Creating a market: an economic analysis of the purchaser-provider model

The focus of this paper is the extent to which the purchaser-provider split and the creation of a market in the provision of health care can be expected to bring about greater efficiency within the new NHS. The starting point is a theoretical discussion of markets and competition. In particular, emphasis is placed upon the economic model of perfect competition. It is argued that because of the existence of externalities, uncertainty and a lack of perfect information, an unregulated market in health care will almost certainly fail. In view of this, the imperfect provider markets of monopoly and contestable markets, which are of particular relevance to health care, are discussed. A description of the new health care market and the principal actors within it is followed by an evaluation of the new health care market. It is argued that in view of the restrictions to competition that exist between providers, some form of price regulation will be necessary to prevent monopolistic behaviour in the hospital sector. Regulation of purchasers is also suggested as a means of improving efficiency. It is concluded that competition may be a necessary condition for increased efficiency in health care provision, but is not sufficient in itself. Other incentives in the hospital sector are necessary to assist the market process and to enhance its impact on efficiency.