A Stitch in Time Saves Nine: Financing Pandemic Preparedness through Domestic Resource Mobilization

This paper has been published in Global Health and Diplomacy (https://onlinedigeditions.com/publication/?i=298544)

A Stitch in Time Saves Nine: Financing Pandemic Preparedness through Domestic Resource Mobilization

Victor J. Dzau, Peter Sands, 

The West Africa Ebola outbreak starkly revealed the human and economic costs of being unprepared for potential pandemics.

Deficiencies in disease surveillance and reporting, and totally inadequate containment and response capabilities led directly to more deaths and more economic disruption. The unfolding story of Zika carries a potentially more threatening message. As we scramble to find ways to counter transmission and understand the virus’s impact of fetal brain development, it is difficult to avoid the thought that earlier recognition of the surge in microcephaly cases and the link to Zika infection would have been immensely valuable. When countering infectious disease outbreaks, days and weeks matter, and preparation is everything.

The international Commission on a Global Health Risk Framework for The Future recognized this truth in its report “The Neglected Dimension of Global Security: A Framework for countering Infectious Disease Threats”.(1) (2) The Commission, convened under the auspices of the US National Academy of Medicine, argued that the first line of defense against potential pandemics were effective national public health systems incorporating disease surveillance, laboratory networks and response capabilities. While better coordination and capabilities at a global and regional level are also necessary, these cannot replace local, on-the-ground expertise and infrastructure.

Yet many countries fail to devote sufficient resources to preparing for pandemics. Fewer than 40% of countries self-assess themselves to be fully compliant with the International Health Regulations (2005).(3) Objective, external assessment – which the Commission also recommended -  would see significantly fewer pass this test. In short, the world’s first line of defense is full of holes. And because infectious diseases pay no respect to national borders, this means we are all much less safe than we should be.

The Commission recommended incremental spending of around US$3.4 billion per year to rectify the most glaring gaps in national public health capabilities in low and middle income countries. This figure is derived primarily from World Bank analysis by of the costs of achieving IHR compliance in such countries.(4) While there is undoubtedly a case for spending more, a step-up in investment of this magnitude would make a significant difference in reducing the human and economic costs of infectious disease crises.

Who should pay for this expenditure? The Commission argued that domestic financial resources should be the primary source wherever possible. National governments should consider protection from infectious disease threats, by strengthening public health, part of their basic duty to protect their citizens, the country’s economy and security. Financing public health is not a one-off investment, but an ongoing spend in people, systems and processes.  It needs both sustainable financing and political ownership. Reliance on external funding delivers neither. External development assistance can help in upgrading skills, systems and infrastructure, but this investment will be wasted without a credible domestic commitment to continued funding.

The Commission recommended that high-income and upper middle-income countries should finance improvement in public health capabilities through domestic resources. Although lower middle-income and low-income countries might need assistance from development partners, they should seek to devise a path towards sustainable domestic financing. This approach will enable multilateral and bilateral development partners to direct their constrained resources to the countries that most need help, such as the very poorest countries, fragile and failed states and war zones. It will also ensure that national governments focus on long-term capability building and sustainability from the start.

How should countries mobilize the necessary domestic resources? To rule out the easiest route, increased government borrowing is unlikely to be sensible, not least because funding public health is an ongoing obligation. What’s needed is committed, sustainable financing.

There are basically four options worth considering.

First, there is a powerful case for redirecting a portion of existing public expenditure from lower priorities. Most governments spend relatively little on protecting their citizens and economies from infectious disease risks relative to what they spend countering other risks to human and economic security. Yet the expected economic and human costs from infectious diseases may dramatically exceed those from other sources, such as terrorism, war, natural disasters or financial crises. For example, in 2014, low and middle income countries spent over US$470 billion on military expenditure.(5)  Diverting a tiny fraction of these funds to improving defenses against infectious disease would almost certainly lead to a net increase in human security.

In many less developed countries the demands on the public purse far exceed its capacity. This is partly due to limited national wealth, but is more often than not exacerbated by ineffective fiscal mobilization. Governments are starved of funds as a result of very narrow tax bases, ineffective collection and pervasive tax evasion and avoidance. For example, tax revenue as a percentage of GDP in low-income countries averages 13% compared to an average of nearly 35% in the OECD.(6) More effective tax collection in such countries should be part of the effort to increase investment in pandemic preparedness. Here, development partners can play a significant role in providing technical assistance and helping upgrade systems and skills. Thus far, less than 0.1% of development assistance has been devoted to domestic resource mobilization, despite largely positive results.(6)

A third potential source of funds is to introduce new taxes designed specifically to fund public health. These could be formally hypothecated so that the funds raised go directly and exclusively to financing public health or notionally hypothecated in that the taxes are justified by the need to put incremental finance into public health, but in fact the funds raised form part of general resources. Formal hypothecation has the advantage of ensuring the funds will not be diverted for other purposes, but has the disadvantage of reducing the fungibility of government financial resources. For this reason, finance ministries tend to resist formal hypothecation. Notional hypothecation can achieve the same objective with less rigidity.

