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Oliver Hart and the ‘Proper Scope of Government’

Hart’s seminal economic theory, ‘The Proper Scope of Government,” underpins much of the research into public-private partnerships in healthcare. Hart developed this touchstone framework jointly with Andrei Shleifer and Robert W. Vishny to better evaluate when a government should provide a service itself and when it should contract with a private provider for support and execution of services.

The model outlined in Hart, Shleifer, and Vishny’s original 1996 working paper is designed to help providers and contractors consider the costs and benefits of a proposed contractual service agreement. While this model was originally applied to the case of prison privatization, the framework has served as an invaluable tool for researchers in multiple sectors including health policy and provision.

Reflections and Updates to the Theory

In reflecting on ‘The Proper Scope of Government,’ there are things Hart would like to see more fully incorporated into the theory to enrich its real-world applicability. Chiefly among these is better accounting for contractual incompleteness or the reality that a contract cannot anticipate and outline every possible unforeseen event or area of ambiguity. However, modeling contractual incompleteness is notoriously difficult given the almost-limitless factors of variability.

Some of Hart’s recent work on guiding principles responds to this challenge. Rather than trying to predict every aspect of a contractual relationship within the framing and language of a standard contract model, Hart argues that mutually agreed-upon guiding principles —such as equity, loyalty, and honesty — can serve as a foundation for navigating inevitable areas of ambiguity and potential conflict that a contract does not specifically state or that the original theory does not fully account for.

These guiding principles also help preserve space for renegotiation and innovation, which are necessary in an era of rapid technological advances and explosion of measurable data. In this context, Hart cautions against the mentality of ‘more is more:’

“If you put more and more things into the contract and then something happens that wasn’t in the contract, the fact that you put so much more in may make it more difficult to negotiate about the thing that you didn’t put in.”

 Applying ‘The Proper Scope of Government’

Hart shared a prime example of his theory at work in health systems in a case study of the Vancouver Island Health Authority. Traditionally, family physicians would continue as the primary care provider for their patients even if a patient needed hospitalization. But a change of law in 2006 required all specialized in-hospital care be contracted to hospitalists with little to no crossover with care provided by family practice physicians.

The result was a rise in caseload and stress levels amongst hospital specialists and repeated failed negotiations of the standard contract. The addition of guiding principles to the contract, however, provided avenues where reasonable solutions and additional communications could happen beyond the limits of the formal contract.

This is just one case of innumerable where Hart’s work has helped inform and contextualize how policymakers consider relationships between the public and private spheres of healthcare. Responding to the praise and input from fellow economists presented in a tribute documentary to the impact of his framework, Hart remarked:

“I hadn't realized how many people have been influenced by this paper and how they've been using it in different contexts. I knew some of the applications, but there were others I didn't, and it’s been truly amazing to see that.”

Looking Toward the Future

The tradeoffs between public and private partnerships in healthcare systems across the world will continue to be a dynamic and evolving area of research that will rely on theories such as ‘The Proper Scope of Government’ for framing and application. Looking towards the future, Hart was hopeful but cautious about the vitality of the kind of theoretical tradition which allowed for the development of his original theory. He recognizes that specialties such as contract theory and contractual incompleteness are inherently “messy” and somewhat out of vogue with current trends in economics which tend to favor theories that are “impressive, clever, and non-obvious,” regardless of whether they address important questions.

As he iterated in his Nobel Prize lecture, the incomplete world of contracts nonetheless “underlies numerous significant phenomena, some of which have great policy relevance,” and therefore fully deserving of upcoming economists’ time and efforts.

Further Research into Public-Private Partnerships

The Asia Health Policy Program’s 2020-21 colloquium series focuses on the roles and impacts of public-private partnerships in healthcare and the tradeoffs in equity, accessibility, and cost that come with contracted agreements in health systems. All of the events from the colloquium series are available on our YouTube channel. Click the thumbnails below to start exploring.

Collaborative governance — that is, relationships involving both the private and public sectors in the pursuit of public value — is part of ongoing research by Karen Eggleston. Her forthcoming book, The Dragon, the Eagle, and the Private Sector (Cambridge University Press), co-authored with Harvard’s John D. Donahue and Richard J. Zeckhauser, examines the ways in which collaborative governance works across a wide range of policy arenas in China and the United States, with the goal of empowering public decisionmakers to more wisely engage the private sector. Join us for the book launch event, which will be held jointly with the Harvard Kennedy School on March 5 

 

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The world’s population is aging at a faster rate and in larger cohorts than ever before. In countries like Japan that have low fertility rates and high life expectancy, population aging is a risk to social sustainability. Developing policies and healthcare infrastructure to support aging populations is now critical to the social, economic, and developmental wellbeing of all nations. As the COVID-19 pandemic has repeatedly shown, accurate projections of future population health status are crucial for designing sustainable healthcare services and social security systems.

