CASESTUDY

How Decentralization Has Shaped Health Financing

Arrangements and PFM Practices in the Health Sector
in Kenya
April 2022

INTRODUCTION
Over the past five decades, sub-national government units in most countries
around the world have assumed some extent of decision-making authority
(Cheema and Rondinelli 2007).
This often occurs through devolution, a reform that typically involves the transfer of
different government functions related to sectors, such as health, from the central
government to sub-national units. Devolution often entails changes to public financial
management (PFM) rules, systems, and processes. In parallel, countries have also
initiated health financing reforms, such as expanding publicly managed health
insurance, eliminating user fees, and introducing performance-based payments to
move closer to the goal of achieving universal health coverage (UHC). While national
governments exercise a high degree of control over the design of health financing
reforms, their implementation in devolved contexts is heavily influenced by local
politics, policies, and processes.
Public funds lie at the heart of sustainable health financing policy for achieving
UHC (Kutzin, Yip, and Cashin 2016).
Globally, public financing accounted for approximately 60% of health spending in
2017 and increased faster than any other source of health expenditure over the
preceding decade (World Health Organization 2019). Given public funding’s growing
role, governments and development partners increasingly recognize the importance of
PFM to effective, efficient, and equitable health spending (Cashin et al. 2017; Barroy
et al. 2019). Therefore, devolution and related PFM reforms can affect how public
funds are allocated, used, and reported in the health sector.
Kenya has a complex and evolving health financing system.
Figure 2 depicts the flow of resources from government, private, and donor sources to
intermediaries that pool these funds and from those intermediaries to the ultimate
providers of health services. A mix of public and private facilities manage health
provision in Kenya. The public sector accounts for 49% of facilities in the country. In
comparison, private not-for-profit and private for-profit facilities represent 16% and
33% of facilities, respectively (Government of Kenya, Ministry of Health 2013).

Figure 2: Overview of health financing arrangements in Kenya

The share of health spending that is financed by government revenue has increased over
the past two decades.
Figure 3 disaggregates current health expenditure (CHE) by the following sources:
government revenue in black (this includes mandatory health insurance), out-of-pocket
spending (OOPs) in dark blue, other private health spending in light blue (this includes
voluntary private healthinsurance spending by households as well as spending by private
companies), and external financing in gray. Government health expenditure as a percentage of
CHE increased from 29% in 2000 to 43% in 2017, while OOPs decreased from 47% to 24%
over this period. The share of spending financed by donors first increased from 12% in 2000
to 29% in 2010 and then declined to 18% by 2017.

figure 3
Budget Development Process
For these case studies, we analyze the budget cycle in terms of four stages: budget
formulation, budget approval, budget execution, and budget accountability. The first two
stages of budget formulation and approval are described here, while execution and
accountability are discussed under the purchasing and reporting sections, respectively. The
FY in Kenya runs from July 1 to June 30 of the following year.
The budget formulation takes place the year before the fiscal year starts. It begins with the
County Treasury releasing a budget circular describing timelines and key policy issues to be
considered in preparing the budget, followed by an Annual Development Plan.
The average health share increased from 23.4% in FY 2015/16 (Ministry of Health, Republic
of Kenya, n.d.) to 27.2% in FY 2018/19 (Ministry of Health 2019). It ranged from 15%to
35% in FY 2018/19 across counties.
The health budget includes allocations for health worker salaries, medical supplies, and
facility operating expenses. These allocations are principally based on past patterns of
expenditure (Mbau et al. 2018). On average, health worker salaries accounted for 75.8% of
counties’ recurrent budget for health in FY 2018/19 while allocations for medical supplies
and facility operations costs comprised 6.9% and 9.7% of the recurrent health budget,
respectively (Ministry of Health 2019).

