MILAN—When California Gov. Arnold Schwarzenegger dropped in on Italy’s fashion capital late last year, his focus wasn’t just the city’s designer shops. He was also intensely interested in the state-of-the-art local health system.

With the U.S. searching for ideas about how to make health care more affordable, he said during a speech, “I hope we have a situation where the federal government…looks at the entire world, including this region here.”

As the U.S. debates the proper roles for the public and private sectors in health care, Italy’s Lombardy region suggests a way that encouraging competition between the two can improve health care overall. For the past 10 years, public and private hospitals in Lombardy have competed directly for patients, and in doing so have created what is considered by many to be one of Europe’s most efficient health-care systems.

Walk in Service

Like other European countries, Italy offers universal health-care coverage backed by the state. Italians can go to a public hospital, for example, without involving an insurance company. The patients are charged a small co-pay, but most of the bill is paid by the government. As a result, the great majority of Italians don’t bother to buy private health insurance unless they want to seek treatment from private doctors or hospitals, which are relatively few.

Offering guaranteed reimbursements to public hospitals, though, took away the hospitals’ incentive to improve service or rein in costs. Inefficiencies were rampant as a result, and the quality of Italy’s public health care suffered for years. Months-long waiting lists became the norm for nonemergency procedures—even heart surgery—in most of the country.

Big changes came in 1997, when Italy’s national government decentralized the country’s health-care system, giving the regions control over the public money that goes to hospitals within their own borders. The money still comes from the central government, which also determines what methods and drugs must be included in various treatments in order to meet national health-care standards. But each region now has the power to adopt additional quality standards, to set its own reimbursement rates, to decide which hospitals qualify for public funds, and to withhold reimbursement if hospitals don’t meet the proscribed standards.

In much of the country, regions have continued to use the standards of care and reimbursement rates recommended by Rome. Some also give preferential treatment to public hospitals, making it more difficult for private hospitals to qualify for public funds.

Lombardy, by contrast, has increased its quality standards, set its own reimbursement rates and, most important, put public and private hospitals on an equal footing by making each equally eligible for public funds. If a hospital meets the quality standards and charges the accepted reimbursement rate, it qualifies. Patients are free to choose between state-run and publicly funded private hospitals at no extra cost. Their co-pay is the same in either case. As a result, public and many private hospitals in Lombardy compete directly for patients and funds.

Commercial Spirit

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