Policy makers have a central concern that the money spent on health care and other public services may not be being used to best effect, and they are seeking assurance that the methods they use to pay for such services are not wasting citizens’ money. To that end, public funders are seeking to more systematic and transparent approaches towards allocating public funds, in the form of mathematical funding formulae. Examples in health care include the development of increasingly elaborate payment mechanisms, in the form of capitation and case payments. In the broader public sector they include increased use of pupil case payment methods in schooling and specification of vouchers for users of services in fields as diverse as personal social services and schooling.
This book offers a comprehensive introduction to the theory and practice underlying the use of formulae as a basis for funding public services. The use of such formulae has become widespread in recent years across most developed countries. For example, in the UK a conservative estimate is that £150 billion of public service expenditure is distributed annually using formulae, in services such as health care, local government, social security and higher education. The philosophy, design and economic consequences of funding formulae have therefore become key policy issues worldwide. This text draws on the author’s wide experience of designing formulae and advising governments on their implementation, and brings together the economic, statistical and political issues underlying formula funding, with a particular emphasis on health care.
The book starts with a general discussion of systems of public finance, and the role of formula funding within those systems. It then introduces a general economic model with which to analyse the formula funding problem. A series of case studies from health care is presented to show how the theory can be turned into practice. There is also special treatment of the problem of budgetary risk in formula funding, and of integrating incentives for service quality into the funding mechanism. The book concludes with a discussion of the general political economy within which formula funding is implemented. Throughout, the author gives many examples of operational funding mechanisms, and he draws out priorities for future work – most notably the need to integrate the funding of public services with performance criteria.