Resource Allocation to Regions and Districts

Case Study

RESOURCE ALLOCATION TO REGIONS AND DISTRICTS

IN THE EASTERN CAPE PROVINCE OF SOUTH AFRICA

DiMcIntyre

TheHealthEconomicUnit, UniversityofCapeTown, CapeTown, SouthAfrica

Acknowledgement: This case study was prepared bythe Health Economics Unit for the World Bank Institute as part of the Flagship Program on Health Sector Reform and Sustainable Financing.

This case study may be copied and used in anyformal academic programme.However, it must be reproduced withappropriate acknowledgment of the author(s).

A. OBJECTIVES

• Todemonstratetheprocessofresourceallocationdecisionmaking;

• Todevelopabetterunderstandingofequityinthegeographicdistributionofhealth careresources;

• Toidentifytheindicatorsofrelativeneedforhealthservicesthatcouldbeincluded inaresourceallocationformula;

• Tohighlighttheimportanceofidentifyingarealisticandappropriatetime-framefor resourceredistribution;

• Toconsidercomplementaryactionsneededtotranslatebudgetaryshiftsintoreal redistributionofresourcesandhealthservicesontheground.

B. BACKGROUND

IntroductiontoinequitiesinSouthAfrica

SouthAfricahasbeendescribedasoneof the most unequal societies. Approximately51%ofannualincomeisattributable to the richest 10% of households (approximately 5.8%ofthepopulation) while lessthan4%goes to thepoorest40%ofhouseholds(approximately53%ofthepopulation). There is also widespread poverty in South Africa.Poverty has a strong ‘racial’ dimension with95%ofthepoorbeingAfrican,andageographic biaswith75%ofthepoor living in rural areas.

TherearealsomarkedinequitiesinaccesstosocialserviceswithinSouth

Africa. Disparities in access are particularly striking between the former

‘homelands’ areas and the restof South Africa. In terms of the 1913 ‘Natives LandAct’,Africans(whoaccountforabout 76% of the South African population) wereconfinedtolivinginten‘homelands’, which were highly fragmented geographic areas scattered throughout South Africa, and established along

‘tribal’ lines. These ‘homelands’ comprised less than 14% of the total surface area of South Africa. The ‘homelands’ were reincorporated within the nine new provinces established shortly before the 1994 democratic elections.

Theextentofpovertyandinequality in South Africa is thus largely attributable to apartheid policies, which fostered differential development of each ‘racial’ group.Thegovernmentelectedduringthefirstdemocratic elections in 1994 has committeditselftoimplementingmeasuresto reduce poverty and to redress the disparities in the distribution ofincome and social services.

While the political history ofSouth Africa is unique, the disparities in access to social services are not. Differential access to health services, particularly betweenruralandurbanareas,isacommon phenomenon in many developing countries.ThiscasestudyofoneprovinceinSouthAfrica, the Eastern Cape, dramaticallyillustratesthechallengesfacingdecision-makerswhenattempting toredress historical inequities in health service distribution.

Background tothe Eastern Cape province

Approximately65%oftheEasternCapepopulation liveinruralareasandthe overallpopulationdensityis39perkm2. OfSouthAfrica’snineprovinces,the EasternCapeisfacedwiththeworstconsequencesoftheapartheideraand hasthemostdifficulttaskofreconstruction.Thisprovincehasthetaskof unifying the wealthy, well-serviced areasof the former Cape province with two underdeveloped former ‘homelands’ (namely the Transkei and Ciskei). The

former Cape province areas contain some metropolitan areas, but mainly comprise small towns and large commercial farms. In contrast, the former Ciskei and Transkei are rural areas where the major activity is that of subsistence agriculture.

HealthservicesintheEasternCapeare provided by both the provincial Department of Health and by a range of local government structures. Historically,provincialdepartmentshavebeen responsible for curative primary careservices(providedfrommobileand fixed clinics and community health centres) and all hospital services. Local governments are responsible for preventive primary care services, communicable disease control and environmental health services. This situation has resulted in significant fragmentationofprimarycareservices.Intheformer‘homeland’ areas,local governmentsdidnotprovideanyhealthservices. In these areas, primary care services are already integrated.

