might have unintended effects on the distribution of IRA to local governments, that is, if it were to benefit wealthy local governments disproportionately, as compared to the relatively neutral distribution of IRA funds under the current formula. Further, the generosity to cities may be more apparent than real, to the extent that urban per capita expenditure needs may exceed the needs of those living outside the chartered cities. It could be argued, for example, that the minimal infrastructure capital costs of cities exceed those of rural areas in per capta terms. Under such conditions, "surplus" IRA revenue for cities may be merited. 5.36 This suggests that any effort to revise the allocation formula should first take into account the above risks, conduct appropriate analyses and research, and plan carefully a corrective step if warranted. 5.37 Pooling of Resources. One of the key variables in determining whether the formula should be revised will be the extent to which cities and provinces adjust expenditure burdens by pooling and sharing resources. In particular, many provinces will support hospitals located within cities, and city residents will use the provincial facilities. In such cases, the provincial government may wish to negotiate a cost-sharing arrangement to support provincial facilities located within city boundaries. Less often, city hospitals may serve provincial residents traveling to the city to take advantage of such services. LGUs will need to examine utilization data for such facilities, determine which serve clients from other jurisdictions and negotiate cost-sharing arrangements accordingly. These arrangements could yield sharp improvements in operational and financial efficiency. 5.38 Similarly, municipalities will be sensitive to utilization patterns of RHUs located near municipal boundaries or enjoying significant quality advantages over neighboring facilities. Cost-sharing arrangements, including fees for non-residents or reciprocal utilization privileges, could be negotiated. In other cases, neighboring municipalities may find that RHUs are located in close proximity and offer duplicate services. This could be addressed through downsizing, relocation, or specialization of services to achieve complementarity and lower costs. Such arrangements, for all levels of local government, enjoy built-in efficiency incentives, which often exceed the political benefits of supporting duplicate, high-profile facilities and services. The DOH can support efficiency measures with dissemination of best- 127 practice information, technical assistance and temporary personnel secondments. E. The Future Role of the DOH 5.39 Given the policy challenges imposed by the LGC, the future role of the central DOH requires strategic consideration. The Secretary of Health has articulated a vision of it ("Health in the Hands of the People," DOH, 1992), that emphasizes the equity and popular foundation of the DOH mandate and the role of the Department in assuring that health services reach those in need. This vision can be placed against a set of four possible choices that have characterized different decentralized health systems in the developing world. Table 5.3 below presents these role choices. 5.40 The column on the left defines the basic characteristics of a role choice, which are then detailed for each of the choices in the next four columns. The four overlap to some degree, and they are cumulative from left to right. Each strategic choice includes the functions of those to the left. Thus, the choice of the strategic role entitled "Partnership" on the right embraces all of those to the left. This cumulative feature indicates that the level of difficulty increases as one moves from left to right. It is thus possible for a country to aspire to a "partnership" strategic role, but fail to successfully implement it. This would result in a de facto choice of a less demandinp role, such as "regulator." 5.41 There is no absolute right and wrong choice among these options, as they very much depend on a country's situation. The LGC, as noted in Chapter II, holds the DOH accountable for public health, but removes from the DOH most of the delivery capacity to directly affect it. Defining its role under such constraints will be a demanding task, but the analysis of costs and benefits of devolution suggest that a more interventionist "partnership" role is appropriate to address existing and potential health service issues. Indeed, the Department has articulated such a role for itself since 1992. Whether the Department will be able to build the necessary capacities, obtain the necessary cooperation from LGUs, and secure sufficient external financial resources to play that role are its fundamental challenges for the rest of the decade. Table12. 3 Macro Optons tor DOH Orarzaiond FtUre StM Organizatonal Models tor Centrl Public Sector Orgerzdaon Infomation Reguator - erventoist Partnershp Reason tor 8eing Answer w ha? Make Hu 'Si DecidelPromote Help/FacilUito Gd On? Enforce ptroran conont) Pubic & roiders) Prioilty Funcls I ata cop Q on Ruilesandards esoarch iaUonshps S.W.'.*...V......,s.s -s,:.s..: :,.-:--..,;,E;: 2 Daa nm ement Mach ws - Don e osociD & MobIl. 3 *nl onsuevisI@nf(otO (acsioe acton SupplylDemad Concern B:th .upoh DenFirst DSuplY 0 rd Pttny System Concers moUr sotor heelta hov sMti e p o healE 1 -related wstems Managewntts,4e passivelftottical autodltui n conultallve arato Staff Requiremet acadenl-irdovet ol eks extrovet scientists extrovert inventers Ptmnwey Mewe of Success daa reIablvldfty few Intactons adopton rates demnad Wr relaionshir s Client Requkemmnts R Rspoit Understandtobey leamconly defin needs/self-help o Organzationsl Unit ResaehEDP LeURgtY Dept ResearctVxtnson Extension Pl & M I'lPR Direeton of l ntlon Fl Upwad Uprd Uoward/Downward UPlOownlSid How accurate Is lnomnaton Often Wror Often WronD Mle Us uallY accurate hfotmal resisSg fomma org. U Defiely Possibe w *>.:::ss~~~~~~~~.:............z..::...:......:-::::::. PrImmmry Unis of Anaysis Decision MUdn .f. I Serice sbsti c Technial andards I Procedural InSfomtson Healta stu irxicat s ....