The encyclopedia · Strategy & Leadership · Strategic decision · 1991
NHS created internal market by splitting buyer and seller roles
The NHS split purchasing from provision, creating an internal market without privatizing hospitals.
UK Department of Health
the move
Before 1991, the British NHS ran as a single integrated system: regional health authorities received a budget from central government and directly ran the hospitals and community health services in their area. A hospital's funding depended on its historical allocation and population served, not on how well it actually treated patients — there was no mechanism through which a hospital doing a poor job would lose resources, or one doing well would gain them, because the same body both funded and ran the care.
Secretary of State for Health Kenneth Clarke's 1989 white paper "Working for Patients" proposed breaking that link, implemented through the National Health Service and Community Care Act 1990, taking effect in April 1991. Anticipating resistance from the medical establishment, the reforms were largely designed by ministers without formal consultation with bodies like the British Medical Association.
why it works
- Hospitals' income became dependent on winning contracts, not guaranteed budgets.
- Purchasers could choose where to send patients, creating competition.
- Competitive pressure incentivized efficiency and responsiveness.
- Public ownership and free care were preserved, easing political resistance.
what transfers
You can introduce market discipline by separating the funding decision from service delivery, even without changing ownership.
what came after
306 GP fundholding practices launched in 1991, covering half of England by 1998; a 1991-99 study tied competition to lower quality. The purchaser-provider split survived subsequent changes of government and remains the structural backbone of NHS commissioning today, even as GP fundholding itself was abolished by the incoming Labour government in 1997-98 and replaced with other commissioning structures, and the internal market became a landmark reference case in health economics for both quasi-market design and its limitations.
references
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