Regulating Markets: The Real Costs of Poly‐Centric Administration under the National Health Insurance Scheme (1912–46)
| Published date | 01 September 1997 |
| Author | Noel Whiteside |
| DOI | http://doi.org/10.1111/1467-9299.00070 |
| Date | 01 September 1997 |
REGULATING MARKETS: THE REAL COSTS OF
POLY-CENTRIC ADMINISTRATION UNDER
THE NATIONAL HEALTH INSURANCE
SCHEME (1912–46)
NOEL WHITESIDE
Using a transaction cost perspective, this article explores the administrative costs
involved in quasi-market systems of public service delivery. Employing the histori-
cal example of the interwar National Health Insurance scheme, it revives Bever-
idge’s early criticisms of the duplication and expense incurred by the utilization of
approved societies for benefit administration purposes. To this we should add the
costs incurred by central audit and actuarial evaluation, the main mechanisms
through which the societies were centrally regulated. The article concludes that,
thanks to regulatory requirements, this poly-centric system of public administration
was more expensive than a state-run equivalent – and that this message has signifi-
cance for recent reforms. In the course of the analysis, the narrowness of a ‘pure’
transaction cost perspective is demonstrated and common assumptions concerning
distinctions between ‘the state and the market’ in administrative structures are
drawn into question. The division of publicadministration into these two typologies
is arguably based on a false dichotomy.
INTRODUCTION
Recent reforms have sought to introduce market competition into public
administration, replacing old bureaucracies with decentralized private pro-
vision. The aim is to stimulate efficiency and to offer greater choice to con-
sumers. This is not, however, the first time that private agencies have been
adapted to the delivery of public services within a competitive environ-
ment. Under the National Health Insurance Scheme (
nhi
), which adminis-
tered sickness benefits and basic health care to workers between 1912 and
1946, ‘approved societies’, competing for members, purchased health care,
collected contributions and administered benefits under the supervision of
the Ministry of Health. From an administrative standpoint, this offered
similar advantages to those promoted by recent
nhs
reforms: the scheme
allowed consumer choice, the separation of purchaser from provider (and
the state from both) – and appeared to contain administrative costs. The
societies received a flat rate, per capita subsidy but were themselves ulti-
Noel Whiteside is Reader in Public Policy at the University of Bristol.
Public Administration Vol. 75 Autumn 1997 (467–485)
Blackwell Publishers Ltd. 1997, 108 Cowley Road, Oxford OX4 1JF, UK and 350 Main Street,
Malden, MA 02148, USA.
468 NOEL WHITESIDE
mately responsible for paying their own running expenses. It is this last
factor – the real cost of poly-centric administration – which provides the
main focus for this article. Are competitive systems, using private agencies
to deliver public benefits, more cost effective than centralized administrat-
ive structures? The answer has been assumed to be positive. While
opponents of reform have objected to its impact on equity and universality,
less attention has been dedicated to the actual cost of its operation. Public
accountability requires official regulation of these new quasi-markets; regu-
latory mechanisms are expensive and can eradicate advantages competitive
administrative systems might offer.
Transaction cost theory has been adapted as an analytical framework for
assessing
nhi
performance. The principles and ideas behind the theory are
described in the first section of this article. They are followed by a brief
description of the
nhi
scheme, its administrative structure, the regulation
of transactions, the consequences for policy development, the problems of
involving commercial agencies in public administration and the costs a
poly-centric system imposed on both the contributor and the Exchequer.
For reasons of space, attention is largely confined to transactions between
central government and the societies – leaving aside those involving
patients and doctors in the administrative process. Finally, this evidence is
used to re-assess the advantages of using private agencies for public ser-
vices, to query some assumptions on which transaction cost theory is based
and to question the almost traditional juxtaposition between state and mar-
ket which has formed the basis for so much recent analysis.
Of course state responsibilities in interwar Britain were not identical to
those of today. The responsibility of government for pre-war welfare was
essentially residual; those who could afford to pay were required to pay.
Separate statutory social insurance schemes were confined to the working
class; publicly funded health services existed, run by local authorities, but
middle class consumers paid for medical care. This pattern changed in the
1940s, with the development of a mixed economy and a universal welfare
state. However, the interwar period, characterized by mass unemployment
and strict public expenditure constraints, bears some resemblance to our
own. Then as now, industrial recession increased the numbers dependent
on the public purse (Whiteside 1988). Then as now, governments tried to
minimize existing responsibilities in the provision of social protection by
fostering voluntary mutuality, by limiting Exchequer subsidies, by encour-
aging private provision (Webster 1985). Then as now, access to state-funded
benefits became increasingly difficult (Deacon 1977; Whiteside 1992, ch. 4).
In this context, administrative efficiency and cost-effectiveness were at a
premium. The Treasury sought to contain public liability by shoring up
voluntary agencies and organizations of all types, to minimize official obli-
gations – promoting the use of the private sector inthe provision of public
welfare. In terms of political context and strategy, therefore, similar per-
spectives can be identified in the two periods. This article does not offer a
Blackwell Publishers Ltd. 1997
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