For decades, public health financing in India has largely followed an input-based model: funds are allocated for infrastructure, staff, or programmes, with limited linkage to results. The National Health Mission (NHM) marks a departure from this model, linking roughly 20 percent of its flexible pool funds to performance indicators such as improvements in maternal and child health outcomes or progress in disease control programmes like tuberculosis.
This shift reflects a broader effort to align public health spending with measurable outcomes rather than programme inputs. Yet experience over the past decade suggests that the effectiveness of such reforms depends heavily on how incentives are designed. Without clear differentiation in rewards and credible measurement of performance, performance-linked financing risks remaining a signalling device rather than a driver of systemic change.
India’s Cautious Experiment With Performance Financing
Countries across the world have experimented with linking health financing to measurable results. In some settings such as Rwanda and Burundi, performance-linked incentives improved service delivery and quality of care; in others, including Nigeria and Benin, the impact was more limited or difficult to sustain. These contrasting outcomes highlight a central lesson: the effectiveness of performance financing depends heavily on how incentives are designed and implemented.
India has adopted a more cautious version of this approach under the National Health Mission. Rather than rewarding individual facilities or providers, the framework links a portion of central transfers to the performance of state governments across selected health indicators, including maternal and child health outcomes, disease control programmes such as tuberculosis, and improvements in health system capacity.
Currently, about 20 percent of NHM flexible pool allocations are tied to these performance indicators. States are assessed against predefined criteria each year, and the funds they receive depend on their performance against these indicators – in principle creating incentives for improved health outcomes.
When Incentives Do Not Differentiate Performance
For performance-linked financing to influence behaviour, rewards must clearly distinguish stronger performers from weaker ones. Under the NHM framework, however, the structure of the incentive pool limits how sharply such differences can emerge.
States compete for incentives from a fixed pool of funds within their respective peer groups. This means the rewards any state receives depend not only on its own performance but also on how other states perform within the same group. Because the pool itself does not expand when overall performance improves, gains by some states must be accommodated within the same budget envelope.
At the same time, incentive allocations are linked to the overall NHM funds a state receives, meaning that performance alters allocations only at the margin around an already determined baseline.
The funds actually disbursed to states therefore remain close to their initial allocations. In most years, states receive roughly 80 to 120 percent of their incentive allocation, leaving relatively modest differences across performers.
When incentives vary only marginally across performers, the financial signal becomes weak, limiting incentives for changes in programme implementation.
When Performance Measures Are Hard to Attribute
A second challenge arises from how performance is measured. Many of the indicators used in the NHM framework track broader health outcomes or system-level changes that depend on multiple factors beyond the immediate control of the programme.
For example, improvements in maternal or infant mortality, disease control outcomes, or screening coverage often reflect the combined effects of infrastructure, staffing, state policies, and socio-economic conditions. When indicators depend on such wider determinants, it becomes difficult to attribute changes directly to programme performance. As a result, financial incentives alone may struggle to generate measurable improvements within a short time frame.
A related challenge lies in how performance is measured and verified. Much of the assessment relies on administrative data reported through government information systems such as the Health Management Information System (HMIS) and other programme portals. While these systems have expanded monitoring capacity, heavy reliance on self-reported data raises concerns about consistency, verification, and the scope for strategic reporting.
Taken together, difficulties in attributing outcomes and limitations in performance measurement weaken the link between incentives and results, reducing the ability of performance-based financing to influence programme behaviour in the way the framework intends.
Designing Incentives That Can Work
These challenges do not mean that performance-linked financing is misplaced in India’s health system. Rather, they point to the need for refining how incentives are designed and implemented.
For incentives to influence programme performance more meaningfully, three design considerations are particularly important.
First, the framework could move beyond purely relative comparisons across states toward clearer performance benchmarks. When improvements translate into predictable rewards rather than relative rankings, incentives become easier for states to anticipate and respond to.
Second, strengthening independent verification of outcomes can improve credibility. External sources such as large national surveys can complement administrative reporting systems and reduce reliance on self-reported programme data.
Third, the choice of indicators matters. Incentives are most effective when they track actions that implementing agencies can realistically influence – such as service delivery coverage, staffing levels, or facility quality – rather than outcomes that depend on broader structural factors.
The Next Step In Health Financing Reform
India’s experiment with performance-linked financing under the NHM marks an important shift in how public health spending is governed. Yet the experience of the past decade shows that incentives influence behaviour only when they are credible, measurable, and clearly tied to actions within the control of implementing agencies.
As India expands public health spending, strengthening the design of performance-linked financing will determine whether the framework remains a modest signalling mechanism or evolves into a tool capable of shaping how health programmes are implemented and delivered.