Editorials

Do we need an Of health?

BMJ 1995; 310 doi: https://doi.org/10.1136/bmj.310.6995.1618 (Published 24 June 1995) Cite this as: BMJ 1995;310:1618

This article has a correction. Please see:

  1. Carol Propper
  1. Professor Department of Economics and School for Policy Studies, University of Bristol, Bristol BS8 ITN

    Other services have regulatory bodies to promote competition

    The internal market was introduced into the NHS to improve patient care by freeing relationships between purchasers and providers. As markets in gas, water, and telephone services have been liberalised, regulatory bodies have been set up to promote competition and limit the behaviour of monopoly suppliers. Does the internal market need an Ofhealth, along the line of Ofgas (the Office of Gas Supply), Ofwat, and Oftel?

    To get the benefits of a market there must be scope for comparison and choice between providers and for comparison between purchasers. But several features of the current internal market limit choice and comparison. For example, hospitals are likely to be monopoly suppliers of some of their services. Information on the quality of services may be poor. To enable suppliers to make decisions on investment they need longer term contracts, but these bring the danger of exploitation by one or other party to the contract.

    Under current arrangements, purchasers do not directly compete with each other, which is not necessarily a bad thing—competition for patients among purchasers can be accompanied by selection of patients. But if purchasers don't have to worry about losing patients if the services they purchase for them are poor then limited incentive exists for purchasers to be very responsive to the populations on whose behalf they buy.

    A case therefore exists for market regulation to protect users and taxpayers. Such regulation will have two goals—to limit monopolies from developing wherever possible and, where they exist, to limit the behaviour of monopolists on either the provider or purchaser side of the market. But regulation has a cost. Too much regulation stifles the incentives for innovation and change. Regulation may be ineffective because the regulator has less information than the regulated, and frequent change in regulatory policy is confusing and reduces incentives for change and growth. Any regulatory strategy for the NHS internal market should therefore aim to be clear and consistent and employ sanctions (not necessarily monetary) against those who break the rules.

    To limit the development of monopolies an Ofhealth might scrutinise mergers, look for and outlaw collusion, and promote entry into the market of competitors—that is, introduce procompetitive policies. Actions to control monopolies could include regulation of price or of the return on capital, and responses by the regulator to indications of consumers' dissatisfaction.

    The NHS Executive has recently announced that it will pursue procompetitive policies.1 It will replace the present ad hoc strategy towards competition with a coherent and clear approach to keep the market structure as competitive as possible. This strategy is to be applied to mergers of providers and of purchasers, collusion, and reconfiguration of the market. The executive has defined the circumstances in which it will intervene to limit the behaviour of market participants and has made explicit the criteria it will use in deciding which regulatory actions to take. Because the guidance has only just been issued there is no experience with its use. Much of its success will depend on how much the NHS Executive can separate out its task as market manager from the many other tasks it undertakes. If it cannot, regulatory rules may be downplayed or ignored to ensure that other goals are met.

    The executive's guidance deals less with the second type of regulatory activity—controlling monopoly. Arguably, this is the more important task facing an NHS regulator. One reason for the lack of guidance is that the NHS Executive already regulates the behaviour of providers through trusts' financial arrangements and the behaviour of district health authority purchasers through its line management of purchasers. But these forms of regulation are questionable. Under trusts' financial arrangements the “price equals cost” form of price regulation used by the executive is difficult to monitor and gives poor incentives for efficiency. Trusts are not allowed to have formal saving mechanisms, and in the long run this makes decentralised decision making inefficient: those who work harder than the average are offered no reward for improving the quality and quantity of services delivered.

    What is urgently needed is a review of these arrangements. Other regulatory tools are used elsewhere in the British economy and in other health care systems. The executive should assess where such regulation would be useful and then design tools to regulate simply those activities. Regulation of all prices in all circumstances is not likely to be necessary or helpful.

    The importance of the purchasing role means that poor incentives for purchasers to respond to the needs of their users may pose the largest threat to the beneficial workings of the internal market. More needs to be done to ensure that purchasers respond. Ways to compare purchasers and to simulate the effects of competition where no competition exists should be developed. League tables are a partial example of such measures. To simulate competition fully, however, those organisations that are not up to a suitable standard must face some penalty. Franchising (competition for the right to act as the purchaser) is another possible route. Another, more radical, option is to increase competition in the market by allowing greater competition among general practitioners for patients, perhaps by changing the rules on where general practitioners can set up new practices. All these mechanisms have their associated pros and cons. What is important is that the executive identifies where the problem lies, limits regulation to those areas, and uses mechanisms that give purchasers positive incentives to improve their behaviour where it is lacking.

    Theoretically, the 1980 Competition Act could be interpreted as implying that procompetition policy is the responsibility of the Monopolies and Mergers Commission (the body responsible for procompetition policy in the rest of the economy).2 The NHS Executive has currently taken that role on itself. In the long run, “regulator capture” (where the regulator acts to protect the regulated and not the general public interest) may occur. It may then be sensible to have a three tier system with the Monopolies and Mergers Commission responsible for competition policy; a separate regulatory body—an Ofhealth—to set prices and monitor customers' complaints; and the executive to manage providers and purchasers to ensure that central policy goals are met within the framework of the internal market. Given the mixed experience of regulation of the utilities in Britain, it may be best to give the present arrangements time to prove themselves while pressing the Department of Health to review its price regulation of trusts and its policy to ensure that purchasers meet the needs of their patients and populations.

    References

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