The irresistible pull of market forces

The debate is about whether, and how far, market forces should drive public sector reform. Nobody is suggesting market forces can begin to tackle everything, but within government there is a view that relatively mediocre improvements in health, education and safer communities could be spiced up (as opposed to sexed up) by a dose of competition. Hence the announcement last week of a tariff for NHS elective care.

The plan is bold. New Labour may have abolished the internal market created by the Conservatives, but now they are busy recreating one of their own. Money will follow patients. Hospitals will be paid on the basis of the numbers they treat. Patients will be able – indeed, encouraged – to choose a hospital, including some run by private companies.

In education, too, there is a vision of different types of local schools – again funded on the basis of pupil numbers – with parents able to choose where they want to send their children. Eventually, some see a whole range of establishments, some run by private companies, some free-standing voluntary institutions and others still nominally under local authority control.

Of course, some councils already see themselves more as commissioners than providers of services. Yet there is uncertainty at the heart of government about how far to go in this world where the consumer is king.

The attractions are obvious. More choice and control to those who use services; competition between providers should mean new players join the market, increasing capacity, bringing more effective modes of delivery and stimulating existing services to improve what they offer.

But in the run-up to an election there are serious risks. In the NHS, some hospitals are concerned that the new pricing structure will leave them looking seriously uncompetitive. They fear for their financial viability if even a small number of patients choose to go elsewhere, carrying "their" money with them.

At the heart of government there is uncertainty about how far to go in this world where the consumer is king

There are worries that managing demand will be harder – after all, this is a market where the consumer pays nothing. Primary care trusts that now, in theory, control the local NHS economy will be handing over a sizeable chunk of it to individual doctors and patients. The local trust may want to move resources from hospitals to community services and unless they are careful, the only incentives will be for hospitals to retain the patients and the money.

Then there is the fear that markets will further disadvantage the disadvantaged. Traditionally it is the better-off who have been able to exercise choice – but again, this is not a given. Some NHS work in offering alternative cataract operations shows that with help and support, poor and vulnerable patients are able and willing to move around.

The real task is to be clear about the nature of the market in different sectors.

Anyone involved in housing will tell you that markets are no panacea. You do not need to examine the US healthcare system to know they can be flawed. Look no further than what has happened to our residential and nursing home care, where a distorted market has failed to stimulate innovation or encourage moves towards different forms of accommodation or support for older people (indeed, the King's Fund is launching an inquiry into the care market in London later this month).