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					Organizational Reform In
Public Hospitals

    Dr. Shahram Yazdani
                      n   Governments in developing countries have
                          traditionally been major providers of health
                          services, in addition to financing health care
                          delivery.
Dr. Shahram Yazdani
                      n   Cost containment and increased efficiency in
                          the financing and provision of health care
                          have become major concerns of
                          governments around the world, and this had
                          led to the institution of major health sector
                          reform efforts in a number of developing
                          countries (e.g., Mexico, Colombia, Egypt,
                          Zambia, etc.)
                      n   Similarly, hospital reform has been an
Dr. Shahram Yazdani




                          important component in many countries.
                      Public Hospitals
                      n   Public hospitals are major players in all health care
                          systems, because they consume a large portion of the
                          health care budget.
                      n   In western European countries, this share is close to 50
                          percent of total health care budget, whereas in the
                          former Soviet Union this figure is about 70 percent.
                      n   At least 50 percent of the 48 countries in sub-Saharan
                          Africa spend 45 percent or more of public sector budget
                          on hospitals.
                      n   Expenditure on hospital care is cost-ineffective, because
                          it focuses more on curative and rehabilitative care and its
                          impact on a poor country’s burden of disease is limited.
                          However, hospitals have political visibility
Dr. Shahram Yazdani




                      n
                      n   Public hospitals are an important part of
                          health systems in developing countries, and
                          depending on their capacity, act as first
                          referral, secondary or last referral facilities.
                      n   These hospitals are generally responsible for
                          50 to 80 percent of recurrent government
                          health sector expenditure in most developing
                          countries, and utilize nearly half of the total
                          national health expenditure in many of these
                          countries.
Dr. Shahram Yazdani
                      Problems with The Public Delivery of
                      Healthcare Services

                      n   Technical Inefficiency
                      n   Allocative Inefficiency
                      n   Failure to Reach Poverty Groups
                      n   Poor Responsiveness to User Expectations
Dr. Shahram Yazdani
                      Technical Inefficiency

                      n   Resources within public facilities are often
                          used poorly, and resource scarcity and waste
                          often coexist. Some of problems that affect
                          technical efficiency adversely are:
                          q   Low throughput
                          q   Low morale of public health care workers
                          q   Low motivation of public health care workers
                          q   Lack of necessary drugs and equipments
                          q   Outdated treatment routines and protocols
Dr. Shahram Yazdani
                      Allocative Inefficiency

                      n   Public delivery of services obscures the cost
                          of services and ignores their effectiveness
                      n   This minimize the ability to identify and
                          deliver cost-effective interventions
                      n   In developing countries resources often
                          flowing disproportionately to urban, curative,
                          and hospital-based facilities
                      n   Major hospitals consume large amount of
                          scarce resources, and many have low
                          occupancy rates
Dr. Shahram Yazdani
                      Failure to Reach Poverty Groups

                      n   Although equity is a key motivation for public
                          delivery of hospital services, distribution of
                          resources in public system is rarely focused
                          on the most needy.
Dr. Shahram Yazdani
                      Poor Responsiveness to User Expectations

                      n   Social services delivered by public providers are
                          notably unresponsive and unaccountable to users
                      n   To prepare the World Development report 2000, the
                          World Bank conducted interviews with more than
                          60,000 poor people in 47 countries.
                      n   According to these interviews following problems
                          discouraged the poor from using public services
                          q   The complexity of bureaucratic procedures
                          q   Rude and unresponsive officials
                          q   Withheld information
Dr. Shahram Yazdani
                      n   To understand the causes of poor
                          performance in public hospitals and ways
                          organizational reforms are expected to
                          address them, we should first answer the
                          following question:
                          q   What factors determine the behavior and
                              performance of hospitals in general?
Dr. Shahram Yazdani
                      Hospital’s Incentive Regime

                      n   Pressures originating from the external
                          environment
                      n   Pressures originating from the hospital’s
                          organizational structure
Dr. Shahram Yazdani
                          Determinants of Hospital Behavior
                      Owners                        External Pressure                                Government



                      Governance                                                                       Stewardship
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                      Policy-driven                       Claimant Status                              Market-driven
                      Purchasing
                                                                                                       Purchasing
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                      Purchasers                                                                       Consumers
                       Organizational Reform