POOLING
MOH controls the single largest pool of health funds in Kenya. At the national level, the
MOH, NHIF, and various private health insurers pool health funds. Each county represents a
pool at the subnational level. MOH’s share of the total government health budget was 43% in
FY 2018/19, while the remaining 57% was distributed into 47 county pools. MOH uses these
funds to finance its operations and a range of vertical health programs and purchase services
from tertiary health care facilities.
NHIF, the sole public health insurance agency in Kenya, is meant to provide social health
insurance to all Kenyans but currently covers approximately a fifth of the population. It was
formed in 1966 to provide inpatient coverage to formal sector employees (both public and
private) and extended to include informal sector households in 1972 (Abuya, Maina, and
Chuma 2015).
At the county-level, pooled funds for the health sector are managed by CDOHs. Each of the
47 counties pools funds from own-source revenue (which includes revenue generated by
public facilities), the equitable share block grant from the national government, and
conditional grants from the national government and donors.

PURCHASING
Purchasing captures how pooled funds are allocated to providers and used to pay for services.
There are multiple health purchasers across Kenya’s two government tiers. Below, we
describe the purchasing landscape, followed by a more in-depth look at how county
governments pay providers during the execution phase of the budget cycle and account for
that expenditure.
Purchasing Landscape
There are 49 public purchasers in Kenya; this corresponds with how health funds are pooled,
MOH purchases health care services provided by the country’s referral hospitals and specialty
medical facilities. NHIF purchases a range of inpatient and outpatient services from
contracted public and private providers.
The remaining public purchasers are the CDOHs in each of the country’s 47 counties.
The Kenya Essential Package for Health (KEPH) forms the basis for healthcare delivery in
public facilities and purchasing by public purchasers in Kenya .
Budget Execution
The start of the fiscal year marks the commencement of the budget execution phase.Counties
are meant to receive funds from the national government in four quarterly installments,
but these transfers are often delayed. CDOH and the County Treasury jointly approve all
spending against the health budget.
Flow of Funds to Public Health Facilities
The flow of funds to public facilities was relatively simple to describe before devolution.
In contrast, the flow of funds in the post-devolution period varies across counties and levels
of care (Mbuthia et al. 2019; MOH 2020).
Hospitals have lost financial autonomy in most counties.
REPORTING,OVERSIGHT,ANDACCOUNTABILITY
The Constitution grants county governments full discretion over how they allocate and spend
their resources, limiting the ability of national government to oversee the counties.
The Constitution mandates statutory bodies at the national level to monitor and audit how
national and county governments spend public funds.
The Constitution mandates statutory bodies at the national level to monitor and audit how
national and county governments spend public funds.
Despite counties' detailed reporting, there is a need for a more timely analysis of county
health budgeting and expenditure.
While the 2010 Constitution provides a strong legal framework for promoting citizen
participation, downward accountability structures in Kenya remain weak.

