Costs and prices in the internal market: markets vs the NHS Management Executive Guidelines

In both academic and government discussion of the performance of the internal market, lack of "good quality" information on prices is seen as a major impediment to the emergence of a competitive market. The National Steering Group on Costing was established to help NHS units improve the quality of market information through development of standardised cost according to procedures to be used in the setting of market prices. This paper argues there has been a misunderstanding of the role and nature of prices in the internal market. THe market structure that is emerging in the acute sector of the NHS is a fairly common one found throughout the economy. In markets characterised by contestability, small numbers and a high proportion of fixed costs, the prices at which transactions take place emerge from negotiation and tend to be unique to each buyer. Prices are usually secret, competition does not require nor does it lead to open information on prices. High fixed costs are relevant to negotiated prices being the preferred method of setting prices and to the incentives for existing suppliers to adapt services to changes in the pattern of demand. The model of the NSGC costing guidelines and the regulatory framework of the Department of Health is one of suppliers setting unique prices for each procedure and buyers choosing the quantity to purchase at that price. This model is appropriate in markets with large numbers of buyers who are price takers. This is clearly not the type of market to be found in the NHS and it is doubtful if regulators could enforce behaviour that is so contrary to the incentives generated in competitive markets with small numbers of participants.