Neoliberalism in Health Care

PRIVATIZATION OF HEALTH SERVICES IN

LESS DEVELOPED COUNTRIES: AN EMPIRICAL
RESPONSE TO THE PROPOSALS OF THE
WORLD BANK AND WHARTON SCHOOL

Howard Waitzkin, Rebeca Jasso-Aguilar,

and Celia Iriart

Academics and World Bank officials argue that, by reducing out-of-pocket

expenditures, expanded private insurance may improve access to needed
health services in less developed countries. In this empirical response,
the authors examine this recommendation through observations from their
research on privatization of health services in the United States, Argentina,
Chile, and Mexico. Privatization, either through conversion of public sector
to private sector insurance or by expansion of private insurance through
enhanced participation by corporate entrepreneurs, generally has not suc-
ceeded in improving access to health services for vulnerable groups.
Although the impact of privatization has differed among the Latin American
countries studied, expansion of private insurance often has generated addi-
tional co-payments, which have increased rather than decreased out-of-
pocket expenditures, thereby worsening access to needed services. Privatiza-
tion usually has improved conditions for private corporations and has led
to higher administrative costs. To address the devastating problems of access
to services worldwide, we must find ways to enhance the delivery of public
sector services and must move beyond conventional wisdom about market-
based policies such as privatization.

Early in 2006, Health Affairs published a position paper by prominent academics

and World Bank officials that focused on lack of insurance coverage in less
developed countries (1). The paper presented the main observations and con-
clusions that emerged from an earlier conference in March 2005, organized by the

International Journal of Health Services, Volume 37, Number 2, Pages 205–227, 2007
© 2007, Baywood Publishing Co., Inc.

205
206 / Waitzkin et al.

World Bank and the Wharton School of the University of Pennsylvania. The
authors presented data on the high proportion of medical expenses paid
out-of-pocket in the poorest nations of the world. They argued that the limited
funds available to governments in those countries imply that health care access for
their populations will never succeed through reliance on public sector programs
and institutions.
To help solve this problem, the authors of the position paper recommended
private health insurance. Given what they term the “potential efficiency gains”
from private insurance, they expressed optimism that sale of private insurance to
individuals and families could alleviate the regressive economic reality resulting
from the extensive out-of-pocket expenditures in less developed countries.
Noting that “entrepreneurial incentives” rarely have fostered the emergence of
private insurance plans in these countries, the authors called for new policies that
would encourage private insurance through both not-for-profit and for-profit
insurance companies. In support of these proposals, the authors cited policies
that encouraged the successful emergence of “private markets” in several Latin
American countries, especially Chile, which reportedly manifested low adminis-
trative costs (estimated at 18% of total health expenditures).
As researchers and activists in struggles to improve access to health services in
the United States and Latin America, we read the proposals that emerged from
the World Bank and Wharton School conference with incredulity. In our work,
we have found that the expansion of private insurance and reduction of publicly
insured services in general have not improved health services for poor people.
Rather than reducing out-of-pocket expenditures, these policy shifts often have
increased such expenditures and have worsened access barriers. In this response,
we present preliminary findings from our ongoing research on privatization in
Latin America and the United States. This work has focused especially on the
impact of privatization on vulnerable populations such as older and disabled
people. We have investigated in depth the role of private insurance and the process
of privatization in several Latin American countries. From these observations,
we have noted a series of difficulties that call into question policy proposals,
such as those emerging from the World Bank and Wharton School conference,
that favor privatization as a solution to access barriers affecting poor people in
less developed countries.

METHODS

Rationale for Cross-National Comparisons

In this project, we have studied the privatization of health services for older and
disabled people in the United States, Argentina, Chile, and Mexico. We chose
these countries for comparisons because they manifest different approaches to
privatization that have proven pertinent to privatization decisions in the United
 Health Services Privatization / 207

States and also have responded to U.S. economic policies regarding global trade.
All countries have enacted policy changes that, to varying degrees, have facilitated
access to social security and other public sector trust funds by multinational
insurance and financial corporations seeking to expand their participation in
health care delivery and/or administration of social security funds. Privatization of
public sector services in the United States similarly has involved increased
corporate access to large public sector trust funds. Full or partial privatization of
public sector funds has affected not only older people but also younger people who
receive public benefits because they have physical or psychological disabilities.
Our rationale for focusing on these specific Latin American countries is that
they have enacted privatization policies leading to very different institutional-
and individual-level outcomes. Influenced by international financial institutions
(IFIs) such as the World Bank, Mexico’s directions of privatizing public sector
health services have emerged within the past decade, especially the last five
years. Because of its geographic proximity to and economic integration with the
United States, facilitated by the North American Free Trade Agreement (NAFTA)
implemented in 1994, Mexico has adopted policies that are beginning to affect
older and disabled people on both sides of the border. As largely unintended
consequences of privatization initiatives in both Mexico and the United States,
partly linked to NAFTA, changing patterns of private sector corporate partici-
pation have affected access and utilization of health services in both countries.
As discussed further below, these emerging shifts relate in part to bidirectional
migration between the two countries, involving both providers and consumers of
health services. To contextualize these changes in the United States and Mexico,
the earlier experiences of privatization in Chile and Argentina prove relevant.
Chile’s privatization policies have achieved wide recognition as successful, while
many observers have perceived Argentina’s as failures. In our work, we have
clarified the process of privatization in the Latin American countries and a strong
connection to policy decisions about privatization in the United States.

