quasi-markets in british health policy: a longue durée perspective

© Blackwell Publishing Ltd.

,

Garsington Road, Oxford OX

DQ , UK and

Main Street, Malden, MA

, USA

S

P

& A

0144–5596V

. 37, No. 7, D

ECEMBER

2003,

. 725–741

Blackwell Publishing LtdOxford, UKSPOLSocial Policy & Administration0144–5596© Blackwell Publishing Ltd. 2003December 20033771000Original Article

Quasi-markets in British Health Policy: A

Longue Durée

Perspective

Martin Powell

Abstract

Quasi-markets in health care are generally associated with the period

–

in the later yearsof office of the British Conservative Party. This paper aims to place such claims in a widerframework by exploring definitions of and conditions of success for quasi-markets over a longertimescale, beginning in the

s and ending with the current New Labour government. Itsuggests a typology of quasi-markets based on hard versus soft, direct versus indirect and internalversus external forms. It applies these categories and the conditions for success for quasi-marketsto seven historical periods. Both the typologies and the conditions for success of quasi-marketsvaried over time, defying a simple linear development, suggesting a more nuanced historicalnarrative than simple continuity or discontinuity accounts of recent developments provide. Coveringsuch a large topic over a long sweep of time, with the absence of clear evidence for much of theperiod, necessarily means that verdicts tend to be impressionistic. However, even at this level, thetentative conclusions provide important contextual elements in the debate on quasi-markets.

Keywords

National Health Service; Quasi-markets; New Labour

Introduction

Markets and competition have been viewed as important elements of healthcare reform in many countries, but the precise form in which these elementsappear has varied between countries (e.g. Arnould

et al

.

; Ham

;Ranade

; Scott

). The standard conceptual framework for analysingthese developments—quasi-markets—has been applied to the internationalcontext (e.g. Bartlett

et al

.

), but has rarely been used in a historicalcontext. However, examining quasi-markets in British health care over the

longue durée

may provide a useful alternative analytical perspective, placingparticular forms of the quasi-market in their wider context.

Address for correspondence:

Dr Martin Powell, Department of Social and Policy Sciences, Uni-versity of Bath, Claverton Down, Bath, BA

AY. E-mail: [email protected]


Although the term “quasi-market” was originally used by Williamson(

:

), it is generally associated with the work of Julian Le Grand and WillBartlett (e.g. Le Grand

; Le Grand and Bartlett

; Bartlett

et al

.

).Le Grand (

) considers that Acts in

/

in education, health care,personal social services and public housing all had a fundamental similarity,in the introduction of “quasi-markets” into the delivery of welfare services.In each case, the intention was for the state to stop being both the funderand the provider of services. Instead, it was to be primarily a funder,purchasing services from a variety of private, voluntary and public providers,all operating in competition with each other. Le Grand locates the roots ofquasi-markets in the Conservative government’s contracting out of cateringand cleaning services in the NHS, the assisted places scheme in educationand with the inclusion of a residential allowance in the system of socialsecurity for elderly people, but the “big bang” reforms occurred with thereforms of

and

.However, some authors have stated that competition, contracts and quasi-

markets have a longer heritage. Harden (

: x–xi) notes that while there isnothing new in the public procurement of goods, or the carrying out ofpublic works, by contract (for example, “farming out” the care of pauperchildren was a common nineteenth-century practice), widespread use of thecontract in the purchase of direct public services is relatively new in con-temporary Britain. Similarly, according to Lane (

:

), contracting

per se

is an old idea, but contracting as the key coordination in the public sector isdefinitely new.

This paper aims to place such claims in a wider framework by exploringdefinitions of and conditions of success for quasi-markets over a longer time-scale, beginning in the

s and ending with the current New Labour gov-ernment. It illustrates the argument with the important case of British healthcare. It shows that there have been different forms of quasi-markets overtime, and suggests a more nuanced historical narrative than simple continuityor discontinuity accounts of recent developments provide (cf. Dixon

;Paton

). Covering such a large topic over a long sweep of time, with theabsence of clear evidence for much of the period, necessarily means thatverdicts tend to be impressionistic. However, even at this level, the tentativeconclusions suggest the need to place particular forms of the quasi-marketinto a wider historical perspective. After discussions of the definitions of andthe conditions of success for quasi-markets, this material is applied to seventime periods, with summaries of each period leading to final tabular forms.

Definitions of Quasi-markets

Despite much attention, the precise definition of a “quasi-market” is not fullyclear. Le Grand and Bartlett (

) explain that they are “markets” becausethey replace monopolistic state providers with competitive independent ones.They are “quasi” because they differ from conventional markets in one ormore of three ways: non-profit organizations competing for public contracts;consumers’ purchasing power either centralized in a single purchasingagency or allocated to users in the form of vouchers rather than cash; and,


in some cases, the consumers represented in the market by agents instead ofoperating by themselves.

Other writers stress slightly different features. Harden (

:

) claimsthat an internal market has three interlocking aspects: the creation of incent-ives to greater efficiency; the delegation of decision-making responsibilitiesto lower levels; and the principle of money following patients. Boyett andFinlay (

:

) define a quasi-market as “a market for public goods wherethe state ceases to be both a funder and provider of the respective service”.According to Walsh (

: ch.

