Dealing with market failure

A new dilemma in UK health and social care policy?

Public services are being outsourced across the world. Over the last year alone the annual contract value for outsourcing across Europe, the Middle East and Africa has increased by 29%, with the United Kingdom showing the highest increase (Information Services Group, 2014).

Shortly after the formation of his coalition government in 2010, the UK Prime Minister, David Cameron, declared that he wanted to ‘release the grip of state control’ on public services, and open them up to the private and voluntary sectors (Cameron, 2011). He has delivered on this ambition – the amount spent on outsourcing public services in the UK has doubled to £88  billion since then (Plimmer, 2014). Social care services have been part of this trend for many years: in 1979, 64% of residential and nursing home beds were provided by local authorities or the National Health Service (NHS), by 2012 it was 6%; in the case of domiciliary care, 95% was directly provided by local authorities in 1993, and by 2012 just 11% (Centre for Health and the Public Interest, 2013). Now, in the wake of the Health and Social Care Act 2012, there is evidence of a similar trend in health care, especially in community health services where there has been a tripling of expenditure on independent sector activity (to 18% of the total) since 2006/7 (Lafond et al., 2014).

These trends have raised a new dilemma in health and care policy – how to deal with the prospect of ‘market failure’ where a contracted provider is no longer able or willing to continue with service provision. In the case of social care this issue was simply ignored until the collapse of a major provider in 2011 – Southern Cross – forced it on to the policy agenda. Sensitive to this event, the passage of the Health and Social Care Bill at around the same time included considerable discussion of how to deal with such an eventuality in health care, though the agreed procedures have yet to be developed and applied. This commentary explores:

  • the growing political and policy concern with ‘market failure’ in health and care
  • the current policy responses
  • possible future responses.

Market failure: An emerging policy dilemma

In theory the creation of competition between providers should simply result in less effective providers ‘exiting’ the market to be replaced by their more successful rivals. Indeed the Impact Statement accompanying the 2010 NHS White Paper was clear on this point, noting that ‘for competition to work effectively, less effective providers must be able to contract or exit the market entirely’ (Department of Health, 2010a: para B112). However, the need to protect services for patients was also acknowledged to be necessary. The ‘Next Steps’ guidance issued alongside the 2010 White Paper (Department of Health, 2010b: 148), for example, stated:

Whereas in the past the response to failure has usually been to prop up the provider as an institution, in future there will be a clear and transparent mechanism for managing provider failure which protects services for patients but not ineffective management or poor quality care.

It is in this tension between the perceived desirability of ‘market exit’ and the political necessity of ensuring service continuity that the practicalities of provider competition are being played out. This is the arena where decisions have to be made about whether or how to constrain or sustain ‘underperforming’ providers (from any sector) in the face of political necessities. Gash et al. (2013: 5) in a review of ‘public service markets’, for example, noted:

reluctance to force underperforming public, private and voluntary sector providers out of markets in service provision – partly as a result of lack of confidence that government can manage transitions between different service providers without causing excessive disruptions to service users.

The policy game-changer here was the collapse of the private care home provider Southern Cross in 2011 (Scourfield, 2012) – a large provider responsible for 31,000 older people mostly concentrated in one geographical area, Tyne and Wear in the north east of England. It quickly became clear that neither the local authorities nor the key national agencies had any contingency plans – indeed nobody even had any formal powers to compel action. Not the least of the problems here was the remote ownership of the company – a complex mix of creditors, property investors, bondholders, banks, shareholders and landlords. The interests of private companies had come face-to-face with the need for service continuity for highly vulnerable people in a new and politically explosive manner.

What the Southern Cross episode also did was focus attention on the highly vulnerable nature of the care market more generally. Local authorities have been able to successfully manage the failure of about forty, mostly small, care providers each year, but the size and scale of some providers makes it difficult for an individual local council to ensure people continue to receive safe care. Data from the Care Quality Commission exposes the scale of this problem, with eight English local authorities having a single care home provider responsible for over 25% of places in their area, and with the concentration even higher in more specialist areas such as nursing care (Department of Health, 2012).

Although local authorities have responsibility for somehow ‘managing’ this market there are several problems where large providers operate across multiple boundaries (Laing and Buisson, 2012a):

  • it is unclear who has complete oversight of that provider’s operations
  •  managing the transfer or closure becomes increasingly difficult when there are thousands of residents and a large number of organisations involved
  • the sector is likely to see larger operators over time across residential, domiciliary and extra-care services
  • high market concentrations at a regional level are challenging for individual local authorities to oversee
  • investors can have a wide-ranging portfolio of diverse international business interests of which care provision is marginal
  • many providers are carrying substantial debt structured in complex arrangements
  • the care market has close and complex interactions with other markets
    such as property and finance.

