Can Market Forces Be Used For Good? May 2003

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The King’s Fund is an independent charitable foundation working for better health,especially in London. We carry out research, policy analysis and developmentactivities, working on our own, in partnerships, and through grants. We are a majorresource to people working in health, offering leadership and education courses;seminars and workshops; publications; information and library services; andconference and meeting facilities.Published byKing’s Fund11–13 Cavendish SquareLondon W1G King’s Fund 2003Charity registration number: 207401First published 2003Any part of this publication may be reproduced without permission for educationaland non-profit purposes if the source is acknowledged.ISBN 1 85717 477 1Priced copies available from:King’s Fund Bookshop11–13 Cavendish SquareLondon W1G 0ANTel: 020 7307 2591Fax: 020 7307 download available from: www.kingsfund.orgEdited by Eleanor StanleyCover design by Minuche Mazumdar FarrarPrinted and bound in Great Britain

ContentsAbout the authorsForeword1Summary3Framing the debateJennifer Dixon6The case for the internal marketJulian Le Grand10The case against the internal marketPeter Smith18Ways aheadJennifer Dixon32References40Linked publications44

About the authorsJennifer DixonDirector of Health Policy at the King’s Fund, with particular responsibilityfor analysis of NHS workforce issues and the future shape of the NHSJennifer’s background is in clinical medicine and health servicesresearch. From 1998 to 2000, she was policy advisor to the ChiefExecutive of the National Health Service, Sir Alan Langlands. In 1990,she studied the US health care system at first hand as a HarknessFellow. She has written widely on health care reform in the UK andabroad, and is currently working with colleagues at the King’s Fundanalysing the lessons that can be learned by the NHS from managedcare organisations in the USA.Julian Le GrandRichard Titmuss Professor of Social Policy at the London School ofEconomics, and King’s Fund Senior AssociateJulian is the author, co-author or editor of 12 books and over 90 articlesand book chapters on public policy, including health policy. He hasacted as an advisor and consultant on health policy, welfare policyand social exclusion to the World Bank, the European Commission,the World Health Organization, the Cabinet Office, HM Treasury, theUK Departments of Health and Social Security, and the National AuditOffice. He was a member of the Fabian Commission on Taxation andCitizenship, and the Institute of Public Policy Research Commission onPublic/Private Partnerships, and has acted as a non-executive directorof a Family Health Service Authority and a Health Commission, and asthe Vice-Chair of an NHS trust. He is currently a Commissioner on theCommission for Health Improvement. He appears frequently on radioand television, and writes regularly for the press.

Peter SmithProfessor of Economics at the Centre for Health Economics at theUniversity of YorkPeter’s research interests include the financing, efficiency andperformance management of public services, topics on whichhe has published widely. He has designed several major systems offormula funding currently in operation in the UK public sector, andhas been a member of numerous government advisory committees,including the Department of Health’s Advisory Committee on ResourceAllocation and the Treasury’s Performance Information Panel. He hasalso acted as a consultant to many other national and internationalagencies, including the Organisation for Economic Co-operation andDevelopment, the World Health Organization and the World Bank, andcurrently holds a three-year fellowship from the Economic and SocialResearch Council.

ForewordThe NHS Plan (2001) set out the Government’s ambitious ten-yearreform programme for the health service – a vision it went on to backwith unprecedented increases in funding. But as planning has givenway to implementation, it has become clear how difficult it is to delivertangible improvements on the ground, which raises wider questionsabout how effective organisational change in public services canbe achieved.How to improve the quality, efficiency and accessibility of healthservices remain central questions facing all governments in developedcountries. In the UK, some policy initiatives – for example, waitinglist targets or local authorities fines for ‘bed-blocking’ – implyimprovements will spring from greater central control. Others – suchas foundation trusts or the expansion of patient choice – seem toassume mechanisms such as local competition or consumer demandare the key to change.So no single approach seems to be shaping the Government’s healthpolicies. If the Government’s mantra is ‘what counts is what works’,will such pragmatism prove effective? Can a highly centralised approachon the one hand and a market-led appraoch on the other sit comfortablyside by side?Policy makers and professionals alike need an informed, transparentdebate on the shape of the new NHS. What are the real trade-offsbetween, for example, equity of access and greater patient choice?Will market forces provide an effective response to the growingdemands on health and social care services made by an ageingpopulation? Is there a need for an ‘arm’s length’ NHS agency thatseparates central policy and local planning?