) an internal market involves three keyfeatures: separation of purchaser and provider; contracts to link them; andthe development of a charging and accounting system—“In a fully developedinternal market system the internal provider will start the year with nofinance, having to earn enough to cover costs and any surplus that isrequired.”

Building on these definitions, it might be claimed that the purchaser/provider split is a necessary feature of a quasi-market. The contracts to linkpurchaser and provider are more problematic because of the problems ofdefining them. Lane (

:

) writes that sometimes there is a form of“contractual degeneration” under which anything that looks like an agreementis called a “contract”. Thus, any kind of interaction between the principaland the agents on public service provision is described as contractual. Forexample, Harden (

) discusses “the contracting state” with no citationof Williamson or quasi-markets. Lane (

) briefly cites Le Grand andBartlett, but does not include “quasi-markets” in the index. In this wide sense,a contract is a form of agreement between two parties that could indicate apartnership rather than a market relationship (Glendinning

et al

.

). Morespecifically, contracts between purchaser and provider may indicate pluralismwithout competition. Ham (

:

) argues that there is no inherentconnection between a purchaser/provider system and the existence of com-petition, although these issues are often confused in the debate about healthcare reform, advocating a split with only a limited role for markets. However,it seems reasonable to claim that “markets” must have some element ofcompetition. In ideal-type terms, a quasi-market should have more incommon with a market than with a hierarchy, network or clan (Exworthy

et al

.

; Powell and Exworthy

; cf. IPPR

, ch.

). The purchaser/provider split seems to provide a basic distinction with a hierarchy, but maybe compatible with both market and network or clan forms. Exploration ofthis gives the first dimension of the “hard–soft” continuum.

At one extreme, relationships may be based on “soft”, “relational” or“incomplete” contracts, where trust is the most important ingredient, while atthe other extreme relationships may be based on “hard”, “spot” or “complete”contracts where price may be the most important ingredient (e.g. Sako

;Goddard and Mannion

; Roberts

et al

.

; Mackintosh

; seePowell and Exworthy

). It is generally claimed that the NHS is bestcharacterized in terms of relational rather than crude classical models ofcontracting (Ferlie and Pettigrew ; Flynn et al. ; IPPR ). Therewere three main types of contract in the NHS. Under block contracts thepurchaser pays the provider an annual fee in return for access to a defined


range of services. Under the cost-per-case contract, each case has a set priceeither on an average or marginal cost basis. The cost-and-volume contractsessentially are a mixture of the two, funding a base-line level of activitybeyond which all funding is on a cost-per-case basis. Cost-per-case contractsmay be seen as representing spot contracting, while block contracts have morein common with relational contracting (Harden : ; Flynn et al. ).

The second dimension focuses on the “direct–indirect” distinction. Mullen() distinguishes between contracts where users make purchasing choicesand those where their agents or proxy purchasers make the decisions (see alsoGreener ). Unlike in education, where students and their parents choseschools, the dominant purchasing decisions in health care were made byDistrict Health Authorities (DHAs). While individual extra-contractual refer-rals (ECRs) accounted for about per cent of the NHS budget (IPPR :) and patients had some say in General Practitioner Fundholding (GPFH),individual input into purchasing decisions by DHAs were limited. Despitethe rhetoric in Working for Patients (DH ), the reforms led to only a limitedenhancement of direct patient choice (Ham ; West ; Klein ).

The third dimension relates to the internal–external distinction. On theone hand, providers may be public in an “internal” market. On the otherhand, providers may also be private or voluntary in an “external” market.For example, some GPFH bought complementary and alternative healthcare from independent therapists (Stopp ). While Working for Patients (DH) briefly mentions the possibility of purchasers spending public moneyin private hospitals, the vast majority of contracts were placed with publicNHS providers (IPPR ).

Putting the three dimensions together gives a typology of eight cells, withexamples (see table ).

Conditions for Success of Quasi-markets

Le Grand and Bartlett () argue that a number of conditions must besatisfied in order to produce successful outcomes in terms of efficiency,

Table

A typology of quasi-markets

Hard Soft

Direct Indirect Direct Indirect

Internal External Internal External Internal External Internal External

(CCT) Con I Con II* NL I sNL II*

White Paper

* = trend towards.


responsiveness, choice and equity. These are concerned with marketstructure, information, transaction costs and uncertainty, motivation, andcream-skimming. The first condition is that the quasi-market on both sidesshould be competitive; that is, there should be many purchasers and manyproviders.

The second condition is concerned with information. Both providers andpurchasers need to have access to accurate, independent information. Themonitoring of quality must be an essential part of any quasi-market system.Otherwise, providers may engage in “opportunistic behaviour” (Williamson, ). The literature points to two main types. First, moral hazardoccurs where providers put fewer resources into the provision of the servicethan is consistent with the terms of the contract. Second, adverse selectionoccurs where providers possess certain characteristics that may adverselyaffect the provision of the service and that are known to them but that theydo not reveal to the purchaser. In theory, opportunistic behaviour should becontrolled through the contracting process and its associated enforcementprocedures. Cost-per-case contracts are often said to be largely complete,involving considerable difficulty of writing. On the other hand, block con-tacts are more incomplete and hence subject to the danger of opportunisticstrategies. They involve a shifting of risk on to providers, and providers mayseek higher contract prices to protect themselves.

