News from nowhere

The rhetoric of reform in the NHS has always sold the internal market as the key to health and efficiency. But what kind of market is it?

Until recently everyone — and especially the NHS Executive — had assumed it was a market just like the one you would find if you went shopping in any High Street. That is, a retail market where there are plenty of buyers, plenty of sellers, the price of a good has been set in advance and is openly displayed, and shoppers can choose either to take it or leave it.

The belief that the internal market in the NHS is basically just another retail market has driven the NHS Executive’s thinking on both how to stimulate competition and how best to regulate it. Hence the persistent efforts by the NHSE to have trusts set prices openly on the basis of uniformly imposed accounting rules.

But recent work by Diane Dawson of Cambridge University argues that the NHS Executive should think again. The developing health care market has little in common with retail markets, since it is characterised by very few buyers (health authorities and GP fundholders), few sellers (the trusts) and a high proportion of fixed costs.

These features are far more typical of what economists call ‘industrial markets’, like those found in the manufacturing and service sectors. Price-setting in a industrial market emerges through negotiation and is likely to be secret and unique to each buyer. Far from open pricing being a pre-requisite of competition the reverse is true, with competitive pressures restricting price information.

Not only does this pose a problem for the Executive, which had hoped to use market prices in resource allocation formulae, but it may also give local purchasers a headache.

Department of Health economists looked uncomfortable when Dr Dawson gave her paper at a recent academic meeting. Uncharitable observers suggested they may never have covered industrial markets — since it is a final year option in many economics degree courses.