Albert Francis E. Domingo, MD

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MSc Essays – Active Purchasing

Posted on | June 10, 2015 | No Comments


“An active approach to purchasing of services is fundamental to achieving efficiency and thereby expanding access to healthcare.” Critically assess this claim with reference to a country or region of your choice.

Albert Francis E. Domingo, MD[1]


Health systems will have to be designed, funded, and operated within the strengths and limitations of a particular sociopolitical and economic context. Managers have commonly sought to improve efficiency in order to expand access by beneficiaries to essential goods and services that can be used to maintain or improve health status. That resources are limited and contested by other social services needed by the population can either constrain or enable the attainment of health goals, depending on whether or not – and how – purchasing is to be used as leverage.

This essay shall critically assess the claim that an active approach to purchasing of services is fundamental to achieving efficiency and thereby expanding access to healthcare in the Philippines. It shall begin by specifying the term “efficiency” as to what it means in health systems parlance, followed by a discussion of what “access” to healthcare is. A discussion on an active or strategic approach to the purchase of health services shall follow, with attention to provider payment mechanisms.

Then, the context of the Philippines shall be explained according to the purchaser-provider split, with a programme to achieve universal health care (UHC) as the country’s current reform direction. The fundamental need for strategic purchasing in the context of the Philippine’s national health insurance program will finally be described, particularly on how the national health insurance firm should take a lead active purchasing role to help the Philippines achieve UHC.

MSc Essays – Active Purchasing

Achieving efficiency to expand access to healthcare

Murray and Frenk (2000)’s framework for assessing the performance of health systems is a good starting point to focus our discussion on strategic purchasing, efficiency, and access. They discuss the concept of “composite goal performance” as the efficiency of a health system: its ability to achieve overall the three intrinsic goals of improving health, being responsive to legitimate demands of people, and being fair in terms of financial contribution, given limited resources.

Palmer and Torgerson (1999, p.1136) give a more nuanced definition: “[e]fficiency is concerned with the relation between resource inputs (costs, in the form of labour, capital, or equipment) and either intermediate outputs (numbers treated, waiting time, etc) or final health outcomes (lives saved, life years gained, quality adjusted life years (QALYs)).” They further specify three kinds of efficiency: technical, attained by maximising improvements in health outcomes given a fixed set of resource inputs; productive, attained by maximising improvements also in health outcomes, but this time based on a given cost; and allocative, attained by maximising the overall health of the community based on explicit decisions of resource allocation across various health programmes.

Meanwhile, Murray and Frenk consider access to healthcare to be an instrumental goal that helps attain intrinsic goals. Gulliford et al. (2002) described three means of access, in terms of service utilisation: personal, or individuals recognising and accepting their healthcare needs and consenting to be a client within the system of provision; financial, or the impact of user charges and other indirect costs, with respect to their magnitude and the user’s willingness and ability to pay; and organisational, or institutions’ abilities to design and use client-oriented services.

For this essay, we assume that strategic purchasing is fundamental to maximising resource inputs (technical efficiency), minimising cost (productive efficiency), and optimising health programmes for the benefit of most of the community (allocative efficiency). It is further assumed that all of these as a composite shall help improve health awareness (personal access), ability and willingness to pay (financial access), and institutional capabilities to provide goods and services (organisational access).

The active approach to purchasing healthcare, or “strategic purchasing”

Murray and Frenk (2000) define purchasing as how pooled revenues are allocated to various providers who are to deliver interventions, with strategic design involving decisions on what to buy, how those are bought, and from whom. Kutzin (2012, pp.867-868) has argued that “[c]ountries cannot simply spend their way to universal health coverage… The main health financing instrument for promoting efficiency in the use of funds is purchasing, and more specifically, strategic purchasing.”

