Contracting out healthcare in developing countries

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Contracting is emerging as a major common policy issue in developing countries (Cruz et al). It involves emulating private sector mechanisms within the public sector in order that public sector framework is maintained whilst deriving the benefits of private provision. Within such a framework, some public sector traits such as direct central planning, free provision and salaried public employees are exchanged with characteristics related to the private sector (McPake 1994).

Hypothetically such markets are less volatile to instances of market failure as they enable large levels of expenditure to remain in the public sector (a factor which cannot be maintained by public finance alone). As a result, advantageous outliers can be taken in to account and healthcare provided on the basis of social needs rather than ability to pay. Likewise, public institutions maintain their authority to be the sole decision-makers, and therefore allocate health resources on social meritocracy. Moreover, according to McPake et al "choices regarding healthcare delivery patterns may be made with little regard for the demand of 'ignorant' consumers as under direct public provision- or consumers may be given a much greater role" (McPake 1994). Hence an equilibrium taking into account needs assessments and population requirements can be provided. This factor is vital in the system design. Further additions of public funds minimise financial uncertainty by sharing risks. (Bennett 1991). Lastly, the role of doctors in assessing monetary failure of the system in emphasised, a measure enabling financial efficiency to be maximised (by ensuring that inefficient providers are not awarded contracts).

In the case of healthcare, contracting involves the exchange of goods and services between a public sector buyer and a private institution in accordance to a pre-agreed set of conditions. Generally, private institutions bid for public sector contracts, and may succeed through monetary offers, exclusivity in products, qualitative components or a combination of these. Hence, the public sector draws the greatest benefit from competing institutions, whilst preserving its financing.

In developing countries, contracting out is restricted mainly to non-clinical aspects such as catering, elevator services and general hospital premise maintenance. However, clinical services are increasingly coming under scrutiny for their potential to be contracted out (McPake 1994) in a similar manner to Western European 'managed markets' in healthcare. At present, this policy of contracting out is being employed mainly in British territories in the Caribbean, who are emulating a UK-style healthcare structure. In other developing nations, contracting of services is largely limited.

The theory of contracting out requires that there must be a degree of competition in a market. However, in practice, markets need only be 'contestable', i.e. that it be possible for competitors to enter a market. However, it is argued that health services, due to their very nature of economies of scale and high start-up and sunk costs have characteristics of monopolies, making it very difficult for other providers to compete fairly. Moreover, there is substantial bureaucracy to entry with much infrastructure being donor funded. As a result, it is increasingly difficult for a private institution to gain an economic edge to entry in such a market. Moreover, economies of location are likely to reduce real efficiency, especially when considering tertiary services e.g. logistics. These problems are likely to be present with greater emphasis in developing countries, as 1) there is acute shortage of private healthcare funding, 2) most care is provided by NGO's and 3) many remote areas are completely cut-off from some medical services.

Contestable markets should allow identification and under-cutting of inefficiency by more resourceful entrepreneurs. In developing countries, price cuts frequently result in quality reductions. It is unclear as to whether contracts will sacrifice quality for price when bidding on contracts. Therefore, it seems logical that quality conditions to healthcare should be outlined prior to contract bidding. Even after successful winning of contracts, there needs to be frequent monitoring of performance. It is doubtful that developing nations have adequate systems to monitor such information. Brazier and Normand (Brazier and Normand 1991) further identified that trust and integrity must exist between all party's a factor which is near impossible due to the large-scale corruption existing in many aspects of political and social life.

Contracts involve skills and activities that are not required under public provision such as accounting, negotiating and monitoring (McPake 1994). Most healthcare systems in developing countries are unable to accommodate these needs.

The essential element of contracting assumes that public finances are available to purchase services from a private provider. However, in reality many developing countries simply do not have the levels of public sector money to afford this model of healthcare. As a result, other means of revenue generation must be achieved. Principally this will be through larger levels of taxation. However any policy which results in the population (most of whom are already living below the poverty line) having less take-home money is certain to be unpopular. An alternative may be combining public and private expenditures or by limiting certain aspects of healthcare so that those deemed to need healthcare provisional the most are treated preferentially to all others. Lastly, a model similar to that in the USA may be considered. Preferred Provider Organisations (PPO's) are private insurance companies who act within the contracting model to purchase healthcare. Providers register with PPO's and those insured by PPO's have access to healthcare, often at lower prices than uninsured persons but have restrictions to the use of certain providers (Brazier and Normand 1991). Alternatively, nations with extensive insurance organisations can provide 'contract-like' mechanisms allowing them to choose whether to accept all charges determined by insurance companies or charge patients small amounts for healthcare. This results in greater flexibility for all party's involved.

Contracting is emerging as a topic of significant debate within many developing countries. It offers many hypothetical advantages but in practice the market conditions for such a model of health provision do not currently exist in poorer nations. Its use is at present limited to non-clinical areas in healthcare, notably logistics. However, it is likely that some urban areas of larger developing countries may have elements favourable to models of contracted healthcare., whilst those countries determined to adopt such a system may focus of development of their human resource system to accommodate contracts.


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