Building Public/Private Partnership for Health System Strengthening

Contracting: Overview

Peter BermanThe World Bank

Bali Hyatt Hotel, Sanur, Bali21-25 June 2010

Outline

Separating the financing and delivery functions in government programs

Contracting is the use of contracts to achieve objectives. So…what is a “contract”?

Advantages and disadvantages of contracting Some examples Some “conditional guidance” on how to do

contracting

The key innovation in contracting is for government to separate

the financing and delivery functions

Contracting definedOld versus new system

In contrast to the traditional, integrated purchaser/provider function of government,contracting implies a split between purchaser and provider functions.◦ The purchaser tries to

maximize the quantity & quality of services for its money.

◦ The provider tries to maximize revenue, profit or some other objective.

4

I control the

budget

I produce services

I pay myself for the

services I produce

The traditional setting

Purchaser and provider

I control the

budget

I produce services under a contract in

exchange for a payment

I contract & pay someone

to produce services

The new setting

Purchaser

Provider

Contract

I must show

results

The rationale for contracting

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Consequences

Low public sector efficiency

Traditional organization of the public sector

Virtues of:

• Direct production

• Coordination and monopoly

• Strong ministerial control

Organizational features:

• Departmentalization and hierarchy

• Career public service

• Strong central agencies

Consequences• Decision makers

face few incentives to allocate resources efficiently property rights theory.

• Those controlling public bureaucracies may not act in the public’s best interestpublic choice theory.

Rationale for contracting: Introduce market mechanisms

Replace direct, hierarchical management structures by contractual relationships between purchasers and providers, where incentives play a key role in promoting better performance.

Examples:• Excess of beds in public hospitals leading to under-utilization of capital

• Public sector doctors can successfully lobby their managers to avoid rural placements

Example: Government officials may be empowered to seek their own economic benefits (rents) from postings and transfers, licensing, and other government functions

Overriding rationale: Move away from the traditional, organization of public supply which limits accountability and thus may lead to poor performance in terms of equity and efficiency.

What is a “contract”? Contracting is the use of contracts to achieve

objectives

Contracting defined Contracting is a purchasing mechanism

used to acquire:◦ from a specific provider◦ a specified service◦ for an explicit quantity◦ of a known quality◦ at an agreed-on price◦ for a given period of time

In contrast to a one-off exchange, the term contracting implies an on-going relationship, supported by a contractual agreement.

7

How contracting worksThe basic elements of a contract

8

Elements of a contract• What services

• How much

• For whom

• Payment conditions

• Provider payment method (PPM)

• Price

• Timing of payment

• M&E system

• Duration

• Dispute resolution

• Conditions for termination

Purchaser

Provider

Beneficiary

Contract Monitoring and

Evaluation (M&E)

Payment

Services

Different contracting arrangements Contracting in

◦ Bring outside private management to operate an internal government service (e.g., hire a private firm to run cleaning or catering services inside a public hospital).

Contracting out◦ Purchase services from a private source that provides

the service using external workforce and resource.

Contracting can be done with public or private providers◦ Governments can contract with public autonomous

institutions or with private providers.

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Advantages and disadvantages of contracting

Potential benefits of contracting Competitive forces:

◦ Contracting can generate pressure on providers to improve performance in both price and quality (but this benefit hinges on the actual competitive forces at work).

Planning and policy development:◦ Contracting requires and may promote better planning & policy

development by improving the flow of information about volumes of goods, services, costs, quality, responsiveness, population served, health needs, and other issues.

Price stability:◦ Contracting provides government with a mechanism for purchasing

needed health services at an agreed-on and, therefore, predicable price.

Improve equity:◦ Contracting can focus on delivering services to targeted population

groups.

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Potential drawbacks of contracting Transaction costs:

◦ If significant costs in designing, M&E, and managing CO government may not capture efficiency gains from CO.

Government capacity:◦ Government limitations to design & manage contracts may limit

potential gains from CO. Provider capacity:

◦ Weak private sector limited number and capacity of bidders low quality.

Setting the price right is difficult:◦ If government over- or under-estimates price, this may waste resources

or threaten providers’ financial equilibrium. Monitoring and evaluation:

◦ If few resources allocated to M&E of providers, government may be unable to effectively enforce contracts & achieve strategic outcomes.

Quality may be a casualty of CO: ◦ Even if contracts specify quality, providers may save on non-verifiable

aspects of care, especially if purchasers have limited ability to scrutinize & enforce contracts.