Data Collection

In this study, we used a multi-method design, with data collection from three
sources. First, we reviewed the research and archival literature on privatization
and health services. Adapted from our prior investigations, this method began
with a structured study of publications and unpublished literature. We examined
professional journals, business journals, newspapers and magazines, government
documents, legislative materials and hearing dockets, and corporate records
in the public sphere. In addition, we searched databases in medicine and health
policy, business, government, and the social sciences to locate pertinent articles
from 1980 through 2006 and assessed the websites of government agencies,
multinational banking and trade organizations, international and national
health organizations, multinational corporations, and advocacy groups. In these
208 / Waitzkin et al.

databases and indexes, we searched for key words including but not limited to:
health care, health policy, public health, international, global, globalization,
trade, privatization, private insurance, managed care, and management. We
searched the targeted organizations and pertinent trade agreements as key words,
authors, and title words.
Second, we conducted interviews with representatives of these same organi-
zations. We interviewed these key informants in person, by telephone, and/or by
e-mail, with a semi-structured protocol designed to elicit responses concerning
health policy and privatization. The in-person interviews took place during
research visits to the Washington, DC, New York City, Philadelphia, San
Francisco, Guadalajara (Mexico), Mexico City (Mexico), Cuernavaca (Mexico),
Buenos Aires (Argentina), Santiago (Chile), and Geneva (Switzerland) areas.
In addition, telephone and e-mail interviews included respondents in Massa-
chusetts, Colorado, and the United Kingdom. We selected key informants in
each targeted type of organization. Adhering to methodological guidelines for
qualitative research, we continued to recruit respondents for in-depth interviews
until the responses became redundant and we did not elicit additional informa-
tion or viewpoints (2). By this criterion, we conducted 42 interviews. In all
interviews, we used a standardized protocol of close-ended and open-ended items.
If respondents permitted, we recorded the interviews and transcribed pertinent
passages. The Institutional Review Board of the University of New Mexico
approved human subjects provisions.
Third, we assessed the organizations’ annual or other periodic reports available
in the public sphere. The organizations usually publish reports in printed form
and/or on their websites. Often the organizations prepare the reports for investors.
Alternatively, the organizations use the reports to attract support from targeted
groups of consumers, professionals, nonprofessional workers, and environ-
mentalists. In the United States, all corporations whose securities are publicly
traded, as well as investment advisors, must file reports for the U.S. Securities
and Exchange Commission; these reports usually are accessible in printed or
electronic form. As available, we obtained these reports from 1980 to 2005 for
the targeted organizations. Printed reports generally were available from the
organizations’ public relations personnel. We also could obtain many reports
through the Internet.
For Spanish-language bibliographic materials and interview notes, the three
authors independently prepared translations from Spanish and resolved differ-
ences through discussion.

Data Analysis and Interpretation

For the analysis of the data, as in our previous research, we used established
analytical techniques for qualitative research, influenced by Strauss and Corbin
(3). In several steps, we categorized the bibliographic database, field notes, and
 Health Services Privatization / 209

transcripts according to stakeholders’ constructions of the social realities link-

ing privatization and health. First, “open coding” involved an unrestricted,
line-by-line analysis of the field notes, to produce provisional concepts and
categories. Later, “axial coding” organized these provisional categories into
broader conceptual dimensions of protagonists’ constructions. We tried to clarify
variations in these constructions, especially sources of debate and controversy.
Software for qualitative data analysis, ATLAS.ti (www.atlasti.com), assisted
in the process of coding and categorization.
Data analysis from the interviews also relied on the analytical techniques
suggested by Mishler (4). This approach identified specific “voices” in the
interview narratives. As in our recent investigations (5), we applied narrative
analysis to notes and transcripts from the interviews. The analysis clarified the
connections between thematic content and the social context of policies linking
privatization and health.

RESULTS

Overview of Privatization

Efforts to privatize health services previously offered in the public sector have
occurred in the United States and many other countries. Although some privatiza-
tion efforts have occurred in Europe (6), more have taken place in Latin America
than in other regions. Influenced by U.S. policymakers, such organizations as
the World Bank and International Monetary Fund (IMF) have advocated reduc-
tion and privatization of public sector health services (5–10). These efforts
have affected policies of the World Health Organization, Pan American Health
Organization, and U.S. National Institutes of Health (11–14). Linked to economic
globalization,1 Latin American experiences in privatizing health services often
have occurred as part of policies referred to as “market-based reforms.”
In our earlier research, we found several important connections among
privatization, global trade, and health services. These connections include the
entry of U.S.-based managed care organizations (MCOs) into Latin American
health systems as these companies ceased providing services to Medicare patients
in the United States. We found that several international trade agreements—
especially NAFTA, the General Agreement on Trade in Services (GATS), the

1 For this study, globalization is defined as the process by which interconnected economic

transactions increasingly occur throughout the world, facilitated by (a) technological changes in
communication and transportation that have dramatically changed the speed of financial and
commercial transactions; (b) international agreements that encourage “free trade,” with a shift of
regulatory authority from governments to international financial institutions and trade organizations;
(c) expanded investments, sales, and collaborations by multinational corporations; (d) increased
movement of private finance capital across national boundaries; and (e) privatization of enterprises
previously administered in the public sector.
210 / Waitzkin et al.

Agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPS),

and emerging regional or bilateral treaties between the United States and
other countries—have affected or will affect health programs and services, tied
to privatization of both public institutions that provide health services and
social security trust funds that pay for health services and retirement pensions
in Latin America.

