Internal market reform and managed competition reform both seek to achieve efficiency gains through proactive purchasing. The concept of a proactive purchaser is a significant development from the historical role of government and private insurers as passive indemnity insurers. In a managed competition system, competition between insurers is managed or regulated to provide incentives for insurers to compete along price and quality dimensions in purchasing and/or providing care. Insurers are expected to act as proactive purchasers and/or managers of the supply of care rather than traditional insurers, although they are still expected to manage financial risk within certain parameters. Managed competition models generally assume that insurer/purchasers will implement managed care arrangements, which are one or more of a variety of methods designed with the goal of influencing the clinical decision-making of health care providers. In a managed competition system, insurer/purchasers are free to choose the most efficient supply arrangement and, subject to anti-trust laws, may or may not be vertically integrated with health care providers. By contrast, the Health Authorities in the internal markets of the UK and New Zealand are precluded from supplying health care services themselves and must contract out for the supply thereof. The goal of internal market reform is to stimulate competition directly between health care providers rather than, as in the managed competition model, between insurer/purchasers.
This chapter will consider and contrast the costs and benefits of these two distinct approaches: the mandatory contracting out required by internal market reform and the more flexible approach of managed competition. This chapter will draw upon the theory of the firm to evaluate the configuration of purchasers and providers in internal market and managed competition models. The chapter will then move on to consider contracting in the UK and New Zealand internal markets and whether or not the reforms have resulted in more efficient systems than those previously in place.