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One ExampleNGO Contracting in

CambodiaLarge Scale

Detailed Impact Evaluation

Methodology Used to Evaluate Contracting in Cambodia

12 districts (100,000-180,000 pop’n each) randomly assigned to CO, CI, or GS

3 districts were not contracted G

Baseline household surveys carried out by 3rd party in 1997

Follow-on survey carried out in mid-2001, 2.5 years after start of the contracts and in 2003, 4 years into the contracts

% of Pregnant Women Receiving Antenatal Care

0

10

20

30

40

50

60

70

80

baseline mid term endline

CO

CI

GS

G

Health Center Utilization in the Last Month (%)

0

10

20

30

40

baseline mid term endline

CO

CI

GS

G

% of Deliveries Taking Place in Health Facility

0

5

10

15

20

25

baseline mid term endline

CO

CI

GS

G

Change in Key Indicators,Endline – Baseline, % points

0

10

20

30

40

50

60

FIC VITA ANC TDEL FDEL MBS USE

CO

CI

GS

G

Change in Concentration Index Endline - Baseline

-0.25

-0.15

-0.05

0.05

0.15

0.25

FIC VITA ANC TDEL FDEL MBS USE

CO

CI

GS

G

More Pro-Poor

Less Pro-Poor

Change in QOC Index Endline (2003) – Baseline (1997)

0

100

200

300

400

500

600

Health Centers Referral Hospitals

CO

CI

GS

G

Total Per Capita Health Expenditures - 2003

1.71.743.474.83

19.9919.8616.7214.29

0

5

10

15

20

25

CO CI GS G

OOP

Public

19.12 20.1921.60 21.69

Discussion Questions

1. What do you think about contracting with NGOs as a way of improving delivery of PHC?

2. What do you think would be the likely impediments or difficulties in introducing contracting in the context in which you work?

3. Besides changes in coverage of services, how else would you evaluate the performance of the NGOs and contracting in general?

Discussion Questions

4) What do you think would be the obstacles to sustainability of contracting in your context in which you work?

 5)What would be the advantages and

disadvantages of increasing the scale of each contract to cover 2 or 3 operational districts?

Some Guidance on Implementation

Design of Agreements/Contracts1. Defining Objectives

2. Maximizing Managerial Autonomy

3. Size of Individual Contracts

4. Other important aspects of contracts

Defining Objectives Big advantage of contracting is results focus

so concentrate on outputs not inputs

The clientshould objectively define:◦Quantity of services (e.g. % DTP3

coverage)◦Quality of care (national technical

guidelines) ◦Equity (ensuring the poor receive services)◦Catchment area and population

Stating Objectives They need to address the most important

outputs/outcomes

There can’t be too many – indicator inflation

They need to be measurable and actually intend to be measured

Targets need to be realistic and plausible, not aspirational

How to ensuring focus on results Use performance bonuses

Provide baseline data to contractors

Regular discussion of indicators

Use and improvement of HMIS data

Credible threat of being fired for non-performance

Use and review the contract

Ensuring Managerial Autonomy Decentralize management to people who

are closest to the ground reality

Accountability for results is easier when managers have responsibility and autonomy

Encourage innovation

Take advantage of private sector’s flexibility

Impediments to Managerial Autonomy Telling contractors “how” they should deliver

services (define objectives, “what”)

Too specific line item budgets ( is it possible to use lump-sum contracts with performance benchmarks?)

Government procures important inputs (allow contractors to do procurement)

Require following Government procedures for staff hiring, firing, transfer, and pay

Unclear authority of government officials

Scale – Size of “Packages”

Economies of scale affects the cost (price) per beneficiary◦Distributing management and admin costs

Large packages facilitate contract management

Easier and cheaper to monitor and evaluate contractor performance with fewer packages

◦ Hence packages should cover millions or hundreds of thousands

Need to balance against concerns regarding contractor capacity

Other Important Aspects

Duration: 3-5 years is minimum, takes time to build relationships, no advantage to yearly “renewal”, but can use performance reviews

Termination/Sanctions: Clearly spelled out procedures. Embarrassment works!!

Payments: Mobilization payment often needed, 6 monthly payment thereafter (less frequent payment may increase timeliness of payment)

Reporting Requirements: Clear, not onerous.

Other Important Aspects Procurement:contractor should be

responsible for procurement, generally. Standards needed for drug quality

User Charges: should contractor be able to implement user charges (if they want to) within guidelines and conditions to assure protection of poor?

Training/Capacity Building:may include contractor obligations in terms of training and capacity building, access to training courses should be specified if coming from government.

Relationships & Responsibilities Contract type: For services already being

delivered by government, “contracting-in” is often easier◦need to define relations with existing

staff

All contracts need to define authority of government officials

Infrastructure: – who owns it? contractor pays for maintenance & repair

Concluding Thoughts

Challenges and potentials Many of the posited difficulties of contracting

can be managed or are exaggerated – need to compare with the alternative of government provision:◦ Not only small scale◦ Not necessarily more expensive◦ Government can manage (if capacity developed)◦ Trust can be developed◦ Equity may be improved◦ As sustainable as government will to finance

There is ample evidence of potential – one of a set of possible strategies to improve outcomes