The third condition refers to transaction costs and uncertainty. Transac-tion costs are often complex and multidimensional. They may be dividedinto two kinds (Williamson , ). Ex ante transaction costs refer to costsin drafting, negotiating and safeguarding an exchange agreement, and tendto be higher for complete than incomplete contracts. Ex post transaction costsare the costs of monitoring the outcomes of the exchange to check com-pliance and any dispute resolution. It is likely that high ex post costs may beassociated with low ex ante costs and vice versa. If quasi-markets are to bemore efficient than other systems (e.g. hierarchy), any extra transaction costsmust not be higher than the cost savings generated by competition.

The fourth condition involves motivation. Providers need to be motivatedat least in part by financial considerations, and purchasers by user interests.Both raise particular difficulties in the quasi-market context. On the providerside, there are commonly non-profit providers, whose motivation is unclear.On the purchaser side, there are commonly third parties who act on behalfof users and whose interests may not always be identical with those of users.

The final condition is cream-skimming. There should be no incentive forproviders or purchasers to discriminate between users in favour of thosewho are least expensive. Cream-skimming may be viewed as a form ofadverse selection that results not from the imbalance of information, butfrom the pricing and contract structures. For example, unless formulae havelarger weights for more expensive service users, then providers may selectless costly users. Other writers such as Enthoven () and Walsh ()have offered similar sets of conditions, but this paper focuses on the originalLe Grand and Bartlett conditions. The next sections examine definitions of,and conditions of success for, quasi-markets for defined periods of Britishhealth care.


Before the NHS

Whiteside () argues that the National Health Insurance (NHI) scheme inthe interwar years constituted a quasi-market in those years. Private agencies,competing for patients, were used in the delivery of public services in theinterwar years. Turning to secondary care, a major theme of the interwarperiod was the search for coordination (Abel-Smith ; Mohan ).While solutions were generally seen in terms of “partnership”, it is clear thatthey had some features of quasi-markets. Local authorities were embryonicpurchasers who made contracts with public and voluntary providers. In anote of 18 December , the Permanent Secretary Sir John Maude wrotethat before the war the Ministry’s policy was clear and consistent. Localauthorities were to supply the needs of their areas either through their ownhospitals or through contracting with voluntary hospitals (Public Recordoffice, PRO MH /, file on postwar hospital policy). According to theNHS White Paper a few years later, the conception of a public authoritydischarging its duty by contracting with others for the provision of serviceshas long been familiar. As early as local authorities were enabled bothto provide hospitals themselves and to enter into agreements with otherhospitals for the reception of people from their districts, with later legislationfollowing similar lines (MH : ). Little is known about this process.However, in terms of our typology (table ), the quasi-market was soft in thatcooperation rather than competition was stressed, and there was little—ifany—role for price competition, indirect as it relied on proxy purchasers, andexternal as it involved voluntary agencies. In terms of conditions for success,it was potentially competitive as there were many purchasers and providers.However, like the s (see below), the competitive structure varied overspace. For example, in areas such as the county boroughs of Lancashire,there were many purchasers and providers, while in towns such as Norwich,the council’s only realistic choice was the local voluntary hospital. Informa-tion was poor, with little known about prices or quality. Similarly, little isknown about transaction costs, but with little effective monitoring, ex antecosts were probably higher than ex post costs. Turning to motivation, thevoluntary hospitals were short of money and so had incentives to agreecontracts, but tended to be wary of control by municipal authorities. Theydesired finance with freedom: a grant or gift rather than a contract. In termsof cream-skimming, there was a danger of perpetuating a two-tier service asthe voluntary hospitals wished to retain their cream of acute cases, leavingthe chronic cases for the local authorities.

The White Paper

Although the plans for the NHS by the wartime coalition government werealso based on a “partnership” between the voluntary and statutory sectors,these plans also contained some quasi-market elements. Early proposalsevolved through complex and tortuous negotiations into a White Paperentitled A National Health Service (MH ; see Powell a, b). Thisdocument, issued in the name of the Conservative Henry Willink, talks of a


“publicly organized” rather than a “publicly provided” service. The import-ance of the voluntary sector is stressed. The basis of the plan was that thejoint authority would secure the necessary service partly through its ownhospitals and partly through contractual arrangements made with voluntaryhospitals. Voluntary hospitals would receive a “specified sum in return forservices rendered”. “In order to avoid a large number of individual bargains,and the risk of competitive bargaining leading to undesirable results, it willbe convenient for standard payments . . . to be settled centrally” (: ).However, it was hoped that these payments would make up only a part ofthe total income of the voluntary hospitals, for if the whole cost came frompublic money “the end of the voluntary movement would be near at hand”.

The White Paper contained a number of references to planning, coordina-tion and partnership. However, it is clear that it was a compromise documentthat disguised significant differences in principle (Powell a, b). Inshort, the Conservatives desired a long-term, autonomous future for thevoluntary hospitals. Labour wanted creeping municipalization. Finance tothe voluntary hospitals would be given in return for representation on theirgoverning bodies. It follows that if the local authority were to supply morethan half of the finance, it would effectively gain control. It is important tonote that neither wanted the “hard quasi-market” contracting or contractculture associated with the Conservatives in the s. In short, the WhitePaper envisaged pluralism without competition (Powell a, b).

