RESTRUCTURING THE NHS AGAIN: SUPPLY SIDE REFORM IN RECENT ENGLISH HEALTH CARE POLICY

Financial Accountability & Management, 25(4), November 2009, 0267-4424

RESTRUCTURING THE NHS AGAIN: SUPPLY SIDEREFORM IN RECENT ENGLISH HEALTH CARE POLICY

PAULINE ALLEN∗

INTRODUCTION

As Lapsley (2008) argues, one of the key aspects of New Public Management isthe preoccupation in English government circles with structures and structuralchange. Despite the fact that there is little evidence to suggest that such changescan alone transform the efficiency and effectiveness of public organisations,he points out that structural change often represents a policy of first resortbecause it is easy to devise and it makes it look like the government is doingsomething. One of the notable strands of structural change in England has beenthe introduction of market-like structures. The NHS is a prime example of apublic service in which an internal market was created (Le Grand et al., 1998).One of the more recent aspects of market-like policy in respect of the NHS isthe growing emphasis on increasing the diversity of types of organisations whichprovide healthcare to NHS patients.

While it is not a new idea for English healthcare to include provision of servicesby independent organisations, being either profit-making or not for profit,1 overthe last five years or so there has been a marked shift in government policy toreintroduce a wider diversity of providers available to NHS patients. The sixtyyear old consensus that the NHS should consist of publicly funded and publiclyprovided healthcare is being challenged. Restructuring of various aspects of theNHS is occurring simultaneously, and supply side changes are a key elementin the overall package. Instead of most services (with the notable exceptions ofsome aspects of sexual health and mental health) being run by publicly ownedbodies, there has been an explicit decision to increase the diversity of types ofproviders offering services to NHS patients.

This paper gives an account of how the government came to the point ofmaking further structural changes to the supply side in order to increase thediversity of providers to NHS patients. It will put the current changes in thecontext of previous market-like policies concerning the structure of the NHS.The paper then focuses on the supply side changes: analysing the objectives ofthis policy of increasing diversity, how it is being carried out and the challenges

∗The author is from the London School of Hygiene and Tropical Medicine.

Address for correspondence: Pauline Allen, Health Services Research Unit, London Schoolof Hygiene and Tropical Medicine, Keppel Street, London WC1E 7HT, UK.e-mail: [email protected]

C© 2009 The Author(s)Journal Compilation C© 2009 Blackwell Publishing Ltd, 9600 Garsington Road,Oxford OX4 2DQ, UK and 350 Main Street, Malden, MA, MA 02148, USA. 373

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this raises. I argue that the government is too optimistic about the benefitsof the introduction of a wider range of providers, and insufficiently concernedabout possible undesirable consequences of such changes for efficiency, qualityand accountability.

ENGLISH NHS REFORMS SINCE 1989

In order to understand the latest set of reforms, it is necessary to rehearsebriefly the salient aspects of the organisational history of the NHS of the pasttwo decades. This series of organisational changes demonstrates that, since theintroduction of the internal market, there have been ebbs and flows in the useof market like mechanisms in NHS organisational policy, while the hierarchicalcontext within which these experiments have taken place continues to be veryinfluential. Figure 1 sets out the relevant policy landmarks.

The NHS Internal Market of the 1990s

The NHS was established initially in 1948 as a hierarchical public organisation.However, by the late 1980s an internal market was seen by the government asthe best form of governance structure for the NHS. The NHS internal marketfeatures resembled those of the other reforms in the welfare state at the time (LeGrand and Bartlett, 1993). An internal market for community, secondary andtertiary health care was introduced by means of a split between the purchasersof care (health authorities and GP fundholders) and its providers. The providersof health care were constituted into ‘self governing Trusts’ (still publicly owned),who were supposed to compete with each other, thereby enhancing technicalefficiency (that is ensuring the greatest output for the least resources used, i.e.‘value for money’) (Department of Health, 1989). The system of annual budgetallocations was to be replaced with one based on negotiated contracts betweenpurchasers and providers.