~~~~~~~~~~~~~~~~~~~~~I.5I- 2 2 awts records I ea RI o HPebth Sts IndicatorsI n S,>>:iS>E.:;'.f:,'::::::::::::::::>:::.::.::::: S .................... faR ..:-vusa lon:d .f~,d. 1 au.: 129 1 M M j i it1, A Aj ij 1jU j~~~~~~~~~~~~~~~~~~~~~~~U Issues Impact Ealy Transiion - Late Transition StabWization Ranking 6/1993-61994 6J1994-7/1995 7/1195- 5. DOH regional offices DOH reorganizes regional Field health units fully Orpnization and offices as field healtb units; operational; central cental reorganization. imtll capacity to conduct reorganization completed with *trades' witb LOUs and project assistance function provide tdem with service defined and assisted. support, inuding management training for _municialties. B. Basic Heal Mm 6. Local availability of medicines, DOH identifies medicines, *Trades conducted to assure DOH and provces supplies and equipment for supplies and equipment stable suppbl of service inputs. monitor, improve system. basic health programs. remaining under central Comprehensive Services mangement, logistical and Agreements signed with procurement problems in the participatng provices. Aess delivery to local service points: to Health Development Fund prepares trakde of the negotiated. resources to LGUs on long- term basis. 7. Continuity of existing health DOH identifies project Trades conducted to assure DOH and provinces 0 projects at local level. fimncial inputs (personnel, LGU cooperation in project monitor. improve systems. equipmenl, supplies) that implmentation; separately require negotiation with LGUs negotiated agreements as new project implementing undertaken as necessary to entities; prepares this info for supplement health services trades.of these resources, or agreements. puts on sepaate fast track if necessary. 8. Health service delivery DOH identifies systematic DOH conducts negotiations on DOH and LGUs review personnel. issues in personnel key personnel Bgmt. support to personnel mgmt. issues on management at municipal and LGUs, such as pmrmotion, regular basis, improve provincial level; prepares input transfer, secondment & mgmt. of support activities, for heahh service agreements. training. including DOH staff secondment to high-risks areas, ner-LGU competition for posts. sabry scale reform, etc. issus mp Early Transiion Late Transition Stabizaion I___________________________ Rank 6/1993-611994 611994-7/1995 7/1995- 9. Health program manementae DOH assesses its health DOH trades MIS technical Refinement of MIS system, nftMAtion systems. program data needs, refines list support, traiking & feedback integation with oher data, of maur.es, prepares for rgular supply of reliable system. (IS, rapid cluster negotiaion say for health basic service data with surveys. etc. service agreements. provinces as key intenmediay. C. Hosnital Manaaement an4 Other Seric-es_ . 10. Hosptal oper l efficy. DOH identifs provinces with DOH trades with provinces DOH coordinates with high poteil for hospital access to support for various private sector mgmt. mgmt. reform, begins work on assistance packages (fee cons.launs to support mgmL asistace packages to ngmt., improvig medicare provincial hospitals. be pan of trades; DOH clais perfmance, cost mots bospital develops in-house bospil t, privadzation performnce, disseminates mgnml advisoty service. etc.). in return for hospital technical innovations data, other objectives. developed at national bospials. II. Public health education * DOH prepares an expanded DOH lanmches program outside Adapts program to progrm public health inf ation of trades with localities to help emergig needs. program to raise level of convince LGUs of neod for awareness of how new system coopeton and itegrated is to work and respond to mgmt. systems. public needs, and to generae local actvim to support health services. D. Ormanizatlon and Mana 12. Planning systems. Area-based system is sustained Provinces and DOH agree on a LGUs implement provincial by provincial coordination new health planning system level planning process; activities, planning for future that responds to completed system is refined. DOH assistance. health service agreements; LGUs implement. __ ____. 13. Procumt and logistics DOH moniors procurement DOH prepares TOR to assess Assessment carried out; system. and logistics, assures sbort- procurement and develop a reforms proposed. term flow of elth program logistics system. nputs and identfies emerging probkm areas. Issues Impact Early Transition Late Transition Stabilization l__________________________ Ranking 611993-6/1994 6tl994-7/1995 7/199S- 14. Infonnation and monnoring DOH defnes information DOH offers local access to Refinement of system. systems. needs (beyond basic health expanded data base in return better adaptation to local services MIS) for LGU fiscal for local supply of needed needs. data, epidemiologic data, information. hospital management data, etc. IS. Terms and conditions of ** DOH refines CSA, adds Refined CSA services are Comprehensive Services programs and management basis for project Agreement (CSA). functions to fill out trades' amendments. with local governments. 16. Equity and performanced ** DOH develops frmework to DOH presents criteria to Refinement of criteria; targeting of DOH resources evaluate LGU health needs, provincial authorties; applies further development of to LGUs. service perfbrmance and fiscal criteria to first post- devolution 'Health Development Fund' status and performance; project, and if possible to to be source of project and integrates the variables into augmentation in 1993. Health other assistance to local targeting criteria for project Development Fund instaUed to governments, NGOs. assistance, cost sharing. account for DOH resources. .