                                                  Private Sector

                                               Broader Public Sector

                                                Core Public Sector

                                                              B        A   C   P




                      B - Budgetary Units
                      B - Budgetary Units
                      A - Autonomous Units
                      A - Autonomous Units
Dr. Shahram Yazdani




                      C - Corporatized Units
                      C - Corporatized Units
                      P - Privatized Units
                      P - Privatized Units
                      n   Organizational reforms move public hospitals
                          out of the core public bureaucracy and
                          transform them into more independent
                          entities responsible for performance, and
                          they also keep ownership in the public sector
Dr. Shahram Yazdani
                      “Marketizing” reforms

                      n   These organizational reforms rely on market
                          mechanisms to carry out functions that used
                          to be carried out by central planning
                          authorities
                      n   Other kinds of organizational reforms such as
                          decentralization change organizational
                          structures but do not incorporate a greater
                          use of market mechanisms
Dr. Shahram Yazdani
                      Pressures originating from
                            the hospital’s
                        organizational structure
Dr. Shahram Yazdani
                          Determinants of Hospital Behavior
                      Owners                        External Pressure                                Government



                      Governance                                                                       Stewardship
                                                          Organizational
                                                            Structure
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                      Purchasing
                                                                                                       Purchasing
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                      Purchasers                                                                       Consumers
                      Autonomy

                      n   Government bureaucrats who make the
                          decisions are far removed from hospitals and
                          thus often lack critical information to make
                          appropriate decisions.
                      n   At the same time, the people who have the
                          information -hospital-based physicians and
                          managers- do not have decision rights.
                      n   This mismatch between information and
                          decision rights is at the heart of poor
                          performance of public sector hospitals.
Dr. Shahram Yazdani
                      Autonomy

                      n   Autonomy is the right to make decisions over
                          various aspects of production, including
                          inputs, outputs, and process..
Dr. Shahram Yazdani
                      Autonomy

                      n   When designing organizational reform, the
                          important question is:
                          q   How much autonomy should hospitals have?
                          q   Which decision rights should be allocated to the
                              hospital?
                          q   Which decision rights should the government
                              bureaucracy retain?
Dr. Shahram Yazdani
                       Autonomy

                       n    Key decision rights to be allocated

                                 Inputs                   Outputs        Outcomes                 Process

                      Labor (hiring, firing,           Level of          Targets for       Strategic management
                      remuneration                     throughput        specific health
                                                                         outcomes          Financial management
                      Capital (investment in and       Mix of services                     including setting user
                      sale of assets including land,                                       charges
                       buildings, equipments                                               Clinical Management
                      Procurement (consumables,                                            Administrative Processes
                      drugs and supplies and
                      small equipments
Dr. Shahram Yazdani
                          Determinants of Hospital Behavior
                      Owners                        External Pressure                                Government



                      Governance                                                                       Stewardship
                                                          Organizational
                                                            Structure
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                      Purchasing
                                                                                                       Purchasing
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                      Purchasers                                                                       Consumers
                      Market Exposure

                      n   Market exposure refers to subjecting
                          hospitals to competition in the product and
                          factor markets.
                      n   In the product market, market exposure
                          means that hospital revenues are linked to
                          performance.
                      n   On the factor market, market exposure
                          means that hospitals compete for inputs,
                          including physicians and capital.
Dr. Shahram Yazdani
                      Market Exposure

                      n   Product market
                      n   Increasing market exposure on the product market
                          means that the hospital’s revenues become more
                          dependent on its performance and ability to attract
                          and keep patients.
                      n   In budgetary units, treating more patients or
                          providing better quality services has no implications
                          for the hospital’s revenues.
                      n   Conversely, public sector problems such as
                          absenteeism of public doctors (due to private
                          practice) and waste have no negative implications
Dr. Shahram Yazdani




                          for hospital revenues.
                      Market Exposure

                      n   Factor market.
                      n   The two most significant input factors where
                          public hospitals do not compete are the labor
                          market and the capital market.
                      n   Regarding the labor market , eliminating or
                          reducing civil service constraints on personnel
                          policies and removing central planning of human
                          resource capacity are the instruments adopted in
                          several countries.
Dr. Shahram Yazdani
                          Determinants of Hospital Behavior
                      Owners                        External Pressure                                Government



