Public Services under Private Management

Theory predicts that outsourcing public services to the private sector can reduce costs and improve efficiency, but can also induce cost-cutting measures and compromise quality should the surplus rights be controlled by firms. We empirically assess the effects of the Brazilian “Organizations Sociais de Sa´ude” model (OSS), which involves specifically outsourcing the management of public hospital services to the private sector while keeping surplus rights with the state. We use a difference-in-differences approach to assess OSS effects, and document evidence of enhanced hospital production and operational efficiency without adverse effects on hospital quality and equity. Increased inpatient production addresses previously unmet demand, expanding local access to hospital care and contributing to declines in population mortality. Performance gains primarily arise from improved operational efficiency achieved through increased hospital management capacity. Such capacity facilitates staffing adjustments, favoring higher-skilled personnel, dismissing lower-productivity staff, and adopting flexible, performance-tied employment contracts. Effects are especially pronounced among private organizations with more management experience, underscoring positive returns to managerial capacity. Our findings support the view that incentive-ownership structures can potentially address the conventional quantity-quality trade-off in public service delivery, even within the challenging policy context of a developing country.