Governance and Incentives in Corporatized Hospitals

Corporate governance challenges in emerging market public sectors are leading to innovations in organizational form, such as corporatization, which separates ownership from management. In seeking to better understand the role of governance and incentive design in corporatized hospitals, this paper focuses on their board structure - the institutional lynchpin of such systems. It shows how principal-agent theory, in particular the multitasking and common agency approach as developed by Dixit (1996), can provide a useful analytical lens in understanding hospital board design. Implications for hospital governance will be shown. There are three potential levels of governmental activity in health: regulation, finance and service provision. Political constraints for hospital privatization and the lack of private entrepreneurial activities are the two main factors that contribute to government involvement in providing health services. This paper focuses on the provision side. It describes corporatization as an institutional design for public hospitals that seeks to improve efficiency and reduce transfers in a publicly owned, decentralized health system. The analysis considers decentralization as a reallocation of decision rights to lower levels of the public sector. It seeks to show how such a strategy creates new needs for monitoring and control of decentralized units, and how the multi-tasking common agency model can shed light on the design of governance mechanisms in corporatized hospitals.