Skip to main content

Decentralisation strategies and provider incentives in healthcare

Evidence from the English National Health Service



This article examines the incentive effects of delegating operational and financial decision making from central government to local healthcare providers. It addresses the economic consequences of a contemporary policy initiative in the English National Health Service (NHS)–earned autonomy. This policy entails awarding operational autonomy to ‘front-line’ organisations that are assessed to be meeting national performance targets. In doing so, it introduces new types of incentives into the healthcare system, changes the nature of established agency relationships and represents a novel approach to performance management.


Theoretical elements of a principal-agent model are used to examine the impact of decentralisation in the context of the results of an empirical study that elicited the perceptions of senior hospital managers regarding the incentive effects of earned autonomy. A multi-method approach was adopted. In order to capture the breadth of policy impact, we conducted a national postal questionnaire survey of all Chief Executives in acute-care hospital Trusts in England (n = 173). To provide added depth and richness to our understanding of the impact and incentive effects of earned autonomy at an organisational level, we interviewed senior managers in a purposeful sample of eight acute-care hospital Trusts.


This theoretical framework and our empirical work suggest that some aspects of the earned autonomy as currently implemented in the NHS serve to weaken the potential incentive effect of decentralisation. In particular, the nature of the freedoms is such that many senior managers do not view autonomy as a particularly valuable prize. This suggests that incentives associated with the policy will be insufficiently powerful to motivate providers to deliver better performance. We also found that principal commitment may be a problem in the NHS. Some hospital managers reported that they already enjoyed a large degree of autonomy, regardless of their current performance ratings. We also found evidence that the objectives of providers may differ from those of both the central government and local purchasers. There is, therefore, a risk that granting greater autonomy will allow providers to pursue their own objectives which, whilst not self-serving, may still jeopardise the achievement of strategic goals.


It is apparent that the design and implementation features of decentralising policies such as earned autonomy require careful attention if an optimal balance is to be struck between central oversight and local autonomy in the delivery of healthcare.

This is a preview of subscription content, access via your institution.

Table I


  1. 1.

    11 Additional economic issues related to autonomy were explored in our research; however, we have chosen to focus in this article on those that provided the most interesting insights for policy.

  2. 2.

    22 One element of the empirical research took the form of a discrete choice exercise aimed at eliciting the motivations of senior managers in acute-care hospital Trusts. However, we do not draw on this material in this article and prefer to leave the discussion of intrinsic and extrinsic motivation aside.

  3. 3.

    33 The algebraic representation is not provided in this article but can be obtained from the authors in the form of the full unpublished report.

  4. 4.

    44 A copy of the questionnaire is available from the authors.

  5. 5.

    55 The detailed breakdown of responses for all areas covered by the postal survey is available from the authors and is in the full unpublished report.


  1. 1

    Peckham S, Exworthy M, Powell M, et al. Decentralisation as an organisational model for health care in England. Draft report for the NHS Service Development and Organisation. Project no.: SDO/67/2003 [online]. Available from URL: [Accessed 2005 Jan 1]

  2. 2

    Saltman R, Bankauskaite V, Vrangbaek K. Decentralisation in health care: strategies and outcomes. In: European Health Observatory on Health Care Systems [online]. Available from URL: [Accessed 2005 Jun 21]

  3. 3

    Levaggi R, Smith P. Decentralization in health care: lessons from public economics. In: Smith PC, Ginnelly L, Sculper M, editors. Health policy and economics: opportunities and challenges. OUP. In press.

  4. 4

    Rondinelli D. Decentralization in developing countries. Staff working paper 581. Washington, DC: World Bank, 1983

    Google Scholar 

  5. 5

    OECD. In search of results: performance management practices. Paris: OECD, 1997

    Google Scholar 

  6. 6

    Klein R. The new politics of the NHS. Harlow: Longman, 2001

    Google Scholar 

  7. 7

    Ham C. Improving NHS performance: human behaviour and health policy. BMJ 1999; 319: 1490–2

    PubMed  Article  CAS  Google Scholar 

  8. 8

    HM Treasury and Cabinet Office. Devolving decision-making: delivering better public services: refining targets and performance management. London: HM Treasury and Cabinet Office, 2004

    Google Scholar 

  9. 9

    Department of Health. The NHS plan: a plan for investment, a plan for reform. London: Department of Health, 2000

    Google Scholar 

  10. 10

    Department of Health. Raising standards: improving performance in the NHS. London: HMSO, 2003

    Google Scholar 

  11. 11

    Propper C. Agency and incentives in the NHS internal market. Soc Sci Med 1995; 12: 1683–90

    Article  Google Scholar 

  12. 12

    Harris M, Raviv A. Capital budgeting and delegation. J Finance Econ 1998; 50: 259–89

    Article  Google Scholar 

  13. 13

    Caillaud B, Jullien B, Picard P. Hierarchical organization and incentives. Eur Econ Rev 1996; 40: 687–95

    Article  Google Scholar 

  14. 14

    Melumad N, Mookherjee D, Reichelstein S. A theory of responsibility centres. J Account Econ 1992; 15: 445–89

