Extending transaction cost economics: Towards a synthesised approach for analysing contracting in health care markets with experience from the Australian private sector

Transaction cost economics (TCE) has been the dominant economic paradigm for analysing contracting, and the framework has been applied in a number of health care contexts. However, TCE has particular limitations when applied to complex industry settings and there have been calls to extend the framework to incorporate dynamic theories of industrial organisation, specifically the resource-based view (RBV). This paper analyses how such calls for theoretical pluralism are particularly germane to health care markets and examines whether a combined TCE-RBV provides a more comprehensive approach for understanding the nature of contractual arrangements that have developed within the Australian private health care sector and its implications for informing policy. This Australian case study involved a series of interviews with 14 senior contracting executives from the seven major health funds (i.e. 97% of the insured population) and seven major private hospital groups (i.e. 73% of the private hospital beds). Study findings reveal that both the TCE perspective with its focus on exchange hazards, and the RBV approach with its emphasis on the dynamic nature of capabilities, each provide a partial explanation of the developments associated with contracting between health funds and hospital groups. For a select few organisations, close inter-firm relational ties involving trust and mutual commitment attenuate complex exchange hazards through greater information sharing and reduced propensity to behave opportunistically. Further, such close relational ties also provide denser communication channels for creating and transmitting more complex information enabling organisations to tap into each other's complementary resources and capabilities. For policymakers, having regard to both TCE and RBV considerations provides the opportunity to apply competition policy beyond the current static notions of efficiency and welfare gains, and cautions policymakers against specifying ex ante the specific nature of contractual arrangements that ought to prevail in health care markets.