Introduction: The Wrong Kind of Success
In Lesotho, one of the poorest and most unequal countries in the world, a gleaming new public-private partnership hospital now consumes more than half of the Ministry of Health’s entire budget under an 18-year contract. The hospital was built with the advice of the International Finance Corporation and hailed as a flagship model for Africa. Yet three-quarters of Lesotho’s population live in rural areas—far from this urban facility—and scarce public funds that could have strengthened primary healthcare services across the country have been diverted to a single, costly institution.
This is not an isolated failure. It is the predictable outcome of a development model that builds hospitals rather than healthcare systems. Across the developing world, countries are confronting the same painful lesson: a hospital is not a healthcare system, and building the former without the latter is a recipe for financial collapse and preventable suffering.
The challenges of healthcare financing in low-income countries are immense, and the consequences of getting it wrong are measured in lives lost and opportunities squandered.
The Structural Problem: Hospitals Without Systems
The fundamental flaw in much international hospital development is treating healthcare as a construction problem rather than a systems problem. The consequences are devastating for health system strengthening efforts across the developing world.
The healthcare funding gap is staggering. In 2024, combined government and donor spending on health averaged just **$17 per capita** in low-income countries—less than one-third of the $60 estimated minimum needed to deliver a basic package of essential services. In lower-middle income countries, the figure was $47, barely half the $90 benchmark. By 2030, over 80% of low-income countries and 40% of lower-middle income countries are projected to have lower government and donor spending on health than in 2024.
External aid is collapsing. Official development assistance for health has dropped by more than 50% from its peak, and the trajectory is clear: a return to previous levels of external funding is unlikely. Countries must now transition to greater self-sustainability in health financing through domestic resource mobilization for health. The volatility of donor funding makes sustainable healthcare systems impossible to maintain without reliable domestic revenue streams.
The result is a system that treats failure at the primary level in expensive hospitals. As one observer put it: “We continue to treat in big hospitals at a very high cost what could be prevented at the PHC level at a very low cost. We treat the failure of PHC in big hospitals with the help of specialists.” This hospital-centered healthcare model is both financially unsustainable and clinically ineffective for addressing the health needs of developing countries.
Meanwhile, non-communicable diseases are rising sharply across the developing world, with Africa experiencing the highest mortality rate and approximately 64% of NCD deaths occurring among people under 70. This dual burden of infectious and chronic diseases demands a more strategic approach to health policy and healthcare infrastructure planning.
The Solution: A Tiered Healthcare System That Matches Need to Resource
The alternative to the failed hospital-centered model is not to abandon specialist care. The answer is to build integrated, tiered healthcare systems where each level of care performs its proper function and patients move through clear referral pathways. This cost-effective healthcare delivery model has been proven to deliver better outcomes at lower costs than hospital-centric approaches.
Primary Care: The Foundation
Primary healthcare is the weakest level of care delivery in most developing countries. Yet evidence shows that regions with higher primary care investments experience more significant improvements in life expectancy and reductions in infant mortality compared to regions with a greater focus on tertiary care. Why primary healthcare matters for universal coverage cannot be overstated—it is the essential foundation upon which all other health services depend.
Primary care networks (PCNs) offer a proven model. These integrated teams deliver services to defined populations while ensuring continuity of care through referral and counter-referral systems. They promote access to basic services closer to home, refer complicated cases to higher-level facilities, and share resources—quickly addressing stock-outs through pooled supplies and shifting human resources where extra support is needed.
Countries like Kenya have adopted the hub and spoke healthcare model, where a sub-county hospital serves as the hub for health centers, dispensaries, and community health units that serve as the entry point to the system. This approach reduces fragmentation and provides advanced care when needed. Community health workers play a vital role in this model, serving as the bridge between formal health facilities and the communities they serve.
The primary care investment required to build these networks is modest compared to the cost of tertiary hospitals, yet the returns—in terms of population health outcomes and health equity—are substantially greater.
Secondary Care: The Regional Backbone
Secondary-level regional hospitals should provide complex services referred from primary facilities. They act as gatekeepers in the healthcare referral system, mediating referrals from primary to tertiary facilities. In functioning systems, patients are incentivized or mandated to attend primary care before seeking specialist care, with primary care providers acting as gatekeepers to specialists.
Yet in most developing countries, healthcare referral systems are informal, with little gatekeeping. Patients bypass lower levels of care and overcrowd referral facilities, a pattern that wastes resources and undermines the entire system. Strengthening the secondary tier is essential for creating a functioning tiered healthcare delivery model that serves all citizens efficiently.
Tertiary Care: Centers of Excellence, Not Catch-Alls
Tertiary national and teaching hospitals should provide all services available at lower levels, plus specialized training and research. But this does not mean replicating every capability in every country. Rather, countries should create interconnected centers of excellence supported by strong referral networks and shared knowledge systems.