Ellis and Miller (2007) discuss strategic purchasing in the context of provider payment methods and incentives. It answers the question on how healthcare is to be bought. They have argued that the prevalent market structure or environment does affect the incentives to which providers are expected to respond. Furthermore, Langenbrunner et al. (2009) have described provider payment methods according to three parameters: how payment rates are set, when the payments are made, and whether payments are related to inputs or outputs. As far as efficiency is concerned, these three parameters are expected to affect both technical and productive efficiencies. Rate setting will determine who between the purchaser and the provider shall bear financial risk; in this sense, prospective rate setting will encourage efficiency because some risk is borne by the provider. The prospective release of payments can encourage “front-loaded” procurement of goods and commodities according to estimated health needs. Output-based payment is expected to increase productive efficiency in particular, because providers are forecast to reduce costs via their input mix so as to increase net revenues after the costs of care have been accounted for.

Strategic purchasing can also be restated as “quality-based purchasing” for which Waters et al. (2004, pp.365-366) have sought to provide a unifying conceptual framework. The authors describe this as meant to improve healthcare quality, where “purchasers must either: (1) use levers within the purchaser-provider relationship to motivate providers to improve quality; or (2) provide information to healthcare consumers so that consumers themselves will motivate providers to promote higher quality standards.” Nevertheless, some authors like Green (2014) doubt the above analyses as to extrinsic incentives affecting the behavior of providers. She argues that “intrinsic motivators” were still able to improve healthcare quality so long as payment incentives did not crowd them out. However, she concedes that more research is needed, as her own study design was only exploratory.

The Philippine health system’s market structure/environment

The Philippine state is constitutionally mandated to “protect and promote the right to health of the people and instill health consciousness among them (Anon 1987).” The national Department of Health (DOH) has technical oversight and authority on health, subject to the devolution of basic service provision to local governments (Romualdez et al. 2011). Given the dual delivery systems of public and private service provision (Anon 2012), governance can be distinguished as close to the NHS model for the public sector, and more of the free market for the private sector (Stevens and van der Zee 2008). Health care financing is a hybrid of taxation and social health insurance schemes, but still with high out-of-pocket payments borne by households (Anon 2014a). Meanwhile, health information systems and research, while existing and established, still has an “uncontrolled growth of data and information that are not integrated and harmonized (Anon 2007, p.52).”

Healthcare services in the Philippines are delivered via both public and private infrastructure (clinics and hospitals), with private facilities outnumbering those that are government-owned. Nevertheless, approval from the DOH must be secured before any new hospital (whether public or private) is built. Capital outlay for government-owned health facilities is provided for by a combination of national government budget, local government budgets, social health insurance reimbursements, and user fees (Romualdez et al. 2011). Overseas migration of the health workforce (particularly nurses) has become a persistent trend over the past few decades in the Philippines (Institute of Health Policy and Development Studies 2005). There is also a maldistribution of health workers (hospital-based doctors, nurses, and other paramedics) among those who have chosen to remain in-country, with more being in private sector practice than being in government institutions (Romualdez et al. 2011).

The availability and distribution of medical products is supplier-induced, with access to essential drugs being impaired (Romualdez et al. 2011). Picazo (2011) has observed that drug prices in the Philippines are high because of dependence on importation, dominance of branded products, information asymmetry, heavy marketing and promotion, as well as strong representation and incentives to providers, apart from the lack of supply of alternative generics. While the safety and efficacy of food and drugs are regulated by the Food and Drug Administration, other units within the DOH oversee the regulation of healthcare technologies (Romualdez et al. 2011).

Strategic purchasing and contracting to achieve UHC in the Philippines

Universal health coverage, domestically known as “kalusugan pangkalahatan” or universal health care (KP/UHC) is the most recent articulation of health systems reform in the Philippines (Anon 2010a). Its approach is to strengthen the Philippines’ national health insurance program (known as “PhilHealth”) in order to improve the provision of public health services, increase financial risk protection, and generate resources to modernize and sustain health service delivery – all so that the health-related 2015 millennium development goals (MDGs) can be achieved. These three strategic thrusts of KP/UHC are more or less equivalent to the intrinsic goals of health systems mentioned earlier: improved health, fair financing, and a responsive system.

