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Journal of the Academy of Hospital Administration


Author(s): D.C. Joshi, Hem Chandra

Vol. 18, No. 1 (2006-01 - 2006-12)

D.C. Joshi, Hem Chandra

This brief report is based on articles published in the special thematic issue of Bulletin of the WHO, Nov. 2006, 84(11) on “Contracting and Health Services” Editor

The World Health Assembly resolution 2003, recognized the potential of “contracting” to improve health system performance. However, contracting if poorly planned and executed also has inherent risks. India is also actively involved on the issue of contracting therefore, the health planners have to pay due attention on the emerging issues and latest trends on contracting health services. The magnitude of inputs required in health systems are enormous. It may not be possible, even in most developed countries to render medical care to whole community free of cost and by one actor, whether public or private. The one viable alternative can be a joint effort both by public and private. The participation may be at the level of provision of inputs in respect of manpower, materials and supply chain management, funding etc. or at the level of management process in rendering the care. It is also true that there is definite risk with the contracting system as well. This risk can be reduced to some extent by performance based contracts, where payments to the contractor depends at least partially on the achievement of the particular outcome.

Considering the economic restructuring under way in the country and over the globe, in the last, decade, the changing role of the private sector in providing health care has been addressed in the National Health Policy of India -2002 (NHP-2002). Currently, the contribution of private health care is principally through independent practitioners. Also, the private sector contributes significantly to secondary and tertiary level care. It is a widespread perception that private health services are very uneven in quality; sometimes even sub-standard. Private health services are also perceived to be financially exploitative and the observance of professional ethics is noted only as an exception. With the increasing role of private health care, the implementation of statutory regulation and the monitoring of minimum standards of diagnostic centers / medical institutions becomes imperative. The NHP 2002 addresses the issues regarding the establishment of a comprehensive information system and based on that, the establishment of a regulatory mechanism to ensure the maintenance of adequate standards by diagnostic centers / medical institutions, as well as the proper conduct of clinical practice and delivery of medical services1.

Contracting is a tool that formalizes the relationships and obligations between the different actors in the health system2. Contracting is as old as the history of health care. If we take into account the various inputs in the health care organizations, it can be appreciated that the organizations, whether in the private or public had to participate in some form or the other; be it - human resource, materials or equipments, financial resources, irrespective of the size or the type of the health care organization. The delivery of health care in almost every country, involves some form of publicprivate partnership. In countries where care is delivered mainly through the public system, many inputs such as pharmaceuticals and support services are sourced from the private sector. In countries with predominantly privately owned facilities, the state influences their configuration through regulations and financial incentives. In hospitals, the situation is further complicated because of the many functions provided by such institutions: the training of health professionals and research and development, for example, are activities that are publicly funded to varying degrees.

According to the English dictionary: “a contract is a legal agreement, usually between two companies or between an employer and an employee, which involves doing work for a stated sum of money”. The private sector is actually a conglomerate of various sub sectors: for profit or corporate, non-government, voluntary and informal. It is a mix of individuals e.g. private practitioners and organizations e.g. NGOs, working in various fields: advocacy, service delivery, community empowerment, etc. and some times dealing with other sectors in health. It is largely uncontrolled and unorganized, with limited management and administrative capacity. The official ‘for profit’ sub sector can be roughly categorized into individuals and institutions. The individuals are Registered Private Practitioners (RPP) of modern medicine or allopathic doctors (639700 in the country) and Indian System of Medicine (ISM) practitioners 6950243. There are 70,000 private hospitals and nursing homes in India, 85% of which are of small size (under 25 beds), representing a total of 914543 beds3. The ‘not-for-profit’ sub sector has been classified in various ways: either by type, by activity, by country origin or some times by source of control. The informal sub sector encounters government doctors with private doctors, non-qualified practitioners of allopathic medicine (quacks), traditional practitioners, community health workers, traditional birth attendants, Dais, Anganwadi workers, faith healers, local medicine men etc.4. It is common for contracting to be seen as a form of privatization. When it ceases to provide health services, the state contributes instead to the privatization of the health sector. Contracts are generally seen as the tool that makes privatization possible. Others take the more subtle view that unwillingness to declare the objective of direct privatization accounts for the use, at least initially, of contracting, which enables the private sector to expand its presence within the health sector. In its accepted meaning, privatization involves a transfer of legal ownership from a public sector entity to the private sector. Privatization is thus an institutional arrangement rather than a contractual one. However, in the specialized literature on the reform of the state, the concept of privatization has taken on a wider meaning: privatization also encompasses the adoption of a management model that draws on the rules of the market5.

