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Viewpoint (May 2004)

Author: April Harding , Senior Private Sector Development Specialist, Health, Nutrition and Population Anchor - leads the Anchors’ work related to the delivery of health services, including issues related to public policy toward the private sector. 

"The line between public and private in the health sector is extremely blurry". This statement crops up frequently in developing-country health policy discussions. It is so often voiced - and so rarely examined - that most people believe it is true. But it isn't.

What is blurry, unfortunately, is peoples', even experts', thinking and discourse on funding, payment, service delivery, and ownership. If you are not clear about which part of the system you are talking about - then it is easy to get confused (and easy to confuse your listeners as well). Likewise, if you are clear about which part of the system, and which activity, you are talking about, the boundaries are very clear. Below is my contribution to enhanced clarity.

  • The source of funding for healthcare can be private or public, with the latter including revenue collected via taxation or mandatory contributions;
  • Payment can be done by a public or private actor, regardless of who provides the services;
  • Ownership of the business or activity. Ownership refers not to the ownership of the premises but to the ownership of any leftover funds (or debts) at the end of the year, after all costs have been paid. When clinics or hospitals are publicly owned, leftover funds belong to the treasury or public purse or the public organization for internal use. When clinics or hospitals are privately owned, the organization itself or a private person has a legal claim to all leftover revenue. For a nonprofit entity, the profits cannot be distributed outside the organization. The next paragraph further elaborates on these distinctions;
  • Ownership of premises. Public clinics are almost always located in publicly owned buildings. Private clinics and hospitals often do not own but rather rent their premises. Sometimes private clinics are even run in publicly owned buildings. This does not make the business, or operation, any less "private," since the leftover revenue still remains with the organization or its owners.
  • Employment. Health professionals can work in the public sector, the private sector, or both. Sometimes this is legal. Sometimes it is not. Sometimes people employed in the public sector "steal" the time they are supposed to devote to public employment and sell it privately, in much the same way that they sometimes steal drugs and sell them privately. It is not difficult to distinguish what is public and private in this case. When employees work for a public organization and steal time, they are stealing from a public employer. When employees sell what they have stolen-be it drugs or time-it is a private transaction (they are selling something they "own", if informally, even if they obtained it by stealing - and, they keep the income).

Another area, where confusion often reigns unchallenged relates to forms of private ownership of business or activities in the health sector. There are three fundamentally distinct options: non-profit ownership; for-profit small business; and, for-profit corporation. These can be distinguished in the following way:

  • A non-profit entity can be distinguished from other service providers by the "non-distribution constraint" - that is, even though they may generate a 'surplus' of revenue over expenditures, they cannot distribute this surplus to individuals in the form of profits. They can spend it in other ways, including higher wages or 'perks' to their employees and managers, training/education, research, community service, or subsidizing less profitable services. Non-profit organizations are also distinct from for- profits in that they often a number of objectives for their operation other than just the financial bottom line.
  • In some developing countries, there are a number of investor-owned, for-profit facilities - usually hospitals. At least some of the capital in these hospitals represents the investment of individuals outside the hospital - and these shareholders expect a return on their investment. This means that management will be concerned with generating a return on this investment - either in the form of distributed profits, or appreciation of the value of the hospital. This concern with the value of the hospital as a business - generates concerns that cost-cutting actions will lead to reductions in healthcare quality or that unprofitable patients will be discouraged or even turned away.
  • The vast majority of private providers of healthcare in developing countries are essentially small businesses. Most private clinics and diagnostic labs for example are organized this way. While these organizations are run as a business, and the proprietor certainly takes home any profits generated - they do not have to generate a return on any investment by external shareholders. This difference is perceived to reduce the focus on the financial bottom-line, allowing professional values and ethics to exert a greater influence. Hence, typically, policymakers are less concerned with quality skimping and patient "cream-skimming" in the case of small healthcare businesses.

By being clear about which part of the health system is under discussion, it is easy to distinguish whether it is public or private. By being clear about the specific organizational form of a private entity, it is much easier to understand the incentives faced by the provider. Such distinctions are critical to understanding the organization of health systems and the incentives associated with that organization.

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