This paper discusses the economic rationale for innovative service models in private sector health care delivery. Social franchising and other business models of health care delivery secure cooperation between providers, and coordinating agencies in order to improve quality, access, and efficiency of primary health care (PHC) in the private sector.
The paper develops a simple economic theory of health care production and demand that is illustrated through application to the simple cases of independent private health providers and government operated clinics. The economic theory highlights the need for supervisory inputs above and beyond the provider-patient level to guard the quality of care. The theory is then enlarged to show how innovative service models of health care can be arranged to deliver supervision and coordination of provider quality. Theoretical predictions are compared to the experience accrued in several experiments using innovative service models to improve primary health care services.
What emerges from the theory are the following predictions: 1) The missing ingredient in both public and private PHC are incentives and financing for the proper functioning of coordinating agencies above the level of the provider; 2) The key to success in Innovative service Models is their promise in eliciting and sustaining diligent effort by the coordinating agencies; 3) The efforts of coordinating agencies offer positive social benefits on par with the outputs of government health regulators.
Experience to date shows that although the private providers can sustain themselves with normal profits, the coordinating agencies seldom create enough value for providers to sustain themselves on levies and royalties—yet the coordinators do create great value for society. This financial problem is the primary obstacle to the success of innovative models. Several suggestions are forwarded to improve the financial position of the coordinators.