Earmarked taxes
Earmarked taxes seek to increase government funds available for HIV and/or health more broadly by increasing tax revenue. A number of countries have introduced special taxes that are earmarked (i.e., exclusively allocated) for health interventions, for example, on air traffic and tobacco products [
17].
Earmarked taxes have several pros and cons (Table
2) [
18,
19]. The pros include a greater willingness of taxpayers to pay a tax with associated positive health benefits [
20] and the ability to protect the funded program/s from general budgetary cutbacks and/or de-prioritization. Cons include loss of control over total expenditure, in particular when priorities of a country change. Earmarked taxes, where mismanaged, may lead to inefficiencies and misuse of funds.
Table 2
Earmarked tax: pros and cons
• Households associate the benefits of the government expenditure with the tax paid and are more prepared to pay. | • Earmarking means a loss of control over total expenditure. |
• Earmarking may provide a more consistent source of funds for expenditures that yield high benefits but may not be high on the political agenda, such as road maintenance. | • Earmarking circumvents the budgetary process and review and may distort and misallocate funds. |
• Earmarking shields expenditures from the uncertainties of legislatures that may cut spending. | • Rights to earmarked revenues become entrenched with funding no longer based on agreed priorities. |
| • Less transparency may lead to inefficiencies and misuse of funds. |
| • Earmarking can facilitate attempts to create monopolies and abuse of monopoly power. |
| • Earmarking could lead to cutbacks (or expansion) of services wholly unrelated to need. |
| • Earmarking leads to less flexibility at the margin to reallocate funds when the budget is under stress. |
| • Earmarking is incompatible with good cash management. |
If this strategy is to be pursued, designers must consider several issues when determining the item to tax and the amount of tax, including: its potential to generate sufficient revenues, the reduction in revenue if it causes a decrease in demand for the taxed good/service, the ease of implementation – for example, straightforward collection processes with low administrative (operating) costs – and the likelihood the tax will affect businesses. The ability to implement such tax depends on the current tax burden. In low-income countries, it can be expected that the tax share will be at least 15% of the GDP. In countries such as Tanzania, where the tax ratio is less than 13%, increasing the fiscal space is possible, yet where ratio already exceeds this rate, as in Zambia and Malawi, adding a new tax might be difficult [
9]. Political will and consensus among the government and lawmakers is important in implementing special levy schemes. Finally, reliance on social security may limit the acceptability to the public of yet another employment tax to cover the costs of HIV services. Reliance on social security is common in most countries in Latin America.
Zimbabwe introduced an AIDS levy in 1998, and it became operational in January 2000, when a 3% earmarked (or special purpose) tax was imposed on employers and workers. Funds collected from this tax are channeled to the National AIDS Trust Fund. In 2011, the government collected US$26 million through the trust fund – a figure that is expected to rise to US$30 million in 2012 [
21]. This funding source is substantial, yet still insufficient – the average annual funding requested from the Global Fund by Zimbabwe for 2014–2016 was US$195 million, more than six times the expected revenue from this tax in 2012. Nevertheless, this method has worked in this low-income country, where other innovative financing mechanisms described in this paper are harder to implement. As a tax on employment, this special earmarked tax for HIV increases the cost of labor and may inhibit formal employment. However, the obvious benefit of this tax is that it has collected a substantial amount of revenue that, if managed well, is put to good social use.
Concessionary loans
Loans for health and HIV programs with favorable terms, such as low interest rates and deferred payment schedules, are available for eligible countries from sources such as the International Monetary Fund, World Bank, and regional development banks, and other financing institutions. While a loan is required to be repaid, unlike a grant, its selection and implementation mechanism focuses on the efficient use of the funds, inclusive of project finance supervision. A number of low- and middle-income countries use World Bank loans and grants to support their health sector programs. Many of them also used World Bank funds for implementing HIV projects in the last decade. In the African region alone, between 2001 and 2011, the World Bank provided US$2 billion to an estimated 50 countries and regional entities for HIV projects. Angola, Botswana, Ethiopia, Kenya, Malawi, Nigeria, Swaziland, and Tanzania are but a few that did so [
22]. The World Bank has greatly scaled back such funding in recent years as both the Global Fund and PEPFAR started offering large-scale grants [
23,
24], though there are still HIV programs being financed through it: in June 2013, India’s HIV national response received US$255 million in a loan with no interest, and ability to repay over a period of 25 years [
25]. This represents 7.8% of the 5-year HIV budget [
26].
