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Leadership Forum (May 2004)

Author: Robert R. Taylor is with IFC's Advisory Services Group which assists governments in implementing public-private partnership transactions for private provision of public services, including health care.

Governments worldwide are grappling with rising health costs and increased demand for health care services. A number of factors are pushing demand and costs, such as aging populations, changing disease patterns, high-cost technology and prescription drugs. As governments struggle to stretch their health care funding, many are increasingly turning to the private sector as a means to reduce rationing in the public system, fund new equipment and facilities, expand services and increase efficiency

Traditional Approach

The standard approach of governments has often been to provide capital funding to public health authorities for medical equipment and facility construction and renovation. But, public patients in many countries are facing longer queues for treatment, often due to shortages of key medical equipment (e.g. CTs or MRIs) or spare parts to maintain the existing equipment within public facilities.

New Approach

Many countries faced similar contraints in their infrastructure services in the 1980s and 1990s. They lacked the capital funding to build new power plants or water treatment plants, or roll out new telephone services. Many turned to the private sector to build, finance and operate a wide range of infrastructure services for the public. But, rather than specifying the investments to be undertaken by the private operator, they specified the service standards and obligations, leaving the choice of inputs and technology, and the level of investment, to the private operator.

A similar approach can be implemented for publicly-funded health care services. Governments, or national health insurers, can contract with private providers to deliver a wide range of bundled or unbundled health care services from vaccinations to the highest-level hospital services.



Contracting for services has many benefits and advantages. It can help expand the availability of heath care services to the entire population, particularly the poor not currently served by the public sector. When properly structured, it can also improve the overall efficiency and quality of health care services. And it can significantly reduce the fiscal burden on governments, as governments can transfer the responsibility for funding new equipment and facilities to the private sector.

Indeed, perhaps the most innovative and far-reaching aspect of contracting is that the government need no longer directly fund the acquisition of medical equipment, supplies, nor the construction or renovation of hospitals. Rather, the Government can contract for specific services and shift entirely the responsibility to the private sector for financing, providing and maintaining the necessary equipment, supplies and facilities required to provide the service. This can be particularly beneficial in the case of equipment, where public hospitals often face the problem of shortages of crucial equipment or replacement parts. Under a contract for services, the private operator will assume all responsibility (and risk) for installing and maintaining the equipment, and purchasing all related parts and supplies within the overall price of the service.

This can also be very beneficial if extended to the construction or modernization of major health facilities such as hospitals. While most countries do not suffer from a shortage of hospital beds, many public hospitals are aging and require modernization and replacement. Rather than proceeding with a traditional public sector investment, the government can contract with the private sector to modernize or construct/operate a new public hospital. The most economically efficient approach would be simply for the government to specify the services it will purchase through a tender, allowing bidders full flexibility in determining the most appropriate facility to provide the services (and location within a specified catchment area). Under this approach, the private operator would design, finance, construct, own and operate the facility, with funding contracts with the government to provide hospital services to public patients. The contracts need not be long term, provided there are transparent procedures for government allocation of funding between hospitals, so that the private operator will have some assurance that if the hospital is efficient (compared to other hospitals) and there is demand for its services, they will receive an appropriate level of annual funding for clinical services.

Governments should also be cognizant of the possibility of purchasing hospital services from existing private hospitals, rather than tendering for a new hospital. In many countries, the private hospitals are operating at 50% capacity, depending upon overall economic conditions and the extent of private health insurance. Yet, governments may embark on constructing new public hospitals, while a more economically efficient solution would be to purchase hospital services from existing private hospitals.


New Challenges

An important lesson from the experience with infrastructure services in the 1990s is that contracting with private operators for provision of public services creates new and difficult challenges for governments. It requires that governments build new skills to implement tenders with sound contracts that include well-defined service requirements, incentive-based funding arrangements, monitoring arrangements for compliance by both parties, and dispute resolution procedures.

It is likely that new regulatory arrangements and institutions will need to be developed to monitor and enforce contracts between the government and private health providers, possibly borrowing from the infrastructure experience of the 1990s where new regulatory agencies emerged worldwide to deal with the proliferation of privatized infrastructure providers. While the health sector often has institutional arrangements for medical licensing, certification and accreditation, regulatory arrangements for service contracts require a different focus and set of skills. Independent regulators may be required to monitor contract compliance and facilitate contract adaptations that will invariably be necessary to address unforeseen changes in market conditions.

The introduction of private provision of publicly-funded health care services will inevitably create higher public expectations regarding service delivery and much lower tolerance for poor service. Indeed, problems that emerge will certainly draw press attention and criticism. Errors under private provision will become a lightning rod for critics. The public must be assured that they will receive the highest quality of care possible and that their health and safety will be protected under private providers. These factors highlight the need for careful attention in contract design and regulatory enforcement. Governments cannot afford to make mistakes in these areas, particularly when dealing with sensitive health care issues.


Feature Reference

  • Public Hospitals: Options for Reform through Public-Private Partnerships
    Author: Rob Taylor and Simon Blair
    Source: Public Policy for the Private Sector 241. World Bank, Washington, D.C., January 2002
  • Contracting for Public Services: Output-Based Aid and its Applications
    Author: Penelope J. Brook and Suzanne M. Smith (eds.)
    Source: World Bank, Washington, D.C., 2001

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