With the gradual opening up of a new market in NHS care in England, there is the prospect of similar problems arising here too. Already there is a high concentration of independent sector provision in a relatively small number of hands – in 2012 four companies alone owned 61% of the independent acute medical and surgical hospital sector, 47% of the private community health care and health at home sector, and 56% of the private mental health and learning disabilities hospital sector (Laing and Buisson, 2012b). These market trends and threats to service continuity can no longer be ignored by policy-makers. The increased reliance upon non-statutory providers now requires some measures to be in place to deal with the possibility of market failure in health and – more urgently – social care.

Policy responses to market failure: Social care

There are two emergent strands in relation to social care – the introduction of a ‘fit and proper person’ test and new requirements around the financial stability of providers.

The fit and proper person test

The assumption behind this proposal is that at least some of the problems of market failure and service withdrawal arise from the capricious behaviour of key individuals, and that this can be countered by undertaking an assessment of their character. In July 2013 the Department of Health began a consultation on the introduction of ‘fit and proper person regulations’ for the directors of providers of any organisation registered with the Care Quality Commission (CQC) (Department of Health, 2013) and published the feedback in March 2014 (Department of Health, 2014). The proposals identify four ‘concerns’ about the character of directors – honesty, integrity, competence and capability – and state that to qualify as a fit and proper person a director must:

  • not have been responsible for misconduct or mismanagement in the course of any employment with a CQC provider
  • be capable of undertaking the position
  • be of good character
  • have the qualifications, skills and experience necessary for the role
  • not be prohibited from holding the position under existing law.

Although the subsequent CQC consultation paper (Care Quality Commission, 2014b: 8) refers to this test as ‘a significant restriction’, the impact of such a measure on the prospect of company market failure is likely to be small. The test is to be confined to directors (executive directors, nonexecutive directors, chairs and trustees) with senior managers and other staff excluded. An impact assessment by the Department of Health itself estimates that only seven directors would be found unfit each year. Certainly in the case of large national and multinational organisations and investors, it is unlikely that the fit and proper person test will be a serious consideration in their decision-making.

Financial stability requirements

The focus on the financial stability of providers constitutes a more serious attempt to assess the extent to which a provider might be in such serious financial difficulty that there is a significant prospect of service cessation. The bargain being struck here is that the price of outsourcing (especially to he private sector) is to open up the balance sheet to state audit. Different versions of this model are in train for health and social care respectively.
NHS providers. The Health and Social Care Act 2012 has established a tortuous route for trying to ensure ‘service continuity’. There are two stages. First the local clinical commissioning group (CCG) has to identify those services for which there is no acceptable alternative provider due to:

  • there being no alternative provider close enough or
  • removing them would increase health inequalities or
  • removing them would make dependent services unviable.

Services meeting these criteria will then be designated as ‘Commissioner Requested Services’ (CRS), and CRS providers will then require from Monitor (the health competition regulator) a provider licence which will include ‘continuity of service’ conditions. These conditions will oblige them to send to Monitor information regarding how financially stable they are, and to accept further investigation and support if they get into financial difficulty (Monitor, 2013, 2014). All services provided by NHS foundation trusts will be automatically given CRS classification but others (such as those provided
by the private sector) will not necessarily be covered.

CCGs have a comfortable timetable – until April 2016 – to complete this review, so we have yet to see how it will work out in practice. If a lot of services are designated as CRS then competition – the raison d’être of the 2012 Act – will be thwarted. During the Public Bill stage, Labour sought to have all services classified as CRS in the first instance, with the onus then put on commissioners to ‘undesignate’ a service by demonstrating that competition will be beneficial. The then Health Minister, Simon Burns, dismissed this, saying that it would miss the benefits of competition. However, he refused to be drawn on when it would be appropriate to use the CRS designation, stating that: ‘I am not going to fall into the trap of answering a question about numbers … I will say very broadly that it might happen in some circumstances’.

What also remains unclear is how far Monitor will have the clout to examine the accounts of private companies and impose conditions on their business activities. In principle a range of conditions could be imposed – restrictions on the disposal or leveraging of assets; limits on borrowing or debt; achieving and maintaining an ‘investment grade’ rating from a credit rating agency; and an undertaking from the provider’s ‘ultimate controller’ that it will continue providing the contracted service, even under financial duress. The greater the extent to which large private operators provide public services, the less the likelihood of Monitor being able or willing to dictate their business model.