2CAN MARKET FORCES BE USED FOR GOOD?At the same time, recent disputes about GPs’ and consultants’ contractsraise further important questions. What kinds of professional roles andskills are needed to underpin a modern health service? Are professionalvalues – the cornerstone of the old NHS – taking a beating? Will theychange or collapse?Shaping the New NHS: Can market forces be used for good? draws on arecent King’s Fund breakfast debate, which presented the views of threeseasoned commentators (Jennifer Dixon, Julian Le Grand and PeterSmith) on the issue of competition and choice in the new NHS. Itexamines the case for and against internal markets in the healthsector, and asks whether it is possible to combine the best of marketdisciplines with planned provision by differentiating between typesof demand.This discussion paper launches a wider King’s Fund Shaping the NewNHS programme of research, seminars, debates and publications,which will run throughout 2003. It builds on earlier work carried out in2001, which brought together a group of professionals, commentatorsand academics from health care and beyond, chaired by Lord Haskins,broadly to consider key issues facing the NHS. They pinpointed threeimmediate and inter-related problems: over-politicisation; excessivecentralisation; and lack of responsiveness to individualsand communities.Their thoughts, published in January 2002 as The Future of the NHS:A framework for debate, attracted widespread interest and mediacoverage. I hope you will find this paper and its scrutiny of market forceshelpful and illuminating in its look at one strand of the debate.Julia NeubergerChief Executive, the King’s FundMay 2003

SummarynDespite a plethora of Government policy initiatives to effecttransformational change in the NHS – now backed by substantialinvestment – there is a growing perception that improvements aretaking place too slowly. How can the Government accelerate changeand make services more responsive to patients in the way the publicincreasingly expects?nMuch of the debate has focused on whether, and how, sharpermarket incentives might prompt better performance, and whetherwe will witness a return to previous experiments with internalmarkets. It remains difficult to discern a single, coherent approachto Government health policy, suggesting a largely instrumentalview of the role of central control versus local market forces.nAny new use of market forces is likely to be markedly different fromprevious experiments. On the policy front, it is clear that:– competition between providers will be based on quality,not price– there will be a standard set of national prices– patient choice of secondary care provider is being encouraged– money will flow around the NHS in ways that support andencourage competition– new providers will be able to enter the NHS market.The health care environment has also changed:– information systems and data are much improved– the system of regulation and standard setting is better.nWould a ‘market’, initially between NHS trusts, work any betterthan when tried in 1991? Should it be tried again? This paper, whichincludes contributions from two senior economists in health care,and the director of health policy at the King’s Fund, debatesthese questions.

4CAN MARKET FORCES BE USED FOR GOOD?nJulian Le Grand supports the introduction of stronger marketincentives to prompt improved performance among secondary careproviders. He:– notes the positive effect market incentives have had inprimary schools– argues that new structures (such as new systems of regulationand performance measurement) will help minimise undesirableconsequences– suggests that, in 1991, the NHS internal market did not work asintended because incentives were not strong enough, andobjectives were not aligned between hospital consultantsand managers– advocates the use of stronger financial incentives to remuneratehospital consultants – for example, payment on a fee-for-servicebasis to encourage greater productivity.nPeter Smith does not support even modest experimentation withstronger market incentives. He:– notes the adverse effects that market incentives can produce inhealth care– argues that, despite the new structures put in place since 1997, akey check on the adverse effects of stronger market incentives isthe professional ethic– suggests that market disciplines could seriously undermine thisethic, resulting in poorer quality care and health outcomes forpatients (particularly those with chronic medical problems, ratherthan those requiring straightforward non-emergency surgery)– believes that a more competitive market between secondary careproviders risks focusing managers’ attention on the acute sector(in particular, elective care) at the expense of the non-acute.nJennifer Dixon asks whether it is possible to combine the best ofmarket disciplines with planned provision by differentiating betweentypes of demand. She:

