Key reform ingredients

This reform merits attention from policy makers seeking to improve performance of public hospitals. The PPP-based model enabled a clear separation of financing from provision of care in a way that allowed the government to move from being a "dumb provider" to a "smart purchaser." The reform allowed private, nonprofit organizations to assume management of all operational aspects of public hospitals. Although the property and physical assets remained public, and PPP facilities serve "public" patients residing in poor neighborhoods where the facilities are located, provision is private and funded under contractual agreement with the State of São Paulo. The mission of the public hospitals remains intact.

Although the public mission (and ownership) was preserved, the structures, governance, and financing systems of traditional government-operated hospitals were radically altered. The PPP model applied a set of alternative arrangements that, taken together, fashioned an environment of performance-oriented incentives and accountability. Managers responded through applying more effective managerial processes to human resources, procurement, and financial management. This in turn contributed to higher production, productivity, and quality, and to lower unit costs than in traditional public hospitals.

Our research suggests that the entire package of governance reforms is necessary and needs to be durable. We identify five essential, closely linked components of this package.

(i) Autonomous authority. This has three aspects. First, autonomy gave managers the decision-making authority to run their facilities. Managers are free to manage their budgets and inputs (human resources, drugs, and supplies) as they see fit to meet performance targets. The second aspect entailed protecting facilities from political interference. Finally, the OSS (or its board) is entrusted with fiduciary responsibility and provides oversight of operations while safeguarding against political meddling.

(ii) Flexible human resource management. Most public hospital staff in Brazil are civil-service employees. Rigid rules govern all human resource processes. The PPP model freed the hospitals from these rigidities. Managers made use of the flexibility of private contract law to recruit qualified personnel who fit the organizational culture. They also displayed a willingness to dismiss nonperforming personnel.

(iii) Strategic purchasing. The management contract and performance-based financing were key ingredients of the robust account-ability framework. The state government used both as a means to implement "intelligent purchasing."8 Contractual terms defined hospitals' roles and responsibilities, preserved their public mission, conveyed physical plant and equipment to the OSS, stipulated payment, and specified service types and corresponding performance targets and reporting requirements. Linking financing to contractual terms created strong incentives for compliance with performance targets.

(iv) Contract monitoring and enforcement. Weak contract management has been the "Achilles' heel" of PPPs in developing countries.9 The state established three main monitoring mechanisms: a contract-management unit that reviews and analyzes hospital data and negotiates budgets with PPP hospitals; annual audits conducted by the State's Comptroller General; and an independent Commission that reviews contract compliance annually. But contracts are meaningless unless enforced. The State has shown a willingness to enforce contractual provisions by not increasing the budget of any hospital in deficit, withholding funds from facilities that fail to achieve performance targets or fulfill reporting requirements, and canceling a contract for a persistent nonperformer.

(v) Information and transparency. Information flows underlie financing, purchasing, contract monitoring, and enforcement. Over time, the state established a robust process for managing information flows. In addition to mandating information systems, the state pioneered the use of standardized cost-accounting systems in PPP facilities. Using costs as a basis of budget negotiations is revolutionary for the public sector in Brazil. Finally, the State places much information in the public domain.

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8  Preker, A. 2005. Managing Scarcity through Strategic Purchasing of Health Care. In Preker, A., and J.C Langenbrunner, eds. Spending Wisely: Buying Health Services for the Poor. Washington, DC: World Bank. pp. 23-46; and State Law 846, Chapter 1, Article 1. Selection criteria included at least 5 years' experience in operating a hospital and possession of a governance board.

9  La Forgia, G., P. Mintz, and C. Cerezo. 2005. Is the Perfect the Enemy of the Good: A Case Study on Large Scale Contracting for Basic Health Services in Rural Guatemala. In La Forgia, G., ed. Health Systems Innovations in Central America: Lessons and Impacts of New Approaches. Washing-ton, DC: World Bank. pp. 9-48; and Loevinsohn, B., and A. Harding. 2005. Buying Results? Contracting for Health Service Delivery in Developing Countries. The Lancet. 366(9486). pp. 676-681.