A purchaser/provider split, then, was envisaged with price competitionruled out. Reflecting earlier practice (see above), the quasi-market was soft,indirect and external. Similarly, the competitive structure remained variable.Information remained limited, but the plan stated that all hospitals partici-pating in the scheme were to be inspected. Ex ante transaction costs wouldbe fairly low due to central uniform prices, but ex post costs might be higherdue to the costs of inspection. Motivation was unclear, because the exactdetails of the scheme remained elusive, and it is likely that some scope forcream-skimming remained.

The Classic NHS

The minister of health in the Labour government, Aneurin Bevan,swept away these compromises with a plan that had been widely regardedas not practical politics only a few years earlier. He nationalized the hospitals,ruling out any type of “partnership” in favour of a hierarchy, where lines ofaccountability rested firmly with the minister on the floor of the House ofCommons.

The “classic NHS” has often been seen as a hierarchy or monolithic“command and control” structure. It became a planned system in whichresidents in an area tended to use their local district general hospital (DGH)in a system of “hierarchical regionalism”. However, there were limitedelements of competition. IPPR (: –) point out that after salaries for thefamily practitioner services (FPS) of general practitioners (GPs), dentists andopticians were ruled out, these groups were private providers or independentcontractors. For example, GPs are independent contractors, largely paid by


capitation (the number of patients on their lists), who have as much incommon with self-employed small business people as with salaried employeesof the NHS (: ). There were larger elements of professional networksor “clans”, and it has been suggested that the classic NHS should be viewedas a “quasi-hierarchy” (Exworthy et al. ).

Nevertheless, the classic NHS was a more of a hierarchy than a market,and had no purchaser/provider split and no price competition. Without asplit, the direct and internal categories are not strictly applicable and socannot be placed within table . However, the classic NHS tended towardsbeing indirect, with the “gentleman in Whitehall” knowing best and, withthe exception of the FPS, internal. As the aim was to build up a plannedhierarchical system, the competitive structure should have declined overtime. Information remained poor. There were, strictly, no transactions, but“transaction costs” were probably low, with a relatively low proportion ofcosts being spent on administration. There was little motivation for com-petition. Indeed, there were perverse incentives in that GPs could offloadpatients to hospitals, and hospitals that treated extra patients or patients fromoutside the local area would soon reach their budget allocation (Enthoven; West ). Le Grand () points out another perverse incentive inthat NHS doctors with private practice could reduce their NHS workloadsand increase their private income if patients “went private”. He notes thatthe specialities with the largest waiting lists tend to have the greatest degreeof private practice. Some opportunity for cream-skimming existed as GPshad little incentive to accept high workload patients.

Conservative I

The s saw some injection of competition in the FPS with some recom-modification in dental and optical services, and with the proportion of GPincome from provided services (such as immunization activity) increasing, asopposed to that from capitation (passivity). In secondary care, under a policyof “compulsory competitive tendering” (CCT), hospitals were forced to placetheir ancillary services such as catering and cleaning out to tender, makingCCT hard, direct and external in our terms. There was embryonic com-petition with an increase in the cross-boundary flow of patients (Haywoodand Ranade ) and the London teaching hospitals operating a form ofquasi-market (Timmins : ). However, providers claimed that withfixed budget allocations, there was a disincentive to use spare capacity totreat extra patients (cf. Enthoven ). The main feature of the quasi-marketproposed in Working for Patients (DH ) and implemented in was toseparate the purchasing and providing function. Now DHAs were to movefrom a providing to an enabling role, and purchase health care on behalf oftheir residents. New institutions such as NHS trusts and GPFH entered theNHS landscape. DHAs represented agency or “wholesale” purchasers, whileat the “retail” end of the market GPFH had the potential for more patient-influenced purchasing.

Some writers tend to give a rather negative verdict on Conservative quasi-markets. Griffith () concludes that the theoretical preconditions for


effective markets do not exist in health care: there are too few providers,the transaction costs are significant, and systematic appraisal of quality isproblematic. Iliffe and Munro (), following Mullen (), point to twodistinct and wholly incompatible market structures of DHA and GPFH, butconclude that in reality, the NHS internal market had none of the charac-teristics of a retail market and stubbornly refused to behave like one. Theyclaim that the market was not competitive, even contestable. Managementheavily outweighed competition. This meant paying for all the costs ofcompetition, but getting none of the benefits.

However, other commentators (e.g. Robinson and Le Grand ; LeGrand , ; Le Grand et al. ; Roberts et al. ; Boyne et al. )suggest a more optimistic conclusion, pointing to some successes but alsoto problems. They also suggest different conclusions for GPFH and DHAs.The evidence suggests that GPFH seem to be closer to meeting the marketstructure and information conditions for quasi-market success than DHApurchasing, but there is cause for concern in GPFH with respect to otherconditions, particularly those of transaction costs and cream-skimming.Moreover, Le Grand (, ) points out that incentives tended to beweak while constraints were strong, but emphasizes a more fundamentalexplanation for the failure of the internal market to have the impact that itsproponents hoped for: that there was little “knavish” behaviour.

