Improving the efficiency of district hospitals: is contracting an option?

A world-wide revolution in thinking about public sector management has occurred in recent years, termed the 'new public management'. It aims to improve the efficiency of service provision primarily through the introduction of market mechanisms into the public sector. The earliest form of marketization in developed countries has tended to be the introduction of competitive tendering and contracts for the provision of public services. In less wealthy countries, the language of contracting is heard with increasing frequency in discussions of health sector reform despite the lack of evidence of the virtues (or vices) of contracting in specific country settings. This paper examines the economic arguments for contracting district hospital care in two rather different settings in Southern Africa: in South Africa using private-for-profit providers, and in Zimbabwe using NGO (mission) providers. The South African study compared the performance of three 'contractor' hospitals with three government-run hospitals, analysing data on costs and quality. There were no significant differences in quality between the two sets of hospitals, but contractor hospitals provided care at significantly lower unit costs. However, the cost to the government of contracting was close to that of direct provision, indicating that the efficiency gains were captured almost entirely by the contractor. A crucial lesson from the study is the importance of developing government capacity to design and negotiate contracts that ensure the government is able to derive significant efficiency gains from contractual arrangements. In other parts of Africa, contracts for hospital care are more likely to be agreed with not-for-profit providers. The Zimbabwean study compared the performance of two government district hospitals with two district 'designated' mission hospitals. It found that the two mission hospitals delivered similar services to those of the two government hospitals but at substantially lower unit cost. The nature of the contract between government and missions was implicit rather than explicit and of long standing. On the whole the mission organizations felt the informal nature of the agreement was advantageous, though the government plans to introduce service contracts at district level with all hospitals, both government and mission. The paper concludes by identifying concerns raised by the case-studies that are of relevance to other countries considering the introduction of explicit contractual arrangements for district hospital provision.