Public Sector Health Services, Social Security

Trust Funds, and Privatization

In the United States and Latin America, public sector health services affecting
older and disabled people are closely related to social security benefits. For
instance, in public discussions about privatizing the U.S. Social Security system,
attention usually focuses on retirement funds rather than social security benefits
for disabled people. However, Social Security also provides financial support for
people with disabilities, who become eligible for Medicare when they are judged
disabled.2
Under the U.S. Social Security Administration (SSA), two programs provide
disability benefits (15). Social Security Disability Insurance is based on prior
work under Social Security and is financed with Social Security taxes paid by
workers, employers, and self-employed persons. The amount of the monthly
disability benefit derives from the Social Security earnings record of the insured
worker. Supplemental Security Income, financed through general revenues,
provides benefits for disabled adults and children who receive incomes below
the federally defined poverty level. Proposals to privatize Social Security often
have not distinguished clearly among the various trust funds administered by the
SSA (16). Proposed reforms usually do not refer to the approximately 18 million
young and disabled people who comprise more than one-third of Social Security
beneficiaries (17).
Four trust funds maintained in the U.S. Treasury derive mainly from Social
Security and Medicare payroll taxes (18). The Old-Age and Survivors Insurance
Trust Fund pays benefits for retirees and survivors of workers who have died.
A Disability Insurance Trust Fund provides benefits to people judged to be
disabled. Under Medicare Part A, the Hospital Insurance Trust Fund pays for
inpatient hospital care. For Part B of Medicare, the Supplementary Medical
Insurance Trust Fund pays for physician and outpatient services. Medicare
Part C, formerly called “Medicare Plus Choice” and more recently “Medicare
Advantage,” permits the use of Medicare Parts A and B benefits in MCOs or
Medical Savings Accounts for private fee-for-service plans. Effective in 2004,

2 The Social Security Administration defines disability as inability to work and considers a person

disabled under Social Security rules if she or he cannot do the same work as previously and cannot
adjust to other work because of medical condition(s). The disability must last at least one year.
 Health Services Privatization / 211

Part D of Medicare provides a prescription drug benefit, usually administered by

private pharmaceutical or insurance corporations. Medicare covers most people
aged 65 and over and most workers who are receiving Social Security disability
benefits. In 2005, updated SSA data showed that 40.1 million people received
Old-Age and Survivors Insurance benefits, 8.3 million received Disability
Insurance benefits, and 42.5 million held coverage under Medicare. Table 1 shows
income to each trust fund by source in 2005 (totals may not add, due to rounding)
(18). Administrative expenses comprised a small percentage of total expenditures.
Although discussions of privatizing U.S. Social Security wax and wane, the
existence of these large public sector trust funds creates a structural condition that
motivates recurrent cycles of initiatives to privatize, fully or partially, the Social
Security and Medicare trust funds. For instance, the enactment of Medicare Part D
in 2004 created a new privatization initiative that largely uses public Medicare
funds to purchase medications in the private sector.
An alternative medication benefit (such as that of Maine and potentially other
states) might have created a standardized, public sector formulary, mainly based
on low-cost generic medications, which the Medicare system could administer
and pay for according to regulated prices. Instead, Part D created a complex
mechanism by which large insurance and pharmaceutical companies provide
administrative oversight of medication lists that include a wide range of costly
drugs still covered by patent. Under Part D, low-income older and disabled
people must use Medicare drug coverage, rather than Medicaid drug coverage
for which they were eligible. Instead of having expanded coverage, low-income
older and disabled people now face a financial barrier, because they must pay

Table 1

U.S. public sector trust funds, 2005, billions of dollars

Source OASI DI HI SMI

Payroll taxes 506.9 86.1 171.4 —

General fund revenue — — 0.5 119.2
Interest earnings 84.0 10.3 15.2 1.4
Beneficiary premiums — — 2.4 37.5
Taxes on benefits 13.8 1.1 8.8 —
Other –0.3 — 1.1 —
Total 604.3 97.4 199.4 158.1

Administrative expenses, % annual expenditures 0.7 2.6 1.6 2.1

Source: Social Security and Medicare Boards of Trustees (18).
Note: OASI, Old-Age and Survivors Insurance; DI, Disability Insurance; HI, Hospital Insurance;
SMI, Supplementary Medical Insurance.
212 / Waitzkin et al.

Part D co-payments for medications previously covered by Medicaid without

co-payments.
As is evident from the data provided by the SSA (Table 1), the size of these trust
funds provides an attractive source of capital, currently housed in the public sector
but potentially subject to privatization. Part of the financial incentive to privatize
the U.S. Medicare and Social Security systems derives from potential access to
these large trust funds for private investment. Even the smallest of the Social
Security funds, targeting disabled people, receives annual revenues of more than
$90 billion. In middle-income countries such as Mexico, the large social security
trust funds that pay for health services and retirement benefits also have proven
attractive for private corporations and investors. The small administrative costs of
the current U.S. Social Security and Medicare trust funds—between 0.7 and
2.6 percent of annual expenditures—are likely to grow under privatized manage-
ment (the authors of the proposals for privatization published in Health Affairs
(1) viewed 18% administrative cost as a favorable percentage); corporations
tend to show higher overhead costs, partly due to dividends for investors. As
administrative costs grow with privatization, the relative proportion of funds
available for use by those who have previously contributed to the trust funds
through taxes may decline.