~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~" 133 ANNEX SB ImDrovinf Provincial Hospital Efficiency 1. DOH support to provincial hospital management is an important ingredient to improve the efficiency of health service provisioning at the provincial level and attract provincial participation in trade agreements. At least at the outset, when provincial authorities will be most active in restructuring hospital services and their financing, the DOH will need to link with private sector expertise to rationalize the sub-sector. 2. To assess the operational efficiency of provincial public hospitals, three parameters will be examined, namely bed occupancy rates, average length of stay (ALOS) and bed turnover rate (which measures the average number of inpatients per bed). Together, these identify the performance of a hospital's inpatient services, although they exclude other important variables such as measures of quality and case mix. A specially- designed graphic incorporates all three measures of efficiency simultaneously and thus identifies which hospitals are performing better and worse than the average. This graphic is first used (Figure 5.1) to portray hospitals according to their location in low-income or high-income provinces, and a second set presents hospitals by region. The objective of this section is to offer policy options for provincial governments in the management of their large recurrent cost burden in the hospital sub-sector. 3. Each point in the graphics in Figure 5.1 represents one hospital. Figures C and D present relative efficiency on a regional basis, showing tertiary provincial hospitals in Figure C and primary-secondary provincial hospitals in Figure D. A unique symbol is used for hospitals from each of the 12 regions and the NCR. The points are defined by the bed turnover and occupancy rates for each hospital, which in turn define the average length of stay (ALOS). 4. Because of the mathematical relationship among these three indicators of hospital performance, a ray drawn from the origin that passes through any point on the chart represents a constant average ALOS, and this increases monotonically from left to right across the top and down the right side. The dotted lines are one standard deviation (plus and minus) from the means of the occupancy and turnover rates. Hospitals which lie outside the center rectangle formed by the intersecting dotted lines (with the intersecting solid lines in its center) would ordinarily be considered outliers and would merit further investigation to reduce inefficiency. 5. The solid lines drawn at the means of the occupancy and turnover rates divide each chart into four zones that depict the relative performance of hospitals being assessed. Those in the corner of zone I are inefficient due to a number of factors including excess bed availability, low demand relative to installed capacity, and possibly demand which is low due to the diversion of patients to competing facilities. Zone III is characterized by hospitals that perform relatively well, as evidenced by both their high turnover rates and moderate ALOS, which reflects a small proportion of unused 134 capacity; but, the upper corner of zone III contains overutilized, overcrowded hospitals. Hospitals in zone IV may have one or all of the following: a higher proportion of severe patients, predominance of chronic cases, and unnecessarily long inpatient stays. But it should be noted that the average length of stay is unusually short by international standards. Also, the Philippine data are unusual in that occupancy ratesat 100 percent or better are not outliers, and some hospitals with respectable bed turnover rates are outliers in zone I. 6. The regional presentation in Figures C and D can be interpreted as indicating two general patterns: a) the mean occupancy and turnover rates for tertiary hospitals are roughly equal to secondary hospitals; and b) the variation in performance is higher for secondary hospitals than for tertiary hospitals, with substantial numbers of the former (over 80) located outside the central dotted line square in Zones I and III, indicating hospitals that are underutilized (Zone 1) or overcrowded (Zone IV). 7. Turning to Figures A and B, these present hospitals according to the income of the province in which each is located. Generally, in wealthier provinces, tertiary hospitals are productive in terms of inpatients tzeated per bed per year (Bed Turnover Rate), and AIDS is relatively short. Most of the tertiary hospitals with a turnover rate of 40-60 and ALOS of 4 to 7 days belong to poorer provinces (Figure A), but this is still relatively good by international standards. Secondary hospitals present a mixed picture, as underutilized or overcrowded hospitals are present both in poor and rich provinces (Figure B). 8. Financial Viability. Tertiary hospitals generate over 80 percent of revenues from user fees, while revenues as a percent of recurrent expenditures range from 2 percent to around 12 percent per annum. Once 1990 revenues of tertiary hospitals are arrayed by their corresponding operational indicators, the pattern is not surprising--low revenue is generally associated with poor operational performance, and hospital revenue is low in poorer provinces and high in wealthier ones. 9. Issues and Recommendations. Although the bed occupancy rates observed in the Philippines' hospitals are similar to those in other countries, turnover rates are high and ALOS is low (see Table A). These anomolies are a source of concern as to data validity. The conclusions drawn here must be appropriately qualified. 135 Table A Hosnital sevie s Bed Tur- Aveage Number of Country and Year evel of Occupancy ova Fite Legt of Hospitals in of Datat Hospital Rate per Year Stay Study lBells (85) C:enral 6B% 40.7 6.1 1 District 31% 37.3 3.0 6 China (86) Teray 94% 13.7 25.1 8 Provincial 86% 17.6 17.9 11 District 95% 26.1 13.3 7 Ethiopia (83-S) Uran 47% 14.7 11.8 6 Rral 59% 29.7 7.2 13 Fiji (87) Tertiary 83% 42.5 7.2 3 District 46% 47.9 3.S 19 hIdones (8S) Terary 75% 29.2 9.4 2 Provincial 68% 28.7 8.7 15 District 54% 33.6 5.9 296 Iamica (85) Tertiary 79% 35.2 8.2 5 Md,Level 84% 43.2 7.1 4 Distrct 61% 28.6 7.8 13 Laoto (5) Cnt 12S% 50.7 9.0 1 Disict 129% 54.9 8.6 7 Papua Now Teriay 80% 29.4 9.9 1 Guinea (88) Regional 80% 28.1 10.4 4 District 60% 16.9 12.9 8 Zimbabwe (87) Cena 89% 41.7 7.8 4 Provincial 91% 54.5 6.1 8 District 76% 40.8 6.8 31 Table adopted f*om arnum and Kutrin (1993). 