What kinds of new taxes could be introduced to fund pandemic preparedness? The most obvious things to tax are activities that either increase the likelihood of potential pandemics or that are most likely to be affected negatively by such outbreaks. In other words, tax activities that contribute to infectious disease risks, or benefit when these risks are reduced.

Activities that increase the probability of infectious disease crises create negative externalities for society which economic theory would suggest can and should be offset by specific taxes to ensure better recognition of the full costs and to influence behavior. This is equivalent to imposing incremental taxes on companies that pollute or financial institutions that increase the risk of financial crises.  Given that many infectious disease threats are zoonotic in origin and can emerge from the production and transportation of meat and poultry, it has been suggested that this logic could be used to justify levying a tax on these industries.(7) (8) Proponents of taxes on intensive production of meat and poultry also point to the industry’s negative externalities around anti-microbial resistance and indeed the environment.

From an infectious disease perspective, the point of such a tax would be to ensure the full costs of meat and poultry production, including associated infectious disease risks are recognized and ultimately reflected in consumer prices. However, such a tax would need to be carefully designed, given the significant risk of unintended consequences. For example, a tax on the organized meat and poultry industry that had the effect of diverting production into the informal sector would probably have a negative impact on public health, since the informal sector’s compliance with animal health and food hygiene regulations would almost certainly be lower. The challenge would be to devise a tax that yields revenue while incentivizing better animal husbandry and hygiene.

A second route is to design specific taxes for activities that are most vulnerable to disease outbreaks and would thus benefit most from improved protection. The meat and poultry industries are also relevant from this perspective, since disease outbreaks can lead to export bans and culls. Yet perhaps the most obvious example is the travel and tourism industry. Fear of infectious disease can devastate tourism, as airlines, hoteliers and tour operators in the Caribbean are currently discovering to their cost with Zika. So in theory the travel and tourism industries should be receptive (or at least less resistant) to bearing taxes to help prevent such outbreaks. This would appear to be a good option for some countries, but not all. Some countries with significant public health deficiencies have very limited tourism industry (e.g., South Sudan, Liberia). In some other low-income countries, travel and tourism are already bearing significant incremental taxes for to fund other development objectives and thus may have limited incremental absorption capacity.

Another industry that benefits particularly from improvements in pandemic preparedness is life insurance. Regulators require life insurers to hold capital for extreme mortality events, such a natural disasters or pandemics. If better public health capabilities reduced the risk of extreme mortality outcomes, then in theory life insurers would need to hold less capital. So it might be possible to introduce a tax on life insurance premiums to fund better pandemic preparedness, and then to use this as justification for modifying the regulatory capital requirements for extreme mortality events. This is worth exploring in some countries, but in others, life insurance is not well-developed enough to bear this burden.

These three options all focus on the public purse: redirecting existing spend, increasing domestic fiscal resources through improved tax collection, devising new taxes specifically for this purpose. The fourth option is to attract finance from the private sector with the argument that every business suffers from the economic impact of an infectious disease crisis and thus should have an incentive to invest in better preparedness.

The challenge here is that pandemic preparedness is a public good. While it should be possible to persuade the private sector to invest more in their own preparedness, it is likely to be impossible to get them to invest significantly as individual entities in the country’s overall pandemic preparedness. While there are business opportunities in building stronger defenses against infectious disease crises, including disease surveillance systems, diagnostics, protective equipment, laboratories and vaccines, the ultimate payer is likely to be the government. Companies might contribute modestly as corporate philanthropy, but not as a core part of their business strategy, since their competitors could free-ride, gaining the benefits without incurring the costs. Corporate philanthropy might undoubtedly be helpful in upgrading public health systems and skills, but is not an optimal source of ongoing finance given its discretionary nature and vulnerability to commercial fortunes and shareholder sentiments. In fact, given that pandemic preparedness is a public good, general taxation is arguably a better route for tapping private sector sources than seeking direct contributions, which takes us back to the importance of design of the tax code and efficiency of tax collection.

Stronger national public health systems and capabilities are vital to building a more effective global framework to counter the threat of infectious disease crises. They represent the first line of defense. Yet there is no “silver bullet” for mobilizing domestic resources to improve pandemic preparedness. The starting point must be to give greater priority to this issue and thus allocate it a greater share of existing fiscal resources. In most developing countries it is also important to reinforce the effectiveness of tax design and collection to improve the overall fiscal position. New taxes to support public health can also be considered, particularly where these can be used to incentivize risk reducing behavior, but these need very careful consideration and design to avoid unintended consequences.

Acknowledgments:

The authors would like to thank Anas El Turabi and Phil Saynisch of the Harvard T.H Chan School of Public Health for their contributions to this paper, and Richard Zeckhauser and Larry Summers for their helpful input.

References:

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