Competition in the NHS internal market: an overview of its effects on hospital prices and costs

The 1989 reforms of the UK National Health Service (NHS) introduced competition in the supply of hospital services. This paper synthesizes both the theory underlying the introduction of competition into the NHS, and the limited existing evidence on whether competition affects the prices posted by sellers of medical services, and the costs of producing these services. The results indicate high levels of price variability, widespread disregard for average cost pricing rules and some indication that competition had some effect on prices. It appears that lower prices may be offered to smaller purchasers, such as General Practice Fund Holders (GPFH). This effect of competition on price was mirrored, with a delay, in hospital costs. © 1998 John Wiley & Sons, Ltd.