What mechanisms are available to fund the pandemic response?

The Ebola crisis in West Africa in 2014 highlighted the difficulty in rapidly organizing funding for an outbreak, especially among economically vulnerable countries. To address this and to prevent future financial catastrophes, several financing mechanisms have been presented to countries. These mechanisms aim to fund the potential gaps between a country’s financial capacity and its actual spending requirements in response to the pandemic. They typically fall into three categories: (1) reallocation/realigning of existing funds, (2) external/donor funding, and (3) taxation.

1.  Reprioritization and reallocation: Use of existing budget to fund first measures

Countries are rapidly mobilizing domestic resources to increase public funds that can be deployed quickly in response to the COVID-19 pandemic.^10,18 Public financial management systems provide flexibility for governments to tap budgeted allocations to fund a pandemic response.⁶

Such is the case in the United States of America where the declaration of a national emergency by the President allows the government to utilize an emergency fund amounting to US$50 billion under the Stafford Act.⁶ Similarly, the declaration of a state of public health emergency in the Philippines allowed government agencies to utilize resources to implement urgent measures in response to the COVID-19 pandemic. This includes the mobilization of local disaster risk reduction management funds (formerly calamity funds) by local government units.¹⁹

Many countries have reprioritized their government budget through reallocation and virements to create a space that can accommodate additional financing requirements.^5,11 Government agencies have worked together to ensure that reallocated funds are drawn from non-urgent and non-essential activities rather than budget cuts across the board.⁵ Hence, many countries have canceled the delivery of non-essential services to increase fiscal space and improve their health systems’ capacity to respond to the pandemic.⁵ Consequently, this will result in unfavorable effects due to unmet health needs and will, therefore, require adequate attention immediately after the pandemic’s urgent phase has passed.⁵

2.  International Insurance Scheme: World Bank’s Pandemic Emergency Financing Facility

The Pandemic Emergency Financing Facility or PEF was launched in 2017 as an innovative mechanism that will rapidly mobilize funds to low-income countries battling pandemics while placing some risks onto financial markets rather than governments.²⁰ The PEF draws on funds from private investors through bonds and swaps in exchange for high-interest rates. The PEF has two components: (1) a cash window designed to rapidly release funding to eligible countries, and (2) an insurance window that will help increase the scale of response in the event of a worst-case scenario.²⁰

The maximum payout for the COVID-19 pandemic is US$ 195.84 million. Only 64 of the world’s lowest-income countries who are members of the International Development Association are eligible for PEF financing.²⁰ Specific funding allocations for each country are determined by population size and reported cases. Financial disbursements begin when eligible countries submit authorized funding allocation requests.²⁰ Interestingly, receiving countries do not need to repay funds from PEF.

Sadly, the cash window has been depleted to pay for Congo’s Ebola response and has not yet been replenished.²¹ Hence, any funding for the COVID-19 outbreak has to come from the investment window. For the bond to be triggered, however, several pandemic-related criteria have to be met. This includes outbreak size, outbreak growth, and outbreak spread. While the criteria have already been satisfied,²⁰ this set of triggers has been widely criticized for being stringent, making the financing mechanism slow and complicated.^21–23 The bond’s triggers are very late and put vulnerable countries at an extreme disadvantage. How do we expect countries who have been struggling financially to be able to reliably record and report cases and deaths early into the pandemic? Essentially, the delay has prevented PEF from enhancing low-income countries’ capacity to respond to the pandemic. Should funds had been paid out earlier, they could have been used to prevent the spread of COVID-19 in severely affected low-income countries.

3.  Collecting additional revenue: Taxation during the pandemic

The idea of increasing tax rates has been proposed as a possible solution to the long-term economic and health impact of the COVID-19 pandemic.^24–27 In particular, governments have been mulling about introducing higher wealth tax rates which supposedly can increase the available funds for the long-term pandemic response, specifically during the recovery phase.^24,25 Wealth tax can be promising for countries like Saudi Arabia that rely almost exclusively on a single sector (i.e. oil industry) to fund its entire government.²⁷ An increase in wealth tax applied across the board (i.e. flat tax) tends to favor the rich and disproportionately burden the poor. In the Philippines, other taxes have been imposed and will likely push low-income families into financial hardship. All of these happening at the same time when the government decided to increase the profit for huge conglomerates by reducing corporate income tax.²⁶

Imposing direct and indirect additional taxes on low-income families during a public health crisis creates a cyclical problem of inequality. Increasing taxes of even the most basic goods for survival somehow cancels out emergency subsidies (e.g. social amelioration program in the Philippines) provided to individuals who live day-to-day on subsistence earnings (i.e. no work, no pay arrangement). Some countries are now looking at imposing taxes only on the wealthiest.^25,26 In the US, a 5% tax on the wealthiest 5% of American households can collect up to $1 trillion.²⁵ Meanwhile, in the Philippines, imposing a higher income tax rate on the wealthiest 2.5% of Filipino households can raise revenue to P127 billion annually.²⁶

What is the way forward?

The COVID-19 pandemic has exposed the interdependence of health security and economic security. Thus, governments are confronted with the challenge to employ a comprehensive pandemic response that will contribute to both health security and economic security. Policies, therefore, should strive to keep health care providers and businesses financially viable while balancing the need to continue providing non-urgent or non-essential services. The following are proposed policies that can support the government’s pandemic response:

1. Provide financial relief in the form of a “global budget” for primary care

Primary care facilities have traditionally relied on fee-for-service which depended on the number of clinic visits. Due to restrictions on in-person visits and challenges in maintaining operations due to reduced demand, primary care facilities can be provided financial relief by instituting global budgets.

As hospitals continue to care for patients in critical condition, primary care facilities will be at the forefront of managing non-COVID conditions such as mental illness, substance abuse, and poorly controlled chronic diseases. Using a global budget will contain costs and allow governments to repurpose available funds to the pandemic response. This type of provider payment should be accompanied by provider incentives to encourage efficiency and utilization and ensure the quality of services.

2. Increase wealth tax of the rich and employ mandatory coverage of services

Taxation is the easiest revenue source of governments. The intention to impose taxes should be balanced out with the objective to level the playing field, especially in terms of accessing health care services. Higher taxes can substantially reduce disposable income which in turn lowers consumer demand. In this case, taxation during a pandemic can lower demand for health services especially when mechanisms to lower out-of-pocket payments have not been instituted. At the moment, a wealth tax for the wealthiest families and corporations seems to be one of the most rational and equitable sources of revenue for the pandemic response.

The issue of increasing health care expenditures (i.e. out-of-pocket payments) is compounded by economic issues, such as massive unemployment, leaving low-income households more vulnerable. Interestingly, moral hazard seems to have a smaller effect during a pandemic. This provides a stronger argument for governments to enforce a system of cross-subsidies; thus, ensuring financial coverage for accessing essential services. Mandatory coverage promises financial access to health services that may be beneficial for those at the lower end of the income distribution. Those at the lowest income quintiles are not likely to take out coverage voluntarily. The government can step in to stimulate the voluntary purchase of coverage by fully subsidizing it. Mandatory coverage can encourage service utilization and may prevent free-riding even for high-income groups.

In conclusion, the COVID-19 pandemic has exposed deep-rooted and neglected health system issues which will require long-term structural changes. Countries are presented with many policy options that will not only immediately finance pandemic response but also policies that try to achieve social justice and health equity. These policy alternatives should be evaluated to inform how governments can make health care financing, particularly pandemic preparedness, become more effective in the long term. Ultimately, this will have implications on how both domestic and international resources can be used to prepare against future pandemics and sustain effective service coverage.

REFERENCES

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