5. Medium-term budgeting for health: Looking beyond the annual focus of the budget

Caroline Penn
Chris James
Camila Vammalle

Traditionally, the annual budget process for health begins with the previous year’s budget as a starting point, adding incremental amounts for the new budget period. This is known as incremental budgeting. While offering a pragmatic approach to public budgeting, with incremental budgeting, budget allocations become rooted to existing policies, and risk not reflecting changing health needs.

The introduction of medium-term budgeting for health involves taking a strategic forward-looking approach and addressing the short-sightedness of annual budget. This means defining priorities and allocating resources for health beyond the annual budget year, so that spending decisions are driven by emerging health needs. The specific budgetary instrument used for multi-annual planning is generally referred to as a Medium-Term Expenditure Framework (MTEF).

Successful medium-term planning offers substantial benefits for the health sector. A multi-year perspective to allocating resources gives predictability in the resource envelope for health agencies, in turn providing incentives for effective forward planning and the confidence to change the direction of policy to improve efficiency. In addition, planning over the medium-term term improves the budget formulation process, allowing ministries of health opportunities to allocate and reprioritise funds to better meet medium-term priorities.

Analysis in this chapter draws on results of the OECD survey ‘Macro-level management of health expenditure, with a special focus on multi-annual financial planning for health’, conducted by the OECD Joint Network of Senior Budget and Health Officials during 2021. Twenty-four countries responded to the survey, comprising 11 countries where the majority of health spending is through government schemes at the central or subnational level (Australia, Finland, Greece, Iceland, Italy, Latvia, Mexico, New Zealand, Norway, Sweden and the United Kingdom), and 13 countries where compulsory health insurance scheme(s) make up the majority of health spending (Austria, Belgium, Colombia, Costa Rica, Chile, Czechia, Estonia, France, Israel, Japan, Korea, Luxembourg and the Netherlands.

This analysis in the chapter identifies two broad preconditions for successful implementation of a medium-term budget framework for health based on experiences among OECD member countries. These findings contribute to the OECD Applying Good Budgeting Practices to Health (2023).

First, effective medium-term budgeting for the health sector depends on reliable medium-term estimates of the baseline expenditure for health:

  • Medium-term health expenditure baselines should be revised at least on an annual basis to incorporate the latest available data on actual health expenditures, and the budgetary impact of recent health policies and cover the next 3-5-year period.

  • Medium-term estimates require an understanding of the core cost drivers of health expenditure, and their impact on baselines.

  • Assumptions and methodologies used to forecast health should be transparent and stable. These assumptions (such as for GDP growth, wage growth, and demographic factors) should be consistent with those used in other areas of central government and line ministries.

  • Medium-term baseline estimates should include most health expenditure funded through public budgets for health (including health insurance, and by sub-national governments – depending on a country’s institutional arrangements).

  • Responsibility for making medium-term estimates of health expenditure baselines should be clearly established, to avoid competing models across ministries of health and finance.

Secondly, effective medium-term planning for health relies on well-formulated resource allocations to the health sector over a multi-year period:

  • Allocations should be set for a reasonable number of out-years (3-5 years).

  • Medium-term allocations should be set at a credible level that prevents the need for annual adjustments.

  • Allocations beyond the budget year could be provided at a higher level of aggregation than the annual budget, to allow flexibility in allocating funds to the top priorities.

Estimating health expenditure beyond the current year can be decomposed in two elements: first, estimating the cost of existing policies (projecting baselines), and second, taking into account new policies.

Even without implementing new policies, the cost of delivering the same goods and services changes from one year to the next (for example due to evolutions of staff in salary grid, or changes in the demand for services). This is captured in the estimations of health budget baselines (i.e. future health expenditure under the assumption of unchanged policy).

Moving towards a forward-looking perspective for the health system thus requires:

  • Estimating health budget baselines beyond year tThis provides visibility on emerging spending requirements for the health sector and the underlying cost drivers.

  • Developing a medium-term plan for health, identifying medium-term objectives for the health sector, required policies to achieve these, and costing these policies. New policies can include providing a new type of health service (e.g. adding telehealth services to the list of reimbursements) or a significant change to existing policies (e.g. expanding publicly funded dental services to adults over 65).

Most OECD countries estimate the health budget for the following three to five years. Except for Mexico and New Zealand, all surveyed OECD countries make official medium-term estimates of health spending (Figure 5.1). These are done by public bodies, or by independent bodies on request of government. Prior to 2022, New Zealand had no formal mechanism for projecting the health budget beyond the annual year. However, the intention in New Zealand is to move towards a three-year funding arrangement from 2024, subject to adequate system settings to support improved planning and financial control being in place.

