From the general literature on privatization it is possible to distinguish four recurring concerns, namely: the extent to which the efficiency gains associated with enhanced competition are likely to materialize; die ability of government to manage relationships with the private sector; the equity or distributional effects of greater private-sector activity; alternative solutions to privatization, particularly the scope for strengthening public-sector activities. These concerns are explained in rather more depth below and their relevance to the social sectors, and health care in particular, is examined.
As described earlier, neo-classical economic theory posits that die benefits from privatization accrue not from the change in ownership but from a concurrent increase in competition. However, there has been questioning, particularly in the developing-country context, of the degree to which competitive or contestable markets exist. The thinness of markets in developing countries has been one of the principal reasons suggested for the failure of privatization programmes (Adams et al. 1992). These concerns have validity in the health-care sector. Measures such as contracting out may depend critically on competitive tendering for efficiency gains (see chapter 12), It has been asserted that: ‘substantial benefits are still possible in less than an ideal competitive framework’ (IFC 1995). However, this would seem to depend critically on two assumptions: either that government can regulate effectively so as to prevent excessive market failure from occurring, or that direct provision of the service or product by the public sector is so poor that even an imperfectly functioning market is superior. These two assumptions will hold to differing degrees for different goods and services; we return to them later in more depth. First we consider further the question of competition in health care.
Competition requires choice between providers. Very few studies outside of the US have examined the degree of choice which consumers have among providers or, in economic terms, the degree of market concentration (see chapter 6). Although there may be substantial competition between health-care providers in urban areas of many developing countries, the scarcity of providers in rural areas and poor accessibility suggest that competition there will be very muted. Contrary to standard economic assumptions, many health economists would aigue that this lack of competition may not be a bad thing (Reinhardt 1985). Because of problems of asymmetric information, competition may not necessarily be beneficial and may have adverse effects. Studies of competition in the health-care sector, which emanate mainly from the US, frequently identify adverse forms of competition, for example providers may compete in terms of quality or service intensity (Thomson 1994).
The sectors in which privatization programmes were, at least initially, focused were utilities and energy (Peele 1989). Such industries often form natural monopolies and thus regulation of the industry and careful structuring of the market are essential in order to reap any gains from competition. In the utilities and energy sector the most common approach to the control of monopoly has been competitive franchising and/or regulating profitability or prices (Bishop et al. 1995). In the health-care sector the central regulatory issue is not monopoly but how to cope with asymmetries of information which may endanger quality of care. If minimal standards of quality care are not assured then not only may competition have adverse effects, but people’s health may be damaged in seeking care.
Regulatory activity in all sectors is fraught by informational problems, as government tends to be less well informed about the activities of providers/producers than the providers /producers themselves; thus incentive structures need to be devised so that the object of regulation both reveals accurate information and behaves as desired. There has been much discussion in privatized industries of regulatory capture, where the regulator and the industry collude to produce a mutually beneficial outcome, but little concrete evidence of its existence (Bishop et al. 1995). In the health sector, regulatory problems are particularly intractable; the heterogeneity of service providers and the wide range of different services provided make informational problems acute. In health, as in other sectors which are dominated by professionals, governments have frequently delegated regulatory functions to the professions themselves, while alleviating informational problems, this often creates conflicts of interest as professionals are asked to police their colleagues. Studies in industrialized countries suggest that professional associations or councils are rarely particularly successful regulators (Rosenthal 199a) and tend to be lenient on the professionals at the expense of the public (Stacey 1992).
Increasingly, the question of developing country government capacity to regulate or manage relationships with the private sector is drawing considerable attention (DAG/ODG/HPU1994). Hildebrand and Grindle (1994) suggest that while the 1960s and 1970s were the era of the developmental state, and the 1980s was the decade of the minimal state, the 1990s has become the era of the capable state. Although government may disengage from certain primarily operational activities, there is still a need for a strong government to develop the over-arching policy framework and regulate providers whether public or private.
A further concern related to growth in private markets is that of equity. Privatization always has considerable distributional implications although these tend to be overshadowed by a focus on efficiency. It is often argued that privatization will hurt the poor (Ugalde and Jackson 1995), and this would appear to be particularly relevant in the social sectors as privatization may make access to crucial, life-enhancing services dependent upon ability and willingness to pay. However, this intuitive argument has been challenged by empirical evidence. Stren (1988), discussing urban services in Africa, suggests that the evolution of private markets led to an overall welfare improvement for the poor as they were at least able to procure, albeit at a cost, essential services to which they had previously had no access. In the health-care sector it has been similarly argued that privatization policies may actually enhance equity. The World Bank, among others, has disseminated this view (World Bank 1987, 1993) suggesting that the private sector can both bring in new resources, so that government can focus its efforts upon the poor and essential services, and may expand services to those who previously did not receive them. However, with the exception of some limited information on the effect of user fees on the accessibility of public health care, no study has properly assessed the validity of these hypotheses.
A final recurring question in the privatization literature relates to the relative benefits of reforming and improving the functioning of the public sector versus expanding private-sector activity. Brett (1988) suggests that the important issue is not how to take assets out of the hands of the state but to subject those who control them (be they publicly or privately owned) to effective sanctions. This stance, rooted in institutional economics, would suggest that certain market-oriented reforms in the public sector emphasizing accountability and appropriate incentives may have effects as beneficial as those of privatization. There is now a considerable body of literature exploring different aspects of civil service reform (AM90S 1994; Cassells 1995; Moore 1996), and given the preceding discussion about capacity it would seem that careful thought needs to be given to structuring appropriate incentives in the public sector, with or without privatization.
The four concerns from the broader literature on privatization-competition, regulation, equity, and gains from improving the public sector – all appear to be relevant to health and the social sectors. Concerns about equity are particularly important in the social sectors. Furthermore there are concerns in health care which are simply not relevant to industrial sectors. For example, one critical respect in which the health-care sector is different from industrial sectors is in the com-plex structure of the health-care market (Evans 1981), in particular the importance of insurance for health-care expenditures and the hierarchy of referral relationships between different levels of the health-care system. Clearly defined relationships between primary, secondary and ¡tertiary providers are required in order for the sector as a whole to function efficiently, yet private providers frequently appear to have poor for non-existent relationships with other (particularly public) levels of the health-care system (Aljunid 1995). The prevalence and form of health-care insurance will not only affect the financial feasibility of private practice but is also important with respect to the equity implications of private practice and may, if appropriate monitoring procedures are in place, improve quality of care. Privatization of health-care provision in a system with fragmented private financing of care is likely to be far more problematic than privatization of provision under a cohesive social insurance financing system.
Thus, while the principal focus of this book is on the role of private health-care providers, it is critical to bear in mind the many and varied links to other actors in the sector, including financing organizations, public providers, regulators and government. To evaluate the equity and efficiency of private providers, and government’s ability to manage relationships with them as a question isolated from the rest of the health-care sector, is like considering the quality of the first violins without assessing how they harmonize with the rest of the orchestra.
The complex structure of the health-care sector is also likely to present many alternative approaches to resolving the same problem. For example, private providers may be promoted as a means to bring extra resources into the health-care sector, but the same end could be pursued through policy changes in the sphere of financing for public-sector providers.
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