The New Market

In a nutshell, the new NHS market is used allegedly to promote competition on the basis of quality not price. The old 1990s internal market is characterized by New Labour as having promoted price competition. This in turn supposedly led to a stress on ‘widgets’ – quantity, but only at the margin, in order to get extra deals – rather than quality, and also led to corner-cutting. There is evidence (Propper et al., Reference Propper, Burgess and Green2004) that the less successful competitor Trusts in the old market exhibited worse clinical outcomes (presumably as they cut costs to compete). There is also evidence that competition was wasteful and counter-productive on the occasions when it genuinely occurred, with purchasers moving contracts without evidence of benefit (Paton et al., Reference Paton, with Hunt, Birch and Jordan1998). Yet there is also evidence that, in general, competition did not occur (except as a new name for the type of reconfiguration of services which had always happened), as the excess capacity to make it possible was forbidden by the government – running a Janus-faced policy (Paton, Reference Paton1995). In the end, the old market was abolished long before Labour made its 1997 promise to abolish it – except for the purchaser/provider split which Labour did not abolish but deepened (Paton, Reference Paton, Sausman and Dawson2005). New Labour’s big idea, not original but important, was clinical governance and quality. The question now is how this is compatible with the new market.

The new market’s analytics are contained in the ‘payment by results’ policy (PBR), which eschews price competition by setting a national tariff (with regional adjustments) at national average cost for clinical treatments grouped into Healthcare Resource Groups (HRGs.) This has an equivocal message for quality. Where services at higher cost/price and quality are desired by purchasers (commissioners), this is prohibited: the tariff is the tariff is the tariff (except when it is not – i.e. when political intervention alters its effect). This is a dangerous situation when the tariff may be plain wrong, and there is evidence that some specialized services are wrongly costed/priced (the same, since price is set at average cost). As a result, Trusts – especially Foundation Trusts, with marginally more freedom – may disinvest in needed services: if this happens by market decision rather than in a strategic framework or as part of a plan, then holes may appear in the NHS menu of services.

What the new market seeks is ‘the maximum quality compatible with the price set by the tariff’. If provider Trusts are in a competitive local or regional market and ‘need the business’, then the complementary policy of patient choice will allegedly force them to cut costs (if they need to) to tariff, or below, and maximize quality to the extent necessary to attract patients.

If they want to cross-subsidize services, which the tariff deems expensive, Trusts will have to cut costs below tariff for other services. Thus, there will be a tension between cutting costs and promoting quality – which, if actors are rational, will be resolved by factors such as the degree of ‘consumerism’ in the local population. Where this is less (i.e. where ‘the public wants what the public gets’), trusts will get away with murder, hopefully not literally. And if they do not want to cross-subsidize (e.g. to protect specialized services where the tariff is arguably wrong), then the danger of omission will arise as argued above.

History is repeating itself from the 1990s in one major way. Foundation Trusts are being fed the rhetoric of self-determination – that they may decide their service mix, within limits decided in practice by ‘the economic regulator’, Monitor. Thus, the whole of the NHS may be less than the sum of its parts, as just argued. But, more than this: to run a market means excess capacity, so that providers can quickly react to demand (given that hospital services are not bananas or umbrellas – they take time to develop). In the language of transactional economics, there is a problem with asset specificity.

Yet, as in the 1990s, hospitals are, as we speak, being ‘stripped out’, to make them lean and mean market machines (the real agenda for Foundation Trusts. …forget the hypocrisy about stakeholding). So where will the capacity come from? The government would argue, ‘from the Independent Sector Treatment Centres (ISTCs) and other market entrants’ (mostly at the point of the government’s gun rather than commissioner choice). The problem is that the new competitors can only be afforded by the said ‘stripping out’ in the traditional NHS. To complain of this is not to be sentimental, or to exhibit Blair’s dreaded symptom, that of being the ‘forces of conservatism’. What it means is that there is no genuine competition, but a rigged market.