Eachprovince in SouthAfricaisgiven a global budget allocation from central government tax revenue. This is supplemented by revenue generated within the province(e.g.motorvehiclelicensefees,userfeesathospitalsandschool fees). The provincial legislature decides on the allocation of provincial resources tothevariousfunctions(e.g.health, educationandhousing).Localgovernment healthservicesarepartiallyfinancedthrough subsidies allocated by the provincial Department of Health. This is supplemented by local government own revenue, in the form of rates, taxes and utility sales. The revenue generating potentialvariesgreatlybetweendifferent local governments, with those in metropolitan areas having the largest tax base.

TherearesignificantdisparitiesinhealthserviceaccesswithintheEastern Cape,withahigherpopulationtoclinicratiointheformer‘homelands’relative totheformerCapeprovinceareas.The former Transkei has particularly poor healthserviceinfrastructure.Overall,thereare869healthfacilities which render district-level health services. Over 36% of these health facilities are administered by local governments (318 facilities), while the Eastern Cape ProvincialDepartmentofHealthadministers the remainder. The state of these facilitiesvaries.Forexample,while46% ofallprimarycarefacilitiesinthe EasternCapelackanadequatewatersupply,82% of such facilities in the northern partoftheformerTranskei lackaccesstopotable water.

TheEasternCapeDepartmentofHealthisintheprocessofdevelopinga districthealthsystem.Theprovinceisdividedinto5regionsand21districts.It isanticipatedthatdistrictstructures will facilitate greater co-ordination between, and ultimately theintegration of,theprimary care services provided bylocal governmentsandtheprovincial healthdepartment. It is proposed that there should be significant decentralisation ofhealth service management to the district level. An important challenge for the provincial health department will be toensureanequitabledistribution of theprovincial health budgetbetween districts.Thiswouldpromoteequitable access to publicly financed health services forthosedependent onthepublic sectorforhealth care.

C. THE CURRENT DISTRIBUTION OF HEALTH CARE RESOURCES

Research team toconsiderresource allocationissues

A team from a South African university undertook a research project in collaborationwiththeEastern Cape Department of Health. The aim of this researchwastoevaluatetheexistingdistributionofpublic sector financial resources between health districts and regions, and to make recommendations on mechanisms for achieving an equitable allocation of these resources.

TheDepartmentofHealthprovideddata on district-level health service expenditure (i.e. excluding specialist referral services) within each health district.Theresearchteamthencalculated equitable resource allocation targets foreachdistrict,usingavarietyofneeds-based formulae. These results were then presented to the provincial Departmentof Health, to assess which formula would be most appropriate for guiding resource redistribution within the province.

Resultsofresource allocationevaluation

Theresearch teaminvestigated theimplications,intermsoftheeffectonequity targetallocations, ofusing thefollowing needs-based resource allocation formulae:

•Acrudecapitationformula,basedonthetotalsizeofthepopulationineach district;

•Aformulawhichweightedthedistrictpopulationstoreflecttheir demographiccomposition(i.e.bytakingaccountofthedifferential needto use health services between different age and sex groups);

•Aformulawhichalsoweightedthepopulationtoreflectdifferentiallevelsof ill-health (using mortality as a proxymeasure) between districts;and

•Aformulawhichaccountedfordifferentialaccesstoprivatesectorservices (as the objective is to ensure equitable access to public sector health servicesforthosewhoaredependentonthepublicsector,itcouldbe arguedthatthepopulationwhoutilisesprivate sectorhealth services should be excluded fromthe district population).

Afurtheradjustmentwastotakelocal government own revenue into account. This is based on the proposition that the provincialhealth department should allocate relatively less of its budget to districts containing a local government which can generate significant revenue forprimary care services.

Figure1summarisesthisanalysisforthe5regionsinthe Eastern Cape. It illustratestheeffectofweightingthebaselinepopulation byvariousindicatorsof need. Each bar indicates how far the particular region’s current expenditure is from its ‘equity target’ allocation (which is based on the average weighted per capita expenditure for the province, and is represented in the graph by 0), when taking differentneeds-based factorsintoaccount.