The government’s reasons for the introduction of the internal market into theNHS were made explicit in Working for Patients (Department of Health, 1989).First was the desire to achieve better ‘value for money’ (Department of Health,1989). Proponents (such as Enthoven, 1985) contended that technical efficiencywas more likely to be achieved in a situation of competition between providersthan in a structure (such as a hierarchy) which effectively contained monopolyproviders. A second reason was that it would stimulate staff and professionalsto behave in a more responsive manner in relation to the needs and desires ofpatients (Department of Health, 1989). A third reason was that patients shouldbe given a greater choice of the services available (Department of Health, 1989).

Although the government did not fund any large scale evaluations of theinternal market, there is evidence to indicate that it was not entirely successful.As Tuohy (1999) points out, policy episodes successfully altering the fundamental

C© 2009 The Author(s)Journal Compilation C© 2009 Blackwell Publishing Ltd

RESTRUCTURING THE NHS AGAIN 375

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institutional mix and structural balance are rare: they need political will andauthority from outside the healthcare arena, and then the internal logic ofthe system will affect the implementation of the policy change. Although statehierarchies can make abrupt strategic changes, they are vulnerable to problemsof delay. In the case of the NHS internal market in the 1990s, the establishedlogic of hierarchical corporatism blunted the effects of the market. Thus, the keyto understanding the NHS internal market is its institutional context. Analysisof this demonstrates the enduring nature of the hierarchical nature of the NHSduring the internal market period, as opposed to any marketised elements (Allen,2002b). Research concerning efficiency in the internal market does not provideany convincing evidence that efficiency was, in fact, improved by the introductionof the new structures (Le Grand et al., 1998). Responsiveness and choice forpatients were not significantly improved. Institutions (health authorities andfundholders) were the purchasers, acting as agents for patients. Studies find thatincentives operating on purchasers did not have the effect of aligning purchasers’goals with those of patients (Propper, 1995; Flood, 1997; Fotaki, 1998; Le Grandet al., 1998; Enthoven, 1999; and Allen, 2002a,). One of the reasons researchershave identified for this lack of success was that the incentives to behave inmarket like ways were not strong enough, and the hierarchical elements of theNHS continued to exercise control (Enthoven, 1999; Tuohy, 1999; and Allen,2002b).

New Labour Policies Since 1997

The internal market is the baseline against which subsequent reforms shouldbe understood. The early indications following New Labour’s election victory inMay 1997 were that, despite a softening of the rhetoric about competition andmarkets, there would be a continuing commitment to the purchaser/providersplit (Allen, 2002b). As Tuohy (1999) argues, New Labour ‘went with thegrain’ and retained the internal market structures. This demonstrates both anideological change in the Labour party and the extent to which the internalmarket had become entrenched as key participants accommodated to and shapedthe reforms in the process of their implementation. In place of GP fundholdersand the health authorities, smaller locality-based purchasers were created knownas primary care trusts (PCTs) (Allen, 2002b). After an initial period when theNew Labour government emphasised the need for purchasers and providers toco-operate within a re-integrated public service, a series of new policy initiativesare now moving towards a more overtly marketised system. Attempts to focus onstandards and modernisation coupled with the use of centrally defined targetsand performance management were tried out, but, especially since the generalelection in 2001, by an increased emphasis on markets and choice (Allen andRiemer Hommel, 2005; and Hughes and Vincent-Jones, 2007). This can be seenas an example of how structural reforms lead to further reforms ‘in slightlydifferent guises’ (Lapsley, 2008 p.84).



