Saving the public from the private? Incentives and outcomes in dual practice

• Date: 01 August 2020
• DOI: http://doi.org/10.1111/jpet.12447
• Author: Robert Nuscheler,Michael Kuhn
• Published date: 01 August 2020

J Public Econ Theory. 2020;22:1120–1150.wileyonlinelibrary.com/journal/jpet1120

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© 2020 Wiley Periodicals LLC

Received: 28 May 2019

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Accepted: 17 April 2020

DOI: 10.1111/jpet.12447

ORIGINAL ARTICLE

Saving the public from the private? Incentives

and outcomes in dual practice

Michael Kuhn

1

|Robert Nuscheler

2

1

Wittgenstein Centre (Univ. Vienna, IIASA,

VID/ÖAW), Vienna Institute of

Demography, Vienna, Austria

2

Faculty of Business and Economics,

University of Augsburg, Augsburg,

Germany

Correspondence

Robert Nuscheler, Faculty of Business and

Economics, University of Augsburg,

Universitätsstr. 16, 86159 Augsburg,

Germany.

Email: robert.nuscheler@wiwi.uni-

augsburg.de

Abstract

We consider a monopoly physician offering free

public treatment and, if allowed, a private treat-

ment for which patients have to pay out of pocket.

While patients differ in the propensity to benefit

from private treatment it always yields better

health outcomes than public treatment but is also

more costly in terms of money and time. We study

the physician's supply of private care and allocation

of time costs across public and private patients and

contrast these with the first‐best allocation. To in-

crease the willingness‐to‐pay for private treatment

the physician shifts time costs to public patients.

While this turns out to be socially optimal, the re-

sulting positive network effect leads to an over‐

provision of private care if time costs are suffi-

ciently high. A second‐best allocation arises when

the health authority sets public reimbursement but

has no control over private provision. Depending

on the welfare weight the health authority attaches

to physician profits, a ban of dual practice may

improve on the second‐best allocation. Notably, a

ban benefits not only public patients but also

private patients with a moderate propensity to

benefit from private care.

1|INTRODUCTION

The provision of health services of both a public and private nature by one and the same

provider, typically labeled dual practice, is a common yet strongly contested arrangement

within many health care systems.

1

Generally, dual practice is an arrangement that admits the

inflow of additional private resources into a public sector that is subject to more or less severe

resource constraints. In a number of countries with a national health service, such as the United

Kingdom or Southern European countries, the provision of treatments (e.g., surgery) within

private practice is allowed as a means to reduce public sector waiting times (e.g., Barros &

Olivella, 2005; Gonzalez, 2005; Iversen, 1997). The idea is that the profit incentive from private

practice may stimulate additional treatment effort so that total waiting time is reduced to the

benefit of even those patients who are not prioritized and remain on the public waiting list.

However, such an arrangement may be plagued by cream‐skimming (Barros & Olivella, 2005;

Gonzalez, 2005) and the incentive to manipulate upwards public waiting times to stimulate

private demand (Iversen, 1997). A second argument as to why dual practice may contribute to

relieving funding pressures within a public health sector is provided by Bir and Eggleston (2003)

and Eggleston and Bir (2006) who argue that the additional income (and perhaps professional

satisfaction) from private practice helps to attract highly skilled personnel into the public health

sector even at comparatively low levels of public reimbursement.

A third argument relates to dual practice as a vehicle to allow for the provision of additional

and/or higher quality services which are not included in public health care plans but may

nevertheless be valued by some patients (e.g., Biglaiser & Ma, 2007; Brekke & Sørgard, 2007).

Indeed, funding pressures within the public health care system force more and more funding

agents (governments or health insurers) to restrict services to a “basic bundle.”Additional

services, which may be valuable to some individuals but do not prove cost‐effective for the

whole population, may then be purchased on the private market. In Germany, for instance,

such arrangements are already in place for dentistry, where many intensive treatments have

been excluded from statutory health insurance and deferred to a private market (possibly

private insurance). Similar arrangements apply to the services of ambulatory care physicians in

Austria, where certain treatments are exempt from statutory health insurance or subject to

considerable copayments with patients having an option to purchase private top‐up insurance.

Finally, within secondary care, in many countries such as Austria and Germany public patients

do not typically have a statutory right to be treated by senior consultants, but such an option

may be purchased privately. In light of increasing pressures on public health care budgets

triggered, for example, by the aging of populations, we would expect a rather general and far‐

reaching shift in health care finance towards a mix of public funding for basic services together

with top‐up private funding.

2

The focus of our analysis is on the second and third rationale for dual practice. We consider

the provision of a basic treatment to which patients have access at no cost within a public health

plan, while, within dual practice, a more effective but more costly treatment may be offered at

an out‐of‐pocket fee. Even though the more intensive treatment is not cost‐effective for the

1

Garcia‐Prado and Gonzalez (2011) provide an excellent summary on both the prevalence of dual practice within

developed and developing countries and on its benefits and disadvantages. See Ferrinho, van Lerberghe, Fronteira,

Hipólito, and Biscaia (2004), Garcia‐Prado and Gonzalez (2007), and Socha and Bech (2011) for additional surveys on

the theme.

2

Barros and Siciliani (2011) and Hurley and Johnson (2014) offer excellent surveys on the economics of public‐private

health care financing.

KUHN AND NUSCHELER

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