In addition to loans from development banks, governments can pursue ODA loans, which have a grant element of at least 25% because of their low-interest and/or long-term payment schedules. These bilateral agreements between governments focus on program-level country ownership, while limiting the burden of the donor country. Japan and France are two countries that frequently give loans in a larger proportion than grants, providing US$7.5 billion and US$1.4 billion, respectively, in loans for a wide range of development projects in 2010 [
27]. However, because of the availability of donor funding, concessionary loans for HIV are limited to date. This might change if demand from countries for such loans increases.
Low-interest loans issued by international development agencies typically have conditions that the host country does not like or cannot fulfill. Thus, securing such loans might involve a lengthy negotiation process between the recipient country and the lender. Repaying the loan may become difficult if the local currency depreciates against the currency in which the loan needs to be repaid, and/or if government tax revenue declines. Loans will be hard to repay in most low-income countries, where costs of HIV programs are 0.5–4% of GDP, substantial given that public health expenditures among African low-income countries averages only about 2.5% of GDP, and domestic government revenues are frequently below 15% of GDP [
28]. But if the HIV project financed by the loan is well conceived and managed, it should yield returns in the form of higher social benefits (e.g., reduced incidence of HIV, reduced mortality and morbidity, lower work absenteeism, higher productivity); these may also translate into higher economic output and tax revenue in the longer term. Thus, the focus should be on the appropriate design and implementation of the activities to be financed through the loan.
Debt conversion
Debt conversion for social investments began in 1996 with the launch of the Heavily Indebted Poor Countries (HIPC) Initiative that linked debt relief and poverty reduction. A prominent example targeting HIV, tuberculosis, and malaria programs is the Global Fund’s Debt2Health program, announced in 2007, which channels resources of developing countries with high debt and disease burdens away from debt repayments and toward investments in health [
29].
Under Debt2Health, the Global Fund works with its partners to identify debt conversion opportunities, and then negotiates a three-party agreement between the bilateral or multilateral creditor, the debtor, and the Global Fund. According to the agreement, creditors forgo a portion of their claims on the condition that the beneficiary country (the debtor) invests an agreed counterpart amount in its national HIV, tuberculosis, and/or malaria programs, through an approved Global Fund grant. The funding provided through Debt2Health is disbursed by the Global Fund to the beneficiary country through the fund’s normal performance-based grant mechanism.
As of May 2013, four Debt2Health agreements plus one framework agreement have been signed. Germany and Australia are the creditor countries and Indonesia, Pakistan, and Côte d’Ivoire are the contracting beneficiaries. A total of €163.6 million has been committed to these Debt2Health agreements, with half of this amount – €81.8 million – paid to the Global Fund for investment in the beneficiary countries through the standard Global Fund processes and systems, and the other half unconditionally written off by the creditor countries.
Australia used the mechanism to execute a debt swap in Indonesia in 2010, canceling US$75 million of debt, with Indonesia investing US$35.5 million into health programs in the country. While a substantial amount, it provides only 15% of the average annual funding needed for the national HIV response of US$241 million from 2013 to 2015 [
30,
31]. An agreement between Germany and Pakistan was signed in 2008, in which Germany cancelled €40 million and Pakistan began to invest €20 million in Global Fund-approved programs in the country. This amount translates into 45% of the annual cost of the HIV program in Pakistan between 2013 and 2015 (thought the Debt2Health funding could be used for fighting malaria and/or tuberculosis, the latter being a larger health issue in Pakistan compared to HIV and malaria). This is because, with an HIV prevalence of less than 0.1%, the cost of the HIV response in Pakistan is much lower than in many countries with generalized HIV epidemics [
31,
32].
In addition to debt reduction and channeling public investment into social sectors, Debt2Health results in foreign exchange savings because the investments are in the local currency. Challenges include transaction costs because debt conversions can be complex to negotiate, execute, and monitor. Also, the amount to be paid to the Global Fund by the debtor country is usually due sooner than the original debt repayment, and the local Treasury may not have funds available to pay the Global Fund. Finally, the increased government spending could be inflationary [
33]. Those challenges can be mitigated with solid planning and implementation of the debt conversion.
Risk-pooling schemes and special social assistance programs
Health insurance is an organizational arrangement devised to offer financial protection to a large group of individuals (known as the
risk pool) from the costs associated with preventing and treating ill health. Health insurance is based on the principle that the financial risk of a few individuals is spread among a large pool of mostly healthy individuals. If all contribute a periodic insurance premium, the insurer can collect and manage the premium revenue to finance the treatment costs of the few who become sick. In the absence of health insurance, people needing medical services, especially those struck by catastrophic conditions such as cancer, HIV, obstetrical emergency, or severe accidents would find it difficult or impossible to obtain the resources necessary to cover the cost of treatment [
34]. In a recent study in Kenya, it was shown that among adult patients hospitalized in a public referral hospital, insurance coverage was associated with decreased in-hospital mortality [
35].