Such projections necessitate models that incorporate the diverse and dynamic associations between health, economic, and social conditions among older people. However, the currently available models – known as multistate transition microsimulation models – require high-quality panel data for calibration and meaningful estimates. Now a group of researchers, including APARC Deputy Director and Asia Health Policy Program Director Karen Eggleston, has developed an alternative method that relaxes this data requirement.

In a newly published paper in Health Economics, Eggleston and her colleagues describe their study that proposes a novel approach using more readily-available data in many countries, thus promising more accurate projections of the future health and functional status of elderly and aging populations. This alternative method uses cross‐sectional representative surveys to estimate multistate‐transition contingency tables applied to Japan's population. When combined with estimated comorbidity prevalence and death record information, this method can determine the transition probabilities of health statuses among aging cohorts.

In comparing the results of their projections against a control, Eggleston and her colleagues show that traditional static models do not always accurately forecast the prevalence of some comorbid conditions such as cancer, heart disease, and stroke. While the sample sets used to test the new methodology originate in Japan, the proposed multistate transition contingency table method has important applications for aging societies worldwide. As rapid population aging becomes a global trend, the ability to produce robust forecasts of population health and functional status to guide policy is a universal need.

Read the full paper in Health Economics.

Learn more about Eggleston’s research projects >>

The Asia Health Policy Program at the Shorenstein Asia-Pacific Research Center, in conjunction with The Next World Program, is soliciting papers for a workshop, “Inequality & Aging,” held at the University of Hohenheim from May 4-5, 2018. The workshop will result in a special issue of the Journal of the Economics of Ageing, and aims to address topics such as:

• Population dynamics and income distribution
• The evolution of inequality over time and with respect to age
• Health inequality in old age
• The effects of social security systems and pension schemes on inequality
• Policies to cope with demographic challenges and the challenges posed by inequality
• Family backgrounds and equality of opportunities
• Demographically induced poverty traps
• Effects of automation and the digital economy in ageing societies
• Flexible working time and careers, and their long-term implications
• The dynamics of inheritances, etc.

Researchers who seek to attend the workshop are invited to submit a full paper or at least a 1-page extended abstract directly to Klaus Prettner and Alfonso Sousa-Poza by Sept. 30, 2017.

Authors of accepted papers will be notified by the end of October and completed draft papers will be expected by Jan. 31, 2018. Economy airfare and accommodation will be provided to one author associated with each accepted paper. A selection of the presented papers will be published in the special issue; the best paper by an author below the age of 35 will receive an award and be made available online as a working paper.

Researchers who do not seek to attend the workshop are also invited to submit papers for the special issue. Those papers can be submitted directly online under “SI Inequality & Ageing” by May 31, 2018.

For complete details, please click on the link below to view the PDF.

Improving health has been a focus of Indonesia as it strives to implement universal healthcare nationwide. Yet as the government tries to achieve that ambitious goal, it finds not unlike other developing countries that poorer patients are struggling to access care, due to a number of environmental and financial constraints.

A set of conditional cash transfer (CCT) programs—a system in which patients are incentivized to seek care upon the promise of a stipend—were introduced in 2007 as an approach to improve health among poor households in Java, Indonesia’s most populous island, and a few provinces outside of Java. The programs specifically sought to better maternal and child health outcomes.

Evaluating those pilot CCT programs is the focus of a newly published paper by former Asia Health Policy Program postdoctoral fellow Margaret Triyana: “Do Health Care Providers Respond to Demand-Side Incentives? Evidence from Indonesia,” an outcome of her research completed at Stanford’s Shorenstein Asia-Pacific Research Center from 2013-14.

Triyana found that the CCT programs increased demand for healthcare providers, and consequently, prices for healthcare services. While the programs led more patients to show up for services, they also may have limited access for some patients who were unable to afford services following an eventual bump up in cost.

Triyana concludes that policymakers should forecast effects on supply and demand before implementing CCT programs in order to plan and adjust the quantity of healthcare providers as needed. Such an approach could keep prices steady and in turn allow a greater pool of patients to access care, she writes.

The paper appears in the November edition of American Economic Journal: Economic Policy.