One investment in specialist care can elevate an entire ecosystem. Through cross-border practice—short-term rotations, virtual consultations, and long-term institutional partnerships—countries can accelerate capability development without waiting decades to build it independently. This approach to healthcare infrastructure development is both more cost-effective and more sustainable than attempting to build parallel systems from scratch.
The health system strengthening literature consistently shows that integrated, tiered approaches outperform fragmented, hospital-centric models in terms of both health outcomes and financial sustainability.
The Economics of Sustainability: Where to Put the Money
The economics of healthcare development are brutally simple: money spent on the wrong things is money wasted, and there is no money to waste. Health budget allocation in developing countries must be guided by evidence of what delivers the greatest population health impact per dollar spent.
Primary Care Delivers the Best Returns
The evidence is overwhelming. Primary care emphasizes preventive care, reducing reliance on more costly specialty and secondary services. Improved health outcomes reduce overall demand on health systems. The lesson across countries and income levels is consistent: prevention and primary healthcare deliver durable health gains at a lower cost than hospital-centered systems.
Cost-effective healthcare is not about providing less care—it is about providing the right care in the right setting at the right time. This is the essence of health system reform that works.
The World Bank’s priorities for action reflect this: targeting high-impact primary healthcare, improving health budget execution, and aligning donor support with national priorities can deliver better results with current levels of government spending. Health budget execution—actually spending allocated funds effectively—is a major challenge in many developing countries, with large portions of health budgets going unspent while health facilities run out of essential medicines and supplies.
The Lesotho Warning
Lesotho’s experience should serve as a cautionary tale for every developing country considering a similar path. Public-private partnerships in healthcare of this kind are high risk and costly, and fail to advance the goal of universal and equitable health coverage. They divert scarce public funds from primary healthcare services in rural areas, where the majority of the population lives.
The Lesotho hospital public-private partnership failure demonstrates the dangers of allowing donor and consultant enthusiasm for flagship projects to override careful consideration of national health priorities and fiscal realities. Health governance and accountability mechanisms must be strong enough to resist these pressures and keep the focus on building resilient, equitable systems.
Addressing the Health Worker Shortage
No healthcare system can function without adequate human resources. The WHO estimates a projected shortfall of 11.1 million health workers by 2030, mostly in low- and lower-middle-income countries. Health workforce development must be a core component of any health system strengthening strategy.
Solutions to the health worker shortage include task-shifting (training lower-level workers to perform tasks traditionally done by higher-level professionals), expanding training capacity, improving salaries and working conditions to retain staff, and leveraging technology to extend the reach of scarce professionals. Investment in health workforce development delivers returns that far exceed the cost, yet it is chronically underfunded in most developing countries.
A Sustainable Financing Model: The Sales Tax Solution
If developing countries are to achieve self-sustainability in health financing, they must mobilize domestic resources. Tax-based financing appears more consistently associated with coverage expansion and financial protection when supported by adequate public funding. Universal health coverage strategies depend on predictable, reliable revenue streams that can sustain health systems over the long term.
A dedicated sales tax—a small percentage levied on goods and services and constitutionally earmarked for healthcare—offers a practical, sustainable solution. Sales tax for healthcare systems is gaining attention as a viable mechanism for achieving health financing reform that can withstand political and economic shocks.
Why a Sales Tax Works
Stability and Predictability. Unlike donor funding, which is unpredictable and subject to political whim, a sales tax provides a reliable, ongoing revenue stream. VAT for health systems is now recognized as a “dependable, effective source of revenue for health programs and projects.” Even in times of high inflation, health taxes can raise revenue when designed with indexation mechanisms that account for both inflation and income growth.
This fiscal autonomy for health allows countries to plan long-term health system development without the uncertainty that comes from annual donor budget cycles and shifting international priorities. Sustainable health financing models must provide this kind of predictability.
Broad Base, Low Rate. A small percentage—perhaps 2-3%—applied broadly generates significant revenue without placing an undue burden on any single segment of the population. This is far more equitable than out-of-pocket payments, which push the poor deeper into poverty. A dedicated health sales tax is a form of health financing that distributes the burden across the entire economy while delivering benefits to all citizens.
Dual Benefit of “Sin Taxes.” Health taxes developing countries should consider include taxes on harmful products such as tobacco, alcohol, and sugary drinks. These serve a dual purpose: they discourage unhealthy consumption while expanding fiscal space for health. The WHO recommends that tobacco taxes account for 75% of the retail price—yet in many developing countries, they remain far below this level.
Tobacco tax health revenue can be substantial, and the public health benefits of reduced consumption compound the financial gains. Sin taxes health financing is a policy tool that achieves both health and fiscal objectives simultaneously.
