Health Expenditure Decentralization and Health Outcomes: The Importance of Governance

Does health expenditure decentralization improve a nation’s health? Should countries care about governance quality when they decentralize healthcare spending to local governments? We answer these questions using cross-country data comprising fifty countries from 1996 to 2018. We find that health spending decentralization worsens health outcomes, which are offset by better governance of government. We calibrate the maximum feasible degree of health expenditure decentralization to have positive effects on health outcomes for a given percentile distribution of governance quality. Countries should be mindful of this negative consequence of health spending decentralization and should ensure that the quality of their governance exceeds a certain threshold to offset this negative externality. We also find that vertical fiscal imbalance is negatively associated with health outcomes, underscoring the role of revenue decentralization in improving the fiscal discipline of local governments by avoiding moral hazard caused by soft budget constraints and the common pool problem.