As the cream is skimmed by ISTCs and others, fixed costs left in the NHS hospitals (even after ‘stripping out’) cannot easily be spread over the more difficult and specialized services, plus the flood of emergencies. When another factor occurs, we have the ‘double whammy’: already, the government is cutting the tariff, service by service, to add to existing ‘efficiency savings’, a neologistic misnomer for arbitrary economies. As a result, good hospitals will be ‘slashed and burned’ and good services will be lost. The tariff for certain categories of specialized services, in particular, is too crude to account for the most complex case-mixes. And it is deliberate policy to reduce ‘price per HRG’ over time – overtly to put pressure upon hospitals’ costs but surreptitiously to ‘square the circle’ of need or demand and available resources. To give an example of the latter: for 2006–07, emergency ‘over performance’ (i.e. demand at the hospital portals which commissioners or GPs have been unable to control) is to be reimbursed at ‘half-tariff only.’

Even worse, some hospitals are in financial deficit not through inefficiency but through inadequate reimbursement for the workload they cannot control. In general, Strategic Health Authorities (SHAs) – the ‘internal NHS regulators’ – insist they do this work, thus de facto encouraging Primary Care Trust purchasers (PCTs) to ‘game the system’. And, absurdly, SHAs then seek to broker money to the hospitals in deficit through ‘top slicing’ from the PCTs (i.e. cutting their budget) – which the PCTs promptly pass on to the hospitals in reduced income. Whether this is described as ‘politics’ or the Gods making mad those whom they wish to destroy, it is certainly not a transparently regulated market.

To this bilious mix, let us fold in consumerism. Which providers will (increasingly well-informed) consumers find attractive – those being cut to the bone, with lengths of stay slashed and ‘no frills’ service, on the one hand, or jerrymandered new market entrants? It seems obvious that they will choose the latter (which are good at marketing themselves but with unproven clinical quality) but if we are to have a market, we have to at least get the NHS to the starting line.

Visible hand or invisible fist?

The new NHS market is clearly not a competitive market guided by Adam Smith’s invisible hand. This need not be a criticism. Just as some textbook idealists had aspirations for a ‘quasi-market’ in the 1990s, the new market might be defended as an attempt, in a different way, to combine ‘animal spirits’ and altruism.

The trouble with the old 1990s version was that government could not make up its mind if its ‘regulation’ (then internal regulation, by government and its minions in the Regions of the NHS) was intended to dampen down market forces (good old-fashioned political management) or to stimulate them (to put the market into ‘quasi’, as it were). This led to the absurdity of hospitals being ordered to compete and collaborate at the same time, even at the level of individual specialties

Now, the rhetoric is marginally more sophisticated. We are told that, in mature ‘industrial’ markets, both competition and collaboration occur – and that market actors can gradually sort out for themselves where and when they do each (improving on the old market’s political confusion, in which action was in response to temporary political orders, each incompatible with the last). Good so far. But can ‘they’ keep the politics out? A few straws in the wind suggest that a politics-free zone is like Gandhi’s take on Western civilization – a good idea, but it’ll never happen.

Julian Le Grand (Reference Le Grand2003) has suggested that altruism and self-interest (co-existing within key NHS actors as well as differently distributed across different groups such as doctors and managers) may both be moulded into a market framework to benefit a (presumably altruistically defined) NHS. The problem is that this ticklishly difficult combination assumes that ‘politics’ sets up the perfect model and then benignly withdraws. I contend, however, that the invisible fist – which uses fragments of economic logic as a fig leaf for ‘informal’ but determinant political and bureaucratic power – is the basis for decision-making as to (provider) service reconfiguration and (purchaser/commissioner) behaviour – just as in the 1990s. The main difference now is also political rather than economic: New Labour (unlike the Conservative Secretary of State for Health who designed the 1990s reforms, Kenneth Clarke) believes its own rhetoric. This leaves idealists like Le Grand disappointed whenever they brush with power. Le Grand was surprised in the mid-1990s when he apprised the reality of ‘market management’ (i.e. Regional politics, acting with national blessing) to protect services which were falling through the market’s cracks, in the then West Midlands Region. ‘But that’s terrible – we’ll never know if the market worked or not!’ (Conversation with the author, Keele University, September 1994). As his own market prescriptions today (he advised the Prime Minister on health policy from October 2003 to 2005) are merged into a cocktail of contradictory policy prescriptions leaving a confused patient (the NHS) distinctly queasy, he must be experiencing a similar frisson.