Earmarking Protects Resources. Earmarking health funds—designating specific tax revenues for health—protects resources for health sector priorities. It creates a fiscal firewall that prevents health funds from being diverted to other purposes. Domestic health financing is strengthened when citizens can see that the taxes they pay are directly supporting their healthcare system.
Addressing the Concerns
Critics raise valid concerns. Sales taxes can be regressive, disproportionately affecting the poor. The solution is exemption: essential medicines, basic food items, and other necessities can be exempted from the tax, protecting the most vulnerable while still generating substantial revenue from luxury goods and non-essential services.
There is also the risk that taxing medical devices or medicines inflates healthcare costs. The solution is straightforward: exempt all medical goods and services from the sales tax, while applying it to the broader economy. This ensures that essential medicines and health products remain affordable while still generating revenue from the broader tax base.
Implementation in Practice
Countries are already moving in this direction. Kenya is exploring wealth taxes and sin taxes to navigate donor shifts and safeguard health gains. Somalia is leveraging sin-tax revenues to address health-financing challenges. The UN Tax Committee is developing a Handbook on Health Taxes for Developing Countries. Health taxes developing countries are implementing today provide a roadmap for others to follow.
A dedicated health sales tax would provide the fiscal autonomy and flexibility to align resources with national health priorities—something external funding, often shaped by donor agendas, cannot offer. Healthcare sustainability depends on countries being able to fund their own health systems from their own resources.
Sustainable Development Goals and the Path Forward
The Sustainable Development Goals (SDGs) include a specific target (SDG 3.8) for universal health coverage, including financial risk protection and access to quality essential healthcare services. The goal of universal health coverage cannot be achieved through hospital-centered models that consume the vast majority of health budgets while leaving rural populations without access to basic services.
The financing gap for achieving the SDG health targets is estimated at $200-370 billion annually. Closing this gap requires both increased domestic resource mobilization and more efficient use of existing resources. Health system reform that prioritizes primary care and cost-effective interventions is essential.
The global health community is increasingly recognizing that sustainable health financing is the key to achieving universal health coverage. Health policy in developing countries must prioritize building the fiscal and institutional capacity to sustain health systems over the long term.
Conclusion: Systems, Not Structures
The path to effective healthcare in developing countries is not about building more hospitals. It is about building systems that deliver care where it is needed, when it is needed, at a cost that can be sustained.
The challenges of healthcare in developing countries are daunting, but the solutions are known. Healthcare in low-income countries can be transformed through strategic investment in the right priorities.
This requires:
- A tiered healthcare system with strong primary care networks, functioning secondary referral hospitals, and tertiary centers of excellence that serve as the apex of an integrated system, not islands of high-tech care disconnected from the communities they should serve. The tiered healthcare delivery model has been proven to work when implemented with political commitment and adequate resources.
- Strategic health budget allocation that puts money where it will do the most good—into primary care that prevents disease and catches problems early, rather than into tertiary hospitals that treat preventable conditions at ten times the cost. Cost-effective healthcare is the foundation of sustainable health systems.
- Sustainable health financing through domestic resource mobilization, including a dedicated sales tax for healthcare that provides a predictable, ongoing revenue stream and frees countries from the volatility of donor dependence. Sales tax for healthcare systems offers a practical, proven mechanism for achieving health financing reform.
- Health system strengthening that addresses the health worker shortage, builds health governance and accountability, and ensures that essential medicines and supplies reach the facilities where they are needed. Universal health coverage strategies must be built on a foundation of strong, resilient institutions.
- Resistance to the temptation of flagship projects and public-private partnerships that consume scarce public funds and divert attention from the fundamental work of building resilient, equitable health systems. The Lesotho hospital PPP failure and other cautionary tales should guide policy decisions.
The lesson from Lesotho and countless other failures is clear: a hospital is not a healthcare system. Building one without the other is not development—it is an expensive distraction from the real work of saving lives.
Countries that succeed in building sustainable healthcare systems in developing countries will be those that invest wisely in primary healthcare, mobilize domestic resources for health, and build the institutional capacity to deliver quality care to all citizens. The path to universal health coverage runs through primary care, not through tertiary hospitals.
The time for hospital-centered healthcare models is over. The future belongs to integrated, tiered systems that deliver the right care at the right place at the right cost—and that are financed sustainably by the countries they serve.
Call to Action
For policymakers, health officials, and international partners: invest in primary care, strengthen referral systems, and build domestic health financing mechanisms that can sustain healthcare systems for generations to come. The cost of inaction—measured in preventable deaths, financial catastrophe, and missed development opportunities—is simply too high.
For consultants and development practitioners: resist the temptation to propose flagship hospital projects that benefit consultants more than patients. Instead, advocate for health system strengthening that builds the capacity of countries to deliver healthcare sustainably, equitably, and effectively.
The goal of universal health coverage is achievable—but only if we build systems, not just structures, and finance them sustainably, not just temporarily.