Privatization, Medicare, and the Exportation

of Managed Care

Our prior research found that some MCOs have faced declining rates of profit and
market saturation in the United States and have entered foreign markets, often
seeking access to public social security funds designated for health care and
retirement benefits (5, 8). Entering foreign markets in the context of privatized
health services, some MCOs have withdrawn from relatively unprofitable U.S.
markets (including Medicare Part C programs). Such withdrawals have led to
disrupted services for many older and disabled patients. MCOs’ withdrawal from
Medicare markets has generated wide concern among patients, professionals,
and advocacy groups. On the other hand, business-oriented stakeholders view
the MCOs’ decisions as predictable corporate responses to changing market
conditions, including policies that undercut reasonable rates of return.
Most Latin American countries have organized social security systems that
include both health and retirement benefits for employed workers. Employers and
workers contribute to these social security funds. For unemployed workers and
those not covered by social security, Latin American countries generally have
established public sector health institutions, including public hospitals and clinics.
Having entered the Latin American marketplace, managed care executives
refer to the importance of accessing privatized social security trust funds (5, 8).
Government or publicly regulated agencies previously managed these trust funds.
Beyond their expressed intentions to improve health services, North American
 Health Services Privatization / 213

executives express their perception of social security funds as a new source of

finance capital. These funds therefore have proven structurally similar to the
U.S. Medicare and Social Security trust funds as a target for privatization (19).
The health care trust funds of the Mexican social security system recently
have attracted attention in privatization efforts, along the same lines of earlier
experiences in Argentina and Chile. We provide more details below about the
associations among market withdrawals in the U.S. Medicare program, entry
into markets abroad, and impacts on older and disabled people.

International Trade Agreements and Privatization

International trade agreements facilitate economic globalization and have exerted

an increasing effect on health services for older and disabled people. The
framework for such agreements began with the “Bretton Woods” accords, which
sought to stabilize and enhance the postwar economies of Western Europe.
Between 1944 and 1947, Bretton Woods led to the creation of the IMF, World
Bank, and General Agreement on Tariffs and Trade (GATT), which reduced
tariffs and other barriers to trade.
Established in 1994 after the “Uruguay round” of GATT meetings, the World
Trade Organization (WTO) has sought to consolidate international agreements,
with a goal of removing financial and nonfinancial barriers to trade. Financial
barriers refer to tariffs and similar measures initiated to favor producers of goods
and services within a country, to the disadvantage of producers outside the
country. Nonfinancial barriers consist of laws and regulations that impede trade
across national borders or within nations. WTO procedures generally treat trade
relations solely as a business issue and restrict consideration of related issues,
including social, environmental, and health problems. By these procedures, the
WTO seeks uniform global health standards of protection and quality at the
level least restrictive to trade (20). A “necessity test” requires that legal and
regulatory protections in these arenas become no more burdensome than neces-
sary. Although the WTO (under General Exceptions of GATT, Article XX)
permits national or subnational “measures to protect human, animal or plant life
or health,” it has initiated sanctions or pressures to restrict such protections
when they interfere with trade (21).
Although many WTO and regional agreements may affect health services for
older and disabled people through privatization processes, two agreements in
particular deserve attention: the General Agreement on Trade in Services and
the Agreement on Trade-Related Aspects of Intellectual Property Rights (22).
Currently under negotiation, GATS prohibits national or subnational laws or
programs that restrict the ability of private multinational corporations to sell
or administer health services or financial services within countries that belong
to the WTO (23, 24). Regulatory provisions that permit government moni-
toring of services provided under Medicare would become challengeable by
214 / Waitzkin et al.

corporations, to the extent that such regulations are stricter than those of any
other country participating in the WTO.
Regulations that seek to maintain the standards of services provided to older or
disabled persons under Medicare, for instance by long-term care facilities, will
become subject to challenge and financial sanctions if these regulations are stricter
than those of any other country participating in GATS. This principle, known as
“harmonization,” requires that regulations that comprise a barrier to trade in any
country do not become more burdensome than those in any other WTO member
nation. Under GATS, state laws restricting foreign corporations’ purchase or
management of public hospitals, clinics, nursing homes, other long-term care
facilities, or diagnostic and treatment centers, as well as the licensing of those
facilities, can be challenged. GATS also can restrict decisions by government
agencies to provide generic drugs or medical equipment in public sector service
programs such as Medicare, while excluding higher priced brands. Similar
limitations would apply to the regulation of social security funds connected
to health services, because such funds can be treated as financial services
under GATS.
GATS also contains profound implications for migration of both consumers
and health professionals across national borders, like that separating the United
States and Mexico. Provisions of GATS, for example, permit and may require
governments to pay for services covered under public programs when patients
receive these services in another country, or in the same country but provided
by a foreign company. In addition, GATS may require that state and national
governments recognize the licenses of health professionals issued in other coun-
tries that participate in the trade agreement. If implemented, this provision
would encourage migration of health professionals between the United States and
Mexico, as well as migration of patients to receive services from professionals
whose licenses are recognized in more than one governmental jurisdiction.
These situations comprise only some of many scenarios by which GATS can
affect services for older and disabled people (25, 26).
The TRIPS agreement protects patents, copyrights, trademarks, and industrial
designs across national boundaries. This agreement covers patented medica-
tions and equipment, textbooks and journals, and engineering and architectural
innovations for health institutions. TRIPS rules mandate that all WTO countries
implement intellectual property protections that provide 20-year monopoly
control over patentable items. Entry into the WTO required that the United
States extend patents from 17-year terms to the WTO’s 20-year standard. TRIPS
limits governments’ ability to provide generic medications under publicly funded
programs. For instance, federal and state health programs such as Medicare have
paid substantially higher drug prices because of these patent extensions; individual
patients covered by Medicare but lacking medication coverage also have paid
higher prices for patented medications over a longer period of time. Overall,
TRIPS has adversely affected U.S. health care cost-containment efforts (27).
 Health Services Privatization / 215

