The Complexity of Public Health Finance

Financing is complex, involving many laws, market driving forces, available resources, and tradeoffs for policy makers—a short-term investment may have long-term impacts. There are many options to finance public services, each with their strengths and weaknesses. 

Securing adequate and sustainable financing for public health services has been a recurring topic in the media lately. Still, it has been a persistent, prevailing theme within the practice community for what seems like forever. It is an important topic because the strings involved and intentions behind different funding sources may have a massive impact on the services delivered.

But what is “public health finance,” and what does it mean to finance public health services?

Key Approaches to Financing Public Health

Financing is complex, involving many laws, market driving forces, available resources, and tradeoffs for policy makers—a short-term investment may have long-term impacts. There are many options to finance public services, each with their strengths and weaknesses. Most financing comes at a cost (eg, debt interest) and generally includes repayment rules to the financier or lender.¹

I divide my thinking into what may be considered traditional public financing, traditional private financing, and public-private partnerships, and then highlight select innovations that have benefitted other sectors.

Traditional Public Financing

Public financing balances political measures of success and leverages public debt, public equity, and direct government support.² Much of this is funded as “pay-as-you-go” taxes (eg, mill levies, public health levies) or through tax-exempt debt (eg, municipal bonds), depending upon what could be borrowed.² The federal government provides substantial funding to state and local governments through a mixture of grants and cooperative agreements. Local or state infrastructure projects are often financed through the jurisdiction’s general fund, but sometimes through proceeds from public bonds or funds from specific sources to be used in limited circumstances (“special funds”). In all, members of the public each contribute to financing the public services.

The average state public health department receives approximately half of its funding from federal sources (eg, grants, cooperative agreements), one-quarter from state general funds, and the remainder from other sources (eg, fees, fines).³ States typically apply for federal cooperative agreements and block grants to ‘categorically’ fund public health services such as public health emergency preparedness and maternal and child health services; much of these dollars are then shared with local health departments. In contrast to states, most local public health departments receive approximately one-quarter of their funding through local general funds, one-fifth through state contributions (eg, state formula funding), one-fifth through federal pass-through (eg, categorical funding), and the remainder from other sources (eg, Medicaid and Medicare reimbursements, fees). The funding provided by the state is accessed through local applications to the state (ie, “aid-to-local” processes). It includes state funds allocated by formula, typically distributed by population size, and categorical funding passed through the state to locals.

Though common for local and state financing of public health services, significant limitations are present in using public subsidies or public borrowing, which are both politically treacherous to cost-conscious constituents.² Debt limits, tax and expenditure limits, bond ratings, and access to bond markets are additional limiting factors. Other legal or fiscal limitations, such as local property tax lids, constrain the ability to finance services publicly.

Traditional Private Financing

Private financing relies upon commercial debt and private equity, which allows much more rapid access to funding than public processes. The private sector receives investments to achieve growth- and efficiency-oriented metrics to maximize shareholder value.² Private financing is attractive due to government subsidization, tax benefits, capital investments, and access to professional expertise not widely available within the public sector. Either private investors finance the venture or financing occurs through revenue generating services, paid for by clients. When a public body does not govern a collective service, the service may be left to the private sector.

When a public body governs a collective service, that body may enter into a public-private partnership with a private company to deliver services (eg, service-related or quasi-nongovernmental arrangements). Financial risk and control of assets shift from public to private companies in these arrangements, and the public agency loses flexibility in managing assets.¹ In these instances, the initiative may be made more attractive to outside financiers by the government subsidizing the service or by raising service prices to increase revenues.¹

The transportation sector provides exemplars for financing public infrastructure through the private sector. For example, the private financing arrangements for Chicago’s Skyway and Indiana’s Toll Road have shown how those governments shifted financial risk to private providers.² In each example, roadway construction was bid to private financiers who developed long-term lease agreements to construct and then maintain the traffic ways and assets for a period of time. The private companies each paid their respective government the toll revenues projected over the lease term (paid in full, upfront). The private companies then received toll revenues from trafficway users throughout the lease; those revenues may or may not match the projected revenues over time.

Since public health is not generally a revenue-generating infrastructure enterprise, other incentives (eg, government subsidies, price-fixing, allowance of a private entity to retain profits) are needed to make it attractive enough for private financiers. There are few fee-for-service programs in public health and due to the frequent use of a sliding fee scale, this makes for an even less attractive option.

Other Means of Financing

Other non-traditional or innovative means of financing are important to note, such as incentivization, special taxes, or the use of special districts.

