PBF, health system performance, and health worker effort in theory

To formalize the link between PBF and effective coverage, this chapter summarizes a conceptual framework linking health worker effort, as well as broader health system considerations, to pecuniary incentives to motivate the consideration of PBF interventions as a means for improving service provision and effective coverage (this conceptual framework is presented in Friedman and Scheffler (2016)). The framework links effective coverage to incentivized health payments by assessing various channels through which incentive financing may impact effective coverage.

A standard economic framework that often serves to motivate the PBF approach is the “principal-agent” model, where the purchaser of health services (the “principal”) delegates, often through a formal contract, to a provider of health services (the “agent”). Even a straightforward contractual arrangement may encounter complications if the objectives of the principal and agent are different or if the information available to the agent is not the same as that of the principal. In standard principal-agent theory, the degree of differential information between principal and agent as well as the principal’s ability to monitor the agent’s output and effort determine the optimal contract form. For situations when it is difficult to monitor the agent’s effort but not the outputs of that effort, or when the agent may have private information on the local health production process that the principal does not have, it may be preferable to reward the agent based on performance and, especially, the achievement of prespecified outputs (see Savedoff and Partner (2010) for a general discussion of this framework).

Another relevant feature of the principal-agent contract is the degree of financial risk imposed on the agent by the chosen contract. On the one hand, if too small a share of overall compensation is made available to the agent through a performance component of the contract, it may not be sufficient to spur the necessary effort to meet the targets. On the other hand, if too large a share of overall compensation is made contingent on performance, this can introduce excessive financial risk for the agent, possibly leading to demotivation, high stress, lower performance, and staff turnover.

In addition to financial incentives, PBF programs involve additional health system reforms, such as facility autonomy and increased supervision