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Viewpoint (November 2002)

Author: Alexander S. Preker, Chief Economist, HNP 

This special reprint of Philip Musgrove's 1996 World Bank Discussion Paper - Public and Private Roles in Health: Theory and Financing Patterns - commemorates his retirement from the Bank after 10 years of distinguished service. During his tenure at the Bank, Philip provided outstanding intellectual leadership, surpassed only by his sense of humor. A selected collection of his most significant work - Health Economics in Development - will soon be published by the World Bank. 
Although many countries are re-examining the role of the state and private sector in health, this topic is not new. Since the beginning of written history, the pendulum has swung back and forth between a minimalist approach to state involvement in the health sector and varying degrees of a greater role by governments. As early as the second millennium B.C., the papyri, give fascinating evidence that Imhotep, archetypal physician, priest and court official in ancient Egypt, introduced a system of publicly provided health care with healers who were paid by the community.

This early experiment in organized health care did not survive the test of time. The Code of Hammurabi (1792-1750 BC) laid down, inter alia, a system of direct fee-for-service payment based on the nature of services rendered and the ability of the patient to pay. For the next three thousand years, involvement of the state in health care revolved mainly around enforcing the rules of compensation for personal injury and protection of the self-governing medical guild. At best, the financing, organization and provision of health care were limited to the royal courts of kings, emperors and other nobility who typically had physicians for their personal use. while the masses got by with local healers, midwives, natural remedies, apothecaries and quacks.

… From Heavy Handed State Involvement

Unlike this predominant historical role of the private sector in health care, during the 20th Century, governments of most countries became central to health policy, often engaging in both the financing and provision of a wide range of care. Today, most OECD countries have achieved universal access to health care through a mix of public and private financing arrangements and providers.

Proponents of such involvement by the public sector in health care have argued their case on both philosophical and technical grounds. In most societies, care for the sick and disabled is considered an expression of humanitarian and philosophical aspirations. But one does not have to resort to moral principles or arguments about the welfare state to warrant collective intervention in health. The past 100 years are rich with examples of how the private sector and market forces alone fail to secure efficiency and equity in the health sector. Economic theory provides ample justification for such an engagement on theoretical and practical grounds to secure efficient and equitable health care for the population.

During the past 50 years, largely inspired by western welfare state experiences such as the British NHS and the problems of market failure, many low- and middle-income countries established state-funded health care systems with services produced by a vertically integrated public bureaucracy.

… Back to Neo-Liberalism of the 1990's

During the 1980s and 1990s, the pendulum began to swing back in the opposite direction. During the Regan and Thatcher eras, the world witnessed a growing willingness to experiment with market approaches in the social sectors (health, education and social protection). This was true even in countries such as Great Britain, New Zealand, and Australia that historically had been the bastions of the welfare state.

As in the case of the rise in state involvement in the health care, the recent cooling towards state involvement in health care and enthusiasm for private solutions has been motivated by both ideological and technical arguments. The political imperative that has accompanied liberalization in many former socialist states and the economic shocks in East Asia and Latin America certainly contributed to a global sense of urgency to reform inefficient and bloated bureaucracies, and to establish smaller governments with greater accountability.

But it would be too easy to blame ideology and economic crises for the recent surge in attempts to reform health care systems by exposing public services to competitive market forces, downsizing the public sector, and increasing private sector participation. In reality, the welfare state approach failed to address many of the health needs of populations across the world. Hence the dilemma that policymakers face throughout the world today: although state involvement in the health sector is clearly needed, it is typically fraught with public sector production failure.

Towards a New Stewardship Role of the State...

Governments everywhere are, therefore, reassessing when, where, how, and to what degree to intervene or to leave things to the market forces created by demand from patients. In this publication Philip Musgrove explores the policy options available to government in improving efficiency or equity, ranging from the minimal provision of information to indirect involvement through regulation and contracting, to more direct involvement thorough public subsidies and public production of services. He argues a strong case in favor of a new "stewardship function" of governments in securing equity, efficiency, and quality objectives through more effective policy making, regulating, contracting, and ensuring that adequate financing arrangements are available for the whole population. At the same time, he also argues for a strong case for strong private participation in the provision of health services and production of inputs, such as pharmaceuticals, medical equipment, and consumables.

By making this publication available to readers in electronic form through the HNP Discussion Paper Series, we hope to share the critical and passionate analysis of Philip and others with a large audience throughout the world.

Alexander S. Preker

World Bank October 2002

Further Reading

  • Musgrave R.A. and P.B. Musgrave (1984). Public Finance in Theory and Practice. New York: McGraw-Hill. 
  • Musgrove P. (1996). Public and Private Roles in Health: Theory and Financing Patterns. Washington, World Bank. 
  • Preker A.S. and A. Harding (2000). The Economics of Public and Private Roles in Health Care: Insights from Institutional Economics and Organizational Theory. HNP Discussion Paper. Preker A.S. Washington, World Bank. 
  • Rice T. (1998). The Economics of Health Reconsidered. Chicago, Health Administration Press. 
  • Vining A.R. and D.L. Weimer (1990). "Government Supply and Government Production Failure: A Framework Based on Contestability." Journal of Public Policy 10(1): 1-22.

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