                      Governance                                                                       Stewardship
                                                          Organizational
                                                            Structure
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                      Purchasing
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                      Purchasers                                                                       Consumers
                      Residual Claimant Status

                      n   An organization’s residual claimant status
                          reflects the degree of enforced financial
                          responsibility -both the ability to keep savings
                          and responsibility for financial loses (debt).
Dr. Shahram Yazdani
                      Residual Claimant Status

                      n   In government-operated hospitals paid
                          through line-item budgets, the public purse is
                          often the residual claimant:
                      n   If hospitals generate extra revenues, save, or
                          cannot spend their budgeted allocation, the
                          funds are withdrawn from hospitals and
                          reallocated within the health sector budget.
Dr. Shahram Yazdani
                      Residual Claimant Status

                      n   In budgetary units, budgets are soft –it lack enforced
                          financial responsibility. The public purse steps in
                          and bails out the loss-making organization.
                      n   Such conditions are hardly conducive to generating
                          savings and efficiency gains because soft budgets
                          reward poor performance through additional
                          resources and penalize those who save.
                      n   Thus, the third element of organizational reforms is
                          to clarify who the residual claimant on revenue flows
                          is: the hospital or the public purse.
Dr. Shahram Yazdani
                      Residual Claimant Status

                      n   Autonomous hospitals established as not-for
                          -profit entities retain all of their surpluses.
                      n   Corporatized hospitals usually have to pay
                          dividends or other forms of capital charges
                          to owners.
                      n   Thus, residual claimant incentives appear
                          stronger for the not-for-profit autonomous
                          hospitals -but at the price of weaker
                          incentives to optimize assets and liabilities
                          and exercise greater managerial discretion.
Dr. Shahram Yazdani
                      Residual Claimant Status

                      n    Enforcing hard budgets is a challenge for many
                           governments.
                          q First of all, it requires political commitment that often
                            wanes under popular pressure to keep hospitals open and
                            increase their funding.
                          q Second, financially unviable hospitals may be strategically
                            important service providers in a given catchment area, and
                            their closure may not be desirable. Thus, in the public
                            hospital sector, enforcement of hard budgets is not taken
                            seriously, unlike in the private sector, where loss-making
                            enterprises are exposed to bankruptcy and closure.
Dr. Shahram Yazdani
                          Determinants of Hospital Behavior
                      Owners                        External Pressure                                Government



                      Governance                                                                       Stewardship
                                                          Organizational
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                      Purchasing
                                                                                                       Purchasing
Dr. Shahram Yazdani




                      Purchasers                                                                       Consumers
                      Accountability

                      n   Accountability refers to holding hospitals
                          responsible and answerable for their
                          behavior and performance.
Dr. Shahram Yazdani
                      Accountability

                      n   As the autonomy of providers increases, the ability
                          of the Ministry of Health to assert direct
                          accountability through the hierarchy diminishes.
                      n   Direct hierarchical accountability is typically
                          manifested as control over employees.
                      n   With organizational reform, alternative accountability
                          instruments are put in place through indirect
                          mechanisms such as boards, contracts, and
                          regulations and their consistent monitoring and
                          enforcement.
                      n   This requires the health ministry, purchasers, and
                          other regulatory agencies in the health sector to take
                          on new functions and roles.
Dr. Shahram Yazdani
                        Accountability

                        n   Key accountability instruments
                      Between hospital     Between hospital     Between hospital   Between hospital
                        and patients          and payers          and owners        and regulator
                      Effective and        Published            Hospital boards
                      accessible patient                        representing       Minimum standards
                                           independent audits
                      grievance                                 community and
                      procedures           Contracts with       business leaders
                                           explicit performance                    Outcome measures
                      Community            objectives           Business plans
                      Representation on
                                           Monitoring and
                      Hospital boards
                                           disseminating
                                           comparative
                                           provider
Dr. Shahram Yazdani




