Transfer prices and innovation in public healthcare: Costing and clinical choices in the NHS

Abstract

AbstractThe establishment of an internal market for clinical services in a publically funded National Health Service (NHS) requires a process for setting transfer prices. Given the values and logics of actors in a public healthcare system, attempts to determine an “optimal” price for specific treatments as prescribed by well‐known transfer pricing texts, are likely to be inappropriate. Rejecting a reductionist model of Economic Man, the study adopted a richer perspective on actor reality through a pragmatic constructivist (PC) methodology. The PC methodology was used to interpret data drawn from a case study of a specialist healthcare centre of English NHS. The case study revealed different realities constructed by clinical and managerial actors. Clinical actors in the study were willing to spread a technological innovation but were not being supported by managers whose reality was influenced by centrally set tariff prices which favoured traditional high cost procedures rather than less costly technical innovations. Characterising the different realities as the “pragmatic truth” of managers and the “proactive truth” of clinicians, the challenge was to bring these together for a fully integrated and coherent solution. This challenge required avoiding a top‐down “command and control” model of governance and greater flexibility for transfer pricing and incentives. More generally, the study supports alternative institutional mechanisms that can routinely promote the spread of new technological innovations which are not only clinically superior but, as this case illustrates, are sometimes cheaper than the current procedures.