Regarding impacts on older and disabled people, TRIPS will continue to affect
generic medication formularies in public sector programs such as Medicare
Part C (for instance, in Medicare Plus MCOs providing medications under
prepaid capitations) and Medicare Part D (which covers medications, but usually
with co-payments, for low-income people who qualify for Medicaid in addition
to Medicare).
In the near future, emerging bilateral or regional trade agreements between the
United States and other countries, including Mexico and other Latin American
nations, will implement even stricter intellectual property rights and provisions
protecting investors’ rights. These new “TRIPS plus” standards move beyond
WTO requirements, as well as those of existing regional agreements such as
NAFTA and the Central American Free Trade Agreement (CAFTA) negotiated in
2005; similar changes in NAFTA and CAFTA may occur, given the precedent
established by newer trade agreements (28, 29). The U.S.-Peru Trade Promotion
Agreement (PTPA), signed in spring 2006, almost certainly will lead to increases
in medication prices, due to decreases in permitted generic medications and higher
prices for those that are permitted (30). The precedent established by intellectual
property provisions in the PTPA eventually may affect medication availability
and prices throughout the Andean region via the U.S.-Andean Free Trade Agree-
ment, under negotiation with Peru, Colombia, and Ecuador (31). Outside Latin
America, the Australia–United States Free Trade Agreement, also implemented in
2006, contains intellectual property rules that probably will alter pharmaceutical
regulations in Australia, especially by weakening the Pharmaceutical Benefits
Scheme, a largely successful federal reimbursement program (32). In our ongoing
research, we are assessing the impact of changing trade agreements, especially
NAFTA, GATS, and TRIPS, on health services and medications for older and
disabled people in the United States and Latin America.

Overall Impact of Privatization Initiatives on Services

In Latin America, privatization usually follows reforms that involve the assump-
tion of private control over public institutions, sometimes with little or no oppo-
sition. IFIs actively participate in the reform process. Recurrent features of the
health reforms promoted by IFIs, primarily the World Bank, include separation of
financing from delivery of health services and promotion of competition among
providers. This approach contrasts with the characteristics of a public sector health
system, which traditionally has financed and delivered services in an integrated
fashion (15). Advocates for privatization often achieve legitimacy for such policy
changes based on a perception of deterioration in public sector services. The
deterioration itself generally results from public sector funding cutbacks required
by IFIs. In Mexico, according to a prominent observer, “a gestation period of
almost a decade was necessary to increase the social legitimacy” of privatization
by “an undermining of public institutions that slowly discredited them” (33). In
216 / Waitzkin et al.

this view, deterioration of public sector institutions through cutbacks in funding

facilitate privatization, which then seems to improve services by removing
them from a weakened public sector. A similar “gestation period” preceded
privatization reforms in El Salvador (34).
The conceptual literature on privatization and its outcomes conveys mixed
themes. Some analysts favor privatization as a means to address the need of
developing countries to build infrastructure and to increase labor productivity.
They base this argument partly on an assumption that state-owned enterprises
and heavily subsidized industries lack essential financial resources (35–38).
Advocates also justify privatization as promoting efficiency, stimulating political
and economic competition, and reducing the self-serving tendencies of bureauc-
racies (39). During privatization, an official discourse emphasizes dire conditions
of public institutions, lack of public funding to solve the crisis, and a need to bring
in fresh capital and management capability. Generally the discourse refers to the
inefficiency and corruption of public management, in contrast to the efficiency
and transparency of private management.
On the other hand, adverse viewpoints highlight issues such as lack of trans-
parency and the importance of public sector regulatory frameworks (40, 41). In
addition to cases of corruption and inefficiency in the public sector, corruption
and lack of transparency also cloud some privatization efforts. Recent observa-
tions of privatization in Latin America point to a frequent lack of transparency,
as well as opposition to privatization at the grassroots level (42).

Privatization Initiatives in Specific Countries

Overview. In Latin America, privatization of social security funds directed to

health services generally has enhanced financial institutions and increased the
capital held by these institutions (43, 44). However, privatizing health services
linked to social security funds also has led to higher administrative costs, increased
income and gender inequality, and higher profits for financial and investment
companies (45, 46). Wealthy industrialized countries have undertaken less fun-
damental privatization reforms than less developed countries (47).
During the 1990s, Argentina adopted most of the recommendations on privat-
ization and reduction of public sector services made by IFIs as requirements for
new or renegotiated loans. However, these policies led to increasing economic
crisis and eventually to the collapse of the Argentine economy. This collapse
resulted in major cutbacks of health services for older people and for persons
with disabilities (48).
In Chile, privatization occurred earlier, during the military dictatorship of the
1970s and 1980s. Influenced strongly by market-oriented principles of U.S.-
based economists, Chile’s policies led to the privatization of public sector health
services, together with the formation of private MCOs linked to multinational
insurance companies. Privatized MCOs did not extend coverage to a substantial
 Health Services Privatization / 217