136 10. Although not a strong correlation, there is a tendency for low- performing tertiary hospitals to be mostly concentrated in poorer provinces and the opposite is true for rich provinces. However, concerning secondary hospitals, the picture is mixed--the number of inefficient secondary hospitals is evenly spread between low and high-income provinces. This roughly neutral pattern broadly follows the distribution of provinces in deficit as a result of the LGC; the 20 percent of the provinces in fiscal deficit also account for about 20 percent of the hospitals in the outlier zones of quadrants I and III. Thus, there is no evidence for a regressive pattern of deficit provinces being both poor and burdened with operationally inefficient hospitals. Most, if not all, provincial governments will encounter hospital efficiency problems, and the demand for DOH technical assistance in this area should be widespread. 11. Possible interventions empowered by the LGC include liquidation and/or privatization of inefficient hospitals. Because of the high priority attached to universal access, especially for low-income families, it may not be possible or advisable for the LGUs to liquidate or privatize on a wide scale. Rather, improvement of quality and efficiency in hospital services should be the priority. As a first step, the LGUs need to determine if poor performance is a result of supply or demand factors. If supply factors predominate, such as low medical staffi. ratios, low budget per bed, low availability of medicines, or other management problems, then the approach should focus on enhancing quality. If demand factors predominate, such as small catchment population, competition from the private sector or from national public hospitals, or special patterns in the disease burden of the area, it would be prudent to consider initiatives such as consolidating inpatient services into a smaller number of facilities and converting some inefficient and costly services into ambulatory centers. This measure would reallocate some staff to ambulatory services and engender economies of scale in operation. 12. The case for privatization would be more supported if it could be shown that public hospitals have been displacing private hospitals through subsidized services. Chapter 1 addressed this issue, and it was shown that apart from a weak substitution effect for tertiary hospitals, the overall relationship between the distribution of public and private hospitals is a complementary one, at least at this stage of the country's hospital development. There will, of course, be particular cases for which privatization or liquidation would be justified, but in most cases managerial improvements and consolidations should yield improved financial and operational efficiency. 13. The financial efficiency data indicate a correlation between operational and financial efficiency, indicating that operational improvements by themselves should have a positive impact on revenue flows. However, financial efficiency of provincial hospitals is shown to be low with little variation, suggesting a large scope for improvements in revenue flows, especially in the wealthier provinces. Those hospitals appearing in the outlier section of quadrant III are burdened with excessive utilization and would seem to be candidates for more attention to fee-based revenues and better management of demand. 137 PROVINCIAL HOSPITAL OPRATIONAL EFFICIINCY MIUICATOBS PINZIUS 1990 Figures 5. I A. P*ovincial Tertiary Hospitals - By Provincial Income Turnover Rate ALOS 160 2ta RelOive Income of Pnvnce Containifg HosPita . 140 -0 Low income + High incoe Mean / .~~~~~~~~47 120 - 100 _ ..................... G+..... ...... ot. - so- 60 40 20 0% 20% 40% 60% 80% 100% 120% 140% 160% Occupancy Rate B. Provincial Primary and Secondary Hospitals - By Proviucial Income Tumover Rate ALOS 200 23 Relative Income of Province Contain.ng HS jtal3 0 LowIncome +HighInome * Mean 7' + 11 / + 111+++ ++ ,42 150 4+ q 100 _i ~~~~. . . . . . . . . . . . . . . . . . . . . . . . . . ---.; S*g".+ 50 ~~~~~~~~~~~. .. ..... . q . ..... ..... .. 0% 20% 40% 60% 80% 100% 120% 140% 160% Occupancy Rate 138 PROVINCrAL HOSPITAL OPERATIONAL EFFICIENCY INDICATORS PHILIPPINES 1990 Figures 5.1 C. Provincial Tertiary Hospitals - By Region Tumover Rate ALOS 1860 2.78 AO Region 7 | 140 X>o AlE *2 A3 * 4 A5 Qe 07+8 V+ O *1 j-1 i2 Meoan | 120 _73 100 H 80..OOL*~~. .... .. .. 6O *;0 7 3 2°so_f ............... ...... ... ...... .. .~ x 60 0% 20% 40% 60% 80% 100% 120% 140% 160% Occupancy Rate D. Provincial Primary and Secondary Hospitals - By Region Turnover Rate ALOS 2.31 200 Regton XO *1 *2 A* 4 *5 C6 8 7 +8 VS * 10 x 11/412 A Mean AA 150 .A . . 100L .:/ a .; 111.~~~~** *- 4.31 A ;.49 50 -.§ * t so - 0~ 0% 20% 40% 60% 80h% 100% 120% 140% 16096 Occuoancv Rate 139 14. In addition to introducing fee schedules for services to the better-off patients, Medicare also remains a relatively untapped source of revenue in public hospitals. Chapter I indicated that private hospitals accounted for almost 80 percent of total Medicare claims in 1990. Part of the reason for this is the tendency of Medicare enrollees to use private hospitals, not the failure of public hospitals to submit Medicare claims. Thus, provincial hospital managers may seek to increase the number of Medicare patients using their facilities so as to raise revenues and obtain a higher share of the Medicare market. Increased revenue from fees and higher Medicare claims would require quality improvements in provincial public hospitals, which would be a favorable outcome for the hospital clients. 