Many developing countries face a critical gap between the demand for health care services and their supply. What are the pros and cons of using private service providers? This paper from the World Bank assesses the options available to governments for mobilising private resources to achieve public health objectives.
In many countries, public resources often fall short of what is needed to provide universal health care. Furthermore, the typical incentive structure in the public sector may not always be conducive to expanding access, improving the quality of care, and ensuring efficient use of limited funding and expertise. A government seeking to encourage private participation in health care provision can choose among six basic policy and regulatory options that vary widely in the risks and responsibilities borne by the private (for-profit or not-for-profit) entity:
- Service contracts – may be good for introducing a private entity’s advantage (specialised technology, access to rural communities). However, because the government is responsible for coordination, this is unlikely to improve performance if overall management is weak.
- Management contracts – may be a good way to gain access to the technical expertise and managerial efficiency of the private sector. However, because commercial risks are borne by the government, they create little incentive to reduce costs and improve the quality of services.
- Lease arrangements – give the private provider incentives to operate efficiently, because profitability depends on how much it can reduce costs while still meeting the standards specified in the contract.
- Concessions – a private entity pays the government a fee to operate and maintain health care facilities and takes on responsibility for capital investment.
- Divestitures – a publicly owned health care facility is sold to a private entity, and ownership is transferred indefinitely. Commercial risks are transferred to the private entity, which takes full advantage of its access to private finance.
- Free entry – qualified private providers are allowed to enter and exit the health care market without establishing a contractual relationship with the government. The government may use other regulatory instruments to ensure safety and a minimum quality of care.
Each of the six options transfers a different degree of risk and responsibility to the private provider. In practice, however, the risks transferred by an option—and therefore the incentives created—can vary significantly, depending on the contract design, selection process, payment mechanism and availability of subsidies.
- Competitive bidding generally creates stronger pressure for providing services at lower cost.
- Schemes that link payment of the private provider directly to its performance also give stronger incentives for efficiency.
- Such incentives may be weaker under concession schemes if the government agrees to make minimum payments regardless of service level provision.
- To maximise the benefits of private participation, a government therefore needs to determine which option is best suited for achieving its policy objectives.
- It then needs to choose the most appropriate contracting and payment mechanisms and the best regulatory framework for monitoring and enforcing the arrangements.