proportion of older and disabled people, who continue to utilize public sector
institutions with reduced public resources (5). However, the financial returns
have proved substantial for these firms, contributing to the perceived success
of privatization policies.
Mexico has received major loans from the World Bank to initiate privatization
reforms in its social security system, which provides health services and retirement
pensions to most workers currently or previously employed in the formal sector of
the economy. Meanwhile, the remaining public sector programs of the national
Ministry of Health have faced cutbacks that impinge on services for older and
disabled people who are not eligible for Mexico’s social security institutions.
High costs of health care in the United States have driven U.S. employers near the
Mexican border to contract health care plans for their employees in Mexican
border cities and towns (49). With the growth of privatized MCO-administered
programs under Medicare Part C, older or disabled U.S. citizens increasingly
travel across the Mexican border to seek inexpensive services and medications
for which they may experience access barriers such as co-payments in the United
States. The availability of lower-cost versions of medications in Mexico attracts
purchases by U.S. consumers, despite the intellectual property provisions of
NAFTA and TRIPS. In addition, the predicted effects of GATS will encourage the
bidirectional migration of health professionals expecting recognition of licensure
and specialty certification in both countries. GATS probably will also encourage
efforts by corporations based in the United States or Mexico to enter the market-
place of the other country, partly to access public funding, when payment no
longer remains restricted to companies based in the home country.
In the following sections, we provide more detailed information about privati-
zation of services in the United States, Argentina, Chile, and Mexico.

United States. As we learned from our earlier research on the exportation of

managed care, some MCOs based in the United States exited from U.S. Medicare
markets at the same time that they entered foreign markets. These MCOs previ-
ously provided services to large numbers of older and disabled people, covered
by Medicare and/or Medicaid. For example, since the late 1990s, Aetna entered
managed care markets in Argentina, Brazil, Chile, Mexico, and Peru. CIGNA
entered these markets in Argentina, Brazil, Chile, Colombia, Ecuador, Guatemala,
Mexico, Panama, and Venezuela (8). The same companies also entered or
attempted to enter managed care markets in several countries of Europe, Africa,
Asia, and Australasia.
Meanwhile, these and other MCOs exited from Medicare programs serving
older and disabled people in multiple geographic areas. Data gathered by the
Centers for Medicare and Medicaid Services on MCO withdrawals from the
Medicare program showed that by December 2000, Aetna had withdrawn
from Medicare managed care markets in 11 states (50). By the end of 2001, Aetna
was leaving Medicare markets in numerous other areas, affecting an additional
218 / Waitzkin et al.

105,000 members—a number equivalent to 38 percent of its Medicare

membership. CIGNA withdrew from Medicare markets in 13 states. Aetna’s
pullout affected an estimated 355,000 members, while CIGNA’s pullout affected
about 104,000 members (51, 52). Several other companies, including PacifiCare
Health Systems and Health Net, also left U.S. Medicare markets across the country
(53). MCO pullouts affected more than 2.2 million beneficiaries between 1998
and 2002 (54). A substantial proportion of these pullouts involved MCOs that
then entered social security markets abroad.
Recent reforms in Medicare Parts C and D have raised wide concerns. Data
from Medicare Advantage (a program offering MCO coverage under Part C) in
2004, for instance, showed costs 8.4 percent higher than those of traditional
fee-for-service Medicare (55). Medicare Part D, which expanded prescription
benefits, provided additional incentives to the pharmaceutical and managed care
industries (56). According to an influential prediction, the privatization process
may convert Medicare from a defined benefit program to a defined contribution
program for older and disabled people, placing a greater financial burden on the
recipients of services (57).
Medicare Part D, with its privatized approach to expanding medication access
through payments to the private insurance and pharmaceutical companies that
administer the program, contrasts with initiatives by some states to expand access
to medications for older and disabled people through a program based mainly in
the public sector. For instance, in the Maine Rx Program, the state government
created a reimbursement program to help protect an estimated 325,000 residents
not covered by a prescription plan. The program required all manufacturers who
participate in any state-funded prescription plan to negotiate a rebate for these
residents. The Pharmaceutical Research and Manufacturers of America has chal-
lenged this public program, unsuccessfully so far (58, 59). Other states predictably
will attempt to introduce similar legislation, following Maine’s lead.

Argentina. In Argentina, social security to protect older and disabled people was
organized under four principal administrative structures, two for social and health
care services and two for retirement pension funds. One of these structures, the
National Institute of Social Security for Retired and Pensioned People (Instituto
Nacional de Seguridad Social para Jubilados y Pensionados, INSSJ&P), managed
social and health care services for older and disabled people who contributed to
the system through their places of employment. Another structure, the Federal
Health Program (Programa Federal de Salud, PROFE) managed social and health
services for older and disabled people who did not contribute through their jobs.
Both administrative structures functioned under the authority of the national
Ministry of Health.
The INSSJ&P was created in 1971 (Law 19032) as a public, nongovernment
institution to provide social and medical protection for people over 65 years old
and disabled people who receive early retirement because of their inability to
 Health Services Privatization / 219

