Understanding good institutional design in hospital corporatization: a decision rights approach

Corporatization is a hybrid organizational form between public sector ownership and privatization that is increasingly being adopted in the social sectors. In the past ten years, hospital conversions from public to non-profit and from non-profit to for-profit have been common to both industrialized and developing countries.

The debate surrounding these conversions has centered primarily on the tradeoff between equity and efficiency when comparing public with private provision of services.

This paper argues that the creation of appropriate incentives, and the matching up of incentives with goals through institutional design is more important than the dichotomy of the current debate.

The paper finds:

• In all areas of decision rights, hospitals must have a clear distribution of prerogatives in order to avoid negotiations and the constant need for accommodation, processes with significant opportunity costs
• Decision rights in areas of design and implementation of broad hospital policies are important to define and stabilize early on, to ensure alignment of the hospitals objective function with those of, for example, the MOH and the MOF
• Board member maximum term lengths and conditions for term renewal are important to clarify to ensure continuity without compromising energy and enthusiasm.
• In the area of human resource management, the HDB experience has shown the importance of designing remuneration as an incentive, and of using incentives as performance and disciplinary measures, instead of allowing them to become public sector entitlements or political rights.
• The capacity to carry out strategic and financial plans requires more than a provision in a decree. Careful selection of skill mixes on boards, but perhaps more importantly, training and continuing education for board members are some ways of promoting good performance in this area.
• Writing the most complete contract possible through appropriate institutional design is more important in achieving the objectives of corporatization than the act of converting the legal status of a hospital into an autonomous institution.