SUMMARY5– agrees with Peter Smith that discussions about market forces inhealth care often focus on secondary care – in particular,elective care– argues that the most complex, challenging and costly conditionsto treat are chronic medical conditions– believes that the structure, organisation and incentivesappropriate for the optimal treatment of these conditions may bevery different from those for elective care– suggests that a market split between secondary care providersand purchasers, with competition between providers, may notresult in the best care for patients requiring complex andintegrated care.nPerhaps a ‘fork in the road’ is now possible, with elective (surgical)care provided by competing hospitals, and other forms of carestimulated by more appropriate incentives. New conceptions of a‘market’ in the NHS may emerge – allowing more vertical integrationbetween primary and secondary care providers.nIn the medium term, it is clear that:– the Government will encourage more providers and greaterpatient choice of provider within the NHS over the next few years– the health care environment will be dynamic and changeable, asnew opportunities arise from the external environment and fromnew policies.nIn the short term:– the pace and scope of change is likely to be dominated by theability of the NHS to achieve the targets set out in the NHS Plan,and the next general election– If Labour is re-elected, and the NHS is not perceived to bechanging fast enough, then pressure will grow to introducestronger market incentives on the provider side and, ultimately,on the demand side.

6CAN MARKET FORCES BE USED FOR GOOD?Framing the debateSlow progress on modernisationThe Government faces a difficult problem. Despite numerous policyinitiatives and a large investment in the service, modernisation hasnot been fast enough to satisfy its desire to effect a transformationalchange in the service received by patients. The NHS is still orientatedtoo much towards producers rather than consumers of care.The ‘top-down’ centrist approach favoured since 1997 has had someeffect. For example, there are now many more central institutions settingstandards and measuring and inspecting performance, and staff on theground in the NHS have clearly focused on achieving centrally-settargets – for example, reducing waiting times for inpatient treatment.Much is being asked of NHS staff, and many changes have been made,but key improvements for patients are either too slow (or, in a serviceas large as the NHS, not yet sufficiently visible at national level) to showthat real progress has been made, despite the extra resources.Furthermore, achieving a key target – reducing waiting times for electivecare – has proved to be slow, expensive and difficult.The drive to improve performanceThe Government is more urgently asking fundamental questions abouthow to effect change in order to improve performance in large publicsector organisations such as the NHS. The discussion turns on the oldpolitical question of the extent to which monopoly state provision andfinancing can improve performance in the desired way, and how farsharper market incentives should be introduced. This discussion hasfeatured in many key political speeches and papers – for example,the paper recently given by Chancellor Gordon Brown to the SocialMarket Foundation (Brown 2003). It has also been at the root ofdebate about recent policies – in particular, the proposal to introducefoundation trusts.

FRAMING THE DEBATE7Policy directionsDespite the turbulence this is causing in policy circles, the reality is thatthe Government’s business-as-usual instincts in terms of NHS policy arestill firmly centrist in style. But, around the edges, there are three broaddirections of policy aimed at improving performance in the NHS – inparticular, making services more responsiveness to patients, which isthe main policy priority. They are:nnncollaborationdevolutionenhancing market incentives.These are described in detail below:nnCollaboration. First, efforts have continued to encouragecollaboration locally to encourage more integrated or seamlessworking across public services, to improve the care of users.Examples include the introduction of the statutory duty ofpartnership and long-term agreements between stakeholders inthe local health and local government economy, and other policiesthat demand closer working – for example, in implementing thenational service frameworks. This looks like ‘centrally mandated’collaboration, but collaboration is the aim nonetheless.Devolution. Second, there is a newer trend to devolve power locallyin the NHS – for example, by giving more of the NHS budget directlyto primary care trusts – and to encourage greater public involvementin the decisions of local health bodies – for example, through thestakeholder councils of the new foundation trusts, and through thelocal work of the Commission for Public and Patient Involvement.As the Secretary of State remarked in a recent seminar on the ‘newlocalism’ (Milburn 2003), the new central institutions set up since1997 to set standards, inspect and regulate health care haveallowed the Government to ‘let go’ and devolve more power locally.

