American Journal of Law & Medicine

Resource allocation in the National Health Service. (United Kingdom)(Managed Care Phase Two - Structural Changes and Equity Issues)


In the United Kingdom, how does the National Health Service (NHS or the Service) respond to the pressures imposed on it by patients, doctors and the government? What techniques for distributing resources have been adopted for managing these pressures? Part I of this Article explains the administrative evolution of the NHS. Part II discusses the legal framework surrounding the allocation of resources throughout the different tiers of the NHS: (1) from the Secretary of State for Health to health authorities, (2) from health authorities to hospitals and general practitioners (GPs), and (3) from doctors to patients. Part III comments on the case for a standing committee to advise the government on matters of resource allocation within the NHS. It also considers the legal, political, and managerial contributions to the debate and, in particular, comments on the future of the traditional notion of clinical freedom.


Section A describes the culture that developed within the NHS, Section B discusses the pressure for reform that developed during the 1980s, and Section C reviews the system of the "internal market" for health that was introduced in 1990. These comments serve as an introduction to the legal issues that arise in Part III.

A. Evolution of Culture of the NHS

The National Health Service Act of 1946 created the NHS which commenced operation in 1948. NHS's most profound commitment was that the service it provided should be "comprehensive" in the sense that it should be available to everyone, to meet all their needs, whenever it was required to do so. The White Paper of 1944 on which the Service was based described this objective as follows:

The proposed service must be 'comprehensive' in two senses -- first,

that it is available to all people and, second, that it covers all necessary

forms of health care.... The service designed to achieve it must cover

the whole field of medical advice and attention, at home, in the

consulting room, in the hospital or the sanatorium, or wherever else is

appropriate -- from the personal or family doctor to the specialists and

consultants of all kinds, from the care of minor ailments to the care of

major diseases and disabilities. It must include ancillary services of

nursing, of midwifery and of the other things which ought to go with

medical care. It must ensure that everyone can be sure of a general

medical advisor to consult as and when the need arises, and then that

everyone can get access -- beyond the general medical advisor -- to

more specialised branches of medicine or surgery.(2)

Toward the end of the Second World War "rationing" was commonplace, but the idea meant sharing resources fairly among all. The thought that those with genuine needs might be denied care contradicted the noble principle on which the service was based. But only three years after coming into operation, demand for care so exceeded expectation that statutory provision was made to charge patients for prescriptions and spectacles.(3) As a result, the first Secretary of State responsible for the health service, Mr. Aneurin Bevan, resigned from office. He regarded the measure as a betrayal of the principles on which the Service was founded.(4) This began a consistent story of providing exceptional service for the victims of accidents and emergencies; generally, a very good service for patients in urgent need of care; but less consistent service for others who often found themselves on long waiting lists. Surprisingly, as this Article will describe, it was not until 1980 that the promise of a "comprehensive" service was first used by a patient to found a claim to NHS resources, although the number and variety of claims has increased ever since.(5)

In addition, an important characteristic of the service in 1948 was its commitment to clinical discretion.(6) Patients were entitled to expect that managers would always defer to the judgment of the medical profession in matters of clinical care.(7) This counsel of "professional perfectionism" contained two important factors. First, "[f]rom the doctor's point of view, this implied that he should be free to carry out his professional imperative of doing his utmost for the individual patient without regard to the cost."(8) Second, the commitment extended well beyond decisions concerning individual patients.(9) Even today, but to a far greater extent fifty years ago, there were no effective measures by which performance in the NHS could be measured, no reliable yardstick against which individual patient's needs could be assessed, and no means of gauging the quality of care that hospitals were providing. As a result, doctors also made decisions concerning the allocation of resources within hospitals. "Lacking independent criteria of their own, policy-makers were forced to fall back on the [medical] professional view of what services were needed and how quality should be assessed."(10) The relative impotence of managers during this period was compounded by scarce resources.

The paradox of the financial stringency was that [while] it led to tighter

control over the total budgets available to health authorities, it also

weakened the centre's ability to use incentives to persuade the

periphery to follow national policies: the Ministry of Health could neither

command nor bribe.(11)

Thus, the medical profession, rather than administrators or managers, assumed a dominant role in decisions concerning the management of resources,(12) a predominance which endured until the reforms introduced in 1990.

The combined effect of these characteristics was to foster expectations that exceeded the capacity of the Service, and to create a system of management that was slow to react and difficult to control. The NHS had explained the objectives it intended to achieve, but could not settle on the means by which they were to be attained.

B. Pressure for Reform

During the 1980s a number of cases exposed the dissatisfaction the public was beginning to feel with the NHS. One in particular, R. v. Central Birmingham Health Authority, ex parte Collier, which is considered below, concerned a four-year-old boy who, despite being put at the top of the doctor's list of clinical priorities, could not be admitted to the hospital for a hole in the heart operation.(13) The unease provoked by the case prompted Prime Minister Thatcher to announce that she had committed herself to reforming the financial administration of the Service. The subsequent reforms were much influenced by an American commentator, Professor Alain Enthoven, who had made a number of telling observations about the management of NHS finances.(14)

