Private v public is not the issue: Hospital ownership is a diversion. Quality service for all must be the goal, argues Chris Ham

RESPONDING to claims that the NHS reforms lack strategic direction, Virginia Bottomley has argued that the NHS has been transformed and is now better placed than ever to achieve its founding goals. The opposition health spokesman, David Blunkett, maintains that the NHS is well on the way to privatisation, while the British Medical Association, caught in the crossfire, has proposed a reform of the reforms to tackle increased management costs and address some of the inequities that have arisen. In the midst of this debate, a recent OECD report commended the changes and identified the UK as an international leader in health-care reform.

There is an element of truth in all these arguments. The NHS has been transformed since 1991 with more pluralistic and flexible management arrangements replacing the old hierarchical structure. There have been benefits, the most significant being a shift in the balance of power within the NHS.

The old system in which health authorities were captured by provider interests has been replaced by a health service in which purchasers are beginning to hold providers more accountable. In the process, purchasers are achieving improvements in health and health services for patients. Much of the credit rests with health service managers who have used the separation of purchaser and provider roles to tackle longstanding weaknesses in the delivery of services. In so doing, they have shown how market principles can be introduced into a public service without fatally undermining the basis on which the service was established.

Against these benefits, the reforms have caused a significant increase in management costs. The refusal of the Government to evaluate the impact of the NHS changes makes this increase hard to quantify. But there is little doubt that a health service based on contracts between purchasers and providers is more expensive to administer than one in which health authorities manage hospitals directly.

The increase in transaction costs is compounded by the fragmentation of purchasing between health authorities and a growing number of GP fundholders. Management in the NHS now resembles a paper chase as trust hospitals seek to secure their income by negotiating contracts with different purchasers, and all players in the market invest in information systems to monitor contract compliance. This has put at risk one of the greatest strengths of the NHS, its tradition of low administrative costs, a fact not adequately recognised in the OECD's assessment.

Tackling these costs is the next challenge facing ministers. Mrs Bottomley has already announced plans to streamline the Department of Health and regional health authorities, but equally important is the need to clarify how the reforms will operate at a local level in a way that will minimise transaction costs while preserving the benefits of a purchaser/provider system. Put slightly differently, ministers must define the kind of market they wish to emerge and the nature of the NHS they are seeking to create.

An important distinction to be drawn here is between market testing and contestability. Market testing of health services would involve health authorities seeking tenders from competing hospitals on a regular basis. Contestability, in contrast, entails not a formal and regular tendering process but the ability of health authorities to switch suppliers if they cannot improve performance through other mechanisms. In other words, it is the threat of contracts being moved that stimulates hospitals to respond to the demands of purchasers rather than the reality of moving contracts.

Experience outside the health sector suggests that a policy based on contestability is often favoured over one which emphasises market testing. In a number of industries, the most effective relationships are those where purchasers and providers work together in long-term collaborative arrangements, rather than relationships in which purchasers seek continual short-term gains by switching contracts between providers. This is precisely the direction in which health services are developing in the US and this holds an important lesson for the UK. If a purchaser/provider system is to be maintained, it must focus on developing a managed market in which contestability is combined with effective regulation.

Such an approach may have the added advantage of reducing transaction costs. Purchasers who work with selected providers in collaborative relationships will not have to carry the burden of competitive tendering exercises. And by forging long-term alliances with hospitals, health authorities will avoid the need for expensive contracting systems. In a contestable NHS, high standards would be achieved through a common commitment by purchasers and providers to high-quality health care, not via paper-rich monitoring arrangements.

This is not to advocate a return to the integration of purchasers and providers. Rather, it is to recognise the value of a clear separation of purchaser and provider roles combined with the ability of purchasers to place contracts with the hospitals of their choice. In this system, the point of separating purchaser and provider is less to stimulate a competitive market in health care than to promote greater accountability on the part of providers.

The nature of hospital ownership matters less than a continuing commitment to government funding and universal coverage in preserving the founding principles of the NHS. To this extent, the NHS that is emerging from the reforms may be likened to a national health insurance organisation, with provision being the responsibility of a range of public and private agencies. If this is what ministers have in mind, debate should focus on how at a local level this insurance or purchasing function should be discharged.

It is this, far more than the privatisation or not of trust hospitals, that affects whether patients will still have access to appropriate and necessary services. The risk at present is that the dissipation of purchasing power between health authorities and GP fundholders and the lack of co-ordination between the two will make it hard to ensure continuing access to comprehensive services everywhere. The Government's critics should direct their attention to this, and should not be sidetracked into a debate about who should own and run hospitals. It is essential that local authorities co-ordinate their purchasing if the principles of 1948 are to be preserved in an NHS fit for the 21st century.

The author is director of the Health Services Management Centre at the University of Birmingham.

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