The latest set of structural reforms in the NHS can be seen as a response towhat is perceived as the failure of the hierarchical model in the early New Labouryears, combined with a particular form of learning from the deficiencies of theConservatives’ internal market of the 1990s. The notion of markets as a coremechanism for improving public services, and health services in particular, hasnot been abandoned. Indeed, the objectives of the internal market of the 1990sare being re-articulated through a set of more radical restructuring reforms.The government is trying to take account of the failures of the internal marketstructures, particularly in relation to motivation and incentives on the supplyside. The re-emphasis on markets as a motor for improvement is encapsulatedin ‘four inter-related pillars of reform’ which ‘are designed to embed incentivesfor continuous and self sustaining improvement’ and produce ‘better quality,better patient experience, better value for money and reduced inequality’ (DH,2007c). These are: ‘(i) Demand side reform – more choice and a stronger voicefor patients; (ii) Transactional reform – money following patients, rewardingthe best and most efficient providers, giving others the incentive to improve;(iii) System management and regulation – a framework of system management,regulation and decision making which guarantees safety and quality, fairnessand equity; and (iv) Supply side reform – more diverse providers, with morefreedom to innovate and improve services’ (DH, 2007d).

New Labour’s Return to Markets

The first three of these policies will be summarised briefly here in order toexplain the context in which supply side reform policies are set. Fuller accountscan be found elsewhere (e.g., Hughes and Vincent-Jones, 2007; Allen and RiemerHommel, 2005; and Allen, 2006).

(i) Demand side reform: Enhanced patient choice is a key feature. NHSpatients awaiting referral to hospital can select from four or more options,one of which must be an independent provider (DH, 2005b). The roleof PCTs is not to direct patients to particular providers, but to offer achoice amongst local NHS hospitals, NHS Foundation Trusts (see below),and Independent Sector Treatment Centres (see below). Patient choice isdesigned to empower individuals and to act as a mechanism to improveservices, as patients are thought likely to avoid under-performing hospitals,and the prospect of losing funding under Payment by Results (see below)should create incentives to improve quality and access times. Choice entailsthe growth of a more diverse supply market because, in order for real choiceto be available, there will need to be an expansion of provider types andcapacity.2

(ii) Transactional reform: A national tariff of fixed prices for procedures, basedon health resource groups (HRGs) to pay both public and independentproviders is being introduced (DH, 2007d). It is called ‘payment-by-results’


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(PbR), which is a misnomer, as it is actually payment by activity. The ideais to shift the emphasis to competition based on quality and to sharpenincentives, as each episode of care reimbursed (or lost to another provider)is charged at national tariff rates, which are average costs. PbR is expectedto cover about 90% of NHS inpatient, day-case and outpatient work inEngland by 2008.

(iii) System management and regulation: In addition to the continuing roleof the hierarchical system run from the Department of Health throughperformance management, the regulation of this system is increasinglycarried out by a series of arms length agencies.3 From the perspective ofthe current reforms, the most important agencies include the HealthcareCommission (formerly the Commission for Health Improvement), whichhas a broad range of responsibilities concerning the quality of care. Theseinclude inspection of both public and independent providers; registrationof independent providers and publication of annual performance ratingsfor all NHS organisations (Allen and Riemer Hommel, 2005). The otherimportant new regulator is the independent regulator of FoundationTrusts (see below) called Monitor. Monitor authorises Foundation Trustsand specifies conditions about borrowing limits, permitted income fromprivate treatments, the range of goods and services that can supplied, andrequired financial and statistical information (Allen, 2006). There is a largenumber of other agencies dealing with functions such as patient safety andpharmaceutical licensing.4

Having described three of the four pillars of reform, the focus of the rest ofthe paper will be on the restructuring of the supply side of the NHS.

SUPPLY SIDE RESTRUCTURING OF THE NHS: THE OBJECTIVES

The current NHS supply side reforms represent an attempt to increase thediversity of providers of care to NHS patients. In this context, diversity meansthat providers will not all be publicly owned. They can be independent: in theform of for-profit or not for profit third sector organisations (TSOs). In anattempt to mimic some aspects of TSOs, diversity will also include some publiclyowned organisations (Foundation Trusts – see below), which have had theirgovernance arrangements changed so that they can operate more autonomouslyfrom government control.