Today, ‘politics’ is already shaping the English NHS according to an agenda very different from that eulogized by the marketeers. Firstly, the external and internal regulators – i.e. Monitor and the Strategic Health Authorities (SHAs) respectively – struggle to help each other. Monitor gets ‘the books balanced’ (for most hospitals, not just Foundation Trusts, on the grounds that Monitor is the agency charged with developing NHS Trusts into Foundation Trusts). Monitor seeks financial viability on an individual Trust basis, rather than for wider health economies as part of a broader strategy – which makes for fragmented service planning. The SHA, in turn, loses some direct influence, but of the sort it found awkward in the first place – i.e. strategically managing the area for which it was responsible, rather than the easier task of ‘performance monitoring’ the Trusts and PCTs in that area. And the SHA can hide behind Monitor’s skirts in enforcing the political and personnel changes it wishes to make in Trusts, the pretext for which has hitherto been elusive.

Secondly, Monitor, by seizing centre stage and political power as well as ‘economic regulation’, will then have to manage the ‘market’, not just regulate it. SHAs, as all Trusts gradually become Foundations (i.e. formally external to the NHS ‘lines of control’ and therefore responsible to the external regulator, Monitor, rather than to the SHA), will yield to Monitor over time. It was intended that SHAs, themselves merging into pale replicas of the old English Regions, would also yield interventionary powers to the new ‘strategic’ Primary Care Trusts (PCTs), post-2006. However, in 2006, the Secretary of State for Health backtracked on plans for radical as opposed to incremental mergers of PCTs – in reaction to backbench MPs and the Parliamentary (House of Commons) Health Select Committee, given the reduced parliamentary majority for the governing party. (Sir Nigel Crisp, the NHS Chief Executive and also Permanent Secretary to the Department of Health, two roles he has admitted to be barely compatible, was forced to resign on 7 March 2006, in part because he ‘carried the can’ for a Ministerial policy which now embarrassed Ministers.) Backbench MPs tend to see ‘their’ local PCTs as symbols of their influence – in US terms, ‘the bacon which they have brought home to their districts.’ It is, however, symbolic and indeed indigestible bacon, as the most notable role for local PCTs has been to seek to lengthen local waiting-times for operations in order to postpone financial crisis.

The idea of larger, ‘strategic’ PCTs was that they would be relieved of direct commissioning in order to promote ‘Practice-Based Commissioning’, which devolves commissioning to groups of GPs (borrowing from the 1990s policy of GP fund-holding). The PCTs are still intended to manage ‘non-contestable services’ (such as Accident and Emergency networks and specialist services). Yet even larger PCTs are too small-scale to do this, and, in any case, their record in this regard is poor in the extreme.

The newly merged ‘strategic’ PCTs are also to set increasingly local standards, which is a major conflict-of-interest as they hold the purse strings and have the power to pressurize hospitals but not the responsibility to provide effective services. According to ‘Commissioning a Patient-led NHS’ (Department of Health, 2005), Primary Care Trusts were to have been stripped of their provider function. This made sense if knavery rather than knightly behaviour (in Le Grand’s, Reference Le Grand2003, terms) were considered to rule – i.e. there was a conflict-of-interest between commissioning and provision. The trouble is that knavery did not prevail as a matter of course but was promoted (as in the 1990s, the culture of which was still lingering) by a constant stress upon markets and contracts rather than trust and cooperation.