Social care providers. The collapse of Southern Cross in 2011 led to parallel proposals to address market failure in social care. In its consultation on ‘Market Oversight’ in December 2012, the Department of Health proposed ‘stronger requirements on social care providers to disclose information and for them to have robust plans in place in case they fall into distress’ (Department of Health, 2012: para 79). This, it was said, was to be a ‘light-touch approach’ that would be ‘proportionate, targeted and would support a diverse market of high quality services’ (2012: para 80). Moreover the government would be ‘mindful of the sensitivities’ and whoever undertook the role ‘would have to respect the commercial sensitivity of such information’ (2012: para 106). None of this suggests a very tough approach is in the offing.

The only unresolved question was who should undertake the task – Monitor (to complement its role with the NHS) or CQC (as the inspectorate for social care)? In the event the 2014 Care Act gave the role to CQC, which is now tasked with ‘overseeing the finances of an estimated 50 to 60 care providers that would be difficult to replace were they to go out of business’ (Care Quality Commission, 2014a: 20). From April 2015, CQC will:

  • require regular financial and relevant performance information from some providers
  • provide early warning of a provider’s failure
  • seek to ensure a managed and orderly closure of a provider’s business if it cannot continue to provide services.

The Act provides that regard must be had to size, geographical concentration and the extent to which a provider specialises in the delivery of a particular type of care. CQC will be consulting on the detail of this duty later in 2014 but already doubts are being cast upon its ability to undertake the role. In its annual report on CQC, the Health Committee (House of Commons Health Committee, 2014) raised doubts about the ability of CQC to do the job and recommended the task be given to Monitor. At a subsequent CQC board meeting, the chair seemed to agree with the Health Committee, saying the organisation lacked the skills to deliver on the duty and would need to outsource the work (Hazell, 2014).

It seems reasonable to question whether the powers and measures arising from the Health and Social Care Act 2012, and the Care Act 2014, given to Monitor and the CQC respectively, will be sufficient to address the dilemma of market failure. What possible alternative measures could be considered?

Three broad models can be identified: shaping the market; regulating the market; and replacing the market.

Shaping the market

This model goes beyond the notion that the role of the state is to ‘fix’ or somehow forestall market failure; rather it could use outsourcing as an opportunity to help ‘transform’ services and support. One variant is that promoted by Mazzucato with her proposal for ‘mission-oriented’ public investments (Mazzucato, 2013, 2014). Her argument is that public sector agencies have in the past led the way in this respect, investing along the entire innovation chain and defining new high-risk directions such as the internet, GPS and touchscreen display. The task of the state here then, is to determine the direction of change by transforming landscapes and creating and shaping markets.

In relation to health and social care there is indeed much talk of the need for ‘transformation’, especially around a shift in focus from hospital care to community-based care, and there are abundant ‘tool kits’ on how to undertake the task (NHS England, 2014). However, there seems to be no strategy to harness the outsourcing of public services to any such strategic direction; rather the end product is simply market diversification and the extension of ‘choice’. Indeed, there is some doubt as to whether the NHS has any  ‘system leadership’ whatsoever following the implementation of the new ‘architecture’ set up by the 2012 Act (Edwards, 2013).

A further difficulty is that outsourcing tends to rid governments of the knowledge, capacities and capabilities that are necessary for managing change – the NHS and social care sectors have been stripped of much of their  management capacity in the name of ‘reducing bureaucracy’ (Farrar, 2013). To undertake effective ‘market-shaping’ the state would therefore need to be revitalised so that it has the ‘intelligence’ or policy capacity to ‘think big and formulate bold policies’ – to ‘transform’. This stands in direct contradiction of neo-liberal demands for the state to ‘get out of the way’ of innovation.

Regulating the market

A second approach would be to revisit the current model – market regulation – but with a stronger array of controls to supplement the ‘fit and proper persons’ test and the financial stability stipulations. One option is to develop a range of ‘ethical tests’ as part of the procurement process to minimise the risk of ‘rogue’ providers simply reneging on contracts or unexpectedly going bust. Three possible additional tests have been identified: a transparency test; a taxation test; and a workforce test.

Transparency test

A ‘transparency test’ could broaden the information demanded of providers beyond that which will be required by Monitor and the CQC. It could be stipulated that where a public body has a legal contract with a private provider that contract must ensure full openness and transparency with no ‘commercial confidentiality’ outside of the procurement process. The Institute for Government (Gash et al., 2013), for example, argues that all providers of public services should publish details of:

  • the funding they receive
  • performance against contractual obligations
  • the suppliers to whom they subcontract services, the value of these contracts and their performance
  • user satisfaction levels.