As discussed above, the supply side restructuring is part of a package of reformswhich it is envisaged will be implemented simultaneously (Klein, 2006). Theoverall aims of the current restructuring resemble those of the internal marketwhen it was introduced in the 1990s. Although not all of the structural reformsare the same, the underlying idea is to move to a more market-like system inwhich competition will improve both efficiency and quality of care, including



responsiveness to patients. Competition will be somewhat different under thelatest structures: instead of the negotiated prices of the internal market, nowthere will be fixed prices; there will be hard budget constraints on providers; andthere will be different types of providers, whose motivations and incentives willbe different. On the demand side, there will also be patients making choices, aswell as their agents.

Efficiency

Supply side reforms are being introduced in order to increase competition, andthereby, it is thought, efficiency. In many parts of the world it is thought thatindependent providers have some desirable characteristics as it is thought theycan be more technically efficient than the public sector (Preker et al., 2000;and Vining and Globerman, 1999). This view of independent providers as moreefficient is based on the fact that the incentives for providing services at lowercosts are stronger outside the public sector, especially where there is a profitmotive and surpluses can be distributed to owners of the business.

Quality

The restructuring is also aimed at improving quality of care. There is someevidence about improvements in quality: recent evidence from the USA indicatesthat competition under fixed prices may produce increases in the quality ofcare (unlike under negotiated prices which appear to be associated with falls inquality) (Zwanziger et al., 2000).

Responsiveness to Patients

A further objective of the current restructuring policies is to increase providerresponsiveness to patients’ needs. Non-profit TSOs are thought to be particularlygood at this (DH, 2006a). This is because they are businesses with primarilysocial objectives, whose surpluses are reinvested. Due to their ‘intrinsic’ socialmotivations they may be more effective in mobilising ‘prosocial behaviour’ thanfor-profit private enterprises (Bartlett, 1996). While for-profits may seek tocut quality in order to save costs and raise profits, the TSO with its non-distribution constraint has less incentive to seek commercial gain from qualityreduction (Francois, 2002, quoted in Bartlett et al., 2007). There is evidencethat, as TSOs are often client-led they find it easier to respond to client needs(Weisbrod, 1988). There is some evidence that user satisfaction is greater inthe case of TSOs (Sheaff et al., 2004; and Pollock et al., 2007). Furthermore,TSOs can introduce new methods of working and new services, and stimulateinnovation among other providers, including the public sector (Bartlett et al.,2007).


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SUPPLY SIDE RESTRUCTURING IN THE NHS: RECENT POLICY DEVELOPMENTS

NHS Foundation Trusts

The first reform to the supply side has been the introduction of NHS FoundationTrusts (FTs). It is intended that all NHS hospital Trusts will eventually becomeFTs.While FTs are not independent providers, as they are still owned by thestate, they are included here because they represent a new, more autonomousorganisational form designed to mimic aspects of TSOs and to increase thediversity of provision at local level. The aim of the new governance regime forFTs (as opposed to ordinary NHS Trusts) is to change the balance between thecompeting goals of autonomy and accountability (Davies, 2004) to tip it further infavour of autonomy, although the membership structure is also meant to increaselocal accountability to make up for lower levels of accountability upwards. Policymakers believe that FTs will both enhance local democracy and improve localservices (DH, 2005c).

Unlike ordinary NHS Trusts, FTs are no longer directly accountable to theSecretary of State for Health and are not performance managed by StrategicHealth Authorities. Moreover, people local to the FT and FT staff have the rightto become members and vote for a board of governors. The governors appointthe chair of the board of directors and non executive directors. The board ofgovernors is meant to work with the board of directors in setting the strategicgoals of the FT. Compared to NHS Trusts, FTs have greater freedom to spendtheir income. FTs are allowed to make independent investments by formingcompanies or acquiring membership in corporate bodies. Also, they do not needto break even, year on year, and can keep surpluses they accrue. FTs can borrowmoney from whom they wish. But the borrowing limit for each FT is still set byMonitor and not all assets may be used as security.5 There is no good evidencecurrently available about how FTs are operating compared to other NHS trusts(other than their financial outcomes, which are reported by Monitor).

