Contracts in the National Health Service Internal Market
| Author | Pauline Allen |
| Date | 01 May 1995 |
| Published date | 01 May 1995 |
| DOI | http://doi.org/10.1111/j.1468-2230.1995.tb02013.x |
Contracts in the National Health Service Internal
Market
Pauline
Allen
*
Introduction
This article will consider one aspect of the structure of the National Health Service
(NHS) which was created by the reforms of the
NHS
and Community Care Act
1990 (the 1990 Act).’ At the heart of these reforms was the introduction of a
quasi-market for secondary and tertiary health care by means of a split between the
purchasers of care and its providers. There are two categories of purchaser:
district health authorities (districts) and certain ‘fund-holding
’
general
practitioners (fundholders). The remit of the districts is to purchase health care for
their resident population. Fundholders are given part of the budget for the district
(which is still allocated to it by central government) in which their practice is
located. Fundholders use their budgets to purchase certain categories of non-
urgent care for the patients registered with them. The providers of health care are
now mainly entities which are not directly managed by the districts. Instead, they
are ‘self-governing trusts’ who have
a
special legal status within the
NHS.*
The
trusts must now compete with each other to obtain funds from the purchasers. The
relationship between purchasers and providers is referred to as a ‘contract.
’3
The government’s reasons for the introduction of the internal market are set out
in a White Paper.4 First is the desire to achieve better ‘value for m~ney,’~ the
term being used in the sense of providing a given quantity and/or quality of care
for the least possible cost. This can also be called productive efficiency.
Proponents of quasi-markets6 contend that productive efficiency is more likely to
be achieved in a situation of competition between providers than in a structure
which contains monopoly providers. A second reason given for the introduction of
the internal market was that it would stimulate staff and professionals to behave in
a more responsive manner in relation to the needs and desires of
patient^.^
A
third reason was that patients should be a given a greater choice of the services
available.8 A series of ‘key measures’ was proposed in ‘Working for Patients’ to
achieve the preceding objectives. The first of these was the decentralisation of
decision making and delegation of authority to local level.9
*Commissioning Manager, Brent and Harrow Health Authority, and Solicitor.
I
would like to thank Julian Le Grand for his valuable comments. The views expressed are my own and any
errors are my own responsibility.
See generally Barker, ‘NHS Contracts, Restitution and the Internal Market’ (1993) 56 MLR 832;
Hughes, ‘The Reorganisation of the National Health Service: The Rhetoric and Reality of the Internal
Market’ (1991) 54 MLR 88; Miller, ‘Competition Law and Anti-Competitive Behaviour Affecting
Health Care’ (1992) 55 MLR 453.
2 They are statutory corporations constituted by
s
5
of the 1990 Act, not legally constituted trusts at
all.
3 These arrangements are referred
to
as ‘contracts’
to
denote the fact that they do not constitute legally
binding contracts due to the provisions of
s
4
of the National Health Service and Community Care Act
1990 which are discussed below.
4
Working
for
Patients
(1989) Cm 555.
5
ibid
p 5.
6
Enthoven,
Rejlections
on
the Management
of
the National Health Service,
Occasional Paper 5
(Nuffield Provincial Hospitals Trust, 1985).
7
op
cit
n
4,
p
4.
8
ibid
p
3.
9
ibid
p
4.
1
0
The Modern Law Review Limited
1995
(MLR
58:3,
May). Published by Blackwell Publishers,
108
Cowley Road, Oxford
OX4
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and
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Main Street, Cambridge,
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Re
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[Vol.
58
The article considers the question of how closely these NHS ‘contracts’
resemble commercial contracts and whether it is desirable that they should do
so.
The role of the ‘contracts’ in the internal market will be considered briefly; then
the legal and organisational context of the ‘contracts’, and the implications for
their form and content, will be explored. The actual terms of certain ‘contracts’
made with providers by selected fundholders will be examined in detail in order to
consider the extent to which such ‘contracts’ diverge from the ideal type of a
legally enforceable commercial contract. The real nature of commercial contracts
as opposed to the classical model of the ideal type will then be considered. The
implications of this analysis for policy makers and negotiators of ‘contracts’ will
be explored.
The article concludes that NHS ‘contracts’ need not be as precisely specified as
commercial contracts, in the light of the lack of use to which commercial contracts
themselves are put and the fact that NHS ‘contracts’ are not legally enforceable.
There is nevertheless a need for greater precision in NHS ‘contract’ drafting in
respect of specification of activities, prices and quality, and in respect
of
the
methods of monitoring of these areas. This is partly due to the need for quality of
care to be improved and partly due to one of the crucial uses to which the
‘contracting’ process can be put in practice: namely, the better management of
provider units.
A
The contractual role
In order for the NHS internal market to work, it is obviously necessary for
purchasers and providers to agree with each other what health care should be
provided and at what price. The ‘contract’ is the fulcrum of this market (as of any
other market that uses the contract mechanism) as it performs this purpose.
The type of contract used will have an effect on the capacity of a market
(whether the internal market or a free market) to operate efficiently. Contracts can
be a powerful method by which value for money is delivered. The contract can be
used to specify accurately what quantity and quality of services are required, their
price, the methods of monitoring whether they have been delivered and the
sanctions to be applied if they have not. However, the contracting process is not a
costless one. Each of the types of contract referred to below involves different
types of transaction costs. These are the costs associated with the contracting
process, which may be divided into those incurred
ex
ante
or
expost
exchange.
Ex
ante
transaction costs are those incurred in negotiating and specifying an
agreement and drafting it to deal with as many contingencies as possible.
Ex
post
transaction costs are those incurred in monitoring the agreement after exchange to
ensure it is being complied with, as well as those costs associated with enforcing
compliance.
lo
There are three types of ‘contract’ in use in the NHS: block, cost, and volume
and cost per case.” Block ‘contracts’ (in their pure form) state that unlimited
services must be provided for a fixed sum. The risk is entirely on the provider.
Cost and volume ‘contracts’ amount to a compromise position for each party
because, when certain volumes of services are exceeded, further sums must be
10
I1
Le
Grand and Bartlett
(eds),
Quasi-Markets
and
Social Policy
(London: Macmillan, 1993).
Bartlett, ‘Quasi-Markets and Contracts:
A
Markets and Hierarchies Perspective on NHS Reforms’
(1991)
Public Money
and
Management
11(3),
p
53.
322
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1995
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