Given the fact that pro-market health advisers had Prime Minster Blair’s ear (and that of the Secretaries of State for Health under New Labour after Frank Dobson was replaced by Alan Milburn in 1999), ‘cooperation’ within local health economies (despite being encouraged officially) was mistrusted in reality (for example, former Ministerial and Prime Ministerial health adviser Simon Stevens (Reference Stevens2005) suggested that ‘integrated health economies’ would involve collusion by doctors.) This ‘smoke and mirrors’ puts local health executives in an impossible position: when they cooperate, they fall foul of deliberately designed market incentives; and when they follow those incentives, they are blamed and even treated as scapegoats by the ‘meso-level political managers’ at the SHA for not cooperating.

And as a result of real as opposed to phony cooperation being dismissed as collusion, hospital Trusts were generally not to be allowed to be the basis for, or even a partner in, vertically integrated services (replicating HMOs), despite Kaiser Permanente in California impressing Ministers and despite this being a classic example of how to create a mature ‘industrial market’ rather than a naïve NHS ‘banana market’.

Finally, good old-fashioned command and control – or more accurately ‘kiss up; kick down’, in the vernacular used in US government – has had a premature obituary. Secretary of State for Health Alan Milburn announced its death in 2002 – in order to deny that the NHS after his 2002 reforms would be ‘Stalinist’. His successor Secretaries of State have continued to ‘kick down’, expecting the meso-level bureaucrats in the NHS to be partial fixers rather than ‘neutral’ regulators.

The visible hand is intended to be the new PCT-as-standard setter and regulator of commissioning. But the invisible fist is what rationalizes the four incompatible policy streams to have emerged from the ‘garbage can’ of recent health policy and still extant to various degrees. The four are: firstly, the old market, based on purchaser contracting; secondly, the ‘third way’ of local ‘collaboration’ (but at the point of a gun, as the collaborators fight like ferrets in a sack); thirdly, neo-‘command and control’, based on various targets promulgated down seriously ‘un-joined up’ vertical silos from the Department of Health; and, fourthly, the new market of patient choice underpinned shakily by ‘Payment By Results’.

Choice and Hirschman

Albert Hirschman’s (Reference Hirschman1970) classic little book was in essence an attempt by a renowned economist to do genuinely inter-disciplinary work between economics and politics, in language both elegant and accessible. He sought to explore when ‘exit’ and ‘voice’ – and particular combinations thereof – would have benign and perverse outcomes in different industrial, organizational, and political settings. Inevitably, the ‘choice debate’ in the English NHS has equated ‘market choice’ with ‘exit’ from providers; and pro-choice advocates such as Le Grand (Reference Le Grand2003) have genuflected briefly to Hirschman. The resulting analysis, however, has omitted some key considerations.

Firstly, competition – exit – may be intended (as Le Grand admits) to send a signal to sub-standard providers to help them improve. Yet it may work too quickly or too abruptly and close them down (or debilitate them, if closure is politically impossible). This is a real danger in the NHS, where the tariff under Payment-by-Results will (from 2006) cover the total cost/price of Trust services. ‘A fool learns from his own mistakes; a wise man learns from those of others.’ We had the chance to do the latter; but now others, abroad, will have a good case study of what not to do. The Department of Health thinks it has learned from other European, North American, and Australian systems of prospective reimbursement, but in fact has implemented on a scale which they (wisely) did not (as with the rash decision to let the tariff cover capital as well as revenue). This rash decision means that, in Hirschman’s terms, ‘exit’ by consumers and loss of full tariff may cripple a hospital too quickly to allow it to respond to market signalling. The effect may be enhanced if the hospital is undergoing a large Private Finance Initiative (PFI), i.e. using a private partner to finance development in order to keep government borrowing down. Market repayment rate to the private sector is about double that of the NHS internal ‘capital charge’, and loss of income at ‘full tariff’ may send the hospital into crisis rather than give it a useful signal.

Secondly, competition can comfort monopoly. If the more demanding consumers go elsewhere, Trusts can have a quieter life, as long as their market contains enough uncompetitive elements and they retain enough services to be viable at all. If Trusts seek ‘break-even’ rather than surplus – as they do – this may be particularly compelling.

