Monday, October 24, 2011

Cost effectiveness and public service delivery

Any true test of a public policy intervention should involve not only an assessment of its defined program outcomes but also its cost-effectiveness in achieving those outcomes. In other words, assuming a set of desired outcomes, which policy approach generates the greatest bang for the buck?

I am inclined to accept the argument that in any real world development intervention, defining the outcomes is essentially a political decision, and therefore the preserve of the respective Department Ministers or the Cabinet. In contrast, structuring the policy design and implementation strategy for a chosen intervention is a bureaucratic/administrative and technical decision, the domain of officials and experts. It is their responsibility to help make an informed choice from among competing policy design alternatives. However, most often, in the real world of policy design and implementation, optimal policy design and cost-effectiveness takes the backseat.

Consider this example. The government of Populismland decides to provide free tertiary medical care and free secondary and higher education, including in private hospitals and colleges, for all those living below the official state poverty line, the BPL. The political objective is laudable. I have already written about the increasing importance of interventionist public policy in education and health care to address glaring market failures.

After the normal inter-departmental consultations, the bureaucrats of Health and Education Departments of Populismland draft their respective implementation strategies. The Health Department proposes the establishment of a government-run Trust to manage the tertiary healthcare program. In order to squeeze out the last ounce of populism, the program provides the ultimate choice to patients to take treatment in any hospital, public and private.

The Education Department too follows a similar script. To ensure that every student belonging to a BPL family gets all types of education for free, in private or government colleges, it formulates a policy that reimburses the full fees to all these students. Colleges fix fees, students apply and get admission, scholarships are sanctioned and disbursed. Simple!

In simple terms, in both cases, all the students belonging to the official BPL category, are offered the unparalleled choice of treatment and education in the best possible hospitals and colleges respectively. As indicated earlier, in both cases, the bureaucrats of Populismland have responded to the dictates of their political masters by tailoring simple but extremely expensive and unsustainable policy designs. How could the bureaucrats of Populismland have done better?

In simple quantitative terms, assuming the objectives, the single most important parameter is the expenditure per person per year for health care and education respectively. In commercial health care and education markets, this is determined by the insurance premium and the interest rate on education loans respectively. Optimal public policy design mandates that it be structured in a manner such that it is atleast as cost-effective as either of these.

Now, in most cases, and certainly with health and education, this would require drawing on professional expertise. The rote and unprofessional manner of policy formulation, commonplace with bureaucratic public policy designs, cannot achieve the objective of cost-effectiveness. So how can the bureaucrats of Populismland address the challenge of cost-effectiveness with its pre-defined healthcare and education interventions.

For a start, in both cases, there should be serious debate about what constitutes eligibility. In some respects, this is the most important determinant of total cost of such programs. In health care, the challenge lies in designing the cheapest and least distortionary insurance scheme. I have blogged earlier here and here about the principles that should underpin such schemes.

In education, the issues are more complex. The challenge would be to provide affordable and good quality college education, in both private or public institutions, at the lowest cost, without creating systemic distortions. A robust mechanism for scholarship sanction and rigorous monitoring its utilization should be established. Incentives that relate sanctions and disbursal to the performance of both students and colleges are an essential requirement. Critical to keeping costs down is a rigorous process of fixing the fee amounts for various college degrees to be reimbursed for those covered under the scheme.

Alternatively, is it possible for public policy to catalyze a carefully regulated but efficient market in education scholarships. Enabling policy framework can be established to encourage banks and other financial institutions to offer student loans. Subsidies, both on interest and principal, of varying amounts, can be offered to students depending on their family incomes. The institutions eligible to be part of any government subsidized loans should be rigorously screened. The exact design of each student loan, and the extent of government support can vary depending on the type of courses.

For example, those studying in professional colleges, and getting placed should take over atleast some portion of their loan. Similarly, those performing poorly in certain school courses should be permitted to avail scholarships only for certain categories of subsequent courses.

In conclusion, any policy which simply doles out assistance, either directly or indirectly, without aligning incentives and preventing systemic incentive distortions, is a recipe for disaster. More importantly, it is a clear case of abdication of their responsibilities by administrators.


Anil Nilugonda said...

Hello Sir, This is really an important thing in public service delivery. its always important to draw or image the successful PSD's optimal cost effective strategies they've implemented or at least study.

Anil Nilugonda said...

Hello Sir, This is really an important thing in public service delivery. its always important to draw or image the successful PSD's optimal cost effective strategies they've implemented or at least study.

sai prasad said...

I think Bannerjee and Duflow have pointed to a study which says that aligning "CTS" to various requirements may not have actually helped achieve the targeted objectives.