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Five Big NHS Market Constraints

Many GPs are fearful of entering a free market – but how free is it? Alisdair Stirling asked some free market advocates what they see as the big constraints on the health market

Many GPs are fearful of entering a free market – but how free is it? Alisdair Stirling asked some free market advocates what they see as the big constraints on the health market

The Government's health bill features a firm commitment to the ‘any willing provider' model, tariffs and Monitor, an economic regulator with a legal duty to promote competition.

But will GPs actually be commissioning in a free market? If not, what are the constraints? Would Adam Smith be dancing on – or turning in – his grave? And will it be good for GP commissioners? We asked our expert panel what they saw as the main influences on the new NHS market.

1. ‘Unlevel' playing field

The Department of Health's impact assessment accompanying the health bill states that private providers face costs about 14% higher than NHS acute hospitals, chiefly due to taxpayer subsidy of the NHS pension scheme and the lower costs of public capital to which NHS organisations have access.

This distorts the market and can result in contracts not being awarded to the best provider, as the private sector faces higher costs and is likely to charge higher prices.

This is an issue Monitor will have to take into account in regulating the NHS. The body's chief executive David Bennett told the public bill committee for the Health and Social Care Bill last month that there were ‘level playing field issues on both sides'.

Monitor would analyse such distortions and assess how providers could be compensated properly, he said. But as with many other aspects of the reforms, it is not yet clear how that will be accomplished.

The level playing field issue is one of the key structural constraints on the new NHS market, Andrea Longhi, a healthcare partner at Ernst and Young, confirms: ‘The private sector says the NHS has an unfair advantage as pensions and the clinical negligence scheme for trusts are subsidised.

‘On the other hand, foundation trusts say there are structural issues on the other side. For example, the cap on the amount of private practice they can undertake – which has now been removed – has been one of these. Another is the cost of training staff.'

Health economist Peter Cutler believes the market is massively skewed towards the NHS because of the state subsidy of NHS pensions. He claims urgent, radical action is needed to tackle the imbalance: ‘The problem for the private sector is that it cannot replicate the NHS pension. It adds 35% to the wage bill. The Government hasn't gone anywhere near far enough with these reforms. The market needs to be opened up.'

2. Loyalty to the NHS

Commissioners who are tentative about the reforms may be tempted to stick with what they know – or even snub private providers or new entrants to the market for ideological reasons. We may yet see an ‘I'm backing British'-style backlash from GPs ‘backing the NHS'.

For Mr Longhi, cultural pressures are the main constraint on the market: ‘The biggest issue is probably around cultural pressure to "prefer" the NHS.

‘This is immense and is backed up with scare stories like "If you don't support your local hospital, it will go bust". It's much less tangible but it is made up of a large number of microbehaviours that together become anticompetitive and put off private-sector investors. I'm hoping Monitor will start to flush these out, otherwise it's patients who will lose.'

Andrew Bell, health policy lead at the Confederation of British Industry, says that from the CBI's standpoint, ‘traditional' values could seriously undermine competition in the new-look NHS.

‘Loyalty could be a big factor – especially among GPs who are used to relationships with trusts. But GPs have to realise that there's a new way and embrace the any willing provider model. Without proper competition among providers, the reforms simply won't work,' he says.

Mr Cutler also believes GPs' loyalty to NHS providers will be a factor in shaping – or rather deforming – the new market: ‘GP commissioning has a fantastic opportunity to open things up.

‘GPs should be saying: "That's a lousy service, let's market test that", rather than just regarding trusts as a tap in the sky. If GPs really harness market forces, they'll bring in private firms to run A&E departments or failing hospitals.

‘If they fail, try someone else. It's up to GPs to run with this, otherwise it won't be a free market.'

James Gubb, director of the health unit at think tank Civitas, says past loyalties have allowed NHS providers to become entrenched at the expense of the private sector and could play a huge part in the way things will pan out post-reforms.

‘Some existing NHS providers have significant monopolies and my research has shown that the market has in the past been blocked by NHS trusts and other providers who don't want to lose their market share. Commissioners who want to look elsewhere are going to have a difficult time,' he says. ‘Personally, I'm very sceptical that many commissioners will actually want to rock the boat for historical reasons.'

So, if Monitor wants to insist on competition, it will have to use its legal powers to force GPs to tender competitively.

Mr Gubb adds: ‘A competitive market place that is dependent on legal power is going to be very expensive. And that will be a further barrier to competition, because it remains to be seen whether Monitor will want to use those powers.