PhilHealth has a hybrid design that is funded by fully tax-based premium subsidies for indigents as well as contributions by both public sector and private firm employees (Anon 2014b). This allows for the integration of strategic purchasing within the Philippine implementation framework for KP/UHC. Government instructions have thus been: (1) on the supply side, for government-owned hospitals and clinics to be upgraded and stocked with commodities using tax-funded line-item budgets; and (2) on the demand side, for PhilHealth to cover indigents using full tax-based subsidies for their premiums (GPH-DOH 2011).

PhilHealth as the purchaser organisation backed by the regulatory power of the State has the greatest potential to harness the prevalent market structure to affect incentives for providers (Anon 2014b; Ellis and Miller 2007). A shift to new provider payment mechanisms has been part of the country’s medium- to long-term health care financing strategy (Anon 2010b). The most recent amendment to the PhilHealth law recognised fee-for-service, capitation, case-based payment, and global budgets plus other payment mechanisms that may be henceforth designed (Anon 2013). Outpatient payment schemes based on capitation and inpatient payment schemes based on case payments have also been instituted, and are starting implementation.

Similar to the three dimensions which the WHO proposes to consider for health systems to move towards universal coverage, Filipino health systems researchers have used a composite metric known as the benefit delivery rate (BDR) to measure the impact of PhilHealth (Anon 2014c; Quimbo et al. 2013). The BDR as a summary measure reflects the capacity of social health insurance to cover its target population (coverage rate), how accessible its benefits are to the users of healthcare (claim rate), and how much of the healthcare expenditures are supported (reimbursement rate).

Quimbo et al. (2013) estimated PhilHealth’s weighted BDR for 2011 to be 9 percent, which means that on average, only 9 out of 100 Filipinos are protected by PhilHealth from the financial risks of healthcare expenditure. Even with official reports cited by the authors declaring PhilHealth coverage of the Filipino population to be above 85 percent, the composite BDR measure is still low because claim and reimbursement rates are low. While it appears that PhilHealth’s current impact is negligible (and to some extent that observation is supported by persistently high out-of-pocket expenditures by households), this also shows that there is still a broad space for reform to strengthen PhilHealth’s role as a single payer social health insurance system.

In his extensive discussion of South Korea’s consolidation of multiple small social health insurance societies into one national firm, Kwon (2003) described a system that was originally modelled after Germany, but after the merger now looks more like the British NHS because of its monopsonistic, single-payer system that has universal coverage and uniform benefits. Just like the Philippines, South Korea was quick to declare “universal coverage” of its population by its social health insurance system but at a trade-off: contributions were low, benefits were limited, and patients still had high out-of-pocket (OOP) expenditures.

Kwon (2003, p.83) noted that “[t]he single payer will have greater bargaining power as a monopoly purchaser (monopsony) relative to healthcare providers,” and that “[t]he financial solvency and efficiency of the unified health insurance system will hinge on its capability and willingness to use its bargaining power over providers, so that it plays the role of a prudent purchaser of medical care and implements effective payment systems…”. These potentials and their required actions can also apply to PhilHealth.

Rovner (1987) has discussed the economic and legal theories in the United States behind a healthcare purchaser’s use of monopsony power, analysing extensive case law in that jurisdiction where providers have historically attacked prepaid purchasers on grounds such as unreasonable restraint of trade. He observed that court rulings have found legitimacy in a buyer’s use of market power to negotiate or “bargain hard” for lower prices that ultimately benefit the healthcare consumer. Rovner thus argued that “[h]ard bargaining to extract low prices, even by a monopsonist, is conduct that facially appears to increase economic efficiency and render markets more competitive (Rovner 1987, p.882).” Exchanges between Staten et al. (1988) and Pauly (1987, 1988) dwell on the importance of market share in terms of the volume of patients vouched for by insurance firms as a proxy for its market power. But these authors debated in the context of the United States, where there may be many monopsonistic private insurance firms but definitely not a single national health insurance firm.

