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HEALTH & EDUCATION 27: Market medicine Internal markets in health The problem: an unresponsive service From the time that it was founded in 1947, the United Kingdom's National Health Service (NHS) has been funded out of taxation. The idea was that state-directed and state-controlled doctors, nurses, and hospitals would give people all the healthcare they needed, with taxpayers picking up the bill. But from the very first, the NHS seriously underestimated demand. Indeed, the ministers who created it fondly supposed that health spending would go down as the new system made people healthier! Instead, given the absence of any price barrier, people simply raised their expectations and demanded more. The result was that NHS costs mounted each year, while its resources were ever more thinly stretched. Its patients, having paid for it by taxation, had no input as consumers. They had to take what they were given. With no competition to fear, the NHS lost track of what its costs were and how good or bad its service might be - a bureaucratic giant, second only to the Red Army in size. The solution: internal markets Given the political sensitivity about healthcare, the response of the Thatcher government in 1990 was to keep the NHS publicly funded, but to introduce two types of internal market to bring value-for-money thinking into its actual service provision. Example: splitting purchase and provision The larger, though less enduring, reform was to split the NHS between purchasers and providers. Funds were allocated to NHS managers, who were given the task of 'buying' (from within the NHS) the services that patients required. For the first time, it became important to know which hospitals and which treatments gave good value. Hospitals became free-standing 'hospital trusts', offering services to be bought by the purchasing managers on behalf of patients. They had budgets and targets for the first time, and an incentive to offer competitive services and high quality. The aim was to set up a creative tension between the purchasers and the providers, so that market incentives would be introduced. There were now reasons to aim for efficiency, and to achieve savings by cutting down on waste. The allocation of taxpayer funds became more cost-effective, as purchasers sought out the units which offered better value. For example, if one hospital was performing a knee operation at a quarter of the cost (or with much better outcomes) than another down the road, the first would now find itself with greater demand for its services, and do more work. The second market reform was one which allowed the family doctors, called general practitioners, to band together in groups and become 'budget holders'. This meant they would be given the entire health allocation for their patients, and be required to meet all of their health needs out of it. They provided not only family care, but paid for consultants and specialists, and met hospital bills. They became ancillary purchasers, buying in the internal market alongside the purchasing managers. Technically, the UK's general practitioners are self-employed, although their sole customer is the government. Nevertheless, they have always been more independent and entrepreneurial than other doctors and managers in hospitals and elsewhere, who are directly employed by the NHS. These family doctors therefore proved much more adventurous than other purchasing bodies, buying services aggressively and competitively to secure the best deal for their patients. Often, family doctors expended their own services to provide certain diagnostics and treatment in the primary-care surgery, rather than have to send patients up to a more expensive and less convenient state-run hospital. Many innovative treatments and practices quickly resulted, giving patients of budget-holding doctors a distinct advantage. Waiting times for their patients fell significantly below the national average. Assessment: politics and bureaucracy The government did not force family doctors into the new arrangements, but allowed them to opt into budget-holding status. Thus the more entrepreneurial doctors opted in, while those who had doubts about it were not threatened. As general practitioners began to see the benefits of being in control of healthcare budgets on behalf of their patients, the numbers budget-holding practices climbed rapidly, eventually covering more than half of all patients. However, the internal market came only at the expense of some bureaucracy. New contractual arrangements had to be drawn up, and accounting systems introduced to track the flow of the budget resources, which in turn led to a rapid increase in the numbers of managers as a proportion of front-line clinicians. At the same time, there was a dearth of good market information: a service which had never had to think about the cost or quality of its work found it difficult to measure these things. Some purchasers and providers simply ignored the problem and negotiated block contracts for all procedures in return for a global budget price: but this effectively just maintained the situation prevailing before the reforms, and did not capture the potential gains of focusing more finely on individual service costs. Some observers also regarded the internal market as unacceptably adversarial. The 'co-operative' culture of the NHS was being replaced by one of 'competition', which many believed was morally unacceptable in the provision of healthcare. In response, the incoming Labour government of 1997 committed itself to ending the internal market in health. Their alternative was to establish new purchasing bodies which had a wider selection of health professionals involved, not just family doctors. This system has been rolled out nationally, so that all NHS care is now covered by it. Arguably this new system is not in fact the abolition of the purchaser-provider split, but its extension throughout the country. However, the all-embracing nature of the new purchasing bodies means that this internal market has lost its entrepreneurial edge. Meanwhile the activities of purchasers and providers alike is being circumscribed by massive direction and paperwork from the centre. As a result, family doctors are threatening to leave the NHS; they may be the seeds of a more profound set of reforms in the future. There are signs of hope, though. The government is talking of giving 'earned autonomy' to the most high-performing NHS units. Is the idea of a decentralized provider sector perhaps coming back into fashion? For further information:
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Copyright 2002: Adam Smith Institute
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