WHO
Montreux Collaborative
Coin and sthetoscope

Montreux Collaborative Blog

The hidden toll of arrears on health financing and service delivery

Federica Margini, Fahdi Dkhimi, and Bruno Meessen

Expenditure arrears, while receiving little attention, can be a sizeable form of deficit financing in many countries. This blog outlines the widespread and damaging effects of arrears on health service provision, and the need for greater attention to this issue. Strengthening attention to and management of arrears can enable governments to reduce disruptions in health financing and service delivery.
Introduction
Arrears are “payments for which claims have been established but which are kept pending for prolonged periods, usually for lack of necessary funds”. They are overdue payments related to specific obligations (e.g., salaries), contractual commitments (e.g., supplies, construction), or continuing service arrangements (e.g. utilities).
Accumulation of government expenditure arrears is a common problem in public financial management. It can reflect inadequate budgeting and fiscal planning. Accumulation of arrears can indicate current fiscal revenues fall short of expected service levels and place a burden on future budgets to meet the unauthorized or excessive obligations of the past. Accumulated arrears have a clear operational consequences: cashflow issues and delayed payments.
Expenditure arrears pose several challenges. Delayed payments can lead suppliers to raise prices or decrease supplies due to late payments, prompting governments to cut services or raise prices. This in turn can cause medium-term inflationary effects. In addition, once arrears have been verified and recorded by fiscal authorities, it increases a country’s debt stock, adding to service costs. This creates disincentives for countries to record or verify arrears to lessen contingent liabilities, a practice that impacts the transparency and credibility of fiscal reports.
There appears to be a lack of systematic monitoring and documentation on arrears. This stems from multiple factors, including the fact that public accounts typically track late payments rather than arrears. However, the issue has recently received more scrutiny. A 2019 IMF publication examined domestic arrears in 30 Sub-Saharan countries. It identified that accumulation of arrears had risen since 2012, particularly in oil exporters, fragile states, and countries with a fixed exchange rate. The analysis suggests that most domestic arrears stem from procurement from private suppliers, as governments tend to avoid delaying payments for wages and salaries. Additionally, "unrecognized arrears" were prevalent, with many countries having potential claims awaiting audits or unpaid commitments to utilities and social security funds.
Impact of arrears on the health sector
Arrears can occur at any stage of the payment and transfer process throughout the health sector. Accumulation of arrears reflects structural imbalances in the health financing system, with consequences to operations and health service delivery. This can be illustrated by reviewing accumulation of arrears across different categories of health spending.
  1. Salary arrears. For example, in 2021, health workers at Rennie Hospital in Liberia accumulated over 30 months of salary arrears. By the end of Ebola outbreak in 2023, Uganda had accumulated USD 500,000 in salary arrears, and health workers in Rivers State (Nigeria) reported over four months of salary arrears. The consequences of delayed salary payments are wide-ranging, including degrading quality of care, personnel absenteeism, absence of essential drugs, and disruption in service provision through strikes.
  2. Arrears linked to the procurement of medicines. For example, in 2022, the Tunisian Central Medical Store (CMS) accumulated approximately USD 210 million in unpaid bills to suppliers. In response, some international suppliers ceased commercial operations in Tunisia, reducing the availability of drugs in the country. Procurement-related arrears are a common challenge. In 2015, Zambia owed more than $30 million for medicines and pharmaceuticals because funds were released late and the local currency lost value. As a result, suppliers refused to provide more goods until the debts were paid off. In 2019, Moreover, procurement delays in Namibia led to higher prices for essential medicines and shortages, disrupting services, especially for local communities and those with limited access to healthcare. In 2021, in Bosnia Herzegovina health sector arrears reached over $291 million and are believed to have caused delays in equipment deliveries, and higher prices as suppliers internalised the costs.
  3. Arrears arising from delayed transfers to service providers. This category of arrears can have an immediate impact on health service delivery. In Ghana in 2021, private providers threatened to stop providing services under the National Health Insurance Scheme due to delayed payments of over USD 12 million. Similarly, in Sierra Leone and Niger, delayed payments to providers led to patients’ being referred to private pharmacies and the reintroduction of user fees, undermining policies for free healthcare.
These problems are often interconnected and may flow from a single or initial financing challenge. For example, due to a structural imbalance, a social health insurance scheme has higher obligations than revenues and responds by reimbursing health facilities late, which then reacts by reimbursing the CMS late.
Analysis
The accumulation of arrears cannot be attributed to a single factor but tends to be associated with many interconnected structural and cyclical factors. These include macroeconomic shocks, poor budget formulation, weak commitment controls, ineffective cash management, and delays in processing and deferring payments.
The health financing community has largely overlooked arrears, their causes, and their consequences. One reason could be the focus of existing analytical frameworks on current expenditures. This neglects the essential consideration that health system agencies and facilities (e.g. CMS, social health insurance agencies, and health facilities) need cashflow to operate. This results in health financing tools and approaches (e.g., purchaser-provider split) not incorporating a cashflow perspective.
Recognizing the existence and impact of arrears would provide important context for health financing policies. In many low and middle-income countries, cashflow management is constrained both at the macroeconomic level (e.g., limited opportunities for issuing bonds, shortage of foreign currencies) and at the micro level (e.g., limited development of the banking system).
Many governments respond to arrears periodically, paying down accumulated arrears but then commencing to accumulate again. There is evidence of the negative impact of accumulated arrears on health services delivery, however there is limited documentation or evidence of successful arrears management strategies. This indicates more can be done to better monitor, manage and address the root causes of the accumulation of health sector arrears.
A possible agenda
Previous PFM frameworks proposed good practices to manage arrears, once the causes are identified. These include clarifying payment terms, improving expenditure reporting, and enhancing budget processes, as well as strategies to create realistic annual budgets, strengthen accounting systems, improve commitment controls, and improve cash and debt management.
While Ministries of Finance are typically responsible for such reform strategies, it is important to understand the sector-specific causes and consequences of arrears for tailored prevention, mitigation, and management. In the case of the health sector, cash flow analyses at the level of budget spending units, particularly in multi-faceted health systems with significant private sector involvement, should be prioritized in ongoing health financing assessments. In particular, priority should be given to health financing assessments of CMS, given problems at this level can compromise the performance of the whole health system.
Raising awareness of the scale and consequences of accumulation of arrears in the health sector is vital, as well as sharing approaches to address these challenges. This could potentially be done through in-depth case studies and targeted technical assistance to CMS, hospitals, and facilities managers to better manage and monitor arrears, and prevent their further accumulation.
Authors affiliations: Federica Margini (UNICEF Tanzania), Fahdi Dkhimi and Bruno Meessen (WHO HQ)
06 June 2024