ECONOMICS OF SOCIAL POLICY: QUASI MARKETS

QUASI MARKETS

Quasi Market reform was introduced by the conservative Government in the late 80·s across a broad range of public sector industries:
y y y

Social Care Education Health

It was introduced to encourage efficiency gains within these sectors, whilst stopping short of complete privatisation. It·s a move from Total Public control (Financing + Provision) to Public Financing and Purchasing from semi-independent providers. In addition the METHOD of funding also changed: a voucher system was implicitly introduced in education and Health Care, for example.

QUASI MARKETS

Differences from conventional markets:
y

Supply side:
Providers not necessarily out to maximise profits, as in a private market, nor are they necessarily privately owned. Ownership structure and goals are therefore loosely defined. Prices will not accurately convey MC, but accounting cost. Information problems: Moral hazard and Adverse Selection are Prevalent. State can provide unspecified contracts to deal with uncertainty ² Private sector can·t.

y

Demand side:
Consumer purchasing power not in direct currency but in an earmarked budget or ¶voucher· (which cannot be topped up). Decision may not be made directly by the consumer, but instead by a third party acting on his/her behalf ² i.e., GPs in Health Care.

QUASI MARKETS

Reasons For Quasi Markets:
Decentralisation of budgeting and decision making allows for more flexibility in the system to allow for adjustment to local needs. y X-Efficiency gains from competition. y Allocative Efficiency gains from consumer choice. y Because of unresponsiveness of the previous system, it was deemed to be INEQUITABLE as well as INEFFICIENT.
y

However:
Because of no profit motive, X-inefficiency may prove recalcitrant. The entire reason for initially having a welfare state must be kept in mind: The presence of market failures. Control must be exerted to prevent these market failures from reoccurring in a Quasi-Market system. y There may be upward pressures on costs:
y y

Large set up costs Advertising costs Low bargaining power against trade unions Rise in Wages. Due to difficulty of measuring QUALITY OF OUTPUT, focus may be given to QUALITY OF INPUTS Rise in costs without discernable improvement of output quality.

Allocative efficiency gains may be hampered by lack of local competition. y Due to being faced with a hard budget constraint, there may be attempts to ¶cream skim·. This could be remedied via a positively discriminatory voucher, but there are problems with that, noted in the extension to the slides.
y

QUASI MARKETS IN PRIMARY AND SECONDARY EDUCATION

QUASI MARKETS IN EDUCATION

Established with the 1988 Education Reform Act. The act proposed the following measures:
y y y y

Formula Funding Open Enrolment ¶Opt ² out· Local Management of Schools (LMS)

Decentralised budgets and provision of a set of common services paid for by the Local Education Authority by taking ~ 15% of the budget. Ensuring a MINIMUM STANDARD

y

A National Curriculum

However, four reasons how it falls short of a full market system:
y y y y

No money can escape to the private sector. No free entry, no provision for bankruptcy. National Curriculum restricts choice. Budgets are constrained by a centrally determined teacher·s pay scale.

QUASI MARKETS IN EDUCATION

Formula Funding:
y

y

y

y y

Pre-formula funding, budgets allocated administratively, with a high degree of inertia. This, however, did allow for a roughly constant pupil/teacher ratio. Formula Funding based on the concept that MONEY FOLLOWS PUPIL. It can be viewed as a fixed voucher system (similar to Jencks·). However, it also has fixed elements and discretionary spending ² although discretionary spending is being reduced, in 1990/91, money follows pupil only accounted for 56% of the total budget. Pupil/Teacher ratio rose under the conservative Government, but because of a spending freeze. Possibility of weighting the funding formula to take into account those children with special needs that require more resources.

HOWEVER, studies have shown increases in funding have only a minor impact on educational attainment.

QUASI MARKETS IN EDUCATION

LMS: Pros:
y y

y

Schools can react more ably to local needs, reducing X ² inefficiency. LMS provides a mechanism for the optimal provision of services determined by localised needs common services should be purchased when they are needed, and they should be purchased at cost. Local bargaining of wages for head teachers and support staff Arguments that there will be higher concentrations of kids with special needs in certain areas means that some schools will draw from the set of common services disproportionately (could be remedied via a PDV, however, remember previous discussion). Local bargaining of wages would disproportionately benefit those in richer areas, and will weaken bargaining power against monopoly trade unions.

