Facility Management Services in UK Hospitals: in-house or outsourcing

Alena Podaneva () and Pierre Picard
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Alena Podaneva: DEM, Université du Luxembourg

DEM Discussion Paper Series from Department of Economics at the University of Luxembourg

Abstract: This paper studies the institutional organization of UK hospitals through traditional procurement and private finance initiatives (PFIs). It first describes the UK hospital sector with hard facility management (FM) services (e.g. building maintenance) and soft FM services (e.g. catering, cleaning) that can be supplied in-house or outsourced. Builders are also bound to provide a partial warranty against construction risk. The paper then shows that a PFI internalizes the externality between builders and hard FM service suppliers. It also requires the payment of a risk premium that can become too high under strong hard FM risk. The builder’s warranty creates a reverse moral hazard in traditional procurement, which becomes stronger for higher hard FM risk. Traditional procurement provides no incentive to outsource FM services, whereas a PFI offers incentives for soft FM services. PFI procurement is shown to be optimal under small and high enough hard FM risk.

Keywords: Private finance initiatives; foundation trusts; hospitals; facility management services outsourcing; moral hazard; incomplete contracts; bundling. (search for similar items in EconPapers)
JEL-codes: D86 I11 I18 L32 (search for similar items in EconPapers)
Date: 2023
New Economics Papers: this item is included in nep-cta
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Persistent link: https://EconPapers.repec.org/RePEc:luc:wpaper:23-15

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