NHS internal market

Although the Thatcher government was slow to reform the NHS, following the 1983 Griffiths report,^[1] from 1988 it began to apply the principles of New Public Management vigorously across the welfare state. The plan was to decentralize decision making and introduce competition, with the state becoming a purchaser, rather than a provider, of welfare services.^[2]

The setting up of the market required the establishment of a system of Payment by Results and the formulation of a national NHS Tariff to complement the funding formula devised by the Resource Allocation Working Party. The Tariff includes a weighting system, the market forces factor, which pays providers in high-cost areas – principally in London – enhanced fees. In 2019 it was decided to reduce the London weighting.^[3]

The internal market initially established NHS trusts, in five annual waves, as separate bodies, splitting purchasers from providers. Until they became trusts the providing organisations were called directly managed units. The trusts had boards with non-executives, analogous to company boards, and business people were encouraged to serve on the boards. The Act also established GP Fundholding, a scheme whereby individual GP practices could take over the management of hospital services for their patients. Fundholding was abolished by the Labour Government in 1997/8. The Labour Party had campaigned against the internal market,^[4] but did not abolish it,^[5] though Tony Blair told the Labour Party conference in 1999 that the dreaded Tory internal market was finally banished for good.^[6] It introduced primary care groups, which were soon converted into primary care trusts—"thereby universalising fundholding while repudiating the concept."^[7]

Julian Le Grand was one of the chief proponents of quasi-markets influencing the Blair governments.

The fundamental concept was that patients would choose between different providers, money would follow the patients and so the best hospitals (there was never any choice of community health services) would prosper. It was never explained what would happen to the less successful institutions. As Kenneth Arrow explained in his famous 1963 paper, Uncertainty and the Welfare Economics of Medical Care^[8] "A competitive healthcare market is grounded in the expectation that some hospitals or surgeries will go bust". No hospitals did go bust, and only a minority of patients, mainly those needing elective surgery, were in a position to exercise choice between providers. Furthermore, as Arrow explained, "In practice, the theoretical advantages of choice are outweighed by the fact that people don't do a good job of making these choices in a competitive environment—it's almost impossible."^[9]

In lieu of commercial failure, health and social care service regulators were established, first the Commission for Health Improvement, which was replaced by the Healthcare Commission and then the Care Quality Commission.