Thirdly, competition may be a zero-sum game. This was a compelling lesson from the old NHS market. As in the old market, patients may move from Provider X to Y while simultaneously patients move from Y to X – to no discernible benefit in either health outcomes or patient satisfaction (indeed, choice may make you miserable). What is more, commissioners are actually only purchasers: that is, they negotiate deals rather than craft new services cooperatively. And even that only occurs if we are lucky: most of them are retrospective ‘contract-breakers’ who agree ‘service-level agreements’ with providers as part of the so-called NHS budgetary process, and then seek to renege on these at the end of the financial year (I speak as the Chairman of one of the country’s largest Acute Trusts for more than five years).

Local commissioners will have little ability to be ‘market makers’, despite the glib rhetoric. It is not just a question of ‘further development for commissioners’, the tired (and arguably self-serving) old mantra of many health analysts and consultants who are too ingenuous about each cycle of health reform: it is instead a question of how patient choice will be reconciled with purchaser choice. The two together create local conflicts, which are already summoning the invisible fist rather than the transparent regulatory hand. Political amnesia (which forgets even the last decade) combined with academic naivety is a dangerous thing.

Fourthly, price and quality have different elasticities. Those who would tolerate price rises may exit at the drop of a hat due to a small decline in quality. In the NHS consumers do not pay (at the point of use), but they may exit quickly, to the private sector, and may fail to return even if the private sector’s quality also declines (since they have invested both economically and psychologically in the change). Thus, the political legitimacy of the NHS – and the economic viability, as willingness to pay taxes for unused services falls – may decline.

This does not mean that ‘voice’ has been effective in the NHS – I think Le Grand is right that it has not. Indeed initiatives to increase consumer or citizen ‘voice’ (such as ‘Patient and Public Involvement’ since 2002) have been at best marginal and at worst diversionary. But Hirschman’s key insights are around perverse outcomes associated with different combinations of voice and exit in different circumstances. For example, if some ‘exit’ (from a provider) leaving only those who refuse to exit out of loyalty, the latter may be the wrong constituency to promote change or innovation. As in education, ‘sink hospitals’ serving those who do not exit through commuting may stagger on – because they have to – just as ‘sink schools’ are left behind by the brave new world of Blairite ‘choice.’

To conclude: firstly, more rigorous examination of ‘choice and voice’ is required if the latest NHS reforms in England are not to end up in the dustbin of history, as with the reforms in the 1990s. Secondly, the centralist political culture of the NHS is deeply entrenched, and buttressed by both structural aspects of the British political system and now (ironically) the ‘post-modern’ style of policy making which makes the ‘eye-catching central initiative’ both ephemeral and yet endemic. In this environment, reconciling a ‘devolved market’ with public accountability for a centrally funded service may be to enter the territory of the oxymoron.

In the 1990s, ‘managed competition’ had the choice of becoming either management or market. The Conservative Government reluctantly chose the former. New Labour boasts that ‘the main difference between the Tory reforms in the 1990s and us is that they “bottled out”’ (meaning that they lost their nerve) (Paul Corrigan, now the Prime Minister’s Health Advisor, made this claim in 2003 when Special Advisor to the Health Secretary). New Labour Ministers are desperate to show that there is a ‘third way’ (although they have dropped that Clintonesque phrase); that ‘regulated competition’ in a public service is the answer.

Whether or not they ‘bottle out’, I think they are wrong. Reconciling the conflicting policy strands in today’s English NHS means either the victory of public planning or the decline of the NHS as a public service. The trouble is that, in the structure and culture of the English NHS today, public planning has to be done by the backdoor, enforced by the invisible fist. It therefore lacks both consistency and legitimacy. It need not be so. The government could admit that ‘commissioning’ is a fudge, with service planning and ‘purchasing’ merged to the detriment of the former, and institute effective service planning. Planning is a frightening word for New Labour, with its New Right connections, but service planning at the regional level can relieve the centre of its need to control so obsessively. The trouble is that Regional Health Authorities were abolished by the Conservatives in 1996, to be replaced by more ‘on message’ Regional Offices, in turn abolished by Labour in 2001. The cultural question is: can New Labour give up its ‘control-freak’ tendency? Don’t bet your mortgage on it!