• When does and doesn’t privatization work?

    People love to debate this question, particularly when it comes to health care. If you’re among them, read Eduardo Porter’s recent NYT article, in which he discusses The Org: The Underlying Logic of the Office, by Ray Fisman and Tim Sullivan. Porter quotes Fisman,

    If I can write a perfect contract in which I pay for a concrete observable outcome, can rule out cream-skimming and can ensure the measure is not gamed, there is no reason that the private sector can’t do it better.

    Is this a fair test? What’s its sensitivity and specificity? Does it rule in or out health care or health insurance?


    • Well, I’m going to try to apply that test to health care:

      The observables, like process measures (how many percent of a physician’s patients or a health plan’s enrollees got a flu shot) may not correlate perfectly with actual outcomes. We can observe many, but not all outcomes, and we cannot necessarily correlate the outcomes to what the health plan or the physician did – for example, if it’s a Medicaid health plan, their enrollees’ unstable housing situations might have trumped anything the physicians in the plan did.

      We cannot rule out cream skimming in health care. It’s well known that Medicare Advantage plans have healthier enrollees on average than traditional Medicare. Or the for-profit chain-owned skilled nursing facilities really do a lot more therapy than non-profit, or even standalone for-profit, facilities because therapy is very profitable.

      And that paragraph above could easily apply to gaming.

      Things are not necessarily hunky dory in fee-for-service Medicare and Medicaid, which are government operated. Medicare has very little support for care coordination. Medicaid really underpays. I think you can make the argument that we have underinvested in competent personnel to run Medicaid, and perhaps Medicare as well. If you are comparing a government-run organization to a private one (for-profit or non-profit), and the government org is understaffed because of budget cuts or general hostility to government, then you have something the test doesn’t capture.

      We do actually have a pretty broad array of quality measures, albeit they are behind for some special populations (e.g. the disabled). We have risk adjustment to guard against cream skimming. In principle, I think you could write contracts well enough that MCOs can’t game them. And there are some private organizations, mostly non-profit but some for-profit ones, that are committed enough to health care. For example, I understand that Amerigroup has a good reputation among people with disabilities in Texas and several other states. So, I think it is possible to successfully privatize health care, provided it is overseen properly. But it is also possible for private organizations (including non-profits) to mess things up – think TennCare’s early years.

    • This issue hits close to home where news reports of norovirus and C. difficil outbreaks are a regular occurrence. I realize that the hospital unions have a stake in the issue. I also realize that the lowest corporate bidder, paying minimum wage to unskilled workers may not produce quality hospital cleaning services, regardless of how the standards are set. This link is 4 years old but sets out the state of play and nothing has improved much since then.

      “The report, from WorkSafeBC, found that Nanaimo Regional General Hospital had, for the second time, failed to maintain adequate cleaning and safety standards. A standard cleaning product was causing health problems in staff. Other chemicals were being diluted or mixed. Hazard investigations were superficial, and the workers’ supervisor “has not been educated on health and safety.”” http://thetyee.ca/News/2009/04/21/HospitalGerms/

    • Megan McArdle’s addressed this question a while back: http://www.theatlantic.com/business/archive/2011/05/when-should-governments-contract-out/239143/

      “I think the number one rule is that we should be extremely cautious about privatizing services with a captive audience, especially when the people they are supposed to serve have little political voice. So no to privatized courts, prisons, or welfare agencies, though it may well work to contract out specific functions within those agencies that have easily agreed-upon objective measures which are hard to abuse.

      We should also be careful about outsourcing monitoring functions such as building inspection. It’s very hard to come up with any sort of performance metric that won’t tempt the company to either issue too many violations, or contrariwise, pass substandard work (especially if you expect them to collect fees for their services.) Since it’s hard to monitor their work, you don’t gain much from privatization, and indeed, you may lose, since unlike the government, they need a profit margin.

      On the other hand, services where the “clients” are primarily customers seem ripe for privatization.”

      Using that guideline, health care and health insurance should be privatized. Affordability can be addressed through subsidies and the perverse incentive of adverse selection can be adequately addressed through some fairly light-touch regulation. However, emergency care tends to serve a captive audience. That one area of health care may be one where there isn’t much to gain from privatization.