Medium-term public health spending estimates always include spending by government schemes or compulsory health insurance. A third of countries also disaggregate health expenditure by type of service. Health expenditure by age group, and private health expenditure are rarely included in estimations. Future health expenditure estimates are revised on an annual basis to coincide with the budget cycle.

Governments in OECD countries consider a range of factors when estimating health spending for future years. These include cost drivers, public finance and macroeconomic factors, and health policy indicators.

Cost drivers – cost changes due to movements in prices and or quantities – have a strong influence on official estimates of medium-term health expenditures across OECD countries (Figure 5.2).

  • Demographic indicators have the greatest influence on estimates of the future health budget. For example, medium-term projections of social health insurance spending in the Netherlands consider the size and composition of the population (Box 5.2).

  • Salaries of health professionals, which represent the large share of health expenditure, also have considerable influence on estimates of the future health budget.

  • Drug and pharmaceuticals costs – that are susceptible to frequent price changes and are often uncertain due to expensive new entrants – also influence estimates, but to a lesser extent.

  • Other costs also influence health expenditure. For example, recent increases in energy prices affected the cost of providing healthcare.

  • During the pandemic, several countries introduced indicators specific to COVID-19 to estimate the budget for future years. Uncertainty around the evolution of pandemic created challenges in forecasting future expenditure needs. In many OECD countries, expenditure related to COVID-19 measures were often contained within dedicated budget programmes, codes, or funds, separate from the general budget for health (OECD, 2021[1]).

Public finance and macroeconomic factors: beyond key cost drivers, estimates of future health spending incorporate the broader criteria used when setting the budget for health.

  • OECD countries usually include the growth rate of health spending in recent years, and a desired future rate of health spending balanced against the government’s policy objectives for the health sector.

  • Estimating the health budget also calls for assumptions on the state of public finance and the macroeconomic outlook. This includes parameters such GDP growth and the government’s fiscal position, indicating how much public health expenditures can feasibly grow in practice, given the overall macro-fiscal outlook. These parameters are often estimated by the ministry of finance and communicated across all line ministries to ensure consistency in the underpinnings of the baseline. Indicators annual health spending in recent years are important to estimate spending over the medium-term, along with financial sustainability considerations, and the overall fiscal position, while less frequently used is the share of health spending in total government spending.

  • Efficiency dividends. Some countries apply a charge to the baseline when setting the target for health expenditure future spending to provide incentives to increase public sector productivity. This is referred to as an efficiency dividend (Box 5.1).

Health policy indicators, such as policies to extend coverage and improve accessibility, or initiatives to improve quality of care, are also considered by governments when producing medium-term health expenditure estimates.

The ministry of health has strong ownership over forward estimates of the health budget. Ministries of Health have full insight to identify the cost drivers of budget items or programmes. At the same time, Finance ministries have strong buy-in to ensure consistency and accuracy in the preparation of estimates across different areas of government. Ministries of finance may also provide a common set of parameters such as macroeconomic forecasts and population projections.

Across OECD countries, the institutions responsible for preparing medium-term estimates of health expenditure depend in part on the health financing arrangements of a country (Figure 5.3). Among countries where health financing is organised predominantly around government schemes, the ministry of health or the national health service is responsible for preparing medium-term health expenditure estimates in just over half (55%) of the countries.

In contrast, among countries organised predominantly around compulsory health insurance, the ministry of health is less likely to have such responsibility (in 23%, or 3 of 12 countries). Rather, agencies implementing the compulsory health insurance scheme (e.g. social health insurance agency) are more likely to have this responsibility (in 62%, or 8 of 13 countries).

In both types of health financing arrangements, the ministry of finance is responsible for medium-term health expenditure estimates in just under half of the surveyed countries. Other institutions responsible for estimates include national government agencies in charge of government planning, those carrying out national economic analyses, and those producing national statistics. For example, this includes the Bureau for Economic Policy Analysis (CPB) in the Netherlands, and the National Statistics Office in Italy. Finally, in just under half of surveyed countries, the responsibility for producing medium-term estimates is shared across multiple institutions.

A forward-looking perspective for health should incorporate longer-term projections of health budget (i.e. over 10 years) (see Chapter 2 on long-term projections). Given the current share of health spending within public budgets and rising cost pressures, longer-term projections of health expenditure provide a picture on the sustainability of healthcare costs in the absence of reform. This provides valuable support to policy makers to modify the long-term trajectory of health spending growth.

The choice of forecasting model changes with the time horizon of projections. Longer-term projections of health expenditure often require a different type of projection model than medium term projections, as they need to acknowledge the many uncertainties and assumptions such as the impact of changes in government policy. Box 5.3 outlines common forecasting models for health spending.

