Abstract:
New Zealand's health sector reforms in the mid-1990s introduced corporate institutions
and market disciplines to public hospitals. Yet the reorganisation of New Zealand's public
hospitals into Crown Health Enterprises (CHEs) led to severe criticisms. Ultimately the
CHEs were replaced with non-profit Hospital and Health Services.
This thesis focuses on three major criticisms of the CHEs. We use game theory to provide
a formal and novel analysis of interactions that could cause an organisation's performance
to differ markedly from the reformers' expectations. The analysis explains how a stylised
set of reforms could fail to achieve their objectives.
Chapter 2 analyses public hospital throughput data over the reform period. We find that
the CHE reforms were independently associated with an increase in hospitals' treatment
costs. This chapter motivates the theoretical analyses of the three criticisms of the CHEs.
We structure the theoretic analysis using an organisational hierarchy with four actors:
a funder, an (hospital) administrator, a (medical) specialist and a (health) consumer.
The first criticism was that CHE Boards paid bonuses despite managers failing to achieve
performance targets. Chapter 3 examines when a funder may want to revise the budget
of an organisation and to pay the administrator a bonus despite failing to meet a target.
We introduce three features of the CHE reforms that conventional soft budget constraint
models partly or entirely neglect: funder bargaining power, revisable targets and performance
bonuses. A
flexible budget constraint paired with bonuses can be efficient in the
light of uncertainty.
The second criticism was that costs escalated despite strong managerial incentives for
cost control. Chapter 4 argues that such incentives could disrupt trust in an organisation.
We show that sharpening the administrator's incentives for cost control can create a misalignment
between the administrator and the specialist and cause costs to escalate. Our
result, that incentivising a measurable dimension of performance can worsen performance
of that same task, contrasts with the conventional game-theoretic literature.
The third criticism was that the reforms let doctors manipulate managers, resulting in
inefficiency. The first model of Chapter 5 shows that an administrator might want to
encourage a specialist to influence public opinion. We modify the first model to reflect a
feature of the reforms: managerial efforts aimed at improving the organisation's operation.
The administrator can damage a whistle-blower's credibility, to the detriment of specialists
and patients. Both models give original insights into how the reforms could let an
administrator take advantage of his role. In this multi-layered model, the administrator
may intentionally reduce communication.
The CHE reformers expected performance incentives to
flow through a corporate structure
to improve efficiency. Rather than a cascade of beneficial incentives, incomplete contracts
could cause unintentional negative interactions. Tension and perverse incentives could
have caused costs to rise, necessitating budget revisions and additional bonus payments,
while permitting administrators to silence whistle-blowers. This research shows how complex
organisations that rely on soft information can benefit from systems that enhance
trust and collaboration, and may be harmed by unhealthy tension.