ResourceallocationtoRegionsandDistrictsin theEasternCape

Figure1:Effectofweightingthepopulationfordifferentneeds-basedindicators andaccountingforlocalgovernmentownrevenue

Difference betweenactual expenditure andequitytarget as %ofequitytarget allocation

80

65

UnweightedPopulation

WeightedforAge/Sex

60WeightedforAge/Sex Mortality

52

40

32

24 24

20

12 131111

9

14 16 15

4 5

WeightedforAge/Sex,Mortality

excludingprivate

Fullweightingadjustingforlocal government

0

-3 -2

-20

-11

-16

-20

-40

-60

-37-39

-44

-48

-51

REGIONAREGIONBREGIONCREGIONDREGIONE

DiMcIntyre,HealthEconomicsUnit,UniversityofCapeTown 4

Figure1indicatesthatthere are significant inequities in the current distribution ofdistrictlevelhealthcareexpenditure.In particular, Region A is substantially over-resourced,relativetothehealthneeds of the population in that region, whileRegionEissignificantlyunder-resourced. Unsurprisingly, Region A containsametropolitanareawhileRegionEincludesthenorthernareasof theformerTranskei(whichismainlyrural).Theadditionofvariousindicators of health need in weighting the population tends to make these inequities starker.

Table1highlightstheinequitiesincurrentresourceallocationbetweenhealth

districts.

Table1:Difference betweenactualexpenditureandequitytarget allocationsforhealthdistricts(usingpopulationweightedforage/sex, mortality,excludingprivateandadjustingforlocalgovernmentown revenue)

Health districts and regions / Difference between actual expenditure and equitytarget as %of equitytarget allocation
Port Elizabeth / 69
Uitenhage / 76
Graaff Reinet / 71
Humansdorp / (4)
REGION A / 65
Queenstown / 5
Cradock / 66
Aliwal North / (14)
Elliot / 46
REGION B / 9
East London / 59
King Williams Town / 39
Butterworth / (50)
Fort Beaufort / 3
Grahamstown / 166
REGION C / 15
Umtata / 7
Libode / (37)
Mqanduli / (47)
Qumbu / (20)
REGION D / (20)
Flagstaff / (44)
Mount Frere/Kwabacha / (64)
Maluti / (77)
Umzimkulu / (2)
REGION E / (51)

Theregionallevelanalysis(Figure1)providesanaggregated and deceptive pictureofinequities.Thisisattributabletothefactthatinequities within a region are obscured as relatively under- and over-resourced districts tend to compensateforoneanother.Forexample, while the difference between the currentexpenditureandtheequitytargetallocationinRegionCisonly15%

above the equity target, one district within the region is 166% above its equity targetwhileanotheris50%belowitsequity targetallocation. Thus,inter- regional resourcedifferencesrangefrom65% above the equity target to 51% belowtheequitytarget(seeFigure 1), in contrast to the inter-district resource differentialswhichrangefrom166%aboveto77%belowtheequitytarget level (see Table 1).

D. PROBLEM STATEMENT AND QUESTIONSTOCONSIDER Stage 1

You are a senior provincial Department of Health official who has been

appointedtoataskteamtodecide on the allocation of the global provincial healthbudgetbetweendistricts. When briefing this Resource Allocation Task Team(RATT),theMinister ofHealth fortheprovince indicated thatsheis concernedthathistoricalinequitiesinthedistribution ofhealth resources should be redressed. She is particularly concerned that the enormous backlogs in health services in the former ‘homeland’ areas (particularly the formerTranskei)shouldbeaddressedassoonaspossible.However,she also emphasised thattheEasternCape healthbudget isnotincreasing inreal termsand would be reluctant to‘rob Petertopay Paul’.

Theuniversityresearchteamisrequested to make a presentation of their findings to the RATT. They argue that the most appropriate resource allocation formula to use is the one that weights the regional population for demographiccompositionandmortality,which excludes the population who useprivatesectorservicesandwhichtakeslocalgovernmentownrevenue intoaccount.

They urge the task team to take bold steps to redistribute financial resources between regions and districts. They suggest that the major focus should be on a relative redistribution of resources from Region A to Region E. Within the other3regions,themajorchallengewillbeto achieve a relative redistribution ofresources between districts within each region.

