A transaction costs analysis of changing contractual relations in the English NHS

The English National Health Service has replaced locally negotiated block contracting arrangements with a system of national prices to pay for hospital activity. This paper applies a transaction costs approach to quantify and analyse the nature of how contracting costs have changed as a consequence. Data collection was based on semi-structured interviews with key stakeholders from hospitals and Primary Care Trusts, which purchase hospital services. Replacing block contracting with activity based funding has led to lower costs of price negotiation, but these are outweighed by higher costs associated with volume control, of data collection, contract monitoring, and contract enforcement. There was consensus that the new contractual arrangements were preferable, but the benefits will have to be demonstrated formally in future.