Not for Profit Providers: The Rise of Social Enterprise

One of the important strands of supply side reform is the policy that, in additionto the for profit sector, commissioners should engage with new providers fromthe ‘third sector’ (social economy) including local voluntary groups, registeredcharities, foundations, trusts, non-profit social enterprises, and cooperatives(DH, 2006b). As stated above, the aim is to develop the entrepreneurial impulsewithin health and social care, encourage entry of new providers, improve quality,and promote innovation. There is special interest in supporting the entry of newsocial enterprises and the DH Social Enterprise Unit has identified a number of‘pathfinder’ social enterprises as demonstrator projects.

Third sector organisations (TSOs) are to play an important role since theyare often client- and community-led (DH, 2006b). There are about 35,000 TSOs



in England providing health and social care services valued at £12bn, while afurther 1,600 plan to enter in the near future (DH, 2007a). Most provide servicesin the fields of mental health, disability, learning difficulties, or long term care.

For Profit Providers: Independent Sector Treatment Centres

For some years now, independent for profit hospitals have carried out smallamounts of surgery for NHS patients. The inception of the reforms discussed herehas been marked by a large increase in the use of for profit providers, mainly todate in the form of independent sector treatment centres (ISTCs), which are setup to carry out NHS work (HCHC, 2006a). As Hughes and Vincent-Jones (2007)report, ‘ISTCs came into being against the background of long NHS waitinglists and pressure from clinicians to separate acute and elective work to improveelective surgical throughput.’The first wave of ISTCs was commissioned centrallyby the DH in 2002. These amount to over 40 centres. Central government’s aimwas that ISTCs would undertake half a million procedures per year by 2008,amounting to about 15 per cent of NHS elective activity. In fact, fewer wereundertaken.

Diversity in Provision of Primary Care

In addition to the changes to hospital and community service providers outlinedhere, there have also been changes to the provision of primary care. For theduration of the NHS, primary care has been mainly provided by GPs, who areindependent contractors. A national contract for all GPs has been negotiatedon their behalf by their trade union, the British Medical Association (BMA,2008). Recently, policy announcements, and local implementation, have endedthe monopoly of provision by these independently contracted GPs, so that privatecompanies can provide GP services (Greenhalgh et al., 2000). Moreover, therehas been an emergence of ‘alternative providers’ offering new forms of firstcontact treatment, such as clinics in supermarkets, and more flexible contractingarrangements for primary care services (DH, 2006a).

SUPPLY SIDE RESTRUCTURING IN THE NHS: CHALLENGES AND OBJECTIONS

The policy of increasing provider diversity is controversial with unions repre-senting healthcare workers and has attracted concern from some politicians.For example, two select committees of the House of Commons have institutedinquiries into different aspects: the Health Select Committee on ISTCs (HCHC,2006); and the Public Administration Select Committee on commissioningservices from TSOs across all sectors, including healthcare (HCPAC, 2007).

The evidence from academic theory and empirical research also raisesquestions about the likelihood of provider diversity delivering the objectives


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of increased efficiency, quality and responsiveness. As Le Grand et al. (1998)set out in their evaluation of the Conservatives’ internal market, these threeconcepts are derived from an economic theoretical framework which is primarilyconcerned with efficiency but also with the tradeoffs between efficiency, on theone hand, and quality of care (including responsiveness to users) on the other.Given that the NHS is a publicly funded service, accountability of providersnot only to individual patients but also to the tax payer is also of centralimportance when evaluating any restructuring of the NHS. Accountability forthe use of money spent is a basic requirement, but accountability for quality isalso important. Moreover, as one of the espoused values of the NHS (DH, 2009)is equal access for all, this is another important criterion on which to assess thesuccess of the introduction of diverse providers to the NHS.

