Health Systems Development
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World Bank – Health Systems Development — March 2006

Economic Viewpoint Editorial

An Active and Intelligent Purchaser or a
“Health Care and the Passive Cashier?
Marketplace,” by John C.
Langenbrunner, Senior Does universal coverage at low income
Economist, The World Bank. levels mean fewer resources allocated to
programs and care for the poor?

Featured Reading Related Event

Spending Wisely: Buying CSIS Conference on
Health Services for the Poor, Health Care
by Alexander S. Preker and John Modernization in
C. Langenbrunner, WB, June Central and Eastern
2005. Europe, March 22 – 23,
2006.

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1
Health Care and the Marketplace
Author John C. Langenbrunner The use of purchasing as a tool to enhance public and private
Senior Economist sector performance is well documented in the literature on
The World Bank institutional economics and industrial organizations (Williamson
1985; Milgrom and Robers 1992). The extension to the health
In a perfect market, patients sector has recently been the focus of increased attention among
policymakers (Oevretveit 1995; Chalkley and Malcomson 2000).
seeking health care services express Lessons learned from this experience are now being successfully
their willingness/ability to pay through applied to developing countries (Bennett, McPake et al. 1997;
consumer demand. Suppliers Preker and Harding 2003; Figueras, Robinson et al. 2005).
compete in a full market, and prices
are the equilibrium point between the expressed demand A recent book from the World Bank, Spending Wisely: Buying
and supply. In the health care sector, we might first hope Health Services for the Poor, Edited by Alexander S. Preker and
that direct payment by the patient could send a clearer John C. Langenbrunner documents the progress and distills the
signal to the consumer about the price of the service lessons learned in recent years in securing better access and
used. It also makes the service provider, most often a financial protection against the cost of illness through collective
physician -- aware of demands. financing and purchasing of health care. A series of policy tools,
organizational issues, and institutional arrangements are
discussed chapter by chapter. This publication is part of a series
But, the relationship with the perfect market ends here; the of World Bank books on getting better value for public money
health sector does not always resemble a working market spent on health care, and the use of policy tools for reaching the
(Arrow, 1963). Poor patients, or patients receiving poor.
expensive care for major illnesses, may not have the
disposable income needed to bridge the period between Efficiency, Equity, and Responsiveness
paying for the service and receiving a full or partial
reimbursement. Promoting health and confronting disease challenges requires
action across a range of activities in the health system. This
The Role of Purchasing includes improvements in the policymaking and stewardship role
of governments, better access to human resources, drugs,
The high cost and uncertain demand for care leads to the medical equipment, and consumables, and a greater
need for a so-called “third party” – public or private -- which pools engagement of both public and private providers of services.
funds. Payment to health providers is then typically mediated Managing scarce resources and health care effectively and
through a pooling arrangement. Once funds are pooled, funds efficiently is an important part of this story. Experience has
then must be allocated in some fashion. The form of allocation is shown that without clear allocation and spending policies and
the purchasing arrangement. The equilibrium point may be effective payment mechanisms the poor and other ordinary
considerably altered by subsidies and co-payments/informal people often get left out.
charges in the case of demand, and restrictions in production and
monopolies on the supply side. The net effect of these A sub-theme of the book explores the shift from hiring staff in
distortions on market prices will also depend on the provider the public sector and producing services “in house” to strategic
reimbursement or reward mechanism used. The mechanism purchasing of non governmental providers – outsourcing –
used rather than prices and demand often creates the incentive which has been at the center of a lively debate on collective
environment for suppliers of services. financing of health care during recent years. Its underlying
premise is that it is necessary to separate the functions of
A final issue is the lack of information and information financing from the production services to improve public sector
asymmetry. Neither consumers nor producers have full performance and accountability.
information about preferences, prices or the market in which they
operate. The level, mix, and quality of care for consumers can A second lively debate in the volume is the right balance
be ascertained only ex-post and good health depends on factors between social responsibility and patient choice. Does collective
other than the health services consumed. Although physicians purchasing assure patient responsiveness? Will the so-called
act as agents for their patients (Arrow, 1963), even they often do “single payer” model now emergent in many countries in Eastern
not know the full impact of the interventions they are Europe and former Soviet Union effectively respond to patient
recommending. Both consumer and provider behavior is choice of benefits and providers? To what extent is consumer
therefore important. choice of purchasers important so that patients have both a say
and participate in their own care. Do competitive models from
So-called “strategic” purchasing connotes an active approach Chile and Columbia provide a better balance?
to addressing these various market failures that affect
consumers, providers, and social citizenry generally. Strategic The experience of strategic purchasing is now being extended
purchasing involves a continuous search for the best ways to effectively to the health sector in many developing countries in
maximize health system performance by deciding which every region of the globe. The work demonstrates how the
interventions should be purchased, how, and from whom. The interest of the poor would often be better served through a
approach is especially important in protecting the poor and fundamental shift in the way public money is spent on the health
medically vulnerable. services – notably by moving from passive budgeting within the
public sector to strategic purchasing or contracting of services
Strategic Purchasing: Value for Services whether public or from non-governmental providers.
2
References