continue working (minimum age, 45 years). This institution developed the

Program of Integral Medical Assistance (Programa de Asistencia Médica Integral,
PAMI), using the U.S. Medicare system as a model. Recently PAMI has covered
approximately 3.5 million people, almost 10 percent of the country’s population
(approximately 36 million); about 68,000 are disabled people. To access INSSJ&P
benefits, people must have contributed to the system of retirement and pensions
for a minimum of 25 years, or 20 years for people with disabilities. An objective
in creating this institution was to give protection to people at the time they
retired, partly because retirees had been excluded from the social and medical
security insurance that protected active workers. The institute protected disabled
people of all ages, as well as minors and spouses who were dependent on
retirees. Financing was derived from compulsory payments—a fixed percentage
of salaries—contributed by employees and employers, as well as a fixed per-
centage retained from monthly pensions for people over 65 and people with
disabilities (60).
After the privatization reforms of PAMI and PROFE during the 1990s,
private corporations could manage contracts for health services and medications
under prepaid capitation payments. According to several analyses, PAMI’s and
PROFE’s funds increasingly have supported administrative salaries and share-
holders’ dividends, rather than direct services for older and disabled people. PAMI
has experienced decapitalization due to the worsening unemployment, decline
of real salaries, devaluation (more than 300%) of local currency, and increasing
costs of medical procedures and prescription medications. PAMI itself has
retained fewer resources to pay for services it once provided. For PROFE, the
fiscal crisis of the federal government decreased the funds available for treatment
and rehabilitation. Recent data show increasing co-payments for services and
worsening mortality rates and adverse outcomes for older and disabled people
experiencing decreased access to care (61). Despite these trends, IFIs and trade
organizations continue to ask the Argentine government to deepen the reforms
that, under emerging trade agreements (especially GATS), will facilitate further
privatization of social and medical security funds (62).

Chile. Before the 1973 military coup, Chile maintained a National Health Service
(Servicio Nacional de Salud) based on the U.K. model. Like most countries
(the United States and Argentina are exceptions), Chile did not set up a separate
system for elderly people (63). This practice allowed risk pooling by age. The
system had reasonably good health outcomes and coverage.
Under the military regime, Chile became the first Latin American country to
develop a privatization project, and the role of the state changed dramatically.
Public social expenditures fell from 25 to 15 percent of the gross domestic product.
The role of the national Ministry of Health changed from service provider to
regulatory entity. Primary care services were transferred to the municipal level.
These changes led to under-financing of public hospitals, dismissal of many
220 / Waitzkin et al.

professionals and health workers, and salary reductions. The health systems that
covered the military and security forces, however, were left unchanged (64).
A central goal of privatization reforms in Chile was to introduce commercial,
for-profit companies to manage the mandatory health contributions from workers
and retirees. The specific needs of older people were not fully considered in the
reform. Employees and retirees had to make a contribution equal to 7 percent of
their taxable income, up to a fixed limit. Self-employed workers had the option to
contribute or not. The reform also created the Previsional Health Institutions
(Instituciones de Salud Previsional, ISAPREs), private MCOs that offered indi-
vidual health plans to members and their families. Benefits were defined by a
private contract between individuals and the ISAPREs, and much variation arose
among plans. For benefits not covered by the mandatory contributions, individuals
paid additional fees. Services not offered by the ISAPREs or purchased through
additional fees were provided by the public sector (65).
The ISAPREs aimed to capture the part of the population with middle or high
incomes, the healthy, the young, and families with few members. Only 3 percent
of persons covered by the ISAPREs were 60 years of age or older, compared with
9 percent of the general population and 12 percent of persons seen at public
hospitals and clinics (9). The public sector still covered the majority of disabled
people. The ISAPREs grew rapidly, in part because mandatory contributions
from retirees increased from 1.5 to 7 percent, maternity expenses remained a state
obligation, and employers paid an additional 2 percent (a tax-deductible contri-
bution) to facilitate low-income workers’ purchase of private insurance. The
number of ISAPREs increased from 6 in 1981 to 23 in 1989, and they recently
covered about 21 percent of the population. But the goal of the military regime and
the private sector—that the ISAPREs would replace the public system—did
not materialize; the public system still covers about 20 percent of the population.
Although viewed by some as a model of successful privatization, especially due
to its facilitation of corporate activities in health care, the Chilean experience
deserves further critical assessment. In particular, its privatized system has pro-
vided services to a disproportionately small number of older and disabled people.
Meanwhile, the weakened public system has continued to assume responsibility
for the care of these and other vulnerable groups.

Mexico. Created in 1943, Mexico’s public sector health care system traditionally
consists of two subsystems: the social security system and the Ministry of Health,
each serving a different population. Social security in Mexico is mandatory for
workers in the formal labor sector, both rural and urban. It is guided by the
principles of “integrity, solidarity, redistribution, and public administration” (33).
That is, participants pay according to income but receive services according to
need. Covering workers and their families, social security consists of the Mexican
Institute of Social Security (IMSS), for workers in the private sector, and the
Institute of Security and Social Services for Workers of the State (ISSSTE), for
 Health Services Privatization / 221