‘It's a bit of a blunt tool. Personally, I would prefer to see the NHS Commissioning Board exert pressure on consortium accountable officers.'

3. Lack of providers

Mr Gubb is also sceptical that patient choice will exert enough of an influence on the system to encourage the plethora of service providers the Government clearly wants to see.

‘It's a pretty weak lever for change in the market as envisaged,' he says. ‘I think the only way it could work is via the independent sector treatment centres. The way to do it would be to offer a guarantee of income to new entrants and then phase in patient choice once the range of providers is there.'

Mr Cutler agrees that there are not enough incentives for providers to join –

a factor he believes is crucial for efficiency: ‘I'm all for the efficiency of the state buying healthcare for the country, theoretically, morally and in terms of efficiency. The monopsony buying power is good for the patient. But the problem is, there is not a free market in provision.

‘You absolutely have to open up the market to providers, because embedded in the current system are such massive inefficiencies – at least 20% in everything

I look at. Proper competition could squeeze a lot more out of the system. It's pure capitalism. It may be brutal sometimes, but it works.'

4. Care pathways

Another potential market constraint comes in the form of the pathway tariffs the Government has pledged to introduce. How these will work in practice has yet to be revealed, but consultant neurologist and chief executive of Independent Health Partners Dr Oliver Bernath believes pathways could make the any willing provider model difficult to operate in practice.

‘If a local consortium sets up care pathways that work well, with information flow and so on then outcomes and patient satisfaction should be great and efficiency should also be great with high utilisation. How would a new provider get into this market? Choice would be irrelevant in such a market as the patients would want to go for the established, well-performing incumbent,' he says.

‘There may be space for the low-capital provider services, but here the GPs will want to run and own them. It would be hard for another provider to come in and compete.

‘I just cannot see the American healthcare chains storming into England setting up tons of new provider units. What I would expect is consolidation of existing capacity – and maybe some poor-performing NHS hospitals will get taken over by private providers alongside more out-of-hospital, GP-based services.'

5. Monitor

Mr Longhi identifies three key functions of Monitor – setting prices, and managing failure as well as overseeing competition – all of which will influence the market.

A key fear was that competition would be encouraged on price rather than quality. Earlier this month, ‘maximum price' was taken out of the bill though Monitor, it seems, will still be able to ‘specify different prices' for different providers.

Even before the recent amendment to the bill, Monitor's chair David Bennett told the health select committee his expectation was that price competition ‘would emerge in a very limited way and very slowly'.

One of the main components of Monitor's remit to manage failure will be ‘designating' services. Commissioners will be able to nominate services they wish Monitor to protect against failure by ‘designating' them. In theory, this could choke competition in the marketplace if commissioners designated too many services, resulting in too many being protected.

However, forthcoming guidance from Monitor is expected to outline how designated services will be set up and how a risk pool will be managed on levies on both providers and commissioners.

Details are still to be confirmed, but the system will work along the following lines:

• Better providers with a lower risk will pay less and those with a higher risk of failure will pay more

• Commissioners will pay depending on the volume of services they designate, which will act as a disincentive for them to designate too many services

• Designated services which become insolvent will go into ‘special administration' which will guarantee that they do not stop providing the service they were commissioned to do.

For Mr Gubb the influence the current health secretary and his successors give to Monitor will be a key factor: ‘Clearly, Monitor and the stance that it takes will have a significant effect on the way things play out. If it takes an active stance, things could develop much more quickly.

‘But while Monitor is being set up as a legal entity, the health bill leaves room for heavy influence from Andrew Lansley and a lot will depend on whether he gives his backing to Monitor or to individual commissioners.

‘And of course, future secretaries of state will be able to influence things in different ways, making the market freer or less free as they see fit.'

Alisdair Stirling is a freelance journalist

Our free market expertS

Andrea Longhi
Former director of commercial policy, Department of Health, and now healthcare partner at Ernst and Young

Dr Oliver Bernath
Managing director of Integrated Health Partners

James Gubb
Director of the health unit at right-wing think tank Civitas

Peter Cutler
Health economist and former economic adviser to the Department of Health

Andrew Bell
Health policy lead at the Confederation of British Industry

Our free market expertS

Andrea Longhi
Former director of commercial policy, Department of Health, and now healthcare partner at Ernst and Young

Dr Oliver Bernath
Managing director of Integrated Health Partners

James Gubb
Director of the health unit at right-wing think tank Civitas

Peter Cutler
Health economist and former economic adviser to the Department of Health

Andrew Bell
Health policy lead at the Confederation of British Industry

Five Big NHS Market Constraints

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