    Article  Google Scholar 

  15. 15

    Rob R, Zemsky P. Social capital, corporate culture, and incentive intensity. Rand J Econ 2002; 33: 243–57

    Article  Google Scholar 

  16. 16

    Deci EL, Ryan RM. Intrinsic motivation and self-determination in human behavior. New York: Plenum Press, 1985

    Google Scholar 

  17. 17

    Frey BS. On the relationship between intrinsic and extrinsic work motivation. Int J Ind Organ 1997; 15: 427–39

    Article  Google Scholar 

  18. 18

    Frey BS. Motivation and human behaviour. In: Taylor-Gooby P, editor. Risk, trust and welfare. Basingstoke: Macmillan Press, 2000

    Google Scholar 

  19. 19

    Holmstrom B, Milgrom P. Multitask principal-agent analysis: incentive contracts, asset ownership, and job design. J Law Econ Organ 1991; 7: 24–52

    Article  Google Scholar 

  20. 20

    Murdock K. Intrinsic motivation and optimal incentive contracts. Rand J Econ 2002; 33: 650–71

    Article  Google Scholar 

  21. 21

    Malcomson JM. Individual employment contracts. In: Ashenfelter O, Layard R, Card D, editors. Handbook of labour economics. Vol. 3B. Part 9. Amsterdam: Elsevier, 1999: 2291–372

    Chapter  Google Scholar 

  22. 22

    Seabright P. Is cooperation habit-forming? In: Dasgupta P, Maler KG, editors. The environment and emerging development issues. Oxford: Clarendon Press, 1993

    Google Scholar 

  23. 23

    Shapiro C. Theories of oligopoly behavior. In: Schmalensee R, Willig RD, editors. Handbook of industrial organization. Amsterdam: Elsevier, 1989: 329–414

    Chapter  Google Scholar 

  24. 24

    Cabral LBM. Introduction to industrial organization. Cambridge (MA): MIT Press, 2000

    Google Scholar 

  25. 25

    Chalkley M, Malcomson JM. Government purchasing of health services. In: Culyer AJ, Newhouse JP, editors. Handbook of health economics. Amsterdam: Elsevier, 2000: 847–90

    Chapter  Google Scholar 

  26. 26

    Walshe K. The rise of regulation in the NHS. BMJ 2002; 324: 967–70

    PubMed  Article  Google Scholar 

  27. 27

    Audit Commission. Strategic regulation: minimising the burden, maximising the impact. London: Audit Commission, 2003

    Google Scholar 

  28. 28

    Department of Health. Working for patients. London: HMSO, 1989

    Google Scholar 

  29. 29

    Robinson R. NHS foundation trusts. BMJ 2002; 325: 506–7

    PubMed  Article  Google Scholar 

  30. 30

    Britnell M. An alarming desire to control. Health Serv J 2004; 114(5919): 17

    Google Scholar 

  31. 31

    Gaynor M, Vogt W. Antitrust and competition in health care markets. In: Culyer AJ, Newhouse JP, editors. Handbook of health economics. Vol. 1. Part 2. Amsterdam: Elsevier, 2000: 1405–87

    Chapter  Google Scholar 

  32. 32

    Propper C, Soderlund N. Competition in the NHS internal market: an overview of its effects on hospital prices and costs. Health Econ 1998; 7: 187–97

    PubMed  Article  CAS  Google Scholar 

  33. 33

    Gravelle H, Smith PC. The new NHS: a principal-agent viewpoint. In: Smith PC, editor. Reforming markets in health care: an economic perspective. Buckingham: Open University Press, 2000

    Google Scholar 

  34. 34

    Mannion R, Davies H, Marshall M. Impact of’star’ performance ratings in English Acute Hospital Trusts. J Health Serv Res Policy 2005; 10(1): 18–24

    PubMed  Article  Google Scholar 

  35. 35

    Goddard M, Mannion R, Smith P. Assessing the performance of NHS Trusts: the role of hard and soft information. Health Policy 1999; 48: 119–32

    PubMed  Article  CAS  Google Scholar 

  36. 36

    Mannion R, Davies H, Marshall M. Cultures for performance in health care. Maidenhead: Open University Press, 2005

    Google Scholar 

Download references


The authors are grateful to the Department of Health in England for funding a programme of policy research at the Centre for Health Economics, but all views expressed are those of the authors only and not necessarily shared by the Department. We are also grateful to the NHS participants who freely gave their time for the postal and interview studies. The comments of anonymous referees were most helpful.

Author information



Corresponding author

Correspondence to Maria Goddard.

Rights and permissions

Reprints and Permissions

About this article

Cite this article

Mannion, R., Goddard, M., Kuhn, M. et al. Decentralisation strategies and provider incentives in healthcare. Appl Health Econ Health Policy 4, 47–54 (2005).

Download citation


  • National Health Service
  • Senior Manager
  • Incentive Effect
  • Star Rating
  • Operational Autonomy