For the Conservative internal market, the early rhetoric suggested apurchaser/provider split with significant “hard” price competition. The earlyquasi-market tended to be largely internal and indirect (with DHA purchas-ing dominant). The market structure was varied, but potentially competitivein some places such as London. Information was limited, and concentratedmainly on price rather than quality, but there was some slow developmentof quality indices over time. Transaction costs were high, especially forannual contracts, ECRs, and GPFH. Motivation was generally low, althoughhigher for GPFH than for DHAs. There was potential for cream-skimmingand much anecdotal evidence, although studies tended to find little directevidence.

Conservative II

The later years of the quasi-market showed some contradictory trends. Onthe one hand, ministers claimed that they rarely used market language (Ham). The market was never as red in tooth and claw as favoured by itsadvocates or feared by its critics (e.g. Paton , ; Klein , ).Enthoven () considers that on a scale from to , where is a totallyplanned economy and is the relatively free American economy, theinternal market got somewhere between and for a year or so, and thenfell back to more central control. In other words, the emphasis shifted overtime from the second to the first word of “managed competition” (e.g. Ham, ; Le Grand , ). On the other hand, with the growingvolume and perceived success of GPFH and experiments with decentralizedpurchasing, there were moves from the wholesale to the retail end of themarket. The Conservative quasi-market remained largely an internal


purchaser/provider split, but there were some trends towards less price com-petition and more direct purchasing.

In terms of quasi-market conditions, on the one hand, the potential forcompetition probably declined, with some mergers of both purchasers andproviders but, on the other hand, may have increased with more decentralizedpurchasing. Information continued to slowly increase. Transaction costs mayhave increased over time with the trend to decentralized purchasing andmore sophisticated contracts. Motivation remained generally low, and littleevidence of cream-skimming was found.

New Labour I

In opposition and early in government, New Labour advocated a third wayof pluralism without competition. This retains the purchaser/provider split,but aims to replace the market and competition with planning and cooper-ation (e.g. DH ). In the words of Klein (: ) Etzioni has replacedEnthoven. This was achieved by reducing the number of purchasers andproviders, moving to longer-term contracts; and encouraging dialoguebetween purchasers and providers, who were no longer in a simple principal–agent relationship (e.g. Paton , ; Klein , ; Goddard andMannion ; Dixon ; Boyne et al. ). The main structural changewas to replace GPFH with primary care groups/trusts (PCG/Ts), which weremeant to maintain the positive features of GPFH such as responsiveness, butreduce the negative such as the “two-tier service”. Initial moves, under FrankDobson as secretary of state for Health, made it more difficult to contractwith private hospitals.

Commentators were not fully convinced by the claim to “abolish theinternal market”, as there never had been a “real market” and many of thechanges appeared to be largely symbolic and technical rather than strategic(e.g. Klein , ; Paton , ; Le Grand , ; Greener). New Labour aimed not to abolish the internal market, but to reduceand refine it: to reform the reforms (Klein ; Powell , ). Somecommentators saw the changes as a move towards “contestability” (Goddardand Mannion ; Roberts et al. ; Le Grand , ) where achange of suppliers of health care would only be undertaken as a last resortand the control of prices was envisaged to come from the publication of aschedule of “reference costs”. However, there were some doubts aboutwhether “cooperation” could provide the motor of change (e.g. Klein ;Le Grand , ; Dixon ). As Klein () put it, PCGs—who aremeant to be in the “driver’s seat” of the new NHS—could find that they arein charge of a vehicle that lacks an engine.

New Labour retained the purchaser/provider split, but wished to minimizeprice competition. The quasi-market became more indirect as GPFH wasabolished, and more internal as the limited degree of private contracting wasminimized The market structure became less competitive, with the abolitionof GPFH and mergers leading to fewer purchasers and providers. Moreinformation was produced through inspection and a new Performance Assess-ment Framework (PAF). Transaction costs were reduced with a longer-term,


simpler system. Motivation was reduced, with political voice replacing marketexit. With larger units, the rationale for cream-skimming was reduced.

New Labour II

Since the NHS Plan (DH ) there appears to be less emphasis on part-nership and collaboration (except for health and social care partnerships),and more on choice and incentives (Boyne et al. ; Le Grand ;Greener ). In The NHS Plan (DH ), criticisms of the Conservativeinternal market appear to be more in terms of practice rather than principle.Competition between hospitals was a weak lever for improvement, becausemost areas were only served by one or two local general hospitals (: ).It was difficult to switch work, even as a last resort. “By itself, the threat ofswitching work is, therefore, often a weak lever to drive improvement in alocal NHS Trust, as shown by the failures of the internal market” (: ).

