The COVID-19 pandemic exposed the vulnerabilities in health systems worldwide, and nowhere more starkly than in low- and middle-income countries (LMICs). Among the challenges intensified by the crisis is the health financing transition—the process of shifting from systems heavily reliant on out-of-pocket (OOP) payments and foreign aid toward more robust, publicly funded models. The pressing question for policymakers is how LMICs can progress toward universal health coverage (UHC) without pushing households into financial distress.
History suggests that as economies grow, public health investment increases, while household and donor contributions decline. However, in many LMICs, this shift remains incomplete. Despite rising national budgets, many governments continue to depend significantly on household spending or donor support. These gaps point to structural and governance issues that hinder effective health financing reform.
In several low-income nations, external aid for health has increased since 2008, yet public health spending failed to keep pace. This can trigger a “crowding-out” effect, where donor contributions dampen the motivation for governments to invest more. In contrast, upper-middle-income LMICs have managed to boost public investment and reduce OOP payments.
A global analysis covering 124 countries from 2000 to 2019 shows that both increased government spending and external aid help lower OOP payments. The effect of external aid is particularly pronounced in low-income countries. However, as domestic spending rises, donor support tends to decline, suggesting a gradual shift of responsibility from international partners to national governments. Interestingly, rising incomes may paradoxically lead to increased OOP spending, as people seek better-quality care from private providers when public systems fall short. Without intervention, this can deepen inequalities in access to care.
Charting the Course for Inclusive Health Financing
To navigate this transition successfully, LMICs must focus on several key policy priorities. First, political leadership is vital. Governments should integrate UHC goals into national development plans, increase domestic health investment, and expand pre-paid risk pooling mechanisms, such as national insurance schemes. Resources like the WHO Global Health Expenditure Database provide important benchmarking tools to track progress.
Equally important is improving governance and financial accountability. Countries that successfully control corruption and manage public funds well tend to allocate health resources more efficiently. Digital public financial management systems can help track expenditures, enhance transparency, and ensure better service delivery. Where governance is weak, inefficiencies persist, often impacting the most vulnerable groups.
Another critical area is managing reliance on external assistance. While donor aid remains important—especially during emergencies—LMICs should actively work toward increasing their fiscal space. This can be achieved through tax system reforms, better revenue collection, and more efficient use of existing public resources. A measured approach to reducing aid dependence can encourage greater national ownership and long-term sustainability.
Additionally, countries must innovate in revenue generation. Health taxes on tobacco, alcohol, and sugary drinks can serve dual purposes: improving public health and generating revenue. Gains from digital transformation and public-private partnerships (PPPs) can also support the development of health infrastructure and enhance efficiency. Evidence shows that countries with stronger tax administrations deliver better and more equitable health services.
Finally, demographic changes present emerging challenges. Although aging populations have not yet led to a dramatic increase in health expenditure in most LMICs, this is likely to change. Longer life expectancy and a rising burden of non-communicable diseases will increase the need for elderly care and chronic disease management. Proactive planning now will help ensure the long-term sustainability of the system.
Looking Ahead
Successfully steering the health financing transition is a complex but essential step for LMICs aiming to achieve UHC. It requires aligning domestic reforms with strong governance practices and wisely managing international support. While there is no universal pathway, countries that embed UHC into their development priorities, improve fiscal accountability, and anticipate social and economic shifts will be better positioned to build resilient and inclusive healthcare systems.
As the global health landscape evolves, those LMICs that manage this transition effectively will not only safeguard their populations against financial hardship but also strengthen their readiness for future public health challenges and post-pandemic opportunities.
