Resource allocation is the bottom line indicator of broad priority setting; a powerful tool for setting priorities when health sector reform is high on the agenda. For example, to correct imbalance/inequity problems (too many hospitals, etc.), resource allocation can be used. Often due to political realities, allocation patterns are changed not through the reallocation of existing resources, but via disproportionate allocation of new resources.

Two main approaches are used in resource allocation:

1. Epidemiologic (standard, disease-based) approach considers diseases as the main problem, prioritizes them for actions, develops programs against diseases, prepares budgets, counts resources; determines scope of a program, and uses resource allocation to fund disease-defined programs.
2. Primary Health Care (PHC) approach is based on understanding that the real problem is not a disease, but rather social deprivation. Resource allocation is driven by considerations of equity, based on need. The principles of PHC suggest that decisions on how resources are used should be decentralized as much as possible

What is the optimal way to allocate resources within health care system? Resource allocation is a powerful tool at the center for achieving health sector reforms, and for guiding local programming. Broad resource allocation represents too much power for the center to relinquish. How can responsibilities related to resource allocation and budgeting be divided between center (e.g. MOH) and local health departments to achieve the set objectives and targets? One solution to this dilemma is to give districts and regions the responsibility for detailed budgeting within constraints with the center-to-periphery allocative decisions being based on population characteristics, such as age, sex, social class, mortality and morbidity. There is a need for a dialogue between the MOH and local health departments and a compromise established.
Based on the information collected in the situational analysis at the local levels, the MOH eventually sets broad resource allocation, national policies and guidelines. The local health departments, which are best suited to work with communities and other sectors at that level, develop the programs and the budgets. Further information collection and analysis works as a basis for reforming resource allocation.