Efficiency

Dealing first with efficiency. While at a system level, there is some evidencefrom the US that increasing diversity of providers may well decrease costs ofeach provider (Dranove and Satterthwaite, 2000), it is probably not the typeof provider which makes the difference to efficiency, but the market conditionsunder which competition is increased. Evidence on performance and average costdifferences between for-profits and TSOs in the health sector is mixed and it islikely that the level of competition which all organisations face is more importantthan the ownership of the organisation (Sloan, 2000). There is no convincingevidence in the health care sector that for profit organisations are more efficientthan TSOs (Vining and Globerman, 1999). Moreover, there is another factorwhich may militate against for profit providers being more technically efficient:this is the issue of donated labour. Hart et al. (1997), in a paper about theprivatisation of prisons, argue there can be loss of donated labour from staffif they work in the private sector, rather than in TSOs or the public sector. Inservices where motivation to serve others is important and many aspects of thoseservices are not measurable, it is not possible to monitor and enforce all aspectsof caring. If staff work in for profit organisations, this motivation to donate labouris likely to diminish, as the benefits will ultimately be accrued by the owners ofthe business.

Furthermore, although there is some evidence from the public sector thatcontracting out reduces costs, much of the hard evidence about the benefits ofprivatisation turns out to be about the provision of relatively simple ancillaryservices and not health care itself (Vining and Globerman, 1999; and Hodge,2000), and even these reductions are not as large as was once thought (Hodge,2000). Crucially, in the case of privatisation, Hodge (2000) states there is noclear evidence about the quality of services which have been contracted out –cost savings may have reduced quality, but this is not known. The same concernsabout the effect of contracting on quality have been voiced in respect of theincrease in competition in the hospital market in California. It is not clear if



price competition (in that situation) has reduced costs by increasing efficiencyor reducing quality (Zwanziger et al., 2000). Even in the current English system,where price competition is not allowed, it is possible that contractors will increasetheir returns by lowering their costs, which may affect unobserved aspects ofquality (Burgess et al., 2005).

The current evidence about ISTCs is instructive about the complexitiesof introducing for profit providers into a system with public providers. TheDepartment of Health (as opposed to local PCTs) led procurement programmefor ISTCs has been controversial. There have been complaints from local NHSareas that the siting of the new centres was not sufficiently sensitive to localfactors and there was insufficient local demand in some areas (HCHC, 2006).The money to pay ISTCs comes out of local PCT budgets, and where ISTCs havenot been fully used, there has been a waste of NHS money because payment wasmade (for the first wave) on a block basis, with no refunds for reduced volumes ofcases. In a zero sum game for local PCTs, this means there is less money availablefor NHS providers. Moreover, the House of Commons Health Committee notesthat insufficient information has been provided by the government for the publicto judge if the ISTCs are good value for money (HCHC, 2006). This is a concerndespite the fact that the then Commercial Director of the Department of Healthtold the House of Commons Health Committee that prices were much lower thanin the spot-purchase market for elective surgery (HCHC, 2006): they may stillbe significantly higher than the NHS tariff under Payment by Results. Moreover,there have also been concerns about the quality of care provided in these centresas the initial policy mandated that the staff used must not also work in the NHSproviders. The government addressed this concern in its response to the Houseof Commons Health Committee report (Secretary of State for Health, 2006) bylifting this ban.

The literature on the economics of contracting indicates that the transactionscosts of contracting out healthcare will be significant. If these are taken intoaccount, the supposed increased efficiency produced by competition in a marketsystem is made more questionable. When contracting for a complex service, suchas healthcare, a range of contractual difficulties (Williamson, 1985) are likely tooccur. It is outside the scope of this paper to discuss these issues at length. Thereis an extensive literature giving detailed explanations of the effect of transactionscost economics on contracting for healthcare (e.g., Roberts, 1995; Ashton, 1997;Croxson, 1999; and Allen, 2002a). Briefly, these are difficulties in specifying whatis required, and problems in monitoring caused by asymmetry of information andthe complexity of services and also the ever present possibility of opportunism.Health care has a number of features which mean that the transaction costsof contracting are likely to be high. Transactions costs result from imperfectinformation, either about the other party involved in the exchange (asymmetricinformation) or about the future (uncertainty). Imperfect information meansthat it is costly to enter into contracts for the exchange of rights, since theparties will have to incur the costs of searching for a suitable trading partner


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and then negotiate and write contracts (ex ante transactions costs). It also makesit costly to monitor, enforce and renegotiate contracts (ex post transactions costs).Both types of transactions cost may be high, but when there is a high level ofuncertainty about relevant events there may be a trade-off between the two: thecosts of making contracts may be reduced by not attempting fully to specifycontingencies, leaving a contract incomplete and necessitating renegotiation(leading to ex post transactions costs) to accommodate events left out of thecontract. We would expect high transactions costs in health care since it ischaracterised by high levels of uncertainty and asymmetric information.