Among private voluntary health insurance plans, several corporations fund HIV services for their employees and dependents and some of the private health insurance companies have begun to offer coverage for HIV services [
36,
37]. However, given the high cost of HIV services, in particular of ART, which is taken for life, many of the public and private health insurance programs still do not cover HIV services altogether or are ambiguous regarding the coverage of these services. For example, Kenya’s National Hospital Insurance Fund does not cover outpatient services, including ART or outpatient treatment of opportunistic infection. Hospitals and other providers in Kenya must recover these costs from patients, government, and donors [
38]. The limited use of health insurance for HIV-related services is shown in a recent review of health insurance plans in five African countries – Kenya, Malawi, Namibia, Tanzania, and Zambia – where private insurance covered less than 6.1% of the national HIV expenditure [
39].
Several efforts in Africa to include HIV services in health insurance plans were supported by donor funding. There are two interesting experiences, which differ in terms of national income level and structure of the services. In Rwanda, a low-income country, the Global Fund provided support to enhance financial access to AIDS, tuberculosis, and malaria health-related services by subsidizing health insurance for the very poor. The strong leadership of the Ministry of Health enabled this Global Fund-funded project to dramatically improve the financial access of its target group, reaching approximately one Rwandan in six. Improved financial access went hand-in-hand with increasing health service utilization and improvements in the population’s health status, including better control of the three diseases [
40].
A different experience occurred in Namibia, a lower middle-income country in sub-Saharan Africa. Namibia received an influx of donor funding between 2004 and 2007 to support publicly provided HIV care and treatment. This raised concerns that private funding would be “crowded out,” thereby leading to a reduction in the overall resources used to treat patients. In 2006, the Namibian medical aid industry, with donor support, created a special fund to subsidize private health insurance, including HIV services. The program allowed both low- and higher-income people to be covered. Crowding out valuable private resources was avoided and the quality of HIV services improved [
41].
Social health insurance (SHI) schemes are based on mandatory enrollment, which maximizes risk pooling and guards against adverse selection. Several of those programs provide full coverage for HIV and operate successfully in upper middle-income and high-income countries. In countries with low HIV prevalence, a large enough portion of the population has formal employment and can therefore contribute payroll-based premiums. Argentina, Chile, Colombia, El Salvador, Mexico, Paraguay, Peru, and Uruguay have such systems. Based on UNGASS data from 2010, 2012, and 2013, those schemes provide 60% of the HIV funding Chile (high-income), and 69% in Colombia (upper middle-income), but the proportion is substantially lower in El Salvador and Paraguay (both lower middle-income), Peru (upper middle-income), and Uruguay (high-income), where those schemes cover 8% to 11% of the national HIV funding.
Chile’s AUGE health reform, enacted in 2005, mandates public and private health insurers to cover treatment for 69 priority health problems, including HIV. Even when the HIV prevalence is low and a large number of people are enrolled in the scheme, additional funding beyond the premiums might be required, as is the case in Brazil’s Sistema Unico de Saûde, which fully covers HIV prevention and treatment, and is financed by a combination of payroll and general tax revenues.
Another type of risk-pooling scheme is special social assistance programs to benefit people living with a particular illness, including HIV. For instance, in Jamaica, the government operates two individual drug benefit programs under the National Health Fund (NHF) that cover citizens for a number of chronic illnesses and conditions including arthritis, diabetes, hypertension, vascular disease, and high cholesterol. Members enrolled in these programs are eligible to receive 300 subsidized drugs from private and public pharmacies, which, in turn, are reimbursed by the NHF. Members are not required to pay a premium, but they do need to make the appropriate copayments. NHF is financed from partial allocations from the special consumption tax revenues. Lately, the NHF drug benefit programs are being used as a mechanism through which people living with HIV can access free antiretroviral drugs [
42].
If well designed and implemented, health insurance can prevent catastrophic health expenditures and, consequently, impoverishment. Health insurance can encourage prevention, early diagnosis, and treatment by removing the financial barriers to access these services. As shown above, in several middle- or upper middle-income countries, health insurance schemes are able to cover HIV services, at least partially. In many low- and middle-income countries, however, public and private health insurance is underdeveloped. There are two major reasons for this. First, in many of those countries a large share of the labor force is informal, which makes mandatory enrollment and premium collection difficult. Second, many public institutions are weak and they may be unable to regulate health insurance to avoid the typical problems of insurance such as adverse selection, beneficiary exclusion by the insurer, cost escalation, misinformation, and deficient quality of care.