Theresearchteamhasalsomodelledthe implications for the pace of change of using different time-frames forachieving an equitable allocation of resources.Thismodellingindicatesthattheaverageannualdecreasefor over-resourceddistrictswouldneedtobe -6.9% while the average annual increaseforunder-resourceddistrictswouldneedtobe12%,ifredistribution istooccurwithin5yearsandifthereisnorealincreaseintheprovincial healthbudget.Ifthetime-frameforredistributionwassetat 8 years, the averageannualdecreaseforover-resourced districts would be -4.4% and the average annual increase forunder-resource districts would be 7.3%.

The research team stresses that these areaverage rates of change, and that thosedistrictswhicharefarfromtheir target allocations would require more rapidbudgetarydecreasesorincreases.Forexample, ifalldistrictswereto reachtheirequitytargetallocationswithin 5 years, the Maluti district would requireanaverageannualrealbudgetaryincreaseof nearly 35% and the MountFrere/Kwabachadistrictwouldrequireannualincreasesofabout23%.

In contrast, the Grahamstown district would be faced with real annual budgetary cutsofnearly-18%peryear.

Attheendoftheresearchers’ presentation, a member of the RATT questions theresearchteam’salternativepaceofchange scenarios. He highlights the fact that during the resource allocation process in England, there was a

‘ceiling’,ormaximumrateofannualreal growth, of 5% for regions spending belowtheirequitytargets. The ‘floor’, or maximum rate of annual real budget cuts,wassetat-2.5%forregions spendingabovetheirequitytargets.He suggests that these ‘ceilings’ and ‘floors’ should be used in the Eastern Cape.

Amemberoftheresearchteamrespondsbyhighlighting the fact that the resourcedisparitiesinSouthAfrica(and particularly in the Eastern Cape) are muchgreaterthanthose that existed in England. Thus, less stringent floors andceilingsarerequiredifequityis to be achieved within an acceptable time frame.Sheindicatesthatitwouldtake about 50 years to achieve the equity targetsincertaindistrictsiftheEnglish ‘ceilings’ and ‘floors’ are used. She concludesbysuggestingthatthepaceof change within a particular country should bebased ontheextentofexisting resource differentials and on what key stakeholders regard as an acceptable time period forredistribution.

The RATTconvenorsuggests a recess in the meeting andrequeststhe researchteamtodosomeadditionalmodelling using longer time-frames. Within30minutes,theresearchteam(who are never without their laptop computers)isabletoreportthat the maximum annual budget increase would needtobe10%andthemaximumannualbudgetdecreasewouldneedtobe

-6% if equity targets are to be achieved within 15 years. If the time-frame was setat20years,themaximumratesofchange would needtobe8%and-5% perannumforunder-andover-targetdistrictsrespectively.

Theresearchersarethankedforcompiling the relevant information and for theirhelpful recommendations onresourceallocation mechanisms. Theyare excusedfromthemeeting, and the RATT members remain behind to consider what approach they should adopt. The RATT convenor suggests that they should consider the following issues:

•Whichofthealternativeformulaewouldbemostappropriateforguiding theresourceallocationprocessin the Eastern Cape (given that disparities appeargreaterwhenvariousneeds-basedfactorsare used to weight the regionalanddistrictpopulationsandwhen private sector users are excluded from the baseline population)? You should try to reach consensus and be able tojustifyyour preference.

•Should differences in local government own revenue contributions to district-levelhealthservicesbetaken into account when considering the allocation of the provincial health budget and why /why not?

•Are there other factors which should be taken into account when determining equity targetallocations and ifso,what are these factors?

•Giventhatthereisunlikelytobearealincreaseintheglobalprovincial health budget in the foreseeable future, and given the Minister’s dual concerns(i.e.toaddressbacklogsrapidlybutnotto‘robPetertopay

Paul’),whattime-frameforachievingequitytargetswouldbedesirableand realistic? You should justify your decision.

Stage 2

Onthebasisofthesediscussions,theRATThadtopropose anapproach for resourceallocationwithintheprovince. In particular, they had to reach consensusonthemaximumannualrate ofincrease and decrease which districtscanexpectin their budgets. This information is conveyed to the regional and district offices. Regions are also informed of their budget for the nextfinancialyear,whichhasbeendetermined on thebasis ofthe‘ceilings’ and‘floors’setbytheRATT.TheDirector for Region A has many sleepless nightsafterheisinformedthathisbudget will be cut drastically, while Region E’s Director also has sleepless nights trying to decide how to use the additional money which will be allocated to his region.