First, he observed that the old formula by which money was allocated by the central government to the local health authorities for distribution to hospitals discouraged efficiency.(15) Although the formula was adjusted from time to time, it rested on the principle that the needs of an area could be assessed solely by reference to the profile of its population, taking account of factors such as age, social class, morbidity and mortality.(16) However, the formula paid no attention to the efficiency with which the population was treated in the hospital. Thus, the most efficient hospitals may have been penalized in the sense that they would tend to treat patients more effectively and more quickly, but inevitably exhaust their fixed revenue allocations before the end of the financial year. In this case, they were forced to turn patients away and close hospital wards until the following financial year. By contrast, the less efficient hospital, which treated fewer patients, could keep all its beds open or transfer "surplus" patients to hospitals in other areas. Thus, Enthoven observed in 1985 that the system contained no serious incentives to guide the NHS in the direction of better quality care and service at reduced cost.(17)

In fact, the structure of the NHS contains perverse incentives. For

example, a [health authority] that develops an excellent service in some

specialty that attracts more referrals is likely to get more work without

getting more resources to do it. A [health authority] that does a poor

job will 'export' patients and have less work, but not correspondingly

less resources, for its reward . . .; management and consultants in [an

authority] risk weakening the case for a new hospital wing they have

been campaigning for by solving their waiting list problem by referring

patients to other districts with excess capacity . . .; [and] GPs have

weak or no incentives to reduce referrals. They have neither the

incentives nor the resources to make extra efforts to keep people out of


The solution proposed to this "efficiency trap" was to introduce a system that rewarded those hospitals able to manage their resources most effectively by enabling them to raise revenue according to the numbers of patients treated and the quality of care provided.(19) By contrast, those that operated below the requisite standards would have to improve or lose revenue.(20) This idea of contract funding provided a central foundation for the internal market.

C. Mechanism of the Internal Market

The incentive to become more sensitive to the relative costs and benefits of providing care was created by a system, referred to as the internal market, which divided itself into purchasers and providers.(21) The purchasers are Health Authorities and GP Fund-holders, to whom money is allocated annually by the Secretary of State.(22) The providers are hospitals, now called NHS Trust hospitals, that must generate their income by providing services to purchasers of the right nature, quality and price. In this way, in theory, the best hospitals generate the most revenue by attracting the most patients. Thus, they, rather than the less efficient provider, can expand for the benefit of patients. The energy that propels the system is the NHS contract.(23) NHS contracts enable providers to negotiate with purchasers regarding the details of the quantity and quality of the services to be provided to patients and their cost. In a recent survey, hospitals were reported to work with around thirty contracts,(24) but this number fluctuates according to the number of GP fund-holding practices in the area with whom the hospital must contract.(25) For the present, contracts are typically negotiated on the basis of large groups of patients, for a lump sum, to be renegotiated approximately every two or three years. Contracts may provide for the sum to be increased or decreased, depending on the performance of the provider at the end of a specified period.

Three comments should be made about the system of NHS contracts. First, although the system may prove beneficial, it carries its own significant management transaction costs, in particular, with respect to GP fund-holding practices. Considerable time and energy is required from health authority managers in agreeing to the sum to be allotted to fund-holders. No specific formula exists by which such a sum is calculated and much hard bargaining occurs during negotiations.(26)

Second, the system may be suitable for arranging care for large groups of patients because prices can be set according to aggregates.(27) Thus, in theory diagnostic-related groups are able to accommodate those whose treatment is unexpectedly prolonged and expensive, by including those whose discharge from the hospital is unexpectedly speedy and inexpensive. But the system may be insufficiently flexible when small numbers are involved. Cystic fibrosis, for example, demands hi-tech, high-cost, but low-volume, specialist care. Many hospitals might have limited experience in its treatment and insufficient expertise to offer adequate care. It is inappropriate either for them to have to estimate the average cost of caring for such a patient, or for the system to encourage hospitals to compete against one another to do so.(28) The government has accepted, therefore, that in areas of this nature health authorities should liaise with one another in order to agree which hospitals should be funded to become the centers of excellence. This demonstrates the view that an unregulated market cannot provide an adequate health service and that there are circumstances where collaboration is more important than competition.(29)

Finally, in addition to these structural reforms, an ideological challenge to the prevailing deference to medical authority existed in the allocation of hospital resources. In 1983, a small group with a record of success in commerce was appointed to advise and make recommendations regarding the management of NHS.(30) Its major observation, contained in the Griffiths Report, was the limited managerial supervision of resources in the NHS:

The NHS does not have the profit motive, but it is, of course,

enormously concerned with control of expenditure. Surprisingly, however,

it still lacks any real continuous evaluation of its performance against

criteria .... Rarely are precise management objectives set; there is

little measurement of health output; clinical evaluation of particular

practices is by no means common and economic evaluation of those

practices is extremely rare. Nor can the NHS display [the]

effectiveness with which it is meeting the needs and expectations of the


it serves. Businessmen have a keen sense of how well they are looking

after their customers. Whether the NHS is meeting the needs of the

patient, and the community, and can prove that it is doing so, is open to


The report recommended a management structure for the NHS in which the creation of policy at the national level would clearly be distinguished from the responsibility for its implementation and operation.(32) At each level of operation, managers should set specific responsibilities and targets and be held accountable for them.(33) The recommendations of the Report were introduced into practice without the need for legislation and, of course, brought clinicians and managers into more direct conflict with one another. …

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