Contracting in the UK NHS: purpose, process and policy

Contracting has played a central role in the NHS reforms as the principal mechanism by which resources are transferred from purchasers to providers. The nature, process and role of contracting are traced by examining the development of government policy on this issue since the inception of the reforms. Much of the emphasis in the early years of the reforms was on getting the detail of contracting ‘right’, with attention becoming focused more recently on wider commissioning issues and the nature of the purchaser-provider relationship. The contracting environment is described and consideration is given to the way in which changes in this environment have influenced the role and nature of contracting, particularly in terms of the tension between the role of the market and the role of management in the NHS. Contracts have been used partly as a management tool and partly as a means to promote competition, often through the threat of competition (‘contestability’) rather than actually switching contracts between providers. The present government’s stated intention to abolish the internal market will lessen the role of contracts as a mechanism to promote competition, but within a “system of contestability to force improvements in standards” (Labour Party 1996). If contestability is to be used more radically in the NHS, a clearer separation may be required between the ownership and operation of assets to address issues of poor provider performance. Longer-term contracts (or agreements) then become the framework within which providers operate to meet purchaser service specifications, with an increasing emphasis on quality and effectiveness of services, and a decreasing emphasis on annual activity and price negotiations. The key challenge will lie in creating an appropriate set of incentives to reward efficient providers, and to ensure sufficient flexibility in longer-term agreements to challenge poor performance.