The document, Delivering the NHS Plan (DH : –), states that havinggot the structures right, it is necessary to introduce stronger incentives toensure the extra cash produces improved performance. PCTs will be free topurchase care from the most appropriate provider—be they public, privateor voluntary. The hospital payments system will switch to payments byresults using a regional tariff system of the sort used in many other countries;units that do more will gain more cash; those that do not, will not. Thedocument explains (: –) that in any health care system incentivesshape performance. The history of the NHS is that it has had weak orperverse incentives and as a result has relied on top-down instruction.Drawing on lessons from other countries and from the internal market,instead of block contracts for hospitals they will be paid for the electiveactivity they undertake. Over time, the government will set the price for unitsof activity, allowing the PCT to focus on volume, appropriateness and quality.For /, there will be a regime in which all providers have contracts fora minimum volume of cases. Providers will lose money on a cost-per-casebasis for failure to deliver, but they will earn extra resources on a cost-per-case basis for additional patients. The document continues that experienceof the internal market taught that price competition did not work, andmerely led to excessive transaction costs. New health resource group (HRG)benchmarks will establish a standard tariff for the same treatment regardlessof provider. This is the hospital payment system used in many health caresystems. In the longer term, a regional tariff to reflect unavoidable differ-ences in costs in different parts of the country will be used.

This seems to reintroduce competitive pressures on the basis of volumerather than price. However, it also signals changes towards a more direct andexternal quasi-market. The NHS Plan (DH ) announced that “by allpatients and their GPs will be able to book appointments at both a time anda place that is convenient to the patient”. A series of moves has given patientsmore choice (Greener ), with the introduction of a Concordat betweenthe NHS and private medicine, leading to greater use of the private sector.Secretary of State for Health, Alan Milburn wishes to see more patientchoice and greater diversity in health care. He admits “crossing the Rubicon”


with a plan, similar to the Conservatives’ “patient guarantee” that would payfor private treatment if NHS waits are too long (Sylvester ).

Growing numbers of NHS managers are striking deals following thesigning of the Concordat agreement in October . Between January andMarch , the private sector performed , NHS operations, whichwas more than the number of NHS operations performed in private hospitalsin the whole of (Charter and Watson ). In December , it wasannounced that a private BUPA clinic—the first of “diagnostic and treat-ment centres” planned by —would treat NHS patients (McSmith ).A pilot scheme announced that unless hospitals offer patients whose opera-tions have been cancelled on the day of surgery another operation within days, they will have to pay for the patient’s treatment at the time and hospitalof the patient’s choice, including private hospitals (DH ). FollowingEuropean Court of Justice rulings in July , patients in the UK are entitledto receive hospital care in other countries in the European Economic Area(West et al. ). According to DH (), from the summer, starting withthose on waiting lists for six months for heart operations, patients will be ableto choose from a range of alternative providers—be they public or private.Echoing—but not citing—Working for Patients (DH ), the documentclaims that “for the first time patients in the NHS will have a choice overwhen they are treated and where they are treated . . . Hospitals will no longerchoose patients, patients will choose hospitals.”

To some commentators, all this sounds like a return to the quasi-market.According to Julian Le Grand, “we are beginning to see a revival of the ideaof competition”, with similarities to the Conservatives’ internal market.Similarly, John Appleby argues that the money following the patient sort ofmodel sounds “very much like the internal market which this governmentcame to power avowing to dismantle” (BBC ). However, Milburn (inTimmins ) claims that it is markedly different from the internal marketbecause Labour has set up national standards and a national framework,with drivers for improving standards everywhere rather than operating atwo-tier service. Nevertheless, an editorial in The Times () argues thatMilburn has been converted to the internal market, and that many of thecriticisms of the internal market amount to an argument that the Conservat-ive failure was a failure to go far enough.

In this second phase, the purchaser/provider split remains. There isgreater emphasis on competition (hard) as opposed to cooperation (soft), butwith pressures of volume rather than price competition. There have beensome moves towards a direct (patient choice) and external (private andContinental Europe) quasi-market. Market structure remains fairly non-competitive. Information continues to improve. Transaction costs remainfairly low. Motivation may be increasing, with greater incentives and consumerpressures. Cream-skimming remains fairly limited.

Conclusion

This paper presents a crude impressionistic sweep across a large period oftime. Modern commentators note some caution in their verdicts for recent


times (e.g. Le Grand and Bartlett ; Le Grand et al. ), and so theverdicts for earlier times are obviously provisional. Nevertheless, it has beenshown that various types and strengths of quasi-market have existed formany years in British health care. Using the typology developed in table ,it has been suggested that some types of quasi-markets both predate andpostdate Bevan’s classic NHS. Before Bevan’s NHS, they existed in soft,indirect and external forms. The first phase of Conservative health policy(Con I) signalled a discourse of a hard, direct and external market, althoughpractice tended to be more indirect and internal. However, the second phase(Con II) showed some trends towards a softer and more direct quasi-market.The first phase of New Labour policy (NL I) suggested a soft, internal andindirect quasi-market, moving towards (NL II) a harder, direct and externalform, which has similarities to the CCT model. However, typologies do notfully capture the more nuanced changes over time. On a very crude ordinalscale of measurement, it can be suggested that the different indices do notmove together in a simple linear fashion. Tables and summarize thecriteria on definitions and conditions for success over the seven periods.Table indicates that while competition perhaps is more pronounced forCon I and NL II, this cannot be said for price competition. In this sense, thequasi-market in the first two periods and NL II stress some form of com-petition with uniform prices. Directness is greater with the trend towards“retail purchasing” of GPFH of Con II and with movements to individualconsumerism with NL II. Finally, public health care was largely a publicmonopoly under the classic NHS. The zenith of the “external market”appears in the pre-NHS phases (out of necessity), falls under NL I only tobecome external in two senses—international and private—under NL II.The different periods, then, show a complex fit between the individual criteriaof quasi-markets.