workers in the public sector. Older people continue to use the same system after
they retire. Historically, these institutions have provided health services for
workers and have managed their pension funds. During the 1980s and 1990s, the
social security system increased coverage steadily and incorporated previously
unprotected groups such as university students and taxi drivers.
The Ministry of Health has responsibility for the health care of the uninsured, or
“open,” population. This responsibility extends to the care of older people whose
work was not covered by IMSS or ISSSTE, such as migrant farmworkers and
people with a disability that does not derive from work-related illness or injury.
Although the Ministry of Health historically has provided a variety of services,
comprehensive health care has not reached the entire eligible population. In recent
years, about 10 million Mexicans lacked access to any type of health care. The
traditionally small private sector increased largely as a result of the 1997 health
care reform, although it remains a small percentage of the total. The majority of
the private sector is for-profit, and it is highly heterogeneous in the quality
and level of services provided (66). For instance, while a few private hospitals
offer high-quality services, about 90 percent of private hospitals have serious
deficiencies in number of beds, medical equipment, and personnel (67).
The 1997 privatization reform changed the landscape of health care in Mexico:
progressive, mandatory, employee-employer contributions changed to flat rates,
and employers could opt out of the social security system if they provided access
to MCOs for their employees (68). According to the World Bank, the reform’s
ultimate goal was “to have the public social security institutions finance but not
provide services” (69). The Bank fostered the reform with loans of $700 million
and $25 million, with the condition that MCOs would be operating by 2000.
This reform facilitated the movement of private corporations into the social
security system. In health care, this process occurred by two mechanisms:
(a) allowing people to “opt out” of social security and into coverage by MCOs; and
(b) decreasing the medical services offered, which then needed to be contracted
by purchasing additional insurance. In public hospitals, this process occurred
through partial privatization—renting of space and rooms for patients with private
insurance. Entry of private corporations also took place through the outsourcing of
services, medical and nonmedical, which the social security system traditionally
provided. In many public hospitals and clinics, laboratory, nutrition, dialysis,
security, cafeteria, and laundry services were contracted out to private providers.
The World Bank itself pointed out the reform’s potential to weaken the financial
underpinnings of the social security system because of adverse selection and
“cream skimming.” Such tendencies involved transferring “good risks” from the
social security system to MCOs, while leaving the social security system with the
relatively “bad risks,” who contributed less to the system but used it more (70).
In 2003, the federal government initiated legislation to help poor people
purchase insurance. People’s Insurance (Seguro Popular) is a tax-based program
in which the federal and state governments subsidize family contributions in
222 / Waitzkin et al.

accordance with ability to pay (71, 72). The administration of Mexico City,
despite federal pressure, declined to adopt the Seguro Popular, arguing that it is
“restrictive and selective, does not solve infrastructure deficiencies, and does
not provide equal attention to all patients” (73). Instead, the Mexico City
administration offered the Program of Free Medical Services and Medications
(Programa de Servicios Médicos y Medicamentos Gratuitos). Financed by
austerity measures and reduced corruption, this program expanded public sector
services for the population. Policy differences between the federal government,
which followed World Bank and IMF recommendations, and Mexico City’s
government, which is an advocate of health services as a right, led them to
differing approaches in delivering and financing health services.

CONCLUSIONS

To summarize, we have found that privatization exerts a much less favorable

effect than the proposals of the World Bank and Wharton School postulate. In
general, neither the conversion of public sector to private sector insurance, nor
the expansion of private insurance through enhanced participation by corporate
entrepreneurs, has succeeded in improving access to health services for vulnerable
groups, such as older and disabled persons. Rather than reducing out-of-pocket
expenditures for poor people, the expansion of private insurance often generates
additional co-payments, which lead to worse rather than improved access to
needed services. Privatization of social security and other public sector trust
funds for health services in Latin America generally has enhanced financial
institutions and increased the capital held by these institutions (74, 75). In addi-
tion, privatization results in higher administrative costs.
The impact of privatization has differed across the Latin American countries
that we have studied. Although Argentina adopted most of the IFIs’ recom-
mendations regarding privatization and reduction of public sector services,
these policies led to increasing economic crisis and major cutbacks of needed
health services for older people and persons with disabilities. In Chile, where
privatization occurred largely during the military dictatorship, private MCOs
prospered as they covered relatively healthy groups, while a constricted public
sector continued to provide services to vulnerable groups such as older and
disabled people. Mexico faced pressures from IFIs to privatize its public sector
health services, based in its social security system; as avenues opened to the
participation of private MCOs, public sector institutions encountered budget
reductions that led to eroded services. In short, even in countries like Chile, which
the World Bank and Wharton proposals see as favorable examples of enhanced
private insurance, major problems have impeded improved access to services
for vulnerable groups.
If we are serious about working to improve the devastating problems of access
to services worldwide, we need to move beyond conventional wisdom about the
 Health Services Privatization / 223

value of market-based policies such as privatization. Here we have presented

findings about only three Latin American countries, but our observations and
those of others have confirmed the problematic empirical reality of private
insurance. Rather than considering empirical findings on prior privatization
experiences, the recommendations of IFIs and many academically based health
policy researchers continue to favor privatization strategies that usually fail
to achieve the goal of improved access. Unfortunately, such nonscientific pro-
nouncements do not remain in the ivory tower but rather result in implementation
of policies that may further worsen the conditions faced by vulnerable groups
throughout the world. Based on such empirical realities, we must find ways to
enhance the delivery of public sector services to those in need, rather than
continuing to implement the mostly failed policies of privatization.

Acknowledgments — The research was supported in part by grants from the

National Library of Medicine (1G08 LM06688), the New Century Scholars
Program of the U.S. Fulbright Commission, the John Simon Guggenheim
Memorial Foundation, the Roothbert Fund, the U.S. Agency for Healthcare
Research and Quality (1R03 HS13251), the National Institute of Mental Health
(1R03 MH067012 and 1 R25 MH60288), and the United Nations Research
Institute for Social Development. The views expressed in this article do not
necessarily represent those of the funding agencies. We are grateful to Ron
Voorhees, Francisco Mercado, and Lori Wallach for their contributions to
this project.

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Direct reprint requests to:

Dr. Howard Waitzkin
Department of Sociology
University of New Mexico
MSC 05-3080
Albuquerque, NM 87131

e-mail: waitzkin@unm.edu