140 ANNEX 5C DOH - LGU Assistance Mechanism: Design and Implementation Issues 1. A workable, functioning assistance mechanism with clear criteria would substantially contribute to the credibility of DOH offers of assistance, and also attract donor finance. Any initiatives to expand "underdeveloped" national programs (nutrition for example) would depend directly on the viability of such a mechanism. The following discussion identifies critical considerations in the design of an assistance mechanism. 2. Section 17(f) of the Code empowers the National Government to augment basic services inadequately provided for by LGUs.2 In keeping with its underlying philosophy and Section 17(c), such augmentation will need to involve LGUs in some manner. The DOH cannot revert to direct delivery of health services. Instead, some form of revenue enhancements or provision of project assistance to LGUs will be necessary. The objective of this section is to discuss the issues associated with the design of such mechanisms. 3. It is extremely likely that under the newly devolved system there are and will be unmet health service needs. This could result if the revenue base (together with other public service requirements) within an LGU is insufficient to meet basic health service requirements. Also, local decisions regarding allocation of funds and/or inadequate management of local health care facilities could result in insufficient amounts or inappropriate administration of resources being utilized for health services. Each is considered, focusing primarily on the first of these factors. 4. Insufficient Revenues. As noted previously, revenues available to the LGUs will consist of the IRA grant together with locally mobilized resources. The only factors which the IRA distribution formula depends upon are LGU populations and land areas with no explicit factors included to account for differences in either the abilities of localities to raise their own resources or the need for health (or other) services. The resulting transfer mechanism makes no attempt to "target" the flow of these grants. An augmentation grant or loan mechanism is, therefore, the most reasonable policy instrument for overcoming the problem of insufficient resources. 5. The design of such a mechanism is likely to be an iterative process. In the short term, DOH will disperse augmentation resources provided by the Congress. This instrument may not be needed in subsequent years, and !/ However, according to Art. 31 of the Rules, such augmentation shall occur when the President is requested to do so by the LGU concerned. It therefore appears that the DOH may not be able to take unilateral action to augment services on a general, wide-scale basis. Whether this provision constitutes a binding constraint to DOH-initiated intervention policies is unknown but will have to be addressed. It is not, however, addressed further here. 141 could be replaced by more flexible instruments. There are several conceptual issues that should be kept in mind as an augmentation instrument is designed, as well as implementation issues that should be considered. 6. Design Issues. In designing such an instrument, at least three conceptual issues are relevant. Any augmentation grant can alter local resource mobilization, can affect local budget outcomes and should avoid creating undesirable or counterproductive distortions in behavior. 7. Supplementary intergovernmental grants further reduce pressures on LGUs to mobilize resources on their own beyond that of the IRA allotment. Even if the augmentation grants are designed specifically to be used for health care services, they can discourage LGU efforts to impose and collect local taxes. Within the overall context of local government budgets, perhaps such marginal increments to the flow of intergovernmental funds will be sufficiently small to have little dampening effect on local revenue effort. Nevertheless, the potential for such effects should not be ignored. 8. Just as an augmentation grant may lessen the LGUs willingness to LGUs to mobilize resources, additional targeted funds flowing into health services may decrease the willingness of local budget-makers to allocate funds for that purpose. That is, with the promise or even the expectation of incremental grants to meet health needs, local officials may decide they would be better served by allocating funds away from health and into other activities since health services can be financed from the augmentation grants. The net result would be no net increase in health services in spite of DOH efforts. 9. In designing an augmentation grant mechanism it will also be necessary to decide how the amounts to be received by different LGUs will be determined. Although use of the grant revenues will be limited to health service provision, it would probably be possible to devise a formula-based distribution mechanism based on factors which reflect relative needs and abilities to meet those needs with normal LGU revenues. A formula allocation approach has the advantage of being relatively easy to administer, once the formula has been chosen and is unlikely to require as much monitoring as would project-based allocation mechanisms. And, if the factors are known by all, a formula can reduce fiscal planning uncertainties faced by local governments. However, care must be taken to insure that the factors included in the formula do not create incentives which will be counterproductive. For example, if the need indicator chosen is number of hospital beds per capita, provinces with above average numbers of beds may perversely decide that they would be better off financially by decreasing the number in order to receive additional grant funds. In any event, if the augmentation grant is to be workable, data for the chosen factors will have to be generally available, should not be easily manipulated by local officials, and should reflect generally accepted indicators of need. Furthermore, the