Similarly, the conditions for success (table ) do not all move together in asimple, linear fashion. The market structure most conducive to the quasi-market appears in Con I. Information very broadly tends to increase overtime. Transaction costs were probably greatest under Con II with the moves

Table

Definitions of quasi-markets

s White Paper

ClassicNHS

Con I Con II NL I NL II

competition + + − ++ + + ++price competition − − − ++ + − −direct − − − + ++ − ++internal −− −− ++ − − + −−

+ = conducive to internal market.− = against internal market.


towards GPFH, and least under the pre-NHS phases and NL II with auniform price structure. However, there will be some transaction costs underNL II in collecting information on quality. Motivation was perhaps greatestunder Con I, although this may also increase with NL II. Information oncream-skimming is probably the most speculative, but it might be arguedthat New Labour’s concerns with equity should make cream-skimming moredifficult. In many ways, the current direction of New Labour may suggestimproved conditions for quasi-market success. The major question mark isto what extent a quasi-market can exist without price competition. Here, NewLabour policy on health appears to be at variance with its policy on highereducation, where uniform prices (student top-up fees) will be replaced withnew variable fees. Uniform prices would seem to suggest a greater role for aregulator of quality.

New Labour’s quasi-market in health, then, appears to have a ratherconfused pedigree (cf. Greener ). In terms of our typology, it bears agreat similarity to the Conservatives’ compulsory competitive tendering, asthey both tend towards hard, direct and external categories. However, withits uniform prices, New Labour’s quasi-market bears some similarities tothe NHS proposed by the Conservative Henry Willink in . In hisbiography of Aneurin Bevan, Michael Foot (: ) made a mischievouspoint about rewriting history: “Future generations may learn that AneurinBevan did not make the National Health Service; he inherited it from thatmuch underrated social visionary Sir Henry Willink.” In rejecting Bevan’sclassic NHS and moving towards Willink, New Labour seems to agree. Thewider point is that rather than being confined to a brief historical periodin Britain, quasi-markets should be examined within a wider historicaland comparative context. This means that quasi-markets may have lessnovelty than is often assumed, but may be seen as part of a longer-termwaxing and waning of market mechanisms in health policy. It also suggeststhat historical perspectives may have some use in illuminating contemporarypolicy analysis.

Table

Conditions for success for quasi-markets

s White Paper

ClassicNHS

Con 1 Con II NL I NL II

market structure − − n/a ++ + − +information −− + n/a + ++ ++ ++transaction costs ++ ++ n/a − −− + ++motivation −− − n/a ++ + − +cream-skimming − − n/a − − + +

+ = conducive to internal market.− = against internal market.


References

Abel-Smith, B. (), The Hospitals –, London: Heinemann.Arnould, R., Rich, R. and White, W. (eds) (), Competitive Approaches to Health Care

Reform, Washington: Urban Institute Press.Bartlett, W., Roberts, J. and Le Grand, J. (eds) (), A Revolution in Social Policy,

Bristol: Policy Press.BBC (), Transcript of On the Record, December (www.bbc.co.uk/otr).Boyett, I. and Finlay, D. (), The quasi-market, the entrepreneur and the effect-

iveness of the NHS business manager, Public Administration, , : –.Boyne, G., Farrell, C., Law, J., Powell, M. and Walker, R. (), Evaluating Public

Management Reforms, Buckingham: Open University Press.Charter, D. and Watson, R. (), in The Times, May: .Department of Health (DH) (), Working for Patients, London: HMSO.Department of Health (DH) (), The New NHS, London: Stationery Office.Department of Health (DH) (), The NHS Plan, London: Stationery Office.Department of Health (DH) (), New Pilots to tackle cancelled operations, DH Press

Release /.Department of Health (DH) (), Delivering the NHS Plan, London: Stationery

Office.Dixon, J. (), Health care: modernising the Leviathan, Political Quarterly, , :

–.Enthoven, A. (), Reflections on the Management of the National Health Service, London:

Nuffield Provincial Hospitals Trust.Enthoven, A. (), In Pursuit of an Improved NHS, London: Nuffield Trust.Exworthy, M., Powell, M. and Mohan, J. (), The NHS: quasi-market, quasi-

hierarchy and quasi-network, Public Money and Management, , : –.Ferlie, E. and Pettigrew, A. (), Managing through networks: some issues and

implications for the NHS, British Journal of Management, (special issue): s–.Flynn, R., Williams, G. and Pickard, S. (), Markets and Networks: Contracting in

Community Health Services, Buckingham: Open University Press.Foot, M. (), Aneurin Bevan –, St Albans: Paladin.Glendinning, C., Powell, M. and Rummery, K. (eds) (), Partnerships, New Labour

and the Governance of Welfare, Bristol: Policy Press.Goddard, M. and Mannion, R. (), From competition to co-operation: new eco-

nomic relationships in the National Health Service, Health Economics, : –.Greener, I. (), Who is choosing what? The evolution of the use of “choice” in

the NHS, and its importance for New Labour. In C. Bochel, N. Ellison and M.Powell (eds), Social Policy Review , Bristol: Policy Press, pp. –.