Triyana, now a professor at Nanyang Technological University in Singapore, shared in an earlier interview her research plans and initial findings. Read the Q&A here or tune in to a podcast from her research presentation here.

China’s recent initiatives to deepen health reform, control antimicrobial resistance, and strengthen primary health services are the topics of ongoing collaborative research by the Asia Health Policy Program (AHPP) at Stanford’s Shorenstein Asia-Pacific Research Center and Chinese counterparts. For example, with generous support from ACON Biotechnology and in partnership with the ACON Biotech Primary Care Research Center in Hangzhou, China, AHPP hosts an annual conference on community health services and primary health care reform in China.

The conference, titled Forum on Community Health Services and Primary Health Care Reform, was held in June at the Stanford Center at Peking University (SCPKU) in Beijing. It featured distinguished policymakers, providers and researchers who discussed a wide-range of topics from China’s emerging “hierarchical medical system” for referring patients to the appropriate level of care (fenji zhenliao), as well as the practice and challenges of innovative approaches to primary care and integrated medical care systems. Yongquan Chen, director of Yong’an City Hospital and representative for the mayor’s office of Sanming, talked about health reforms in Sanming City, Fujian Province, a famous example within China. He discussed the incentives and reasoning behind the reforms, which focus on removing incentives for over-prescription of medications, demonstrating government leadership for comprehensive reforms, consolidating three agencies into one, monitoring implementation and easing tensions between doctors and patients. He pointed out the feasibility and early successes of reform by comparing public hospitals in the city in terms of their revenues and costs, reduced reliance on net revenue from medication sales, and other dimensions of performance. Finally, he addressed reform implementation and future plans on both the hospital's and the government's part.

Xiaofang Han, former director of the Beijing Municipal Development and Reform Commission, shared her personal views on the challenges patients face in navigating China’s health system (kan bing nan) and the need to improve the structure of the delivery system, including a revision to the incentives driving over-prescription in China’s fee-for-service payment system. She emphasized that patients’ distrust of primary care providers can only be overcome by demonstrating improved quality (e.g. with a systematic training program for general practitioners, GPs), and that referral systems should be based on the actual capabilities of the clinicians, not their formal labels. To reach China’s goal of over 80 percent of patients receiving management and first-contact care within their local communities will require improved training and incentive programs for newly-minted MDs, a more flexible physician labor market, and innovations in e-health and patient choice regarding gatekeeping or “contract physician services” (qianyue fuwu).        

Guangde County People's Hospital Director Mingliang Xu spoke about practices and exploration of healthcare alliances and initiatives to provide transparent incentives linking medical staff bonuses to metrics of quality. Ping Zhu from Community Healthcare Service Development and Research Center in Ningbo addressed building solid relationships between doctors and residents and providing more patient-centered services.        

Professor Yingyao Chen from Fudan University School of Public Health discussed performance assessment of community health service agencies based on his research in Shanghai. He introduced the strengths and weaknesses of the incentives embedded in the assessment system for China’s primary care providers, and concluded with suggestions for future research. Dr. Linlin Hu, associate professor at Peking Union Medical College, discussed China's progress and challenges of providing universal coverage of national essential public health services.

Professor Hufeng Wang of Renmin University of China discussed China’s vision for a “hierarchical medical system”– bearing resemblance to “integrated care,” “managed care,” or NHS-like coordination of primary and specialized care – with examples of pilot reforms from Xiamen, Zhenjiang and Dalian cities. Dr. Zuxun Lu, professor of Tongji Medical College of Huazhong University of Science and Technology, also discussed hierarchical medical systems and declared that China currently had a “discounted gatekeeper system.”

Dr. Yaping Du of Zhejiang University presented his research on mobile technology for management of lipid levels and with the help of a volunteer, demonstrated “Dyslipidemia Manager,” a mobile app-based product for both patients and doctors. Innovative strategies for primary prevention of cardiovascular diseases in low- and middle-income countries were the focus of remarks by Dr. Guanyang Zou from the Institute for Global Health and Development at Queen Margaret University, including its connections to international experiences with China’s current efforts in that area.  

In sum, the 2016 Forum elicited lively, evidence-based discussions about the opportunities and challenges in improving primary care and sustaining universal coverage for China.  Plans are underway for convening the third annual ACON Biotech-Stanford AHPP Forum on Community Health Services and Primary Health Care Reform in June 2017 at SCPKU. Anyone with original research or innovative experiences with primary care in China may contact Karen Eggleston regarding participation in next year’s Forum.