Cons:
y

y

In sum, the case for LMS holds up well under economic scrutiny.

QUASI MARKETS IN EDUCATION

Open Enrolment: Pre ² 1988, LEA largely determined who went where. Now, each school has a ceiling, below which they must admit the pupil in question. Above the ceiling, the LEA will ration places. Thus, rationing still occurs in the system, especially with the more popular schools. Technically, catchment areas no longer exist ² the LEA will provide a means of transport to whatever school the pupil has chosen. However, in rationing, criteria such as an ¶Area of Prime Responsibility· are still pervasive. It has lead to changes in admissions patterns; suggesting that parents are indeed exercising choice.
y

However, there are information problems ² unequal power in the case that some parents are better able to understand league tables than others.

QUASI MARKETS IN EDUCATION

Problems with extending the market principles: Information Problems:
League Tables are not adjusted for background ability (the largest influence on educational attainment), nor is such information abundant. y However, studies by Rutger et al. show that schools with mixed ability intakes tend to do better on a standardised, although not absolute, basis. y Education is an ¶Experience Good·. Thus, there are high SUNK COSTS associated with it·s consumption. This may lead to parents proving recalcitrant to moving their child elsewhere, making market signals somewhat unreliable.
y

Cream Skimming:
A fully private market would lead to a high degree of selectivity due to the problem of Adverse Selection y Those children with the highest needs would require more resources ² and, as we·ve seen, a PDV would not be able to sufficiently increase the incentive for high achieving schools to consider such applicants. y This is not optimal, as stated above, since mixed ability schools tend to do better.
y

Externalities:
y

In addition, there are externalities from mixed ability schools ² they could possibly foster local cohesion and act as a vehicle for social mobility.

QUASI MARKETS IN THE NHS

QUASI MARKETS IN THE NHS

Quasi market reform came into effect with the Working For Patients act of 1989.
y

y y

Changed GPs into small HMOs (making them FUNDHOLDERS), increasing the power of GPs, increasing pressures on hospitals to become more efficient. Purchasers (GPs) and Providers (Hospitals) were separated. Well Managed Hospitals could become Self Governing trusts. Introduce competition between hospitals (and hopefully see efficiency gains). Consumers do not spend cash, but an earmarked budget designates their constraint (voucher system). Allows them greater choice to an extent and Hospital. via choosing GP

Supply side Effects:
y

Demand side Effects:
y

Consumer Choice:
y

QUASI MARKETS IN THE NHS

How useful is competition?
There is still excess demand, due to the existence of waiting lists. y Competition stymied by geographical considerations. y Competition ONLY benefits the well informed and BOTH the GP and Patient can be accused of being ill ² informed.
y

Assessing the reforms is difficult because:
Of the common problems in evaluation techniques. y The reforms were coupled with a spending boost, so causality is difficult to establish. y Self ² selection Those hospitals that were performing better automatically took up the reforms. y According to Le Grand (2002), attempts to give Hospitals more freedom has been marginally positive.
y

QUASI MARKETS AND THE NHS

1997+ Decentralisation was reneged on, before coming back in 2002. GP Fundholders were scaled up to Primary Care Trusts This allows for economies of scale, but reduces the sensitivity that Fundholders allowed. Quantitative targets on waiting lists etc., were introduced in hospitals.
y y

Targets on observable variables rather than the more pertinent unobservable variables (patient satisfaction). Also lead to perverse incentives to treat non-urgent people who had been on the waiting list a long time rather than treat urgent and new admitals.

Wanless Report in 2002 was commissioned to address these problems and that of declining Hospital productivity.
y

It stressed the need for:

More PRODUCTIVE + FLEXIBLE Workforce. Effective use of Technology. Improved Incentives to encourage allocative efficiencies.

y y

Lead back to the Quasi Market being reintroduced and broadened the targets to include health outcomes + distribution. Also lead to a rise in NHS expenditure allocation.