Contracting for health services in New Zealand: a transaction cost analysis

The splitting of the functions of purchaser and provider in the New Zealand health system in 1993 necessitated the use of explicit contracts between the two parties. This paper examines contracting experiences during the first two years of operation. The study focuses on four services: rest homes, primary care clinics, surgical services, and acute mental health services. The insights of transaction cost economics form the theoretical framework. The objective of this study was to examine whether the transaction costs associated with contracting vary across the four different services, and whether different types of contracts and contractual relationships are emerging as transactors attempt to reduce these costs. Information was collected in a series of 53 interviews with purchasers and providers, together with any relevant documentation. The results suggest that the costs of contracting are indeed greater for some services than for others. Other variables such as the style of negotiations, the type and specificity of contracts and the degree of monitoring also differ across the four services. At this early stage of the reform process, there was little evidence that purchasers and providers were attempting to reduce transaction costs by negotiating more flexible, longer-term, relational contracts. The main benefit from contracting to date has been improved accountability of service providers.