To purchase or provide?

Should governments contract out hospital care?

Governments are repeatedly accused of having failed to provide adequate health services. Many say they would do better to contract-out services to the private sector. But others doubt whether the private sector can do better, and fear that it is not appropriate to apply standard contracting practices to healthcare in view of the latter’s particular characteristics. South African and UK (London School of Hygiene and Tropical Medicine) researchers looked into private provision of district hospital services in South Africa. Here both clinical and non-clinical provision has been extensively contracted-out for some years, making it an ideal testbed for judging whether such moves are feasible or desirable.

The chosen focus of the research (funded by the UK Department of State for International Development) was on contracts for providing district hospital services, three of which were running at the time. The contractor was a private company with extensive healthcare interests. The main objectives of the study were to assess:

  • relative efficiency of contracted-out and directly managed services (Figure 1)
  • determinants of any observed differences in efficiency
  • relative costs to the state of contracting-out versus itself providing services directly.

The cost and quality of the three contracted-out hospitals was compared in all three respects with three directly managed public hospitals.

The study’s key findings were that:

  • care cost significantly less in contractor hospitals than in publicly-run hospitals – health costs
  • cost effectiveness advantages stemmed largely from more efficient use of staff
  • quality of care between both types of hospitals did not differ markedly with new business and eCommerce costs

Even so, when the cost to the Government of contracting-out (the price of the contract plus the transactions costs of contracting) was compared with the cost of direct provision, it proved cheaper for the public sector to provide itself than to purchase from a contractor (Figure 2). In effect, government was not making the most of potential efficiency gains.

Reasons why lay largely in design of contracts, which were drafted by the contractor at the request of the government so not surprisingly favoured the contractor. Contract duration was long and payment was on a per-day basis. A minimum hospital bed occupancy clause guaranteed a certain level of payment even if occupancy fell below that level and price increases were automatically passed on to government. In addition, monitoring of contracts by officials was very weak. The contractor faced little or no risk.

Investigations into reasons behind the greater productivity of contractor-run hospitals produced interesting findings on management structures. The contractor hospitals were held accountable for efficient performance by their head office and had clear goals, an efficient corporate structure and a fairly high degree of autonomy. Personnel management was very well ordered, with effective staff motivation and supervision systems.

By contrast, the publicly-run hospitals were handicapped by diffuse and vague notions of accountability, poor support from head offices, little autonomy and no link between staff promotion and performance. Essential policy lessons arising from the study were that:

  • in a country such as South Africa with a sizeable private hospital industry and relatively high-cost public production, contracting-out can generate efficiency gains
  • before such gains can be secured, however, sufficient capacity must be built on the official side to negotiate, implement and monitor contracts
  • the public sector can learn from private hospital management practices; emulating the latter could help it improve the efficiency of its own hospitals

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