Model of Public–Private partnerships in hospitals

The model in which a public authority contracts with a private company to build or run the hospital is, inevitably seen mainly in countries with national health services, where various models have been developed as shown in Table 16

Table I: Models of public-private partnership in the hospital provision

Model Description
Franchising Public authority contracts a private company to manage existing hospital.
DBFO (design, build, finance, operate) Private consortium designs facilities based on public authority’s specified requirements, builds the facility, finances the capital cost and operates the facility.
BOO (build, own, operate) Public authority purchases services for fixed period (say 30 years) after which ownership remains with the private provider.
BOOT (build, own, operate, transfer) Public authority purchases services for fixed period after which ownership reverts to public authority.
BOLB (buy, own, lease back) Private contractor builds hospital, facility is leased back and managed by public authority.
Alzira model Private contractor build and operates hospital, with contract to provide care for a defined population.

Key Issues in Contracting

The key issues which have emerged as a result of public-private partnership in the health care organization:

1. Cost: There is significant cost not only for the firm bidding for a public-private partnership (PPP), but also for the health care provider. A large sum of amount is incurred in preparation of bids, seeking legal and financial advice. The cost of annual charges for buildings constructed under PPP arrangements may be higher than the cost associated in hospitals built and run using conventional procurement methods. The legacy of buildings that are expensive to run, clean, air conditioning and repair is a significant problem.

2. Quality: There are no relevant data available to cite in the Indian context except that some of the sporadic observations made as under (i) it is a widespread perception that private health services are very uneven in quality, sometimes even substandard. (ii) Private health services are also perceived to be financially exploitative (NHP 2002). The quality problems experienced with the United Kingdom private finance initiative (PFI) hospital scheme, which will also be relevant in the Indian context as depicted in Table-II

3. Flexibility: The problem is not unique to PPP but the rigidity of contracts makes the solution more complex. In England, the difficulty of inflexible contracts has become more acute as new policies, especially in health, have created a much less stable environment. Incorporating flexibility into the original design is possible without adding costs for constructors or operators but it does not impose additional design costs.

4. Complexity: The challenges of implementing PPP have been greatest in the case of teaching hospitals. These institutions accept a wide range of referrals and provide services for various types of patients, these projects involve many different types of the stockholders, which make it more complex. Fig. 1 depicts the different approaches to contracting in health system6.

Table II: Quality problems experienced with United Kingdom private finance initiative (PFI) hospital scheme

PFI development Problems
Cumberland Infirmary, Carlisle * Use of cheap components necessitating regular refitting
* Maintenance cost 50% higher in their projections
* Poor drainage and plumbing and limited signage
* Patients leaving the cardiology department must go through five sets of swing doors, even though most are in wheel chairs
Durham District General Hospital * Pathology laboratory flooded three times in first 18 months, twice with raw sewage
* Poor ventilation and air filtration
* Fixtures and fittings are of poor quality, lightweight storage cupboards unable to take weight of routine equipments
Bishop Auckland Hospital * Opening delayed by 2 months for modifications
* Generator and core electrical systems had to be redesigned immediately after opening
Norfolk & Norwich Hospital * Negative pressure rooms were not properly operational for 2 years
* Air ducting found to be lying in unconnected lengths
* No ventilation in the kitchen so staff work in 30°C temp (with 40°C being recorded)
* Delivery loading bays inefficient
Hereford Hospital * Boiler house opened with no water treatment plant
* Doors too heavy for the opening restraints
* Three lifts had to be refitted within 12 months of operation
Seacroft Hospital, Leeds * Mental health facility found to have breached “every section of the fire safety code”

Approaches to contacting in health systems

(for larger image, click here)

1. Contracting relations based on delegation of responsibility: Delegation of responsibility is set on instead of directly managing the health services.

1.1 Contracts delegating responsibility to private actors: In some cases rather than establishing and managing the health services, the governments negotiates with the private operator

1.1.1 Contracts for the devolution of a public service: A private organization manages a public health service on behalf of the government. On the basis of an agreement, this entity runs the public service on the basis of contractual agreements.

