HEALTH ECONOMICS Health Econ. 7: 105–119 (1998) GUEST EDITORIAL FROM COMPETITION TO CO-OPERATION: NEW ECONOMIC RELATIONSHIPS IN THE NATIONAL HEALTH SERVICE MARIA GODDARD* AND RUSSELL MANNION Centre for Health Economics, Uniersity of York, UK SUMMARY The Labour government has outlined its plans to ‘replace’ the competitive internal market with a more collaborative system based on partnership. Agreement amongst purchasers and providers is to be based on co-operation rather than competition. Longer term agreements covering periods of 3 – 5 years are to replace annual contracts within this new environment. The aim of this paper is to explore the potential economic implications of these policy changes by drawing on the economics of co-operation and the transaction costs approach to longer term contracting. Issues surrounding the role of trust in contractual relationships are explored and the relevance of experience and evidence from non-health care sectors is considered in the context of the NHS. It is concluded that both theory and empirical evidence suggest that co-operation and trust can play a central role in the efficient organisation of contractual arrangements in circumstances similar to those under which the NHS operates. However, we warn against the expectation that the policy changes will produce automatically the scale of benefits predicted by the Labour government, especially as they will have to find a way of extracting reasonable performance from providers under a system of collaboration and long term agreements. They may find they need to tread a fine line between competition and co-operation in order to reap the benefits of both. © 1998 John Wiley & Sons, Ltd. KEY WORDS — internal market; National Health Service; contracting; competition; co-operation INTRODUCTION In the White Paper, ‘The New NHS: Modern, Dependable’, the UK Labour government set out their vision for the future shape of the NHS in England [1]. The proposed reforms aim to replace the competitive internal market created by the previous government, with a more collaborative system of ‘integrated care’ based on ‘partnership’ and driven by ‘performance’. One of the vehicles through which the new collaborative partnerships are to be forged is via the replacement of the annual contracting round with longer term fund- ing agreements (LTAs) for the provision of health care services covering periods of 3–5 years. What are the economic implications of these policy changes in the context of the NHS and are they likely to have the impact predicted by the govern- ment? After briefly describing the proposals contained in the White Paper, the potential economic impli- cations of these changes are examined by consid- ering both the economics of co-operation and, related to this, the transaction costs approach to * Correspondence to: Centre for Health Economics, University of York, Heslington, York YO1 5DD, UK. Tel: +44 01904 434570. CCC 1057–9230/98/020105 – 15$17.50 © 1998 John Wiley & Sons, Ltd.