Internal markets in the public sector: the case of the British National Health Service
| Published date | 01 February 1997 |
| Date | 01 February 1997 |
| DOI | http://doi.org/10.1002/(SICI)1099-162X(199702)17:1<141::AID-PAD918>3.0.CO;2-X |
| Author | ROBERT LACEY |
Internal markets in the public sector: the case of the British
National Health Service
ROBERT LACEY
World Bank, Washington, DC
SUMMARY
This article discusses the application of internal markets to the publicly ®nanced British
National Health Service (NHS). The objective of internal markets is to obtain, through the
stimulus of competition, greater ef®ciency, effectiveness, and responsiveness to consumer
needs than would be obtained through continued direct government provision. There have
been real advances in the NHS attributable to the internal market, not the least of which is a
growth of debate, dynamism, experimentation, and entrepreneurial attitudes that contrasts
sharply with the glacial pace of change prior to 1990. However, there is also a sense in which
the reforms have, thus far, failed to achieve all their promoters hoped for. It is far from clear
that ef®ciency gains exceed the high transaction costs associated with the reform. Competition
remains restricted, information is inadequate, and the regulatory and legal framework is
¯awed. Lack of transparency and a clear publicly stated `end vision' of the reform process,
together with a refusal to evaluate it systematically, have heightened already intense
controversy. This has blurred the fact that the internal market is not a panacea and cannot
alone be expected to solve the problems of a health service where demand is accelerating faster
than the resources available through taxation. (&1997 by John Wiley & Sons, Ltd.)
INTRODUCTION
The relationship between the state and markets has been at the centre of the debate
concerning the role of government in recent decades. There are two sides to this
relationshipЮrst, there is the way in which the state can affect markets outside of
itself through direct intervention in market activities, regulation, and facilitation.
Second, the state may try to improve some of its own activities through bringing
competition and other market forces to bear upon them. It is this latter side of the
state/market relationship that forms the subject of this article.
One way of introducing market forces into of®cial activities is through the creation
of internal or quasi-markets. Such markets assumed a certain vogue in the United
Kingdom in the late 1980s, particularly in the provision of social services. They
continue today with recent changes, for example, in the provision of welfare bene®ts
and legal aid.
PUBLIC ADMINISTRATION AND DEVELOPMENT, VOL. 17, 141±159 (1997)
CCC 0271±2075/97/010141±19$17.50
&1997 by John Wiley & Sons, Ltd.
Robert Lacey is at the World Bank, 1818 H Street NW, Washington, DC 20433, USA. The views
expressed in this paper are those of the author and do not necessarily re¯ect those of the World Bank
Group.
Perhaps the best way to de®ne an internal market is to describe its characteristics:
.It is `internal', meaning that the activities carried out in the market remain in the
public sector.
.Within the overall budget envelope for the activity in question, resources are no
longer allocated to providers by bureaucratic decision, but by user choice. For
example, in the case of education, money should follow the pupils; in health,
money should follow the patients.
.The provision of services is split from their ®nancing.
.Resources are earmarked by activity and by market (for example, education
vouchers cannot be encashed and thus have no value outside the school system).
.Prices in the internal market are not normally determined by supply and demand
but by bureaucratic diktat or negotiated between purchaser and provider within a
heavily regulated framework.
The objective of internal markets is to obtain, through the stimulus of
competition, greater ef®ciency, effectiveness, and responsiveness to consumer
needs than would be obtained through continued direct government provision of
the services concerned. The extent to which this objective is achieved will depend on
the strength of certain preconditions (Sappington and Stiglitz, 1987):
.There must be a suf®cient degree of competition, or contestability, among service
providers.
.There should be suf®cient agreement and knowledge in the market about the
desired output and its value to permit the elaboration of contracts.
.The transaction costs associated with these contracts, and of administering,
regulating, monitoring and evaluating the market itself, should not exceed the
ef®ciency and effectiveness gains from introducing the market.
.The political, administrative, and legal/regulatory framework, while offering
protection to the consumer, should also motivate market agents to make the
system work ef®ciently by acting competitively.
.For internal markets relating to the provision of social services, the introduction
of the market should not result in greater inequity of access than obtainable under
direct government provision. (Bartlett and Le Grand, 1993)
One of the leading and most controversial applications of internal markets has
been the British National Health Service (NHS) reforms of the early 1990s. This is of
interest as a case study, because it shows up clearly the implementational dif®cul ties.
This article brie¯y describes the NHS as it was prior to the reforms, why the
reforms were enacted, and the main changes involved. It then discusses the way the
internal market has operated to date, using the framework outlined above. Finally,
the article identi®es some lessons for other countries, and looks ahead to the future
of the internal market in the context of the evolving political situation in the United
Kingdom.
142 R. Lacey
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