The separation of functions in the health system: insights from economics

1. The separation of functions in the health system:insights from economics CERDI, 17th December 2009 B. Meessen, Institute of Tropical Medicine, Antwerp

2. Starting point • The separation of functions is emerging as a key concern in the PBF literature on low-income countries (Meessen et al. 2006; Soeters et al. 2006) and in national debates (e.g. Burundi); it has recently been presented as a key principle (e.g. Burkina Faso). • Ouagadougou workshop (9/2009): not clear enough.

3. Acheteur Prestataire Régulateur Consom mateur La séparation des fonctions (2/2009)

4. Les fonctionsprincipales du FBP (September 2009)

5. Questions • What should be understood by the ‘separation of functions’? • Which functions should be separated? • What is the rationale behind this? • Is it really a principle? • Our approach: • Can economic theory help us to get a ‘stabilized’ view?

6. Functions in the health system • Consensus: A health system rests on different complementary functions. • There exists a literature on ‘essential public health functions’ (PAHO/WHO); some authors make the link with New Public Management (e.g. Khalegian & Das Gupta 2005) • Kutzin (2001): (1) resource mobilisation, (2) risk pooling, (3) purchasing + provision • WHO (2000): Stewardship / regulation • « PBFers »: verification; voice of the population; capacity building/coaching. • Ouagadougou: service delivery, purchasing, payment, regulation, verification, support…

7. Challenging the standard view (in LIC) • In many LICs: The NHS model, the State (MoH) performs all the functions. • WHO (2000): the State is maybe not the best performer for some functions. • A debate often sparked by the inefficiencies due to the monopolistic, centralized and hierarchical character of the public sector.  The State should fulfil only/at least the functions that other actors cannot undertake (e.g. stewardship). When the private sector is more efficient, rely on the private actors.

8. Splitting functions • The argument of PBFers is slightly different. Part of the issue is (also) the fact that some bundlings of functions create conflict of interest. • For instance, under a PBF system, the health care facility has an incentive to over-report its activities. This indicates the need for a ‘new’ function: verification, which must be entrusted to another actor (i.e. autonomous) than the actor in charge of provision. • No (negative or positive) a priori against public or private actors.

9. A new economic framework • Instead of the efficiency of the central planner, expected to manage and control everything, one focuses on the efficiency of the institutional arrangements. • Consequence: rather than one actor that controls everything (logic: avoid duplications and competition) one tries to divide the property rights (logic: avoid conflicts of interest). • A Copernician revolution for many actors and more in particular for the Ministry of Health.

10. A substantial body of literature • Montesquieu; checks and balances; regulatory literature (e.g. Laffont & Martimort 1998). • New Institutional Economics (transaction costs); contract theory. • New Public Management. • Literature on purchaser-provider split in the health sector. • Yet, so far, we have not found a clear presentation / unequivoqual rules on how functions should be bundled.

11. The functional split? Nothing new. • Example: • The one who prescribes the drugs should not own the pharmacy. • The one who has to assess the due execution of a contract / to settle a dispute cannot have some earning rights attached to some possible solutions. Better not to be both player and referee at the same time.

12. Conflict of interest • John has received decision rights (a mandate) to protect Mary’s interest, but John is in a situation where he has some (supplementary) earning rights attached to some of the possible options he can opt for.

13. Some other definitions • Complacency: A situation where John, the principal, tacitly or not does not fully enforce a contract upon his agent Mary. • Collusion: A situation where at least two economic agents develop an explicit joint action (e.g. to agree on price, share the market) to their benefit, obviously to the detriment of a third economic agent. • Corruption: misuse of entrusted power for private gain (Transparency International).

14.  A problem of economic property rights • Splitting functions should be in line with close analysis of property rights. • Not formal rights, but real property rights! • Splitting functions = establishing institutional arrangements that entrust the two functions to different actors which are autonomous (i.e. subtantial decision rights for both), cannot collude or be complacent to each other and whose real earning rights are attached to different behaviours.

15. Five options to deal with a conflict of interest • Remove the earning rights. Ex: do not allow bonus funded on drug prescription; forbid kickbacks from pharmacies (and sanction!). • Increase the earning rights attached to other options (fee-for-service attached to curative consultation). • Remove the task/function/decision rights from the agent exposed to a conflict of interest (it can be temporary). This last option requires the identification of a new holder for this function. It may entail also some economic losses (see next slide). • Expose the conflict of interest situation to public scrutiny (e.g. transparency, set up a supervisory board gathering different stakeholders) • Increase transaction costs of collusion.

16. Rules for deciding to whom to entrust the function • Earning rights are aligned on the good completion of the function. • Economies of scale: a reduction in long-term average cost as a result of an expansion in output. • Economies of scope: a reduction in average costs brought about by the joint production of two or more goods or services by a single firm, rather than by several firms. The similarities of the products permit the use of the same factor inputs for different products. • Signal theory / yardstick competition models (Shleifer 1985; Dewatripont et al. 2000): split tasks up into similar packages to reduce the informational rent of the agent. Bundle tasks with a similar degree of measurability; specialize organisation around tasks that require similar talents (inference process). • Transaction costs: no specific asset; collusion would entail high transaction costs. • Preferences, market structure, asymmetry of information, availability of skills, capacity to bear risk.

17. Take home messages (1) • The economic property rights framework indicates that much more than splitting functions, the crux is to reallocate decision and earning rights in a coherent way. No clear cut. Ex: purchasing/payment; monitoring. • Taking some decision rights or tasks from the health administration may entail some economic losses. There are interdependencies between tasks. A place for hybrid organisations, multi-stakeholder bodies? • Taking away from the health administration  Taking away from the State. Ex: local government or an agency with clear and distinct objectives.

18. Take home messages (2) • Taking a function away from the health administration certainly do not automatically entail entrusting the function to the private-for-profit sector. • Several functions fulfilled by international NGOs today are in fact strategic. We rely on their non-profit motive and their concern to build and secure a good reputation. Still little knowledge on how to transfer back these functions to local actors. • Contract is a key tool to govern such a system: it clarifies the decision rights and earning rights of respective parties. • Key message to MoH: contracting a function does not mean losing power, it may in fact increase accountability, as a contract requires that performance is better defined and measured.