                                           performance
                                           information
                      Accountability
                      n   Boards
                      n   A key challenge for many countries is to
                          design functional boards that provide
                          mechanisms to hold hospitals accountable.
Dr. Shahram Yazdani
                      Accountability
                      n   Boards
                      n   The Board of Directors can be a representative body
                          ensuring that the different, often conflicting interests
                          of stakeholders are represented and heard.
                      n   This includes functions such as providing voice to
                          community views and preferences; seeking
                          donations and volunteers from the community,
                          lobbying for political support; and advising hospital
                          management on business issues.
                      n   Boards of this nature tend to be larger and
                          participate little in the decision-making process.
Dr. Shahram Yazdani
                      Accountability
                      n   Boards
                      n   The other function a board can play is closer
                          to that of a strategic body that makes
                          strategic decisions for the hospital and holds
                          the management of the hospitable
                          accountable for their performance.
                      n   These boards are usually smaller, and their
                          members are selected for their skill in making
                          strategic and funding decisions for the
                          organization.
Dr. Shahram Yazdani
                      Accountability
                      n   Boards
                      n   One possible constitution of the board would include the
                          following members:
                          q Representatives of the community

                          q Representative of the Ministry of Health

                          q Representative of the Ministry of Finance

                          q Representative of the Ministry of Planning

                          q Representative of the private sector (e.g., the CEO of a private

                              hospital)
                          q Representative of a nongovernmental organization

                          q Representative of the medical school

                          q An expert in financial management, accounting, and evaluation

                          q An expert in health economics
Dr. Shahram Yazdani




                          q An expert in community medicine and public health
                          Determinants of Hospital Behavior
                      Owners                        External Pressure                                Government



                      Governance                                                                       Stewardship
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                      Purchasing
                                                                                                       Purchasing
Dr. Shahram Yazdani




                      Purchasers                                                                       Consumers
                      Social functions

                      n   Social functions refers to the responsibility to
                          cover services and populations where
                          revenues do not cover costs.
Dr. Shahram Yazdani
                      Social functions

                      n   A hospital organizational reform should
                          distinguish hospital services that are pure
                          private goods from services that fulfill a social
                          function and to define and subsidize the
                          social functions of the hospital.
Dr. Shahram Yazdani
                      Organizational Modalities and Structure
                        Budgetary          Autonomous           Corporatized            Privatized
                          Units               Units                Units                  Units

                          ˜                          Decision Rights

                          ˜                         Market Exposure

                          ˜                        Residual Claimant

                          ˜                          Accountability

                          ˜                          Social Function


                       The public purse is autonomy over direct of these such as staff mix and size,
                       Hospitals have little the residual claimant hierarchical control through a chain
                       Accountability is enforced through key decisions hospitals.
                       servicesexposure is low or nonexistent with management, salaries,directsothe
                       Market offered, technology the revenue of centralized through a and
                       of government bureaucrats. used, financial the hospital procurement and
                       The government determinesHowever, governments’ objectives in running on.
                       The social functions performed by the hospital are not distinguished from
                       The manageroftenwhichhospital is essentiallyaan and lack of competition
                       distribution of drugs and other medicalset on historical basis. Any revenues
                       hospitals are of such a is commonly supplies, administrator.
                       budget allocation, unrecorded and unmonitorable.
                       their other activities nor are they funded separately.
Dr. Shahram Yazdani




                       and government’s hierarchy monitoring hospital and managerial performance
                       Bureaucrats responsible for of officials and must be returned to the issues
                       The savings belong to the public sector and rules control all strategicpublic
                       among providers.
                       purse for reallocation. Losses are on monitoring spending
                       tend to focus on inputs especially covered
                       and determine most day-to-day decisions by the public purse.
                      Organizational Modalities and Structure
                        Budgetary         Autonomous           Corporatized           Privatized
                          Units              Units                Units                 Units

                                               ˜Decision Rights
                                               ˜Market Exposure
                                               ˜Residual Claimant

                                               ˜ Accountability
                                               ˜Social Function
                       Autonomizationclinic becomes still generally come from hierarchical savings
                       Accountability arrangements a partial residual claimant on rights
                       The hospital or focuses on shifting many day-to-day decisioncertain from
                       generated through cost savings or set budget, to have more
                       the hierarchyHowever, objectives Themore clearly specified. freedom to to
                       Shift from input-based, historicallyare amount of autonomy actually given
                       supervision. to the organization. other improvements.
                       Responsibilities for performing social functions may be specified in the
                       The management has byobjectives isdegree ofpayments, or byhave been
                       execute the scope of the aperformance-related autonomy, result in more and
                       Usually the achieved varied considerably. Most governments co-payments.
                       This may bebudget with significant narrowed, and focus on economic
                       agreement.
Dr. Shahram Yazdani




                       market orientation to increases. An over labor, recruitment, government and
                       Moving from a line-item to a global budget, whereby savings salaries, staff
                       financial or unable
                       unwilling performance transfer controlagreement between the in one service or
                       budget area can be shifted to another.
                       the and the like      concluded with monitorable performance targets.
                       mix,hospital may and have instead left employees in the civil service.
                      Organizational Modalities and Structure
                        Budgetary          Autonomous           Corporatized           Privatized
                          Units               Units                Units                 Units

