Where Do Internal Markets Come from and Can They Work?

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Abstract
The basis for the argument in favour of the internal market as a means of allocating resources within the health care sector has never been made fully explicit. In particular, the link between the economic theory of market allocation and the specific pricing rules adopted by a number of health care sectors to allocate resources is rarely a focus of attention. Health sector objectives are rarely specified. The mechanisms which remedy failure in the exchange process are not explicitly defined. In short, the optimal structural conditions for the operation of internal markets are not known. The central argument pursued here is that, as this is the case, and using the UK as an example, there are no criteria to which purchasers or providers can turn to assess the operation of exchange within the internal market. Not surprisingly, the internal market dissolves into a number of individual bilateral agreements between purchasers and providers which may or may not increase efficiency in allocating health sector resources.

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