Governments use incentivization in a variety of settings. For example, with public health accreditation, some states provided financial incentives for accreditation readiness and application activities. In contrast, others have linked funding to deliverables, such as the completion of accreditation prerequisites.⁴ In a more extreme example of this, the state of Ohio mandated that all health departments become accredited as a condition of receiving funding.⁵ Some states have also established financial incentives for general or programmatic collaborations among local health departments, whether as an informal arrangement, shared program, or regionalized approach.⁶ Incentives have been provided either as startup funding to support the development of a collaborative effort or as an ongoing incentive for collaboration. Some state aid-to-local funding formulas offer additional funds for collaborative arrangements. Financial disincentives have also been found in some formulas in which funding would not be available except to applicants representing populations above a minimum threshold—a subset of applicants would be ineligible for those funds except as a multi-jurisdictional applicant.

Special taxes or fees may be used to fund specific services. Financing mechanisms for public safety answering points (PSAPs) exemplify this type of financing. In a 2015 report, the National Association of State 9-1-1 Administrators (NASNA) overviewed four recommended funding models for next-generation 911 (NG911).⁷ The options included:

• dedicated sales tax partition: establishing a dedicated percentage of sales tax revenues for special distribution;
• monthly surcharge: assessing fees per each user as a percentage of base service charges;
• health plan fees: establishing an adjustable fee applied to state-centric health insurance plans; and
• universal service fund: assessing fees per subscriber to telecommunications services for each service address, creating a special service fund.

Those options offer an innovative way to fund a specific service or program through special fees or taxes.

Special districts may be another innovative approach toward financing public health services. Special taxing districts, like local governments, may impose special assessments or secondary property taxes within their district to fund public services. Arizona, for instance, facilitated the creation of special taxing districts related to health.⁸ This has allowed for the following four types of special districts to be created by majority vote:

• public health services district:  district that allows for an entity to take on powers and duties of county board(s) of health to provide non-hospital-based services;
• health service district (medically underserved areas):  district that allows for an ambulance service, medical clinic, or combination of the two to provide non-hospital-based services;
• special health care district (counties with > 3M persons):  district that allows for the provision of public health, health care, or other social services (broadest range of available services); and
• hospital district (medically underserved areas):  district that allows for the operation of a hospital or urgent care center to combine services with an ambulance service.

These special districts were able to assess taxes to fund specific public health and medical services that were then available to the public.

Concluding Thoughts

The descriptions above consider only a fraction of the available options, benefits, and challenges in the topic area of public health finance, intended to give a brief perspective on the issues and their complexity. Financing collective services, such as public health services, is politically complex and centered around a common funding source that many partners aim to access. As investments in public health erode over time, policy makers and practitioners must look toward other innovative and sustainable investments for governmental public health. It is vital for each of us working within and supporting governmental public health to be savvy in the terminology and concepts of public health finance and to find ways to support sustainable investments for foundational public health services.

For some additional information on public health finance, please visit the Public Health Finance & Management website, including the Public Health Finance Bootcamp.

References

1. Fay M, Martimort D, Straub S. Funding and financing infrastructure: The joint-use of public and private finance. Journal of Development Economics. 2021;150:102629.
2. Florian M, Holt J, Frates J. Public-Private Partnerships: Examining the Key Drivers of Value. In. Horizon: The Future of Transportation. Austin, TX: Texas Department of Transportation; 2017:4-12.
3. Hyde JK, Shortell SM. The structure and organization of local and state public health agencies in the U.S.: a systematic review. Am J Prev Med. 2012;42(5 Suppl 1):S29-41.
4. Thielen L, Leff M, Corso L, Monteiro E, Fisher JS, Pearsol J. A study of incentives to support and promote public health accreditation. J Public Health Manag Pract. 2014;20(1):98-103.
5. Ohio Department of Health. Accreditation. https://www.odh.ohio.gov/localhealthdistricts/Futures/Accreditation.aspx. Published 2017. Accessed September 29, 2018.
6. Libbey P, Miyahara B. Cross-Jurisdictional Relationships in Local Public Health: Preliminary Summary of an Environmental Scan. 2011. https://phsharing.org/wp-content/uploads/2019/06/rwjf69317.pdf. Accessed April 28, 2022.
7. National Association of State 9-1-1 Administrators [NASNA]. Four Potential Sustainable Funding Models for NG911. East Calais, Vermont: NASNA;2015. https://www.911.gov/pdf/NASNA%20White%20Paper%20-%20Four%20Potential%20Sustainable%20Funding%20Models%20for%20NG911%2008-05-2015.pdf. Accessed April 28, 2022.
8. Barraza L, Hensley D. Using Taxing Districts to Fund Health Care and Public Health Programs. The Network for Public Health Law. https://www.networkforphl.org/resources_collection/2018/06/20/1011/using_taxing_districts_to_fund_health_care_and_public_health_programs. Published 2018. Accessed July 2, 2018.

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