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There is a recent trend towards the introduction of market-based mechanisms in the operation of public health facilities. According to Mills and Broomberg (1998), this development can be attributed to two main reasons which includes the emerging trend of new public management that emphasizes the utilization of private-sector action in the quest for solutions to the numerous difficulties of the public-sector and secondly, the evident failure of the health care systems in meeting the original objectives of responsiveness, efficiency and value to the users.
On a general spectrum, market-based proposals are many and varied. These variations are evident in the extent of proposed reforms, aspects of the health system that are targeted, and detailed approach that are employed in problem solving. It is possible that sometimes such reforms in the health sector may end up creating full 'quasi-markets' which could lead to competition either in terms of funding or in the supply of health care or both. However, some reforms may not be so all-encompassing and may aim at introducing some form of limitations in the market elements (Mills and Broomberg 1998).
Contractual relationship can take various forms. According to Walsh (1995), contractual arrangements can range from a situation where the contract calls for competitive tendering involving both internal staff and independent contractors; internal contracting, which involves, internal bids only; performance contracts, which can subsist between the government and managers in the public sector; internal market, which allows the provider and the purchaser to act independently and be only linked through contracts or some forms of trade agreement and finally, contracting out which involves bids from the private sector where contractual agreements can be reached even without a competition process.
Generally speaking, the option to contract out services by the government to the private sector can be attributed to the inefficiency of government to provide the particular services. Eminent scholars have observed that in recent past, considerable efforts have been directed towards the reassessment of the structure and roles of government with regards to the provision of public services. This new wave of thoughts seem to tie-in with the concept of 'new public management', which postulates that the hierarchical bureaucracy is inefficient and that such inefficiency can appropriately be mitigated through the introduction of various market mechanisms (Moore 1996).
The service to be contracted and the specifications of the contract are important issues to consider in drawing up a contract. The contract should clearly specify the services to be provided and the specification should include issues of quality and a vivid description of the services involved. The contract should state the position of the staff under the contract regime; identify the group of patients for whom the service is meant and state the terms and conditions for co-operation with other service providers.
The issue of the bidding price, whether single or multiple winners and contract price are equally salient. There are many ways through which the bid price can be specified depending on the risk associated with the workload as well as services to be contracted out. The mode of payment is also vital as that will serve as an incentive to the provider (Barnum, Kutzin and Saxenian 1995). With multiple winners, the bidding process becomes more attractive and the more the number of contracts awarded, the number of firms in the market thus creating the prospect of flexibility which in the event of default by a winning bidder, reimbursement of expenses can be done at the rate of the bid with no incentive for inflating the costs of the bid (McCombs and Christianson 1987).
A contract need to be certain about its duration and should be unambiguous about the penalties and sanctions for non-performance. Contractors will like to be certain about their investments especially in training and equipment as they will need to recoup over time. To do so will require certainty of the duration of their contracts. Longer-term contracts may be considered as a way of enhancing collaboration and effective sharing of information, which will have the overall effect of reducing the transaction costs (Robinson and Le Grand 1995).
Whether the approach shall be a punishment-based or a co-operative contractual, the issue of non-performance need to be considered clearly and to be agreed upon between the parties. In fact, all contentious issues including price-changing rules and quality assurances should be seriously considered while drawing up the contract and loop-holes covered to avoid future litigations.
The essence of contracting out is to achieve an efficient outcome. Though claims of efficiency are still been contested, the ambiguity is more in terms of determining the parameters of measuring the gains. Fundamentally, a contract for the contracting out of public health services must be devoid of uncertainty in terms of its design and implementation. It must be clear as to its intendment, which is, to achieve an efficient service delivery to the patients. This singular goal can only be achieved through a good understanding of the ingredients that make up the health care system. Broadly, the success of contracting out can be attributed to a number of political, economic and social factors and the capacity of the contracting agency in effectively monitoring the performance of the contract will lead to an overall maximisation of utility including lowering the transaction costs to the public authority and contractors.