                                                                  ˜
                                                    Decision Rights

                                                   Market Exposure˜
                                                                   ˜
                                                   Residual Claimant

                                                    Accountability˜

                                                    Social Function˜
                       Under corporatization, managerial more a through a claimant Directors and a
                       Accountability mechanisms are autonomy are generally much stronger
                                               social functions residual pursued than is
                       The corporatized hospital is muchexertedare usually Board of throughthe
                       In corporatized hospitals market incentives stem from the combination of an
                       autonomized hospital. is a binding demand-side financing, or mandates over
                       Than under autonomization, retainagreement between complete may bethat
                       purchasing, insurance regulation, managers virtually the hospital (and
                       corporate plan, which It can giving excess revenues although it control the
                       increased portion of revenue coming from sales (rather than budget allocation)
                       required all organizations, or capitalThe organization is legally established as
                       all inputs, outputs, and processes.public facilities. ownerout thealso of owner
                       apply to to the dividends not just agency to its Rather than role
                       board) and pay relevant supervisory charges that carries but is force hospitals
                       and increased possibilities for keeping and using extra revenue, as well as
Dr. Shahram Yazdani




                       responsible for of private hence poor citizen, accountable an appropriate
                       andeliver servicesabelow cost to athe transfer offor example,for its financial
                       to independent entity the company.
                       or shareholder losses.and organization is fully control is more durable than
                       from the hard budget constraint.
                       under autonomization. management of assetsor the hospital.
                       subsidy may including
                       This corporate plan contains financial patient and liabilities,
                       performance,be delivered to either theperformance targets
                      Organizational Modalities and Structure
                        Budgetary         Autonomous           Corporatized           Privatized
                          Units              Units                Units                 Units

                                                    Decision Rights                      ˜
                                                   Market Exposure                       ˜
                                                   Residual Claimant                     ˜
                                                     Accountability                      ˜
                                                    Social Function                      ˜
                       Privatization naturally removes the hospital from all direct control of the
                       All incentives come from opportunities to earn revenue, and cross-subsidy is
                       hierarchy of government officials and public sector rules. The organization for
                       Private functions through funded mandates with claimants on extra revenues,
                       Social owners or shareholders are the residual an explicit the incentives are
                       Accountability is enforced through indirect regulations
                       now fully independent of where revenues do not cover costs.
                       relativelyand populations the hierarchy, although the management is likely
                       thus called profits.
                       services strong.
Dr. Shahram Yazdani




                       quite constrained by the new owners.
                      The right decision depends on:

                      n   Central regulatory capacity
                      n   Reform priorities
                      n   Managerial capacity of hospitals
                      n   Customer sophistication
                      n   Professional self-discipline
Dr. Shahram Yazdani
                      Structure of Dysfunctional Hospitals

                      Few at the                         Many at the
                      Hospital        Decision Rights      Hospital

                      None           Market Exposure             Full

                      Public
                      Purse          Residual Claimant       Hospital

                      Direct:                               Indirect:
                      Hierarchy       Accountability     Regulations

                      Implicit                               Explicit
                      Unfunded        Social Function        Funded
Dr. Shahram Yazdani
                      Structure of Dysfunctional Hospitals
                                                         Type A

                      Hospital ˜
                      Few at the
                                                      Decision Rights                        ˜  Many at the
                                                                                                  Hospital

                      None
                               ˜                      Market Exposure                                   Full

                      Public
                      Purse    ˜                     Residual Claimant                              Hospital

                      Direct:
                      Hierarchy˜                       Accountability
                                                                                                   Indirect:
                                                                                                Regulations

                      Implicit
                      Unfunded ˜                       Social Function
                                                                                                    Explicit
                                                                                                    Funded



                         In some countries, organizational reform has been limited to granting
                         increased autonomy to hospitals.
                         In such cases, neglecting accountability structures results in loss of
                         government control over the organization’s behavior, in particular, over
Dr. Shahram Yazdani




