Despite a dearth of research on the internal market, John Appleby looks to two economists for their assessment of its effectiveness at reducing prices and costs

After struggling to formulate an intelligent question to put to an eminent historian, a radio journalist blurted: 'The crusades - good or bad, professor?' For all its apparent naivety, the question was worth asking - even if it did produce an answer consisting almost exclusively of the phrase 'on the one hand ... but on the other'.

Economists are used to such turns of phrase for, like historians, they deal with uncertainties and incomplete accounts of events. So as the internal market slips slowly into history, what do economists reply to the question: 'Internal market - good or bad?'

In a recent editorial for the journal Health Economics, two economists, Carol Propper and Neil Soderlund, go some way to providing an answer. They summarise the relatively small amount of empirical evidence on the effects of competition in the internal market on hospital prices and costs.1

As Propper and Soderlund note, the traditional view is that competition tends to lower prices and costs for a given service. Moreover, it is expected that areas with greater levels of competition would benefit from commensurate reductions in prices and costs.

The internal market had a high degree of regulation, with constraints on price competition through the (widely flouted) 'price equals cost' rule and limited incentives for purchasers to seek out best value.

Yet Propper and Soderlund conclude that there was scope in the internal market structure for competition and hence potential for the efficiency gains predicted by traditional economic theory.

But where is the evidence? The internal market was one of the most significant reforms ever undertaken by the NHS - one watched, and in some cases emulated, by other countries. Yet there is a dearth of research.

Nevertheless, Propper and Soderlund identify only a handful of economic studies examining the effects of competition on prices - and then only for extra- contractual referrals and GP fundholders. They highlight just one published study on the effects of competition between providers on costs.

The authors conclude that there is only weak evidence to suggest that competition had an effect on ECR and fundholder prices. Interestingly, it appears that prices charged to fundholders were generally below average costs. This suggests that non-fundholders effectively subsidised fundholders. Although there was a lag, it also appears that competition had an impact on costs: hospitals in more competitive markets reduced their costs by a greater proportion than those in areas of low competition (see box below).

Given the relatively short life of the internal market, its heavy regulation and the lack of empirical evidence, particularly concerning health authority dealings with trusts, Propper and Soderlund attach an obligatory health warning to their summary.

Was the internal market worth it? Possibly, but without evidence as to the impact of the market on some of the non-financial costs and benefits, such as quality of healthcare, the answer is some way off.


1 Propper C and Soderlund N. Competition in the NHS: an overview of its effects on hospital prices and costs. Health Economics 1998; 7:187-197.