8CAN MARKET FORCES BE USED FOR GOOD?At least three key policies signify this trend:nnnallowing primary care trusts to control 75 per cent of the NHSbudget directlythe proposed introduction of foundation trusts (Department ofHealth 2002a)the revamping of the national and local apparatus to involve thepublic and patients more in decision making within the NHS(Department of Health 2003).Much could be said of this trend to devolve power, but it is not thesubject of this discussion paper. It is suffice to say that, while the NHSremains funded largely through central taxation and is accountablethrough the Secretary of State to Parliament, it remains to be seen how‘real’ devolution can be in practice, how long it will last, and howeffective the new efforts to involve the public in decision making will be.nEnhancing market incentives. Finally, there is the issue of enhancingmarket incentives on the provider side. This has been done by:– allowing a diversity of private and not-for-profit providers tocompete for NHS contracts for secondary care.– allowing more autonomy for foundation trusts (especially to raisecapital funds on the private market)– allowing greater choice of provider for patients waiting more thansix months for elective surgery– encouraging competition between providers.Competition, in the NHS at least, is being encouraged on the basis ofquality rather than price, since NHS providers must adhere to a nationalset of prices. A new system of financial flows supports and underpinsthese arrangements (Department of Health 2002b). In the proposedGP contract, it is clear that primary care trusts will be allowed to contractwith a diversity of primary care providers (British Medical Association2003). No competition is encouraged yet on the demand side – that is,between commissioners of NHS-funded care – and so far, the

FRAMING THE DEBATE9Government has been firm that there will be no new changes to themethod of funding NHS care.Of these three trends, the most significant is this final one, becauseit represents the most radical departure from previous Labour policy,and it is central to current heated debates over the future direction ofthe NHS. We have been here before. In 1991, the ‘internal market’ wasintroduced between providers to stimulate competition and moreresponsiveness to patients or their agents (general practitioners).But the environment is different now. Competition will be based onquality not price, information systems are much improved, and thesystem of regulation of providers is tighter. Will the ‘market’ workbetter this time? Should it be tried again?Can market forces work?These questions are the subject of the two papers in this discussionpaper, written by two senior economists in health care. Julian Le Grandargues that the Government is enhancing market incentives on theprovider side in the NHS once again. Drawing on evidence from the 1991reforms – and more recently, from elsewhere in the public sector – heargues that the ‘new market’ can work if we learn the lessons from the1990s and pay attention to how to provide incentives to clinical staff –specifically to consultants.In the second paper, Peter Smith argues that markets can introduce very‘raw’ incentives that can produce adverse outcomes – in particular,alienating clinicians, on whom the NHS depends more than any otherstaff group. These papers were the subject of a breakfast discussionat the King’s Fund in February 2003. The publication concludes withsome reflections on the positions of Smith and Le Grand, and drawsupon some of the points raised at the breakfast discussion.

10CAN MARKET FORCES BE USED FOR GOOD?The case for the internal marketThe Government is in the throes of developing an internal market inheath care, with patient choice, financial flows following patient choice,PCT commissioning, foundation hospitals, cost and volume contracting(Department of Health 2002b, p 13, Lewis 2002). But there is a generalperception that the internal market did not work very well last time itwas tried – in the 1990s, under the Conservative governments ofMargaret Thatcher and John Major. So what guarantee is there that itwill work this time?The internal market in the 1990sThe first point to make is that while the original internal market maynot have delivered as much as its proponents hop

n Julian Le Grand supports the introduction of stronger market incentives to prompt improved performance among secondary care providers. He: – notes the positive effect market incentives have had in primary schools – argues that new structures (such as new systems of regulation and performance measurement) will help minimise undesirable consequences – suggests that, in 1991, the NHS .

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