                         meeting non-market-based objectives.
                      Structure of Dysfunctional Hospitals
                                                        Type B

                      Hospital ˜
                      Few at the
                                                     Decision Rights                      ˜  Many at the
                                                                                               Hospital

                      None
                               ˜                     Market Exposure                      ˜          Full

                      Public
                      Purse    ˜                    Residual Claimant                     ˜      Hospital

                      Direct:
                      Hierarchy˜                      Accountability
                                                                                                Indirect:
                                                                                             Regulations

                      Implicit
                      Unfunded ˜                     Social Function
                                                                                                 Explicit
                                                                                                 Funded



                         Market incentives (market exposure and residual claimant status) are pursued
                         aggressively, but explicit definition of social functions is forgotten.
                         Such situations invariably reduce access for the poor. Training, research,
                         and public health services may also be neglected unless these are explicitly
Dr. Shahram Yazdani




                         purchased or subsidized.
                      Structure of Dysfunctional Hospitals
                                                         Type C

                               ˜
                      Few at the
                      Hospital                        Decision Rights
                                                                                                Many at the
                                                                                                  Hospital

                      None
                               ˜                      Market Exposure
                                                                                            ˜           Full

                      Public
                      Purse    ˜                     Residual Claimant                      ˜       Hospital

                      Direct:
                      Hierarchy˜                       Accountability
                                                                                                   Indirect:
                                                                                                Regulations

                      Implicit
                      Unfunded ˜                       Social Function
                                                                                                    Explicit
                                                                                                    Funded



                         Exposure on the product market is increased by collecting user fees and
                         making hospitals residual claimants, but rigidities over staffing issues, lack of
                         overall managerial independence, and impact on the poor are left unaddressed.
                         Weaknesses in implementing regulations to protect access for the poor cut the
Dr. Shahram Yazdani




                         number of subsidized beds for the poor.
                      Structure of Dysfunctional Hospitals
                                                         Type D

                      Hospital ˜
                      Few at the
                                                      Decision Rights                      ˜   Many at the
                                                                                                 Hospital

                      None
                               ˜                     Market Exposure                                   Full

                      Public
                      Purse    ˜                     Residual Claimant                             Hospital

                      Direct:
                      Hierarchy˜                       Accountability                      ˜      Indirect:
                                                                                               Regulations

                      Implicit
                      Unfunded ˜                      Social Function
                                                                                                   Explicit
                                                                                                   Funded



                         When autonomy is transferred to the organization and new accountability
                         instruments (e.g., contracts) are put in place, but no emphasis is placed on
                         market incentives (market exposure, residual claimant status). In such cases,
                         although hospitals could improve their performance, they have no reason to
Dr. Shahram Yazdani




                         because performance is not responded by rewards or penalties.
                       Improving Hospital
                      Performance Through
                        External Pressures
Dr. Shahram Yazdani
                          Determinants of Hospital Behavior
                      Owners                        External Pressure                                Government



                      Governance                                                                       Stewardship
                                                          Organizational
                                                            Structure
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                      Policy-driven                       Claimant Status                              Market-driven
                      Purchasing
                                                                                                       Purchasing
Dr. Shahram Yazdani




                      Purchasers                                                                       Consumers
                      Strengthening government oversight

                      n   Developing a policy framework
                          q   Setting well-defined objectives.
                          q   Ensuring internal consistency and coherence.
                          q   Matching scale and pace of reform design with
                              institutional capacity.
                      n   Regulatory challenges
                          q   Licensing
                          q   Certification
                          q   Accreditation
                          Gathering intelligence
Dr. Shahram Yazdani




                      n
                          Determinants of Hospital Behavior
                      Owners                        External Pressure                                Government



                      Governance                                                                       Stewardship
                                                          Organizational
                                                            Structure
                                                                             Ac
                                                                                  co
                                             o my                                      un
                                           n                                             tab
                                      Auto                                                     ility
                                                            Managerial
                                                           Instruments
                                  Ma                                                              ns
                                       rke
                                          tE                                                n ctio
                                               xp                                    F  u
                                                 os
                                                    ure                       c  ial
                                                             Residual       So
                      Policy-driven                       Claimant Status                              Market-driven
                      Purchasing
                                                                                                       Purchasing
Dr. Shahram Yazdani