Moreover, health care provided by hospitals (as opposed to low technologycare such as community nursing) requires a large amount of specific capitalinvestment in the buildings and facilities. This causes problems either waythe assets are dealt with: if those assets are owned by the public sector andleased to the provider, the provider may skimp on maintenance and avoidrelationship specific investments. On the other hand, if the provider owns theassets, the contract will have to be very long to make it profitable. This causesproblems. The main one is that the force of ex ante competition is attenuated andthereby potential benefits to the public purchaser are reduced (Domberger andJensen, 1997). (Williamson calls this effect of asset specificity on the relationshipbetween purchaser and provider ‘the fundamental transformation’. Williamson,1985). The conclusions to be drawn from this transactions cost analysis ofcontracting is that using diverse providers may not increase efficiency oncetransactions cost are included. (Hodge’s, 2000, survey of privatisation supportsthis view.)

Quality and Responsiveness

Government policies including independent sector providers in the regulatoryand inspection regimes of the NHS (see above) are designed to address concernsabout the possibility of quality being lower for those providers. However,transactions costs economics indicates that this will not be adequate, as manyaspects of quality are hard (and very costly) to observe. This is especiallyimportant where for profit providers with strong incentives to cut costs are used(Preker et al., 2000, who advocate contracting out, accept this). There is evidencethat competition with negotiated prices does lead to falls in quality (Propper,2007). However, even in a situation with fixed prices, where, unlike under pricecompetition, there are weaker incentives to reduce quality to cut costs, qualitywill not necessarily improve (Zwanziger et al., 2000). And, as quality of healthcarehas many attributes, there will be over production of those which can be observed,as opposed to harder to measure aspects (Propper, 2007).

Concerns about quality of care provided by independent sector organisationscould be somewhat alleviated if TSOs are used instead of for profits. As explainedabove, TSOs are more likely to provide high quality services. However, as Bartlettet al. (2007) point out, in the reformed NHS, TSOs may not be able to retain their



client focus. If commissioning systems are too complex or too highly regulated,TSOs may lose their entrepreneurial flair and become bureaucratised. They maybecome dependent on public funds and lose their flexibility and responsivenessto patient needs (Weisbrod, 1998). TSOs that are not client-led may sufferfrom ‘voluntary sector failures’ including service provision skewed towards thepreferences of the members, and paternalism (Salamon, 1987; quoted in Bartlettet al., 2007). These concerns have been raised in the House of Commons SelectCommittee Enquiry into the use of TSOs (HCPAC, 2007) and by the sector itself(Leather, 2007; and NCVO, 2007).

Planning and Equity

The restructured system of healthcare in the English NHS depends on a strongand highly competent purchasing/commissioning function. In order to allow awider range of providers to operate, it will be necessary for commissioners ofcare to understand how to work with both local populations and local providers toshape the local configuration of supply, while still managing demand and volumesof care within fixed budgets. This is a complex task, which many commentatorssuggest is currently beyond their capacities (e.g., Higgins, 2007) and about whichthe government itself has indicated concern (DH, 2006b and 2007b). The dangeris that if the demand side is not able to regulate and shape supply, severaltypes of problem can arise: these include inadequate monitoring of the initialsuitability and ongoing quality and value for money of independent providers;overspending the local budget; financial damage to vital incumbent suppliers,such as hospitals which provide emergency services; and the creation of gaps inservices for certain groups. The latter problem may lead to increases in inequalityin access to services.