formula should not provide a substantial disincentive for LGUs to raise revenues of their own. In the short term, an augmentation grant could follow a fiscal gap criterion (as was developed in Chapter III) combined with an assessment of need. 142 10. Proiect Assistance ApRroach. Rather than attempting to devise a formula applicable to all LGUs in the country, specific project grant mechanisms may be used. The principal advantages of this approach are that grants can generally be more finely tuned to fit the specific needs of different localities and from those that spend little on health while insuring that jurisdictions with fewer needs or greater resources are excluded from benefiting from the funds. Furthermore, project grants can also require that localities match some portion with their own funds (including their IRA allotments). Such local matching has the added advantage of lessening the negative effect the grant may have on revenue mobilization. It is even possible to require greater local matching funds from wealthier localities so as to enhance the positive equity effects. 11. The principal downside of such mechanisms is that they are generally more costly to administer than are formula-driven schemes. Such grants are likely to require that the locality prepare a project proposal (and, unless this process is kept simple, LGUs with poorer administrative capabilities may be at a disadvantage vis-a-vis larger, wealthier localities). Furthermore, the DOH will need to review and evaluate the grant proposals which may be costly and time consuming and, since LGUs will be uncertain about the outcome of these processes, they will face greater fiscal uncertainties. Finally, monitoring the use of the funds is likely to be more stringent and, therefore, more cumbersome. 12. Another potentia' disadvantage of the project approach is that personal, political factors may become determinants of the allocations rather than actual health care needs and lack of resources. The formula approach embedded in the LGC suggests a political philosophy favoring the severing of political factors from the allocation of Government funds. Reverting to an ad hoc allocation method for the augmentation grants could undermine that philosophy. This risk necessitates, therefore, a rigorous and transparent process of project selection. One way to approach this issue would be to allocate available project funds by a needs formula approach to each province, and then invite proposals from LGUs within their individual allocation. 13. Another policy decision that needs to be made for either formula- driven or project-specific allocations concerns what constitutes a legitimate use of the funds. One important issue is the question of whether the funds can be used to augment physical capital in the health sector. While such use might be appropriate, the longer-term recurrent cost implications of such investments should not be ignored since to do so runs the risk of creating a recurrent cost burden that the LGU is subsequently unable to meet. A related issue concerns what role the various actors who are to participate in the local budget process will have in determining how the augmentation grants are to be spent. To circumvent this group undermines the devolution initiative; however, to allocate such funds in exactly the same way the local budget is allocated raises the risk that the outcomes will not result in improved health services. A project-oriented approach would engage local governments and the DOH in a dialogue on the use of project funds, thus allowing for negotiated adjustments in local provisioning behavior. 143 14. In summary, there are some very basic policy issues that the DOH will address when considering how to augment local resources in hopes of providing a more equitable allocation of health services withoit greatly diminishing any efficiency gains that may accrue from the dev,Aution policy. There are, as well, other implementation issues that need to be addressed. 15. Implementation Issues. Probably the most pressing and pragmatic issue concerns how to finance the augmentation grants. With LGUs expected to take on substantial authority in the provision of health services, it might be anticipated that the DOH will be unlikely to receive substantial central budget allocations from which to fund significant augmentation grants. The Central fiscal position post devolution also suggests limited availability of GOP funds. However, the FY 1993 budget contains substantial "augmentation" funds for health, and the political appeal of appropriating health resources for localities appears to be strong. The revenue augmentation instrument, however, contains many design risks as discussed above. 16. A more realistic source of funding could be the donor community Since donor funding processes are probably more likely to be targeted towards particular types of projects, e.g., maternal and child health schemes, a specific grant allocation method discussed above would probably be preferred to a more general, formula-driven approach. The DOH would then be required to devise a project approval process whereby qualified localities, e.g., those LGUs with particularly important health care needs or an especially high incidence of poverty, would be allowed to submit project proposals. Again, the qualification criteria must be well defined and reasonably accurate local data must be available to insure that the qualification criteria are met, either in the eligibility for submission or the criteria for awarding project funds. 