                      Purchasers                                                                       Consumers
                      Creating strategic purchasing

                      n   By purchasing we mean the health system
                          function whereby collective (pooled)
                          resources are allocated to providers who
                          deliver health services to the population on
                          whose behalf resources have been collected.
                      n   Globally, between 50 percent and 60 percent
                          of total health spending -US$2,830 billion in
                          1998- is channeled through such collective
                          purchasing arrangements.
Dr. Shahram Yazdani
                      Creating strategic purchasing

                      n   The core policy feature of purchasing is whether it is
                          passive or strategic.
                          q   Passive purchasers act as “cashiers” for providers. They
                              pay providers without evaluating the efficiency or
                              effectiveness of their product, without exercising selectivity
                              in the interventions they fund or in the providers they buy
                              from.
                          q   In contrast, strategic purchasing involves a continuous
                              search for the best ways to maximize health system
                              performance by operationally deciding which interventions
                              should be purchased, how, and from whom. (World Health
                              Report 2000).
Dr. Shahram Yazdani
                      Creating strategic purchasing

                      n        Strategic purchasing involves identification
                               of
                          1.    The beneficiary group covered by collective
                                resources;
                          2.    The service package to be funded from collective
                                resources;
                          3.    The providers to purchase services from; and
                          4.    The mechanism by which providers are
                                reimbursed for their services.
Dr. Shahram Yazdani
                          Determinants of Hospital Behavior
                      Owners                        External Pressure                                Government



                      Governance                                                                       Stewardship
                                                          Organizational
                                                            Structure
                                                                             Ac
                                                                                  co
                                             o my                                      un
                                           n                                             tab
                                      Auto                                                     ility
                                                            Managerial
                                                           Instruments
                                  Ma                                                              ns
                                       rke
                                          tE                                                n ctio
                                               xp                                    F  u
                                                 os
                                                    ure                       c  ial
                                                             Residual       So
                      Policy-driven                       Claimant Status                              Market-driven
                      Purchasing
                                                                                                       Purchasing
Dr. Shahram Yazdani




                      Purchasers                                                                       Consumers
                      Increasing market pressures

                      n   According tot economic theory, competitive markets
                          yield efficient allocation off resources based on the
                          well -informed individual decisions of many sellers
                          and many buyers without any coercion or
                          intervention of a government body.
                      n   In other words, in a competitive market, consumers
                          demand goods and services until they reach the
                          point where the marginal value of that good or
                          service is equal to the price. Providers adjust their
                          price until the marginal cost is equal to the price.
Dr. Shahram Yazdani
                      Increasing market pressures
Dr. Shahram Yazdani
                      Increasing market pressures

                      n   A number of assumptions have to be met for
                          markets to be competitive and really lead to
                          efficient outcome:
                          q   There are so many buyers and many sellers of a
                              commodity or good that none can individually
                              affect the price.
                          q   Sellers and buyers are well informed about the
                              quality of the product and about each others’
                              prices.
                              The commodity or service is standardized.
Dr. Shahram Yazdani




                          q
                      Increasing market pressures
Dr. Shahram Yazdani
                          Determinants of Hospital Behavior
                      Owners                        External Pressure                                Government



                      Governance                                                                       Stewardship
                                                          Organizational
                                                            Structure
                                                                             Ac
                                                                                  co
                                             o my                                      un
                                           n                                             tab
                                      Auto                                                     ility
                                                            Managerial
                                                           Instruments
                                  Ma                                                              ns
                                       rke
                                          tE                                                n ctio
                                               xp                                    F  u
                                                 os
                                                    ure                       c  ial
                                                             Residual       So
                      Policy-driven                       Claimant Status                              Market-driven
                      Purchasing
                                                                                                       Purchasing
Dr. Shahram Yazdani




                      Purchasers                                                                       Consumers
                      Encouraging good governance

                      n   Governance is commonly defined as the
                          relationship between the owner and
                          management of an organization.
                      n   “Good governance” is said to exist when
                          managers closely pursue the owners’
                          objectives or when the “principal-agent”
                          problems have been minimized.
Dr. Shahram Yazdani
                      Encouraging good governance

                      n   From observing successful large private
                          organizations, experts have identified these
                          key ingredients for good governance:
                          q   Objectives.
                          q   Supervisory structure.
                          q   Competition and motivation of management.
Dr. Shahram Yazdani
                       Thank You!
                      Any Question?
Dr. Shahram Yazdani

				
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