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Nikolaos Tsilingiris

May 26th, 2020

Responding to COVID-19 invites a ‘hold-up’ problem when outsourcing public services

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Estimated reading time: 10 minutes

Nikolaos Tsilingiris

May 26th, 2020

Responding to COVID-19 invites a ‘hold-up’ problem when outsourcing public services

0 comments | 2 shares

Estimated reading time: 10 minutes

Responses to COVID-19 oblige weakened public health care systems to optimise performance.  The public sectors of many European countries were already anaemic due to long-term austerity measures that impacted public health spending. Beyond this, however, COVID-19 highlights a more grotesque social policy reality: the inequality between outsourced contracts and the state as the guardian of the public interest.

To cope with the glut of COVID-19 patients, countries like Greece and Spain repurposed private clinics and private health care providers to expand provision of intensive care beds. The World Health Organisation (WHO) also proposed a synergy between the public and the private medical sectors to accommodate surge capacity. In Strategic Action 1, the WHO stressed the need to purchase or otherwise acquire additional capacity from the domestic private health sector. Such responses seem superficially appropriate to the desperate situation at hand.

However, different countries have implemented the WHO’s proposal in different ways. To return to the examples above, while Spain sensibly applied the logic of requisition for private health care facilities, including private hospitals, Greece pursued a provocative market-friendly approach that relied on contracting with private clinics. Prime Minister Kyriakos Mitsotakis’s cabinet negotiated a sliding fee of 1,672 euros per day for the first three days of hospitalisation, to be paid from Greece’s public funds.

COVID-19 could therefore be a critical moment that focuses attention on the welfare state’s fragility and vulnerability. Indeed, this important state function is taking place in a social context characterised by intense marketisation, stemming from the supply-side revolution in neoclassical economics. In periods of crisis and uncertainty, public-sector outsourcing can pierce the welfare state’s armour. The most common aftereffect is the ‘hold-up problem’, wherein a corporate supplier of a public service can hold a buying state hostage.

The hold-up problem is relevant to the case of private health care providers because responding to the COVID-19 crisis obliges the state to urgently acquire intensive care beds.

First, extreme specialisation and expense limits private clinic suppliers, meaning the state has few options for alternatives. Second, the state’s life-saving priority competes with the time to acquire beneficial bargain-related information. Because the state is unlikely to find a competitively-priced offer, it is on the back foot from the beginning.

Hence, the hold-up problem means that an emergency like COVID-19 exacerbates the private supplier’s leverage to extract disproportionate value or ‘hold up’ the state for the fixed contract. For example, if a supplier demands a sudden surge in prices, it becomes more costly for the desperate state to breach or renegotiate than to acquiesce to the new financially harmful conditions.

In a case where the state does not already have a contract but is trying to negotiate one (e.g., to supplement the intensive care bed gap), the most likely scenario is that the state will succumb to private suppliers’ exploitative demands. In the context of a serious social emergency, this plausible situation opens the state to corporate blackmail.

Finally, if the state fails to reach a competitive contract, it is held culpable while the private providers are not. In a situation of emergency, the state—as the principal defender of the public interest—shoulders responsibility for market inefficiency.

Nevertheless, we can avoid the hold-up problem if we judiciously reflect on the relation between the state and the private sector. This would also require that we avoid outsourcing sensitive, complex and strategically important public services in a highly marketised economy with scarce and ineffective regulatory tools. Responding to the COVID-19 pandemic requires endurance, not only for the performance of national health care systems, but also for the welfare state in an era characterised by a spirit of fierce anti-statism.

Note: This article gives the views of the authors, and not the position of the Social Policy Blog, nor of the London School of Economics.

About the author

Nikolaos Tsilingiris

Nikolaos Tsilingiris is an MSc student in Political Theory at the London School of Economics and Political Science (LSE). His research interests revolve around social epistemology and political economy.

Posted In: COVID 19

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