Most surveyed countries project health expenditure over the longer term (Figure 5.4). In nearly all these countries, longer-term projections for health expenditure use a different methodology than medium-term projections. For example, Australia uses a component-based model for medium-term projections, and a macro-level model for long-term projections (Box 5.4).

The results of medium-term budgeting for health should feed into the annual budget process. As a starting point, health spending projections can be integrated into government budget documents. This informs Parliament and other stakeholders of the emerging spending requirements for the health sector. Only half of surveyed OECD countries include such estimates of the health budget for future years within government budget documents (Figure 5.5). For countries with a compulsory health insurance scheme – such as France and Belgium – projections are integrated into separate budget documents for social health insurance institutions.

Medium-term spending projections for the health sector are translated into multiyear budget allocations through the annual budget process. Medium-term expenditure frameworks (see following section) are the main instrument for setting medium-term budget allocations to the health sector.1 Future budgets may be set as an approved hard expenditure target with the only adjustments allowed for exceptional circumstances. A less developed approach may include soft or indicative budget ceilings. While these provide valuable information on expected future budgetary decisions, the credibility of such financial planning is lower, and serves more as an outlook rather than a framework.

Medium-term expenditure allocations to health can be defined in either nominal or real terms. Forward allocations expressed in nominal terms are simpler to interpret and monitor and ensures tight financial discipline. However, price and wage shocks are not absorbed within nominal frameworks, which can come at the disadvantage of the health sector if real budgets shrink to accommodate inflationary pressures. On the other hand, expenditure allocations set in real terms are adaptable to changes in wages and prices but are less transparent in nature and deliver less predictably as projections are routinely updated (Van Eden, Gentry and Gupta, 2017[2]).

Medium-term budgeting for health provides binding future budget allocations in just under half of surveyed OECD countries (Figure 5.6). In four surveyed countries (Finland, Iceland, Italy and Latvia), medium-term budgeting for health is used as the basis for binding budget allocations. Further, binding spending ceilings for health beyond the current fiscal year are set in Greece, Israel and the Netherlands; with guaranteed minimum spending floors set in Chile, Costa Rica and England (United Kingdom).

For the remaining countries, medium-term budgeting for health is limited to being used only for informational purposes in just over half (11 of 20) of those surveyed countries that produce medium-term expenditure estimates (Figure 5.6). Here, medium-term expenditure projections are intended to highlight the future costs of current policies and signal the direction of future financing, but do not bind future decisions on policies. For example, France, sets the target for health expenditure (objectif national de dépenses d’assurance maladie) for three years, but these are not enshrined in budget law, and cannot constrain either the government or parliament in the annual procedure for preparing and adopting the budget.

Multi-year binding budget allocations generally cover most publicly funded health services. Table 5.1 provides information on the medium-term budget allocations for health in place across selected OECD countries. In Italy and England (United Kingdom), expenditure ceilings are set for the National Health System budget; in Greece, Latvia and Finland, expenditure ceilings are set at the ministry level, for the ministry responsible for health.

Time horizon of medium-term budget allocations varies across OECD countries, ranging from three to five years. Budget allocations are set for a three-year horizon in Italy and Latvia. In Italy, the Pact for Health is produced typically every three years, determining a set level of funding and related objectives for the National Health Service for the duration of the Pact. Budget allocations are set on a longer time horizon in Finland and England (United Kingdom). In Finland, binding ceilings for expenditure are set for the whole parliamentary term of four years, with the annual budget updated to reflect changes in the level of prices and costs. In 2018, England (United Kingdom) established a five-year funding deal for the National Health Service for the period 2019-2024. However, it is still to be decided if such a five-year funding deal will be repeated after 2024.

In general, medium-term budgeting for health is not an isolated activity. Medium-term allocations to the health sector often form part of governments’ broader medium-term budgeting through instruments such as medium-term expenditure frameworks (MTEF) (Box 5.5). These feed into the budget formulation process.

Across the OECD, over three-quarters of surveyed OECD countries integrate health expenditures within their central government’s medium-term expenditure framework (MTEF) (Figure 5.8). This includes both countries heath systems funded through government schemes and compulsory health insurance schemes. For example, the MTEF in Latvia includes the budget of the Ministry of Health – the main source of finance for the national health system – among other sector such as education, defence, and welfare (Box 5.6).

Successful medium-term planning for health can offer substantial benefits for the health sector. Preparing an annual budget by taking the previous year’s budget and adding incremental amounts for the new budget period discourages policy debate and creates rigidities in the budget. A forward-looking approach to setting priorities and budgeting means spending decisions are determined in light of emerging needs, as medium-term budgeting implies that the ministry of health or equivalent has developed a medium-term plan based on an assessment of priorities. (Figure 5.10). For example, the NHS Long Term plan in the United Kingdom defines the future direction for the health sector given the multi-annual funding settlement for the National Health Service (Box 5.7).

