Published: 16/01/2003, Volume II3, No. 5838 Page 18 19

Foundation hospitals, patient choice, financial flows following the patient, primary care commissioning, cost-per-case contracts, starratings, the Commission for Healthcare Audit and Inspection: we are undoubtedly seeing the development of a regulated internal market in heathcare.

But internal markets - or the introduction of competitive pressures - did not work too well the last time. Is there any guarantee that they will work now?

They could. For similar kinds of regulated internal or quasimarkets have succeeded in levering up the performance of public services in other areas.

A combination of open enrolment, league tables and formula funding has meant that state primary schools have been subject to competitive pressures of the kind now being (re)developed for the NHS. And the results have been striking.

The percentage of pupils reaching a given level of achievement in the attainment tests introduced in 1995 in England has steadily increased.

Some of the improvements have been remarkable: the percentage of pupils gaining the expected level of competence in maths at the end of primary school moved from 45 per cent in 1995 to 70 per cent in 2001. This should be set against the fact that the best available evidence suggests that there was no improvement in the maths skills of children in the early years of secondary school for 30 years to 1995.

Moreover, these improvements were not confined to good schools; in fact, the lowestperforming schools in 1995 showed the greatest improvement by 2001. The same is true of schools ranked according to the wealth of the area: over the period, schools in poor areas were catching up with schools from rich ones.

1These results need to be treated with caution. There are many anecdotal stories of 'teaching to the test' - and indeed of outright fraud.And we cannot draw the unequivocal conclusion that, even if the improvements are real, they are all due to the impact of the regulated competitive market.

Some undoubtedly arose from the introduction of the decidedly non-market device of a compulsory numeracy and literacy hour. But more micro-level research suggests that competition has been an important factor in raising standards.

2If competition has worked for primary schools, why should it not work equally effectively in healthcare? Analyses of the relative lack of success of the earlier version of the NHS internal market drew attention to a number of factors that impeded its working, including a lack of appropriate incentives and the continuation of heavy-handed central control.

3But there is another factor that supports the comparison with primary education. In a school, the relevant decision-makers are headteachers. They are motivated to a large extent by a wish to preserve or improve the financial health of the institution. This is in part self-interest - a desire to keep their own job. But it also has a public service component: they believe that by improving the financial health of their institutions, they benefit their pupils and staff.

More importantly, headteachers also have direct managerial control over their staff, with freedom to hire, fire and promote. They also have considerable autonomy over admissions and exclusions. In this way they have both the motivation and the ability to respond to market pressures.

Contrast this with the situation facing those in charge of a hospital competing in the old internal market.

Those nominally in charge of the institution were managers, motivated in large part by similar factors to headteachers - the financial health of the institution and a public service concern for the quality of care.

However, they had little direct managerial control over the key members of their staff providing that care - consultants.

Consultants had considerable freedom of action in allocating resources. They too were motivated by a variety of considerations, their own income and professional status and more altruistic concerns for patients.

Crucially, though, they were not necessarily motivated by a concern for the financial health of the institution.Whatever happened to hospital finances, they were very unlikely to lose their jobs or their incomes (those with substantial incomes from private practice were even more secure). They were not concerned with the impact of market pressures on the hospital; and hence those pressures had relatively little impact.

The problem for the new version of the internal market that the government is developing is that all of this is still true.The new consultant contract was an attempt to put more power in the hands of managers; but (largely for that reason) it has failed.Consultants are still left with the power to ignore institutional pressures and thereby to dilute, or even nullify, the incentive effects of the new market.

So what should the government do if its new arrangements are to work? The aim should be to extend positive financial incentives for consultants to meet their institution's objectives, such as providing direct fees for services performed.

If markets are to work in healthcare, market principles have to be applied within the relevant institutions, as well as outside them.


1 Glennerster H. United Kingdom education 1997-2001. Oxford Review of Economic Policy 18: 120-136, 2002.

2Bradley S, Johnes G, Millington J.School choice, competition and the efficiency of secondary schools in England. European J of Operational Research. 135: 545568, 2001.

3Le Grand J, May N, Mulligan J-A.(eds). Learning from the NHS internal market. London: Kings Fund, 1998.

Julian Le Grand is Richard Titmuss professor of social policy, London School of Economics.