Quasi-Markets and Contracting for Health Services

Abstract

ln 1993, the New Zealand health system was radically restructured. Area health boards, which were responsible for both purchasing and providing health services, were replaced by a quasi-market system in which public and private providers compete for public funds via contracts with purchasers. This thesis employs transaction cost economics (TCE) to examine the theory, the policy and the practice of the emerging quasi-market for health services in New Zealand. The main hypothesis which emerges from TCE is that contractual arrangements, which differ in their costs, will be aligned with transactions, which differ in their attributes, in a way which minimizes the sum of production and transaction costs. If services involve specific assets, or are difficult to measure and monitor, the transaction costs of contracting are likely to be high. The structure of the New Zealand health system prior to and after 1993 are described and analysed. Features of the emerging quasi-market include monopsonistic regional purchasers, a highly concentrated market for hospital services, weak budget constraints for CHEs, and a lack of competitive or political neutrality. All of these factors tend to dilute any incentives for efficiency. The TCE framework is used to examine the early contracting experiences and contractual relationships for four different health services: rest homes, primary health clinics, surgical services and mental health services. The selection of these four services was based upon a profiling of the characteristics which, according to TCE, are likely to influence the cost of transactions. The results support the central argument of the thesis. That is, that the costs of contracting are higher for some services than for others because of inherent differences in the attributes of different health services. A blunt policy instrument which forces a split between the roles of purchaser and provider for all health services fails to recognise these differences and may prohibit the development of organizational structures which might otherwise be selected as means of economizing on the transaction costs. Efforts must now be made to encourage a more discriminating approach to contracting in which a classical or neo-classical style of contracting is retained for those services where potential efficiency gains are high and the transaction costs of contracting are relatively low while longer-term relational contracts are developed for services where transaction costs are high.