Professional Services and the Poor 2: The poor use markets. Can direct payments help them to work better?

By David Leonard

In my previous blog post, I established that most of the world’s poorest people live in countries where they have to pay (formally or informally) for professional services. They pay even when services are provided by governments. For better or worse, the poor are participating in markets for health, education, veterinary medicine and other services.

In the remaining posts in this series, I will ask: What can be done to make these markets work better for the poor? This post looks at what happens when payments are made to individual professional practitioners. The next post will look at what happens when payments are made to organisations.

The problem with markets for professional services: Information inequality

My earlier post showed that information inequality is a big problem in markets for professional services. The people paying for services know much less than the provider about the quality of what is being offered. The consequence is that quality goes into a downward spiral – because the purchasers don’t want to pay a ‘quality’ price for what might be inferior services and the professional providers can’t afford to provide quality services if they aren’t paid more for them. Both parties to the transactions lose.

But there are solutions: reconfiguring institutions can overcome the ‘information asymmetry problem’ and can benefit both parties.

Why is it hard to recognise quality professional services in markets?

In order to look at potential institutional solutions, we need to recognise that purchasers are interested not only in the quantity of professional services they receive but in their quality as well. With preventive human and animal health the big challenge is to reach large numbers and remote locations.  Such quantity problems are much easier to manage, which is one reason that even poorly governed countries usually do an adequate job of providing them. (And this is all the better because people are more willing to buy cures than immunisations.) But quality matters in curative medicine and education.

The quality of a service is made up both of competence (capacity to meet a need) and the effort made to apply that competence well. The problem is that clients will not pay for competence and effort if they do not know they exist. Before they are willing to pay appropriately clients need reliable signals so they know the quality they are being offered.

Some signals of competence can be observed. You can look for a diploma on the wall of your doctor’s office. Competence tends to be regulated moderately well even in countries with poor governance. And once obtained, competence tends to persist.

But competence alone isn’t enough. Good quality services depend on effort as well. There is often a substantial gap between what practitioners are capable of doing and what they do in practice. Effort is transitory, hard to observe and difficult to regulate, so this is the dimension on which it is hardest for consumers to know what they are getting.

When professional services are acquired through markets, it can have a long-term effect on competence. But it has an immediate impact on effort.

Can user payments to individuals help improve the quality of professional services?

Sometimes governments or donors make direct payments to professionals for the quantity of services delivered to individual clients. The literature investigates when happens when such payments are made for immunisations, maternities, pupils and exam passes, for example.

At other times, service recipients themselves provide payments to providers. Even when these payments only supplement much larger investments by governments or donors, they still provide incentives for service providers to apply effort.

Individual user fees create greater effort only if they add to the income of the professional or contribute to the budget of the organisation. If they are transmitted into the national budget or substitute for it they are not inducements. And this is the way most user fees in government facilities have been used in practice.

Even when fees go directly to individual providers, however, they may not lead to better quality services. They may stimulate quantity of effort, but not better quality. For example, we have evidence that physicians provide a greater quantity of primary care under fee-for-service payments compared with capitation or salary. Financial incentives also can stimulate delivery of services for which demand is insufficient, such as the delivery of immunizations or screening tests.

But when they are used widely, financial incentives can have unintended effects. They can induce corruption and make consumers wary of the motives of service providers. By stimulating quantity alone they contribute to the ‘race to the bottom’ among most service providers; they incentivize them to take activity at the margin that is of limited or no value, rather than stimulating higher quality.

Avoiding a ‘race to the bottom’ in professional services: Examples from traditional healers and midwives

In some settings, direct payments do avoid a ‘race to the bottom’. One way to do this is through ‘outcome contingent contracts’. Much of the work of traditional healers in African countries on wounds, broken bones and animal health has been found to be quite effective. Healers are stimulated to provide quality care because they charge only a small initial fee for their services and expect most of the payment to come much later, once patients know there has been a cure. But these contracts usually exist only in rural areas, where the practitioner and patient know each other.

A related example concerns midwives in Cameroon. Since patients can usually tell whether child delivery was successful shortly after birth, they are expected to pay an ‘appreciation’ for a good outcome before leaving. And this payment has a clear effect on the quality of service.

Both of these examples are exceptional because the results (and the quality of the service) are clearly visible before payment is made. This significantly reduces the information inequality and creates incentives that are more responsive to quality. But the circumstances in which such ‘contracts’ are possible are not common. Something close to the same effect is achieved, however, when there are repeat transactions between the parties over a considerable period, so the client can assess whether the service provider is delivering quality.

More to come on providing quality professional services for the poor...

We’ve seen that payments to individual service providers have strong limitations. Except in a limited set of circumstances, they don’t overcome the unequal information problem.  In the next post in the series, we’ll see that making payments to organisations offers better institutional solutions to the challenges of providing services for the poor.

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This blog draws on a paper currently under consideration with WORLD DEVELOPMENT -- Institutional Solutions to the Asymmetric Information Problem in Services for the Poor by David Leonard, Gerald Bloom, Kara Hanson, Juan O’Farrell, and Neil Spicer.