Strategic Purchasing Under South Africa's NHI: Challenges and Theoretical Insights

The introduction of the National Health Insurance (NHI) fundamentally reshapes the government's role in healthcare. Traditionally, the government has been responsible for both financing and directly providing health services to its citizens. However, with the NHI, the government's primary focus shifts to financing, negotiating and purchasing healthcare services, while a separate set of providers will focus on delivering those services. By leveraging economies of scale from a large single pool, the NHI Fund will be able to use its financial leverage to actively regulate healthcare costs actively. This separation, known as the purchaser-provider split, allows the government to act as a strategic purchaser of health services.

The rationale behind a purchaser-provider split in healthcare lies in the fundamental principles of specialization and coordination within economic organizations. According to Milgrom & Roberts (1992), economic organizations emerge as entities where people interact to achieve individual and collective goals. Specialization allows individuals and organizations to focus on specific activities, leading to greater efficiency in the production of goods and services. However, for these benefits to materialize, coordination and motivation are essential. Coordination refers to each person’s actions and decisions are coordinated in such a way “that one person’s contribution is compatible and consistent with another’s”. Simultaneously, people must be motivated to make the appropriate contributions.

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The purchasing and contracting of health services from providers have been mostly underpinned by the Principal-Agent theoretical framework, which provides insights into understanding divergences or incongruencies between the interests of a principal (NHI Fund) that requires an agent (healthcare providers) to carry out a task (Kipo-Sunyehzi, 2018). A particular challenge in the procurement of services is the occasional misalignment between the interests of agents/healthcare providers (particularly in the private sector who are often motivated by profit) and their subsequent decisions and those that would best serve the principal's/NHI’s interests.

To contract healthcare providers effectively, the NHI Fund must design incentive structures that encourage providers to deliver high-quality services at the lowest cost. However, this often requires additional effort from providers, who must be adequately compensated through financial incentives. The provider evaluates the effort required by weighing it against potential financial rewards. The principal (NHI Fund) must then design these incentives with a deep understanding of how the agent (healthcare provider) is likely to respond, thereby encouraging greater effort and improved performance.

Achieving this alignment necessitates several considerations:

Performance Measures	Because providers’ efforts cannot be observed and measured, achieving this alignment requires specific measures of performance (quality, access to priority services, and efficiency) that can be measured timeously, are accurate, sensitive to differences in providers’ efforts, and resistant to manipulation or corruption. Quality can be challenging to measure, but it can be thought of in two ways, health outcomes and health system responsiveness. Outcomes are usually conceptualised as improvements in the length and quality of life because of health services, i.e. Quality adjusted life years (QALYs). However, such measurements are often impractical and are typically beyond the control of providers. In practice, assessments usually focus on structural indicators (such as the existence of specific service infrastructure) or care processes (such as compliance with clinical guidelines). Responsiveness measures refer to a range of aspects that have an influence on patient experience but are not directly related to health outcomes (e.g. long waiting times and interruption of treatment due to non­availability of medicines which are common to most public health facilities [1]). The existing limitations of performance measurements mean that relying on structure and process indicators is often unavoidable. However, using these indicators as measures of quality is only appropriate if research evidence demonstrates that they lead to improved health outcomes.
2. Financial Incentives	A second important consideration is the design of the financial incentive(s), such as the magnitude, how they increase relative to quality, whether they are relative to other providers, whether they are based on individual performance measures or an aggregate of their achievement, and whether they are based on absolute levels of achievement or on improvements from previous levels.
3. Alignment of Intrinsic Motivations	The effectiveness of strategic purchasing depends on aligning the NHI Fund’s objectives with those of healthcare providers. If the improvements in quality sought by the NHI Fund are aligned with healthcare providers’ objectives, and the contract arrangements are explicit in this improvement while offering adequate encouragement through incentives, then it is more likely to achieve the NHI’s desired interests. Conversely, contracts that contradict or undermine providers professional motivation are likely to be ineffective or even lead to worse outcomes [2].

While financial instruments can create powerful incentives, they can also create unintended, or adverse, incentives. For instance, if incentives are linked only to specific aspects of quality, there is a risk that other important, but unrewarded, aspects of quality may be overlooked. Additionally, if performance measures are inadequate, they could encourage negative provider behaviours, such as avoiding the treatment of certain patients who might still benefit from care.