17. These proposals could be evaluated by regional and, ultimately, the central DOH staff to ensure that all necessary qualifications are satisfied (including any prescribed by the donor agency). At the same time, the proposal approval process should not be so unwieldy and bureaucratic that it results in inordinate delays in the flow of funds. According to Art. 453 of the Rules and Regul2tions Implementing the Local Government Code of 1991, it is likely that these funds will be maintained in a special account established by the recipient LGU. While disbursements from this account (together with any prescribed local matching funds) would be audited by the COA to ensure that all fiscal regulations have been met, the DOH may also have to monitor the expenditures so the conditions of the grant agreement have been satisfied. But, again, this requires that meaningful indicators be available for the monitoring process. 18. InayDropriate Utilization of Funds. It is possible that, even where sufficient funds are available, their allocation will not meet basic needs (at least as perceived by the DOH). The potential for this is particularly severe when the allocation of funds to certain segments of the local population are considered--that is, an LGU may allocate a sufficient total amount of funds to health, but the distribution (either spatially within a jurisdiction or across types of services) is inequitable. 144 19. Such a situation creates a dilemma. Central interventions to reallocate LGU funds undermines the devolution policy initiative; however, ignoring the inequitable allocation constitutes a failure to carry out the DOH responsibility of providing health care to everyone in the nation. Use of a project based assistance approach can exert at the margin some influence on local allocative choices. Cost-sharing requirements can be scaled to levels and purposes of local health spending. This will add to administrative complexity and costs. 20. Conclusion. The potential problems of spillovers and, even more, of inequities, suggests that some combination of augmentation grants and project assistance be designed and implemented. The former can be used to help equalize resources especially in the short term so that poorer LGUs will not be burdened with a large fiscal gap. To extend the augmentation program past 1993 would run the risk of creating fiscal incentives with unintended outcomes. A cost-sharing grant mechanism, although probably more costly to administer than a simpler formula-based allocation method, may be the most appropriate instrument over the medium term to address equity issues, with the funds derived primarily from grants and loans obtained from the donor community. Establishing a Health Fund within the DOH to house donor finance might be an effective way to ensure that targeted project finance is rigorously allocated and accounted. 145 ANNEX 5D Exnsnding an "Underdeveloped" Public Health Program - The Case of Nutrition 1. As Chapter I indicated, moderate protein energy malnutrition (PEM) affects no less than a third of very young children in the Philippines, and iron deficiency anaemia no less than 45 percent of pregnant women. The 18 percent of children who are born with low birth weight indicates that there is also a significant PEM problem among women, although the extent of this has not been adequately measured. Operation Timbang (OPT) has been the major program aimed at identifying and dealing with PEM; however, this annual growth monitoring program discovers malnutrition only after it has been a problem for many months and is harder to treat. The poor quality of scales and the poor training of workers in growth monitoring means that the OPT nutrition data are unreliable and the quality of nutrition education provided by volunteer workers is low. Dealing effectively with malnutrition remains one of the Philippines' major public health and managerial challenges. 2. Much is now known from the international experience, about what it takes to run a good growth promotion (growth monitoring, counseling, food supplementation) program. A major international workshop held by UNICEF in Nairobi in 1992 concluded that growth promotion programs only work when there has been substantial investment in support services, especially for the training and supervision of workers, and detailed attention to the design of program software and field management processes. The World Bank's nutrition project experience also bears this out. Assuming that the Philippines is prepared to invest in strengthening its nutrition program, the major issues after devolution will be: What are the minimum design standards that an LGU must meet to expect success? And, how will LGUs be persuaded to adopt and maintain these standards--i.e. what's in it for them? 3. The prerequisites for success: The minimum design stan4ards for a growth promotion program can be divided into two types--essential structures, and essential software and management Rrocesses. A workable structure must include at least the following: (a) An adequate number of outreach workers per client population. For example, where village workers put in 4-6 hours a day on nutrition, it has been found that they can effectively serve a population of about 1500, implying at least 20 such workers for an RHU area of 30,000; (b) No more than about 10-12 outreach wuvzkers per first line supervisor, if high standards of weight monitoring, charting and counseling are to be achieved and maintained, implying two such supervisors per RHU area of 30,000; (c) A full-time senior supervisor/trainer for every 10 to 12 supervisors, implying about three for a province of 600,000; 146 (d) Standardized equipment, including scales/armbands, growth charts, and recording and reporting forms; (e) A facility, which may be a house or a barangay center, with room for preparing and storing food, where 20-40 children can sit for supplementary feeding (on-the-spot consumption is important to avoid them sharing food with family members); (f) A supplementary food which is locally acceptable and meets standard criteria for calories per ration and nutrient density. 