The Economics of Public and Private Roles in Health Care Insights from Institutional Economics and Organizational Theory

Many countries today have large inefficient public sector that are producing goods and services that could be bought from non-governmental providers. These countries could benefit from greater private sector participation both factor markets (production of inputs) and product markets (provision of services). Moving from a public sector monopoly to a more effective balance between public and private roles is not easy. It will take time and must be accompanied by capacity building in areas such as contracting, regulation, and coordination of non-governmental providers. Using a framework based on recent insights from new institutional economics and organizational theory, this paper challenges the principles and nature of public intervention pursued by many governments especially in the area of the public production of health services. Parallel to recommending that governments move away from the production of goods and services, the paper also makes a strong argument in favor of greater public sector involvement in health care financing, sectoral coordination, regulation, and monitoring and evaluation. A three step process is proposed to gradually move from one balance in the public-private mix in service delivery to another. First, when there is already a large existing private sector, the public sector can begin by recognizing its existence, slowly increase the use of these resources through better coordination, contracts and establishment of a positive regulatory environment. Once some learning has taken place in coordinating and contracting with existing providers, the positive lessons from this experience can be transferred to other priority areas where non governmental providers may not yet be active. Finally, in some cases where the public sector is clearly engaged in inefficient activities such as public production of may inputs, these can be converted through outright privatization and subsequently bought from the private sector. .