The introduction of a wider range of providers leads to a concern about theeffect on the patients’ experience of the health system. Many patients (especiallythe elderly and those with long term conditions) move between providers to havetheir care needs met. While this experience is often unsatisfactory when movingbetween NHS providers (Hardy et al., 2005), it is likely to be more difficultto achieve seamless care when patient journeys involve crossing from publicto independent providers and back again. As noted above, the incentives forindependent providers do not promote co-operation.

Regulation and Accountability

As the current restructuring of the NHS is introducing a broader range ofproviders who are meant to compete with each other, there is a need for asystem wide regulatory function to ensure competition in supply. Irrespectiveof their ownership status, providers are likely to merge both horizontally andvertically to ensure assured demand, and if they do not merge, they are likely tocollude. An independent co-operation and competition panel has very recently


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been established to deal with these issues (Co-operation and CompetitionPanel, 2009), based on the principles set out by the Department of Health(DH, 2007e).

Moreover, the payment of public money to independent organisations, someof whom are for-profit, is likely to raise concerns about diminution in publicaccountability (Hodge, 2000). While it is not suggested here that independentproviders are likely to be fraudulent, it is more difficult to make sure that thosemaking decisions about services delivered to the public (using public money) canbe held to account for those decisions (Vincent-Jones, 2006). The mechanisms forholding public sector staff to account are well rehearsed, and include legal action,formal complaints procedures and elections. The legal status of contracted outservices militate against many of these remedies (Vincent-Jones, 2006). Theremay well be a tension between the entrepreneurialism being encouraged inthese supply side reforms and the need for accountability (Groot and Budding,2008).

CONCLUSION

The NHS has embarked on yet another bout of organisational restructuring.The rate of organisational change is very high, and it is well known that changeitself is disruptive to the delivery of high quality, efficient services (Fulop et al.,2005). While this is not an argument for always maintaining the status quo,there has to be a good reason to cause this degree of disruption time andagain. This paper has cast doubts on the likely efficacy of one aspect ofthe current reforms; increasing provider diversity. Other authors have castdoubt on other aspects (for example, Fotaki et al., 2005, in respect of patientchoice).

Looking at the NHS as a whole system, Sheaff and Pilgrim’s (2006) insightis apposite. The policy shifts since the 1990s have produced an accumulation ofcontradictory organisational effects, making the NHS both more bureaucratisedand more marketised than in the 1980s.

As Maynard (2005) remarks:

For decades, successive Conservative and Labour governments have changed theorganisational framework of the NHS without defining the precise problems they areaddressing, let alone allowing time and resources for their social experiments to beevaluated (p. 76).

It remains to be seen if Tuohy’s (1999) twin attributes for making funda-mental change to the institutional mix and structural balance of the Englishhealthcare system are present this time: there is undoubtedly the politicalwill and authority from outside the healthcare arena, but will the internal logicof the NHS system defeat these policy changes once again? In particular, theprofessional groups in the NHS may be able to continue their resistance to whatthey see as increasing ‘managerialism’ (Lapsley, 2008).



NOTES

1 Prior to the establishment of the National Health Service, with its government owned hospitals,most healthcare was provided by independent organisations (Keen et al., 2001). Indeed, todaymost general practitioners (GPs) are formally independent self employed contractors, sellingtheir services to the NHS. In other care sectors, notably social care, the use of independentproviders is widespread, having been encouraged by the Conservative government in the 1980s.

2 Although Patient Choice can be seen as a policy dealing with the problems identified in theinternal market caused by NHS organisations acting imperfectly as agents for patients, it alsoraises challenges for NHS organisations (PCTs) who are still responsible for planning andcommissioning services within the constraints of local budgets.

3 These can be seen as examples of the New Public Management phenomenon of audit (Lapsley,2008).

4 It has been argued that these agencies (i.e. the former Healthcare Commission, now the CareQuality Commission and Monitor) duplicate each others’ functions and impose heavy burdenson providers (NHS Confederation, 2007).

5 A full description of FTs’ governance structures can be found in Allen, 2006.

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