TheregionalDirectorsareinvitedtoa meetingattheprovincial Head Officeto presenttheirplansforaccommodatingtheir respective budget increases or decreases to the RATT.Region A’s Director arrives with all his district managersandanumberofother eloquent regional stakeholders. The Director ofRegionEisonlyaccompaniedbyhisDeputy-Director(whowasappointed a month before the meeting). No one elsein his region was able to attend the meeting.

RegionA’sDirectorhandsouta10-pagedocumentwhich provides extensive detailsoftheirrecurrentexpenditurerequirements, given theexisting service infrastructure.Inaddition,hemakesa well-motivated presentation using overheads. He makes an impassioned plea for an additional budget allocation,andarguesthatmanyresidentsofotherregionscometouse health services in his region. He also points out that the majority of recurrent expenditure is attributable to staff and that he is not allowed to retrench staff. How can the province expect him toabsorb such a large budget cut?

Incontrast,theDirectorforRegionEhas not had much opportunity to prepare hispresentation.Heargues that his region needs even more resources than theRATThasallocatedtoit.Themembers of RATT are taken aback and ask for a motivation for this request. The regional Director indicates that his office believesthattheircurrent expenditurelevelsare actually higher than the provincialHeadOfficesuggests.Thisisbasedonthefact that a considerable numberofstaff,particularlyinmanagement posts, have been seconded to his regionfromotherareas.Theirsalaries arethusnotreflectedonhisregion’s accountsbutarecostsincurredinprovidingandmanagingservicesinhis area.Oncepeopleareappointedonafull-timebasistopostscurrentlyfilled by seconded staff, the additional budget allocation will be completely absorbed.Thisleaveslittlescopeforactually expanding service provision. However,theregionalDirectorisunableto provide data to substantiate these claims.

AmemberoftheRATTthenaskstheregional Directorwhattheadditional budgetaryresources,ifgranted,wouldbeusedfor.TheDirectorresponds:

“Themoneywouldbeusedforbuyingmotorcyclestoprovide mobile health servicesinsmallruralsettlements.”Another RATTmember follows up by askinghowmanymotorcycleswouldbepurchased and at what cost.There is ahastyconsultationbetweentheregional Director and his deputy. “We think about10would besufficient,butwehaven’t been able to determine the unit costyet”respondstheDirector.“These motorcycles won’t account for the entire additional budget allocation youare requesting”, comments the RATT convenor. “What other plans do you have.” There is more consultation between theDirector and his deputy. “We haven’t had time to develop a detailedplanyet;wereceivedveryshort notice about this meeting” explains theDirector.

TheRATTconvenorindicatesthattheteamwill consider alloftheregional Directors’submissions,andthatthefinaldecisiononbudgetallocationswill be conveyed to the Directors within a fortnight. He requests that those regions thathavenotsubmitteddetailedwrittenplansandbudgetsdosowithin2 days. The meeting is concluded with wordsofthankstoall participants.

The RATT holds another meeting 3 days later to determine the final regional budget allocations. The provincial Minister must then approve these allocations.RegionEhasstillbeenunabletosubmit a written plan and budget bythisstage.TheRATTconvenorsuggests that they should consider the following issues:

•WhatfactorscontributedtotheinabilityofRegionEtosubmitadetailed plan andbudget,andarethesefactorslikely to impact on the ability of this region toabsorb budgetary increases? Ifso,in what way?

•Giventheverbal(andinsomecaseswritten)submissionsoftheregional Directors,shouldtheRATTreconsider theirtime-framefor,andhencethe pace of, resource redistribution? If so, what time-frame should be selected and why? Ifnot,whynot?

•Asthemajorreasonthatthebudgetarycutsinrelativelyover-resourced districtsandregionsaresolargeisthat the provincial budget is not expectedtoincreaseinrealterms, are there additional sources of finance for provincial health services to ease the burden of redistribution? If so, what are these sources?

•WhatadditionalstepsshouldtheRATTtaketofacilitatethe implementationoftheresourceredistribution process, to ensure that financialandotherresourcesareactuallyreallocatedonageographic basis without significantly disrupting existing health services (i.e. to assist regions and districts in overcoming absorptive capacity constraints)?

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