1.1.2 Contracts relating to the concession of a geographical area: A concession contract for an entire health district awarded to a nongovernment organization (NGO)

1.1.3 Public Private Partnership (PPP): Since the early 1990 PPP has been set up in certain developed countries and now it is in the beginning stage in many developing countries including India. The government wishing to build a new hospital may tun to a private partner, who in turn will take on all of the following functions: financing, design, construction, and maintenance etc.

1.2 Public service association contract: A private organization that owns its own facilities and disposes of its own resources, collaborates with, is an associate of and discharges a “public service license holder”.

1.3 Contracts binding the government and its autonomous institutions: They may enter into a contract with care purchasers and are allowed some leeway in determining staff remuneration. However, these trusts are non-profit organization which remain public property and must comply with the directives laid down by the governments.

1.4 Internal contracting: Delegation of responsibility may occur within the same entity in the legal sense of the terms, for example, in cases where the central level wishes to establish contractual relations with the peripheral level.

2. Contractual relation based on act of purchase: The rationale behind contractual relations based on an act of purchase is based on simple principle: rather than providing the service itself, a health actor entrusts a partner with providing it in exchange for payments.

2.1 Relation between fund holders and health service providers: An individual fundholder may decide to purchase the health services he requires from a health service provider. Such a purchase does not usually give rise to a specific contract. But the individual may also hand over his funds to an institution that will decide whether to provide the health care services itself or to purchase these health services from a provider.

2.2 Health service providers production processes: Health service providers and administrations have at their disposal funds to carry out their core functions. Like conventional producers, they assemble the items necessary to produce the product they wish to supply to their clients.

3. Contractual relations based on co-operation: This means sharing the resources needed to work together towards a common goal while respecting one another’s identity.

3.1 Weak organizational interpenetrational agreement: Weak organizational interpenetrational agreements refer to situations in which the actors reach an understanding on the framework of cooperation.

3.1.1 Franchising: At the heart of the system is the idea that a higher authority wishes to harmonize a network of legal entities sharing a common goal. The franchiser is the coordinator of the network and therefore endeavors to ensure consistency.

3.1.2 Collaboration between healthcare establishments and voluntary associations: Collaboration between health care establishments and voluntary associations is provided in this case. The public and private organizations sign the agreement with non-profit associations to enable them to intervene in the hospitals.

3.1.3 Strategic planning at the level of local health system and health networks: Negotiations among all the local actors may give rise to contractual cooperation, which determines the roles and responsibilities of each actor.

3.2 Strong organizational interpenetration agreements: Strong organizational interpenetrational agreements apply to situations in which actors reach an understanding on the frame work of cooperation and conducts some if not all activities together.

3.2.1 Joint management: Understood as a sharing of authority and responsibility, joint management can be seen on a macro level; for example, the joint management of social security bodies by employers and trade unions.

3.2.2 Alliance: Alliance lie at the heart of working together. The success of agreements requires the active participation of the partners as well as complementarity between resources, technology and known how.


Contracting in health care is a diverse phenomenon, and is very difficult to generalize. It should not be used as a management tool to reduce the cost of the health system. The approach of contracting should lead to improved health care and all the actors to officer the health services, that are effective, efficient, fair and superior and in the larger interest of the community.


  1. National Health Policy- 2002: Ministry of Health & Family Welfare, Government of India-New Delhi.
  2. David E: Contracting and health, Bulletin of WHO November, 2006; 84 (11):842
  3. Health Information of India- Government of India, Central Bureau of Health Intelligence, DGHS, Ministry of Health & Family Welfare, Nirman Bhawan, New Delhi- 2004
  4. Health Sector Reforms in India- A District Medical Officer’s Manual-India research Pres, New Delhi, 2004.
  5. Jean: Different approaches to contracting in health system-Bulletin of WHO, November, 2006; 84 (11);859-63
  6. Martin McKee Edwards N, Atun R. Public-private partnerships for hospitals. Bulletin of WHO, November, 2006; 84 (11);890-96.

D.C. Joshi – Chief Medical Officer, Central Health Services, Postal Dispensary No.1, Lucknow, UP
Hem Chandra – Addl. Medical Superintendent, SGPGIMS, Raebareilly Road, Lucknow-UP
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