Quasi‐markets and contracts: A markets and hierarchies perspective on NHS reform

Abstract

Recent reforms in the organization of the National Health Service (NHS) have introduced market‐type relationships between purchasers and providers, based largely on long‐term contracts, in an attempt to improve the cost‐effectiveness of health service delivery. The proponents of the new arrangements argue that efficiency will be stimulated via the incentive effects of competition. However, any such gains from the introduction of quasi‐markets are likely to be offset by the substantial transaction costs associated with the operation of markets characterized by uncertainty, bounded rationality and imperfect information. This paper analyses the sources of the transaction costs which are likely to arise, in the context of the various types of contract design available to the new quasimarket in health service delivery.