Contracting-out health care services: a conceptual framework

Contracting-out has become increasingly prominent in the health-care sector. It has been used in activities ranging from 'internal market' arrangements in which providers compete for funding from government payers to purchases of medical and non-medical inputs by service providers. While contracting-out arrangements for non-medical services have been widely adopted with apparent success, the contracting-out of medical services has met with criticism. Specifically, prominent 'market failures' have been identified which allegedly make contracting-out inefficient and even potentially disruptive to health care delivery. This paper presents and discusses a systematic framework for policymakers to identify and assess potential problems in contracting-out health care services, as well as some generic approaches to mitigating these potential problems. A key to the framework is the notion that conditions contributing to potential market failure problems can often be mitigated by policymakers, and that the strategic choices of policymakers in the 'first stage' of the contracting process should include an analysis of how the contracting-out environment can be changed to mitigate potential market failure problems.