In addition to these measures, non-statutory providers could be made subject to local political scrutiny processes, and to the Freedom of Information Act.

Taxation test

A taxation test could require private companies in receipt of public services contracts to demonstrate that they are domiciled in the UK and subject to UK taxation law – Southern Cross was noticeably in the hands of offshore funds. The investigative organisation Corporate Watch (2012) argues that some leading private health firms have set up corporate structures that allow the avoidance of tax on millions of pounds of profits by making use of corporate entities in the British Virgin Islands, Luxembourg, Jersey, Guernsey and the Cayman Islands. These companies include some of the biggest private providers of health and social care services in the UK such as Spire Healthcare, Care UK, Circle Health and the private equity firm, Terra Firma.

Workforce test

Given long-standing concerns about the treatment of staff, especially but not solely in social care, a final procurement test could be around workforce terms and conditions. This might have several components:

  • That all providers comply with minimum standards around workforce terms and conditions, training, development and supervision. This could include outlawing attempts to get round the national minimum wage levels such as not paying travel time between visits or using tracking
    devices that pay people by the minute (Low Pay Commission, 2013).
  • Collective bargaining: in 1978 over 80% of British workers had their working conditions set by a collective agreement; this has now fallen to under 30%. Commissioning bodies could include procurement requirements designed to oblige all employers to participate in collective bargaining and to outlaw such practices as blacklisting workers for taking part in trade union activities (Ewing and Hendy, 2014).
  • Information and Consultation: the TUC in its recent report on democracy in the workplace (Trades Union Congress, 2014) argues for a strengthening of the Information and Consultation of Employees (ICE) regulations in the UK. The rule requiring 10% of employees to request information and consultation (the ‘trigger mechanism’) should, it says, be replaced, and such procedures made available if a minimum of five employees request them, or if requested by a trade union. Again this could form part of a procurement contract.

Replacing the market

A final option is to avoid market failure by replacing the market with statutory or non-profit agencies – an approach that both identifies the ‘moral limits’ of markets and holds a more positive view of the role of the state. The argument that markets have become detached from morals has been put forward most recently by Sandel (2012) who argues that without any real debate there has been a drift from having a market economy to being a market society. Markets and market values, he argues, have penetrated into spheres in which they do not belong and there is a need for a public debate about the moral limits of markets rather than merely about technical hindrances to market entry such as the regulatory measures described above.

For Sandel, the question of markets is really a question about how we want to live together. Morality is essentially social, not personal, and that means the only way to deal with it is socially – public moral values need a negotiation between all of us. The state is the vehicle for this negotiation with the potential for strategic thinking, coordination and serving as the ultimate source of legitimacy. In this context public services are viewed as an expression of communal solidarity, expressing a sense of moral obligation that citizens feel for each other – something more than a contract put out to the market to secure ‘value for money’.

It is questionable whether the ‘replace’ option is any longer feasible in the case of social care where the sector is so heavily privatised that returning it to state provision would be very challenging. However, it is a very live issue in relation to the NHS, with the Labour Party pledging (in the event of a victory in the 2015 General Election) to repeal the ‘market’ elements of the 2012 Health and Social Care Act, including total repeal of Part 3 which sets out the role of competition in the NHS.


There is a broader literature on the adverse impact of markets in health and social care on transaction costs, quality of care and workforce terms and conditions (Centre for Health and the Public Interest, 2013). In England the coalition government seems to be of the opinion that a stronger and more complex regulatory framework not only can address these problems but can also be utilised to forestall ‘market failure’ and ensure service continuity.

The analysis in this commentary suggests that while stronger regulation might have some impact, the current policy proposals are insufficiently robust. Although there is scope for a much stronger regulatory framework, it is also important to look at the feasibility of using the role of the state to ‘shape’ the market, rather than to see market diversity as an end in itself, and to also assess the case for traditional state control of commissioning and provision of health and social care.

The pursuit of these objectives is not, however, simply a matter for a national government. Public services procurement is also constrained by European Union competition law (NHS Confederation, 2009) and – imminently – by the Transatlantic Trade and Investment Partnership (TTIP). The latter raises the prospect of not only requiring all public services contracts to be opened up to private US corporations, but even allowing such companies to sue national governments for loss of profits arising from denial of access to tendering arrangements (Hilary, 2014). Nation states could well end up in the most unenviable of positions – holding responsibility for public services market failure but no real power to address it.


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This article first appeared in Critical Social Policy