Public and Private Procurement of Services in the Healthcare Sector

This Dissertation examines the healthcare sector in the United Kingdom and globally, contributing to healthcare economics by studying different service procurement methods. Specifically, it investigates the expected net benefit of healthcare providers via external sourcing and internal provision of facility management services for public hospitals, as well as those delivered through PFI. Moreover, it explores possibilities for cost savings in facility management services, along with optimal contract formulation that benefits both public and private parties involved. The government nowadays is not the unique source of healthcare services financing and development. For instance, recently during the COVID-19 pandemic, only thanks to the collaboration of the public and private sectors was the vaccine invented. The same occurs in other industries, such as space, construction, or robotics. The future of human progress depends directly on the partnership between the public and private sectors. I, as a scientist, feel the responsibility on my shoulders to contribute to it via research. My dissertation is the first step in my career where I launch a cost-savings and net benefit analysis, along with the exploration of internal and external enforcement balance between public and private parties’ partnerships in the healthcare sector. The healthcare sector is a complex arrangement with multiple parties interaction. These parties can be generalised into risk-neutral principals and risk-neutral or risk-averse agents working together over time. I utilize principal-agent modelling to describe the interaction between healthcare service providers and medical equipment maintaining firms, pharmaceutical companies and hospitals, foundation trusts in the UK and facility management service providers. However, this model has broader potential applications. Parties interact through different procurement types. For instance, when the government solely utilizes taxpayers’ money, it constitutes public procurement. In contrast, when the government attracts private sector financing, it is termed as PPP procurement. There are multiple types of PPP procurement, including concession, build-maintain-operate, PFI, and others. This dissertation specifically focuses on the PFI procurement type. The objective is to glean insights from the utilisation of this procurement type and derive lessons that would enable governments to develop more efficient PPP models in the future, with a focus on cost-savings and net-benefit perspectives. The enforcement mechanisms of procurement play a crucial role in the success of parties’ interaction in the healthcare sector. I emphasise the involvement of external enforcement to establish clear contractual terms and incentives, as well as regular communication, feedback mechanisms, performance reviews, recognition, and dispute resolution processes. Additionally, I aim to balance this with internal self-enforcing mechanisms in the contract. I establish in Chapter 1 empirically that facility management services delivered through PFI are more costly. In Chapter 2, I provide theoretical reasoning for these costs due to the choice of the wrong procurement type under a certain level of hard and soft FM risk intensity dominance background with double moral hazard problem. Finally, Chapter 3 adds that through relational contracts, the reasoning could also be due to the wrong external and internal enforcement balance in the contract. Chapter 1 shows that hospital sites procured through PFI have higher hard and soft FM costs compared to public ones, with an increase of up to 37.1% and 20.3% respectively. This difference is particularly noticeable in specific parts of facility management service costs: for hard FM, it is seen in energy costs and estates maintenance costs, while for soft FM, it is observed in laundry and linen expenses. We found that hospital sites procured through PFI with old buildings or those partially delivered through PFI experience larger hard FM service costs, while the effect is reversed for soft FM services excluding old constructions or when delivered fully through PFI. Nevertheless, our empirical study indicates that PFIs fulfil their intended function according to theory by transferring risk and managing efficiently. Specifically, we demonstrate that they are able to minimize FM service costs on management and when ruling out moderate- and low-risk backlog buildings. Moreover, at the trust level, we show that with each additional unit of private investment, trusts managing a higher share of PFI experience lower soft FM service costs. Chapter 2 extends the analysis by showing that PFI is optimal for small and high hard FM risks, while public procurement is preferred for intermediate risks. The reasoning arises from the builder’s warranty that creates a "reverse" moral hazard in public procurement and becomes stronger for higher hard FM risk. Moreover, public procurement gives authorities no incentive to outsource facility management services, whereas PFI structures offer incentives for soft FM services being outsourced. Consequently, this result provides a simple rationale for why authorities taking over expired PFIs may return to an in-house provision of soft FM services. Chapter 3 clarifies how contracts for outsourced healthcare-related services should be formulated. It emphasises the need for targeted external and internal enforcement when parties’ efforts sensitively contribute to healthcare output or when parties are very patient. This Dissertation discusses the advantages and disadvantages of using PFI in the UK. It also contributes new knowledge that can be applied by other governments to develop more effective forms of PPPs in the future. The research emphasizes that there is limited study on PPPs in the healthcare sector due to insufficient data, but as data access grows, further investigation and attention to this area are warranted.