Chapter Two explored the Conservative government's attempts to reorganise healthcare in the 1980s, taking this account up to the introduction of the internal market at the end of that decade.

Having outlined the political and ideational context into which the internal market was being introduced at the end of Chapter Two, we now consider the programme theory for it. How was the internal market meant to work?

This chapter first considers the programme theory of the effects of the 1990s internal market reorganisation, before taking the story on to the change in government in 1997and New Labour's various attempts to reorganise healthcare in the 2000s. Chapters Four and Five then consider the evidence from Labour's healthcare reorganisations, before turning to the coalition government's 2010 Health and Social Care Bill.

Purchaser–provider split and the internal market

The logic underlying the programme theory of the purchaser–provider split was that it would allow purchasers to use their funding decisions to reward good providers of care with contracts, giving all providers a funding incentive to improve the quality of their service, and creating the opportunity for successful services to expand (Day and Klein, 1991). The internal market was also meant to incentivise purchasers to find the best value and best quality care for the people they were serving. The government believed that the introduction of market-like governance into the NHS would improve its performance by increasing efficiency and productivity, while at the same time raising quality and reducing the wasted ‘resources on excessive administration’ (Le Grand, 1991, p 1262) that they regarded as coming from a traditional public sector bureaucracy. The internal market represented an internal or wholesale market (in contrast to New Labour's later external, retail market) in that NHS managers were supposed to be working on behalf of patients as their agents, rather than patients being responsible for driving the process of choosing care for themselves. Patients, however, had limited choice or say in their healthcare apart from through GP fundholding and a very limited number of ‘extra contractual referrals’ (ECRs), which were quasi-individual contracts rather than making use of the more usual block contacting process.