• Arrow, K. W. (1963). Uncertainty and the Welfare Economics of Medical Care. American Economic Review. 53: 940-73.

• Bennett, S., B. McPake, et al., Eds. (1997). Private Health Providers in Developing Countries. London, ZED Publishers.

• Chalkley, M. and J. M. Malcomson (2000). Government Purchasing of Health Services. Handbook of Health Economics. A. J. Culyer and J. P.
Newhouse, Elsevier. 1: 848-890.

• Figueras, J., Robinson, R., and Jakubowski, E. (eds.), (2005) Purchasing Health Care in Europe to Improve Health Systems Performance,
Buckingham: Open University Press. Milgrom, P. and J. Robers (1992). Economics of Organization and Management. Englewood Cliffs, N.J,
Prentice-Hall.

• Oevretveit, J. (1995). Purchasing for Health. Buckingham, Open University Press. York, Praeger Publishers.

• 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. A. S. Preker. Washington, World Bank.

• Preker, A. S. and A. Harding, Eds. (2003). Innovations in Health Service Delivery: The Corporatization of Public Hospitals. Health, Nutrition,
and Population Series. Washington, World Bank.

• Williamson, O. (1985). The Economic Institutions of Capitalism: Firms, Markets and Relational Contracting. New York, Free Press.

3
Editorial

An Active and Intelligent Purchaser or a Passive Cashier?

During the 1990s, introducing purchaser provider splits has been a central mantra of health care reform in
many developing countries. The underlying principle is that central governments that both own and produce
their own health services are inefficient and often waste scarce public money. Such services are often
captured by the interests of bureaucrats who are motivated more by political patronage and their own gains
than by ensuring that the population has access to efficient and equitable health services.

Separating control over resource allocation or purchasing from control over the production of services can
have two quite different outcomes. Ideally new and autonomous purchasing agencies will act as intelligent
purchasers of health care. Often they end up as passive cashiers merely disbursing money according to
decisions taken elsewhere.

What are the reasons for this negative outcome in strategic purchasing and what can be done to prevent
it?

The one who “pays the piper calls the tune”. Purchasers therefore can become powerful agents that do not
always follow the rules set by the Ministry of Health. In a single payer system where there are no competitive
or consumer pressures to keep the purchasing agency accountable, this can sometimes lead to unpopular
polices and corruption. The reputation of everyone can be affected by the behavior of a few.

Sometimes, such abuses lead to a backlash against the purchasing agency. When this happens, it often
leads to a recentralization of the decision making process with the Ministry of Health once again in the driver
seat of the budget process. At other times, it may lead to the purchasing agency being forced to become a
passive administrator of decisions taken elsewhere – nothing more than a passive cashier.

Many of the purchasing agencies that were established during the 1990s have fallen prey to such
problems. The solution is to establish clear rules of the game at the onset of the reform process. Who
controls the decisions and keeping an appropriate balance of power among the various actors are critical.
There are many ways that such power can be shared.

Ministries of Health are more effective if they concentrate on overall sectoral governance and stewardship
oversight. They are less effective when they get bogged down in the day to day operations of the health
services. Purchasing agencies are more effective if they concentrate on purchasing value for money and
ensuring that providers deliver high quality care. They are less effective when they get involved in power
struggles with the Ministry of Health, second guessing the clinical decision making of providers or telling
patients about their health care priorities. Health care providers are more effective when they focus on the
clinical care of their patients rather than getting involved in the politics and economics of health. All need to
listen to the needs and expectation of patients. When they ignore the client, they usually fail.

An active strategic purchasing agency has much to offer in terms of improving performance of the health
care system. A passive cashier is little better than the former integrated financing and service delivery
systems of most National Health Services. Many countries that have introduced a purchaser provider split
are now re-examining how to achieve such an outcome for their health reform process.