DISCUSSION
Kenya’s transition to a devolved system of government in 2013 fundamentally
transformed the organization of health financing functions and, within that, PFM
policies and practices in the health sector.
While the national government continues to mobilize and pool the bulk of public funds for
health, county governments exercise direct control over half of government health spending.
They undertake a budgeting process that mirrors the national cycle, and the national
government has limited ability to influence the spending decisions they make. Moreover,
counties are the main purchasers of primary and secondary care services in the country, and
they own and operate most public facilities in the country. They also have the mandate to
grant public facilities the authority to retain and spend own-source revenue from user fees and
insurance reimbursements. This case study also garners the following findings:
1. The new devolved structure is less than ten years old and, as such, still nascent.
While PFM systems, processes, and capacities have matured considerably since 2013, both
the national and the county governments have room to grow. For example, the national
government is increasingly using conditional grants to channel ear-marked resources to
counties in the health sector to finance activities that align with national health policies and
plans. MOH can more effectively use the “carrots” and the “sticks” that the mechanism of
conditional grants affords them to influence county government policies and practices by
improving formulas for the allocation of the conditional grants, testing and improving the
conditionalities incrementally, stating the conditions more explicitly in agreement documents
with county governments, and more closely monitoring whether counties are applying the
conditions.
2. For their part, county governments can stand to improve many of their budgeting
practices.
This includes improving how their program-based budgets are structured and developed to
create more flexibility for implementing units and yield more meaningful information about
whether spending aligns with stated health priorities and improves performance. There is a
need for a more timely and detailed accounting of county financing for public facilities. At
present, county budget documents do not provide information about how much revenue was
generated by different facilities, any appropriation-in-aid for public facilities, amount of funds
transferred by county government to public facilities, county spending on various inputs
disaggregated by facility, or how facilities used any of the funds that were available to them.
3. County governments would also be well served by testing approaches to become more
strategic purchasers of health services.
Presently, the bulk of county spending for health flows via budgetary allocations for salaries,
commodities, and facility maintenance. County governments use resources from conditional
grants to transfer funds to primary care facilities. Augmenting these transfers to facilities and
linking them more explicitly to outcomes would be a step toward making purchasing more
strategic. Several counties are now exploring ways to give health facilities the authority to
receive, retain, and use revenue from user fees and NHIF reimbursements. Enhancing health
facility autonomy with concomitant measures to enhance management capacity and
accountability structures within public facilities is a precondition for strategic purchasing by
county governments and a national purchaser like the NHIF.
4. Such reforms will determine the success of GOK’s plan for achieving UHC, which it
launched recently.
In 2018, GOK initiated a new UHC pilot called Afya Care in four counties. All user fees
at county public hospitals were discontinued, and the national government transferred
additional resources in the form of conditional grants to the counties (Shano and Vilcu 2020).
In recent weeks, the national government has announced a plan to scale up the scheme
country-wide. In addition to channelling funds to county governments, the national
government will sponsor NHIF cover for a million poor households from across the country.
The implementation of this plan calls for greater coordination between national and county
governments. Its success hinges on timely and transparent intergovernmental transfers and
improved county PFM policies and practices, especially with the use of conditional grants to
enhance service delivery and facility autonomy in the public sector.

Refrence:
https://thinkwell.global/wp-content/uploads/2022/04/Kenya-Case-Study-April-2022.pdf

Question / Answers

Question 1: How has devolution in Kenya influenced the allocation of health

financing from the national government to county governments, and what is
the role of conditional grants in this process?

Answer 1: Devolution in Kenya has led to a significant change in the allocation

of health financing, with county governments gaining control over a
substantial portion of government health spending. The national government
uses conditional grants to channel earmarked resources to counties in the
health sector to finance activities aligned with national health policies and
plans. This mechanism allows the national government to influence county
government policies and practices by improving the formulas for allocating
conditional grants, specifying conditions in agreements with county
governments, and closely monitoring whether counties are applying these
conditions.
Question 2: How has the distribution of health spending sources, such as
government revenue, out-of-pocket spending, and external financing, evolved
in Kenya since devolution, and what impact has this had on health financing
arrangements?

Answer 2: Since devolution, there has been an increase in the share of health
spending financed by government revenue in Kenya. The government's health
expenditure as a percentage of current health expenditure (CHE) has risen
from 29% in 2000 to 43% in 2017. In contrast, out-of-pocket spending (OOPs)
has decreased from 47% to 24% during the same period. Donor funding
initially increased but then declined, from 12% in 2000 to 18% in 2017. This
shift in financing sources has had implications for the structure of health
financing arrangements and overall health financing in Kenya.

Question 3: What are the key challenges and opportunities presented by the
devolved health financing system in Kenya, particularly in terms of budget
formulation, execution, and accountability?

Answer 3: The devolved health financing system in Kenya faces both

challenges and opportunities. Some of the key challenges include the nascent
nature of the system, room for improvement in PFM systems and capacities,
and the need for better financial reporting and accountability at the county
level. However, there are opportunities for improvement in county
government budgeting practices, including better structuring of program-
based budgets and a more timely and detailed accounting of county financing
for public facilities. Counties can also explore strategic purchasing of health
services, which would require enhancing health facility autonomy and
accountability structures. The success of Kenya's plan to achieve Universal
Health Coverage (UHC) through initiatives like Afya Care relies on improved
coordination between national and county governments, as well as
transparent intergovernmental transfers and enhanced PFM policies and
practices.