Method of Purchasing a Service

How and from whom should the government purchase services? Public funds may be used to pay for the provision of services by public providers (budget allocation), or to purchase services from private or public providers. Once resources are available, restrictions on how to use them are determined by the country’s ‘absorptive capacity’. Absorptive capacity includes the ability of the public sector to design, disburse, coordinate, control, and monitor public spending. The coordination is both vertical (i.e. between the national and local governments) and horizontal. Absorptive capacity also takes into account situations where an allocated resource may not be spent within the time limit (usually the financial year) and also the effective execution of a budget.

The crucial question is whether the governments (and the institutions) have the capacity to manage a large increase in real expenditures. The issue relates to effective public expenditure management, free from or having minimum of leakages. The perception of corruption, payment delays and difficulty in adhering to contractual agreements, and the overall lack of absorptive capacity negatively affect prices for medical supplies. They result in delays and sometimes even cancellation of donor financing to the health sector. This is important as the term ‘absorptive capacity’ is more particularly used in cases of ‘external funding’ where the donor countries may insist on a level of public expenditure management expertise in the recipient countries.

It may, therefore, even constitute a necessary precondition for scaling up programmes in health or other social sectors. Well-designed health plans need to be part of a multi-sectoral strategy, reflected and costed as part of poverty reduction strategies. The instruments and policy options available to governments to improve expenditure performance are: poverty reduction strategy papers (PRSPs), poverty reduction support credits (PRSCs), medium-term expenditure frameworks (MTEFs), public expenditure reviews (PERs), and public expenditure tracking surveys (PETS). Judicious employment of these instruments to monitor the programmes coupled with public expenditure management strategies would result in optimum outcomes ensuring good returns on investment. For whom should the government purchase services? A major problem with allocations of resources is that increased expenditures often may benefit the better-off more than the poor. Studies have repeatedly shown that the poor benefit much less than the non-poor from government health expenditures in many countries.

Supply-side subsidies (like financing of public hospitals) and gratuities (payments to physicians for favours) are common in many countries. Together they imply a subsidy to the rich, who take advantage of a public facility by paying an amount that does not cover the full cost while receiving a privileged service because of their ability to pay the gratuity to the doctor. Similarly, supply-side subsidies to deficit-ridden social insurance institutions imply a subsidy to the non-poor, as such institutions cover mostly formally employed urban workers. In this context, the question of how to and for whom the government must purchase the health services assumes relevance. There is no conclusive evidence that either of the collective resource generation mechanisms for health services [viz. social insurance (Bismarck model) or general taxes (Beveridge model)] works better for the poor. Both require some level of cross-subsidy, through either differential premiums or  progressive taxes, to favour the poor. However, in a low-income country, given the limits of the formal economy, as well as the binding constraints faced by government at low levels of per capita expenditures, the options for reaching the poor are less clear. In view of this, beyond a basic universal package, special targeting mechanisms are needed to ensure financing of needed services for the poor population. Evolving a suitable framework for resource allocation and purchasing thus involve many issues surrounding purchasing decisions.

It requires financial sector reforms which carries important implications for long-term fiscal sustainability. Central to such reforms is the issue of separating purchasing from provision. There is a need to evolve incentive based payment systems which rely on features like capitation and managed care, case-based payments to hospitals, and mechanisms to ensure a more equitable sharing of financial risk between the purchaser and the provider.