In the Philippines where PhilHealth is – by force of law – the sole national health insurance program (with a government-owned and controlled corporation as its administrator), the potential for monopsony to improve provider quality in a public-private mixed setting has been already demonstrated, on a small scale but with robust methodology (Shimkhada et al. 2008). Backed by empirical evidence, the authors of the Quality Improvement Demonstration Study (QIDS) assert that the careful measurement of quality combined with a provider bonus and system-level incentives may have a larger impact on healthcare quality than previously recognised (Peabody et al. 2011). They piloted a performance-based system (also known as pay-for-performance or P4P) that has overcome limitations identified by Ellis and Miller (2007) on physician ratings being based on claims data, because they used a robust measure of healthcare quality closest to the point of healthcare use (Solon 2009). Most importantly, QIDS demonstrated that expanded PhilHealth coverage resulted in newly insured patients seeking healthcare more at PhilHealth-accredited public providers, causing private doctors to improve their quality in order to compete for losses in case volume (Quimbo et al. 2011).

The way forward

All of the above considered, the policy environment of the Philippines demonstrates the fundamental need for an active approach to the purchasing of health services in order to improve efficiency and therefore expand access.

PhilHealth’s market share, once made significant for monopsony to work for its advantage, will allow for the hard bargaining described by Rovner to take place. That will increase technical and productive efficiencies, ultimately for the welfare of patients who are the consumers of healthcare. As an initial step PhilHealth may have to increase its benefit payouts first to successfully crowd out other provider payment sources; once this has been achieved, further reform of the purchasing environment will follow. The fact that there is still high out-of-pocket expenditures by households registered in the national health accounts means that not enough is being done to capture those funds into the PhilHealth risk pool. Better risk pooling brings with it improvements in financial access.

Providers, especially from the private sector, are expected to respond to incentives offered through the various payment mechanisms outlined by Langenbrunner et al. and which are explicitly authorised in the PhilHealth law. Again, QIDS research has shown initial results for the specific mechanism of pay-for-performance. This push towards quality may even involve interventions to promote health awareness and thus increase personal access, because providers also have an incentive to increase volume. Towards that end, the next frontier will be strategic contracting, because “[c]ontracts are the main vehicle by which purchasers translate their populations’ health needs and desires into the provision of health services (Busse et al. 2007, p.68).”

It may be expected that the broader provision environment will easily reform to increase organisational access once PhilHealth is able to establish itself as a credible single purchaser. To achieve this, actors within the health system will also have to improve allocative efficiency. Service delivery programs, networks, and referral systems that have been fragmented (or partitioned as public versus private) will integrate, because a singular financing mechanism will serve as the focal point for coordination. Increases in benefit payments or reimbursement will most likely include better compensation packages for health workers, hence lessening outward migration and improving distribution in-country. Finally, the procurement of medicines and other health products will be able to harness economies of scale more so that it will be demand-driven and not supplier-induced.


In this essay, we have evaluated the claim that an active approach to purchasing of services is fundamental to achieving efficiency and thereby expanding access to healthcare in the Philippines. We described efficiency in terms of its technical, productive, and allocative aspects. Access to healthcare was also outlined, in terms of its personal, financial, and organisational dimensions.

In discussing an active or strategic approach to the purchase of health services, we focused on provider payment mechanisms. We reviewed the literature to support a logical framework that outlines a stepwise linkage from strategic purchasing to improved efficiency and then increased access. We then demonstrated this logical framework in the context of the Philippines’ own market structure highlighting the purchaser-provider split. The fundamental need for strategic purchasing in the Philippine context of a monopsonistic single purchaser was finally described, emphasizing how the national health insurance firm PhilHealth can and should take a lead active purchasing role to help the Philippines achieve universal health care.


[1] The author submitted this essay to The University of Edinburgh for assessment in the course “Health Systems Analysis”. He was a student in the MSc Health Systems and Public Policy programme of the university in the 2014/15 academic year. The views expressed herein are the author’s own, and do not necessarily represent those of the university or its faculty.

Suggested citation: Domingo, A.F.E. (n.d.) “An active approach to purchasing of services is fundamental to achieving efficiency and thereby expanding access to healthcare.” Critically assess this claim with reference to a country or region of your choice. [Unpublished].

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