4. The heavy personnel requirements for training and supervision raise important issues as to how far supervisors and trainers can also serve other primary health programs. Integration makes technical sense, given that programs such as nutrition, women's health and family planning, ARI and EPI have considerable overlap in their target groups. On the other hand, spreading sutpervisors across too many interventions may reduce the quality of management support to workers. Thus, support staff planning for any one 'underdeveloped' program will have to be done in the context of the overall supervision and training demands for all primary care programs at full development. 5. Key software and managerial process prerequisites for success include: (a) A standardize- Ilient targeting system focusing on the nutritionally vulnerable--probably pregnant and lactating women and children under two, in the Philippines context; (b) Standard recruitment criteria for outreach workers, who should be local, and preferably poor women with demonstrated success in child rearing; (c) A limited set of tasks for the outreach worker, defining exactly the primary care interventions for which she is responsible; (d) Clearly defined work routines for outreach workers, laying out when and how they will do growth monitoring, counselling, supplementation and home visiting on a daily and monthly basis, and procedures for referring children who fail to thrive to the health service; (e) Clearly defined processes for involving the local community in identifying their malnutrition problem, analyzing its causes, and helping to intervene and monitor program performance; (f) Clearly defined processes for procuring and distributing supplementary foods--a major issue to be decided in the Philippines is whether foods should be centrally procured, or prepared by local women's groups; 147 (g) Clearly defined entry/exit criteria laying down under what circumstances a woman or child participates in the supplementary feeding program; (h) Clearly defined routines for field supervision and training; (i) A management information system feeding monthly information on program coverage and nutritional status to local communities as well as program managers. 6. Although long, the above structure and process-oriented lists reflect what is necessary rather than what is just desirable for a successful nutrition program; the absence of one or two components can threaten the effectiveness of the whole investment. It is clear that the standards for participating LGUs are demanding; also that a carefully drafted and Comprehensive Health Service Agreement between DOH and the LGU would be needed to capture the key elements of a strengthened nutrition program and form the basis of an understanding for implementation. Implementation of such agreements at the municipal level would in turn require a well developed managerial capacity of health programs, not only to expand the nutrition program, but to ensure that it attains performance objectives. The demands on personnel management, logistical systems, management information, and technical supervision would be high for participating municipalities. 7. Receptivity of Local Government. The interest of local governments to implement a strengthened nutrition program will increase to the degree that they receive financial or in-kind support from the center and see it as providing significant developmental and political benefits to the local area. Fortunately, nutrition programs can be attractive to local governments because they offer visible benefits to the community in the form of commmnity- organized growth monitoring, individual nutritional improvements, and other benefits. Nutrition programs also allow local government to play a visible, proactive role in implementation and evaluation. A strengthened nutrition program could and should be designed to reinforce these potential benefits. 8. Conclusions. Developing an effective national nutrition program will be a complex and challenging task. It will require significant additional investment, significant staffing increases or reorientation, development of local program management capacity, and a significant amount of new program software. It will also be very demanding of local governments, raising questions about their willingness to participate in developing new structures and to conform to rigorous standards. 9. But a successful nutrition program can also be politically attractive--both as a mechanism for empowering communities, and as a means of enabling local governments to demonstrate visible benefits and proactive support for their constituencies. There is therefore a high probability of local government interest and commitment, if the proposed program is designed in a way which will maximize these benefits, and marketed to local governments so as to make the benefits apparent. The next steps in formulating such a program would be to: 148 (a) Define clearly the minimum design standards for such a program; (b) Carry out organizational assessments of MHOs and IPHOs to determine the additional supporr/reorientation required for them to be able to manage a high quality nutrition program; (c) Develop proposals for appropriate cost-sharing arrangements between center and local government for LGUs with different financial capacities and malnutrition burdens; (d) Prepare a draft Memorandum of Agreement which would be the basis for program implementation, and which would set out the roles and responsibilities of center, province, municipality and barangay, as well as the agreed program design standards and cost- sharing arrangements; (e) Prepare a professionally designed marketing program setting out the potential benefits and demands of the program, to assist the center in eliciting the informed participation of LGUs. 10. The expansion of the nutrition program on a national scale contains a broad range of requirements, most of them at the municipal level. To perform the above steps will require that the provincial governments restore their intermediary role, that a workable mechanism for channeling DOH assistance to local governments be devised, and that on-going programs enhance municipal management capacity.