Extending the time horizon of policy analysis means saving measures are more easily identifiable. Extending the budget horizon provides an opportunity for health agencies to examine the composition of baseline spending and the allocation of resources across different programmes or services. This allows for greater opportunities to reallocate resources to better meet medium-term priorities.

Medium-term budgeting improves predictability and certainty for the health sector. Health budget managers feel annual budgets do not provide enough planning certainty. Moving towards a multi-year perspective signals the direction of health policy and gives more predictability in the resource envelope. This in turn provides incentives for effective forward planning and the confidence to change the direction of policy to improve efficiency.

Medium-term budgeting highlights the value of spending in the short term to avoid facing costs in the future. Planning over the medium term demonstrates that tackling long-standing issues now can produce cost-savings down the line. This raises important questions about health system capacity and provides a framework within which multi-annual policy proposals can be assessed. This can help to highlight and lock in the impact of various savings measures that accrue over time, such as upgrading or modernising capital infrastructure, or investing in the health workforce or prevention.

Medium-term budgeting can also show the future increases in health expenditure due to present policies. In particular, some investment projects (such as building a new hospital) have a long-term impact on operational expenditure.

However, finance ministries warn about the possible trade-off with flexibility. Committing to credible medium-term budget allocations gives health officials greater budgetary predictability. For finance ministries, committing reduces the flexibility to set allocations to the health sector as the fiscal environment changes, creating a sustainability risk. The challenge is to design the medium-term framework that allows health agencies to plan based on a reasonable assumption of availability of financial resources, while preserving the government’s flexibility to adjust to policy changes.

There is also a risk that the medium-term budget allocation is seen by ministries of health as a minimum spending floor for starting the budget negotiation in coming years, rather than a fixed ceiling constraining expenditure growth.

Implementing a medium-term budgeting framework for health is arguably more complex than for other expenditure areas. Medium-term budgeting inherently loses value as soon as it cannot be upheld. Strong baseline estimates capturing an inclusive list of all the cost-drivers of health expenditure are difficult to produce, due to inherent uncertainties of certain health expenditures. Multi-annual reforms also require broad support and participation from stakeholders. In the health sector, where there is often many stakeholders, pushing through reform can be challenging.

OECD countries have taken steps to build a medium-term perspective into the budget process for health, with most OECD countries estimating the public budget for health for future years to provide visibility on emerging spending requirements for the health sector and the underlying cost drivers. However, the link between this multi-annual budgeting and the annual budget process is often weak, with less than half of surveyed OECD countries using medium-term budget plans for health as the basis for future budget allocations. More commonly, medium-term budgeting for health is limited to being used only for informational purposes. That it, it is used to highlight the future costs of current policies and signal the direction of future financing but does not bind future decisions on spending levels or policies. This reduces the potential benefits of implementing a medium-term budget for health. Well-functioning medium-term budget frameworks for health should be based on reliable baseline forecasts and integrate flexibility instruments to ensure a balance between increasing certainty whilst maintaining flexibility.


[4] Astolfi, R., L. Lorenzoni and J. Oderkirk (2012), “A Comparative Analysis of Health Forecasting Methods”, OECD Health Working Papers, No. 59, OECD Publishing, Paris, https://doi.org/10.1787/5k912j389bf0-en.

[3] Bureau for Economic Policy Analysis (CPB) (2019), Middellangetermijnverkenning zorg 2022-2025, https://www.cpb.nl/sites/default/files/omnidownload/CPB-Middellangetermijnverkenning-zorg-2022-2025-nov2019.pdf.

[5] Commonwealth of Australia (2021), 2021 Intergenerational Report, https://treasury.gov.au/sites/default/files/2021-06/p2021_182464.pdf.

[6] OECD (2022), Medium term expenditure frameworks.

[1] OECD (2021), “Adaptive Health Financing: Budgetary and Health System Responses to Combat COVID-19”, OECD Journal on Budgeting, https://doi.org/10.1787/69b897fb-en.

[7] The Health Foundation (2020), Spending Review 2020: Managing uncertainty.

[2] Van Eden, H., D. Gentry and S. Gupta (2017), Chapter 4. A Medium-Term Expenditure Framework for More Effective Fiscal Policy, International Monetary Fund, https://doi.org/10.5089/9781513539942.071.


← 1. Note in most countries, while appropriations law only covers a single budget year, governments prepare an annual budget for each year covered by the MTEF.

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