It has been argued that explicit incentives may be unnecessary to attain the desired quality of services if there is trustworthy publicly available information the standards of quality healthcare that enables payers and patients to select providers based on their published performance metrics. This is because the competition associated to such information could lead to optimal levels of quality [2]. The ‘SA Health Benefits Online Platform’ – an electronic system enabling providers to search any condition or service against defined parameters – presents an excellent opportunity for this to be built onto this platform by attaching providers performances against these parameters.

Attaining and publicly reporting on the necessary information is a demanding ordeal, and the country’s experience with this in the public sector has been dismal. In 2010 the Director-General of the NdoH established the Data Advisory and Co-ordinating Committee (HDACC) to identify key indicators and data sources used to monitor the performance of the health outcomes and suggest improvements to the quality of this data. In the same year, the Negotiated Service Delivery Agreement (NSDA) identified 12 priority outcomes, corresponding key indicators and targets for 2010-2014. The 2016 HDACC report highlighted two key challenges: The first was related to the lack of an interventional model to quantify the impact of potential interventions hindered the ability to set achievable targets. The second noted the need to develop indicators related to non-communicable diseases and injuries. The HDACC recognised the need to develop a set of indicators related to the performance health system, however, this process is yet to be completed. The country’s effort to establish system-wide performance indicators have also been undermined by the NdoH and CSIR reporting at least 42 different Health Information Systems which supported patient administration and care in 2013. Only seven were operational in five or more provinces and of these, five were for surveillance and monitoring and only two concerned patient care [3].

Safeguards Against Opportunistic Practices

The EO literature, encompassing Agency Theory (AT) and Transaction Cost Economics (TCE), provides insights into designing contractual and extra-contractual arrangements to safeguard the NHI Fund against potential opportunistic practices and poor performance from healthcare providers [4]. These arrangements include various ownership models, contractual and non-contractual rules, regulations, and protocols designed to incentivize and regulate the actions of the agent (healthcare provider) operating on behalf of the principal (NHI Fund).

Two key assumptions underpin these arrangements in EO literature, specifically agency theory (AT) and transaction cost economics (TCE): The first, both the principal and agent enter transactions with differing motivations and preferences, each aiming to maximize individual utility; second, that the principal faces bounded rationality (TCE) or information asymmetry (AT), which can lead to opportunistic behavior by the agent, potentially inhibiting the principal’s capacity to achieve their desired objectives.

AT assumes that the agent’s opportunism can either occur through adverse selection (where the agent might misrepresent their skills or abilities to secure a contract) or moral hazard (where the agent might not put in the necessary effort once they have secured the contract, knowing they might not be closely monitored). In either circumstance, the agent is exploiting an information asymmetry advantage over the principal to secure a contract on a misleading basis.

TCE explains agent opportunism in contracting by highlighting a situation called a hold-up. This happens after a contract is signed, where the agent might refuse to deliver the agreed-upon services until the principal agrees to more favourable terms for the agent. The principal is often forced to agree to these terms because they’ve already invested significantly into the contract (buildings, machinery, or specialized knowledge). This gives the agent leverage to demand better conditions, knowing that the principal can't easily back out without losing these investments.

The different assumptions of these two theories mean that they offer slightly different methods to safeguard against potential opportunism from agents. AT focuses on creating complete contracts that incentivize the agent to be clear about their abilities and to act as expected. In contrast, TCE acknowledges that, because of bounded rationality, contracts can't cover every possible situation. This means there are gaps that an agent could potentially exploit. To prevent this, the principal needs to use additional methods beyond the contract to ensure the agent behaves appropriately.

To this end, the Council of Medical Schemes recommends that the Health Provider Registration Information System should be able to “capture all data (financial and non-financial) on health professionals involved in different types of contractual arrangements within the NHI. This information can be used for monitoring and evaluation purposes, including contractual engagements between the NHI fund and the service providers.”

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Until there is detailed clarity on key purchasing questions – what services should be covered, which providers should deliver them, and how should they be paid for – any decisions to increase coverage or spending are likely to will fail to garner the support of private sector actors. A more intentional contracting arrangement, that can align the NHI’s desired outcomes and the incentivized motivations of private healthcare provider’s is more likely to see progress towards Universal Health Coverage. Other challenges will also need to be addressed, including establishing an integrated information system an enabling and de-fragmented regulatory environment, stronger governance relations and more routine and formal monitoring, reporting and evaluating of strategic purchasing and performance-based. This evidence gap is crucial if we wish to inform the successful design and implementation health financing reforms that have substantial and explicit upsides.