Griffith, B. (), Competition and containment in health care, New Left Review, :–.

Ham, C. (), Public, Private or Community? What next for the NHS? London: Demos.Ham, C. (ed.) (), Health Care Reform, Buckingham: Open University Press.Ham, C. (), The Politics of NHS Reform –, London: King’s Fund.Harden, I. (), The Contracting State, Buckingham: Open University Press.Haywood, S. and Ranade, W. (), Privatizing from within: the NHS under

Thatcher, Local Government Studies, : –.Iliffe, S. and Munro, J. (), New Labour and Britain’s National Health Service,

International Journal of Health Services, , : –.Institute for Public Policy Research (IPPR) (), Building Better Partnerships, London:

IPPR.Klein, R. (), Why Britain is reorganising its National Health Service—yet again,

Health Affairs, , : –.


Klein, R. (), The New Politics of the NHS, th edn, Harlow: Longman.Lane, J.-E. (), New Public Management, London: Routledge.Le Grand, J. (), Quasi-markets and social policy, Economic Journal, : –.Le Grand, J. (), Competition, co-operation and control? Health Affairs, , : –

.Le Grand, J. (), Further tales from the British National Health Service, Health

Affairs, , : –.Le Grand, J. and Bartlett, W. (eds) (), Quasi-markets and Social Policy, Basingstoke:

Macmillan.Le Grand, J., Mays, N. and Mulligan, J.-A. (), Learning from the NHS Internal

Market, London: King’s Fund.Mackintosh, M. (), Flexible contracting? Economic cultures and implicit contracts

in social care, Journal of Social Policy, : –.McSmith, A. (), Patients will go private for free, Daily Telegraph, December: .Ministry of Health (MH) (), A National Health Service, London: HMSO.Mohan, J. (), Planning, Markets and Hospitals, London: Routledge.Mullen, P. (), Health and the Internal Market, HSMC Discussion Paper , Birming-

ham: University of Birmingham.Paton, C. (), Competition and Planning in the NHS, Cheltenham: Stanley Thornes.Paton, C. (), New Labour’s health policy. In M. Powell (ed.), New Labour, New

Welfare State? Bristol: Policy Press, pp. –. Paton, C. (), Cheques and checks: New Labour’s record on the NHS. In M. Powell

(ed.), Evaluating New Labour’s Welfare Reforms, Bristol: Policy Press, pp. –. Powell, M. (a), The forgotten anniversary? An examination of the White

Paper, A National Health Service, Social Policy & Administration, , : –.Powell, M. (b), The changing blueprints of the British NHS: the White Papers

of and , Health Care Analysis, : –.Powell, M. (), New Labour and the Third Way in the British National Health

Service, International Journal of Health Services, , : –.Powell, M. (), Analysing the “new” British National Health Service, International

Journal of Health Planning and Management, : –.Powell, M. and Exworthy, M. (), Partnerships, quasi-networks and social policy.

In C. Glendinning et al. (eds), Partnerships, New Labour and the Governance of Welfare,Bristol: Policy Press, pp. –.

Ranade, W. (ed.) (), Markets and Health Care: a Comparative Analysis, Harlow:Longman.

Roberts, J., Le Grand, J. and Bartlett, W. (), Lessons from experience of quasi-markets in the s. In W. Bartlett et al. (eds), A Revolution in Social Policy, Bristol:Policy Press, pp. –.

Robinson, R. and Le Grand, J. (eds) (), Evaluating the NHS Reforms, London:King’s Fund Institute.

Sako, M. (), Price, Quality and Trust, Cambridge: Cambridge University Press.Scott, C. (), Public and Private Roles in Health Care Systems, Buckingham: Open

University Press.Stopp, E. (), Complementary Therapies and the NHS. Unpublished PhD

dissertation, University of Bath.Sylvester, R. (), NHS will pay for treatment at private hospitals, Daily Telegraph,

June: .The Times (), Healthy choice, January: .Timmins, N. (), The Five Giants, nd edn, London: HarperCollins.Timmins, N. (), A time for change in the British NHS: an interview with Alan

Milburn, Health Affairs, , : –.


Walsh, K. (), Public Services and Market Mechanisms, Basingstoke: Macmillan.West, P. (), Understanding the National Health Service Reforms, Buckingham: Open

University Press.West, P., Chaplin, S. and O’Reilly, J. (), Evaluation of Treating Patients Overseas, York:

York Health Economics Consortium.Whiteside, N. (), Private agencies and public purposes: a quasi-market in the

interwar years. In J. Roberts et al., A Revolution in Social Policy, Bristol: Policy Press,pp. –.

Williamson, O. (), Markets and Hierarchies, New York: Free Press.Williamson, O. (), The Economic Institutions of Capitalism: Firms, Markets and Relational

Contracting, New York: Free Press.

quasi-markets in british health policy: a longue durée perspective

Documents